Section 6: Business Law

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VI. BUSINESS

In This Section:

New Case: 03-1238 IBP, Inc. v. Alvarez, et al.

Synopsis and Question Presented p. 308

New Case: 04-0066 Tum v. Barber Foods


"Local Attorneys Gearing up for Supreme Court"Francis B. Allgood p. 321

"Tyson Asks Court to Resolve Pay Dispute"Tony Mauro p. 324

"Workers Sue for Back Pay at Barber"Peter Pochna p. 326

"Court Rules Tyson Fresh Meats Must Pay $3.1 Millionto Wallua, Wash. Workers"Jeff St. John p. 328

New Case: 04-805 Texaco, Inc. v. Dagher


"Oil Giants Take on Gas Station Owners"Alexis Grant p. 336

"FTC, DOJ Pitch Joint Venture Ruling"Cecile Kohrs Lindell p. 338

"Gasoline Price-Fixing Suit Reinstated"David Kravets p. 339

"Gas Pains; L.A. Lawyer Tom Bleau Takes Service Station Woes to the Court"Bob Burtman p. 340

New Case: 04-1329 Illinois Tool Works Inc. v. Independent Ink, Inc.


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"High Court to Re-Evaluate Precedent Affecting Antitrust Law"Tony Mauro p. 350

"Asserting Old Standard in Patent-Tying Case"Pamela A. MacLean p. 351

"What Antitrust Law May Tell Us About Abortion"Tom Goldstein p. 355

New Case: 04-905 Volvo Trucks North America v. Reeder-Simco GMC


"High Court Takes Volvo Appeal on Discounts to Truck Dealers"Roger Gilroy p. 366

"U.S. Supreme Court Grants Certiorari in Significant Robinson-Patman Act Case"William Hohengarten p. 368

New Case: 04-881 Lockhart v. United States


Lee v. Paige p. 373

"Justices to Decide if Social Security Can Be Seized"David Savage p. 375

"Government Can't Offset Student Loans with Social Security"Consumer Financial Services Law Report p. 376

New Case: 05-92 United States v. Phillip Morris


"U.S. Seeks Higher Damages in Tobacco Industry Suit"Eric Lichtblau p. 390

"Government Appeals on Tobacco Remedy"Lyle Denniston p. 392

"Huge Tobacco Case Seems Court-Bound"Lyle Denniston p. 394

"Political Leanings Were Always Factor in Tobacco Suit"Eric Lichtblau p. 396

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New Case: 03-1599 Bank of China v. NBM, LLC


"Second Circuit Reverses $106 Million Fraud AwardDue to Erroneous Jury Instruction on Reliance"

Consumer Lending Litigation News p. 400

New Case: 04-1186 Wachovia v. Schmidt


"National Bank's Branches Destroy Diversity Jurisdiction"Barbara Grzinci p. 403

307

IBP, Inc. v. Alvarez, et al.

(03-1238)

Ruling Below: (Alvarez v. IBP, Inc, 339 F.3d 894 (9t Cir. Wash., 2003), cert granted 125 S. Ct.1292; 161 L. Ed. 2d 104; 73 USLW 3494 (2005).

Employees at IBP, Inc. sued to recover lost pay for time they spent donning and doffingspecialized protective clothing before and after work and their lunch breaks. The Ninth CircuitCourt of Appeals affirmed the key conclusions of a federal district judge in Washington, holdingthat walking time should be compensated under the Fair Labor Standards Act. The court statedthat the work day begins with the first act of compensable work. Because wearing protectiveclothing is a part of the principal work activity, required by law, any and all time betweendonning and doffing that equipment should be compensated.

Questions Presented: Whether time spent by employees walking between clothes-changingstations and their actual work stations constitutes non-compensable activity within the meaningof the Fair Labor Standards Act and Portal-to-Portal Act.

Gabriel ALVAREZ, et al., Plaintiffs-Appellants,V.

IBP, Inc., a Delaware corporation, Defendant-Appellee.

United States Court of Appealsfor the Ninth Circuit

Decided August 5, 2003

[Excerpt: some footnotes and citations omitted]

THOMAS, Circuit Judge: 1.

Perhaps the packing plant employees inPasco, Washington, should have heededHenry David Thoreau's warning to "bewareof all enterprises that require new clothes."

The central dispute in this class actionlawsuit is whether IBP, Inc. ("IBP") shouldbe required to compensate its employees forthe time it takes to change into requiredspecialized protective clothing and safetygear. Under the circumstances presented bythis case, we conclude that it must. ...

IBP, Inc. is the world's largest producer offresh beef, pork, and related products. ...

Among IBP's many meat processingfacilities is a "kill and processing plant" inPasco, Washington ("the Pasco plant"). Asthe moniker suggests, the Pasco plantincludes slaughter and processing worksections, both of which play a direct role inthe carcass "disassembly process. . . ."

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.. . Pasco plant production line employees . .

. are required to be at their work stations andprepared to work as the first piece of meatcomes across the production line. However,before they are able to assume their workstations all Pasco plant employees mustcomplete a number of preliminary tasks, andbefore employees may leave the Pasco plantat the end of a shift, most of thesepreliminary tasks must be completed ininverse form. Each Pasco plant jobclassification has specific tool, supply, walk-time, and gear requirements. . . . [F]or allPasco plant production line employees, ageneral pattern obtains: At the start of ashift, Pasco plant employees must gathertheir assigned equipment, don thatequipment in one of the Pasco plant's fourlocker rooms, and prepare work-related toolsbefore venturing to the slaughter orprocessing floors. At the end of every shift,employees must clean, restore, and replacetheir tools and equipment, storing all of it atthe Pasco plant itself.

