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2008

Section 4: BusinessInstitute of Bill of Rights Law at the William & Mary Law School

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IV. BUSINESS

In This Section:

New Case: 07-1216 Philip Morris USA v. Williams

Synopsis and Questions Presented p. 144

"Justices to See Philip Morris Case a Third Time" p. 154Linda Greenhouse

"Justices Uphold Cigarette Damages" p. 155Ashbel Green

"Justices Overturn Tobacco Award" p. 157Robert Barnes

"Oregon Supreme Court Backs $79.5 Million Tobacco Award" p. 159Ashbel Green

"High Court Sends back Tobacco Case Award" p. 160David Savage

"Jury Awards $81 Million to Oregon Smoker's Family" p. 162Barry Meier

"A New Day on Punitive Damages Law" p. 164Lyle Denniston

New Case: 07-562 Altria Group v. Good

Synopsis and Questions Presented p. 166

"Altria Gets U.S. High Court Hearing on 'Lights' Suit" p. 177Greg Stohr

"Light Cigarette Case not Preempted, First Circuit Says" p. 179Allison Torres Burtka

"Bid to Shift Tobacco Cases to U.S. Courts Denied" p. 182John Donnelly

New Case: 06-1249 Wyeth v. Levine

Synopsis and Questions Presented p. 184

14]

"Justices to Hear Cases on Products Liability" p. 197Linda Greenhouse

"Court Considers Protecting Drug Makers from Lawsuits" p. 198Gardier Harris

"Patients' Ability to Sue at Risk" p. 200Daniel Costello

"The State of Medical Device Tort Litigation in the Wake of Riegel" p. 202Eric J. Parker and Richard S. Cabelus

"No Special Treatment" p. 206Sol Weiss

New Case: 07-512 Pacific Bell v. linkLine

Synopsis and Questions Presented p. 208

"High Court Agrees to Hear AT&T ISP Dispute" p. 218EWeek.com

"Ninth Circuit Case Alleging DSL 'Price Squeeze' Can Proceed" p. 219Telecommunications Reports

"Ninth Circuit Prequels and Sequels" p. 221Neal R. Stoll and Shepard Goldfein

ISPs File Antitrust Lawsuit Against SBC in California" p. 224Telecommunications Reports

"U.S. High Court Rules in Favor of Verizon" p. 225James S. Granelli

New Case: 07-1059 United States v. Eurodif

Synopsis and Questions Presented p. 227

"High Court to Hear Uranium Case" p. 231Robert Barnes

"ITC Rules in Favor of USEC Position on French Uranium Imports" p. 233Business Wire

"Sole U.S. Company that Enriches Uranium Is Struggling to Stay in Business" p. 234Matthew L. Wald

142

New Case: 07-1239 Winter v. Natural Resources Defense Council

Synopsis and Questions Presented p. 237

"Justices Take Case on Navy Use of Sonar" p. 248

Linda Greenhouse

"Court Upholds Whale Protection in Navy Exercises" p. 250

Bob Egelko

"White House Went too Far in Sonar Case, Judge Rules" p. 252

Marc Kaufman

"Navy Wins Exemption from Bush to Continue Sonar Exercises in California" p. 254

Mark Kaufman

"Judge Imposes Stricter Rules on Navy to Protect Marine Life" p. 256

Carolyn Marshall

"Navy Given Choice: New Safeguards or No Sonar" p. 257

Kenneth Weiss

"Judge Curbs Navy Sonar" p. 259

Kenneth Weiss

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Philip Morris USA v. Williams

07-1216

Ruling Below: Williams v. Philip Morris, Inc., 344 Ore. 45, 176 P.3d 1255 (2008).

Plaintiffs husband died from lung cancer after smoking cigarettes for over forty years. A juryawarded Plaintiff over $80 million in actual and punitive damages in her suit against PhilipMorris for fraud and negligence. On appeal, Philip Morris argued that the trial court erred byrefusing to give a proposed jury instruction. The Oregon Supreme Court upheld the jury's verdictand damages award. On appeal to the U.S. Supreme Court, the Court held that the OregonSupreme Court did not apply the correct constitutional standard and could have allowed the juryto consider factors that violated the Due Process clause of the Fourteenth Amendment. Onremand, the Oregon Supreme Court upheld on procedural grounds its ruling that the trial courtdid not err in refusing to give the proposed jury instruction.

Question Presented: When this case was last before it, this Court reversed the decision of theOregon Supreme Court and held that due process precludes a jury from imposing punitivedamages to punish for alleged injuries to persons other than the plaintiff. Philip Morris USA v.Williams, 127 S. Ct. 1057, 1065 (2007). This Court then remanded the case to the OregonSupreme Court with directions to "apply the [constitutional] standard we have set forth." Id. Onremand, however, the Oregon Supreme Court refused to follow this Court's directive. Instead,the Oregon court "adhered to" the judgment that this Court had vacated because it found thatPhilip Morris had procedurally defaulted under state law and thereby forfeited its claim offederal constitutional error. App., infra, 22a.

The question presented: Whether, after this Court has adjudicated the merits of a party's federalclaim and remanded the case to state court with instructions to "apply" the correct constitutionalstandard, the state court may interpose-for the first time in the litigation-a state-lawprocedural bar that is neither firmly established nor regularly followed.

Mayola WILLIAMS, Personal Representative of the Estate of Jesse D. WILLIAMS,Deceased, Respondent on Review,

V.

PHILIP MORRIS Inc., nka Philip Morris USA Inc., RJ Reynolds Tobacco Company, FredMeyer, Inc., and Philip Morris Companies, Inc., Petitioners on Review

Supreme Court of Oregon

Decided January 31, 2008

[Excerpt: some footnotes and citations omitted.]

GILLETTE, J. United States Supreme Court. Previously,this court held (among other things) that

This matter is before us on remand from the certain federal constitutional limitations

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constraining punitive damage awards did notrequire a trial court to instruct a jury that itwas not to use an award of punitive damagesto punish a defendant for harms to personswho were not parties to the litigation.Williams v. Philip Morris Inc., 340 Ore. 35,51-54 (2006). On certiorari, the UnitedStates Supreme Court vacated that opinionand remanded. Philip Morris USA v.Williams, 127 S. Ct. 1057, 1065 (2007). TheCourt concluded that the Due ProcessClause of the Fourteenth Amendmentprohibits the state from using punitivedamages to punish for harms to nonparties,and that states must prevent punitivedamages from being misused in that way.127 S. Ct. at 1065. On remand, we are calledupon to reconsider and reassess our earlierholding, which arose in the context of thetrial court's refusal to give a particularproposed jury instruction that defendant hadrequested. Having reconsidered andreassessed the issue, we now conclude thatthe proposed jury instruction at issue herealso was flawed for other reasons that wedid not identify in our former opinion. Wetherefore reaffirm this court's priorconclusion that the trial court did not err inrefusing to give the instruction. Weotherwise reaffirm our prior opinion in allrespects.

Before we turn to the facts and proceduralposture of this particular case, we firstsummarize the legal context in which itarose. The issues in this case revolve aroundfederal constitutional limitations on punitivedamage awards. Those constitutionallimitations derive from the Due ProcessClause of the Fourteenth Amendment. [T]heSupreme Court has held that stateslegitimately may use punitive damages topunish and to deter wrongdoing bydefendants in tort cases. However, the Courtalso has held that the amount of punitive

damages that a jury awards cannot be

arbitrary; the jury's discretion must be

limited. Otherwise, defendants will not haveadequate notice of potential sanctions, thepunishments may be arbitrary, and largepunitive damage awards may force oneState's policy choices onto other States. Forthose reasons, the United States Constitutionrequires both procedural and substantivelimits on punitive damage awards.

We turn to the facts of this case. Theplaintiff, Mayola Williams, is the widow ofJesse Williams, a smoker who died of lungcancer. Plaintiff, as personal representativeof Jesse Williams's estate, sued defendantPhilip Morris Inc., asserting that PhilipMorris's fraud and negligence caused JesseWilliams's death.

The parties do not dispute this court's prioroverview of the evidence offered at trial,which was presented in the light mostfavorable to plaintiff. See Williams, 340 Ore.at 38-43 (describing facts of case). Briefly,the evidence permitted the jury to concludethat Philip Morris and other tobaccocompanies had known of the carcinogenicdangers of smoking since at least the 1950s.Nevertheless, Philip Morris, operating inconjunction with the rest of the tobaccoindustry, carried out an extensive publicitycampaign, from the 1950s into the 1990s, toconvince the public that doubts remainedabout whether smoking actually wasdangerous to one's health. No legitimatecontroversy existed about whether smokingwas harmful to health, although PhilipMorris and the rest of the tobacco industrystrove to persuade the public otherwise.Philip Morris and the rest of the tobaccoindustry also fostered the sham impressionthat they were themselves vigorouslyinvestigating the health effects of smokingwhen, in actuality, their research institutionavoided doing research on that question.

The jury further could have concluded thatthis program of disinformation succeeded in

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tricking Jesse Williams, who smoked fromthe early 1950s until he died in 1997. Hewas highly addicted to nicotine, eventuallysmoking three packs of cigarettes-primarily Philip Morris's Marlboro brand-a day. Williams resisted his family's effortsto convince him to quit smoking, because hebelieved media representations that thedangers of smoking were overstated ornonexistent. See id. at 39 (presented witharticle about dangers of smoking, Williamshad found "published assertions thatcigarette smoking was not dangerous"); id.at 42 (Williams rejected arguments to quit,because "he had learned from watchingtelevision that smoking did not cause lungcancer"). When Williams was diagnosedwith lung cancer, however, he asserted thatthe "cigarette people" had betrayed him by"lying" to him. Williams was dead withinsix months after the cancer was discovered.

Near the end of trial, the parties offeredproposed jury instructions. One instructionsubmitted by Philip Morris was its proposedjury instruction No. 34, dealing withpunitive damages. Among other things, thatinstruction provided:

The size of any punishment shouldbear a reasonable relationship tothe harm caused to Jesse Williamsby the defendant's punishablemisconduct. Although you mayconsider the extent of harmsuffered by others in determiningwhat that reasonable relationshipis, you are not to punish thedefendant for the impact of itsalleged misconduct on otherpersons, who may bring lawsuits oftheir own in which other juries canresolve their claims and awardpunitive damages for those harms,as such other juries see fit.

The trial court analyzed the proposed jury

instructions line-by-line with the parties,during which time Philip Morris argued thatthe consider-but-don't-punish part ofproposed jury instruction No. 34 was neededto ensure that this plaintiff did not receivepunitive damages that should be awarded (ifthey were to be awarded at all) to otherplaintiffs. After the trial court had reviewedPhilip Morris's proposed jury instructionNo. 34 together with plaintiffs proposedjury instruction on punitive damages-thetranscript of that part of the trial court'sanalysis is 50 pages long-the trial courtdeclined to give proposed jury instructionNo. 34 as proffered.

The jury returned a verdict for plaintiff. Thejury's unadjusted award was $ 821,485.50 incompensatory damages and $ 79.5 million inpunitive damages. The trial court, amongother things, reduced the punitive damageaward to $ 32 million. Williams, 340 Ore. at44.

Plaintiff and Philip Morris both appealed.The Court of Appeals reversed on plaintiffsappeal, concluding that the trial court shouldnot have reduced the punitive damagesaward. Williams v. Philip Morris Inc., 182Ore. App. 44, 72 (2002). The Court ofAppeals affirmed on Philip Morris's cross-appeal, concluding that the trial court did noterr in refusing to give Philip Morris'sproposed jury instruction No. 34. This courtdenied review.

The United States Supreme Court thengranted certiorari, vacated the judgment ofthe Court of Appeals, and remanded the caseto the Court of Appeals for furtherconsideration in light of the SupremeCourt's opinion in State Farm Mut.Automobile Ins. Co. v. Campbell, 538 U.S.408 (2003). After an extended analysis onremand, the Court of Appeals again reachedthe same conclusions that it had reached inits earlier opinion. Williams v. Philip

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Morris, Inc., 193 Ore. App. 527, 530 (2004).Specifically, the court concluded that the$79.5 million punitive damage award didnot violate due process. The court alsorejected Philip Morris's argument that thetrial court erred in refusing to give proposedjury instruction No. 34.

This court then allowed defendant's petitionfor review, and affirmed the decision of theCourt of Appeals. Williams, 340 Ore. at 38.This court concluded, also after an extensiveanalysis, that the $ 79.5 million punitivedamage award comported with federal dueprocess. As pertinent to the presentproceeding, this court also rejected PhilipMorris's argument that the trial court shouldhave given proposed jury instruction No. 34.Philip Morris had argued that Campbellprohibited courts from "'adjudicat[ing] themerits of other parties' hypothetical claimsagainst a defendant,"' because of the"'possibility of multiple punitive damageawards for the same conduct[.]'" Id. at 52(quoting Campbell, 538 U.S. at 423). Thiscourt concluded, however, that thosequotations from Campbell were taken out ofcontext. "The [full] quote referred only todissimilar acts and dissimilar claims; theCourt intended to prohibit a punitive damageaward from becoming a referendum on acorporate defendant's general behavior as acitizen." Id. at 52. But, this court stated,"evidence of similar conduct against otherparties may be relevant to a punitive damageaward." Id. at 53. Because proposed juryinstruction No. 34 therefore incorrectlystated federal requirements of due process oflaw (at least as this court understood it), thiscourt concluded that the trial court did noterr in refusing to give the instruction.

[In a footnote, the Court explained:"Plaintiff also had argued, in the alternative,that the refusal to give proposed instructionNo. 34 was not error, because that

instruction misstated other points of law.

Given this court's holding that theinstruction was erroneous with respect tofederal due process law, however, this courtdid not need to address those alternativearguments. Now, in light of the remand fromthe United States Supreme Court, we mustconsider those alternative reasons foraffirmance."]

On certiorari, the United States SupremeCourt reached a different conclusion. PhilipMorris USA, 127 S. Ct. at 1057 et seq. Theterms of the Court's decision are importantto understanding the issues presented to thiscourt. We therefore review that opinion insome detail.

After reviewing the procedural history of thecase, the Court summarized the limits thatdue process imposes on punitive damagesawards. Although the United StatesConstitution requires both procedural andsubstantive limits on punitive damageawards, in this case the Court only addressedthe procedural limits. Id. at 1063. As theCourt explained, "the Constitution's DueProcess Clause forbids a State to use apunitive damages award to punish adefendant for injury that it inflicts uponnonparties or those whom they directlyrepresent, i.e., injury that it inflicts uponthose who are, essentially, strangers to thelitigation." Id. The Court identified threereasons for that conclusion: First, adefendant cannot effectively defend againstclaims of injuries to nonparties. Second,permitting a punitive damages award topunish for harm to nonparties "would add anear standardless dimension to the punitivedamages equation," with speculation aboutthe nonparties magnifying the risk ofarbitrary treatment. And, third, the Courtfound that no authority existed to permitusing punitive damages to punish for harmto nonparties.

That said, the Court also went on to

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acknowledge that harm to nonparties (to theextent that it exists) may play a role in thepunitive damages calculus in the sense thatit is relevant to showing the degree ofreprehensibility of a defendant's conduct.The Court distinguished, however, betweenlegitimate use of evidence of such harm toestablish reprehensibility and illegitimateuse of that evidence to punish defendant forharm it caused to nonparties. As the Courtexplained:

Evidence of actual harm tononparties can help to show thatthe conduct that harmed theplaintiff also posed a substantialrisk of harm to the general public,and so was particularlyreprehensible. . . . Yet for thereasons given above, a jury maynot go further than this and use apunitive damages verdict to punisha defendant directly on account ofharms it is alleged to have visitedon nonparties.

Id. at 1064. The Court repeated the samepoint later in its opinion:

We have explained why we believethe Due Process Clause prohibits aState's inflicting punishment forharm caused strangers to thelitigation. At the same time werecognize that conduct that risksharm to many is likely morereprehensible than conduct thatrisks harm to only a few. And ajury consequently may take thisfact into account in determiningreprehensibility.

127 S. Ct. at 1065.

All in all, the Court concluded, the risks ofunfairness inherent in punitive damageawards mean that state courts must "provide

assurance that juries are not asking thewrong question, i.e., seeking, not simply todetermine reprehensibility, but also topunish for harm caused strangers." Id. at1064. The Court noted that that distinctionraised practical difficulties for reviewingcourts, difficulties that should be met byappropriate procedures:

How can we know whether a jury,in taking account of harm causedothers under the rubric ofreprehensibility, also seeks topunish the defendant for havingcaused injury to others? Ouranswer is that state courts cannotauthorize procedures that create anunreasonable and unnecessary riskof any such confusion occurring. Inparticular, we believe that wherethe risk of that misunderstanding isa significant one-because, forinstance, of the sort of evidencethat was introduced at trial or thekinds of argument the plaintiffmade to the jury-a court, uponrequest, must protect against thatrisk. Although the States havesome flexibility to determine whatkind of procedures they willimplement, federal constitutionallaw obligates them to provide someform of protection in appropriatecases.

Id. at 1065 (emphasis in original).

Having explained the general principles oflaw, the Court then applied those principlesto this case. "The instruction that PhilipMorris said the trial court should have givendistinguishes between using harm to othersas part of the 'reasonable relationship'equation (which it would allow) and using itdirectly as a basis for punishment." Id. at1064. The Court reviewed this court'sopinion in Williams, 340 Ore. at 35 et seq.,

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and concluded that that opinion permitteddirect punishment for harm to others,without limiting the use of such harm todetermine reprehensibility. For that reason,the Court vacated this court's opinion andremanded for further proceedings. The Courtspecifically explained its conclusion, and thenature of the remand, as follows:

As the preceding discussion makesclear, we believe that the OregonSupreme Court applied the wrongconstitutional standard whenconsidering Philip Morris' appeal.We remand this case so that theOregon Supreme Court can applythe standard we have set forth.Because the application of thisstandard may lead to the need for anew trial, or a change in the levelof the punitive damages award, weshall not consider whether theaward is constitutionally "grosslyexcessive."

Id. at 1065 (emphasis added).

Under the Supreme Court's remand, then, itis our task to apply the constitutionalstandard set by the Supreme Court in ourconsideration of the sole issue raised byPhilip Morris, viz., whether the trial courterred in refusing to give proposed juryinstruction No. 34. As we shall explain,however, there is a preliminary, independentstate law standard that we must consider,before we address the constitutionalstandard that the United States SupremeCourt has articulated.

A state court decision like the decision ofthe trial judge in this case to refuse to giveproposed jury instruction No. 34 may beaffirmed, without reaching the federalquestion, if there is an independent and

adequate state ground for doing so. See, e.g.,Osborne v. Ohio, 495 U.S. 103, 123 (1990)

(Ohio Supreme Court, applying state law,had held that defendant had waived dueprocess challenge by failing to object to juryinstructions at trial: "We have no difficultyagreeing with the State that [defendant's]counsel's failure to urge that the courtinstruct the jury on scienter constitutes anindependent and adequate state-law groundpreventing us from reaching [defendant's]due process contention on that point."). Webelieve that this is such a case, i.e., oneresting on an independent and adequate stateground for affirming the trial judge's ruling.

Under Oregon law, there are two differenttypes of error respecting jury instructions:(1) error in the failure to give a proposedjury instruction, and (2) error in the juryinstructions that actually were given. SeeBennett v. Farmers Ins. Co., 332 Ore. 138,152-53 (2001) (so indicating). As noted,Philip Morris failed to preserve for ourreview any claim that the jury instructionsactually given were erroneous. See Williams,340 Ore. at 54 (unpreserved in Court ofAppeals). This case, therefore, involves onlythe failure to give a proposed juryinstruction.

In Oregon, there is a well-understoodstandard governing claims of errorrespecting a trial judge's refusal to give aproffered instruction: An appellate court willnot reverse a trial court's refusal to give aproposed jury instruction, unless theproposed instruction was "clear and correctin all respects, both in form and insubstance, and . . . altogether free fromerror." Beglau v. Albertus, 272 Ore. 170,179, (1975); see also Hernandez v. BarboMachinery Co., 327 Ore. 99, 106 (1998)("there is no error [in refusing to give aproposed instruction] if the requestedinstruction is not correct in all respects");Owings v. Rose, 262 Ore. 247, 258 (1972)("The trial court is not obliged to give anincorrect instruction, or to give the correct

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portions of one which includes errors."). Theeffect of that standard is to require that aparty to litigation take responsibility for thejury instructions that a trial court eithergives or refuses to give. That means that, inthe case of the refusal to give aninstruction-and we repeat that that is allthat is at stake here-the party seeking aparticular instruction must be correctrespecting the rule of law stated in theinstruction. In this case, the United StatesSupreme Court has opined that there is a riskthat a jury will be confused about how totake into account harm that the defendantmay have caused to others. A trial courtmust, "upon request," protect against thatrisk. But, as with any other request for aninstruction, the question that we first mustaddress is whether the rest of Philip Momis'srequested instruction correctly stated Oregonlaw. It is not enough, for example, to offer aproposed instruction that is correct in partand erroneous in part, leaving the trial courtto solve the problem for itself. We also note,in passing, that asking the court to give amultiple-page instruction-essentiallyplacing all the party's eggs in oneinstructional basket-involves a significantdanger that the proffered instruction will beerroneous in some aspects. We turn to anexamination of proposed instruction No. 34in light of the standard just discussed.

Proposed instruction No. 34 addressed arange of issues relating to punitive damages,and plaintiff contends that it was erroneousin a number of ways that are unrelated to theissues addressed by the United StatesSupreme Court. Among other things,plaintiff contends that proposed instructionNo. 34 would have instructed the juryerroneously that (1) the Oregon statutoryfactors that the jury must find in order tojustify a punitive damage award werediscretionary, when they are mandatory; and(2) one factor to be considered in awardingpunitive damages was Philip Morris's

"motiv[ation]" to make "illicit profits." Aswe will explain, we agree with plaintiff onboth points.

. . . [B]efore we examine what proposedinstruction No. 34 actually would have done,we examine what it appears that defendantintended the instruction to accomplish.Oregon law provides that, in productliability actions (such as the present case),punitive damages should be awarded (if atall) based on seven criteria. ORS 30.925(2),which sets out that requirement, provides:

Punitive damages, if any, shall bedetermined and awarded basedupon the following criteria:

(a) The likelihood at the time thatserious harm would arise from thedefendant's misconduct;

(b) The degree of the defendant'sawareness of that likelihood;

(c) The profitabilitydefendant's misconduct;

of the

(d) The duration of the misconductand any concealment of it;

(e) The attitude and conduct of thedefendant upon discovery of themisconduct;

(f) The financial condition of thedefendant; and

(g) The total deterrent effect ofother punishment imposed uponthe defendant as a result of themisconduct, including, but notlimited to, punitive damage awardsto persons in situations similar tothe claimant's ...

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Proposed jury instruction No. 34 restatedmost of the foregoing factors-oftendrastically. It provided:

(2) The size of the punishment mayappropriately reflect the degree ofreprehensibility of the defendant'sconduct-that is, how far thedefendant has departed fromaccepted societal norms ofconduct. Factors that you may findto bear upon the degree ofreprehensibility include:

(a) The likelihood at the time thatserious harm would arise from thedefendant's misconduct, beyondthe harms generally understood toinhere in cigarette smoking;

(b) The degree of the defendant[']sawareness of that likelihood;

(c) The degree to which thedefendant was motivated by adesire to obtain illicit profits fromits misconduct;

(d) The duration of the misconductand any concealment of it;

(3) In determining how muchpunishment is necessary to achievethe goal of appropriate deterrence,you may consider the extent towhich the obligation to paycompensatory damages will sufficeto cause defendant and others torefrain from similar misconduct inthe future.

(4) Finally, you may also considerthe defendant's financial conditionas part of the process of arriving atan appropriate punishment.However, you may not punish thedefendant simply because it islarge. Rather, the paramount

consideration remains the degreeof reprehensibility of anymisconduct and the extent of anyharm caused by such misconduct.

We turn to plaintiffs critique of thatproposed instruction. Plaintiff first arguesthat proposed jury instruction No. 34incorrectly indicates that the statutoryfactors are discretionary and nonexclusive-"[fjactors that you may find to bear . . .include" (emphasis added)-while ORS30.925(2) actually makes those factorsmandatory and exclusive-"shall bedetermined and awarded based upon thefollowing criteria." (Emphasis added.) PhilipMorris offers no argument against plaintiffsproposed reading of the statute.

We agree with plaintiff that proposed juryinstruction No. 34 is defective in the waythat plaintiff argues. ORS 30.925(2) uses theword "shall," which generally indicates thatsomething is mandatory. See, e.g., Preble v.Dept. of Rev., 331 Ore. 320, 324, 14 P.3d613 (2000). The legislature's instruction thatany punitive damage award "shall bedetermined and awarded based upon thefollowing criteria" thus limited the scope ofthe jury's authority to the list that followed.Altering that list in a jury instruction (asdefendant proposed to do) would thereforefly in the face of the statute. Plaintiff mighthave a constitutional right to a furtherinstruction of the kind suggested by theUnited States Supreme Court in Williams,but nothing in that right negated the trialcourt's duty to follow ORS 30.925(2) in allother respects. To have given the instructionin the form proffered by defendant thuswould have been error under Oregon law.

Plaintiff also maintains that proposed juryinstruction No. 34 misstates one of thestatutory factors in ORS 30.925(2). Whilethe proposed jury instruction would havepermitted the jury to consider "[t]he degree

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to which the defendant was motivated by adesire to obtain illicit profits from itsmisconduct," ORS 30.925(2)(c) actuallydirects the jury to consider "[t]heprofitability of the defendant's misconduct."That is, proposed jury instruction No. 34focuses on motive or intent, while the statuteinstead focuses on outcome. Again, to havegiven the instruction in the form profferedby defendant would have been error underOregon law.

On remand, Philip Morris makes noargument that proposed jury instruction No.34 accurately states the law in that respect.In the prior briefing in this case, however,Philip Morris had addressed that issue inpart. As to the words "illicit profits," PhilipMorris had contended that those words werenecessary to "prevent[] the jury from relyingon [Philip Morris's] 'profits'-withoutregard to whether they were derived fromlawful or unlawful conduct-as an indirectway of punishing lawful cigarette sales." Insupport, Philip Morris cited CooperIndustries, Inc. v. Leatherman Tool Group,Inc., 532 U.S. 424, 441-42 (2001), in whichthe Court stated that "it would be unrealisticto assume that all of [defendant's] sales of [acompeting product] would have beenattributable to its misconduct in using aphotograph of [plaintiffs product] in itsinitial advertising materials." Id. at 442.

Again, we agree with plaintiff that PhilipMorris's justification fails, and proposedjury instruction No. 34 misstated the law.While the statutory factor requires anexamination of the profitability of themisconduct-an objective fact-proposedjury instruction No. 34 instead focuses onPhilip Morris's subjective state of mindregarding profit-i.e., whether Philip Morriswas "motivated by a desire" to profit frommisconduct. And, while ORS 30.925(2)(c)directs the jury to consider all "profitabilityof the misconduct," the proposed jury

instruction permits the jury to consider only"illicit profits from its misconduct"(emphasis added), thus implicitly directingthe jury to try to subdivide the profits frommisconduct into legal and illegal parts-acircular inquiry, at best.

We see no merit to Philip Morris's argumentthat the jury instruction needed to refer to"illicit profits" to keep the jury fromconsidering lawful profits, because thatsimply misreads the statutory factor. ORS30.925(2)(c) does not allow the jury toconsider profitability generally-it insteadlimits the jury's inquiry to a consideration of"the profitability of the misconduct."(Emphasis added.) But, once theprofitability of the misconduct is identified,it makes no difference whether it wasotherwise licit (not against law) or illicit(against law). Either way, it was relevant tothe jury's inquiry.

We think that it follows from the foregoinganalysis that, even assuming that proposedjury instruction No. 34 clearly and correctlyarticulated the standard required by dueprocess, it contained other parts that did notstate the law correctly. Accordingly, the trialcourt did not err in refusing to give it. Ourprevious conclusion to that effect isreaffirmed. And, because our rulingrespecting the trial judge's refusal to giveproposed jury instruction No. 34 wascorrect, it follows that the remaining aspectsof the judgment against defendant should bereaffirmed. That latter point is true, not onlybecause reconsidering the remaining aspectsof the judgment would lie outside the scopeof the Supreme Court's remand, but alsobecause defendant has not advanced anyseparate arguments for doing otherwise. Wetherefore reaffirm our previous decision inthis case in all particulars.

The court's decision in Williams v. PhilipMorris Inc., 340 Ore. 35 (2006), is adhered

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to. The decision of the Court of Appeals isAFFIRMED. The judgment of the circuitcourt is reversed, and the case is

REMANDED to the circuit court for furtherproceedings.

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"Justices to See Philip Morris Case a Third Time"

The New York TimesJune 10, 2008

Linda Greenhouse

A staring contest between the United StatesSupreme Court and the Supreme Court ofOregon over a $79.5 million punitive damageaward to a smoker's widow has entered itsfifth year, and so far neither side has blinked.

The justices have twice vacated the awardagainst the cigarette maker Philip Morris,once in 2003 and again last year, and theOregon court has twice reinstated it. OnMonday, the justices announced that theywould review the case for a third time.

The scope of their review will be deliberatelynarrow. Philip Morris, a unit of the AltriaGroup, appealed the latest Oregon SupremeCourt decision on two grounds. One was thatthe ratio of punitive damages to compensatorydamages, nearly 100 to one, was so great as tobe constitutionally impermissible. The secondwas that the Oregon court's invocation of astate procedural law in its latest ruling againstPhilip Morris came too late in the day to besustained and represented little more than aneffort to evade the instruction the justicesgave last year to reconsider the damagesaward.

The justices denied review on the firstquestion, which would have had broadapplication to all punitive damages cases. Inearlier rulings, the Supreme Court hassuggested that punitive damages should be nomore than nine times the compensatorydamages, and perhaps a good deal less thanthat, but there is evidently not a clear majorityto convert the suggestion into a firm rule.

Instead, they will hear Philip Morris's appealonly on the second question, which applies tothis convoluted case, now in its ninth post-

verdict year, and to no other. The justices, inother words, appeared less concerned withmaking law than with asserting their ownauthority over that of state courts on the issueof punitive damages.

In its February 2007 ruling in Philip MorrisUSA v. Williams, the court overturned theaward on the ground that the jurors mighthave been allowed to calculate the amountbased on harm to other, unnamed smokers inaddition to Jesse D. Williams, the man whosewidow, Mayola Williams, brought thelawsuit. The 5-to-4 majority ordered theOregon Supreme Court to reconsider theaward and make sure it was not calculatedbased on harm to "nonparties."

The Oregon trial court that originally heardthe case had rejected a proposed juryinstruction from the cigarette maker thatwould have told the jurors "not to punish thedefendant for the impact of its allegedmisconduct on other persons, who may bringlawsuits of their own."

In its latest ruling reinstating the $79.5million award, the Oregon Supreme Courtsaid the trial court had been correct to rejectthe proposed instruction because it wasflawed as a matter of state law by includingtoo many unrelated issues.

Philip Morris's appeal, also called PhilipMorris v. Williams but with a new docketnumber, 07-1216, told the justices that thestate court had never raised this objection inany of the previous proceedings. "The OregonSupreme Court's defiance of this court'sdirective should not be countenanced," theappeal said.

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"Justices Uphold Cigarette Damages"

The OregonianFebruary 1, 2008Ashbel S. Green

The widow of a Portland janitor wonanother round Thursday in her nine-yearlegal battle with the world's largest cigarettemaker.

The Oregon Supreme Court upheld a $79.5million punitive damage award againstPhilip Morris for its role in the death ofJesse D. Williams, a longtime Marlborosmoker who died of lung cancer in 1997.

"Jesse wanted to fight back against thecigarette companies," Mayola Williams saidin a statement. "If he was here, he would bevery proud today."

The ruling was a surprise.

Last year, the U.S. Supreme Courtoverturned the verdict on the grounds that afaulty jury instruction deprived PhilipMorris of its constitutional rights.

The nation's highest court-and the finalword on federal legal cases-sent the suitback to Oregon.

But it didn't provide specific instructionsabout what to do.

And with several options, Oregon's highestcourt decided that the verdict could standbecause Philip Morris had effectivelyforfeited its right to appeal the juryinstruction.

Company officials condemned the Oregoncourt.

"This is an inexplicable attempt by theOregon Supreme Court to avoid the ruling

of the nation's highest court," William S.Ohlemeyer, the company's vice presidentand associate general counsel said in astatement.

Ohlemeyer promised to appeal again to theU.S. Supreme Court, which likely willdecide next fall whether to take the caseagain.

To add to the intrigue, Thursday's rulingwas the second time the Oregon SupremeCourt has upheld the verdict after the U.S.Supreme Court overturned it.

In 2003, the U.S. Supreme Court orderedOregon to reconsider whether the $79.5million punitive damage award wasexcessive. The U.S. Supreme Court has saidthat most punitive damage awards should beno more than nine times the award ofcompensatory damages.

The $79.5 million punitive award is nearly100 times the $821,485 in compensatorydamages awarded in the case.

But the U.S. Supreme Court did notexplicitly tell Oregon to overturn the verdict.

And Oregon didn't.

In 2006, the Oregon Supreme Court notedthe 9-1 ratio, but said the company'slongstanding policy of lying about the risksof smoking was so "reprehensible" that thelarger award was justified.

Benjamin C. Zipursky, a professor atFordham University School of Law in NewYork, said the Oregon Supreme Court

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seemed unusually committed to the verdictgiven "what is in some sense the obviousdirection of what the Supreme Court seemsto feel about this case."

But without a direct order to reduce theverdict, the Oregon Supreme Court has sofar refused to do so.

"They're calling their bluff," Zipursky said.

Howard Bashman, a Pennsylvania attorneywho runs the influential legal blog, HowAppealing, said the ruling certainly had theappearance of a state court ignoring theorders of a superior court.

But Bashman said the decision was based onstate law and was carefully written in a waythat doesn't seem to thumb its nose at thenation's highest court.

"It's not something that would cause offense

to the U.S. Supreme Court," he said.

With Philip Morris promising to appeal, thebig question is whether the U.S. SupremeCourt will take the case a third time andsquarely answer the question of whether the$79.5 million award is excessively large.

Bashman doubts it, saying that because ofsome procedural issues, the case has"vehicle problems-it's not a good vehiclefor announcing a good rule on punitivedamages."

Zipursky also said he's not sure the SupremeCourt wants to take the case again becausethe justices don't want to look as if they areriding to the rescue of a tobacco companythat can easily afford to pay the verdict.

Why?

"Reputational concerns," Zipursky said.

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"Justices Overturn Tobacco Award"

The Washington PostFebruary 21, 2007

Robert Barnes

The Supreme Court yesterday overturned anearly $80 million verdict intended topunish the Philip Morris tobacco companyfor endangering the lives of smokers, andthe justices set limits on how jurors candecide to make big business pay forwrongdoing.

The court's narrowly written 5 to 4 decisionsaid that an Oregon court had improperly letjurors calculate the harm done to many indeciding damages paid to an individual.

The court ruled that the Constitution's due-process clause forbids a state to use punitivedamages to punish a company for injury itinflicts upon others who are "essentially,strangers to the litigation," according to themajority opinion, written by Justice StephenG. Breyer.

The case was seen at the beginning of theterm as one of the most important businessdecisions that the court would make undernew Chief Justice John G. Roberts Jr., and itwas clearly a victory for Philip Morris andother big companies. It continues thereasoning in the court's recent rulings thatpunitive damages-aimed at punishing acompany and deterring more wrongdoing-must be proportionate to the wrongcommitted.

But in sending the case back to Oregoncourts for further litigation, the justicessidestepped a decision that industry hadmost wanted: whether to set a solid limit onhow much could be awarded for punitivedamages, perhaps based on a specific ratioto the actual damages done to the individual

who brought the suit.

Still, business advocates praised thedecision.

"This is a really important case for thebusiness community, and a big win," saidRobin Conrad, senior vice president of theNational Chamber Litigation Center of theU.S. Chamber of Commerce. She said itwould be valuable to insurance companies,automakers, pharmaceutical manufacturersand other firms that have been hit with hugepunitive-damages awards in recent years.

But Robert S. Peck, the Washington lawyerwho represented the Oregon smoker'swidow who brought the suit, said thedecision "slays a dragon that didn't exist."Peck contended that the jury calculated itslarge award not on the number of othervictims but on the company's profitability,and he predicted that Oregon courts will"reaffirm" that they "did the right thing."

How the jury decided the amount to award isunclear, and confusion at the Supreme Courtoral arguments foreshadowed the justices'ultimate decision. "Isn't perhaps the bettercourse to send this back to them . . .?"suggested Justice David H. Souter, whovoted with the majority to do just that.

The case involved Jesse Williams, aPortland janitor who smoked at least twopacks of Marlboros every day for 45 yearsand died of lung cancer in 1996. PhilipMorris, now owned by Altria Group, haddenied during that time that its cigaretteswere addictive, and at trial, lawyers for his

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estate told the jury to consider the damagedone to other smokers in Oregon.

The attorney for his widow, MayolaWilliams, told the jury to "think about howmany other Jesse Williams in the last 40years in the state of Oregon there havebeen."

The jury awarded Mayola Williams$821,000 in compensation and then tackedon the $79.5 million punitive award. (Not allstates allow punitive awards; in Oregon, 60percent of the award goes to the state, Pecksaid.) The nearly 100 to 1 ratio of punitivedamages to compensatory damages is faroutside the "single-digit" ratio the SupremeCourt suggested in previous cases, but a firmlimit has never been set.

The majority opinion issued yesterdayagreed with Williams that the jury couldhear evidence of harm to others to show thata company's conduct was reprehensible,which could increase the punitive-damagesaward.

But Breyer wrote that a "jury may go nofurther than this and use a punitive damagesverdict to punish a defendant directly onaccount of harms it is alleged to have visitedon nonparties."

Dissenting justices said they wondered howa judge could properly instruct a jury to

consider what Justice Ruth Bader Ginsburgcalled our "less than crystalline precedent."

The majority "relies on a distinctionbetween taking third-party harm intoaccount in order to assess thereprehensibility of the defendant'sconduct-which is permitted-from doingso in order to punish the defendant'directly'-which is forbidden," JusticeJohn Paul Stevens wrote. "This nuanceeludes me."

The court's split in recent decisions limitingpunitive damages is far different from theideological differences that are apparent inmany decisions on social issues. Breyer wasjoined by Roberts and Justices Samuel A.Alito Jr., Anthony M. Kennedy and DavidH. Souter.

Stevens, who in the past has supportedlimiting the amounts of punitive awards,joined Ginsburg and Justices Antonin Scaliaand Clarence Thomas.

The case was sent back to the OregonSupreme Court, which had upheld the largepunitive award. Breyer wrote that theapplication of the court's standard may "leadto the need for a new trial, or a change in thelevel of the punitive damages award."

The case is Philip Morris USA v. Williams,case No. 05-1256.

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"Oregon Supreme Court Backs $79.5 Million Tobacco Award"

The OregonianFebruary 2, 2006Ashbel S. Green

The Oregon Supreme Court today affirmed a$79.5 million punitive damages awardagainst tobacco giant Philip Morris.

The decision comes about three years afterthe United States Supreme Court ordered theOregon courts to reconsider the verdict inwhat some interpreted as a strong suggestionto reduce it significantly.

But the Oregon Supreme Court said PhilipMorris' conduct justified such a large award.

"Philip Morris' conduct here wasextraordinarily reprehensible, by anymeasure of which we are aware," JusticeMichael Gillette wrote for the unanimouscourt. "It put a significant number of victimsat profound risk for an extended period oftime. The state of Oregon treats suchconduct as grounds for a severe criminalsanction, but even that did not dissuadePhilip Morris from pursuing its scheme."

Gillette wrote that "Philip Morris, withothers, engaged in a massive, continuous,near-half-century scheme to defraud theplaintiff and many others, even when PhilipMorris always had reason to suspect-andfor two or more decades absolutely knew-that the scheme was damaging the health ofa very large group of Oregonians-thesmoking public-and was killing a numberof that group."

The award stems from a lawsuit by thefamily of Jesse D. Williams, a formerPortland janitor and longtime smoker whodied of lung cancer in 1997.

During the 1999 trial, lawyers for theWilliams family argued for a large punitivedamages award because Philip Morrisofficials had known for more than half acentury that smoking was deadly, hadconsistently downplayed the health risks andhad manipulated the levels of nicotine tokeep smokers addicted.

In addition to the $79.5 million punitivedamages award, which at the time was thelargest smoking-death verdict in the country,the jury awarded more than $800,000 incompensatory damages.

On appeal, Philip Morris lawyers arguedthat punitive damages were too high. Theypointed out that the U.S. Supreme Court hadsaid there must be a reasonable ratiobetween the compensatory and punitivedamage awards.

The nearly 100-to-1 ratio in the Williamscase was too big, Philip Morris lawyersargued.

The Oregon Court of Appeals upheld theaward, and the Oregon Supreme Courtrefused to take it.

Philip Morris appealed to the U.S. SupremeCourt, which in 2003 vacated the award andordered the Oregon Court of Appeals toreconsider the case in light of a U.S.Supreme Court opinion on punitive damagesout of Utah.

The Oregon Court of Appeals in 2004upheld the award.

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"High Court Sends back Tobacco Case Award"

Los Angeles TimesOctober 7, 2003David Savage

The Supreme Court tossed out a largepunitive damage verdict against cigarettemaker Philip Morris on Monday, tellinglower court judges to reevaluate the size ofthe award.

The court set aside a $79.5-million awardthat was designed to punish the tobacco firmfor the lung cancer death of an Oregonjanitor. In another personal injury case, it setaside a $3-million verdict in which jurorssought to punish DaimlerChrysler for thedeath of a Kentucky man who was ejectedfrom his Dodge Ram pickup in a crash.

The court's one-line orders Mondayfollowed a major ruling in April that sharplylimited the power of juries to punishcompanies with huge punitive damageawards. The justices stressed that civillawsuits are intended to compensateplaintiffs for their losses if they were injuredand wronged by another. It is not a systemfor punishing unpopular industries and"unsavory businesses," the court said.

Since the 1970s, an increasing number oflawsuits filed by injured individuals haveresulted in multimillion-dollar verdictsagainst corporations. Typically, the jurorsare asked to award actual damages to coverthe victim's losses and then award a second,larger amount to punish the company for itswrongdoing.

In its April decision in State Farm vs.Campbell, the high court warned judges thatthey must rein in punitive damage verdictsthat greatly exceed the actual losses of thevictims who brought the lawsuit.

In that case, a Utah jury had ruled againstthe auto insurer with $145 million inpunitive damages for having refused to paythe full verdict against a man who caused anaccident that killed another driver.

Ordinarily, after handing down such aruling, the justices act on a series of pendingappeals in related cases and send them backto lower courts to be reevaluated.

They did just that in May when theyreversed two large verdicts against FordMotor Co., including a $290-millionpunitive verdict in California. In that case, aStanislaus County jury had awarded morethan $6 million to a family that sufferedinjuries and a death when its Bronco rolledover, plus $290 million to punish Ford forwhat it said was gross wrongdoing inmanufacturing a defective vehicle.

In Monday's action involving Philip Morrisand DaimlerChrysler, the high court did notrule out the possibility of punitive damages.Its order told lower courts that the amount ofthese damages should be in line with theactual losses of the victim.

Only in the rarest circumstance can thepunitive verdict "exceed a single-digit ratio"compared with the actual damages, saidJustice Anthony M. Kennedy. For example,if a jury awards $1 million to a plaintiff foractual losses, the punitive damages shouldnot exceed $9 million, he said.

In the Oregon case, lawyers for PhilipMorris had appealed, saying "the 97-1 ratioof punitive-to-compensatory damages in this

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case cannot stand constitutional scrutiny."

Jesse Williams started smoking during the1950s and continued a three-pack-a-dayhabit for four decades. He died of lungcancer in 1997. His family sued PhilipMorris and won $521,000 in compensatorydamages. The jury tacked on $79.5 millionin punitive damages. The verdict was upheldlast year by the Oregon Supreme Court.

On Monday, the court granted an appeal byPhilip Morris, vacated the lower court rulingand sent the case back to Oregon "for furtherconsideration in light of State Farm vs.Campbell."

The tobacco industry has several other largepunitive damage awards on appeal,including four in California.

Last month, a state appeals court in SanFrancisco reduced the punitive damagesawarded to a former smoker with lungcancer to $9 million from $25 million. Butthe court refused Philip Morris' request totoss out the award entirely, saying $9million was "permissible and appropriate"because Philip Morris had "touted tochildren what it knew to be a cumulativelytoxic substance."

Two other cases in California that resultedin punitive damages of $28 billion and $3billion were later reduced to $28 million and$100 million, respectively.

Shares of Philip Morris parent Altria GroupInc. rose 34 cents Monday to $45.03.DaimlerChrysler gained 36 cents to $35.94.Both trade on the New York StockExchange.

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"Jury Awards $81 Million to Oregon Smoker's Family"

The New York TimesMarch 31, 1999

Barry Meier

A state jury in Portland, Ore., yesterdayordered the largest award in a smoking-related lawsuit, deciding that the PhilipMorris Companies must pay $81 million tothe family of a man who smoked Marlborocigarettes for four decades before he died.

The verdict, coming just a month after a SanFrancisco jury awarded $51 million inanother case brought by an individualsmoker against Philip Morris, could indicatethat the tobacco industry's legal fortunesmay have shifted, analysts said. In recentyears, the public has witnessed a constantdrumbeat of documents damaging tocigarette makers, which industry analystssay may be a factor in the jury decisions.

For example, in both cases involving PhilipMorris, the juries called for large punitivedamages, which are meant to punish acompany for its behavior. In yesterday'sdecision, the jury awarded $79.5 million inpunitive damages and $1.6 million incompensatory damages to the family ofJesse Williams, who died in 1997, fivemonths after lung cancer was diagnosed. Inthe San Francisco case, the jury awarded$50 million in punitive damages.

Yesterday Mr. Williams's wife, Mayola,said he had had a dying wish. "He wanted tomake cigarette companies stop lying aboutthe health problems of smokers," she toldThe Associated Press. "This jury agreedwith his goals."

Philip Morris, which is appealing theCalifornia verdict, said yesterday that itwould also appeal the Oregon verdict.

Higher courts have thrown out the fewprevious victories by smokers in cigarette-related lawsuits, often on proceduralgrounds.

"No verdict has ever withstood an appeal,and we don't believe this will be a first one,"said Gregory Little, the associate generalcounsel for Philip Morris, which is thecountry's biggest cigarette maker.

But tobacco industry analysts saidyesterday's decision was a particular setbackfor cigarette makers because state productliability laws in Oregon are far tougher thanthose in California or Florida, the otherstates in which producers have suffered legallosses.

In Oregon, a smoker is barred fromreceiving an award if a jury determines thathe or she bore more than 50 percent liabilityfor the problem over which a suit wasbrought.

Cigarette company lawyers argued that Mr.Williams was aware of the health risk whenhe decided to continue smoking. The jurydetermined that Mr. Williams and PhilipMorris equally shared liability.

William A. Gaylord,Williams family,acknowledged that Mr.responsible for his deatt

a lawyer for thesaid they hadWilliams was partly

"The problem has been that Philip Morrisand other cigarette companies have neveraccepted an ounce of responsibility," Mr.Gaylord said. "They deny everything. They

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essentially say to their very best customersthat you get what's coming to you forbelieving us."

Gary Black, a tobacco industry analyst withSanford C. Bernstein & Company in NewYork, said that added to the Californiadecision, yesterday's verdict suggested thatthe industry's $206 billion settlement lastyear with 46 states had failed to put its legaltroubles to rest.

Under that agreement, which resolvedlawsuits brought by the states to recoverhealth care expenses related to smoking,individual smokers and groups of them canstill sue. Four states had earlier settled theirclaims in deals with the industry.

"I think the industry has got to get its headout of the sand and stop believing that thesettlement got them closure," Mr. Blacksaid. "With all the documents and whistle-blowers out there, juries are increasinglygoing to award damages."

In trading after the verdict, Philip Morrisstock fell $3.4375 a share to close at $37.75a share.

In the California case last month, the juryordered Philip Morris to pay $51.5 millionto Patricia Henley, who said her lung cancerhad been caused by more than 35 years ofsmoking. That verdict was the largest awardof its kind until yesterday.

Cigarette industry officials have portrayedthat case as an aberration, pointing to anumber of recent legal victories. Earlier thismonth, a Federal jury in Akron, Ohio, ruledthat tobacco companies did not have torepay the costs of treating smoking-relatedillnesses to dozens of union health andbenefit plans in Ohio.

But analysts said the back-to-back losses byPhilip Morris in individual cases suggestedthat cigarette makers were likely to see moredefeats and escalating awards.

"It does seem to appear in the last two casesthat the juries wanted to punish PhilipMorris and the industry," said BonnieZoller, an analyst with Credit Suisse FirstBoston Corporation in New York.

The Oregon lawsuit was brought by the wifeand children of Mr. Williams, a formerjanitor in the Portland school system whowas 67 when he died. It charged that PhilipMorris knew cigarettes caused cancer andmisrepresented that information.

In making its finding, the Oregon jury alsohad to conclude that the misrepresentationstook place over the past decade becausestate law limits the time in which plaintiffscan seek damages.

There are more than 500 smoking-relatedlawsuits pending against Philip Morris.President Clinton also announced this yearthat he had directed the Justice Departmentto begin preparing a lawsuit against cigarettemakers to recover Medicare and otherFederal money spent treating illnessesrelated to smoking.

Mr. Black said a Federal lawsuit could be inthe industry's interest because it mightprovide a way to resolve individual cases aswell.

"The industry has got to make a decision,"he said. "They have to recognize that thetide has turned and decide they have to getsome type of settlement. Either that or theyhave to build in the anticipated price oflitigation in the cost of cigarettes."

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"A New Day on Punitive Damages Law"

Scotusblog.comJune 25, 2008

Lyle Denniston

Conspicuous in the Supreme Court's lengthyand scholarly review Wednesday of the rolepunitive damages verdicts play in punishingserious wrongdoing, especially by bigcorporations, there is this cruciallysignificant statement: "The real problem, itseems, is the stark unpredictability ofpunitive awards." And, for that problem, theCourt has found a simple, easy-to-usesolution: a low numerical ratio between thedamages awarded to compensate for actualloss or harm and the damages awarded ontop of that to punish or to make an exampleof the wrongdoer. In the case before itWednesday, the Court set the ratio at 1-to-1.That approach provides a rule-of-thumb thatmay well guide the Court as it looks, in thefuture, at a wide array of punitive verdicts.

It is necessary, in examining what the Courthas done in Exxon Shipping Co. v. Baker(07-219), the celebrated case of the ExxonValdez's oil spill in Alaskan waters 19 yearsago, to acknowledge that this is not aconstitutional ruling, that it is only about theCourt's common-law powers, and that itarises only in the context of law governingmaritime commerce. But to look at it only inthose narrow terms is to miss the signal thatthe Court is giving-that is, it has grownhighly skeptical that it can spell out, inwords rather than numbers, workableguidelines that could bring some sense-some consistency-to punitive damagesawards.

For years, the Court has had on display itsprevailing view that punitive damage awardsin the modern era have gotten out of control.It has undertaken, under the Constitution's

Due Process Clause, to lay down a numberof verbal standards that supposedly couldkeep juries in check when they ponderpunitive verdicts. But, try as it might, itsefforts have not achieved that objective; yearafter year, corporations return again andagain to the Court, arguing anew that juriesand some lower courts don't get it, that theproblem of punitives is not getting solved.

In Justice David H. Souter's long anddetailed opinion in Exxon Shipping, theCourt makes clear that it has not seenconvincing evidence that juries are acting inrunaway fashion, or that the actual dollaramounts of punitive awards are far too high.It homes in on the central problem it sees:"stark unpredictability," which it perceivesas an indication that maybe the process isnot fair because of its inconsistency.

That comes in a part of the opinion wherethe Court was examining punitive damagesin a much wider context than merelymaritime law, or federal common law.Poring over the options it sees for dealingwith the unpredictability phenomenon, itfinds that "verbal formulations" of punitivedamages limits have not worked to produceconsistency. The Court says explicitly that itis "doubtful that anything but a quantifiedapproach will work." It expresses itsconcern over those trying to manage asystem without numerical guidelines being"left at large, wandering in deserts ofuncharted discretion."

It then turns to alternatives for a verbalapproach: a hard dollar ceiling on anypunitive award, or "pegging punitive to

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compensatory damages using a ratio ormaximum multiple." And, since it isoperating in the Exxon Shipping case as acommon-law court, unguided byconstitutional or statutory mandates, it isfree to choose which of those alternatives toapply in the maritime context. It chooses theratio approach, and settles here on the 1-to-1. (It should be noted, as a matter of caution,that this particular 1-to-1 gauge is chosen ina case where corporate behavior was foundto be more reckless than malicious, andwhere there was a sizable compensatoryverdict; a somewhat higher ratio-but still anumber-might be appropriate withoutthose two factors in a future case.)

Justice Souter's opinion goes on to reject thesuggestion that the Court, in so choosing, isengaging too much in policy and too little inprinciple. The opinion comments:"Traditionally, courts have accepted primaryresponsibility for reviewing punitivedamages and thus for their evolution, and if,in the absence of legislation, judiciallyderived standards leave the door open tooutlier punitive-damages awards, it is hardto see how the judiciary can wash its handsof a problem it created, simply by callingquantified standards legislative. . . . Historycertainly is no support for the notion that

judges cannot use numbers."

Since it is the Court that decidesconstitutional standards, perhaps the samesentiments as expressed by Justice Soutermight apply in that context, too. If so, thosemaking future Due Process claims againstpunitive awards might well suggest thatthere is merit to going to the numericalapproach there, too. True, Justice Souterdoes say, at one point, that the Court wasreaching for "more rigorous standards" inthe maritime/common law arena than theConstitution would require, that may notmean that the Court, in time, would find thatusing the numbers is a better alternative thanthe verbal formulations the Court has laiddown in judging the constitutionality ofpunitive verdicts.

What's more, in a final footnote in theopinion, Justice Souter suggests, even in theExxon Shipping context, "the constitutionalouter limit may well be 1:1 ."

It hardly will be a surprise if lawyers forcorporations facing large punitive awardswill find ways to cite Exxon Shipping aspersuasive authority for adopting thenumbers approach as a workable formulaunder the Constitution.

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Altria Group v. Good

07-562

Ruling Below: Good v. Altria Group, Inc., 501 F.3d 29 (1st Cir. 2007).

Plaintiffs are all smokers who allege that Defendant cigarette manufacturers committed fraudwhen they advertised cigarettes as "light" or "low in tar" without including actual tar andnicotine levels. Plaintiffs claim this action violated the Maine Unfair Trade Practices Act.Defendants claim that Plaintiffs' action is preempted by the Federal Cigarette Labeling andAdvertisement Act. The First Circuit ruled that the Plaintiffs' state law action was not explicitlyor implicitly preempted by federal law, overturning the District Court.

Question Presented: To ensure that interstate commerce is "not impeded by diverse,nonuniform, and confusing cigarette labeling and advertising regulations," Congress hasprecluded the States from imposing any "requirement or prohibition based on smoking andhealth . . . with respect to the advertising or promotion of any cigarettes," and has authorized theFederal Trade Commission to regulate "unfair or deceptive acts or practices in the advertising ofcigarettes." 15 U.S.C. §§ 1331, 1334, 1336. Based on studies suggesting that cigarettes withcomparatively lower tar and nicotine yields may present fewer health risks, the FTC requirestobacco companies to disclose those yields as measured using an FTC-mandated test, and hasauthorized tobacco companies to advertise cigarettes using "descriptors," such as "light," asshorthand references to the numerical test results. Respondents in this case contend that suchdescriptors are misleading, in violation of a state deceptive trade practices statute.

The question presented is whether state-law challenges to FTC-authorized statements regardingtar and nicotine yields in cigarette advertising are expressly or impliedly preempted by federallaw.

Stephanie GOOD, Lori A. Spellman and Allain L. Thibodeau, individually and on behalf ofothers similarly situated, Plaintiffs-Appellants

V.

ALTRIA Group, Inc., and Philip Morris USA Inc., Defendnats-Appellees

United States Court of Appeals for the First Circuit

Decided August 31, 2007

[Excerpt: some footnotes and citations omitted.]

HOWARD, Circuit Judge company (collectively, "Philip Morris"), onstate-law claims based on the marketing of

The plaintiffs appeal from the entry of "Light" cigarettes. The district court ruledsummary judgment for the defendants, that these claims were preempted by thePhilip Morris USA Inc. and its parent Federal Cigarette Labeling and Advertising

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Act (the "FCLAA"), which provides that"[n]o requirement or prohibition based onsmoking and health shall be imposed underState law with respect to the advertising orpromotion of any cigarettes the packages ofwhich are labeled in conformity with theprovisions of this chapter." 15 U.S.C. §1334(b) (1998). Because we find that theclaims are not preempted, and becausePhilip Morris's alternative arguments foraffirmance are also unavailing, we vacatethe decision of the district court and remandfor further proceedings.

I.

The plaintiffs, who say they have smokedMarlboro Lights for at least fifteen years,claim that Philip Morris has employed unfairand deceptive practices in "designing,manufacturing, promoting, marketing andselling Marlboro Lights and CambridgeLights purporting to be 'light' and having'Lowered Tar and Nicotine,' all while [it]knew those cigarettes would not deliver lesstar or nicotine to the consumer." Thesebrands have rings of ventilation holes intheir filters, causing air to mix with thesmoke as the smoker draws on the cigarette.As a result, "Lights" register lower levels oftar and nicotine than their so-called "full-flavor" counterparts under a test known asthe "Cambridge Filter Method." This testuses a machine to "smoke" a cigarette,collecting the resulting tar and nicotine in afilter for weighing.

The plaintiffs allege that a person smoking"light" cigarettes, however, engages inunconscious behaviors that essentiallynegate the ventilation effect, such as takingmore frequent, voluminous, or longer puffs,covering the air holes with the lips or thefingers, or smoking additional cigarettes.Due to such "compensation," which theplaintiffs attribute to the addictive nature of

nicotine, they assert that a smoker consumesthe same quantities of tar and nicotine fromlight cigarettes as from full-flavored ones.The plaintiffs explain that the relative levelsof these substances bear on a reasonableconsumer's decision on which cigarette topurchase because consumers understand thatreducing the quantities of tar and nicotine incigarettes reduces their adverse healtheffects. Thus, the plaintiffs allege that PhilipMorris has misrepresented material facts bydescribing its "Lights" as such or as having"lower tar and nicotine," and that PhilipMorris-which was aware of the"compensation" phenomenon before itbegan marketing its "Lights" brands-did sowith the intent to deceive.

The plaintiffs claim that thesemisrepresentations amount to unfair ordeceptive acts or practices in violation of theMaine Unfair Trade Practices Act. Me. Rev.Stat. Ann. tit. 5, § 207 (2002). This statuteentitles any person who suffers a loss ofmoney or property as a result of such acts orpractices to sue for "actual damages,restitution and for . . other equitable relief."Id. § 213(1). The plaintiffs have expresslydisclaimed any "damages for personalinjuries," but they do seek other relief,including the return of the sums they paid topurchase Marlboro Lights and CambridgeLights, in addition to punitive damages andthe attorneys' fees as authorized by the Act.The plaintiffs also seek to certify a class ofall purchasers of Marlboro Lights orCambridge Lights in Maine throughNovember 2002.

In response to the plaintiffs' amendedcomplaint, Philip Morris promptly movedfor summary judgment. Philip Morris arguedthat the plaintiffs' claims were (1) expresslypreempted by the FCLAA, (2) implicitlypreempted by "the efforts of Congress andthe [Federal Trade Commission] for 40

167

years to implement a national, uniformpolicy of informing the public about thehealth risks of smoking," and (3) for similarreasons, not cognizable under the MaineUnfair Trade Practices Act, which does notapply to "[t]ransactions or actions otherwisepermitted under laws as administered by anyregulatory board or officer acting under thestatutory authority of the . . . United States."Me. Rev. Stat. Ann. tit. 5, § 208(1)....

[Starting in 1959, the FTC required cigarettemanufacturers to report the amount of tarand nicotine in their cigarettes based on theCambridge Filter Method. The FTC alsoreported the test results to Congress through1998, continuing even after the cigarettecompanies agreed to voluntarily report thetest results in their advertising.]

Based on this regime, Philip Morrischaracterized the lawsuit as "a challenge tothe FTC's regulatory scheme," because"terms like 'light' and 'lowered tar' .

convey precisely the same comparativeinformation" as the tar and nicotinemeasurements derived from testing underthe Cambridge Filter Method. The districtcourt agreed, reasoning that

To respond to Plaintiffs' claims,Philip Morris would have to tellthe public that the FTC Methodtest, though accurate in thelaboratory, was inaccurate in reallife, and that light cigarettesmokers . . . infused greateramounts of nicotine and tar thanthe designation 'Lights' and'Lowered Tar and Nicotine' wouldimply. But, this information, ifconveyed through a form ofadvertising, would run head firstinto . . . the comprehensive federalscheme governing the advertisingand promotion of cigarettes.

436 F. Supp. 2d at 152. Finding theplaintiffs' claims thus "grounded on PhilipMorris's 'advertising or promotion of . . .cigarettes labeled in conformity with theprovisions of federal law and regulation,"'the district court concluded that they wereexpressly preempted by the FCLAA. Id. at153; (quoting 15 U.S.C. § 1334(b)). Thecourt did not decide Philip Morris'salternative arguments for summaryjudgment. This appeal followed.

II.

The plaintiffs challenge the ruling below asat odds with Cipollone v. Liggett Group,Inc., 505 U.S. 504 (1992), where a pluralityof the Supreme Court held that some-butnot all-actions for damages under state laware expressly preempted by the FCLAA. Inresponse, Philip Morris argues that thedistrict court correctly found the plaintiffs'claims preempted under Cipollone. PhilipMorris simultaneously urges us to affirm theentry of summary judgment in its favor onthe alternative grounds not reached below,namely, that the plaintiffs' claims areimplicitly preempted by federal law or thatthey complain of "actions otherwisepermitted under laws" and therefore cannotserve as the basis for liability under theMaine Unfair Trade Practices Act. Wereview these arguments de novo. See PhilipMorris Inc. v. Harshbarger, 122 F.3d 58, 62(1st Cir. 1997).

A.

"A fundamental tenet of our federalistsystem is that constitutionally enactedfederal law is supreme to state law. As aresult, federal law sometimes preempts statelaw either expressly or by implication." N.H.Motor Transport Ass 'n v. Rowe, 448 F.3d66, 74 (1st Cir. 2006). Preemption questionsultimately turn on congressional intent, and

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the primary indicator of that intent is the textof the congressional act claimed to havepreemptive effect. But "[t]he text of thepreemption provision must be viewed incontext, with proper attention paid to thehistory, structure, and purpose of thelegislative scheme in which it appears."Lorillard Tobacco Co. v. Reilly, 533 U.S.525, 591 (2001).

1.

As noted at the outset, the FCLAA'spreemption clause states that "[n]orequirement or prohibition based onsmoking and health shall be imposed underState law with respect to the advertising orpromotion of any cigarettes the packages ofwhich are labeled in conformity with theprovisions of this chapter." 15 U.S.C. §1334(b). Those provisions mandate that thepackages of all cigarettes sold in the UnitedStates-and, in general, theiradvertisements-bear one of a rotatingseries of labels warning about the adversehealth effects of smoking. Id. §§ 1333(a),(c). But no additional "statement relating tosmoking and health . .. shall be required onany cigarette package." Id. § 1334(a). TheFCLAA also bans cigarette advertising "onany medium of electronic communicationsubject to the jurisdiction of the FederalCommunications Commission," id. § 1335,and preserves the authority of the FTC over"unfair or deceptive acts or practices in theadvertising of cigarettes," id. § 1336.

These provisions were added to the FCLAAthrough the Public Health CigaretteSmoking Act of 1969, enacted as therestrictions on cigarette advertisingcontained in the prior version of the FCLAAwere set to expire. As the expiration dateapproached, both federal and stateauthorities prepared to resume their effortsto regulate cigarette advertising. See

Cipollone, 505 U.S. at 514-15.Congress amended the FCLAA

Thus,

to establish a comprehensiveFederal program to deal withcigarette labeling and advertisingwith respect to any relationshipbetween smoking and health,whereby-

(1) the public may be adequatelyinformed about any adverse healtheffects of cigarette smoking byinclusion of warning notices oneach package of cigarettes and ineach advertisement of cigarettes;and

(2) commerce and the nationaleconomy may be (A) protected tothe maximum extent consistentwith this declared policy and (B)not impeded by diverse,nonuniform, and confusingcigarette labeling and advertisingregulations with respect to anyrelationship between smoking andhealth.

With these purposes in mind, the CipolloneCourt considered whether the FCLAA'spreemption clause barred a state-law suit fordamages brought by a smoker who hadallegedly developed lung cancer from thedefendants' cigarettes. 505 U.S. at 509-10.The smoker asserted a number of commonlaw causes of action, including strictliability, negligent failure to warn, breach ofexpress warranty, fraudulentmisrepresentation, and civil conspiracy. Thecourt of appeals held that, while § 1334(b)did not expressly preempt common lawclaims, the FCLAA's labeling requirement"revealed a congressional intent to exertexclusive federal control over every aspectof the relationship between cigarettes and

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health." Id. at 517. Accordingly, the court ofappeals ruled that the plaintiffs claims"challenging the adequacy of the warningson labels or in advertising or the propriety of[the defendants'] advertising andpromotional activities" were implicitlypreempted.

A plurality of the Court disagreed with thisanalysis, holding that "the preemptive scopeof the [FCLAA] is governed entirely by theexpress language in [§ 1334(b)]," id., whichdid, in fact, reach some common lawactions. Id. at 521-23;. But because "[fjorpurposes of [§ 1334(b)], the common law isnot of a piece," the plurality explained that ithad to "look to each of [the smoker's]common-law claims to determine whether itis in fact pre-empted." . . .

. . . [T]he plurality determined that theFCLAA preempted the claim, pleaded as afailure to warn, that the defendants'"advertising and promotions should haveincluded additional, or more clearly statedwarnings," because it relied on "a state-law'requirement or prohibition ... with respectto ... advertising or promotion."' Id.

The plurality proceeded to consider thesmoker's two theories of fraudulentmisrepresentation. The first, that thedefendants, "through their advertising,neutralized the effect of federally mandatedwarning labels," was preempted by theFCLAA. Id. at 527. As the pluralityexplained, this theory was "predicated on astate-law prohibition against statements inadvertising and promotional materials thattend to minimize the health hazards ofsmoking," which is itself "merely theconverse of a state-law requirement thatwarnings be included in [such] materials."Id. This fraudulent misrepresentation claim,then, was "inextricably related to" thefailure-to-warn claim and therefore also

premised on a "requirement or prohibitionbased on smoking and health" imposed bystate law. Id. at 528.

But the plurality reached a differentconclusion as to the smoker's secondfraudulent misrepresentation theory:"intentional fraud and falsemisrepresentation both by falsemisrepresentation of a material fact and byconcealment of a material fact." Id. First, theplurality held that the FCLAA does notpreempt fraudulent concealment claims that"rely on a state-law duty to disclose suchfacts through channels of communicationother than advertising or promotion," e.g., inthe case of a state law requiring cigarettemanufacturers "to disclose material factsabout smoking and health to anadministrative agency." Id. Second, theplurality held that

fraudulent-misrepresentationclaims that do arise with respect toadvertising and promotion (mostnotably claims based on allegedlyfalse statements of material factmade in advertisements) are notpre-empted by [§ 1334(b)];. Suchclaims are predicated not on a duty"based on smoking and health" butrather on a more generalobligation-the duty not todeceive.

Id. at 528-29;. The plurality saw this resultas consistent with the text, structure, andpurpose of the FCLAA. Id. at 529. First, theFCLAA "offered no sign that [Congress]wished to insulate manufacturers fromlongstanding rules governing fraud"-infact, the Act "explicitly reserved the FTC'sauthority to identify and punish deceptiveadvertising practices . . . ." Id. Second,reading § 1334(b) to exclude fraud claimswould not frustrate the FCLAA's stated goal

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of protecting commerce from "diverse,nonuniform, and confusing cigarettelabeling and advertising regulations withrespect to any relationship between smokingand health," 15 U.S.C. § 1331(2), because"state-law proscriptions on intentional fraudrely only on a single, uniform standard:falsity." 505 U.S. at 529.

2.

The parties agree that whether the FCLAAexpressly preempts the plaintiffs' claimsdepends on how best to categorize them byanalogy to the various causes of actionconsidered in Cipollone. In doing so, as thedistrict court recognized, we must lookbeyond the plaintiffs' own classification oftheir claims and to their actual substance.

The plaintiffs seek relief under the MaineUnfair Trade Practices Act, which, inrelevant part, outlaws "unfair or deceptiveacts or practices in the conduct of any tradeor commerce." Me. Rev. Stat. Ann. tit. 5, §207. Though this prohibition encompassesvarious kinds of behavior, including "amaterial representation, omission, act orpractice that is likely to mislead consumersacting reasonably under the circumstances,"Maine v. Weinschenk, 2005 ME 28, 868A.2d 200, 206 (Me. 2005), the substance ofthe plaintiffs' claim is that Philip Morris hasfalsely represented certain of its brands as"light" or having "lower tar and nicotine"although they deliver the same quantities ofthese ingredients to a smoker as do "full-flavored" cigarettes. So, under the functionalapproach, we consider how this particulartheory-as opposed to a more generalizedclaim under the Maine Unfair TradePractices Act-resembles the variouscommon-law causes of action considered inCipollone. If, as the plaintiffs argue, they

have indeed alleged fraudulentmisrepresentation claims, the claims are notpreempted because, as Cipollone explains,they are not premised on a state-law dutybased on smoking and health. But if, asPhilip Morris argues, the plaintiffs have inreality alleged failure-to-warn or warningneutralization claims, the claims arepreempted.

. . . [T]he district court concluded theplaintiffs' claims were expressly preemptedby the FCLAA as construed by Cipollone.