Until July of 1998, the Pasco plant's shiftsran eight hours. . . . In July of 1998, IBPrestructured its shift time to include fourminutes of so-called "clothes" time, therebyreducing the overall work time to sevenhours and fifty-six minutes. In the fall of1999, the Pasco plant reduced its shift timeto seven hours and fifty-one minutes. Long-running litigation between IBP and theUnited States Department of Labor(hereinafter "USDOL") in the 1990s spurredmuch of IBP's shift-time reduction. In thecourse of that litigation, damage and wageissues comparable to those raised in thiscase were decided. . . . See Reich v. IBP,Inc., 38 F.3d 1123, 1127 (10th Cir. 1994)(holding IBP liable for unpaid pre-shift andpost-shift donning, doffing, and cleaning ofspecial packinghouse industry safetyequipment and for time spent betweenwaiting to pick up and return knives). Once

a shift begins, the Pasco plant employees'time is strictly regulated and monitored. Asa rule, employee rest- or meal-break timebegins as soon as the last piece of meatpasses on the production line, and, as a rule,employees must be completely prepared toresume work as soon as the break periodends. When departing the processing andslaughter floors-whether to go to thecafeteria or to the restroom-employees arepermitted to leave only hats, haimets,goggles, earplugs, and boots in place; outergarments, protective gear, gloves, scabbards,and chains must be removed. For manyPasco plant employees, the operation ofIBP's mandatory donning and doffing rulesnecessarily impinges-if not more-theirunpaid thirty-minute meal break time.

To help monitor employee arrival anddeparture times, IBP instituted a mandatory,computerized "swipe card" system at thePasco plant. IBP does not use the data itsswipe card system gathers in calculatingemployee pay. Instead, IBP pays its Pascoplant employees according to a "gang timepay" model, which bases employeeremuneration entirely on the times duringwhich employees are actually cutting andbagging meat. Under this "gang time"framework, the period in which IBPconsiders its employees to be performingcompensable work commences with theprocessing of the first piece of meat andends with the processing of the last, notablyexcluding any time spent abiding the Pascoplant's required pre- or post-shift routines.

In 1999, believing parts of IBP'scompensation practices to be unlawful, thePasco plant's slaughter and processingemployees brought this class action suitunder § 16(b) of the Fair Labor StandardsAct ("FLSA"), see 29 US.C. § 216(b)(1999) . .. in United States District Court forthe Eastern District of Washington. Three

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aspects of their work-day animatedplaintiffs' claim: (1) the pre-shift donning ofprotective gear and the preparation of work-related tools, including the attendant waitingand walking; (2) the requisite donning anddoffing of protective gear during the thirty-minute unpaid meal-break; and (3) the post-shift doffing, cleaning, and storing ofprotective gear and tools.

[A twenty-day bench trial followed.]

. . . [O]n September 14, 2001, the districtcourt issued thorough findings of fact andconclusions of law. . . . [It found] thatFLSA required compensation for all ofplaintiffs' work time-e.g., donning,doffing, and cleaning of "integral andindispensable" protective gear; waiting andsome walking time during the workday-both during pre-shift and post-shift timesand during the thirty-minute meal-break.

The district court also rejected IBP's . . .FLSA-based defenses. . . . [T]he districtcourt found that 29 US.C. § 203(o) (1999),which excludes "clothes changing" and"washing" time from compensable timewhen these activities are the subject ofcollective bargaining, offered IBP no reliefbecause § 203(o)'s "changing clothes" and"washing" exclusions did not reach donning,doffing, and cleaning of specificallyprotective, non-clothing-like gear; that IBPlacked "good faith"; and that the Portal-to-Portal Act did not operate to plaintiffs'disadvantage because the donning, doffing,and cleaning of protective gear was "integraland indispensable" to their jobs, fulfillingmutual obligations of employer andemployee. Walking and waiting time, thedistrict court continued, occurred during the

principal vcompensable.

vorkday and was thus

For IBP's FLSA . . . violations, the districtcourt awarded plaintiffs liquidated damages... and prejudgment interest....II.

It is axiomatic, under the FLSA, thatemployers must pay employees for all"hours worked." See 29 US.C. § § 206, 207(1999); Turner v. City of Philadelphia, 262F.3d 222, 224 (3d Cir. 2001). The thresholdquestion in this case is whether the activitiescited by the plaintiffs-donning and doffing,waiting and walking-constitute "work"under the FLSA. We agree with the districtcourt that, under the facts presented by thiscase, they do.

"Work," the Supreme Court has long noted,is "physical or mental exertion (whetherburdensome or not) controlled or requiredby the employer and pursued necessarily andprimarily for the benefit of the employer."See Tenn. Coal, Iron & R. Co. v. MuscodaLocal No. 123, 321 U.S. 590, 598, 88 L. Ed.949, 64 S. Ct. 698 (1944). Definitionallyincorporative, Muscoda's "work" termincludes even non-exertional acts. SeeArmour & Co. v. Wantock, 323 U.S 126,133, 89 L. Ed 118, 65 S. Ct. 165 (1944)(noting that even "exertion" is not the sinequa non of "work" because "an employer ...may hire a man to do nothing, or to donothing but wait for something to happen").

Plaintiffs' donning and doffing, as well asthe attendant retrieval and waiting,constitute "work" under Muscoda andArmour's catholic definition: "pursuednecessarily and primarily for the benefit ofthe employer," Muscoda, 321 US. at 598,these tasks are activity, burdensome or not,performed pursuant to IBP's mandate forIBP's benefit as an employer. 323 U.S. at

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133; 321 US. at 598. The activities,therefore, constitute "work."

That such activity is "work" as a thresholdmatter does not mean without more that theactivity is necessarily compensable. ThePortal-to-Portal Act of 1947 relieves anemployer of responsibility for compensatingemployees for "activities which arepreliminary or postliminary to [the]principal activity or activities" of a givenjob. 29 US.C. § 254(a) (1999). Not all"preliminary or postliminary" activities cango uncompensated, however. "Activitiesperformed either before or after the regularwork shift," the Supreme Court has noted,are compensable "if those activities are anintegral and indispensable part of theprincipal activities." Steiner v. Mitchell, 350U.S. 247, 256 (1956).

The Supreme Court's approach to this"principal," "integral and indispensable"duty question is context-specific. To be"integral and indispensable," an activitymust be necessary to the principal workperformed and done for the benefit of theemployer. Plaintiffs' donning and doffing ofjob-related protective gear satisfies Steiner'sbipartite "integral and indispensable" test.