We differ with the district court's view ofthe fit between the plaintiffs' theory and theCipollone taxonomy and, morefundamentally, of Cipollone itself. To start,we do not read Cipollone to hold thatthe FCLAA preempts claims "grounded on[a defendant's] 'advertising or promotion of... cigarettes labeled in conformity with theprovisions of federal law and regulation," asthe district court ultimately explained itsconclusion. 436 F. Supp. 2d at 153.Cipollone reasoned that "each phrase" in; §1334(b)-not just the phrase "with respectto the advertising or promotion of anycigarettes"-"limits the universe ofcommon-law claims pre-empted by thestatute." 505 U.S. at 524. So "[t]heappropriate inquiry is not whether a claimchallenges the 'propriety' of advertising andpromotion, but whether the claim wouldrequire the imposition under state law of arequirement or prohibition based onsmoking and health with respect toadvertising and promotion." Id. at 525. Aclaim is not preempted, then, merelybecause it is "grounded on" the advertisingor promotion of cigarettes with FCLAA-compliant labels.

Nor is a claim preempted merely because itarises out of the adverse healthconsequences of such cigarettes, as both the

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reasoning and the result in Cipollone makeclear. There, in fact, all of the plaintiffsclaims were "based on smoking and health"in the sense that they "alleged that [she]developed lung cancer because she smokedcigarettes," 505 U.S. at 509, yet the Courtheld that the FCLAA preempted only someof them. And the fate of each claimdepended on "whether the legal duty that isthe predicate of the common-law damagesaction"-not the claim itself-met thecriteria of § 1334(b). Id. at 524. Thus, forexample, while the theory that thedefendants in Cipollone "had expresslywarranted that smoking the cigarettes whichthey manufactured and sold did not presentany significant health consequences," id. at509, was clearly based on smoking andhealth, it was not preempted because "it[did] not rest on a duty imposed under statelaw," but on the defendants' own''contractual commitment voluntarilyundertaken," i.e., the warranty. Id. at 526.Accordingly, the FCLAA preempts onlythose claims based on a "requirement orprohibition based on smoking and healthunder State law with respect to theadvertising or promotion of any cigarettesthe packages of which are labeled inaccordance with" the FCLAA. 15 U.S.C. §1334(b). It does not preempt claims becausethey are "based on smoking and health."

Because the state-law "duty not to deceive"is one such "more general obligation," itfalls within Cipollone's express holding that"claims based on allegedly false statementsof material fact made in advertisements"survive FCLAA preemption. 505 U.S. at528-29. In line with this holding, courtshave routinely (though not uniformly)concluded that the FCLAA does not preemptfraudulent misrepresentation claims arisingout of false statements made in advertising

or promoting cigarettes. A number of thesedecisions, in fact, hold that the FCLAA doesnot preempt the very theory the plaintiffsadvance here-that a cigarette manufacturerhas perpetrated fraud by stating that its lightbrand offers lower tar and nicotine than itsfull-flavored one.

... Unlike the district court, then, we do notsee the plaintiffs' claims as arising out ofwhat Philip Morris "should have said," butrather, what it did in fact say: that MarlboroLights and Cambridge Lights have "lowertar and nicotine" than their full-flavoredcounterparts.

... The district court's ruling was in error.

B.

Philip Morris also challenges the plaintiffs'claims as impliedly preempted by federallaw. Even in the absence of expresspreemptive language-which the FCLAAcontains, but which we have concluded doesnot reach the claims in this case-federallaw can preempt state law by implication intwo other ways. See, e.g., California v. ARCAm. Corp., 490 U.S. 93, 100 (1989). First,"Congress implicitly may indicate an intentto occupy an entire field to the exclusion ofstate law." Schneidewind v. ANR PipelineCo., 485 U.S. 293, 300 (1988). "Second,even if Congress has not occupied the field,state law is nevertheless pre-empted to theextent it actually conflicts with federal law,that is, when compliance with both state andfederal law is impossible, or when the statelaw stands as an obstacle to theaccomplishment and execution of the fullpurposes and objectives of Congress." ARCAm. Corp., 490 U.S. at 100-01; And,

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whether through field or conflictpreemption, "state laws can be pre-emptedby federal regulations as well as by federalstatutes." Hillsborough County, Fla. v.Automated Med. Labs., Inc., 471 U.S. 707,713 (1985).

Philip Morris does not argue that eitherCongress or the FTC has evinced an intentto occupy the entire field of cigaretteadvertising, or even the narrower field oflow-tar cigarette advertising. Nor doesPhilip Morris protest that complying withboth the state law the plaintiffs say has beenviolated and some contrary federal lawwould be impossible. Instead, Philip Morrismaintains that the "[p]laintiffs' claimsconflict with the FTC's 40-year history ofregulation and control over the development,testing and marketing of low tar cigarettes,as well as the reporting of tar and nicotinemeasurements pursuant to the FTC Methodand the use of descriptors substantiated bythose measurements." Because Philip Morrishas limited its implied preemption argumentto the so-called "frustration-of-purpose"theory, see Geier v. Am. Honda Motor Co.,529 U.S. 861, 873-74 (2000); it cannotprevail unless "the rule of law for which [theplaintiffs] contend [stands] 'as an obstacle tothe accomplishment and execution of theimportant means-related federal objectives"at stake. Id. at 881.

In identifying those objectives, Philip Morrisargues that "Congress and the FTC haveboth sought uniform, national standards forcigarette advertising with respect to smokingand health. And State-law actions like thisone would create a different standard ofdeceptiveness that would plainly conflictwith these goals." At the outset, we rejectthe notion that the plaintiffs' claims wouldinterfere with any congressional designs oncigarette advertising. It is true that, in theFCLAA, "Congress prohibited state

cigarette advertising regulations motivatedby concerns about smoking and health."Reilly, 533 U.S. at 548. By the same token,however, "Congress offered no sign that itwished to insulate cigarette manufacturersfrom longstanding rules governing fraud,"which are not so motivated. Cipollone, 505U.S. at 529. As we have taken pains toelucidate, the plaintiffs' claims seek toenforce state-law prohibitions on fraud, notstate-law prohibitions on cigaretteadvertising based on smoking and health. Sotheir asserted rule of law-that thestatements "light" and "lower tar andnicotine" constitute fraud-does notinterfere with the goals of the FCLAA,which do not include establishing anynational "standard of deceptiveness" forcigarette advertising.

Philip Morris . . . founds its impliedpreemption claim on the FTC's oversight ofcigarette advertising under the Federal TradeCommission Act, 15 U.S.C. § 41 et seq.(1997) ... [W]e do not agree that the FTC'sexercise of its authority in this area haspreempted state-law damages actions, likethis one, alleging that a cigarettemanufacturer has engaged in such acts orpractices through its use of the terms "light"and "lower tar and nicotine."

In brief, the FTC Act prohibits "unfair ordeceptive acts or practices in or affectingcommerce," 15 U.S.C. § 45(a), andempowers the Commission both to defineand enforce that prohibition in a number ofways relevant here. The Commission mayprescribe either informal "interpretive rulesand general statements of policy withrespect to unfair or deceptive acts orpractices," id. § 57a(a)(1)(A), or, pursuant tonotice-and-comment procedures, see id. §§57a(b)-(e), formal rules which define those

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acts and practices "with specificity," id. §57a(a)(1)(B). In addition, the Commissionmay issue cease-and-desist orders againstthose engaged in violations of the Act. Id. §45(b). The FTC may enforce such orders-as well as its formal rules-by suingviolators for either civil penalties, id. §45(m), or "such relief as the court findsnecessary to redress injuries to consumers"or other injured parties, id. §§ 57b(a);, (b).

The FTC has regularly trained these powerson tar and nicotine claims in cigaretteadvertising; as the district court observed,"the tobacco industry is hardly unregulatedin what it says to consumers about itsproducts, including light cigarettes." 436 F.Supp. 2d at 151. . . [U]nder the establishedrules of conflict preemption we have recited,we must determine whether the FTC'soversight of tar and nicotine claimsmanifests a federal policy intended todisplace conflicting state law....

[Recounting the history of FTC regulation ofcigarette advertising, including a proposedrule requiring manufactures to disclose tarand nicotine levels that was put on holdwhen the manufacturers voluntarily agreedto make the disclosures.]

Based principally on these exercises ofauthority over tar and nicotine claims, PhilipMorris argues that the FTC has expressed a"policy of allowing their use so long assubstantiated with the FTC Methodnumerical results and requiring publicationof those results in all brand advertisements."Because the plaintiffs' claims "stand[] as anobstacle" to this policy, Philip Morriscontinues, they are implicitly preempted.Like the plaintiffs, we see a number ofproblems with this argument.

First, since its 1969 agreement with thetobacco companies, the FTC has never

issued a formal rule specifically definingwhich cigarette advertising practices violatethe Act and which do not....

... [F]ormal rulemaking comes with a host

of procedural protections under theAdministrative Procedure Act ("APA"),such as notice of the proposed rule, anopportunity for interested parties toparticipate, a statement of the basis andpurpose of any rule adopted, and itspublication in the Federal Register. 5 U.S.C.§ 533 (2007). Limiting the preemptivepower of federal agencies to exercises offormal rulemaking authority, then, ensuresthat the states will have enjoyed theseprotections before suffering thedisplacement of their laws. This reasoninghas particular force in the case of the FTCAct, which imposes procedural requirementson the Commission's rulemaking powersthat exceed those of the APA. 15 U.S.C. §§57a(c)-(e). Indeed, courts and commentatorshave understood these additional safeguardsto reflect a congressional concern-well-documented in their legislative history-over the preemptive effect of FTC regulationon state consumer protection law.

Second, apart from the likely import of itsrulemaking provisions, the FTC Act raisesan additional hurdle to Philip Morris'simplied preemption theory. . . The Act statesthat "[r]emedies provided in [15 U.S.C. §57b] are in addition to, and not in lieu of,any other remedy or right of action providedby State or Federal law." 15 U.S.C. §57b(e). And § 57b, as we have observed,empowers the Commission to sue for reliefon behalf of consumers against those whoviolate its cease-and-desist orders againstunfair or deceptive acts or practices. We donot think it a stretch, then, to say that whenthe FTC merely issues such an order, butnever uses it as the basis for a subsequentlawsuit, the order does not supplant state-

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law rights of action any more than thelawsuit would have....

Third, as the one court squarely holding thatFTC consent orders can preempt state lawhas recognized, the mere entry of such anorder dealing with a particular practice "isinsufficient to preclude supplemental stateregulation." Gen. Motors Corp., 897 F.2d at39. Thus, even if we were to agree that FTCaction short of formal rulemaking-including consent orders-can implicitlypreempt state law in some cases, we do notthink that this is one of them, because theplaintiffs' state-law claims do not pose athreat to any federal regulatory objectivesapparent in the FTC's approach to tar andnicotine claims in cigarette advertising.

Though Philip Morris argues that FTCpolicy permits a manufacturer to make suchclaims so long as they are consistent withthe results of testing under the CambridgeFilter Method and those results are disclosedin the manufacturer's advertising, theCommission has on occasion challengedstatements about the tar or nicotine contentof a particular brand even though they weresupported by such testing. In 1982, forexample, the FTC told a cigarettemanufacturer that it could not rely on theCambridge Filter Method to substantiateclaims that one of its brands had only1 milligram of tar, because the method didnot accurately measure the tar and nicotinecontent of that brand due to its unusual filterdesign. The FTC has also challenged amanufacturer's advertisements "thatconsumers will get less tar by smoking tenpacks of [its] brand cigarettes than bysmoking a single pack of the other brands ofcigarettes depicted in the ads," since theclaim was based on "ratings obtainedthrough smoking machine tests that do not

reflect actual smoking, in part because themachines do not take into account suchbehavior as compensatory smoking." In reAm. Tobacco Co., 119 F.T.C. at 4.

The FTC, then, has not invariably allowedtar and nicotine claims that are supported bythe Cambridge Filter Method, but hasrecognized that such claims maynevertheless amount to unfair or deceptiveacts or practices in certain circumstances.We acknowledge that the claim at issuehere-that Marlboro and Cambridge Lightshave "lower tar and nicotine" than their full-flavored versions-differs from those theFTC has challenged in the past, but our taskis not to decide whether the FTC wouldview a particular kind of tar and nicotineclaim as a violation of the FTC Act. Instead,we must determine whether the FTC'soversight of such claims "convey[s] anauthoritative message of a federal policy"jeopardized by the plaintiffs' common-lawdamages action. Sprietsma, 537 U.S. at 67.Because the only policy we perceive is thatcertain tar and nicotine claims consistentwith Cambridge Filter Method test resultscan still amount to unfair or deceptive actsor practices, we think not.

[I]t is not the fact of agency action on aparticular subject alone-but the reasons forthe action-that control its preemptiveeffect. And here, no clear rationale emergesfrom the history of the FTC's treatment oftar and nicotine claims; indeed, the partiespoint to conflicting statements by theCommission itself on whether it even has anofficial position on the definitions of theterms "light" and "lower tar and nicotine."Compare, e.g., 62 Fed. Reg. 48, 158, 48,163(Sept. 12, 1997) ("There are no officialdefinitions for these terms") with, e.g., 1980FTC Rep. to Congress 18 n. 11 ("The FTC

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has not defined . . . any term related to tarlevel except for 'low "tar'", which the FTCdefines as 15.0 mg or less 'tar."').Moreover, as in Sprietsma and in contrast toGeier, the Solicitor General recently filed abrief in the Supreme Court explaining thatthe FTC "has never promulgated definitionsof terms such as 'light' and 'low tar' andthat its previous statements purporting todefine them "did not reflect an officialregulatory position." On this record, wecannot discern a coherent federal policy onlow-tar claims, let alone one driven by thesort of "important means-related federalobjectives" necessary to preempt conflictingstate law. Geier, 529 U.S. at 881. Theplaintiffs' claims are not implicitlypreempted.

III.

In summary, we conclude that the plaintiffs'claims that Philip Morris has madefraudulent misrepresentations in violation of

the Maine Unfair Trade Practices Act byadvertising and promoting Marlboro andCambridge Lights as "light" and having"Lowered Tar and Nicotine" are not(1) expressly preempted by the FCLAA, (2)implicitly preempted, either by the FCLAAor by the FTC's oversight of tar and nicotineclaims in cigarette advertising, or (3) barredby the Act's exemption for "transactions oractions otherwise permitted." We do not, ofcourse, reach any conclusion on the meritsof the plaintiffs' claims, the availability ofsummary judgment on other grounds, or theforce of or any other defense potentiallyavailable to Philip Morris; and nothing inwhat we have said should be construed asexpressing any views on those issues thatare not before us. As always, "we leave theextent and nature of further proceedings inthe hands of the district court." Patterson v.Patterson, 306 F.3d 1156, 1162 (1st Cir.2002).

We VACATE the judgment of the districtcourt and REMAND for furtherproceedings.

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"Altria Gets U.S. High Court Hearing on 'Lights' Suits"

BloombergJanuary 18, 2008

Greg Stohr

The U.S. Supreme Court agreed to heararguments from Altria Group Inc. in a casethat may shield the tobacco industry fromsuits seeking billions of dollars over themarketing of "light" cigarettes.

The justices today said they will review alower court decision that said Altria's PhilipMorris USA unit, the nation's largestcigarette maker, must face Maine smokers'claims that it fraudulently portrayed lights assafer than other cigarettes. Philip Morriscontends that federal law bars the suit,which invokes a state consumer protectionlaw, from going forward.

The clash may determine the fate of morethan 30 similar lawsuits around the countryagainst Philip Morris, Reynolds AmericanInc.'s R.J. Reynolds Tobacco Co. and othercigarette makers. An Illinois suit at onepoint threatened Philip Morris with a $10.1billion award before it was overturned.

"These staggering stakes provide acompelling reason for this court to resolvethe question," Philip Morris argued in itspetition seeking Supreme Court review.

The high court's decision to hear the casesuggests it will rule in favor of the tobaccoindustry, Morgan Stanley analyst DavidAdelman said in an investors' note. Thatprobably would mark "the death knell of theremaining lights class-action cases," wroteAdelman, who rates Altria shares"overweight."

Lower courts have disagreed about thepropriety of the suits. In letting the Mainecase go forward, the Boston-based 1st U.S.

Circuit Court of Appeals criticized adifferent federal appeals court's decision toblock a Louisiana suit over light cigarettes.

Deception Alleged

The lawsuit seeks to recover the moneysmokers spent on Philip Morris's MarlboroLights and Cambridge Lights throughNovember 2002, plus punitive damages.

The smokers, led by Stephanie Good,contend that Philip Morris intentionallydeceived consumers by describing thecigarettes as being "light" and containing"lowered tar and nicotine."

"For over 30 years, Philip Morris falselyreported on its cigarette packages thatconsumers would receive lower amounts oftar and nicotine from Marlboro Lights thanfrom regular Marlboro cigarettes," the groupargued in a filing that urged the SupremeCourt to reject the appeal.

The Supreme Court fight will focus on a pairof cigarette-labeling laws enacted in the1960s. Those measures require each packageof cigarettes to carry a specified warninglabel while barring additional state lawrequirements "based on smoking andhealth."

In 1992, a splintered Supreme Court saidthat law barred some, though not all, smokerlawsuits against tobacco companies.

Cipollone Case

The smokers argue that the 1992 ruling,known as Cipollone v. Liggett Group,

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permits suits that accuse tobacco companiesof violating generally applicable laws, suchas those that bar companies from deceivingconsumers.

"Congress did not intend to give the tobaccocompanies a free pass to violate state lawsthat are promulgated pursuant to traditionalstate police powers and are binding on allother commercial actors," the consumersargued.

Philip Morris contends the Cipollonedecision allows those types of suits only ifthey claim that cigarette makers lied abouttheir products. The company says it didn'tlie and simply used terms that had beenendorsed by the Federal Trade Commission,the agency that oversees cigarette testing.

The smokers "do not allege that PMUSA'star and nicotine descriptors are inherentlyfalse and do not dispute that they provide anaccurate shorthand means of conveying tarand nicotine testing results to consumers,"the cigarette maker argued.

Two Hurdles

R.J. Reynolds and the U.S. Chamber ofCommerce joined Philip Morris in urging

Supreme Court review. Philip Morris isbased in Richmond, Virginia, while itsparent company's headquarters are in NewYork. Altria fell $1.38, or 1.8 percent, toclose at $75.42 in New York StockExchange composite trading.

The pre-emption question is one of twohurdles that have prevented some lightscases from going forward. Courts havederailed other suits by refusing to grantclass-action status, a designation that letssmokers with relatively small claims suetogether.

The high court case "is an absolute must-win issue for plaintiffs, but not for theindustry," Adelman said in his investors'note.

A victory for Altria would mean the lightscases "are essentially wiped out," said EdSweda, an attorney at the Tobacco ProductsLiability Project at Northeastern UniversitySchool of Law in Boston. He said that resultwould be a "tragedy depriving theseaggrieved consumers from having their dayin court."

The case is Altria v. Good, 07-562.

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"'Light' Cigarette Case not Preempted, First Circuit Says"

TrialNovember 1, 2007

Allison Torres Burtka

The First Circuit recently allowed a casebrought by "lights" smokers againstcigarette manufacturers to move forward,reversing a district court's decision. Thelower court had granted the defendants'motion for summary judgment, ruling thatthe plaintiffs' claims were preempted by theFederal Cigarette Labeling and AdvertisingAct (FCLAA). The plaintiffs sued PhilipMorris USA, Inc., and its parent company,Altria Group, Inc., under the Maine UnfairTrade Practices Act (MiUTPA). Themanufacturers' claims that light cigaretteswere lower in tar and nicotine than regular,"full-flavor" cigarettes-when they actuallydelivered the same amount of tar andnicotine-constituted unfair and deceptivetrade practices, the plaintiffs argued. Theysought the return of sums they had paid tobuy lights, as well as punitive damages andattorney fees.

The First Circuit held that the plaintiffs'claims were neither expressly nor implicitlypreempted by the FCLAA, nor implicitlypreempted by Federal Trade Commission(FTC) oversight of cigarette advertising, norbarred by exemptions in the MUTPA. (Goodv. Altria Group, Inc., 2007 WL 2460039 (1stCir. Aug. 31, 2007)).

The decision revitalizes light cigarettelitigation and "protects the legitimate claimsof consumers deceived by a scam that goesback to the early 1970s," said EdwardSweda, senior attorney with the Boston-based Tobacco Products Liability Project.

Light cigarettes yield lower nicotine and tarlevels than full-flavor cigarettes in amachine test known as the Cambridge Filter

Method, but actual smokers unconsciouslycompensate for the holes that lights have intheir filters-by puffing harder, covering theholes, or smoking more-which exposesthem to just as much tar and nicotine assmoking regular cigarettes would, theplaintiffs argued.

The district court concluded that theplaintiffs' claims were expressly preemptedby the FCLAA because they were groundedin the company's advertising or promotion.

But the plaintiffs argued that that rulingconflicted with the U.S. Supreme Court'sdecision in Cipollone v. Liggett Group, Inc.,which held that the FCLAA expresslypreempted only some actions under statelaw. (505 U.S. 504 (1992)). The First Circuitsided with the plaintiffs, holding that "theFCLAA preempts only those claims basedon a' requirement or prohibition based onsmoking and health under state law withrespect to the advertising or promotion ofany cigarettes the packages of which arelabeled in accordance with' the FCLAA. Itdoes not preempt claims because they are'based on smoking and health."'

Circuit Judge Jeffrey Howard wrote for thethree-judge panel that the plaintiffs'"asserted rule of law-that the statements'light' and 'lower tar and nicotine' constitutefraud-does not interfere with the goals ofthe FCLAA."

Sweda said the court was "very careful inadhering to precedent in Cipollone."

The defendants argued the lawsuitchallenged the FTC's regulatory scheme,

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and the district court agreed. But the FirstCircuit held, "[E]ven if we were to agreethat FTC action short of formalrulemaking-including consent orders-canimplicitly preempt state law in some cases,we do not think that this is one of them,because the plaintiffs' state law claims donot pose a threat to any federal regulatoryobjectives apparent in the FTC's approach totar and nicotine claims in cigaretteadvertising."

The court said it disagreed "with thosecourts holding that the FTC has 'authorized'Philip Morris's 'light' and 'lower tar andnicotine' claims so as to put them beyondthe reach of state consumer protectionstatutes with exceptions similar to Maine's."

Samuel Lanham of Bangor, Maine, whorepresents the plaintiffs, said it wassignificant that although the district courtruled only on express preemption, the FirstCircuit also addressed implied preemption.

Howard wrote, "As the Supreme Court hascautioned, to 'infer preemption whenever anagency deals with a problemcomprehensively is virtually tantamount tosaying that whenever a federal agencydecides to step into a field, its regulationswill be exclusive. Such a rule, of course,would be inconsistent with the federal-state[balance] embodied in our SupremacyClause jurisprudence.'"

William Ohlemeyer, Philip Momis's vicepresident and associate general counsel, saidin a statement that the company would seekSupreme Court review. "Attempts byplaintiffs' lawyers to use state laws to

regulate the marketing and sale of cigarettes

are at odds with the nationwide regulationsestablished by the Congress," he said.

But Sweda noted that the cigarette

manufacturers were trying to get "a special

immunity that Congress never intended."

Good creates a split in the circuits; the FifthCircuit held last February that fraudulent-misrepresentation claims regarding lightcigarettes were preempted by the FCLAA.(Brown v. Brown & Williamson TobaccoCorp., 479 F.3d 383 (5th Cir. 2007).)

The Good decision is likely to affect lightscases pending in other states, Sweda said,especially Aspinall v. Philip Morris Cos.

(No. SJC-9981 (Mass.)), set for argument inNovember, and Dahl v. R.J. ReynoldsTobacco Co. (No. A05-1359 (Minn. App.argued Sept. 18, 2007)). Sweda noted thatsimilar cases have been filed in more than20 states.

In June, the Supreme Court consideredanother lights case. The plaintiffs arguedthat Philip Morris manipulated the design ofits light cigarettes, using techniques to makethem register lower levels of tar and nicotineon the Cambridge Filter Method than theyactually delivered to consumers-and thatthese amounts of tar and nicotine weregreater than the adjective "light," as used inthe company's advertising, indicated. Theplaintiffs argued that the company'sbehavior was deceptive and misleadingunder Arkansas law.

Philip Morris removed the case from statecourt by invoking the Federal OfficerRemoval Statute, arguing that it was actingunder a federal officer or agency-the FTC.The district court agreed, holding that theplaintiffs attacked the company's use of thegovernment's cigarette-testing method, andthe Eighth Circuit also found in thecompany's favor.

A unanimous Supreme Court disagreed andreversed the Eighth Circuit's decision. "Aprivate firm's compliance (ornoncompliance) with federal laws, rules, and

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regulations does not by itself fall within thescope of the statutory phrase 'acting under'a federal 'official,"' the Court held. (Watsonv. Philip Morris Cos., 127 S. Ct. 2301(2007).)

A recent study found that more than 100cigarette additives enhance or maintainnicotine delivery, mask smoke odor, maskillnesses, and could increase cigarettes'addictiveness. (Michael David Rabinoff et

al., Pharmacological and Chemical Effectsof Cigarette Additives, Am. J. Pub. Health(July 31, 2007).) Lanham said moreinformation on how manufacturersmanipulate cigarette design "would make astrong case even stronger on the merits," but"the challenge is getting to the merits."

Lanham noted, "In Maine, we are thrilledfor the opportunity to get to the real meritsof the case."

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"Bid to Shift Tobacco Cases to U.S. Courts Denied"

Boston GlobeJune 12, 2007John Donnelly

WASHINGTON-In a major blow totobacco companies, the U.S. Supreme Courtyesterday denied tobacco giant PhilipMorris's request to shift all smokers'lawsuits to federal courts, which generallygive greater leeway to corporations andsmaller damage awards to those claimingharm from years of exposure to tobaccosmoke.

The decision, in a case involving the allegedmarketing deception of "light" cigarettes, isexpected to affect liability lawsuits againsttobacco companies filed in 20 states,including Massachusetts. Some state awardsin recent years have been in the billions ofdollars, although many of those judgmentswere later overturned on appeal.

The case stemmed from a class-actionlawsuit in Arkansas brought by smokersLisa Watson and Loretta Lawson. The suitalleges that Altria Group, the corporateowners of Philip Morris USA, violated stateadvertising laws by portraying MarlboroLight and Cambridge Light cigarette brandsas low in tar and nicotine, though testsshowed levels of both were dangerouslyhigh.

Attorneys for Philip Morris argued that,because the Federal Trade Commission isresponsible for regulating the tobaccoindustry, federal courts should havejurisdiction over the case. The company alsoargued that because the U.S. government hasallowed tobacco companies such as PhilipMorris to assume responsibility for tests todetermine tar and nicotine levels in

cigarettes, the federal court should decidethe case.

The U.S. Court of Appeals for theCircuit agreed, but the Supremeunanimously reversed that decision.

EighthCourt

In the opinion, Justice Stephen G. Breyerwrote that the high court found no evidencethat the federal government had delegated itslegal authority allowing the tobaccocompanies to take over testing for tar andnicotine from the U.S. government.

Breyer pointed out that Philip Morris andother tobacco firms are highly regulated,citing the FTC's rules on "advertising,specifications for testing, requirementsabout reporting results."

"This is a big loss for the industry," saidEdward L. Sweda Jr., senior attorney for theantismoking Tobacco Products LiabilityProject at Northeastern University School ofLaw in Boston. "If the appeals court rulinghad been upheld, it would have basicallyeliminated state courts as a venue forlawsuits against the tobacco companies."

Sweda said other industries, such aspharmaceutical companies and automakers,could argue that lawsuits against themshould move to federal court because oftheir relationship with federal regulators.

William Ohlemeyer, associate generalcounsel for Philip Morris, downplayed theSupreme Court's decision as "narrow" andinsisted it would not affect the case.

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"We have compelling defenses to theWatson claim that have been advanced instate courts," Ohlemeyer said in a statement.

Because the high court has allowed the caseto proceed in state court, Sweda said, theruling "now makes it easier for the plaintiffattorneys to bring these light-cigarettelawsuits against the companies."

Several analysts said the ruling was largelyexpected, especially given the questions andcomments from justices during oralarguments earlier this year.

Justice Ruth Bader Ginsburg, for instance,said Philip Morris was serving theconsumer, not the U.S. government. "Thecompany is doing it so they can stay inbusiness and market a product, not serve theU.S. government," she said.

Some of the pending cases in 20 states weresidetracked until the Supreme Court ruled inthe Watson case.

In Massachusetts, a suit filed by LoriAspinall and Thomas Geanacopoulos in1998 is now before the state Superior Court.In 2004, the Massachusetts Supreme JudicialCourt, in a 4-to-3 decision, allowed smokersto proceed with a class-action suit over themarketing of light cigarettes.

The lawsuits involving the marketing of

light cigarettes are part of the latest trend oflitigation against tobacco companies.Starting in the mid-1990s, aided bydamaging internal tobacco companydocuments, smokers and states won manycases against the companies based onproduct liability claims.

Thomas Glynn, director of cancer scienceand trends at the American Cancer Societyin Washington, said the high court's verdictyesterday "certainly favors smokers andnonsmokers alike."

"The main thing is it's going to help thecases pending in state courts move forward,which was in some question before."

Glynn said that the percentage of smokers inthe United States has dropped by more thanhalf over the past two generations, but thegains have leveled off in recent years. In the1960s, 43 percent of American adultssmoked. Today, that figure has dropped to21 percent or 45 million Americans.

Now he is hopeful that several upcominglegal cases will cause smokers to rethinktheir risky habit. "Whenever litigationoccurs, it focuses attention on the issue,which is vitally important," Glynn said. "Itdoes cause people to consider their tobaccouse and revisits the whole idea, either fortheir health or the health of people aroundthem."

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Wyeth v. Levine

06-1249

Ruling Below: Levine v. Wyeth, 2006 VT 107, P3 (Vt. 2006).

Levine received treatment for nausea by receiving injections of the drug Phenergan. The drugwas mistakenly injected into an artery in her arm, which resulted in a section of her arm beingamputated. Levine contended, and the lower courts agreed, that the warning label with the drugwas inadequate under state common law. Wyeth's warning label was in compliance with federalregulations when Levine received the injection. Wyeth contends that they were preempted byfederal law and that by permitting this claim the courts are creating an obstacle to compliancewith federal purposes.

Question Presented: Whether the prescription drug labeling judgments imposed onmanufacturers by the Food and Drug Administration ("FDA") pursuant to FDA's comprehensivesafety and efficacy authority under the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 301et seq., preempt state law product liability claims premised on the theory that different labelingjudgments were necessary to make drugs reasonably safe for use.

Diana LEVINE,V.

WYETH.

Supreme Court of Vermont

Decided October 27, 2006

[Excerpt: some footnotes and citations omitted.]

JOHNSON, J.

Defendant Wyeth, a drug manufacturer,appeals from a jury verdict in favor ofplaintiff Diana Levine, who suffered severeinjury and the amputation of her arm as aresult of being injected with defendant'sdrug Phenergan. Plaintiff claimed at trialthat defendant was negligent and failed toprovide adequate warnings of the knowndangers of injecting Phenergan directly intoa patient's vein. Defendant argues that thetrial court should not have allowed the juryto consider plaintiffs claims because theclaims conflict with defendant's obligations

under federal law regulating prescriptiondrug labels. We hold that there is no conflictbetween state and federal law that requirespreemption of plaintiffs claim. Defendantalso raises two claims of error relating to thejury instructions on damages. We hold thatthe court's rulings on these jury instructionswere correct, and we affirm.

In April 2000, plaintiff was injected withdefendant's drug Phenergan at NortheastWashington County Community Health, Inc.("the Health Center"). The drug wasadministered to treat plaintiffs nausearesulting from a migraine headache. Plaintiff

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received two injections. The drug was firstadministered by intramuscular injection.Later the same day, when plaintiffs nauseacontinued, she received a second dose by adirect intravenous injection into her arm,using a procedure known as "IV push." Thesecond injection resulted in an inadvertentinjection of Phenergan into an artery. As aresult, the artery was severely damaged,causing gangrene. After several weeks ofdeterioration, plaintiffs hand and forearmwere amputated.

Plaintiff brought a superior court action fornegligence and failure-to-warn productliability, alleging that defendant'sinadequate warning of the known dangers ofdirect intravenous injection of Phenergancaused her injuries. During a five-day jurytrial, both parties presented expert testimonyregarding the adequacy of the warningsdefendant placed on Phenergan's label.Plaintiffs experts testified that the labelshould not have allowed IV push as a meansof administration, as it was safer to use otheravailable options, such as intramuscularinjection or administration through thetubing of a hanging IV bag. Defendant'sexpert testified that allowing IV push withinstructions cautioning against inadvertentarterial injection was sufficient. The courtinstructed the jurors that they could considerthe FDA's approval of the label in use at thetime of plaintiffs injury, but that the label'scompliance with FDA requirements did notestablish the adequacy of the warning orprevent defendant from adding to orstrengthening the warning on the label. Atthe conclusion of the trial, the jury found infavor of plaintiff on both the negligence andproduct-liability claims and awarded her$2.4 million in economic damages and $5million in noneconomic damages. Pursuantto the parties' stipulation, this award wasreduced to a total of $6,774,000 to accountfor pre-judgment interest and plaintiffsrecovery in a settlement of a separate action

she had filed against the Health Center.

In a summary judgment motion prior to trial,as well as in its timely motion for judgmentas a matter of law following trial, both ofwhich the superior court denied, defendantargued that federal law preempted plaintiffsclaim. These arguments rested in part ondefendant's contention that it had submittedan adequate warning to the FDA, but thatthe FDA rejected the change because it didnot favor strengthening the warning.Plaintiff contended that neither warningwould have been adequate. The trial courtstated, in its decision on defendant's motionfor judgment as a matter of law, thatalthough the FDA had rejected a newwarning, the agency's "brief comment"failed to explain its reasoning ordemonstrate that it "gave more than passingattention to the issue of whether to use an IVinfusion to administer the drug. Theproposed labeling change did not address theuse of a free-flowing IV bag." The courtconcluded that there was "no basis forfederal preemption" and upheld the jury'sverdict.

Defendant claims the superior court erredby: (1) failing to dismiss plaintiffs claim onthe basis that the Food and DrugAdministration's approval of the Phenerganlabel preempted state common law claimsthat the label was inadequate; (2) failing toinstruct the jury to reduce plaintiffsdamages by the amount of fault attributableto the Health Center; and (3) failing toinstruct the jury to calculate the presentvalue of plaintiffs damages for futurenoneconomic losses. We reject these claimsof error, and we affirm.

I. Federal Preemption

Defendant's principal argument on appeal isthat the court should have dismissedplaintiff s claim because it was preempted

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by federal law. Defendant asserts that anystate common law duty to provide a strongerwarning about the dangers of administeringPhenergan by IV push conflicts with theFDA's approval of the drug's label. Aspreemption is a question of law, we reviewthe trial court's decision de novo. We holdthat the jury's verdict against defendant didnot conflict with the FDA's labelingrequirements for Phenergan becausedefendant could have warned against IV-push administration without prior FDAapproval, and because federal labelingrequirements create a floor, not a ceiling, forstate regulation.

The United States Constitution provides thatfederal law is the supreme law of the land.U.S. Const. art. VI, cl. 2. The SupremacyClause is the basis for the doctrine ofpreemption, according to which "state lawthat conflicts with federal law is 'withouteffect."' Cipollone v. Liggett Group, Inc.,505 U.S. 504, 516 (1992). In Cipollone, theCourt described the relevant analysis fordetermining whether Congress intended afederal statute to preempt state law:

Congress' intent may be explicitlystated in the statute's language orimplicitly contained in its structureand purpose. In the absence of anexpress congressional command,state law is pre-empted if that lawactually conflicts with federal law,or if federal law so thoroughlyoccupies a legislative field as tomake reasonable the inference thatCongress left no room for theStates to supplement it.

Id. (quotations and citations omitted).Absent clear congressional intent tosupersede state law, including state commonlaw duties, there is a presumption againstpreemption. This presumption has "add[ed]force" when there has been a "long history

of tort litigation" in the area ofcommon law at issue. Bates v.Agrosciences LLC, 544 U.S. 431,(2005).

stateDow449

Defendant concedes that Congress has notexpressly preempted state tort actionsthrough the Food, Drug and Cosmetics Act(FDCA), 21 U.S.C. §§ 301-399, and thatCongress did not intend the FDCA tooccupy the entire field of prescription drugregulation. Rather, it asserts that plaintiffsaction "actually conflicts with federal law."Cipollone, 505 U.S. at 516. This requiresdefendant to show either that "it isimpossible for a private party to complywith both state and federal requirements," orthat Vermont's common law "stands as anobstacle to the accomplishment andexecution of the full purposes and objectivesof Congress." Freightliner Corp. v. Myrick,514 U.S. 280, 287 (1995).

Defendant presents two alternative bases forits assertion of conflict preemption: (1) inthe specific context of the Phenergan label,the FDA was aware of the dangers of IV-push administration and specifically ordereddefendant to use the warning it used, makingit impossible for defendant to comply withboth its state common-law duty and therequirements of federal law; and (2) bypenalizing drug companies for using FDA-approved wording on drug labels, state tortclaims like plaintiffs present an obstacle tothe purpose of the FDA's labelingregulations. Before reaching these issues, webriefly examine the FDA's role in regulatingprescription drug labels and the generalapproach courts have taken to thepreemptive effect of federal labelingrequirements.

A. Regulatory Background

Prior to distributing a prescription drug suchas Phenergan, the manufacturer must submit

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a New Drug Application (NDA) for FDAapproval. 21 U.S.C. § 355(a). The FDAmust approve the application unless it failsto meet certain criteria, including whethertest results and other information establishthat the drug is "safe for use under theconditions prescribed, recommended, orsuggested in the proposed labeling thereof,"whether there is "substantial evidence thatthe drug will have the effect it purports or isrepresented to have under the conditions ofuse prescribed, recommended, or suggestedin the proposed labeling thereof," andwhether, "based on a fair evaluation of allmaterial facts, such labeling is false ormisleading in any particular." Id. § 355(d).

"FDA regulations mandate the generalformat and content of all sections of labelsfor all prescription drugs as well as the riskinformation each section must contain," and"[flinal approval of the NDA is 'conditionedupon the applicant incorporating thespecified labeling changes exactly asdirected, and upon the applicant submittingto FDA a copy of the final printed labelprior to marketing."' McNellis v. Pfizer,Inc., 2005 WL 3752269, at *4 (D.N.J.).Once a drug and its label have beenapproved, any changes to the labelordinarily require submission and FDAapproval of a "Supplemental NDA." Id.; 21C.F.R. § 314.70(b)(2)(v)(A).

If the NDA process and the submission ofchanges for FDA approval were theexclusive means of creating and alteringprescription drug labels, this might be a verydifferent case. A key FDA regulation,however, allows a drug's manufacturer toalter the drug's label without prior FDAapproval when necessary. The regulationprovides in relevant part:

The agency may designate acategory of changes for the

purpose of providing that, in thecase of a change in such category,the holder of an approvedapplication may commencedistribution of the drug productinvolved upon receipt by theagency of a supplement for thechange. These changes include, butare not limited to:

(iii) Changes in the labeling .. . toaccomplish any of the following:

(A) To add or strengthen acontraindication, warning,precaution, or adverse reaction;

(B) To add or strengthen aninstruction about dosage andadministration that is intended toincrease the safe use of the drugproduct[.]

21 C.F.R. § 314.70(c).

Section 314.70(c) creates a specificprocedure allowing drug manufacturers tochange labels that are insufficient to protectconsumers, despite their approval by theFDA. "The FDA's approved label . . . cantherefore be said to set the minimumlabeling requirement, and not necessarily theultimate label where a manufacturerimproves the label to promote greatersafety." McNellis, 2005 WL 3752269, at *5.While specific federal labeling requirementsand state common-law duties mightotherwise leave drug manufacturers withconflicting obligations, § 314.70(c) allowsmanufacturers to avoid state failure-to-warnclaims without violating federal law. Id.("[I]t is apparent that prior FDA approval

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need not be obtained, nor will a product bedeemed mislabeled, if the manufacturervoluntarily or even unilaterally strengthensthe approved warnings, precautions orpotential adverse reactions upon the labelpursuant to 21 C.F.R. §314.70(c)(6)(iii)(A)."). There is thus noconflict between federal labelingrequirements and state failure-to-warnclaims. Section 314.70(c) allows, andarguably encourages, manufacturers to addand strengthen warnings that, despite FDAapproval, are insufficient to protectconsumers. State tort claims simply givethese manufacturers a concrete incentive totake this action as quickly as possible.

B. Conflict Preemption in OtherJurisdictions

In light of the leeway created by § 314.70(c)for drug manufacturers to add warnings,courts have been nearly unanimous inholding that state failure-to-warn tort claimsdo not conflict with federal law. See, e.g.,McNellis, 2005 U.S. Dist. LEXIS 37505,2005 WL 3752269, at *7 ("[T]he FDCA andthe FDA's regulations do not conflict withNew Jersey's failure to warn law becausethose federal regulations merely setminimum standards with whichmanufacturers must comply."). See alsoCartwright v. Pfizer, Inc., 369 F. Supp. 2d876, 882 (E.D. Tex. 2005) ("With littleexception, courts that have considered thisexact issue have concluded that state failureto warn claims are not preempted by theFDCA and its attendant regulations.").

* * *

... Section 314.70(c) does not allow us tointerpret FDA approval of a drug label asanything but a first step in the process ofwarning consumers. When further warningsbecome necessary, the manufacturer is at

least partially responsible for takingadditional action, and if it fails to do so, itcannot rely on the FDA's continuedapproval of its labels as a shield against statetort liability. While a state common-lawduty may encourage departure from a labelthat the FDA has approved in great detail,such a duty does not create a conflict withfederal requirements because the FDA andthe state share the purpose of encouragingpharmaceutical companies to alter their druglabels when they are inadequate to protectconsumers. We agree with the significantmajority of courts that state failure-to-warnclaims are generally not preempted byfederal labeling requirements.

We must now apply this reasoning todefendant's two original contentions:(1) notwithstanding the fact that it isgenerally possible for manufacturers tocomply with both federal and state lawthrough the procedures created by§ 314.70(c), the FDA's specific actions withrespect to Phenergan made it impossible fordefendant to comply with both federal andstate law; and (2) even if plaintiffs claimand the cases cited above do not make itimpossible for manufacturers to complywith both state and federal law, they presentan obstacle to federal objectives.

C. Impossibility of Compliance

Defendant contends that in this case it wasimpossible to comply with both state andfederal law because the FDA prohibited theuse of a stronger warning with respect to IV-push administration of Phenergan. Thisclaim is not supported by the evidencedefendant presented to the trial court. Therecord lacks any evidence that the FDA wasconcerned that a stronger warning was notsupported by the facts, that such a strongerwarning would distract doctors from otherprovisions in the drug's label, or that the

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warning might lead to less effectiveadministration of the drug. Instead,defendant essentially relies on two factualassertions: (1) the FDA approved the labelthat was in use in 2000; and (2) the FDA, inreviewing the label for use in a differentversion of Phenergan, expressed its opinionof the adequacy of the warning in theoriginal label by stating, "Retain verbiage incurrent label."

With respect to defendant's first assertion,our analysis above demonstrates that FDAapproval of a particular label does notpreempt a jury finding that the labelprovided insufficient warning, as defendantwas free under § 314.70(c) to strengthen thewarning without prior FDA approval.Defendant's second assertion depends on themeaning of the instruction, "[r]etainverbiage in current label." Tort liability fordefendant's failure to strengthen its warningcould have created a direct conflict requiringfederal preemption only if the FDA intendedthe instruction to prohibit any languagestrengthening the original warning. In otherwords, unless we interpret the FDA'sstatement as evidence that it would haverejected any attempt by defendant tostrengthen its label through § 314.70(c), wecannot conclude that it was impossible fordefendant to comply with its state common-law duty without violating federal law.

Defendant argues that the instructionreflected the FDA's opinion not only that astronger warning was unnecessary, but alsothat it would have harmed patients byeliminating IV push as an option foradministering Phenergan. The record doesnot support this interpretation.... The FDAcould have rejected the new warning for anynumber of reasons, including clarity ortechnical accuracy, without implicitlyprohibiting a stronger warning. Defendant'sunsupported hypothesis that the FDA saw

the new warning as harmful seems amongthe least likely explanations, as the rejectedproposal would not have eliminated IVpush as an option for administeringPhenergan.... There is no evidence that theFDA intended to prohibit defendant fromstrengthening the Phenergan label pursuantto § 314.70(c). Thus, we cannot concludethat it was impossible for defendant tocomply with its obligations under both stateand federal law.

D. Obstacle to Congressional Purposesand Objectives

Defendant next contends that state common-law liability for its use of an FDA-approvedlabel presents an obstacle to federalobjectives. We hold that plaintiffs claimdoes not interfere with any objective thatcan legitimately be ascribed to Congress.We agree with the reasoning in the casescited above, that federal labelingrequirements pursuant to the FDCA create afloor, not a ceiling, for state regulation.Defendant presents a new FDA rulecontaining language disputing thisreasoning, but this statement does not alterour conclusion that there is no conflictbetween federal objectives and Vermontcommon law.

1. The Purposes and Objectives of Congress

In the absence of a conflict that makes itimpossible for a regulated entity to complywith both state and federal law, federal lawwill preempt state law only if it "stands asan obstacle to the accomplishment andexecution of the full purposes and objectivesof Congress." Freightliner, 514 U.S. at 287,115 S.Ct. 1483 (quotations omitted). Wemust therefore examine what "the fullpurposes and objectives of Congress" werewith respect to federal labeling requirementsfor prescription drugs. We agree with the

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McNellis court that a system under which"federal regulations merely set minimumstandards with which manufacturers mustcomply" is

fully consistent with Congress'primary goal in enacting theFDCA, which is "to protectconsumers from dangerousproducts," United States v.Sullivan, 332 U.S. 689, 696, 68S.Ct. 331, 92 L.Ed. 297 (1948), aswell as Congress' stated intent thatthe FDCA "'must not weaken theexisting laws,' but on the contrary'it must strengthen and extend thatlaw's protection of the consumer."'United States v. Dotterweich, 320U.S. 277 [282, 88 L.Ed. 48](1943).

2005 U.S. Dist. LEXIS 37505, 2005 WL3752269, at *7; see also Witczak, 377 F.Supp. 2d at 731 ("Congress certainly did notintend to bar drug companies fromprotecting the public. In the 1962amendments to the FDCA, Congressincluded a clause expressly limiting thepreemptive effect of the statute: "Nothing inthe amendments made by this Act to theFederal Food, Drug, and Cosmetic Act shallbe construed as invalidating any provision ofState law . . . unless there is a direct andpositive conflict between such amendmentsand such provision of State law." DrugAmendments of 1962 (Harris-KefauverAct), Pub.L. No. 87-781, § 202, 76 Stat.780, 793 (1962).

This amendment essentially removes fromour consideration the question of whethercommon-law tort claims present an obstacleto the purposes and objectives of Congress.Congress intended that the FDCA wouldleave state law in place except where itcreated a "direct and positive conflict"between state and federal law. Drug

Amendments § 202. This language "simplyrestates the principle that state law issuperseded in cases of an actual conflictwith federal law such that 'compliance withboth federal and state regulations is aphysical impossibility."' See S. BlastingServs., Inc. v. Wilkes County, 288 F.3d 584,591 (4th Cir.2002). In other words, underany circumstances where it is possible tocomply with both state law and the FDCA,the state law in question is consistent withthe purposes and objectives of Congress.Thus, our discussion above regardingdefendant's impossibility argument, supra,TT 21-23, provides a complete answer to thequestion of preemption.

2. The FDA's New Statement on Preemption

Defendant, after oral argument in this case,cited a new FDA regulation that contains astatement relating to the preemptive effect ofthe FDCA. The substance of the regulationchanges certain aspects of labelingrequirements for prescription drugs, butthese changes are irrelevant to this appealbecause the new rule did not take effect untilJune 2006. Food and Drug Administration,Requirements on Content and Format ofLabeling for Human Prescription Drug andBiological Products, SupplementaryInformation, 71 Fed.Reg. 3922, 3922 (Jan.24, 2006). The rule's "SupplementaryInformation" section, however, contains abroad statement regarding the preemption ofstate common-law failure-to-warn claims.In this statement, the FDA asserts that recentcases rejecting preemption of these claims,including those cited above, pose anobstacle to the agency's enforcement of thelabeling requirements. Among theinterpretations the agency claims areincorrect are: (1) those rejecting preemptionon the basis of § 314.70(c); and (2) thosestating that federal labeling requirements are

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minimum standards and that "[s]tate lawserves as an appropriate source ofsupplementary safety regulation for drugs byencouraging or requiring manufacturers todisseminate risk information beyond thatrequired by FDA under the act."

We are ordinarily required to defer to anagency's interpretation of a statute itadministers. Plaintiff, however, urges us notto defer to the FDA's statement. . . . Weneed not decide this difficult question ofadministrative law, however, because weconclude that irrespective of the level ofdeference we might apply, the statementwould not affect the outcome of this appeal.

Under Chevron, deference to an agency'sinterpretation is appropriate only when astatute is "silent or ambiguous with respectto the specific issue" the agency hasconsidered; otherwise, "the court, as well asthe agency, must give effect to theunambiguously expressed intent ofCongress." 467 U.S. at 842-43, 104 S.Ct.2778. Moreover, "[tihe judiciary is the finalauthority on issues of statutory constructionand must reject administrative constructionswhich are contrary to clear congressionalintent." Id. "If a court, employing traditionaltools of statutory construction, ascertainsthat Congress had an intention on the precisequestion at issue, that intention is the lawand must be given effect." Id. When anagency's interpretation is not the type ofinterpretation entitled to Chevron deference,we must still grant it some respect, but only''a respect proportional to its 'power topersuade."' Mead, 533 U.S. at 235, 121S.Ct. 2164.

. . . Nothing in the FDA's new statementalters our conclusion that it would bepossible for defendant to comply with bothits federal obligations and the obligations of

state common law. The regulatoryframework for prescription drug labeling

allows drug manufacturers to add orstrengthen a warning "to increase the safeuse of the drug product" without prior FDAapproval. Even if the new rule eliminated oraltered this provision, the change in theregulation did not take effect until June2006. Without such a change, it is possiblefor manufacturers to comply with both FDAregulations and duties imposed by statecommon law, and there is no "direct andpositive conflict" between state and federallaw.

Here, we are not attempting to infer theeffect of statutory language that onlyindirectly addresses the specific state law atissue. Instead, we are interpreting anunambiguous express preemption clause thatspecifically preserves the type of state law atissue. Under these circumstances, ordinarypreemption principles must give way toCongress's intent to preserve state laws thatdo not create a "direct and positive conflict"with federal law. Drug Amendments § 202.There is no such conflict here. Accordingly,the FDA's statement is neither anauthoritative interpretation of an ambiguousstatutory provision entitled to deference,Chevron, 467 U.S. at 842-43, 104 S.Ct.2778, nor a persuasive policy statemententitled to respect. Mead, 533 U.S. at 235,121 S.Ct. 2164. Plaintiffs claim does notimpose conflicting obligations on defendantor present an obstacle to the objectives ofCongress. We therefore agree with the trialcourt that the claim is not preempted byfederal law.

AFFIRMED.

REIBER, C.J., dissenting.

The overarching issue in this appeal is

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whether plaintiffs common-law claim forfailure to warn conflicts with the FDA'sregulation of Phenergan, the drugresponsible for plaintiffs injuries. I wouldconclude that the jury's verdict in this caseconflicts with federal law for two reasons.

First, it would be impossible for defendantWyeth to comply with the requirements ofboth state and federal law. Specifically, theFDA approved IV administration ofPhenergan and required that IVadministration be listed on the Phenerganlabel. By contrast, plaintiffs theory of thecase required Wyeth either to remove thisapproved use from the Phenergan label, adda warning that would directly contradict thelabel's indication that IV administration wasa safe and effective use, or, at a minimum,add a warning that only certain types of IVadministration should be used. Thus,compliance with state law in this case wouldrequire Wyeth to eliminate uses ofPhenergan approved by the FDA andrequired to be included in the Phenerganlabeling.

Second, plaintiffs state-law claim conflictswith federal law in that it poses an obstacleto federal purposes and objectives. In short,by approving Phenergan for marketing anddistribution, the FDA concluded that thedrug-with its approved methods ofadministration and as labeled-was bothsafe and effective.

For both of these reasons I would concludethat the state-law cause of action ispreempted. I respectfully dissent.

I. Impossibility of Compliance

As explained by the majority, because thereis no clause in the FDCA expresslypreempting state law, Wyeth mustdemonstrate that preemption is implied byshowing either that federal law thoroughly

occupies the regulatory field (a claim thatWyeth does not advance) or that there is anactual conflict between state and federallaw. Actual conflict, in turn, can bedemonstrated in one of two ways: byshowing that it is impossible for theregulated party to comply with both stateand federal law or that state law "stands asan obstacle to the accomplishment andexecution of the full purposes and objectivesof Congress." Freightliner Corp. v. Myrick,514 U.S. 280, 287, 115 S.Ct. 1483, 131L.Ed.2d 385 (1995).

The majority in essence concludes that it isnot impossible for Wyeth to comply withboth federal and state standards becauseWyeth never sought FDA approval of a"stronger warning" of the type advocated byplaintiff. According to the majority, becausethe FDA was not presented with, andtherefore did not explicitly reject, suchstrengthened language, there is no reason topresume that the FDA would disapprove.Therefore, the majority reasons, there is noactual conflict between state and federallaw. It is inaccurate, however, tocharacterize the requirements imposed bythe jury verdict in this case as merelyrequiring a "stronger warning." Rather, whatplaintiff sought was an elimination of a useof Phenergan that had been approved by theFDA. Furthermore, the FDA's rejection ofWyeth's efforts to alter the language of thewarning in 2000 supports Wyeth's claimthat the FDA had an affirmative preferencefor the language of the original warning.

A.

The crux of plaintiffs claim was not basedon the label warnings per se, but on theapproved uses listed there. See, e.g., ante,T 3 ("Plaintiffs experts testified that thelabel should not have allowed IV push as ameans of administration. . . ."). A review ofplaintiffs complaint and the evidence

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presented at trial makes clear that thestandard plaintiff sought to establish (i.e.,the change to the label that would berequired in light of the jury's finding ofliability) was to remove IV administration-or at least certain types-as an approveduse. . . . In her appellate brief, plaintiffcharacterizes the evidence as revealing "thatWyeth was aware of research indicating thatdirect IV administration of Phenergan wasunsafe." (Emphasis added.) Plaintiff furtherrefers to expert testimony "that the labelshould have restricted Phenergan tointramuscular injection as this method ofadministration presents no risk ofinadvertent arterial injection; or,alternatively, that if IV administration isused, it must be by injecting the Phenerganinto a hanging IV bag, not through a directIV." (Emphasis added.)

Here, the FDA clearly addressed the risksattending IV administration of the drug. Thelabel approved IV administration generally,and specifically warned of the dangers ofdirect IV administration, includinginadvertent arterial injection possiblyresulting in amputation. In light of this, itcannot be argued that the FDA did not(1) assess the risk of IV administration,including direct IV administration and theassociated risk of amputation due toinadvertent arterial injection; (2) concludethat the benefits of allowing IVadministration with appropriate warningsoutweighed the risk; and (3) reach a decisionregarding precisely what warning languageshould be used. These assessments are, infact, the very essence of the FDA's approvaland are in furtherance of the federalobjective of advancing public health bybalancing the risks and benefits of newdrugs and facilitating their optimal use.

The majority reconciles this manifestconflict by relying on 21 C.F.R. § 314.70(c),

which allows a drug manufacturer to alter alabel "[t]o add or strengthen acontraindication, warning, precaution, oradverse reaction" or "add or strengthen aninstruction about dosage and administration"prior to FDA approval. On this basis, themajority concludes that Wyeth "was freeunder § 314.70(c) to strengthen the warningwithout prior FDA approval." Ante, T 22.But, it is an overstatement to claim thatmanufacturers are "free" to change druglabels under § 314.70(c). To the contrary, amanufacturer may change a label only toadd or strengthen a warning, not to eliminatean approved use, as plaintiff would requirehere. In other words, what plaintiffadvocates is not a stronger warning butlanguage that would directly contradictlanguage approved and mandated by theFDA.

Further, the apparent purpose of § 314.70(c)is to allow manufacturers to address newlydiscovered risks. Even courts that concludethat § 314.70(c) provides manufacturersbroad latitude to add warnings to labelsacknowledge that such supplements areaimed at previously unknown andunanalyzed risks. Another section of theregulation makes clear that any changes to alabel that exceed the scope of § 314.70(c)are considered "major changes" that requireprior approval before the drug may bedistributed. § 314.70(b), (b)(2)(v). In short,the regulation does not allow manufacturersto simply reassess and draw differentconclusions regarding the same risks andbenefits already balanced by the FDA. Here,the FDA had already evaluated the risk ofinadvertent arterial injection from direct IVadministration of Phenergan, and hadmandated warning language for the label toreflect that risk assessment.

In addition, any change accomplished under§ 314.70(c) is subject to ultimate FDA

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review and approval. Thus, any additionalor different warnings must ultimately besupported by scientific research that meetsthe FDA's standards. Neither amanufacturer, a state court, nor a statelegislature can permanently substitute itsjudgment of the risk-benefit analysis for thatof the FDA.

B.

Wyeth argues that even if § 314.70(c)theoretically allows a manufacturer to makeunilateral changes to a drug label, in thiscase, the FDA actually rejected Wyeth'sattempts in 2000 to change the warningregarding intra-arterial injection andamputation. The trial court concluded thatthe FDA gave only "passing attention" tothe risks of IV administration in 2000. Themajority similarly concludes that the recorddoes not indicate "that the FDA wished topreserve the use of IV push as a method ofadministering Phenergan." Ante, T 23. Icannot agree with this assessment of therecord.

Both the original label and Wyeth'sproposed alternative were titled."INADVERTENT INTRA-ARTERIALINJECTION." On the original label, the firsttwo sentences of the warning read:

Due to the close proximity ofarteries and veins in the areas mostcommonly used for intravenousinjection, extreme care should beexercised to avoid perivascularextravasation or inadvertent intra-arterial injection. Reportscompatible with inadvertent intra-arterial injection of [Phenergan],usually in conjunction with otherdrugs intended for intravenous use,suggest that pain, severe chemicalirritation, severe spasm of distal

vessels, and resultant gangrenerequiring amputation are likelyunder such circumstances.

On the proposed label, the first sentence ofthe warning read: "There are reports ofnecrosis leading to gangrene, requiringamputation, following injection of[Phenergan], usually in conjunction withother drugs; the intravenous route wasintended in these cases, but arterial or partialarterial placement of the needle is nowsuspect." While the proposed change to thewarning language may not reflect whatplaintiff would require in a warning, itcannot be disputed that Wyeth's proposedalternative warning (1) placed greateremphasis on the risk of necrosis andamputation by referencing it in the firstsentence, and (2) gave the FDA theopportunity to consider the specific,alternative warning advanced by Wyeth, aswell as the adequacy of the warning ingeneral. Despite this opportunity, the FDAmandated that Wyeth retain the language ofthe existing warning. The alleged extent ofthe FDA's consideration of the issue is notrelevant, in my view.

In 2000, the FDA confirmed its assessmentthat health care professionals should bepermitted to choose IV administration in itsvarious forms as a means of delivering thedrug, where appropriate. Wyeth could notboth list all forms of IV administration as anapproved use, as required by the FDA, andexclude all or some forms of IVadministration as unsafe, as required by thejury's verdict in this case. It would beimpossible to comply with bothrequirements.

II. Obstacle to Federal Purposes andObjectives

I would further conclude that Wyeth hasdemonstrated actual conflict preemption by

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showing that plaintiffs state-law failure-to-warn claim poses an obstacle to federalpurposes and objectives. The majority doesnot address this issue, concluding thatWyeth does not have the option of provingthis form of actual conflict preemption. Themajority reaches this conclusion by relyingon the following clause in the 1962amendments to the FDCA:

Nothing in the Amendments madeby this Act to the Federal Food,Drug, and Cosmetic Act shall beconstrued as invalidating anyprovision of State law . . . unlessthere is a direct and positiveconflict between such amendmentsand such provision of State law.

Ante, T 26 (quoting Drug Amendments of1962 (Harris-Kefauver Act), Pub.L. No. 87-781, § 202, 76 Stat. 780, 793 (1962))....[T]he majority concludes that the provision''essentially removes from our considerationthe question of whether common-law tortclaims present an obstacle to the purposesand objectives of Congress," because the1962 provision "simply restates the principlethat state law is superseded in cases of actualconflict with federal law such thatcompliance with both federal and stateregulations is a physical impossibility."Ante, 27. "In other words," the majorityexplains, "under any circumstances where itis possible to comply with both state law andthe FDCA, the state law in question isconsistent with the purposes and objectivesof Congress." Id. Thus, the majorityeliminates the possibility of proving actualconflict preemption independently throughthe "obstacle" prong of that standard.

But neither the passage in Southern Blastingon which the majority relies nor the UnitedStates Supreme Court decision cited as

authority in that passage provide an

explanation or even an affirmative statement

that the phrase "direct and positive conflict"in the 1962 amendment eliminates the"obstacle" prong of the actual conflictpreemption standard. Thus, the majorityeliminates one of the two means by whichWyeth may show actual conflict based on asingle, unclearly reasoned Fourth Circuitdecision that is itself lacking in case lawsupport. There is no basis for eliminatingthis prong of the actual conflict standard,and I disagree with the majority'sconclusion to the contrary.

Assuming, then, that Wyeth maydemonstrate actual conflict preemption byshowing that state law is an obstacle tofederal regulatory purposes and objectives, Ibelieve the facts here support the conclusionthat the state tort-law verdict in this case ispreempted. TheCourt's decisionHonda Motor Co.,1913, 146 L.Ed.2don the question ofobstacle to federalIn that case,

United States Supremein Geier v. American529 U.S. 861, 120 S.Ct.914 (2000), is controllingwhen state law poses anpurposes and objectives.the Department of

Transportation had issued a safety standardthat required automobile manufacturers "toequip some but not all of their 1987 vehicleswith passive restraints." Id. . . . TheSupreme Court held that a lawsuit premisingnegligence on the failure to install an air bagconflicted with the objectives of the federalsafety standard and was thereforepreempted.

In reaching this conclusion, the Court notedthat the plaintiff and the dissentingopinion-like the majority in the instantcase-viewed the federal regulation assetting a minimum safety standard that stateswere free to supplement or strengthen. Id.However, by examining the commentsaccompanying the regulation, the Courtconcluded that a safety standard allowing achoice of passive restraint systems while notmandating any particular system was a

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deliberate decision that reflected a balanceof diverse policy concerns.

Application of the Supreme Court precedentin Geier dictates the same result in this case.As with the DOT in Geier, the FDA isprimarily concerned with public safety. Theconclusion of what is best for public safetyis arrived at by considering various policyfactors that are sometimes in tension withone another. . . . In the specific context ofwarnings on drug labels, the FDA considersnot only what information to include, butalso what to exclude. As the Eighth Circuithas noted in the medical device context,"[t]here are . . . a number of sound reasonswhy the FDA may prefer to limit warningson product labels." See Brooks v.Howmedica, Inc., 273 F.3d 785, 796 (8thCir.2001).

No drug is without risks. The FDA balancesthe risks of a drug against its benefits tomaximize the availability of beneficialtreatments. The FDA's decision inapproving a drug, its uses and labelingreflect consideration of these and otherpolicy factors. While a state-court jurypresumably shares the FDA's concern thatdrugs on the market be reasonably safe, thejury does not assess reasonableness in the

context of public health and the associatedrisk-benefit analysis. A jury does not engagein a measured and multi-faceted policyanalysis. Rather, a jury views the safety ofthe drug through the lens of a single patientwho has already been catastrophicallyinjured. Such an approach is virtuallyguaranteed to provide different conclusionsin different courts about what is "reasonablysafe" than the balancing approach taken bythe FDA. In fact, different conclusions werereached in this case.

The jury in this case was instructed that "[a]prescription drug is unreasonably dangerousdue to inadequate warnings or instructions ifreasonable instructions regardingforeseeable risks of harm are not provided tothe physician and other medicalprofessionals who are in a position to reducethe risks of harm." Faced with plaintiffstragic injuries, the jury concluded thatallowing Phenergan to be delivered throughIV administration was "unreasonablydangerous." The jury's verdict conflictssquarely with the FDA's assessment ofprecisely the same issue: whether Phenerganis safe and effective when delivered throughIV administration. The claim is preempted.

For the above reasons, I dissent.

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"Justices to Hear Cases on Products Liability"

New York TimesJanuary 19, 2008Linda Greenhouse

WASHINGTON-The Supreme Court'salready substantial investment in definingthe boundary between federal regulation andstate tort law grew even bigger on Friday.The justices added two new cases to theirdocket on drug and cigarette labelingrequirements.

In each case, as in four others the court hasalready agreed to decide in the current term,the question is one of federal pre-emption.The cases offer variations of a commonquestion: if a product meets federalstandards, can the manufacturer be liable fordamages under state law for injuries sufferedby consumers? ...

In the drug labeling case, the plaintiff was aguitar player who suffered the career-endingamputation of her right arm after beinginjected in a hospital with an anti-nauseadrug made by Wyeth.

Gangrene and subsequent amputation was arisk from intravenous administration of thedrug, Phenergan.

The plaintiff, Diana Levine, argues that thefederally approved label did not give doctorsa specific enough warning about the risks ofthe method used to give her the drug.

The state courts in Vermont allowed Ms.Levine to sue for damages under state lawand upheld a jury verdict of more than $6million. The manufacturer's Supreme Courtappeal, Wyeth v. Levine, No. 06-1249,

argues that the lawsuit was pre-empted bythe Food and Drug Administration'sapproval of the label.

The Bush administration, which reversed alongstanding policy against pre-emption indrug cases, is supporting the appeal. In abrief filed this month in response to theSupreme Court's request for its views, theadministration said the agency's approval ofthe Phenergan label "reflects F.D.A.'s expertjudgment that the labeling strikes theappropriate balance." The brief added:"Where, as here, F.D.A. was presented withinformation concerning the relevant risk, ajury's imposition of liability based on adrug's F.D.A.-approved labeling wouldinterfere with F.D.A.'s expert judgment."

Nonetheless, the court's decision to grantWyeth's appeal at this point was surprising.The administration urged the justices todefer action until they decide, later this term,another medicine-related pre-emption casethat was argued last month.

That case, Riegel v. Medtronic Inc., No. 06-179, presents a question under a separatestatute, the Medical Device Amendments,which governs the F.D.A.'s premarketapproval process for devices like the ballooncatheter at issue in the case. There isconsiderable overlap between that processand the one for approving new drugs underthe Food, Drug and Cosmetic Act, which isat issue in the new case....

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"Court Considers Protecting DrugMakers from Lawsuits"

New York TimesFebruary 26, 2008

Gardier Harris

Less than a week after issuing a sweepingruling that bars most lawsuits againstmedical device makers, the Supreme Courtheard arguments Monday in the first of twocases that could determine whether drugmakers receive similar protection.

Justice Stephen G. Breyer said thefundamental question in the cases was whoshould make the decisions that willdetermine whether a drug is "on balance,going to save people or, on balance, going tohurt people?"

"An expert agency on the one hand or 12people pulled randomly for a jury role whosee before them only the people whom thedrug hurt and don't see those who need thedrug to cure them?" Justice Breyer asked.

Normally a member of the court's liberalwing, Justice Breyer came down squarely onthe industry's side when he answered hisown question, saying Congress left the roleof policing the medicine market exclusivelyto the Food and Drug Administration.

"What worries me is, what happens if thejury is wrong?" he said.

If the justice's view prevails, most lawsuitsagainst drug makers, thousands of whichhave been filed in recent years and settled insome cases for billions of dollars, would bebarred. But the Supreme Court is likely towait until next year to answer JusticeBreyer's question completely.

That is because the question before the courtMonday in Warner-Lambert v. Kent was inpart restricted to the effects of a Michiganstatute that bars personal injury suits againstdrug makers unless injured patients canshow that the company deliberately withheldinformation from the F.D.A. that wouldhave led the government to block themedicine from being sold.

The case was brought by 27 Michiganplaintiffs who claim they were injured as aresult of taking a Warner-Lambert diabetespill, Rezulin, which has since beenwithdrawn from the market. The plaintiffsclaim the company withheld from theF.D.A. evidence of Rezulin's dangers to theliver that would have led the agency to denyan approval.

But in a 2001 case involving the BuckmanCompany, the Supreme Court held thatplaintiffs cannot sue based upon claims thata manufacturer defrauded the F.D.A.

Many of the arguments Monday concernedwhether the court should strike down all ofthe Michigan statute or just the part allowingan exception for claims of fraud.

In October, the court will hear arguments inLevine v. Wyeth, a pharmaceutical case withno such state complications. In the Levinecase, the court is being asked to decidewhether F.D.A. approval bars personalinjury lawsuits-the same question itdecided in device makers' favor last week.

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Before the Bush administration, the F.D.A.argued that lawsuits provided patients withadditional protection.

Now, the administration says the lawsuitslargely conflict with the agency's ability todo its job, and several of the justices seemedto agree.

Justice Samuel A. Alito Jr. asked the lawyerfor the Michigan patients to explain whytheir lawsuit should go forward given that itmight "very seriously interfere with what theF.D.A. is doing?"

Justice Anthony M. Kennedy asked whetherthe patients intended to argue whetherRezulin "should not have been on themarket?"

Even Justice Ruth Bader Ginsburg, the lonedissenter in the case decided last week thatgave medical device makers broadprotection against lawsuits, asked whethercertain claims in the suit against Warner-Lambert, now Pfizer, "are the kind of thing

that the F.D.A. would want to police itselfand not have state courts look into?"

Allison M. Zieve, the lawyer for theplaintiffs, pointed out that lawsuits againstdrug makers are still allowed in every state,pending the court's decision next year.

Carter G. Phillips, who represented Pfizer,said the Buckman case and the Michiganstatutes allowed lawsuits to be filed againstdrug makers in Michigan only if the F.D.A.itself concluded that a company hadcommitted fraud. Such a determination bythe F.D.A. is exceptionally rare.