First, because the donning and doffing ofthis gear on the Pasco plant's "premises isrequired by law, by rules of [IBP], [and] bythe nature of the work," see 29 C.F.R. §790.8(c) n.65 (1999), this donning anddoffing is "necessary" to the "principal"work performed. From sanitary aprons tometal-mesh gear, IBP "by rule," id.,mandates the donning and doffing of clothesand gear at various intervals throughout theworkday, requiring employees to wait forand to retrieve that gear in particular areas atparticular times on the Pasco plant'spremises. See Steiner, 350 U.S. at 256.United States Department of Agriculture

sanitation standards and Occupational Safetyand Health Administration (hereinafter"OSHA") industry standards bolster this "byrule" conclusion, demanding maintenance ofsanitary conditions, 9 C.FR. § 308.3, andthe provision of protective equipment at thePasco plant "wherever necessary by reasonof hazards or processes of [work]environment." 29 C.FR. § 19 1 0 .13 2 (a)(1999).

Second . . . the donning, doffing, washing,and retrieving of protective gear is, at bothbroad and basic levels, done for the benefitof IBP. These plaintiff-performed activitiesallow IBP to satisfy its [legal] requirements.I . [and] prevent unnecessary workplaceinjury and contamination, both of whichwould inevitably impede IBP's"disassembly" process. Under Steiner,plaintiffs' donning, doffing, and cleaningactivities are "integral and indispensable" toPasco's "principal" activity.

This "integral and indispensable" conclusionextends to donning, doffing, and cleaning ofnon-unique gear (e.g., hard-hats) and uniquegear (e.g., Kevlar gloves) alike. Little timemay be required to don safety glasses andthe use of safety goggles is undoubtedlypervasive in industrial work. But ease ofdonning and ubiquity of use do not make thedonning of such equipment any less"integral and indispensable" as that term isdefined in Steiner. Safety goggles are, likemetal-mesh leggings, required by IBP, andthey are, like metal-mesh leggings,necessary to the performance of theprincipal work. Both are "integral andindispensable" under Steiner's exception tothe Portal-to-Portal Act's bar tocompensation of preliminary or postliminaryactivity.

However, we agree with the district court'salternative conclusion as to why the time

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spent donning and doffing non-uniqueprotective gear such as hardhats and safetygoggles is not compensable: The time ittakes to perform these tasks vis-a-vis non-unique protective gear is de minimis as amatter of law....

In sum . . . "donning and doffing" and"waiting and walking" constitutecompensable work activities except for thede minimis time associated with the donningand doffing of non-unique protective gear.

III.

The FLSA contains an exception for "anytime spent in changing clothes." 29 U.S.C. §203(o) (1999) (hereinafter "§ 3(o)"). IBPargues that, even if compensable in a generalsense, the time employees spend donningand doffing protective gear is non-compensable under the "changing clothes orwashing" exclusion.

Distilled to its essence, this case requires usto decide whether putting on and taking offprotective gear constitutes "changingclothes" as that phrase is used in the statute.Neither § 3(o) nor its legislative historydefines the phrase, and no case law assessesthe precise question we address here. Inlight of this doctrinal, statutory, andlegislative lacunae, we give the relevantlanguage its "ordinary, contemporary,common meaning." Perrin v. United States,444 US. 37, 42 (1979).

. . . FLSA exemptions, the Supreme Courthas long counseled, "are to be narrowlyconstrued against the employers seeking to

assert them." Arnold v. Ben Kanowsky, Inc.,361 U.S. 388, 392 (1960). Following theSupreme Court's lead, we have also readFLSA exemptions-such as § 3(o)-tightly,refusing to apply FLSA exemptions "except[in contexts] plainly and unmistakablywithin the [given exemption's] terms andspirit." Klem v. County of Santa Clara, 208F.3d 1085, 1089 (9th Cir. 2000). Theprotective gear at issue does not "plainly andunmistakably" fit within § 3(o)'s "clothing"term. Absent such a plain and clear § 3(o)fit, Arnold requires that we construe § 3(o)'sagainst the employer seeking to assert it.361 US. at 392. Thus, the exemption mustbe construed against IBP.

Second, and perhaps more importantly,specialized protective gear is different inkind from typical clothing. The admonitionto wear warm clothing, for example, doesnot usually conjure up images of donning abullet-proof vest or an environmentalspacesuit. Rather, personal protectiveequipment generally refers to materials wornby an individual to provide a barrier againstexposure to workplace hazards. OSHA hasrecognized the difference in its regulationsdefining "personal protective equipment[.]"

. . ."General work clothes (e.g. uniforms,pants, shirts or blouses) not intended tofunction as protection against a hazard arenot considered to be personal protectiveequipment." 29 C.F.R. § 1910.1030 (1999).

Of course, this OSHA definition waspromulgated in a different context.Nonetheless, it provides a useful analyticdistinction. It also underscores the fact that,from both a regulatory and common senseperspective, "changing clothes" meanssomething different from "donning requiredspecialized personal protective equipment."In short, the district court correctlyinterpreted the "changing clothes" exception

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in § 3(o) as not including the time spentputting on personal protective equipment.

IV.

IBP also disputes the district court's view ofthe compensable work day. It claims thatthe district court erred in determining thatthe compensable work day began with thefirst act of compensable work. Specifically,IBP argues that workers should not be paidfor the time spent walking to and from thePasco plant stations after donning personalprotective equipment. Under § 4 of thePortal-to-Portal Act, employees receivecompensation only for "hours worked," i.e.,for work occurring during the "workday."Under § 4, employees have no right toreceive overtime compensation for activitiesthat are "preliminary to or postliminary to [ajob's] principal activity or activities," 29U.S.C. § 254(a) (1999), unless thosepreliminary or postliminary activities are"integral and indispensable [to] the principalactivities for which [the employees] areemployed." Steiner, 350 U.S. at 256; 29US.C. § 254(a) (1999).