The government argues that the F.D.A.competently oversees the drug and devicemarkets, and should not be second-guessedby courts. But the Institute of Medicine, theGovernment Accountability Office and theF.D.A.'s own science board have all issuedreports saying poor management andscientific inadequacies make the agencyincapable of protecting the country againstunsafe drugs, medical devices and food.

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"Patients' Ability to Sue at Risk"

Los Angeles TimesMarch 03, 2008Daniel Costello

Years of high-profile court battles overdrugs such as Vioxx and Celebrex, alongwith billion-dollar settlements and juryverdicts, could soon be a thing of the past.

The U.S. Supreme Court, in an 8-1 decision,ruled last month [in Riegel v. MedtronicInc.] that patients injured by most medicaldevices can't sue their manufacturers. Andthis fall, a similar case could extend thesame legal protection to the much largerpharmaceutical industry-a frequent targetof lawsuits.

In last month's case, the high court backed alegal theory, supported by the Bushadministration, that maintains that the Foodand Drug Administration adequatelyregulates the drug and device industries andshould not be second-guessed by courts.

Critics say such an argument would makemore practical sense if the FDA were doinga better job.

The high-profile cases come as the federalagency faces growing challenges and someof its most withering criticism in years,some from within its own walls. ...

A trio of recent reports, including one by theFDA's own advisory committee, has raisedserious questions about the agency's recentperformance.

Last fall a yearlong study by the FDA'sadvisory committee found "the agency is sounderfunded and understaffed that it'sputting U.S. consumers at risk in terms offood and drug safety."

In an unusual public departure from theview of the Bush administration, the currentFDA commissioner, Andrew C. vonEschenbach, said in an interview last weekthat the agency needed a systemic overhaulthat could take years.

In last month's Supreme Court case, thewidow of a New York man who died after aballoon catheter burst in his chest duringsurgery sued the manufacturer, MedtronicInc., saying the catheter was defective.

Because federal law makes few provisionsfor suits against drug and device makers,injured patients have turned to state law andwon substantial awards.

In 2004, the Bush administration reversed along-standing federal policy, contending thatif the FDA approves a medical product, thatshould protect manufacturers from damagesunder state law.

Supporters of that stance say it is overdue.Drug and medical-device manufacturershave contended for years that the legalenvironment around their products hasgrown too restrictive and is stymieinginnovation.

"You have to balance the costs that so manylawsuits place on" the system, said GlennLammi, chief counsel for the WashingtonLegal Foundation. The foundation, a groupthat seeks restrictions on lawsuits, submittedan amicus brief on behalf of the devicemanufacturer in last month's case.

Dane Titsworth of Bakersfield sees things

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differently. After nearly a decade ofworsening back pain, the former buildingmanager had disks in his lower backreplaced two years ago with new-generationartificial disks.

But after the surgery, he said, his pain wasworse than before, immobilizing him to thepoint that he could no longer garden or playcatch with his children. He has since left hisjob.

Titsworth and several dozen patients withsimilar stories have sued the disk's maker,DePuy Spine Inc., a Raynham, Mass.-basedsubsidiary of Johnson & Johnson.

"This sounds to me like just another way bigbusiness can line their pockets," Titsworthsaid. "I was a guinea pig for this company. Ishould be compensated for that." He expectshis case to be heard later this year.

In October, the court will hear arguments inanother case, Levine vs. Wyeth, in which itmight decide whether FDA approval bars

personal-injury lawsuits involving drugcompanies.

The mere prospect that the high court couldbar injury claims for FDA-approvedpharmaceuticals helped precipitate therecent $4.85-billion settlement of Vioxxclaims, according to lawyers involved in thenegotiations.

Some legal experts and attorneys areconcerned that without such lawsuits,regulators and the public may never hear ofevidence that manufacturers knowinglymarketed products they knew were unsafe.

In recent years, documents and e-mailsuncovered in court cases have shown thatsome companies kept safety issues involvingtheir products from the FDA.

"Without the tort system, what reasonableassurance do we have we will learn aboutthe bad actors?" asked David Vladek, a lawprofessor at Georgetown University. "A lotis lost without these lawsuits.

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"The State of Medical Device Tort Litigationin the Wake of Riegel"

Massachusetts Lawyers WeeklyMay 19, 2008

Eric J. Parker and Richard S. Cabelus

In 1906, muckraker and investigativenovelist Upton Sinclair revealed to the worldthe horrors of the Chicago meatpackingindustry in his novel The Jungle.

His account of human and animal partsbeing ground into rotted and spoiled meatthat was sold for public consumption led toconsumer revulsion.

In order to quell public outrage and restorethe U.S. meat market to economic viability,President Theodore Roosevelt spearheadedthe passage of the 1906 Pure Food and DrugAct, the precursor to what is today the Foodand Drug Administration.

In the decades following the FDA'screation, the administration's regulatoryscope grew to include not only drugs andcertain foods, but vaccines, medicalproducts and medical devices as well.

For the past several decades, the FDA'smission has been to regulate theseindustries, with a mandate to ensure thatanything receiving FDA approval meets itspromulgated minimum standards tosafeguard the public health and welfare.

The recent decision by the U.S. SupremeCourt in Riegel v. Medtronic, Inc., has ratherdramatically supplanted the FDA's coremission with respect to medical devices and,in effect, given large corporatemanufacturers of medical devices immunityfrom state and common law products-liability claims stemming from "defects" inthe devices they produce.

Riegel

In Riegel, the court held that so long as anew medical device receives pre-marketapproval from the Food and DrugAdministration, the medical devicemanufacturer will be shielded from all stateand/or common law claims for damages inthe event the product is later found to bedefective.

The court found that if the medical devicewas classified by the FDA as a Class IIIdevice, meaning the device is "purported orrepresented to be for supporting orsustaining human life," and was screened bythe FDA and received "pre-marketapproval," all state or common law"requirements that are different from or inaddition to" the FDA's pre-marketrequirements would be preempted by the1970 Medical Device Amendments to theFederal Food, Drug and Cosmetic Act.

Examples of Class III devices includereplacement heart valves, cerebellastimulators and pacemakers, to name just afew.

The decision now makes regulatorycompliance an affirmative defense for ClassIII medical devices that receive pre-marketapproval from the FDA, except in the rarecircumstance where a device makerknowingly commits fraud on the FDA.

Therefore, any negligence or impliedwarranty suit brought by an injured plaintiffregarding such devices would be dismissed,

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as it is no longer a valid claim. Prospectiveplaintiffs faced with such design defectswould be required to prove that the devicemanufacturer failed to comply with FDAregulations, or that doctors or other medicalpersonnel misused the device, placing aneven greater strain on the medicalprofession.

180-Degree Change

This holding is an about-face for the court,which only 12 years ago, in a strikinglysimilar case, held that the Food, Drug andCosmetic Act did not preempt state orcommon law defect design claims withrespect to Type III medical devices.

So why the 180-degree change? Therightward shift in the composition of thecourt brought about by the Bushadministration closely mirrored the shift thattook place at the FDA.

Under the Bush administration, theadopted a new approach with respectClass III medical device classification.

FDAto its

Historically, the FDA promulgatedminimum standards that medical deviceswould be required to meet in order to begranted "FDA approval." Of course, thesebenchmark standards varied depending onthe degree of danger of the device, but theywere nonetheless a minimum standard.

In recent years, however, the FDA has takenthe approach that a Class III medical devicethat has met pre-market approval hasthereby met an optimal standard as set forthby the FDA with respect to safety andefficacy.

Indeed, Justice Antonin Scalia, writing forthe majority in Riegel, went to great pains toemphasize that a device that receives pre-market approval goes through a "rigorous

process" and is screened and tested "anaverage of 1,200 hours."

Therefore, the court held any state orcommon law claim for damages would be arequirement different from, or in addition to,the FDA optimal standard and thuspreempted.

Gaping Loophole

On its face this does not seem too egregiousuntil one discovers the gaping "loophole"that many medical device makers may nowjump through to avoid the pre-marketprocess.

This loophole with respect to Class IIIdevices allows a device maker to qualify forpreemption, and be immune from suit,without ever passing the FDA's pre-marketapproval process. So long as (1) the devicewas in use prior to the 1976 Medical DeviceAmendments to the Food, Drug, andCosmetic Act and is therefore"grandfathered-in"; or (2) the new device isfound by the FDA to be "substantiallyequivalent" to another device that is exemptfrom pre-market approval, no pre-marketapproval of the device is required.

In fact, most new Class III medical devicesfind their way to the medical market by wayof the second loophole and receive roughly20 hours of screening, consisting mostly ofFDA officials ensuring that the necessarypaperwork is in order.

For example, a 1983 report by Congressrevealed that of the approximately 1,100Class III devices entering the market, nearly1,000 never received pre-market screeningbecause they were found to be "substantiallyequivalent" to previously approved devices.

Alarmed, Congress madeamendments to the Medical

furtherDevice

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Amendments in 1990, rendering it moredifficult for the most dangerous devices toexploit this loophole.

Nevertheless, in 2005, more than 3,100 newClass III devices entered the market underthe "substantially equivalent" exception,with only 32 devices required to undergopre-market screening.

To make matters even worse, the"substantially equivalent" exception ispremised on economic considerations andnot those of safety. Buried in the majority'sopinion, Justice Scalia reveals the drivingforce behind the "substantially equivalent"exception as "seek[ing] to limit thecompetitive advantage grandfathereddevices receive."

Through Riegel, the Supreme Court hasradically undermined the spirit and purposeof the Medical Device Amendments to theFood, Drug and Cosmetic Act based on theconclusion that the "rigorous" pre-marketprocess employed by the FDA is the optimalstandard that Class III devices seek to meet.Therefore, it should not be left to "juries[who] see only the cost of a dangerousdesign, and unconcerned with benefits toapply the tort law of fifty states."

In reality, however, the Riegel decisionwidens the economic loophole, which islikely to be exploited with impunity bycorporations more intent on conformingtheir devices to pre-existing designs so as tocompete economically than being concernedwith the safety and efficacy of their devicesas the act was intended to promote.

And as the numbers clearly show, meetingthe substantial equivalency exception seemsto involve little heavy lifting.

The FAA

The underlying theme of the Riegel court is

that tort law seeks not only to make aninjured party whole, but also to regulateconduct by penalizing medical devicemanufacturers.

The court found that the "optimal" standardemployed by the FDA for Class III devicescannot live in harmony with the negligencestandard employed at common law.

However, if the court had broadened thescope of its inquiry, it may have beensurprised to find that rigorous federalstandards and tort law have peacefullycoexisted for years.

To emphasize this point, one need look nofurther than the Federal AviationAdministration's requirements for airplanedesign and product certification. The FAA'sproduct design approval process is acomplex five-phase process in which theFAA and the manufacturer work jointlythrough each phase to analyze material andinspect and re-inspect mountains of data.

Even after a new design receives FAAcertification, the design is still subject to apost-certification inspection and tests toensure maximum safety. In contrast withcurrent state of FDA approvals, there existsno similar means of circumventing the FAAapproval process.

Courts, however, have been reluctant to holdthat the express preemption section of theAirline Deregulation Act of 1978 preemptsstate law claims for negligence and grossnegligence causing personal injury. Indeed,relatives of 59 victims of last year's TAMAirlines flight 3054 crash in Brazil recentlybrought wrongful-death actions in federalcourt in Florida, alleging, among otherthings, a faulty right thrust reverser.

Why the Supreme Court seeks to imposepreemption in the complex realm of medicaldevices, but not in the equally sophisticated

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area of airplane products and design, isperplexing if not totally inconsistent.

Hopefully, when the Supreme Court takesup FDA preemption again in the fall in

Wyeth v. Levine, its rationale will becomeclearer and the public will be provided withgreater insight into the future of federalpreemption as it relates to product safety.

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"No Special Treatment"

The National Law JournalMay 19, 2008

Sol Weiss

Pre-emption threatens the vitality of statetort law and the historic co-existence offederal prescription drug safety standardsand common law remedies for injuriesarising from prescription drugs. The recenttrend of pharmaceutical companies filingprocedural motions seeking immunity fromstate law tort liability and prevailing raisesserious questions about federalism. Whyshould this industry deserve specialtreatment?

Courts that grant dismissals do so byignoring the force of the settled presumptionagainst pre-emption that protects consumers.Furthermore, in the context of prescriptiondrugs, Congress never intended to pre-emptstate court litigation. There is a completeabsence of any concrete law from Congressthat might be frustrated by a state law tortsuit.

Congressional intent is the "ultimatetouchstone of preemption analysis,"Cipollone v. Liggett Group Inc. (1992). Inascertaining that intent, the U.S. SupremeCourt's pre-emption jurisprudence hasrepeatedly applied a presumption againstpre-emption. See, e.g., Bates v. DowAgrosciences LLC (2005). The SupremeCourt has always held fast to thepresumption, especially in implied (conflict)pre-emption cases. Geier v. Am. HondaMotor Co. (2000). The rationale for thatpractice is clear: The presumption againstpre-emption-and in favor of the sovereignstate-is at its strongest when Congress hasnot explicitly trumped that sovereignty.Should mere regulatory action remove all

means of judicial recourse for consumersinjured by unsafe drugs?

In 2006, the Food and Drug Administration(FDA), without public comment, in apreamble, announced its belief that a tortlawsuit for a failure-to-warn case is pre-empted when the warning urged by thelawsuit has not been required by the FDA.71 Fed. Reg. 3922, 3936 (Jan. 24, 2006).This preamble follows earlier amicus briefsfiled by the FDA arguing the same outcome.

FDA Should Get Little Deference

Some courts have given deference to theFDA's view of pre-emption. However,under the high court cases Skidmore v. Swift& Co. (1944) and U.S. v. Mead Corp.(2001), the degree of deference should bereduced by the fact that the FDA's earlierposition was different. Under Mead, courtsshould afford a "relatively low level ofdeference" because the FDA's position hasbeen inconsistent; the FDA is not an experton federalism concerns; and there is noevidence of any degree of formality in itsposition. Some courts that apply impliedpre-emption discuss the tension between theFDA regulations and the potential forverdicts caused by unsafe drugs undercommon law. Both fora seek to balancesafety and efficacy. If those results doconflict, Congress could, if it so chooses,step in and pass curative legislation.

Allowing multiple-source inquiries into thestrength of warnings on drug labels can haveimportant benefits. State courts provide a

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check on agency power. Discovery in statetort suits provides a useful venue to raisequestions about new and existing drugs.Immunity from litigation eliminates thesepotentially valuable information-gatheringtools.

The scope and power of regulations againstcommon law lawsuits was addressed by thehigh court in Sprietsma v. Mercury Marine(2002). The plaintiff argued that a motorboat was unreasonably dangerous withoutprotective propeller guards. The IllinoisSupreme Court found that the U.S. CoastGuard had explicitly considered and rejectedthe adoption of a regulation requiringpropeller guards under the Federal BoatSafety Act (FBSA). The state court thusconcluded that "the Coast Guard's failure topromulgate a propeller guard requirementequates to a ruling that no such regulation isappropriate." The Supreme Court reversed,holding that the plaintiffs claims wereneither expressly nor impliedly pre-emptedby the FBSA. The court commented that itwas "quite wrong" to view the Coast

Guard's rejection of the protective measurein question as "the functional equivalent of aregulation prohibiting all states fromadopting such a regulation." Rather, therecommendation by the Coast Guard "leftthe law applicable to propeller guardsexactly the same as it had been before thesubcommittee began its investigation."

The FDA's conduct, in post-marketingsafety analysis, closely parallels theagency's conduct underlying the regulatoryinaction in Sprietsma. Sprietsma mandatesthat an agency's intentional and carefulconsideration does not convey an"authoritative message of federal policyagainst" safety measures that trumps thepositive effects from jury verdicts findingproducts unsafe without proper warnings.Conflict pre-emption infringes on theSeventh Amendment right to a trial by jury.It vests absolute power in an agency that atbest is underfunded and that has closeassociations with drug companies that earngreater profits with fewer warnings.

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Pacific Bell v. linkLine

07-512

Ruling Below: Linkline Communs., Inc. v. Cal., Inc., 503 F.3d 876, (9th Cir. 2007).

Plaintiffs, Internet Service Providers, sued Defendants, regional telephone companies, for allegedviolations of the Section 2 of the Sherman antitrust act. Plaintiffs claim Defendants engaged in aprice squeeze by selling wholesale DSL access to the ISPs at a drastically higher price thanDefendants provided retail DSL access to their direct customers, intending to squeeze Plaintiffsout of the DSL market. The Ninth Circuit upheld the lower court's decision to deny Defendant'smotion to dismiss for failure to state a claim, holding that the Defendants' retail pricing schemecould have created an anticompetitive price squeeze.

Question Presented: Whether a plaintiff states a claim under Section 2 of the Sherman Act byalleging that the defendant-a vertically integrated retail competitor with an alleged monopoly atthe wholesale level but no antitrust duty to provide the wholesale input to competitors-engagedin a "price squeeze" by leaving insufficient margin between wholesale and retail prices to allowthe plaintiff to compete.

LINKLINE Communication, Inc.; Inreach Internet LLC; OM Networks, dba OmsoftTechnologies, Inc.; Nitelog, Inc., dba Red Shift Internet Services, Plaintiffs-Appellees

V.

California, Inc., fka Pacific Bell Telephone Company; PACIFIC BELL Internet Services;SBC Advanced Solutions, Inc., Defendants-Appellants

United States Court of Appeals for the Ninth Circuit

Decided September 11, 2007

[Excerpt: some footnotes and citations omitted.]

THOMAS, Circuit Judge:

This appeal presents the question of whetherthe Supreme Court's decision in VerizonCommunications, Inc. v. Law Offices ofCurtis V Trinko, LLP, 540 U.S. 398 (2004)("Trinko"), bars a plaintiff from claiming aviolation of § 2 of the Sherman Antitrust Actby virtue of an alleged price squeezeperpetrated by a competitor who also servesas the plaintiffs supplier at the wholesalelevel, but who has no duty to deal with theplaintiff absent statutory compulsion. Weconclude that it does not, and affirm the

order of the district court denying judgmenton the pleadings.

I.

This action was filed by linkLineCommunications, Inc., In-Reach InternetLLC, Om Networks, and Nitelog, Inc.(collectively "linkLine"), who are InternetService Providers ("ISPs") who sell DSLaccess to the internet to retail customers.While some ISPs affiliated with localtelephone companies own their owninfrastructure and facilities for transmitting

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data between the internet and consumers,these four lease those facilities variouslyfrom SBC California, Inc., Pacific BellInternet Services, and SBC AdvancedSolutions, Inc. (collectively "SBC Entities").

As is true in many regions, because of thedevelopment of the telecommunicationsindustry and the costs of building thenecessary infrastructure, regionalmonopolies have developed that own andcontrol the lines necessary for the deliveryof telecommunication services. Theseregional telephone companies are known asincumbent local exchange carriers("ILECs"). ILECs tend to own the localtelephone network as well as the telephonelines-known as the "last-mile"-thatconnect each individual consumer to thenetwork. Because any company seeking toconnect with users at the end of these lastmile connections must interconnect with theILEC, the ILEC's facilities are commonlyreferred to as "bottleneck" facilities.

At the time of the filing of linkLine'samended complaint . . . [t]he SBC Entitieswere . . . organized so that they sold bothwholesale DSL access ("DSL transportservices") to independent ISPs as well asretail DSL access (through PBIS and thenSBC-ASI) to individual consumers. At thetime the amended complaint was filed, theSBC Entities were both a supplier to thePlaintiffs at the wholesale level, and acompetitor at the retail level.

Linkline filed its original complaint on July24, 2003, alleging that the SBC Entities,acting as a single entity, have monopolizedand attempted to monopolize the regionalDSL market in violation of § 2 of theSherman Act. In support of the § 2 claim,the complaint alleged that SBC Entities:

(a) created a price squeeze bycharging ISP a high wholesale

price in relation to the price atwhich defendants were providingretail services;

(b) intentionally adoptedanticompetitive procedures andprocesses for handling customerordering and installation to ISPsthat are calculated to (i) cause ISPcustomer disruption andinterruption in service, and (ii)create extraordinary and seriousdelays and a substantial backlog oforders, in the hope that the ISPcustomers will revert back todefendants;

(c) purposefully created andimposed procedures that impeded,and/or caused significant delaysand costs for, end user customersof defendant switching to theservices of independent ISPs,including plaintiffs;

(d) misled, harassed and exhibitedhostility toward customers of ISPs,including plaintiffs;

(e) disparaged and created doubtsabout the efficacy and legality ofISPs, including plaintiffs; and

(f) purposefully failedproperly for DSL services.

to bill

In short, defendants adoptedprocedures carefully calculated todeny ISPs access to an essentialfacility and to preserve andmaintain its monopoly control ofDSL access to the Internet.

On July 6, 2004, the SBC Entities filed amotion for judgment on the pleadings. Thedistrict court read linkLine's complaint asalleging three different categories of

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anticompetitive conduct: refusal to deal,denial of access to an essential facility, andprice squeezing. In an order dated October20, 2004, the district court dismissed thefirst two as barred by the Supreme Court'sdecision in Trinko [finding that "Defendantswere obligated by law to offer their DSLtransport facilities to the Plaintiffs under the1934 Telecommunications Act ("1934 Act")and the FCC rules implementing it." Thisconclusion is not disputed on appeal.] Withrespect to the price squeezing claim, itordered the Plaintiffs to file an amendedcomplaint "limited to the price squeezeclaim that details beyond the normalrequirements of Rule 8 specific factssupporting Plaintiffs' price-squeeze claim."The first amended complaint described theallegation as follows:

(1) As set forth above defendantsunlawfully manipulated their dualrole as vertically integratedmonopolists as both a wholesale-monopoly supplier and retailcompetitor of plaintiffs for DSL byengaging in an unlawful pricesqueeze by intentionally chargingindependent ISPs wholesale pricesthat were too high in relation toprices at which defendants wereproviding retail DSL services andnecessary equipment to end-usercustomers-and for a period bycharging wholesale DSL prices tocompeting ISPs (such as plaintiffs)that actually exceeded the prices atwhich defendants retail affiliate(PBI) was charging retail end-usercustomers for DSL services andnecessary equipment-therebymaking it impossible forindependent ISP competitors suchas plaintiffs to compete at the lowretail prices set by defendants forcombined DSL-Internet Serviceand necessary equipment provided

to end-user customers.

(2) If plaintiffs charged retail DSL-Internet access customers the sameretail price as defendants' retailaffiliate charged, plaintiffs couldnot cover the cost of providingDSL service, which costsnecessarily includes the wholesaletransport costs charged bydefendants.

(3) By the same token, ifdefendants themselves chargedtheir retail affiliates the samewholesale costs for DSL transportthat they charged their wholesaleISP customers (such as plaintiffs),defendants could not cover theirwholesale costs and make a profitfrom DSL service at their lowretail prices for their bundledoffering of DSL, Internet Serviceand necessary equipment (e.g., freemodem and installation), that werein some cases, and for someperiod, even below the wholesaleDSL transport cost. Given the pricemargin relationship between retailand wholesale prices, defendantsare clearly attempting tocompensate for deliberatelysacrificing profits on the retail endof their operations (with offsettingmargins on the wholesale side) inorder to stifle, impede and excludecompetition from independent ISPssuch as plaintiffs that are bothwholesale customers and retailrivals.

[The amended complaint also containedallegation (b)-(f) listed above.]

In response, the SBC Entities filed variousmotions challenging the price squeezeallegations and other portions of the

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amended complaint.

The district court granted in part the reliefrequested, but denied the motion to dismissfor failure to state a claim. Acting on therequest of the SBC Entities, the district courtcertified the order for interlocutory appeal.

We granted permission to appeal pursuant to28 U.S.C. § 1292. We review the denial of amotion for judgment on the pleadings denovo. Doe v. United States, 419 F.3d 1058,1061 (9th Cir. 2005).

II.

In antitrust terms, a price squeeze occurs"when a vertically integrated company setsits prices or rates at the first (or 'upstream')level so high that its customers cannotcompete with it in the second-level (or'downstream') market." Von Kalinowski etal., 2 Antitrust Laws and Trade Regulation §27.04[1], 27-40 (2d Ed. Matthew Bender2007). For over six decades, federal courtshave recognized price squeeze allegations asstating valid claims under the Sherman Act.[In a footnote, the court stated: "Section 2states that "[e]very person who shallmonopolize, or attempt to monopolize, orcombine or conspire with any other personor persons, to monopolize any part of thetrade or commerce among the several States,or with foreign nations, shall be deemedguilty of a felony."] See United States v.Aluminum Co. ofAm., 148 F.2d 416, 437-38(2d Cir. 1945) ("ALCOA") (holding pricesqueeze unlawful); see also Bonjorno v.Kaiser Aluminum & Chem. Corp., 752 F.2d802, 809-11 (3d Cir. 1984) (price squeeze isonly an antitrust violation if plaintiffs canshow that "the defendants deliberatelyproduced the effect" to "destroy itscompetition"); Lansdale i. PhiladelphiaElectric Co., 692 F.2d 307, 309-10 (3d Cir.1982); City of Kirkwood v. Union Elec. Co.,

671 F.2d 1173, 1178-79 (8th Cir. 1982)(antitrust liability can still lie for pricesqueezes even when rates are regulated);City of Mishawaka v. Am. Elec. Power Co.,616 F.2d 976, 983-85 (7th Cir. 1980)(antitrust liability can lie for price squeezesin regulated industry upon a showing ofspecific anticompetitive intent).

We have joined our sister circuits in holdingthat claims of price squeezing under § 2 areviable against monopolists in regulatedindustries. City of Anaheim v. SouthernCalfornia Edison Co., 955 F.2d 1373(1992). In Anaheim, we held that even in abusiness where prices were regulated at boththe wholesale and the retail level, it waspossible for a price squeeze to occur. Id. at1377 ("[I]t is possible for a utility tomanipulate its filings and requests in amanner that causes a, at least temporary,squeeze which might be just as effective asone perpetrated by an unregulated actor.").

In Trinko, however, the Supreme Court heldthat the failure by a monopolist to deal witha competitor on certain service terms whenthat monopolist was under no duty to dealwith the plaintiff competitor absent statutorycompulsion, did not state a claim under § 2of the Sherman Act. This holding raised thequestion of whether a price squeeze ismerely another term of the deal governed bythe Supreme Court's analysis in Trinko, orwhether it is something else. The D.C. andEleventh Circuits have offered conflictinganswers to that question. Compare CovadCommunications Co. v. Bellsouth Corp., 374F.3d 1044, 1050 (11th Cir. 2004)("Bellsouth") (holding that price squeezeclaims survive Trinko), with CovadCommuns. Co. v. Bell Atl. Corp., 398 F.3d666, 673 (D.C. Cir. 2005) ("Bell Atlantic")(holding that they do not).

In Trinko, a customer of one of Verizon's

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rivals sued Verizon Communications, Inc.,alleging that Verizon had engaged inanticompetitive practices by discriminatorilydelaying orders placed by customers ofVerizon's competitors-orders Verizon wasrequired to fill by the TelecommunicationsAct of 1996. 540 U.S. at 404. Trinko allegedthat by rendering poor performance onorders placed through Verizon'scompetitors, it would sour those customers'relationships with their CLECs and drivethem back to Verizon. Id. Trinko suedVerizon after both the FederalCommunications Commission ("FCC") andNew York's Public Services Commission("NYPSC") had already investigated thematter, resulting in a series of orders by theNYPSC and a consent decree with the FCC.

The Supreme Court held that "Verizon'salleged insufficient assistance in theprovision of service to rivals is not arecognized antitrust claim under this Court'sexisting refusal-to-deal precedents." Id. at410. Trinko began from the premise that theTelecommunications Act of 1996 neitheradded to nor subtracted from the class ofpunishable conduct under traditionalantitrust laws. Id. at 406 (quoting 47 U.S.C.§ 152, note ("nothing in [the 1996 Act] shallbe construed to modify, impair, or supersedethe applicability of any of the antitrustlaws")). Accordingly, the Court set out todetermine whether Trinko's allegationsmade out an actionable antitrust claim underthe Court's existing refusal-to-dealprecedents, irrespective of Verizon'sstatutory requirements under the 1996 Act.

The Court reiterated that "the Sherman Act'does not restrict the long recognized rightof [a] trader or manufacturer engaged in anentirely private business, freely to exercisehis own independent discretion as to partieswith whom he will deal,"' id. at 408(quoting United States v. Colgate & Co.,

250 U.S. 300, 307 (1919)), but that "theright to refuse to deal with other firms doesnot mean that the right is unqualified," id.(quoting Aspen Skiing Co. v. AspenHighlands Skiing Corp., 472 U.S. 585, 601,(1985). The Court then stated that it is "verycautious" when recognizing exceptions tothe right of refusing to deal and that AspenSkiing was "at or near the outer boundary of§ 2 liability" for refusing to deal. Id. at 408-09. In Aspen Skiing, the Court saw strongevidence that the defendant's sole purpose inrefusing to deal was to attempt tomonopolize, "not by competitive zeal but byanticompetitive malice." Id. at 409. Thatevidence included that (1) the parties had"voluntarily engaged in a course of dealing"(proving that the defendant would have doneso absent statutory compulsion); (2) thedefendant refused even to sell highlands skipasses at retail rates; and (3) the services itwas withholding were "otherwise marketedor available to the public." Id. at 409-10.Having found no similar evidence in Trinko,the Court held that Verizon's allegedinsufficient service failed to state a validantitrust claim since Verizon's refusal todeal with its competitors at all could noteven be seen as anticompetitive. Id. at 410.

The Court went on to reason that not onlydid Trinko's allegations not make out atraditional antitrust claim, but that it wouldnot be justified in extending antitrustliability to include Trinko's case. Inreaching this conclusion, it emphasized "theexistence of a regulatory structure designedto deter and remedy anticompetitive harm,"and the dangers of judicial intervention. Id.at 412-14. The latter include the risk of"false condemnations" that might "chill thevery conduct the antitrust laws are designedto protect." Id. at 414 (quoting MatsushitaElec. Industrial Co. v. Zenith Radio Corp.,475 U.S. 574, 594 (1986)). Importantly, theCourt did not say that the existence of a

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regulatory scheme was a per se bar tojudicial enforcement of the antitrust laws,only that "the existence of a regulatorystructure" is "[o]ne factor of particularimportance." Id. at 412 (emphasis added).Trinko never addressed price squeeze claimsspecifically. However, Trinko is ofsignificant import. Indeed, we have alreadyhad occasion to apply Trinko to bar antitrustliability when the complaint centered onallegedly anticompetitive price terms, albeitnot price squeezes. See MetroNet ServsCorp. v. Qwest Corp., 383 F.3d 1124 (9thCir. 2004).

Given this background, we must decidewhether Trinko entitles the SBC Entities tojudgment on the pleadings, which in turnrequires us to decide whether Anaheimremains viable after Trinko....

Here, reconsideration of Anaheim is notrequired because the reasoning and theory ofAnaheim is not "clearly irreconcilable withthe reasoning or theory" of Trinko. First, asthe Eleventh Circuit has underscored, Trinkodid not involve a price squeezing theory.Indeed, Trinko took great care to explainthat in this particular regulatory context,"claims that satisfy established antitruststandards" are preserved. 540 U.S. at 406.Because a price squeeze theory formed partof the fabric of traditional antitrust law priorto Trinko, those claims should remain viablenotwithstanding either the telecommun-ications statutes or Trinko. See Bellsouth,374 F.3d at 1050 ("price squeezing claimsurvives [Trinko] because it is based ontraditional antitrust doctrine").

Second, Anaheim did not embrace anunlimited view of § 2 price squeeze liabilityin regulated industries. To the contrary,Anaheim rejected the idea that, in the case ofregulated industries, "a mere showing that a

price squeeze developed would suffice to

cause antitrust liability." 955 F.2d 1378.Anaheim recognized that "courts shouldtread carefully" in imposing antitruststandards on regulated industries, id. at1378, and ultimately required a showing ofspecific intent on the part of the wholesalemonopoly holder to "serve its monopolisticpurposes at [retail competitors'] expense" inorder for § 2 liability to attach. Id. Thus,Anaheim recognized the viability of thetheory, but carefully circumscribed it.

Trinko did not, as the SBC Entities wouldargue, completely eliminate the viability of a§ 2 price squeeze theory in regulatedindustries. Were that the case, Trinko wouldnot have referred to the existence of aregulatory regime as only "one factor" toconsider in determining whether antitrustliability might also lie. 540 U.S. at 412.Moreover, the existence of regulation doesnot always eliminate the danger of anti-competitive harm. See Mishawaka, 616 F.2dat 983-84 (noting that the presence of aregulatory structure offers price squeezers a"ready made illegal opportunity with alegitimate gloss"). The key, under Trinko, isthe nature of the regulatory structure atissue. As Justice Scalia observed:

One factor of particular importanceis the existence of a regulatorystructure designed to deter andremedy anticompetitive harm.Where such a structure exists, theadditional benefit to competitionprovided by antitrust enforcementwill tend to be small, and it will beless plausible that the antitrust lawscontemplate such additionalscrutiny. Where, by contrast,"[t]here is nothing built into theregulatory scheme whichperformances the antitrustfunction," Silver v. New York StockExchange, 373 U.S. 341, 358

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(1963), the benefits of antitrust areworth its sometimes considerabledisadvantages.

Thus, consistent with Trinko, 540 U.S. at412, Anaheim rejected the wholesaleimportation of antitrust theory as applicableto regulated industries. In the particularindustry at hand, Anaheim recognized that,even in the regulatory scheme at issue, "it ispossible for a utility to manipulate its filingsand requests in a manner that causes a, atleast temporary, squeeze which might bejust as effective as one perpetrated by anunregulated actor." 955 F.2d at 1377. Thus,Anaheim undertook a Trinko-type analysisin the context of the particular industry andfactual setting. Significantly, afterexamining the particular pleadings, theAnaheim panel concluded that the pricesqueeze theory was not viable in that case.Of course, in any future application ofAnaheim, we will have to ensure consistencywith Trinko. However, a careful reading ofAnaheim does not demonstrate that theholding is "clearly irreconcilable with thereasoning or theory" of Trinko.

When we apply Anaheim and Trinko to thiscase, the soundness of the district court'sconclusion in denying judgment on thepleadings is clear. Here, unlike thecircumstances in Anaheim and Trinko, weare confronted with a partially regulatedindustry. At the wholesale level, there are aseries of regulatory mechanisms andregulatory agencies charged with assuringfair play. These regulations grew out of the1934 Act and have been considered in aseries of FCC decisions known as the"Computer Inquiries." In short, under FCCrules in place at the time of the filing of thecomplaint, the SBC Entities were subject tocertain regulatory requirements if theywished to enter the enhanced servicestelecommunications market (i.e., offer DSLinternet access).

If an ILEC wished to offer DSL internetaccess, it could choose one of two routes. Itcould form a separate subsidiary throughwhich it would offer DSL internet access,but which had to obtain the infrastructurenecessary to provision such services fromthe ILEC on the same terms as unaffiliatedISPs. See 47 C.F.R. § 64.702(c) (codifyingthe second "Computer Inquiry").Alternatively, an ILEC could provide DSLinternet access itself, but to do so it must filewhat is known as a "Comparably EfficientInterconnection" plan ("CEI") with the FCC.See In re Computer III Further RemandProceedings: Bell Operating CompanyProvision of Enhanced Services, Report andOrder, 14 FCC Rcd. 4289 (1999)[hereinafter "Computer III" order]. Theseplans indicated how ILECs planned onproviding competing ISPs with equal accessto all the elements necessary to provide theirown DSL internet access services. Amongthe requirements for CEI plans, ILECs hadto "provide competitors with interconnectionfacilities that minimize transport costs. Thisprovision ensures that [ILECs] cannotrequire competitive ISPs to purchaseunnecessarily expensive methods ofinterconnection with the [ILECs] network."Id. The 1934 Act also required that "[a]llcharges, practices, classifications, andregulations for and in connection with suchcommunication service, shall be just andreasonable. . . ." 47 U.S.C. § 201(b).

The 1934 Act charged the FCC withenforcing these regulations and, in somecases, parties can also bring complaintsbefore state public utility commissions.Aggrieved parties can either file a complaintin federal district court or before theCommission. 47 U.S.C. § 207. The FCCmay also initiate its own enforcementproceedings and craft remedies as it deemsappropriate. 47 U.S.C. § 205. In practice,however, the FCC tends to rely on marketplayers bringing complaints to its attention.

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See Cannon, Guide to the ComputerInquires at 70.

All of this regulation, however, applies onlyto the wholesale prices the SBC Entitiescharged linkLine; there is no comparableregulatory attention paid to the retail DSLmarket. Any restrictions on pricing at theretail level derive primarily from theantitrust laws. It is unclear at this juncturethe extent to which linkLine is basing its § 2price squeezing theory on wholesale pricing,retail pricing, or both. However, sincelinkLine could prove facts, consistent withits complaint, that involve only unregulatedbehavior at the retail level, its action orlawsuit survives a motion for judgment onthe pleadings. We do not preclude thedistrict court, however, from re-examiningthe viability of this claim on summaryjudgment after the record is more fullydeveloped and it is clear whether thecomplained of behavior took place at theregulated wholesale level, the unregulatedretail level, or some combination of the two,and to what extent, if any, the responsibleagencies have devoted attention to or hadinvolvement in the complained of conduct.Based on the record before us at this time,we are able to conclude that the district courtwas correct to deny the SBC Entities'motion for judgment on the pleadingsbecause linkLine's allegation that thepricing scheme created an anticompetitiveprice squeeze states a potentially valid claimunder § 2 of the Sherman Act.

AFFIRMED.

Dissent

GOULD, Circuit Judge, dissenting:

I respectfully dissent, concluding that theamended complaint should have beendismissed for failure to state a claim, in lightof dispositive Supreme Court precedent,

notwithstanding the permissive standard bywhich we assess a complaint whenconfronted with a motion to dismiss on thepleadings.

As the court correctly notes, we assume thefacts pleaded in linkLine's amendedcomplaint to be true. As a general matter itis not correct to dismiss the complaint if anyfacts might be proved under which thecomplaint would be valid. However, thecomplaint only generally alleges a "pricesqueeze" and related exclusionary conduct.The complaint does not allege that the SBCEntities had any market power to set orinfluence the retail price for internet service.So it seems quite odd to say they could haveviolated the antitrust laws in part because ofretail pricing; if SBC has no power to set itsretail prices above the price at which it hassold its wholesale connection, it does notmake sense to consider its pricing an illegal"price squeeze" under the antitrust laws.Given that SBC's DSL internet connectionscompete with connections by cable and bysatellite, it is by no means clear that SBChas the market power to influence the retailmarket price.

Moreover, the complaint does not allege thatthe prices at which the SBC Entities soldretail "DSL" internet connections werebelow cost, under any measure of cost; yetto the extent the concern is with predation atthe retail level, then it would seem that, incurrent antitrust theory, below-cost salesmust be shown. The complaint does notallege that the SBC Entities, to the extentthey had losses by selling below cost in theretail market, had any realistic prospect ofrecouping losses; yet again, this prospect ofrecoupment is an integral element of apredation analysis under current SupremeCourt doctrine.

Because of the expense and burden ofproceeding in the antitrust litigation, it

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would be inefficient and unwise to permitthe complaint to proceed on the generalallegations of price squeeze, absentallegation of critical facts that in my vieware needed for liability. To put the matterpractically, it seems to me that the SupremeCourt's decision in VerizonCommunications, Inc. v. Law Offices ofCurtis V Trinko, LLP, 540 U.S. 398 (2004)("Trinko") in essence takes the issues ofwholesale pricing out of the case, and thustransforms what is left of any claim of "pricesqueeze." If so, and if plaintiffs in good faithcannot allege market power, below costsales and probable potential for recoupmentin the retail market, then the case should notproceed. Conversely, if plaintiffs are able toallege that the SBC Entities had marketpower in the retail market to set or influencethe price, and that their retail sales ofinternet connection were predatory in thesense of being below cost with a realprospect of recoupment, then the caseshould proceed for factual development.After Trinko and Brooke Group v. Brown &Williamson Tobacco Corp., 509 U.S. 209,(1993) ("Brooke Group"), the case doesn'tget out of the antitrust law starting blocks ifplaintiffs cannot make allegations showingthat the retail prices charged by the SBCEntities were predatory in a sense forbiddenby the antitrust laws.

The district court dismissed most of theallegations of the complaint, but let stand the"price squeeze" allegation. As the majorityopinion notes, "At the time the amendedcomplaint was filed, the SBC Entities wereboth a supplier to the Plaintiffs at thewholesale level, and a competitor at theretail level." The majority opinion alsocorrectly explains: "In antitrust terms, aprice squeeze occurs 'when a verticallyintegrated company sets its prices or rates atthe first (or 'upstream') level so high that itscustomers cannot compete with it in thesecond-level (or 'downstream') market."'

Yet, the notion of a "price squeeze" is itselfin a squeeze between two recent SupremeCourt precedents.

Let us look first at the part of the "pricesqueeze" represented by SBC setting theupstream price at which it would sell use ofits land lines to linkLine and the other ISPshere suing. The Supreme Court's decision inTrinko, upholding the ability of a regulatedmonopolist to deal with a competitor oncertain service terms, means that if SBC setits wholesale price, the upstream price, toohigh, that cannot be challenged under theantitrust laws by analogy to permissiblerefusals to deal. I substantially andsubstantively agree with the position takenby the D.C. Circuit in Covad Communi-cations Co. v. Bell Atlantic Corp., whereinthe court adopted the reasoning of a majortreatise on antitrust law that "'it makes nosense to prohibit a predatory price squeezein circumstances where the integratedmonopolist is free to refuse to deal."' CovadCommuns. Co. v. Bell Atl. Corp., 398 F.3d666, 673 (D.C. Cir. 2005). I am inagreement with this reasoning so far as itgoes: Trinko insulates from antitrust reviewthe setting of the upstream price.

However, although the D.C. Circuitconcluded from this that "price squeeze"allegations should be dismissed, in thisrespect I would disagree if the keyallegations I have identified could be made,because part of the "price squeeze"lallegation is based on the retail price set inthe "downstream" market. Thus, herelinkLine is complaining about its inability tobuy use of wholesale service lines at theprice set by SBC when it cannot competewith the retail price at which SBC itself sellsDSL internet connections to consumers.

SBC's setting of its sale price of the use ofits land lines by ISPs in a wholesaletransaction cannot be the basis of an

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antitrust claim in light of Trinko. That,however, does not dispose of scrutiny ofSBC's conduct in the retail market, for it isthe price at which SBC sells DSL service toits retail customers that squeezes linkLine'sability to resell internet connections at aprofit. Thus the "price squeeze" contentionboils down to a claim of a predatory pricingon sales of internet connections by SBC inthe retail market. If all that remains of the"price squeeze" claim is a challenge to theretail prices set by SBC on sale of DSLinternet connection service, then it seems tome essentially a predatory pricing claim, andit can only be viable in the first instance ifthe SBC Entities have some real marketpower sufficient to set or influence prices inthe retail market.

Moreover, even beyond the need foralleging and proving some degree of marketpower in the retail market, if that is the truelocus of the antitrust complaint after Trinko,the retail side of a price squeeze cannot beconsidered to create an antitrust violation ifthe retail pricing does not satisfy therequirements of Brooke Group, which setunmistakable limits on what can beconsidered to be predatory within themeaning of the antitrust laws. In that casethe Supreme Court held that a predatorypricing claim could proceed only if therewere allegations (1) that the prices set were

below an appropriate measure of the seller'scosts; and (2) that the seller had a reasonableprospect, or, under § 2 of the Sherman Act, adangerous probability, of later recoupinglosses. Id. at 222-24. Here, plaintiffs in their"price squeeze" contentions in the amendedcomplaint did not allege that the seller hadthe market power to set prices for internetconnection in the retail market, that SBC'sretail price, contributing to the squeeze, wasset below cost, and that losses could later berecouped.

Because we have not heretofore held thatthere must be a showing of market power inthe retail market, nor held that the standardsof Brooke Group must be applied inassessing predation in the retail side of a"price squeeze," I do not think it would becorrect to dismiss the complaint on thepleadings with prejudice. Instead, afterdismissal, plaintiffs should have been free toamend their complaint if they could assert ingood faith the allegations that are requisitehere, after Trinko, for antitrust liability.

Thus I respectfully dissent, believing thatthe Supreme Court's precedents in Trinkoand Brooke Group have so hemmed in thepotential for "price squeeze" liability thatthe specific allegations I have identified arenecessary to state an antitrust claim in thecontext of the "price squeeze" alleged.

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"High Court Agrees to Hear AT&T ISP Dispute"

EWeek.comJune 25, 2008EWeek.com

When the Federal CommunicationsCommission classified DSL as aninformation service in 2005, it put telephonebroadband providers in the same category ascable modem broadband providers. Thedecision relieved both telephone and cablecompanies from legal obligations to leasebroadband lines to competitors.

More importantly, telephone companieswould not face the same antitrust laws thatrequired dial-up carriers to lease their linesat a discount to independent dial-upcompanies. Or did it?

The Supreme Court decided June 23 to heara case pitting California broadband providerlinkLine against AT&T. The company,which leases broadband lines and resellsbroadband access to consumers, claimsAT&T's wholesale broadband prices are sohigh, linkLine was unable to competeagainst AT&T's retail prices.

In the legalese of the case, linkLine accusedAT&T of a "price squeeze" in violation ofthe Sherman act. The case was originallyfiled against Pacific Bell, which was lateracquired by SBC, which, in turn, acquiredAT&T and began to operate under theAT&T name.

AT&T contended the FCC's 2005 decisiondid not obligate it to lease any lines tolinkLine and that the arrangement shieldedAT&T from antitrust claims. After legalwrangling on the district court level, theNinth Circuit Court of Appeals ruled thecase could proceed. With the support of theDepartment of Justice, AT&T appealed thecase to the Supreme Court.

"Defendants [AT&T] adopted procedurescarefully calculated to deny ISPs access toan essential facility and to preserve andmaintain its monopoly control of DSLaccess to the Internet," the Ninth Circuitruled.

In accepting the case to be heard this fall,the Supreme Court said it would considerwhether a "vertically integrated retailcompetitor with an alleged monopoly at awholesale level but no antitrust duty toprovide the wholesale input" could engagein price squeezing by leaving "insufficientmargin between wholesale and retail pricesto allow the plaintiff to compete."

According to the Ninth Circuit, a pricesqueeze occurs when a vertically integratedcompany sets its upstream prices or rates sohigh other companies are unable to compete.

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"Ninth Circuit Case Alleging DSL'Price Squeeze' Can Proceed"

Telecommunications ReportsSeptember 15, 2007

Telecommunications Reports

The U.S. Court of Appeals for the NinthCircuit (San Francisco) has affirmed thefinding of a district court that refused todismiss an antitrust lawsuit filed by a groupof Internet service providers (ISPs) chargingthat subsidiaries of the former SBCCommunications, Inc., had "created a pricesqueeze" for DSL (digital subscriber line)competitors that buy SBC's wholesaleservices.

The complaint was filed more than fouryears ago by a group of ISPs-includingLinkline Communications, Inc., In-ReachInternet LLC, Om Networks, and Nitelog,Inc.-that lease facilities for transportingdata from SBC and its subsidiaries. SBC andits subsidiaries were both supplier to theplaintiff ISPs at the wholesale level, andcompetitor at the retail level.

The lawsuit accused SBC of charging theISPs "a high wholesale price in relation tothe price at which defendants wereproviding retail services." The ISPsspecifically alleged that SBC monopolizedthe regional DSL market in violation ofsection 2 of the Sherman Act.

SBC subsequently filed a motion forjudgment on the pleadings, contending thatthe anticompetitive "price squeeze"allegations made under the Sherman Actwere not valid claims. Among other things,SBC based its argument for dismissal on theU.S. Supreme Court's decision in VerizonCommunications Inc., vs. the Law Offices ofCurtis V Trinko and argued that itswholesale pricing can't be the basis of an

antitrust claim.

The federal district court in Californiadenied SBC's motion to dismiss for failureto state a claim and determined that thedecision in the Trinko case does not bar aplaintiff from claiming a violation of theSherman Antitrust Act by "virtue of analleged price squeeze perpetrated by acompetitor who also serves as the plaintiffssupplier at the wholesale level, but has noduty to deal with the plaintiff absentstatutory compulsion."

The majority of the Ninth Circuit, accordingto a decision written by Judge SydneyThomas, agreed with the finding of thelower court and affirmed the decisiondenying dismissal of the plaintiffs' pricesqueeze claims against SBC. The courtpointed to its 1992 decision in City ofAnaheim vs. Southern California Edison Co.in which it determined that even in abusiness where prices are regulated at boththe wholesale and retail level, it's possiblefor price squeeze to occur.

Judge Thomas also pointed out that the"Trinko decision did not, as the SBC entitieswould argue, completely eliminate theviability of a section 2 price squeeze theoryin regulated industries." The existence ofregulation does not always eliminate thedanger of anticompetitive harm, JudgeThomas wrote in the decision.

"When we apply Anaheim and Trinko to thiscase, the soundness of the district court'sconclusion in denying judgment on the

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pleadings is clear," Judge Thomas said,pointing out that at the time the complaintwas made SBC was subject to certainregulatory requirements related to theprovision of retail DSL.

Ultimately, the Ninth Circuit concluded thatthe lower court was correct to deny SBC'smotion for judgment on the pleadingsbecause the allegations made by the ISPsconstitute a "potentially valid claim" under

the Sherman Act. Judge Ronald Gould,however, dissented from the majorityopinion and questioned the extent to whichthe ISPs allege that SBC and its subsidiarieshad any market power to set or influence theretail price for Internet service. "It seemsquite odd to say they could have violated theantitrust laws in part because of retailpricing if SBC has no power to set its retailprices above the price at which it has sold itswholesale connection?" Judge Gould wrote.

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"Ninth Circuit Prequels and Sequels"

New York Law JournalDecember 18, 2007

Neal R. Stoll and Shepard Goldfein

It must be more than a mere coincidence thatthe U.S. Court of Appeals for the NinthCircuit's jurisdiction includes California andits constituent city Hollywood, the locus ofmotion picture production. Once again, theSupreme Court is being asked to review adecision brought to us by the same CircuitCourt that produced the short-run opinionsin Dagher and Weyerhaeuser.

The 'linkLine' Case

The writ of certiorari, currently pendingbefore the Court, arises from the NinthCircuit's decision in linkLineCommunications, Inc. v. SBC California,Inc. that affirmed the District Court'srefusal to grant judgment on the pleadingsfor a defendant who allegedly priced itswholesale and retail provision of Internetconnection services so as to monopolizeDSL access to the Internet. The SupremeCourt is being urged to consider whether ornot a claim under §2 of the Sherman Act canbe based on an alleged 'price-squeeze'theory where the defendant's duty to dealwith rivals only arises under statutorycompulsion.

Specifically, the Ninth Circuit's reasoningraises questions about the implications of theSupreme Court's decision in VerizonCommunications, Inc. v. Law Offices ofCurtis V Trinko, LLP, i.e., antitrustoversight over vertically integratedcompetitors and the potential limitation ofclaims based on pricing to those allegingexclusionary conduct. Collaterally, the'price-squeeze' claim also implicates theCourt's Weyerhaeuser decision and the

Ninth Circuit's recent holding in CascadeHealth Solutions v. PeaceHealth.

SBC, the defendant in linkLine, wasrequired to give access to its local telephonenetwork to independent Internet serviceproviders (ISPs), including linkLine,pursuant to statutory compulsion. SBC andlinkLine both competed in the provision ofDSL Internet services to consumers.linkLine alleged that SBC's conductamounted to a refusal to deal, denial ofaccess to an essential facility, and was price-squeezing in violation of §2 of the ShermanAct.

Trinko, also in the context oftelecommunications deregulation andcompulsory access to networks, held thatantitrust liability was inappropriate wherethere already exists a regulatory structuredesigned to prevent anticompetitive conduct.Therefore, the Supreme Court's decisionrequired the dismissal of the first twoclaims. However, a price-squeeze theorywas not explicitly advanced in Trinko, andthe majority of the Ninth Circuit panel heldthat Trinko did not preclude such a claim.Even though Trinko reiterated the generalprinciple that the Sherman Act does notrestrict the right to choose with whom todeal, Justice Antonin Scalia conceded, citingAspen Skiing Co. v. Aspen Highlands SkiingCorp., that, '[u]nder certain circumstances, arefusal to cooperate with rivals canconstitute anticompetitive conduct andviolate §2.' The Ninth Circuit was alsocareful to note that the Supreme Court didnot state that the regulatory structure inexistence created a per se bar to antitrust

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liability, only that it was "[o]ne factor ofparticular importance."

The regulatory scheme in linkLine requiredthe defendant to provide access to itsnetwork to independent ISPs with whom itcompeted in the downstream market. If itcompeted through a subsidiary, SBC wasrequired to provide access on the same termsand conditions to independent ISPs as it didto its subsidiary. If it provided retail DSLservices itself, SBC was required to providenetwork access in accordance with an FCC-approved plan that would ensure comparableparity in the ability to compete for theprovision of retail DSL Internet services.The Ninth Circuit noted that the regulatorystructure did not exercise control over retailprices for DSL Internet services. The Courtof Appeals therefore concluded that therewas room, consistent with Trinko, forantitrust regulation of the defendant'sconduct, particularly as it related to retailpricing. Since it was unclear to what extentthe plaintiff was basing its price-squeezeclaim theory of wholesale pricing, retailpricing, or both, its claim should be allowedto proceed.

Judge Ronald Gould, dissenting, argued thatTrinko precluded any claim based on SBCconstructing a price-squeeze. The U.S. Courtof Appeals for the District of ColumbiaCircuit had come to the same conclusion inCovad Communications Co. v. Bell AtlanticCorp. However, Judge Gould expressed theview that Trinko did not bar a claim basedon predatory pricing. The Eleventh Circuithas already allowed such a claim to proceedin Covad Communications Co. v. BellSouthCorp. In light of the intervening judgment ofTrinko and its implication that conductmeeting the standards of Brooke Group mustbe alleged, the dissent would have dismissedthe plaintiffs pleading without prejudice,allowing the plaintiff to amend and re-file its

claim should it have one based on predatorypricing.

Price-Squeeze Theory

The other context in which the price-squeezetheory has been advanced in a regulated-industry context has been with respect to thesupply of electricity generated by verticallyintegrated utilities and distributed byindependent local distributors. One suchcase is Town of Concord, Massachusetts v.Boston Edison Company. As noted in theU.S. Court of Appeals for the First Circuit'sopinion in that case, delivered by then-JudgeStephen Breyer, the price-squeeze theoryhas a long and not insubstantial pedigree. InUnited States v. Aluminum Co., JudgeLearned Hand held that Alcoa actedunlawfully when it charged higher than a'fair price' for aluminum ingot used tomanufacture aluminum sheet because it alsopriced aluminum sheet so low as to deny itscompetitors an opportunity to make a "livingprofit." And since then, various courts ofappeal and district courts have used similarlanguage in describing claims allowed underthe antitrust laws. In fact, the legitimacy ofprice-squeeze theories in a regulated-industry context has tended to be recognizedin the electricity context, albeit in a limitedfashion, although claims have rarely beenallowed to succeed.

Notoriously absent from the linkLinedecision are references to the SupremeCourt's decision in Weyerhaeuser and theNinth Circuit's recent decision inPeaceHealth. Both of these precedents aremore on point than Trinko in the context of aprice-squeeze claim:

A predatory buying claim resembles a price-squeeze claim in that, in both instances, thedefendant allegedly inflated the input pricesand left too small a differential between the

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upstream input price and the downstreamoutput price for rivals to survive.

Applying Weyerhaeuser, overpaying in theinput market becomes suspect only when itleads to below-cost pricing in the outputmarket. Moreover, Weyerhaeuser likelyoverrules Judge Hand's holding in UnitedStates v. Aluminum Co. that relied onqualitative concepts such as "fairness" and"living profit."

As we previously reported, the Ninth Circuitin PeaceHealth held that a cost-based test isan essential element of a monopolizationclaim premised on multiproduct or"bundled" discounting. Bundled discountingdescribes the practice of offering discountsthat are conditioned upon the customer'spurchase of two or more products from theseller's products or services. PeaceHealthapplied a rule modeled on the SupremeCourt's landmark predatory pricingdecision, Brooke Group. The Ninth Circuit'sapproach unified the legal standard forSherman Act §2 claims based on allegationsof predatory pricing, predatory bidding, andbundled discounting practices.

Analysis

It is only a short distance from where theSupreme Court and the Ninth Circuit, standnow to the dismissal of a plaintiffs claimbased on a defendant's wholesale servicecost forcing the plaintiff to operate at a loss.Unless the defendant is also operating at aloss with respect to its retail services it ishard to see why the antitrust laws shouldprotect a clearly less efficient provider of theretail services.

The Ninth Circuit's use of Trinko as akeystone to allow linkLine to attack thedefendant's retail pricing is a non sequitur.The Ninth Circuit, in denying the motion for

judgment on the pleadings, stated that"linkLine could prove facts, consistent withits complaint, that only involve unregulatedbehavior at the retail level." The fact that aplaintiff must prove its price-squeeze theoryhas a predatory effect in the retail market isdictated ultimately by Brooke Group, notTrinko.

Despite the deficiencies in the Ninth'sCircuit reasoning, one might feel somesympathy for the plaintiff in linkLine,especially when the end goal is to delivercheaper and better Internet connection forconsumers. It might be the case that thedefendant is not as efficient a retail serviceprovider as linkLine. But so long as thedifference between the defendant'swholesale price and its retail price issufficient to cover the defendant's costs toprovide its retail services (i.e., it is notengaged in predatory pricing), there willalways be room for a more efficient retailservice provider to make a profit. In fact, insuch a situation, the defendant wouldincrease its profit by raising its wholesaleprice to capture the plaintiffs efficienciesand exiting retail service provisionaltogether; all without any harm toconsumers.

A monopolist has always had the right to bevertically integrated, even if it is lessefficient than its competitors who it suppliesin the downstream market. Once this isaccepted, Trinko can be used to punctuatethe conclusion, as some commentators havestated, that 'it makes no sense to prohibit apredatory price squeeze in circumstanceswhere the integrated monopolist is free torefuse to deal.'

At least it ultimately should be a HappyHolidays for wholesalers with marketpower!

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"ISPs File Antitrust Lawsuit Against SBC in California"

Telecommunications ReportsJuly 24, 2003

Telecommunications Reports

A group of Internet service providers (ISPs)in California today filed an antitrust lawsuitcharging that subsidiaries of SBCCommunications, Inc., had "created a pricesqueeze" for DSL (digital subscriber line)competitors that buy SBC's wholesaleservices.

"SBC has used the classic ' price squeeze' toput independent ISPs out of the DSLmarket," said David Simpson, one of theattorneys of the plaintiffs. "With DSL,where SBC has a stranglehold on the 'lastmile' critical for deployment of thebroadband technology, SBC suddenly hasnearly all of the market." The lawsuitaccuses SBC of charging ISPs "a highwholesale price in relation to the price atwhich defendants were providing retailservices." It also says SBC took a number ofother actions to make it difficult forcompeting ISPs to do business. Theplaintiffs allege that the extent of the

damages they have incurred exceeds $40million for each one.

An SBC spokesman said the lawsuit was"without merit and appears to be a rehash ofissues that have already been resolved withthe California Internet Service ProvidersAssociation." He added that SBC recentlylowered its DSL transport pricing, which hesaid allows ISPs to better compete withcable modem providers.

Filing the lawsuit in U.S. District Court inLos Angeles against SBC California, Inc.,Pacific Bell Internet Services, and SBCAdvanced Solutions, Inc., were linkLineCommunication, Inc., InReach InternetLLC, Om Networks, and Nitelog, Inc. Theaction alleges violations of the ShermanAntitrust Act and the California UnfairBusiness Practice statues. It seekscompensatory and punitive damages and aninjunction on the defendants.

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"U.S. High Court Rules in Favor of Verizon"

Los Angeles TimesJanuary 14, 2004James S. Granelli

Local telephone companies may have toshare their lines with competitors, butantitrust laws don't force them to bend overbackward to help rivals serve theircustomers, the U.S. Supreme Court ruledTuesday.

The court rejected a customer's complaintthat Verizon Communications Inc. wasfurthering its monopoly in local service byfailing to help AT&T Corp. deliver serviceon Verizon lines. The customer, a lawyer inNew York, can't sue under antitrust lawsjust because Verizon violated the federalTelecommunications Act of 1996, the courtsaid.

That decision could lead lower courts tothrow out most of the nearly three dozenantitrust lawsuits filed against Verizon, SBCCommunications Inc. and other Baby Bells,said John Thorne, Verizon's deputy generalcounsel. Verizon faces 13 such suits andSBC 15.

The high court justices ruled that the 1996telecommunications law, intended to breakup local phone monopolies and promotecompetition, didn't give Verizon, SBC andother Bells immunity from conventionalantitrust actions, as some Bell lawyers hadargued.

New York-based Verizon is the nation'slargest local phone company. In California,it is second to SBC, serving many of thecoastal communities in Southern California.

Both companies have argued vociferously

that the rates they can charge competitors torent their lines and equipment are too low.

Under the 1996 law, the Bells had to opentheir markets to competition and lease theirequipment to rivals to get approval to offerlong distance. In exchange for allowingrivals on their lines, the Bells were permittedto sell long-distance service.

James D. Ellis, general counsel for SBC,California's dominant local carrier, said thedecision freed the company from "frivolouslawsuits" and allowed it to focus more onnew products.

Organizations representing consumers andcompetitors were disappointed.

"It will make the process of deciding tobring a case quite a bit more challenging,"said Michael McNeely, a lawyer forConsumers Union, which supported thecustomer who filed the complaint, Curtis V.Trinko. "It ups that ante on what you have toprove."

Jonathan Askin of the Assn. for LocalTelecommunications Services said the localloop to homes was an "essential facility,"and that without fair access to it, "the Bellcartel will always be able to wield monopolycontrol."

"In our view, the decision is not surprising,"said James Kirkland, general counsel forDSL provider Covad CommunicationsGroup Inc., which filed a brief supportingTrinko.

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Kirkland said the decision shouldn't affecttwo antitrust suits that Covad has filed,alleging that Verizon and BellSouth Corp.illegally furthered their monopoly positionsin digital subscriber line service. Thoseactions, he said, are based on conventionalantitrust rules.

Trinko declined to comment on the decision,and his lawyer was unavailable.

Trinko's law firm was an AT&T customer,receiving service on lines AT&T leasedfrom Verizon. Trinko claimed that Verizondiscriminated against AT&T customers byproviding them worse service than itprovided to its own customers.

He claimed this violated both the 1996 actand the Sherman Antitrust Act of 1890,which prohibits monopolies fromaggressively defending their monopolypositions.

A federal district court ruled that Trinko hadno grounds to sue because he wasn't a directcustomer of Verizon.

A U.S. 2nd Circuit Court of Appeals panelreinstated the Sherman Act claims. Verizon

appealed to the Supreme Court.

Verizon's alleged failure to provide AT&Tadequate access to its lines may be aviolation of the 1996 telecom law, JusticeAntonin Scalia wrote for the majorityTuesday, but that doesn't mean that Verizonbroke antitrust laws.

Just as "the 1996 act preserves claims thatsatisfy existing antitrust standards, it doesnot create new claims that go beyondexisting antitrust standards," Scalia wrote.

Having a monopoly isn't unlawful "unless itis accompanied by an element ofanticompetitive conduct."

In this case, he said in the majority opinion,there was no evidence showing Verizon'smotivation was to further its monopolyposition.

Trinko's complaint led to investigations bythe Federal Communications Commissionand the New York Public ServicesCommission, the high court opinion noted.In the federal case, Verizon paid a $3-million fine. In the state case, it made a $10-million payment.

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United States v. EurodifS.A.

07-1059

Ruling Below: EurodifS.A. v. United States, 506 F.3d 1051 (Fed. Cir., 2007).

The United States Enrichment Corporation (the only company in the United States that enrichesuranium) filed a complaint with the Commerce Department against Eurodif S.A. for selling lowenriched uranium at unfairly low prices, in violation of anti-dumping laws. In two previousdecisions, the court found that contracts for the enrichment of uranium were contracts forservices as opposed to contracts for the sale of goods, and therefore were not subject to anti-dumping laws. On remand from the Court of International Trade, Commerce redefined the scopeof the anti-dumping laws to exclude such services. The appeal was dismissed by the Court ofAppeals for the Federal Circuit as unripe.

Questions Presented: The antidumping law allows for duties to be imposed on "foreignmerchandise .. . sold in the United States at less than its fair value." The Commerce Departmentconstrued that phrase as including transactions in which a U.S. customer furnishes cash andfungible raw material to a foreign producer and receives a substantially transformed finishedproduct. The question presented in this case is whether the Federal Circuit erred in failing toaccord Chevron deference to that construction, when a contrary one will prevent the CommerceDepartment from applying the antidumping law to imports causing or threatening material injuryto a domestic industry.

Section 1673 of Title 19 of the United States Code provides that, when "a class or kind offoreign merchandise is being, or is likely to be, sold in the United States at less than its fairvalue," to the detriment of a domestic industry, the Department of Commerce (Commerce) shallimpose antidumping duties on entries of the foreign merchandise.

The question presented is: Whether the court of appeals erred in rejecting Commerce'sconclusion that foreign merchandise is "sold in the United States" within the meaning of 19U.S.C. 1673 when a purchaser in the United States obtains foreign merchandise by providingmonetary payments and raw materials to a foreign entity that performs a major manufacturingprocess in which substantial value is added to the raw materials, thereby creating a new anddifferent article of merchandise that is delivered to the U.S. purchaser.

EURODIF S.A., Compagnie Generale des Matieres Nucleaires, and Cogema, Inc., and AdHoc Utilities Group, Plaintiffs-Appellees

V.

UNITED STATES, USEC Inc., and United States Enrichment Corporation, Defendants-Appellants

United States Court of Appeals for the Federal Circuit

Decided September 21, 2007

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[Excerpt: some footnotes and citations omitted.]

ROBERTSON, District Judge.

In this dispute about the correct applicationof the antidumping statute, 19 U.S.C. §1673, to enriched uranium feedstock,appellants United States, USEC Inc., andUnited States Enrichment Corp. (the lattertwo collectively referred to as "USEC")appeal from a judgment of the United StatesCourt of International Trade. EurodifS.A. v.United States, 442 F. Supp. 2d 1367 (Ct.Int'l Trade 2006). In 2005, we issued twointerlocutory opinions in the same case,EurodifS.A. v. United States, 411 F.3d 1355(Fed. Cir. 2005) ("Eurodif 1'), and EurodifS.A. v. United States, 423 F.3d 1275 (Fed.Cir. 2005) ("Eurodifl"). Because the issuesappellants raise in the instant appeal concernonly the application of those decisions tofuture entries of low enriched uranium, wedismiss the appeal as unripe.

I. BACKGROUND

In Eurodif I and Eurodif II, we found thatseparate work unit ("SWU") contracts forthe enrichment of uranium were contractsfor services, rather than for the sale ofgoods, and that the low enriched uranium("LEU") produced under those contractswas therefore not subject to the antidumpingstatute. Eurodif , 411 F.3d at 1364; Eurodif

I, 423 F.3d at 1278. Following thosedecisions, the Court of International Tradeissued a remand order, instructing theDepartment of Commerce ("Commerce") torevise its final determination and order, andto "explain how its final determination andorder on remand has eliminated all SWUtransactions" in accordance with ourdecisions. Eurodif S.A. v. United States, 414F. Supp. 2d 1263 (Ct. Int'l Trade 2006)("Eurodif IT'). Acting pursuant to that

order, Commerce excluded LEU covered by

SWU contracts from its recalculation of theduty margin, Final Results ofRedetermination Pursuant to Court Remand,EurodifS.A. v. United States (Mar. 3, 2006),but it did not modify the scope of theantidumping duty order to exclude futureimports of LEU covered by SWU contracts.

Plaintiffs-Appellees Eurodif S.A., Cogema,and Cogema, Inc. (collectively referred toherein as "Eurodif') supported Commerce'saction, as far as it went, but they also askedthe Court of International Trade to requireCommerce to amend the scope order so thatit would expressly exclude LEU covered bySWU contracts. Defendant-Appellant USECsupported Commerce's decision not toamend the scope order, but asserted that itwas error for Commerce to exclude all LEUimported pursuant to SWU contracts fromits recalculation without investigating thefacts behind each contract to determinewhether the transaction was a sale ofservices, as stated in the contract, or was infact a sale of goods.

The Court of International Trade agreedwith Eurodif. It found that our opinions inEurodif I and Eurodif H1 took into accountthe factual circumstances operating behindthe individual contracts in this case andtherefore that Commerce was correct toexclude all LEU covered by those SWUcontracts from its recalculation. Eurodif S.A.v. United States, 431 F. Supp. 2d 1351, 1354(Ct. Int'l Trade 2006) ("Eurodif IV").Furthermore, the Court of InternationalTrade concluded that our previous opinionsrequired Commerce to rewrite the scope ofthe antidumping duty order, and it remandedthe case to Commerce once again withinstructions to amend the order to excludeall LEU covered by SWU contracts from the"class or kind of merchandise" covered by

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the order. Id. at 1355 (citing 19 U.S.C. §1673e(a)(2)). On this second remand,Commerce redefined the scope of theantidumping order to exclude any entry ofLEU that is accompanied by a certificationclaiming that the entry is made pursuant to aSWU contract. The Court of InternationalTrade sustained, Eurodif S.A. v. UnitedStates, 442 F. Supp. 2d 1367 (Ct. Int'l Trade2006) ("Eurodif V"), and this appealfollowed. We have jurisdiction pursuant to28 U.S.C. § 1295(a)(5).

II. DISCUSSION

In Eurodif I and Eurodif II, we found thatthe SWU contracts at issue "in this case"were contracts for the sale of services thatwere not subject to the antidumping statute.See Eurodif I, 411 F.3d at 1362, 1364. Wedid not address how Commerce shoulddetermine whetherfuture entries of LEU aremade pursuant to SWU contracts. Thecontentions of the government and USEC onthis appeal are directed to future entries.They argue that Commerce should bepermitted to suspend liquidation of futureLEU imports until it determines-transaction-by-transaction and byadministrative review-whether the SWUcontract exception applies. USECadditionally argues that the scopeamendment and certification should bemodified now to make it clear that futureLEU imports will not be outside the scope ofthe antidumping law if the unenricheduranium is either (a) obtained from anaffiliate of the enricher or (b) delivered tothe enricher after entry.