The district court properly reasoned that theworkday commenced with the performanceof a preliminary activity that was "integraland indispensable" to the work, and thedistrict court also properly determined thatany activity occurring thereafter in the scopeand course of employment wascompensable. Thus, the district courtincluded "the reasonable walking time fromthe locker to work station and back . . . foremployees required to don and doffcompensable personal protective equipment"in its "compensable" time measure.

... The district court correctly held that

Pasco plant work time was continuous, notthe sum of discrete periods.

V.

IBP contends that it is shielded from liabilityby FLSA's good faith defense provisions.See 29 US.C. §§ 259, 260 (1999)....

The good faith provisions of § 259 do notembrace IBP's conduct. To come within theexception's reach, an employer's acts "musthave been taken in reliance on [an]administrative ruling or interpretation."Home Ins. Co., 672 F.2d at 264.... As thedistrict court rightly noted, [prior] litigationprovided IBP "nothing upon which to relyother than its assumptions about whatclothes changing and washing wereincluding under 3(o)."

VI.

[The district court appropriately applied 29U.S.C. § 255's three-year statute oflimitations to IBP's willful conduct.]

VII.

[The district court did not err in awardingliquidated damages under the FLSA.]

VIII.

[The district court properly rejected IBP'scontention that it was exempt from the Stateof Washington's overtime wage provisions.]

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Ix.

[The Washington Minimum Wage Act, likethe FLSA, requires employers tocompensate employees at, at least, aminimum-wage rate. Some courts have heldthat, under the FLSA, an employee's right torecover minimum wage accrues eachworkweek, not by individual hour. Thedistrict court concluded that Washingtoncourts were "likely" to adopt the per-hourstandard for hourly employees. We agree.]

X.

[Under Washington Administrative Code,

plaintiffs are owed compensation for the fullthirty-minute period where IBP has intrudedupon or infringed the mandatory thirty-minute term to any extent.]

XI.

[The district court did not abuse itsdiscretion in its compensation calculation.]

CONCLUSION

For the foregoing reasons, we affirm in partand reverse in part the judgment of thedistrict court. We remand for recalculationof damages....

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Tum v. Barber Foods

(04-0066)

Rulings Below: (Tum v. Barber Foods, 360 F.3d 274 (1" Cir. Me., 2004), cert granted 125 S.Ct. 1295, 161 L. Ed. 2d 104, 73 USLW 3494).

Employees of Barber Foods sued their employer for alleged violations of the Fair LaborStandards Act ("FLSA"), seeking to recover wages for time they spent donning and doffingspecialized protective clothing before and after work. The First Circuit Court of Appealsaffirmed the decision of a Maine federal district court, holding that only time spent actuallydonning and doffing legally required gear was compensable. Neither waiting in line for requiredequipment nor walking between stations was compensable, under the Portal-to-Portal Act'sexceptions to the FLSA.

Questions Presented: Whether time employees spend walking to and from stations whererequired safety equipment is distributed is compensable under the Fair Labor Standards Act andPortal-to-Portal Act, and whether employees have a right to compensation for time spent waitingat the required safety equipment stations.

Abdela TUM, et al., Plaintiffs, Appellants,V.

BARBER FOODS, Inc., Defendant, Appellee.

United States Court of Appealsfor the First Circuit

Decided March 10, 2004

[Excerpt: some footnotes and citations omitted]

TORRUELLA, Circuit Judge:

Plaintiffs-appellants are a group of hourlywage employees ("Employees") whobrought suit against their employer, BarberFoods, for alleged violations of the FairLabor Standards Act of 1938 ("FLSA"), 29U.S.C. § 216(b). Employees soughtcompensation for alleged unrecorded anduncompensated work performed by them forBarber Foods.

The district court granted partial summaryjudgment for the defendant. A trial was held

on the issue of whether the time spentdonning and doffing required clothingconstituted "work" and whether such timewas de minimis. The jury found for thedefendant. Employees appeal from the grantof summary judgment and from the districtcourt's decision and they challenge two ofthe district court's jury instructions. BarberFoods cross-appeals, arguing that the districtcourt erred in ruling that the donning anddoffing of required clothing and equipmentis an integral part of the Employees' workfor Barber Foods and is not excluded fromcompensation under the Portal-to-Portal Act

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as preliminary or postliminary activity.

After initial review by the panel, weaffirmed. Tum v. Barber Foods, Inc., 331F.3d 1 (1st Cir. 2003). Plaintiffs filed apetition for rehearing, after which wereceived an amicus brief from the Secretaryof Labor ("the Secretary"). Havingconsidered the arguments, we now grantrehearing but affirm.

I. Background

Located in Portland, Maine, Barber Foods isa secondary processor of poultry-basedproducts. ... Barber Foods has two shifts,each with six production lines, consisting ofthree "specialty" lines and three "pack-out"lines....

The production lines are staffed primarily byrotating associates, employees whogenerally rotate to different positions on thelines every two hours....

All associates are expected to be on theproduction floor ready to work when theirshift begins. They are paid from the timethey actually punch in to a computerizedtime-keeping system from time clockslocated at the entrances to the productionfloor.

A. Equipment

Rotating associates are required to wear labcoats, haimets, earplugs, and safety glasses.The lab coats, hairnets, and earplugs must beon before they can punch in and until theypunch out. Safety glasses and any items thatthey choose but are not required to wear,such as gloves, aprons, and sleeve covers,can be donned after punching in and doffedbefore punching out.

Shipping and receiving associates arerequired to wear steel-toed boots, hard hats,and back belts. They generally don theseitems before punching in and doff them afterpunching out. Their time clock is located onthe production floor, so they must also donand doff lab coats, haimets, and earplugs inorder to enter the production floor to punchin and out.

Employees may have to wait to obtain anddispense with clothing and equipment. Atbusier times, there may be lines at the coatracks, glove liner bins, and cage window.There may also be lines at the time clocks.

B. Time Keeping

Barber Foods uses a computerized time-keeping system. The system downloadsclock punches into the payroll software.Time clocks are located at the entrances andexits to the production floor and at variousother locations in the facility....