Neither the procedural question presentedhere (scope review vs. administrativereview) nor the substantive questionsrelating to affiliation of the enricher are ripefor decision. The doctrine of ripeness isdesigned "to prevent the courts, through

avoidance of premature adjudication, fromentangling themselves in abstractdisagreements over administrative policies,and also to protect the agencies from judicialinterference until an administrative decisionhas been formalized and its effects felt in aconcrete way by the challenging parties."Abbott Labs. v. Gardner, 387 U.S. 136, 148-49 (1967). It is drawn "both from Article IIIlimitations on judicial power and fromprudential reasons for refusing to exercisejurisdiction, but, even in a case raising onlyprudential concerns, the question of ripenessmay be considered on a court's ownmotion." Nat'1 Park Hospitality Ass'n v.DOI, 538 U.S. 803, 808 (2003) (citing Renov. Catholic Soc. Servs., 509 U.S. 43, 57n.18, (1993).

AdministrativeDetermination

Review vs. Scope

The Court of International Trade found thatan administrative review is not the "properforum to address whether merchandise iswithin the scope of an order," and thatCommerce's own regulations authorize adifferent mechanism for this purpose: a"scope determination." Eurodif IV, 431 F.Supp. 2d at 1356. At the request of anyinterested party, Commerce may "initiate aninquiry" as to whether merchandise is withinthe scope of an antidumping duty order. Id.(citing 19 C.F.R. § 351.225(b)). If theSecretary determines that the product inquestion is included within the scope of theorder, he may instruct Customs to suspendliquidation for each unliquidated entry,effective as of the date the scope inquiry wasinitiated. 19 C.F.R. § 351.225(l)(2). Thatdetermination is reviewable by the Court ofInternational Trade. 28 U.S.C. § 1581(c).

Appellants argue that this scopedetermination process is inadequate,because, as a practical matter, an entry of

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LEU under review will be liquidated beforeCommerce can complete its determination.They assert that determining whether aparticular transaction is entitled to the SWU-contract exception requires a carefulanalysis of the contract itself and anopportunity to investigate the manner of itsexecution. The administrative reviewprocess would permit Commerce to suspendliquidation while such an assessment takesplace, but the scope determination processpermits Commerce to suspend liquidationonly after the Secretary has issued apreliminary scope ruling. USEC notes thatliquidation typically occurs ten months afterentry, but Commerce's previous assessmentsof LEU contracts have taken seventeen toeighteen months. As a result, appellantsargue, the scope determination process willnot be completed before the entry underreview has been liquidated, mooting thereview.

This dispute is about what may or may nothappen with the next LEU case-a caseabout which we have no facts. Our decisionsin Eurodif I and Eurodif II did not resolvethe procedural problem that USEC and thegovernment have presented here, but wedecline to attempt a resolution on thisrecord. We have held that SWU contractsare contracts for services and that the LEUin this case entered under SWU contracts.Whether the next contested shipment ofLEU is covered by a valid SWU contract isa question that must await the next case. IfCommerce is correct, and the next disputedLEU entry is liquidated before Commercecan complete its scope review, the dispute

will not be rendered non-justiciable, as itwould be "capable of repetition, yet evadingreview." S. Pac. Terminal Co. v. ICC, 219U.S. 498, 515 (1911).

LEU Obtained from or Sold to Affiliates

The more substantive questions USECbrings on this appeal also require a specificfactual context for their resolution, and sucha record is not before us. USEC wants itmade clear that future LEU imports will notavoid antidumping penalties if theunenriched uranium was either (a) obtainedfrom an affiliate of the enricher or (b)delivered to the enricher after theimportation of the LEU. Although USECdoes not challenge our finding that thecontracts in this case were contracts for thesale of services, it seeks clarification as towhether our holding would apply to futureentries with these characteristics. Until wehave record evidence regarding such entries,however, USEC's questions are non-justiciable. Elec. Bond & Share Co. v. SEC,,303 U.S. 419, 443 (1938) ("We are invitedto enter into a speculative inquiry for thepurpose of condemning statutory provisionsthe effect of which in concrete situations,not yet developed, cannot now be definitelyperceived. We must decline thatinvitation.").

III. CONCLUSION

For the aforementioned reasons, we dismiss.

DISMISSED.

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"High Court to Hear Uranium Case"

Washington PostApril 22, 2008Robert Barnes

The Supreme Court said yesterday that itwould hear a dispute between USEC ofBethesda and a French supplier of low-enriched uranium in a case the federalgovernment said has implications not onlyfor the energy industry but also for efforts todismantle some nuclear weapons.

Justices agreed to consider in their term thatbegins'next fall whether anti-dumping dutiescan be imposed on Eurodif, which suppliesutilities in the United States with low-enriched uranium, a critical component inthe domestic production of nuclear power.

USEC, the only U.S. company that enrichesuranium, complained to the CommerceDepartment that Eurodifs prices wereunfairly low, and the agency decided in2001 that anti-dumping duties should belevied. But the U.S. Court of InternationalTrade disagreed, and in September the U.S.Court of Appeals for the Federal Circuitupheld that ruling.

USEC received powerful support from thefederal government, which urged theSupreme Court to take the case.

The appeals court decision, SolicitorGeneral Paul D. Clement said in a brief tothe high court, "threatens to undermine U.S.foreign policy and national security interestsin the remarkably sensitive context ofnuclear fuel, nonproliferation, and ensuringdomestic supplies for nuclear weaponry."

He said it would endanger the financialviability of USEC, the sole source of certain

types of nuclear fuel used for militarypurposes.

A coalition of utilities joined Eurodif and itsparent company, Areva, in urging the courtnot to review the case, which they said hadbeen correctly decided by the lower courts.If Congress is concerned about the viabilityof USEC, they argued, there are other waysto take care of it.

"The antidumping statute is an instrument oftrade policy with general application to allindustries, and not a tool for theimplementation of national security orenergy policies," argued the Ad HocUtilities Group.

While the Commerce Department sided withUSEC, the courts agreed with the utilitiesthat, in at least some cases, importing thelow-enriched uranium constituted aprovision of a service by the Frenchcompany, not a purchase of a product.Products are covered by the anti-dumpinglaws, while services are not.

The federal government asked the SupremeCourt to uphold the CommerceDepartment's authority and expertise. And itwarned that the decision, in a "trulyunprecedented manner" for a trade case, hasimplications for national security.

The government said that a program underwhich Russia has agreed to convertweapons-grade, highly enriched uraniuminto the kind of uranium needed by U.S.utilities could be endangered. Dismantling

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nuclear warheads, it said, is a moreexpensive process than simply enriching theuranium as the French company does. It iseconomically viable only because the UnitedStates has the ability to use anti-dumping

laws to regulate the entry of low-enricheduranium from foreign sources.

The combined cases are U.S. v. Eurodif andUSEC v. Eurodif.

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"ITC Rules in Favor of USEC Positionon French Uranium Imports"

Business WireNovember 29, 2007

Business Wire

BETHESDA, Md.-The U.S. InternationalTrade Commission (ITC) voted today infavor of USEC's position that terminatingthe antidumping duty order on imports oflow enriched uranium (LEU) from Francewould materially injure the U.S. enrichmentindustry.

Today's ITC vote concludes the "sunsetreview" of the 2002 antidumping orderagainst French uranium imports. A sunsetreview is a two-part administrativeproceeding conducted every five years inwhich the ITC and the U.S. Department ofCommerce (DOC) make separatedeterminations that are required forantidumping orders and certain other trademeasures to remain in place. In May 2007,the DOC determined that dumping of FrenchLEU is likely to continue or recur if theantidumping duty order were terminated.

This positive ruling from the ITCdemonstrates that the dumping of foreign-produced uranium imports continues to be asignificant threat to the U.S. enrichmentindustry, the economic well being of its

workers and the communities in which theylive. USEC is working vigorously to deploynew uranium enrichment technology at theAmerican Centrifuge Plant in Piketon, Ohio,while maintaining our current enrichmentoperations in Paducah, Ky., and successfullyimplementing the Megatons to Megawattsnonproliferation program with Russia.Discipline on unfairly traded imports mustbe maintained until the success of all theseinitiatives is assured.

USEC will continue to support the efforts ofthe U.S. government to address the dumpingof foreign-produced uranium imports. USECalso intends to seek U.S. Supreme Courtreview of the U.S. Court of Appeals for theFederal Circuit's decision that enrichmenttransactions under SWU (separative workunit) contracts are sales of services, notgoods, and thus outside the scope of U.S.antidumping law.

USEC Inc., a global energy company, is aleading supplier of enriched uranium fuel forcommercial nuclear power plants.

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"Sole U.S. Company that Enriches UraniumIs Struggling to Stay in Business"

New York TimesJune 12, 2007

Matthew L. Wald

WASHINGTON-Seventy years after theUnited States invented uranium enrichment,the sole American company in the businessis struggling to survive, while nuclear powerexperts worry that its failure would leave theRussians dominant in the market for fuelprocessing.

The company, USEC , has liquidated someof its valuable uranium inventories to stayafloat, as its income has declined because ofchanging market conditions. But it had alsomaintained a high dividend, bought backstock and spent heavily on severancepayments after frequent purges in theexecutive suite. The company spent morethan $100 million on two new technologiesfor enrichment before abandoning them andembarking on a third.

"USEC has been a four-letter word in somecircles," said its president, John K. Welch,who was hired in October 2005 to save thecompany. Though he has taken steps tostrengthen the company, he said the problemnow is to find a way to finance newtechnology and become competitive in theworld market.

Enrichment means sorting two types ofuranium to raise the proportion of uranium235, a step essential for use in Americannuclear reactors. The government ispromoting nuclear as a step toward energyindependence.

The United States invented the process andused it to build the bomb that destroyedHiroshima in August 1945. Later, the United

States offered enriched uranium to civilnuclear programs worldwide.

In the 1990s, the government privatized itsantiquated enrichment plants. USEC closedone, in Piketon, Ohio, and still runs theother, in Paducah, Ky.

But the Paducah plant is a heavy user ofcostly electricity, which now amounts tomore than 70 percent of USEC's costs.Centrifuges, which are used by almost allother enrichment plants, use only 5 percentof the electricity used by the Paducah plant.

In February, USEC announced that thecentrifuges it was developing would cost$2.3 billion, up from a previous estimate of$1.7 billion, and would take an extra year todeploy. The company has already spentabout $400 million on the centrifuges and islooking for financing to complete theproject, which it is trying to build in Piketon,Ohio.

"Most people expect that $2.3 billion isgoing to go up," said Paul R. Clegg, a stockanalyst at Natexis Bleichroeder Inc.

The company has been involved in mergertalks with several companies in the nuclearbusiness, and the trade press has carriedreports of other negotiations. But two peoplewith knowledge of the talks said that theydid not appear to be leading anywhere.

In addition to USEC's Paducah plant and itsplanned centrifuge project, a Europeanconsortium is building a centrifuge plant in

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it calls the Nationaland General Electric isAustralian enrichment

Silex commercially

Despite the challenges, and the fact that Mr.Welch eliminated the dividend, the stockprice is strong. Market analysts say onereason is that the price of virgin uranium isso high that customers are demanding moreenrichment work, thus driving up the priceof the service that USEC provides. Someinvestors also see the company as a takeovertarget, or a likely beneficiary of governmenthelp.

USEC would like to acquire uranium fromthe Energy Department on favorable terms,to help provide funds for its centrifugeproject. But the Energy Department appearsto want a signal from Congress, and thecompany faces questions there about itsprevious performance, and about thewisdom of bailing out its stockholders.

The government still owns the Paducahplant, and could take it over and give it to acontractor to run. Or it could allow USEC tooperate in bankruptcy, although that wouldprobably eliminate the company's ability tobuild a more modern plant.

The assistant secretary of energy for nuclearenergy, Dennis R. Spurgeon, was USEC'sexecutive vice president and chief operatingofficer until he left in 2003, receiving apayment of more than $5 million, accordingto Securities and Exchange Commissionfilings. Mr. Spurgeon, through a spokesman,declined repeated requests for an interview.

According to people close to the company,Mr. Spurgeon had clashed with the chiefexecutive, William H. Timbers, as had othertop officials. Mr. Timbers left the company

Hobbs, N.M., thatEnrichment Facility,trying to make antechnology calledfeasible.

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in December 2004, after disagreements withthe board. In February 2006, USEC agreedto pay him $14.5 million, according toS.E.C. filings.

Some Democrats in Congress aredemanding a full explanation of thedepartures of Mr. Timbers and others beforethey proceed with a discussion about how tohelp the company.

USEC has other problems as well. It alsotakes in enriched uranium from Russia, leftover from Russia's nuclear weaponsprogram, under a program called Megatonsto Megawatts. USEC dilutes the material toreactor grade under an agreement inoperation since the early 1990s.

Half of the enrichment that the companysells is done under the terms of thatagreement, which were locked in years ago,and it provides a substantial profit to USEC.But the agreement ends in 2013, after whichthe Russian nuclear enterprise, Rosatom,wants to deal directly with the nuclearutilities. Those utilities would like to do thesame.

Another potential problem for USEC is thata near-total ban on Russian imports beyondthose allowed in the Megatons to Megawattsprogram may be coming to an end.

The ban dates from a trade case brought byAmerican uranium companies against theSoviet Union. The companies won a rulingthat the Soviets were dumping production inthis country below cost. As a result, theUnited States threatened a tariff of morethan 100 percent, and reached an agreementthat limited the imports allowed under theMegatons to Megawatts program.

But last month, a similar ruling against aFrench producer was overturned by the

Court of Appeals for the Federal Circuit.The court ruled that enrichment was aservice, not a product, and thus not subjectto import quotas.

Russian and American officials said that thecourt decision put pressure on the Americanside to conclude a deal more favorable to theRussians.

Russia has vast inventories of enricheduranium and a huge ability to enrich more,according to trade experts. The prospectalarms some on Capitol Hill, who believethat the United States must maintain the

ability to enrich uranium.

The prospect is that without USEC, theUnited States will rely on others not only forthe uranium ore, but also for most of thework needed to convert it into fuel.

"We import two-thirds of our oil, but 90percent of our uranium," said Jack Edlow, aWashington businessman who deals inuranium and who pointed out that thereliance was for both raw ore and forenrichment. "I can't say 'energyindependence' with a straight face."

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Winter v. Natural Resources Defense Council

(07-1239)

Ruling Below: Natural Resources Defense Council v. Winter, 518 F.3d 658 (9th Cir. 2008),cert. granted, Winter v. NRDC, Inc., 128 S. Ct. 2964, 2008 U.S. LEXIS 5165 (2008).

Plaintiffs filed the current lawsuit against Defendants concerning the U.S. Navy's use of mid-frequency active sonar in Navy training exercises in southern California. Plaintiffs contend thatDefendants failed to comply with the requirements of the National Environmental Policy Act bynot filing an Environmental Impact Statement concerning the effect of the use of mid-frequencysonar on marine mammals in the area. The District Court found a likelihood that the Navy failedto comply with the National Environmental Policy Act (NEPA) and preliminarily enjoined theNavy's use of mid-frequency active (MFA) sonar during training exercises that prepare Navystrike groups for worldwide deployment. The Chief of Naval Operations concluded that theinjunction unacceptably risks the training of naval forces for deployment to high-threat areasoverseas, and the President of the United States determined that the use of MFA sonar duringthese exercises is "essential to national security." The Council on Environmental Quality (CEQ),applying a longstanding regulation, accordingly found "emergency circumstances" forcomplying with NEPA without completing an environmental impact statement. The NinthCircuit nevertheless sustained the district court's conclusion that no "emergency circumstances"were present and affirmed the preliminary injunction.

Question Presented: (1) Whether CEQ permissibly construed its own regulation in finding"emergency circumstances"; (2) Whether, in any event, the preliminary injunction, based on apreliminary finding that the Navy had not satisfied NEPA's procedural requirements, isinconsistent with established equitable principles limiting discretionary injunctive relief.

NATURAL RESOURCES DEFENSE COUNCIL, Inc; The International Fund for AnimalWelfare; Cetacean Society International; League for Coastal Protection; Ocean Futures

Society; Jean-Michel Cousteau, Plaintiffs-PetitionersV.

Donald C. WINTER, Secretary of the Navy; Carlos M. Gutierrez, Secretary of theDepartment of Commerce; National Marine Fisheries Services; William Hogarth, Assistant

Administrator for Fisheries of the National Oceanographic and AtmosphericAdministration; Conrad C. Lautenbacher, Jr., Administrator of the NationalOceanographic and Atmospheric Administration, Defendants-Respondents.

United States Court of Appeals for the Ninth Circuit

Decided February 29, 2008

[Excerpt: Some footnotes and citations omitted.]

B. Fletcher, Circuit Judge:

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Defendants Secretary of the Navy,Department of the Navy, Secretary of theDepartment of Commerce, National MarineFisheries Service (NMFS), and twoAdministrators of the NationalOceanographic and AtmosphericAdministration (NOAA) appeal the districtcourt's January 3, 2008 order, as modifiedon January 10, 2008, granting a motion for apreliminary injunction and imposing certainconditions on the completion of theremaining eight of fourteen large trainingexercises scheduled to be conducted by theNavy's Third Fleet in the waters off thecoast of southern California betweenFebruary 2007 and January 2009 (the"SOCAL exercises"). The motion was filedby plaintiffs Natural Resources DefenseCouncil, Inc., International Fund for AnimalWelfare, Cetacean Society International,League for Coastal Protection, OceanFutures Society, and Jean-Michel Cousteau(collectively "NRDC" or "plaintiffs"), whoare concerned that the Navy's use of high-intensity, mid-frequency active sonar("MFA sonar") in the SOCAL exercises willcause serious harm to various species ofmarine mammal present in the southernCalifornia waters, and by extension, toplaintiffs themselves.

I. Procedural History

On January 3, 2008, [on remand from theNinth Circuit] the district court . . . issued anew preliminary injunction that allowed theNavy to conduct the remaining SOCALexercises provided that it employ certainmeasures intended to mitigate the impact ofthe Navy's use of MFA sonar on theenvironment. On January 9, 2008, the Navyapplied for a stay pending appeal and

requested relief from the district court byJanuary 14, 2008.

On January 10, 2008, in response toarguments raised in the Navy's stayapplication, the district court modified thepreliminary injunction by narrowing themitigation measures contained in theJanuary 3, 2008 order. The Navy filed anotice of appeal the following day. Thedistrict court denied the Navy's stayapplication on January 14, 2008.

On the evening of January 15, 2008, theNavy filed an emergency motion with thiscourt requesting vacatur of the preliminaryinjunction or, alternatively, a partial stay ofthe preliminary injunction pending adecision on its appeal by our court. TheNavy's motion was based in part on twodevelopments that occurred on the same daythat the motion was filed. First, the Presidentof the United States, pursuant to 16 U.S.C. §1456(c)(1)(B), exempted from theprovisions of the CZMA the Navy's use ofMFA sonar during the SOCAL exercises,finding that such use of MFA sonar is"essential to national security" and in the''paramount interest of the United States."Second, the CEQ, finding "emergencycircumstances," purported to approve"alternative arrangements" to accommodatethose emergency circumstances, pursuant to40 C.F.R. § 1506.11. It permitted the Navyto follow the prescribed arrangements tocontinue its exercises pending completion ofthe Navy's EIS. The Navy subsequentlyadopted the alternative arrangements anddetermined that it would comply with them.

On February 4, 2008, following briefing bythe parties and oral argument, the districtcourt denied the Navy's application tovacate the preliminary injunction and lifted

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the temporary partial stay. In its publishedorder, the district court held in relevant partthat CEQ's approval of "alternativearrangements" was invalid because there areno "emergency circumstances" within themeaning of 40 C.F.R. § 1506.11. Feb. 4,2008 Dist. Ct. Order at 13-25, 527 F. Supp.2d 1216. Thus, the district court left in placethe original preliminary injunction. TheNavy filed a notice of appeal two days later.

... We now affirm the district court's orderimposing the preliminary injunction.

II. Factual Background

A. The SOCAL Exercises and the Effectof MFA Sonar on Marine Mammals

Active sonar involves a vessel or other sonarsource emitting a loud noise underwater andthen listening for whether the noise comesback to the source, indicating that the noisemay have bounced off the hull of apreviously undetected submarine....

The Navy acknowledges in itsEnvironmental Assessment that MFA sonarmay affect both the physiology and behaviorof marine mammals. Exposure to "veryhigh" acoustic energy levels may impair thefunctioning of marine mammals' visualsystem, vestibular system and internalorgans, and may cause injury to their lungsand intestines. However, the primaryphysiological effects of MFA sonar are onmarine mammals' auditory system: veryhigh sound levels may rupture the eardrumor damage small bones in the middle ear, buteven exposure to lower levels of sound maycause permanent or temporary hearing loss.

The Navy also acknowledges that the use ofMFA sonar may overtly disrupt the normalbehavior of marine mammals even if it doesnot affect their physiology. While the Navyacknowledges that active sonar may causebehavioral responses such as attempting toavoid the site of sound exposure, swimmingerratically, sluggish behavior, tail slapping,"jaw popping," and aggressive behavior,those responses were observed in studiesusing trained animals held in captivity.NOAA concluded in 2006 that studies ofmarine mammals in the wild "stronglysuggest" that the use of sonar at levels lowerthan those found to produce behavioraleffects in the tests of captive animals canresult in "profound" behavioral alterations,including changes in feeding, diving, andsocial behavior. In a February 9, 2007Biological Opinion concerning the SOCALexercises, the NMFS found that acousticexposures can impair marine mammals'foraging ability and their ability to detectpredators or communicate. The NMFS citedstudies finding that noise has caused whalesto move away from their feeding and matinggrounds and migration routes, and to changetheir calls.

B. The Navy's EA and the PredictedHarm to Marine Mammals in theSouthern California Waters

[Discussion of the Navy's EnvironmentalAssessment and the estimated number ofmarine mammals hurt by the use of MFAsonar during the SOCAL exercises.]

In light of the harm that marine mammalsare expected to suffer as a result of theSOCAL exercises, plaintiffs contend thatthey and their members living in southernCalifornia will be harmed. For example,

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plaintiff Jean-Michel Cousteau alleges thatas an environmental enthusiast and film-maker his ability to enjoy and educate othersabout the marine environment in southernCalifornia will be impaired if the harmfuleffects of MFA sonar on marine mammalsare not sufficiently mitigated. Otherplaintiffs make similar allegations.

C. Mitigation Measures Employed by theNavy and Those Imposed by the DistrictCourt

While the Navy adopted a number ofmitigation measures intended to reduce theharm caused by the use of MFA sonar in theSOCAL exercises, the district courtconcluded that those measures wereinadequate both to cure the Navy's likelyNEPA violation and to avoid the possibilityof irreparable harm to NRDC. Accordingly,following our November 13, 2007 remandorder, the district court establishedadditional, narrowly-tailored mitigationmeasures which the Navy would have toemploy during the remaining SOCALexercises....

After reviewing the parties' briefs andtaking a Navy-guided tour of the USSMilius, the district court imposed sixmitigation measures in addition to thosealready required by National DefenseExemption II: (1) the Navy shall suspenduse of MFA sonar when a marine mammalis detected within 2,200 yards from thesonar source, except where the marinemammal is a dolphin or a porpoise and itappears that the mammal is intentionallyfollowing the sonar-emitting naval vessel inorder to play in or ride the vessel's bowwave; (2) the Navy shall reduce the MFAsonar level by 6dB when significant surface

ducting conditions are detected; (3) theNavy shall not use MFA sonar within 12nautical miles from the California coastline;(4) the Navy shall monitor, including byaircraft, for the presence of marinemammals for 60 minutes before employingMFA sonar, shall utilize two dedicated,NOAA- and NMFS-trained lookouts at alltimes when MFA sonar is being used, shallemploy passive acoustic monitoring tosupplement visual detection of the presenceof marine mammals, and shall use aircraftparticipating in the training exercises tomonitor for marine mammals for theduration of the exercises when MFA sonar isbeing used; (5) Navy helicopters shallmonitor for marine mammals for 10 minutesbefore employing active dipping sonar; and(6) the Navy shall refrain from using MFAsonar in the Catalina Basin between theSanta Catalina and San Clemente Islandsbecause ingress and egress to the basin arerestricted and the basin has a high density ofmarine mammals. See Jan. 10, 2008 Dist. Ct.Order at 1-5.

The Navy takes issue only with the first twoof the mitigation measures imposed by thedistrict court, namely the 2,200 yard"shutdown zone" and the "power-down"requirement during significant surfaceducting conditions. Specifically, the Navyargues that those two mitigation measurestip the balance of hardships in its favor andare contrary to the public interest.

III. Standards of Review

Our review of a district court's grant of apreliminary injunction is "very deferential."Nat'1 Wildlife Fed'n v. Nat'1 MarineFisheries Serv., 422 F.3d 782, 794 (9th Cir.2005). We do not reverse the district court

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unless it "relie[s] on an erroneous legalpremise or abuse[s] its discretion." SportsForm, Inc. v. United Press Int'l, Inc., 686F.2d 750, 752 (9th Cir. 1982). A courtabuses its discretion if it bases its decisionon an erroneous legal standard or clearlyerroneous findings of fact. Earth Island Inst.v. U.S. Forest Serv., 442 F.3d 1147, 1156(9th Cir. 2006) ("Earth Island 11").

A district court may grant a preliminaryinjunction if one of two sets of criteria aremet. "Under the 'traditional' criteria, aplaintiff must show (1) a strong likelihoodof success on the merits, (2) the possibilityof irreparable injury to plaintiff ifpreliminary relief is not granted, (3) abalance of hardships favoring the plaintiff,and (4) advancement of the public interest(in certain cases). Alternatively, a court maygrant the injunction if the plaintiffdemonstrates either a combination ofprobable success on the merits and thepossibility of irreparable injury or thatserious questions are raised and the balanceof hardships tips sharply in his favor."Freecycle Network, Inc. v. Oey, 505 F.3d898, 902 (9th Cir. 2007); see also EarthIsland II, 442 F.3d at 1158.

IV. Discussion

A. Likelihood of Success on the Merits

1. Effect of CEQ's AlternativeArrangements for NEPA Compliance

On January 15, 2008 CEQ purported toapprove "alternative arrangements" for theNavy to continue its use of MFA sonarwhile complying with NEPA, reasoning that''emergency circumstances" preventednormal compliance. CEQ's authority togrant such relief derives from 40 C.F.R. §1506.11, which provides in full:

Where emergency circumstancesmake it necessary to take an actionwith significant environmentalimpact without observing theprovisions of these regulations, theFederal agency taking the actionshould consult with the Councilabout alternative arrangements.Agencies and the Council will limitsuch arrangements to actionsnecessary to control the immediateimpacts of the emergency. Otheractions remain subject to NEPAreview.

40 C.F.R. § 1506.11. CEQ's letter ofexplanation to the Navy stated that thedistrict court's modified injunction "imposestraining restrictions . . . that continue tocreate a significant and unreasonable riskthat Strike Groups will not be able to trainand be certified as fully mission capable."CEQ Letter to Donald C. Winter at 3. CEQalso stated that "the inability to traineffectively with MFA sonar puts the lives ofthousands of Americans directly at risk....Therefore, there are urgent national securityreasons for providing alternativearrangements under the CEQ regulations."Id. at 3-4.

The Navy then petitioned this court tovacate the district court's preliminaryinjunction, arguing that CEQ's approval of"alternative arrangements" deprived NRDCof the "likelihood of success on the merits"of its NEPA claims, thus eliminating thelegal basis for the injunction. We remandedto the district court to allow it to consider inthe first instance whether this legaldevelopment merited vacatur or a partialstay of the injunction.

On remand, the Navy maintained that theCEQ's "emergency circumstances"determination relieved it of the requirement

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to prepare an EIS prior to commencing theremaining SOCAL exercises. NRDC arguedthat CEQ's action was beyond the scope ofthe regulation and otherwise invalid, andthat the preliminary injunction shouldremain in place. The district courtconsidered these arguments and concludedthat its preliminary injunction was "notaffected by [CEQ's] approval of emergencyalternative arrangements because there is noemergency." Feb. 4, 2008 Dist. Ct. Order at2, 527 F. Supp. 2d 1216. Accordingly, itheld that "CEQ's action is beyond the scopeof the regulation and is invalid[]" and that"[t]he Navy is not, therefore exempted fromcompliance" with NEPA and thepreliminary injunction. Id. The district courtfound that CEQ's interpretation of"emergency circumstances" to include acourt order entered in the course of pendinglitigation was not authorized by 40 C.F.R.§1506.11, because it was contrary to boththe plain meaning of "emergencycircumstances" and the drafters' originalintent. It also found that CEQ's action wascontrary to the governing statute, NEPA.

The Navy makes two basic arguments as towhy the district court erred by failing tovacate the preliminary injunction in light ofCEQ's approval of "alternativearrangements." First, the Navy argues thatthe district court lacked subject matterjurisdiction to review CEQ's approval ofalternative arrangements because suchapproval constitutes a superseding agencyaction that removes as moot any basis for aninjunction predicated on plaintiffs' originalclaims concerning the Navy's EA. Second,the Navy argues that, even if the districtcourt could review CEQ's action, the courterred by not deferring to CEQ's and theNavy's assessment that "emergencycircumstances" exist within the meaning of40 C.F.R. § 1506.11...

b. The District Court's Assessment ofWhether "Emergency Circumstances"Existed

(1) Deference

The district court concluded that CEQ'sinterpretation of 40 C.F.R. § 1506.11 is notentitled to deference. It reasoned that underthe Administrative Procedure Act ("APA"),5 U.S.C. § 551 et seq., the courtstraditionally afford deference to (1) anagency's reasonable interpretation of astatute it administers "if the statute is silentor ambiguous with respect to the specificissue. . .," citing Chevron, U.S.A., Inc. v.NRDC, 467 U.S. 837, 843 (1984), and (2) anagency's interpretation of its ownregulations unless "an alternative reading iscompelled by the regulation's plainlanguage or by other indications of the[agency's] intent at the time of theregulation's promulgation," citing ThomasJefferson Univ. v. Shalala, 512 U.S. 504,512.

... Accordingly, the district court concludedthat it did not owe deference to CEQ'sinterpretation of § 1506.11 under ThomasJefferson and Seminole Rock. We reviewthat conclusion to determine whether in sodoing it relied on an erroneous legal premiseor abused its discretion; we conclude that itdid neither.

The district court followed establishedSupreme Court precedent in finding that anagency's interpretation of its own regulationis not entitled to deference when it isinconsistent with the regulation itself,conflicts with agency intent at the time ofpromulgation, and reaches beyond "thelimits imposed by the statute," NEPA. SeeAuer v. Robbins, 519 U.S. 452, 461-63

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(1997). Next, the district court, afterconcluding that the meaning of "emergencycircumstances" was clear, applied theappropriate legal principles that an agency'sinterpretation of its own regulation isentitled to deference "only when thelanguage of the regulation is ambiguous."See Christensen v. Harris County, 529 U.S.576, 588 (2000). Accordingly, the districtcourt did not abuse its discretion when itdetermined not to give deference to CEQ'soverly broad interpretation of "emergencycircumstances."

(2) Plain Meaning and Intent of CEQRegulation

In finding that no emergency circumstancesexisted, the district court reasoned that the"Navy's current 'emergency' is simply acreature of its own making, i.e., its failure toprepare adequate environmentaldocumentation in a timely fashion, via thetraditional EIS process or otherwise." Feb.4, 2008 Dist. Ct. Order at 17, 527 F. Supp.2d 1216, 2008 U.S. Dist. LEXIS 8110 *33.In short, it was not a sudden unanticipatedevent. The district court supported itsconclusion by noting that the CEQ letterdoes not specify an "emergency" other thanthe district court's mitigation order itself,which, in CEQ's view, creates a "significantand unreasonable risk" that strike groupswill not be able to train and be certified asfully mission capable. Id. at 16-17.

There is ample support for the manner inwhich the district court exercised itsdiscretion. The district court properly reliedon dictionary definitions of "emergency"and "emergency circumstances" to supportits conclusion that CEQ's interpretation isnot entitled to deference. See Watson v.United States, 128 S. Ct. 579, 583, 169 L.Ed. 2d 472 (2007) (noting that terms are

construed consistently with their everydaymeaning, including by reference to thedictionary absent statutory definition ordefinitive clue). As the district courtobserved, the Oxford English OnlineDictionary defines "emergency" as "[t]hearising, sudden or unexpected occurrence (ofa state of things, an event, etc.)." OxfordEnglish Online Dictionary, available athttp://dictionary.oed.com. Black's LawDictionary defines the term "emergencycircumstances," through a cross-reference to"exigent circumstances," as "[a] situationthat demands unusual or immediate actionand that may allow people to circumventusual procedures, as when a neighborbreaks through a window of a burning houseto save someone inside." Blacks LawDictionary 260, 562 (8th ed. 2004)(emphasis added). The district court did notabuse its discretion in concluding that thecircumstances in the present case fall outsidethe scope of these definitions because itspreliminary injunction was entirelypredictable given the parties' litigationhistory. Feb. 4, 2008 Dist. Ct. Order at 15,527 F. Supp. 2d 1216, 2008 U.S. Dist.LEXIS 8110 *30.

The Navy urges that the risk to nationalsecurity created by the preliminaryinjunction falls squarely within the legaldefinition of "emergency circumstances."However, the Navy has been on notice of itspossible legal obligations to prepare an EISfor the SOCAL exercises from the momentit first planned those exercises. In addition,NRDC filed its complaint almost a year ago,and on August 7, 2007, the district courtheld that the Navy was likely to lose on themerits of NRDC's claims. We affirmed thatruling in November of 2007. Still, the Navywaited until January 10, 2008, to raise a cryof "emergency" and request the NEPA andCZMA waivers it relies on here, in order tocontinue its routine, planned trainingexercises. We find no abuse of discretion in

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the district court's determination that such aseries of events gives rise to a predictableoutcome, not an unforeseeable onedemanding "unusual or immediate action."

(6) Conclusion

For the foregoing reasons, we hold that thedistrict court did not abuse its discretion orrely on an erroneous legal premise indetermining that CEQ's broad interpretationof "emergency circumstances" was notauthorized by 40 C.F.R. § 1506.11 becauseit was contrary to the plain meaning of theregulation and contrary to NEPA and,accordingly, that the Navy remains subjectto the traditional requirements of NEPA.

2. NRDC's NEPA Claim

We next address the district court'sconclusion that NRDC has shown probablesuccess on the merits of its claim that theNavy violated NEPA by failing to preparean EIS for the SOCAL exercises.