Employees get paid from the moment theypunch in. In an attempt to stagger check-intimes, Barber Foods allows Employeestwelve minutes of "swing time," meaningthat Employees can punch in up to sixminutes early and get paid for that additionaltime or punch in up to six minutes late andnot be charged with an attendance violation.

C. History of Dispute

Seven current employees and thirty-sevenformer employees brought suit in districtcourt claiming that Barber Foods violatedthe FLSA by forcing its hourly employees towork "off the clock" by not payingEmployees for the time it takes to obtain,don, and doff their gear. . . . [T]he districtcourt ... found that the donning and doffing

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of clothing and equipment required byBarber Foods or by government regulation isan integral part of Plaintiffs' employment.This finding removed the donning anddoffing of required gear from the Portal-to-Portal Act and its exclusion ofcompensability for preliminary orpostliminary activity. 29 C.F.R. § 790.8. Atrial was held on the issue of whether thetime spent donning and doffing requiredclothing was de minimis and thus did notconstitute work under the FLSA.

. . . The jury found that each of [the]donning and doffing times [was] de minimis,making the donning and doffing time non-compensable. Employees do not challengethe jury's findings.

Employees appeal the following findings: .. (1) that the time employees mustnecessarily spend walking and waiting inconnection with obtaining, donning, doffing,and disposing of the sanitary and protectivegear required by Barber Foods and/orfederal regulation is not compensable; (2)that the time spent donning and doffingclothing, equipment, and gear which is notexpressly required by Barber Foods is non-compensable. In addition, Employeeschallenge two district court jury instructions.

III. Discussion

The FLSA requires an employer to record,credit, and compensate employees for all ofthe time which the employer requires orpermits employees to work, 29 US.C. § 201,et seq., commonly defined as "physical ormental exertion (whether burdensome ornot) controlled or required by the employerand pursued necessarily and primarily forthe benefit of the employer and hisbusiness." Tenn. Coal, Iron & R.R. Co. v.

Muscoda Local No. 123, 321 U.S. 590, 598(1944).

However, even when an activity is properlyclassified as "work," the Portal-to-PortalAct, 29 US.C. § 254, exempts fromcompensation activities which arepreliminary or postliminary to an employee'sprincipal activity or activities unless they arean "integral and indispensable part of theprincipal activities for which coveredworkers are employed and not specificallyexcluded by section 4(a)(1) [of the Portal-to-Portal Act]." Lindow v. United States, 738F.2d 1057, 1060 (9th Cir 1984). Inaddition, some activities that may qualify as"work" and fall outside of the Portal-to-Portal Act nevertheless do not requirecompensation because the activities requiresuch little time that they are adjudged deminimis. Dunlop v. City Elec. Inc. 527 F 2d394 (5th Cir. 1976).

A. Donning and Doffing of Gear

The district court found that the donning anddoffing of required gear is an integral andindispensable part of Employees' principalactivities. See generally Steiner v. Mitchell,350 U.S. 247 (1956) (holding that activitiesshould be considered integral andindispensable when they are part of theprincipal activities for the particular jobtasks). We agree with the district court'sconclusion as to the required gear. In thecontext of this case, Employees are requiredby Barber Foods and or governmentregulation to wear the gear. Therefore, thesetasks are integral to the principal activityand therefore compensable. See Alvarez v.IBP, Inc., 339 F. 3d 894, 903 (9th Cir. 2003).

As relates to the non-required gear,Employees contend that any activity whichpromotes safety and sanitary conditionsnecessarily benefits the employer. We think

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this takes the argument too far. The donningand doffing of non-required gear is notcompensable under these facts. Noteverything an employee does in herworkplace is compensable under the FLSA.These optional items are required neither bythe employer nor by the regulations and areworn by Employees at their own discretion.

B. Walking Time

Employees argue that the district courtimproperly excluded from compensable timethe periods Employees walk from one areawhere they obtain an initial piece of clothingor equipment (required by Barber Foodsand/or USDA regulations) to another areawhere they obtain additional items, theperiod they spend walking from getting theirgarb to the time clocks, and the period theyspend walking to the area where theydispose of clothing and equipment after theypunch out.

The Portal-to-Portal Act specificallyaddresses walking time, generallyexempting from compensation "walking,riding, or traveling to and from the actualplace of performance of the principalactivity or activities which such employee isemployed to perform." The Act alsogenerally exempts from compensationactivities which are preliminary orpostliminary to an employee's principalactivity or activities. On their face, theseprovisions would appear to exempt fromcompensation the walking at issue here.

Employees argue that the Portal-to-PortalAct excludes only that walking time whichoccurs before an employee commences herprincipal activity or activities. The Code ofFederal Regulations ("Code") states thatCongress intended the term "principalactivities" to be broad. 29 C.FR. § 790.8(a)(2002). However, the Code regulations state

that just because the changing of clothesmay in "certain situations be so directlyrelated to the specific work the employee isemployed to perform that it would beregarded as an integral part of theemployee's 'principal activity[,]' this doesnot necessarily mean, however, that travelbetween the washroom or clothes-changingplace and the actual place of performance ofthe specific work the employee is employedto perform, would be excluded from the typeof travel to which section 4(a) [Portal-to-Portal Act] refers."

Compensability issues are determined underthe FLSA and its accompanying regulations.Both parties agree that the Portal-to-PortalAct does not apply to questions ofcompensability during the "workday." TheSecretary urges an expansion of the ordinary"workday" rule in favor of a broader,automatic rule that any activity that satisfiesthe "integral and indispensable" test itselfstarts the workday, regardless of context....

[N]othing in Steiner requires the result thatthe Secretary urges, and the Secretary's rulethreatens to undermine Congress's purposein the Portal-to-Portal Act, which (with rareexceptions) sought to exclude preliminaryand postliminary waiting and walking timefrom compensability.

. . . We affirm the determination that theemployees' walking time is notcompensable.

C. Waiting Time

Employees claim that Barber Foods mustcompensate them for all the time they spendwaiting in line to receive the requiredclothing or equipment and to punch in at thetime clocks.