In our November 13, 2007 order weconcluded that "Plaintiffs have shown astrong likelihood of success on the merits oftheir claims under [NEPA]." NRDC, 508F.3d at 886. While that conclusion wasbased on our review of the recordunderlying the district court's August 7,2007 preliminary injunction order, the onlysubsequent developments are CEQ'sapproval of "alternative arrangements"pursuant to 40 C.F.R. § 1506.11 and theNavy's concession, by virtue of seekingsuch approval, that the SOCAL exerciseswill have a "significant environmentalimpact." See 40 C.F.R. § 1506.11 ("Whereemergency circumstances make it necessaryto take an action with significantenvironmental impact without observing the

provisions of these regulations, the Federalagency taking the action should consult withthe Council about alternativearrangements.") (emphasis added). Althoughwe elaborate on our reasons, our originalconclusion remains unchanged.

a. Statutory Background

As discussed earlier, NEPA requires afederal agency such as the Navy to prepare adetailed EIS for all "major Federal actionssignificantly affecting the quality of thehuman environment." 42 U.S.C. §4332(2)(C). However, if, as here, anagency's regulations do not categoricallyrequire the preparation of an EIS, then theagency must first prepare an EA todetermine whether the action will have asignificant effect on the environment. Nat'1Parks & Conservation Ass'n v. Babbitt, 241F.3d 722, 730 (9th Cir. 2001); see 40 C.F.R.§ 1501.4. If the action will significantlyaffect the environment, an EIS must beprepared, while if the project will have onlyan insignificant effect, the agency issues aFinding of No Significant Impact (FONSI).Ocean Advocates v. U.S. Army Corps ofEng'rs, 402 F.3d 846, 864 (9th Cir. 2005);see 40 C.F.R. §§ 1501.3, 1501.4.

"An EIS must be prepared 'if substantialquestions are raised as to whether aproject . . . may cause significantdegradation of some human environmentalfactor."' Blue Mountains BiodiversityProject v. Blackwood, 161 F.3d 1208, 1212(9th Cir. 1998) (quoting Idaho SportingCongress v. Thomas, 137 F.3d 1146, 1149(9th Cir. 1998)). Thus, a plaintiff need notshow that significant effects on theenvironment will in fact occur; raising"substantial questions whether a project mayhave a significant effect" on theenvironment is enough. Id.; Idaho Sporting,137 F.3d at 1150.

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exercises will have a significant impact onthe environment....

b. Substantial Questions about theEnvironmental Impact of the Exercises

The district court found that NRDC hadraised substantial questions as to whether theSOCAL exercises would have a significantimpact on the environment. Accordingly, thecourt concluded that NRDC haddemonstrated probable success on the meritsof its claim that the Navy's failure to preparean EIS was arbitrary and capricious and inviolation of NEPA and the APA. Id. at 7.The district court did not rely on anerroneous legal premise or abuse itsdiscretion in so concluding.

Initially, we repeat our observation that theNavy, by seeking approval by CEQ of"alternative arrangements" pursuant to 40C.F.R. § 1506.11, has effectively concededthat the SOCAL exercises will have asignificant impact on the environment. See40 C.F.R. § 1506.11. As the text of§ 1506.11 indicates, the very purpose of theregulation is to provide for the possibility ofalternative arrangements where emergencycircumstances require the taking of an action"with significant environmental impact"without observing the requirements ofNEPA. See id. The fact that the Navy soughtrelief under § 1506.11 is evidence that theNavy recognizes that the SOCAL exerciseshave a "significant environmental impact."

Moreover, the fact that "[t]he Navy iscurrently evaluating the environmentalimpact of MFA sonar training exercisesthrough its development of the SOCALRange Complex Environmental ImpactStatement," Jan. 15, 2008 CEQ Letter at 2,confirms that, at the very least, the Navyacknowledges that substantial questionshave been raised as to whether the SOCAL

c. The Navy's Mitigation Measures

The district court also concluded that NRDChad demonstrated probable success on themerits of its claim that the Navy's mitigationmeasures were inadequate to obviate theneed for preparing an EIS. Again, we findno reliance on an erroneous legal premiseand no abuse of discretion in the districtcourt's conclusion.

The Navy correctly points out that "[a]nagency's decision to forego issuing an EISmay be justified in some circumstances bythe adoption of [mitigation] measures" andthat those measures, if significant, "need notcompletely compensate for adverseenvironmental impacts." Nat'1 Parks &Conservation Ass'n, 241 F.3d at 733-34.However, we have also held that a"perfunctory description" or "mere listing ofmitigation measures, without supportinganalytical data," is insufficient to support afinding of no significant impact. OkanoganHighlands Alliance v. Williams, 236 F.3d468, 473 (9th Cir. 2000). We find noreversible error in the district court'sconclusion that the Navy's list of proposedmitigation measures was precisely such aperfunctory description devoid of supportingdata.

The explanation contained in the EA as towhy the mitigation measures are effective iscontained in four short bullet points, statingthat whales and dolphins spend extendedperiods of time on the surface, haverelatively short dive periods, tend to move inlarge groups (pods), and frequently come tothe surface and have a high level of activitythere. Three of those bullet points in effect

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state the same thing, namely that whales anddolphins spend little time under water. Thisexplanation is inadequate for severalreasons.

First, the Navy's explanation overlooks thefact that beaked whales spend much of theirtime under water, surface infrequently, andare generally difficult to detect. A study byNMFS scientists observed that "beakedwhales are always difficult to see when theyare on the surface, spend most of their timebelow the surface, and are found at lowdensities over large areas." Likewise, NRDCsubmitted a declaration by a biologist whoopines that visual monitoring by ship-basedlookouts would result in the detection ofonly 2% of beaked whales in the SouthernCalifornia Operating Area, in part becauseof the speed at which Navy vessels travel.Declaration of Dr. Robin William Baird P 6.

Second, the Navy's explanation fails toaddress the effectiveness of the Navy'ssafety zones-the only measure that directlyreduces exposure of marine mammals toMFA sonar. Specifically, the EA fails toexplain why a safety zone of only 1,000yards is adequate, why reducing the sonarlevel by 6dB and 10dB at the 1,000-yard and500-yard marks, respectively, is adequate,and why it is effective to halt MFA sonartransmission altogether only at the 200-yardmark. The Navy's explanation also does notrelate to the effectiveness of the measurerequiring passive sonar to be used to detectsounds made by marine mammals.

We find further support for the districtcourt's conclusion that the Navy'smitigation measures did not obviate the needto prepare an EIS in the fact that, asexplained above, the Navy refused to adoptseveral of the more aggressive mitigationmeasures recommended by the CCC,

employed in the 2006 RIMPAC exercise, orimposed by the Department of Defense fornon-RIMPAC exercises in 2006.

Notably, as to most of these measures theNavy does not contest that they would beeffective. While the Navy claims that someof the measures would adversely affect itsability to achieve the objectives of theexercises, that does not render the measuresthe Navy has adopted adequate to avoid theneed for preparing an EIS. Indeed, the Navystates in its "after action report" followingthe first three SOCAL exercises that infuture exercises it intends to incorporate datacollection necessary to address the questionof how many marine mammals not observedby lookouts may have been exposed todangerous sonar levels, and will integrateadditional monitoring tools and techniques.While the Navy's intent is commendable, itimplicitly acknowledges that its currentmitigation and data collection efforts are lessthan adequate.

We conclude that the district court did notabuse its discretion in determining that theNavy's cursory explanation in the EA forwhy its mitigation measures are effectivedoes not demonstrate that those measures"constitute an adequate buffer against thenegative impacts" that may result from theSOCAL exercises. See Nat'1 Parks &Conservation Ass'n, 241 F.3d at 734.Accordingly, we uphold the district court'sconclusion that the Navy's reliance on itsincomplete mitigation plan in deciding notto prepare an EIS was likely arbitrary andcapricious and affirm its determination thatNRDC has demonstrated probable successon the merits of its NEPA claims. CfWetlands Action Network v. U.S. ArmyCorps of Eng'rs, 222 F.3d 1105, 1112 (9thCir. 2000).

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V. Conclusion

The district court concluded that plaintiffshave met the necessary burden of proof todemonstrate that preliminary injunctiverelief is appropriate. It held that plaintiffshave shown a strong likelihood of successon the merits, as well as the possibility ofirreparable injury if relief is not granted. Italso held that plaintiffs have shown that thebalance of hardships tips in their favor inlight of the preliminary injunction's

narrowly tailored mitigation measures whichprovide that the Navy's SOCAL exercisesmay proceed as planned if conducted undercircumstances that provide satisfactorysafeguards for the protection of theenvironment. Finally, it held that the publicinterest is advanced by a preliminaryinjunction that imposes adequate mitigationmeasures. In reaching these conclusions, thedistrict court neither relied on erroneouslegal premises nor abused its discretion. Wetherefore affirm the district court'spreliminary injunction.

AFFIRMED

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"Justices Take Case on Navy Use of Sonar"

New York TimesJune 24, 2008

Linda Greenhouse

WASHINGTON-The Supreme Court onMonday stepped into a long-runningenvironmental dispute over the impact onwhales and other marine mammals of Navytraining exercises off Southern California.

The court, warned by the Bushadministration that a set of conditions placedon the exercises by the federal appeals courtin San Francisco "jeopardizes the Navy'sability to train sailors and marines forwartime deployment during a time ofongoing hostilities," agreed to hear theNavy's appeal during its next term.

The training exercises, which are due to endnext January, will continue in the meantime,because the appeals court issued a stay of itsown order when it ruled in the case fourmonths ago. That court, the United StatesCourt of Appeals for the Ninth Circuit,ordered the Navy to suspend or minimize itsuse of sonar when marine mammals are inthe vicinity.

The Navy acknowledges that the sonar cancause "behavioral disruptions" and short-term hearing loss in dolphins and whales,but denies that these effects are serious orlasting. But the Natural Resources DefenseCouncil maintains that the high-intensitysonar causes "mass injury," includinghemorrhaging and stranding. The appealscourt said the Navy's own assessment"clearly indicates that at least somesubstantial harm will likely occur" withoutthe measures designed to mitigate thesonar's effects.

The justices themselves will not resolve the

debate over the extent of the harm. Rather,as presented to the Supreme Court, the caseis a dispute over the limits of executivebranch authority and the extent to which thecourts should defer to military judgments.

In January, as the case was proceeding in theappeals court, President Bush granted theNavy an exemption from one federalenvironmental law, the Coastal ZoneManagement Act. Simultaneously, theCouncil on Environmental Quality, anexecutive branch agency, declared that"emergency circumstances" warrantedgranting an exemption from the full effect ofanother statute, the National EnvironmentalPolicy Act.

These actions did not sway the appealscourt, which said that "while we are mindfulof the importance of protecting nationalsecurity, courts have often held, in the faceof assertions of potential harm to militaryreadiness, that the armed forces must takeprecautionary measures to comply with thelaw."

In the government's appeal, Winter v.Natural Resources Defense Council, No.07-1239, the administration describestraining in the use of sonar to detectsubmarines as an "essential element" of theexercises, which it says are designed to"train the thousands of military personnel ina strike group to operate as an integratedunit in simultaneous air, surface andundersea warfare."

The administration's brief says that byimposing conditions on the use of sonar,

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"the decision poses substantial harm tonational security and improperly overridesthe collective judgments of the politicalbranches and the nation's top naval officersregarding the overriding public interest in aproperly trained Navy."

Under the appeals court's order, the Navymust suspend the use of sonar or reduce it tospecified levels when a marine mammal isseen at certain distances. The appeals courtssaid this requirement would not compromisethe Navy's ability to conduct the exercises.

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"Court Upholds Whale Protectionin Navy Exercises"

The San Francisco ChronicleMarch 2, 2008

Bob Egelko

A federal appeals court has ruled that theNavy must protect endangered whales fromthe potentially lethal effects of underwatersonar during anti-submarine training off theSouthern California coast, rejectingPresident Bush's attempt to exempt theexercises from environmental laws.

In a Friday night ruling rushed into printahead of the next scheduled exercise onMonday, the Ninth U.S. Circuit Court ofAppeals in San Francisco upheld a federaljudge's decision that no emergency existedthat would justify Bush's intervention.

The Navy is engaged in "long-planned,routine training exercises" and has hadample time to take the steps that the lawrequires-conduct a thorough review of theenvironmental consequences and proposeeffective measures to minimize the harm towhales and other marine mammals, thethree-judge panel said.

The court noted that the Navy has beenconducting similar exercises for years, hasagreed in the past to restrictions like theones it is now challenging, and was sued byenvironmental groups in the current casenearly a year ago. The lower-court judgereviewed the evidence and found nothing tosupport the Navy's claim that the protectivemeasures would interfere with vital trainingor hamper national security, the court said.

Past rulings have established that "there isno 'national defense exception' "to theNational Environmental Policy Act, thecourt said. That law requires government

agencies to review projects that might harmthe environment and propose reasonableprotective measures.

Nonetheless, the panel allowed navalcommanders to modify two of therestrictions if they arose during a "criticalpoint in the exercise," when certain levels ofsonar are needed for effective training. Themodifications reduce the protective zoneswithin which vessels must reduce or shutdown sonar when whales are detected.

Those changes are to remain in effect for 30days, and will be extended if the Navyappeals the ruling to the Supreme Court, theappellate panel said.

The ruling sets a precedent for federal courtsin California and eight other Western states.One of those states is Hawaii, where afederal judge on Friday ordered similarrestrictions on Navy sonar exercises off theHawaiian islands. The ruling by U.S.District Judge David Ezra includesrequirements to reduce sonar when whalesare detected within certain distances or whenconditions make monitoring difficult.

The Navy has completed six of the 14 large-scale training exercises scheduled offSouthern California between February 2007and January 2009. It decided not to conducta full environmental review before theoperations, saying it had already agreed topost lookouts for whales and taken otheradequate protective measures.

In an August 2007 ruling, U.S. District

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Judge Florence-Marie Cooper of LosAngeles said the Navy's measures were"woefully ineffectual and inadequate" andwould leave nearly 30 species of marinemammals at risk, including five species ofendangered whales.

She said the Navy's own research showsthat its use of mid-frequency sonar candamage the hearing of whales and dolphins,can interfere with their ability to find foodand mate, and has been linked to thebeaching of whales.

After Cooper reaffirmed her order requiringthe Navy to observe restrictions on sonaruse, including a ban within 12 miles of thecoast, Bush declared the Navy exempt fromthe laws that were the basis of the ruling.The president's Jan. 15 order said therestrictions would interfere with training thatwas "essential to national security."

But the appeals court said that federalregulations in place since 1978 allow apresident to override the environmental lawonly in an emergency, and that theadministration had failed to demonstrate any"sudden unanticipated events" had occurredin this case.

Bush's actions were also constitutionallyquestionable, the court said, because he citedno evidence that Cooper had not alreadyreviewed, but instead merely disagreed withher conclusions. Under the constitutionaldoctrine of separation of powers, "it was thejob of the appellate court, and not theexecutive branch," to decide whether thejudge erred, said Judge Betty Fletcher in thecourt ruling.

She said the court didn't have to decide theconstitutional issue, however, because thepresident's order failed to meet the standardfor an exemption under the environmentalregulations.

The ruling shows that "neither the presidentnor the U.S. Navy is above the law,"attorney Joel Reynolds of the NaturalResources Defense Council, lead plaintiff inthe lawsuit, said Saturday.

Lt. Cmdr. Cindy Moore, a Navyspokeswoman, told the Associated Press theNavy is considering an appeal. The rulingplaces "significant restrictions on our abilityto train realistically," although it is lessrestrictive than Cooper's earlier decision,she said.

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"White House Went too Far inSonar Case, Judge Rules"

The Washington PostFebruary 5, 2008Marc Kaufman

The Bush administration overreached whenit sought to limit the Navy's obligationsunder national environmental laws related tosonar training exercises off California, afederal judge ruled yesterday.

In a sharply worded decision that will keepthe Navy from continuing a series of 14planned exercises, U.S. District JudgeFlorence-Marie Cooper wrote that the Navyand the administration had improperlydeclared that an emergency would becreated if they had to accept court-mandatedsteps to minimize risk to whales and othersea mammals. Because no real emergencyexists, she said, the White House cannotoverride her decisions and those of the U.S.Court of Appeals for the 9th Circuit.

Accepting the Navy's arguments, she wrote,would produce "the absurd result ofpermitting agencies to avoid their[environmental] obligations by re-characterizing ordinary, planned activities as'emergencies' in the interest of nationalsecurity, economic stability or other long-term goals."

White House spokesman Tony Fratto said,"We disagree with the judge's decision. Webelieve the orders are legal and appropriate."

A Navy spokeswoman, Lt. Cmdr. CindyMoore, said the military was studying thedecision.

Joel Reynolds, an official at the NaturalResources Defense Council, which obtainedan earlier injunction against the Navy

blocking the exercises, said in a statementthat the court "has affirmed that we do notlive under an imperial presidency."

"The Navy doesn't need to harm whales totrain effectively with sonar," said Reynolds,who directs the council's Marine MammalProtection Project. "By following thecarefully crafted measures ordered by thecourt, the Navy can conduct its exerciseswithout imperiling marine mammals."

Early last month, President Bush signed awaiver exempting the Navy from provisionsof the Coastal Zone Management Act afterCooper and the appeals court had concludedthat the law required the Navy to do more toprotect marine mammals during the sonarexercises. The loud blasts produced duringsonar exercises have been shown to disorientsome types of whales, leading in somecircumstances to strandings and deaths.

At the same time Bush signed his order, theWhite House Council on EnvironmentalQuality determined that the Navy did notneed to follow the procedures of theNational Environmental Policy Act whendoing so would cause an emergencysituation. The Navy has long argued that iturgently needs to train more sonar operatorsbecause of new threats from "quiet" dieselsubmarines that can approach ships or theU.S. coast without being detected bytraditional passive sonar.

While Cooper's ruling dealt primarily withthe legality of the Navy's "alternativearrangement" under NEPA, she also raised

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the possibility that the administration'sactions were unconstitutional in generalbecause they implied that White Houseagencies could routinely overrule federalcourt decisions. She did not, however, ruleon those grounds.

"The Navy's current 'emergency' is simplya creature of its own making, i.e., its failureto prepare adequate environmentaldocuments in a timely fashion," she wrote.

The ocean off Southern California, wherethe exercises were scheduled, is especiallyrich in sea life and is on the migration pathsof five endangered species of whales, animportant population of blue whales, and asmany as seven individual species of beakedwhales-small, deep-diving whales whichhave been shown to be particularly sensitiveto sonar blasts.

The council and several other environmental

groups have been fighting the Navy oversonar issues for more than a decade. Thetwo sides have reached some agreements inthe past, but the Navy in this case offered toenforce 29 "mitigation" measures to protectthe whales, and nothing more.

The California Coastal Commission, a stateagency, agreed with the environmentalgroups that the Navy's offer would notsufficiently protect the whales. In her earlierdecision, Cooper mandated additional stepsadvocated by the commission involvingwhere the Navy could use sonar, what it hadto do when a whale was spotted, how loudthe sonar blasts could be, and how close tothe coast its ships could come.

The Navy appealed, and then after losing theappeal, won White House support foroverriding the court's earlier decision.

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"Navy Wins Exemption from Bush to ContinueSonar Exercises in California"

The Washington PostJanuary 17, 2008Marc Kaufman

The White House has exempted the Navyfrom two major environmental laws in aneffort to free the service from a federalcourt's decision limiting the Navy's use ofsonar in training exercises.

Environmentalists who had suedsuccessfully to limit the Navy's use of loud,mid-frequency sonar-which can be harmfulto whales and other marine mammals-saidyesterday that the exemptions wereunprecedented and could lead to a largerlegal battle over the extent to which themilitary has to obey environmental laws.

In a court filing Tuesday, governmentlawyers said President Bush had determinedthat allowing the use of mid-frequency sonarin ongoing exercises off Southern Californiawas "essential to national security" and of''paramount interest to the United States."

Based on that, the documents said, Bushissued the order exempting the Navy fromprovisions of the Coastal Zone ManagementAct, and the White House Council onEnvironmental Quality granted the Navy awaiver from the National EnvironmentalProtection Act.

The government filings said the federalruling limiting sonar use "profoundlyinterferes with the Navy's globalmanagement of U.S. strategic forces, itsability to conduct warfare operations, andultimately places the lives of Americansailors and Marines at risk."

The exemptions were immediately

challenged by the environmental group thathad sued the Navy and by the CaliforniaCoastal Commission, a state agency thatruled last year that the Navy's plans toprotect marine mammals were too limitedand deeply flawed.

"There is absolutely no justification forthis," commission member Sara Wan said ina statement. "Both the court and the CoastalCommission have said that the Navy cancarry out its mission as well as protect thewhales."

Joel Reynolds, attorney for the NaturalResources Defense Council (NRDC), saidthe organization would "vigorously" contestthe White House orders in court.

U.S. District Judge Marie Florence-MarieCooper ruled this month in Los Angeles thatthe Navy's plan to limit harm to whales-especially deep-diving beaked whales thathave at times stranded and died after sonarexercises-were "grossly inadequate toprotect marine mammals from debilitatinglevels of sonar exposure." A federal appealscourt had previously ruled that the Navyplan was inadequate and sent the case backto Cooper to set new guidelines for theexercise.

In her ruling, Cooper banned sonar usewithin 12 nautical miles of the coast andrequired numerous procedures to shut it offwhen marine mammals are spotted. Afterthe ruling, the Navy indicated that theguidelines would render the exercise useless,but the judge disagreed.

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The Navy had received a federal exemptionfrom the Marine Mammal Protection Act forthe exercises, which are scheduled tocontinue through January 2009, but theNRDC and other groups filed suit underother environmental laws. The Navy willstill have to convince federal judges that theexemptions are legal. The NRDC saidyesterday that waivers are not allowed underthe National Environmental Protection Act.

The NRDC also said the situation does notconstitute an emergency, because the Navyis allowed to continue sonar training underCooper's ruling.

"The president's action is an attack on therule of law," said Reynolds, director of theMarine Mammal Protection Project at theNRDC, which obtained the injunctionagainst the Navy. "By exempting the Navyfrom basic safeguards under both federaland state law, the president is flouting thewill of Congress, the decision of theCalifornia Coastal Commission and a rulingby the federal court."

Navy officials have argued that they muststep up sonar training because a newgeneration of "quiet" submarines has madeit increasingly difficult to detect underwaterintruders. The Navy says that more than 40nations now have relatively inexpensivediesel-powered submarines, which can belocated only with sonar that emits the loudblasts of sound. The Navy trains sailors insonar use on an underwater range off

Southern California and wants to set upanother range off the Carolinas.

Adm. Gary Roughead, the chief of navaloperations, said in a statement yesterday thatthe White House waivers were essential andwarranted, given that the Navy has 29procedures to mitigate sonar's impact onwhales.

"We cannot in good conscience sendAmerican men and women into potentialtrouble spots without adequate training todefend themselves," Roughead said. "Thesouthern California operating area providesunique training opportunities that are vital topreparing our forces, and the plannedexercises cannot be postponed withoutimpacting national security."

Sen. Barbara Boxer (D-Calif.) sharplycriticized the exemptions. "Once again theBush Administration has taken a slap at ourenvironmental heritage, overriding a courtthat was very mindful to protect marinewildlife, including endangered whales, whileassuring that the Navy's activities cancontinue," she said in a statement."Unfortunately, this Bush Administrationaction will send this case right back intocourt, where more taxpayer dollars will bewasted defending a misguided decision."

The NRDC said the waters off SouthernCalifornia are especially rich in marinemammal life and are on migration paths offive species of endangered whales.

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"Judge Imposes Stricter Rules on Navyto Protect Marine Life"

New York TimesJanuary 5, 2008

Carolyn Marshall

A federal judge has ordered the Navy toadopt stringent new safeguards intended toimprove protection of whales and dolphinsduring its sonar training exercises offSouthern California.

The ruling, issued Thursday by JudgeFlorence-Marie Cooper of the United StatesDistrict Court for the Central District ofCalifornia, orders the Navy to limit its use ofmedium-range sonar to an area beyond 12nautical miles from shore. Closer to theshore, marine mammals have exhibitedfrenzied and disoriented behavior during theemissions of sonar blasts as part of theNavy's practice missions.

Judge Cooper's order also outlinedsafeguards, which include a monitoringsession one hour before a military exerciseto detect the presence of marine mammals,the use of trained aerial lookouts throughoutexercises and a mandatory sonar shutdownwhen mammals are spotted within 2,200yards of training maneuvers.

The ruling stems from a long-running legalbattle between environmental groups, led bythe Natural Resources Defense Council, andthe Navy, which has argued that mid-frequency sonar is vital to the training ofsubmarine seamen and other crews who nowface a new generation of quiet submarinesthat cannot be detected by traditional passivesonar waves.

A spokesman at the Pentagon said Fridaythat the Navy was reviewing the judge'sruling to determine its next move, whichcould include an appeal to the United StatesCourt of Appeals for the Ninth Circuit.

"Despite the care the court took in craftingits order," said the spokesman, Cmdr. JeffDavis of the Navy, "we do not believe itstruck the right balance between nationalsecurity and environmental concerns."

The Navy, Commander Davis said, remainsespecially concerned over the larger safetybuffer zone now offered to protect marinemammals. Additionally, he said, Navyexperts worry that some restrictions maymake it difficult to adequately trainsubmarine crews in certain underwaterwarfare techniques.

A senior lawyer with the Natural ResourcesDefense Council, Joel Reynolds, said theorder established a precedent for court casesin other jurisdictions, although it appliedonly to a specific set of military exercisesused in Southern California.

"Although the court's order recognizes theNavy's need to train with sonar for ournational defense," Mr. Reynolds said, "thisis the most significant environmentalmitigation that a federal court has everordered the U.S. Navy to adopt in itstraining with mid-frequency sonar."

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"Navy Given Choice: New Safeguards or No Sonar"

Los Angeles TimesNovember 14, 2007

Kenneth Weiss

A federal appeals court Tuesday restored aban on the U.S. Navy's use of submarine-hunting sonar in upcoming training missionsoff Southern California until it adopts bettersafeguards for whales, dolphins and othermarine mammals.

The order allows the Navy to continue itscurrent exercises, but will force thePentagon to devise ways to ensure thatmarine mammals are not harassed or injuredby powerful sonic blasts during a series oftraining missions slated to begin in January.

Those precautions, such as reducing sonarpower at night, when whales are not easilyspotted, will have to be approved by thesame federal court in Los Angeles thatordered the initial sonar ban in August.

Tuesday's decision by a three-judge panel ofthe U.S. 9th Circuit Court of Appeals camein a case that had pitted the interests ofunencumbered military training againstenvironmental protection.

At issue is mid-frequency, active sonar, atechnology developed to hunt for Sovietsubmarines in the deep ocean. The Navy hasadopted the technique in coastal waters totrain sailors for a potential threat posed byquiet, diesel-electric submarines operated byNorth Korea, Iran or other nations.

U.S. and NATO warships using mid-frequency sonar near land have, at times, leftbehind clusters of panicked and sometimesfatally injured whales and dolphins in thePacific and Atlantic oceans and in theMediterranean Sea.

U.S. District Judge Florence-Marie Cooperhad issued a temporary injunctionforbidding the Navy from training withsonar off Southern California until she couldhear the merits of a case brought by theNatural Resources Defense Council andother groups.

The Navy appealed her decision and won areprieve from the 9th Circuit Court.Tuesday's ruling restored the original courtdecision, essentially forcing the world'smost powerful navy either to negotiate withenvironmental attorneys or unilaterallypropose measures that will satisfy thedistrict court.

In its five-page ruling, the three judges saidthat the environmental groups had shown a"strong likelihood" of winning their lawsuitand that the Navy had used many of theadditional safeguards those groups havebeen pushing.

At the same time, the panel said Cooper didnot explain why "a broad, absoluteinjunction . . . for two years was necessaryto avoid irreparable harm to theenvironment."

The panel ordered the judge to narrow theinjunction to allow the Navy to increase itssafeguards and proceed with trainingexercises that military officials say areneeded to certify sailors as battle-ready.

Both the Navy and environmental attorneysclaimed some measure of victory in theruling.

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"We are encouraged that the appeals courtfound the original injunction was too broadand ordered the district court to tailormitigation conditions under which the Navymay conduct its training," Navy spokesmanCapt. Scott Gureck said in a statement. Hedeclined to reveal the Navy's next move,saying: "We are considering our options."

Attorney Richard Kendall, representingenvironmental groups, said his clients willoffer to meet with the Navy immediately tofashion timely remedies that will not disruptthe Navy's training schedule.

"Our position has been the same all along:We are not opposed to training, but we areopposed to training without precautions thatwill prevent unnecessary harm to whales andother marine mammals," Kendall said."We're pleased that the appeals court hasupheld our position."

The California Coastal Commission, whichalso sought additional safeguards that wererejected by the Navy, has joined the lawsuit.The commission has some say in Navyactivities because of a federal law thatempowers states to protect their coastalresources.

The Navy says it already uses 29 protectivemeasures during the exercises, includingplacing personnel on ships to look formarine mammals and turning off sonar whendolphins or whales come within about 1,000yards of sonar-emitting ships.

The Coastal Commission and other groupswant to double the radius of that "safetyzone" and require the Navy to reduce theintensity of sonar at night and during roughsea conditions, when whales and dolphinscannot be spotted.

The commission and environmentalists arepushing the Navy to avoid training in thegray whale migration route, typically withina dozen miles of the coast, and to avoid theChannel Islands, shallow banks andseamounts, where marine mammals tend tocongregate.

"The Navy is faced with a brick wall," saidJoel Reynolds, an attorney with the NaturalResources Defense Council. "It has noalternative but to increase the level ofprotections for marine life."

In a similar lawsuit brought byenvironmentalists, the Navy agreed last yearto expand its buffer zone, and take othersteps during multinational "Rim of thePacific" exercises held off Hawaii in July2006.

The Navy appeared to be eager to take theissue to the Supreme Court and establish aprecedent that would prevent further legalaction. But the decision Tuesday made itunlikely that the nation's highest courtwould take up the matter because the Navyhas alternatives through the lower court.

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"Judge Curbs Navy Sonar"

Los Angeles TimesAugust 7, 2007Kenneth Weiss

A federal judge in Los Angeles banned theU.S. Navy from using high-powered sonarin nearly a dozen upcoming trainingexercises off Southern California, rulingMonday that it could "cause irreparableharm to the environment."

U.S. District Judge Florence-Marie Cooperissued the preliminary injunction afterrejecting the Navy's request to dismiss alawsuit brought by the Natural ResourcesDefense Council.

The lawsuit, along with a similar one filedby the California Coastal Commission,argues for broader safeguards to protectmarine mammals from powerful blasts ofmid-frequency active sonar that have beenlinked elsewhere to panicked behavior andmass die-offs of whales.

The Navy, which plans to appeal thedecision, said even a temporary ban woulddisrupt crucial training of sailors before theyare sent overseas. The Navy uses the sonarto detect potentially hostile vessels,including quiet diesel submarines, whichone captain called "the most lethal enemyknown" on the high seas.

"It's akin to sending a hunter into the woodsafter one of the most lethal preys known, butsending him in partly deaf and blind," saidNavy Capt. Neil May, assistant chief of stafffor 3rd Fleet training and readiness.

Over the last decade, scientists have linkedmid-frequency active sonar to a number ofmass strandings or panicked behavior ofwhales after naval exercises in the waters off

Greece, Hawaii, the Bahamas andelsewhere.

In a well-documented case near the CanaryIslands in 2003, an international team ofscientists found that at least 10 beakedwhales probably succumbed to the bendsafter bolting to the surface in a panic.

The dead whales washed ashore after theSpanish navy led international militaryexercises involving warships from theUnited States and other members of theNorth Atlantic Treaty Organization.Pathologists found tissue in the whales'internal organs that appeared to have beendamaged by compressed gas bubblesbursting inside them.

Navy lawyers argued in court that mid-frequency active sonar is crucial to nationalsecurity and to keeping sailors safe fromattacks by enemy submarines. Unlikepassive listening devices that rely ondetecting sounds, mid-frequency activesonar emits bursts of sound waves that canreveal even quiet submarines.

"Today, dozens of countries-includingNorth Korea and Iran-have extremely quietdiesel-electric submarines, and more than180 of them operate in the Pacific," saidVice Adm. Samuel Locklear, commander ofthe U.S. 3rd Fleet. "Active sonar is the bestsystem we have to detect and track them."

To remove the temporary ban, the Navy willhave to take the case to the U.S. 9th CircuitCourt of Appeals. Navy lawyers plan tomove quickly because the next training

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mission is scheduled to begin in September.

Cooper said it was never easy to balance theinterests of wildlife with those of nationalsecurity. But in this case, she said,environmental lawyers have made apersuasive case that the potential harm towhales and other marine life outweighs anyharm to the Navy while the court caseproceeds.

The lawsuit, according to environmentallawyers, could be settled quickly if the Navywould agree to more sweeping precautions,such as shutting off or reducing the intensityof the sonar when visibility is too low forspotters stationed on deck to see whales thatventure into harm's way.

Joel Reynolds, a senior attorney with theNatural Resources Defense Council, said thejudge's ruling in no way restricts the Navy'sability to use sonar against real threats or inbattle. Instead, he said, the court decisionzeroes in on training exercises planned longin advance in waters rich with endangeredblue whales, various kinds of dolphins andmigrating gray whales.

"Just as the Army has a responsibility not totrain soldiers to shoot in the middle of acrowded city street, the Navy has a duty,when it's learning how to hunt with sonar,not to choose a practice range next to amarine sanctuary."

Cooper also ruled against the Navy last yearin an earlier case, temporarily blocking theuse of active sonar in multinational wargames near Hawaii.

Ultimately, her decision forced the Navy tonegotiate with environmentalists andestablish a buffer zone and otherprecautionary measures before conductingits month-long Rim of the Pacific exercises

involving 40 surface ships and sixsubmarines from the U.S., Korea, Japan andAustralia.

Other federal judges have also shut down orforced the Navy and various marineresearchers to negotiate for strongersafeguards. The U.S. Navy has alreadyconducted three of 14 planned trainingmissions scheduled over the next two yearsin Southern California waters.

Naval attorneys said in court Monday thatthere was no evidence of strandings, injuriesor even behavioral disturbances in marinemammals during those exercises. But theNavy's own environmental assessment,Cooper noted, predicted that the exercisesusing powerful sonar will harass or disruptthe behavior of marine mammals 170,000times and will cause hundreds of cases ofpermanent injury to deep-diving whales.

"The predicted permanent injury of 436Cuvier's beaked whales is especiallysignificant in light of' federal scientists'"estimate that there are as few as 1,211 suchwhales remaining off the entire U.S. WestCoast," Cooper wrote in a detailed, 19-pagetentative ruling.

The judge also took issue with an array ofmeasures to protect whales that the Navyhas already put in place, including rules thatprohibit using the sonar within 1,000 yardsof marine mammals. Sound waves may notdissipate to sub-lethal levels for more than5,000 yards, she noted.

Environmental lawyers have argued for alarger safety zone, as well as for a 12-milebuffer along the coastline. They wanttraining missions to remain a respectfuldistance from the Channel Islands NationalMarine Sanctuary, and they want the Navyto use acoustic monitoring as well as

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spotters in aircraft to watch for whales.

The California Coastal Commission, whichfiled a similar lawsuit, has also beennegotiating with the Navy for extensivesafeguards. Its hand was significantlystrengthened Monday when Cooper ruled

that the Navy had failed to comply with thefederal Coastal Zone Management Act.

That's the law that gives the CaliforniaCoastal Commission power to influencefederal activities in waters off the state.

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