Whether waiting time is compensable under

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the FLSA depends on whether an employeeis "waiting to be engaged" or "engaged towait." See generally Skidmore, 323 US. at136-37. Idle time may be considered workunder the FLSA where it is controlled by theemployer and the time spent is dominated bythe need to serve the employer's needs. SeeArmour & Co. v. Wantock, 323 US. 126,133-34 (1944). The regulations elaborate onthis principle by stating that an employee isengaged to wait, i.e., working, when "theemployee is unable to use the timeeffectively for his own purposes. It belongsto and is controlled by the employer. . . ."

. . . Employees argue that they should becompensated for time spent waiting to punchin at the time clocks. Waiting in line topunch in at the time clock is explicitlyexcluded from compensable activity by 29C.F.R. § 790.8(c). There is no indicationthat any of the time spent waiting iscontrolled by the employer. Employeeshave adduced no evidence to counter thatconclusion.

Second, we turn to the waiting timeassociated with donning and doffing ofclothes. Even if we were to find that theemployees were engaged to wait under theFLSA and its accompanying regulations, thewaiting time would qualify as preliminary orpostliminary activity under the Portal-to-Portal Act.... When we look at 29 C.F.R.§ 790.8, we find that while the Code doesnot explicitly address the type of waitingtime at issue, the Code indicates that areasonable amount of waiting time isintended to be preliminary or postliminary. .. . [B]y excluding walking with ordinaryequipment and carrying light equipment, theCode indicates that a line must be drawn,otherwise an almost endless number ofactivities that precipitate the employees'essential tasks would be compensable. Wefind that a short amount of time spent

waiting in line for gear is the type of activitythat the Portal-to-Portal Act excludes fromcompensation as preliminary.

E. Jury Instructions

[Employees challenged two jury instructionsreferring to the definition and scope of"donning" and "doffing." Both instructionswere accurate, and neither was prejudicial,so the challenges are without foundation.]

IV. Conclusion

For the reasons stated above, we affirm thedistrict court judgment.

AFFIRMED.

CONCURRING:

BOUDIN, Chief Judge:

The central issue in this case is whetherwalking and waiting time, incident to thedonning and doffing of required clothes andequipment, are compensable where(according to findings in the district court)the time spent in donning and doffing isminimal but the combined walking andwaiting time may be extensive. There maybe no "right" answer short of the SupremeCourt's reading of its own precedents, butthe problem can at least be understood if thehistory and underlying tensions are candidlyarrayed.

The original Fair Labor Standards Act madecompensable time spent in "work," but itdefined the concept only in the most generalterms....

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. . . [The Supreme Court's interpretations]contradicted actual pay practice within theindustries and created large overhangingliabilities for employers. To the extent thatworkers received more than the minimumwage, the decisions also upset underlyingbargains. A flood of lawsuits followed.Congress responded with the Portal-to-Portal Act to cut off these claims for the pastand to provide in the future (with exceptionsnot here relevant) that compensation was notrequired for [preliminary or postliminaryactivities].

A decade later, this new legislative balancewas reset (and perhaps upset) in a small wayby a new Supreme Court decision. InSteiner, the Justices held that the Portal-to-Portal Act did not cover the time spentdonning and doffing of special clothing andtime spent showering, in facilities requiredby state law, to protect workers dealing withdangerously caustic and toxic materials....

Steiner was an understandable reaction-after all, the dangers were extreme andunique to the job . . . ; but the tension withthe Portal-to-Portal Act's underlying policyhas been less easy to escape as Steiner hasbeen extended.

However, the more serious problem foremployers arises in cases such as this one byattempts to extend Steiner further to walkingand waiting incident to such donning anddoffing....

. . . [T]hus extended, the tension with thePortal-to-Portal Act becomes acute: after all,why is this complex of donning, doffing,waiting and travel within the Barber plant

very different from the preliminary activitieswhich were involved in the Mt. Clemenscase-one of the targets of the Portal-to-Portal Act....

[T]wo positions are juxtaposed. One isthe . . . mechanical combination of Steinerwith a rigid "everything after is work"principle. The other is to treat requireddonning and doffing as compensable wheremore than de minimis but, where it is not,leaving both it and any associated walkingand waiting time as non-compensable.Neither outcome is impossible analyticallyand neither is clearly dictated by SupremeCourt precedent or underlying policy.

So where does the balance of advantage lie?

On Barber's side, as already noted, thehistory and language of the Portal-to-PortalAct tend to favor Barber, as do two of thethree circuit decisions; the question is howfar Steiner has qualified the statute. ...

Finally, it appears that wages at the Barberplant were set against a background practiceof treating as non-compensable the donning,doffing, walking and waiting involved inthis case. Unless those wages are the federalminimum, a decision that now such time iscompensable will likely be offset by wageadjustments in the future, leaving only aone-time windfall for employees. It is hardto begrudge this to workers doing difficultand disagreeable work, but the situationdoes bear an uncanny resemblance to thatwhich prompted the Portal-to-Portal Act. Itmay be time for the Supreme Court to haveanother look at the problem.

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"Local Attorneys Gearing up for Supreme Court"

GSA Business (S.C.)March 23, 2005

Francis B. Allgood

Sometime this fall, the U.S. Supreme Courtwill deliver a decision that may dictatewhether a manufacturer must pay employeesfor the time it takes to put on protectiveclothing and walk to their workstations.

David R. Wylie and Christopher Lauderdale,attorneys with Jackson Lewis LLP inGreenville, are representing the NationalChicken Council, American Meat Instituteand the National Association ofManufacturers. They petitioned theSupreme Court, claiming there areinconsistent interpretations of the Fair LaborStandards Act. "It's a battle of language ofthe statute enacted by Congress 60 years agoand the way the Labor Department wants tointerpret it," Lauderdale says.

Interest by the Supreme Court was sparkedby two separate rulings: Abdela Tum v.Barber Foods Inc. in Portland, Maine, andIBP Inc. v. Gabriel Alvarez in Pasco, Wash.

For IBP-now known as Tyson Fresh MeatsInc.-the company was ordered to pay $3.1million to 815 employees for the time ittakes to put on protective clothing and walkto their workstations. Barber Foods, on theother hand, won its case, following arehearing decision that provided someconflicting opinions.

The argument before the court is that there iscontradicting language among decisionsmade by the high courts and Congress forwhat's compensable.

In 1946, the definition of "work" under theFLSA was extended to include time spent by

employees walking to their workstations andother activities, such as changing clothes. Inresponse, Congress passed the Portal-to-Portal Act in an attempt to stop such claimsfrom being compensable, asserting it wouldcreate "unexpected liabilities" for theemployer.

But in 1956, in Steiner v. Mitchell, theSupreme Court found exception to thePortal-to-Portal Act. Employees exposed totoxic chemicals while working in a batteryplant were required to change clothes priorto their shift and shower immediately aftertheir shift. The court ruled that because theworkers were in hazardous conditions,showering and changing clothes wascompensable. "Steiner almost swallowedthe rule of the Portal-to-Portal Act,"Lauderdale says.

Kevin Russell, an attorney with Goldstein &Howe PC in Washington, D.C., representsthe employees in Tum v. Barber Foods. Hesays employees must wait in line to get theirlab coats, ear plugs, safety glasses and othergear from a distribution cage, then changeclothes and walk to their work area beforethey clock in. "The employer has noincentive to making that line move quicker,"Russell says. "It's not a huge amount ofmoney for the employer, but it is significantto the low-paid worker."

In the original Tum v. Barber Foods case,the court ruled the time it takes to changeinto uniform was compensable, but ruledagainst the time it takes to wait in line to getthe equipment and the time it takes to walkfrom the changing room to the workstation.

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If the worker is paid for changing clothes,but is not compensable for leaving thechanging room for her workstation,inevitably there's a conflict.

"It's a scheme that doesn't make a whole lotof sense," Russell admits. Lauderdale saysin the beef industry, where heavy equipmentis donned by workers, changing clothes hasbeen compensable and is not beingchallenged. Lightweight protective gear,such as a bump cap and clean outerweargarments worn in poultry processing plants,don't warrant the same standard. "It's notjust limited to the poultry issue," Lauderdalesays.

As recently as a week ago, a similar casewas settled in Timmonsville.

Honda of South Carolina Manufacturing Inc.will pay a $2 million settlement for the timeit took employees to prepare for work. Thesuit, filed in U.S. District Court in Florence,asks Honda to pay overtime for the 7.3minutes it took each time to change into andout of uniforms from July 1, 2001, to July31, 2003.

On Aug. 1, 2003, Honda changed its policyto allow workers to prepare for work athome. The agreement states that Hondadenies the allegations, but Honda and otherautomotive manufacturers have seen similarlawsuits before.

In January 2003, Honda agreed to pay $1.2million in back pay at a plant in Lincoln,Alabama.

In April 2003, Mercedes-BenzInternational paid $687,588 in backto workers in Vance, Alabama.

U.S.wages

David George, president of Data DrivenManufacturing Inc., which offers Six Sigma

consulting and data analysis services, saysthe manufacturers he works for have alwaysruled compensation begins at the employee'sworkstation.

"I've never seen it come into play," Georgesays. "If you are scheduled to be at yourworkstation, that includes being dressedappropriately. Whether you are having towear proper shoes or eye protection, youcome ready to work or you change at work."

According to George, most employees atGeneral Electric Gas Turbines in Greenvillewear their uniforms to work. The onlyequipment donned at GE are special bootsfor some workers. At Associated Fuel PumpSystems Corp. in Anderson, the companypays for a portion of up to 11 sets ofuniforms per employee, and offers to do aweek's worth of work laundry.

But human resource manager Donna Bakersays uniforms are optional, not required.Basic equipment, such as protectiveeyewear, takes only seconds to put on, shesays. "In my mind, this has more to do withcompanies that have clean rooms where(employees) have to dress," says Baker, whohas kept abreast of the recent court rulings.

Lauderdale says the concern is how theSupreme Court's ruling may impact not onlymeat processors, but other manufacturers,and state and local governments.

Cases involving law enforcement and fireofficials have also revealed conflictingarguments.

"Everybody's got to dress. Whether its atuxedo, a waitress uniform or just a coat andtie," says Clay Johnston, owner of Wright-Johnston Uniforms in Columbia.Specializing in public safety uniforms with asmall industrial business, Johnston admits

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he's never heard of such cases.

Wright-Johnston is a supplier for theGreenville Police Department.

"Putting on a belt holster may take 30seconds, not much more than that," Johnstonsays.

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"Tyson Asks Court to Resolve Pay Dispute"

Legal TimesApril 26, 2004Tony Mauro

Tyson Foods, the world's largest supplier ofmeats, is trying to enlist the Supreme Courtin its dispute with slaughterhouse workersover their claim that they should be paid forthe time it takes to change into protectiveclothing and walk to and from their workstations.

In a petition filed by Carter Phillips ofSidley Austin Brown & Wood, the companyis hoping to reverse a ruling that awardedworkers at its Pasco, Wash., plant more than$3 million in damages for its failure to payworkers for the time at issue. The case iscalled IBP Inc. v. Alvarez, No. 03-1238.IBP was taken over by Tyson in 2001, afterthe suit was filed.

Citing conflicting rulings in circuits acrossthe country, a brief filed by the NationalChicken Council and other industry groupsalso urges the high court to grant review."The issue raised by this case regarding thecompensability of walking time is extremelyimportant" to the meat industry, says DavidWylie of Haynsworth Baldwin Johnson &Greaves in Greenville, S.C., author of theindustry brief.

The case is one of dozens that the Court willdiscuss at its private conference April 30.The Court could announce on May 3whether it will review the case.

The original lawsuit was brought in the U.S.District Court for the Eastern District ofWashington on behalf of 815 beef slaughterand processing workers, citing violations offederal and state labor laws. They soughtcompensation for the time they spend

donning and doffing protective clothing theyare required to wear for health and safetyreasons, and for the time then needed towalk between locker rooms where theychange and their work stations at thebeginning and end of their shifts. U.S.District Judge Robert Whaley sided with theworkers.

IBP appealed, citing sections of federal lawthat allow employers not to pay workers fortime spent "changing clothes" or walking toand from work areas. The LaborDepartment also weighed in, with then-Labor Solicitor Eugene Scalia filing a briefagreeing that the walking time should becompensated. On the clothing issue, thedepartment reversed a Clinton-erainterpretation and sided with the company,finding that companies did not have tocompensate workers for the time spentputting on and taking off the garments andprotective gear.

The San Francisco-based U.S. Court ofAppeals for the 9th Circuit affirmed theDistrict Court, rejecting IBP's arguments.The statute, wrote Judge Sidney Thomas,could not be read to "lead to the conclusionthat a workday may be commenced, thenstopped while the employee is walking tohis station, then recommenced when thewalking is done." On the clothing issue, thepanel agreed that the specialized gearrequired by the employer was "different inkind from typical clothing," and thereforethe workers' time should be compensated.

Thomas also noted that since the publicationof Upton Sinclair's The Jungle in 1906, the

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meatpacking industry has been heavilyregulated, yet still remains "one of the mostdangerous jobs in America."

On a lighter note, Thomas also said,"Perhaps the packing plant employees inPasco, Wash. should have heeded HenryDavid Thoreau's warning to 'beware of allenterprises that require new clothes.' "

Thomas was joined by circuit Judge DorothyNelson and Judge Susan Illston of theNorthern District of California, sitting bydesignation.

Phillips, in his brief for IBP, notes that the

Boston-based 1st Circuit "squarely rejected"the 9th Circuit's reasoning in a decision lastyear, and a decision by the Denver-based10th Circuit also ruled differently in a caseinvolving IBP.

The brief for the workers in the case arguesthat there is no significant circuit conflict onthe issue and that the 9th Circuit ruling iscorrect and should not be disturbed. "Thefew opinions to date are intensely fact-bound," writes William Rutzick of SchroeterGoldmark & Bender in Seattle. "Theyinvolve only a few industries and smallamounts of time."

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"Workers Sue for Back Pay at Barber"

Portland Press Herald (Maine)December 28, 2000

Peter Pochna

Several employees at Barber Foods havefiled a lawsuit against the poultry-packingplant, claiming that the company hasviolated federal labor law by requiringworkers to perform tasks for which they arenot paid.

The claim strikes at the company'sreputation as a generous employer thatstrives to take care of its many foreign-bornworkers. Barber has 750 full-timeemployees, 44 percent of whom are foreign-born.

Four employees are named as plaintiffs inthe collective-action case that eventuallycould include hundreds more workers. Atstake are millions in wages dating back threeyears.

The lawsuit filed Dec. 12 in U.S. DistrictCourt claims that the company does not payits hourly employees for the time they spendat the St. John Street plant gathering andputting on safety equipment before shifts,and storing the equipment at the end of theday. For some of the workers, that amountsto nearly an hour of overtime pay each daythat they aren't getting, the lawsuit states.

Worker advocates say the company is takingadvantage of employees who don't speakEnglish well and don't understand theirrights.

"I think people are fed up with how they arebeing treated," said Kathy Poulos, a Portlandadvocate for refugee and immigrant rights."We want these procedures to be revised andto come into compliance with the law. We

want people paid for the hours they work."

Vicki Mann, a spokeswoman for Barber,said the company tries to treat its employeesfairly. She cited the numerous services thecompany offers its workers, such as the fouron-site classrooms where English, math,science and computer skills are taught.

"It's very unfair" to accuse the company ofmistreating its workers, Mann said. "Wepride ourselves on treating all our employeesfairly."

She said Barber officials are investigatingthe allegations made in the lawsuit.

"Obviously, we are taking this veryseriously," Mann said. "It has always beenour intention to comply with the law."

Barber Foods is a locally owned companyfounded in 1955 by Gus Barber and stillowned by the Barber family. It offers awide variety of products, including frozenchicken entrees. It distributes to grocerystores, restaurants and other businessesthroughout the United States and Canada aswell as some other foreign markets.

Many of the jobs at the plant involve workon "specialty lines," where employeesperform tasks such as wrapping chickenparts and packing them in trays. Workerstypically earn between $ 9 and $ 13 an hour.

The 21-page lawsuit states that "Barberfoods has willfully engaged in a pattern andpractice of unlawful conduct by declining torecord and pay for all of the time it requires

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or permits its employees to work, inviolation of the" Fair Labor Standards Act.

The case only covers three years because thestatute of limitations blocks any claims forprevious years.

Tadeusz Olszynski, one of the plaintiffs, is amachine operator who has worked forBarber since 1991. He immigrated toPortland from Poland 12 years ago.

Before punching the clock each day, he mustput on extensive safety equipment, such asgloves, earplugs, safety glasses, a haimet, ahat, steel-toed boots and a safety belt. Heclaims he should earn about an hour more ofovertime wages per day. He believes thecompany owes him at least $ 10,000.

"They don't pay for what they are supposedto pay for," Olszynski said. "People havebeen scared to bring this up. But I thinknow many others will join this lawsuit."

The other plaintiffs are Abdela Tum, whohas worked at Barber since 1990, CelsoFlorendo, an employee since 1994, andNajib Sayed, who worked there from 1994to February of this year.

The law firm of Gordon, Silberman,Wiggins and Childs, based in Washington,D.C., is representing the workers. The firmspecializes in employment litigation.

Poulos, who helped organize the legalaction, is in the process of informing all theworkers at the plant about the suit. Thisinvolves distributing forms in numerousdifferent languages. Olszynski estimatesthat about 1,000 current and former workerswill join the suit.

In order for the case to be considered aclass-action lawsuit, the plaintiffs' lawyersmust convince the court that there is asubstantial group of people who may havebeen harmed by the defendant's actions.

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"Court Rules Tyson Fresh Meats Must Pay $3.1 Millionto Wallula, Wash. Workers"

Tri-City Herald (Washington)August 9, 2003

Jeff St. John

Tyson Fresh Meats Inc. must pay more than$ 3.1 million to workers at its Wallula beefplant for time they spent putting on andtaking off mandatory safety gear on the job,a federal appeals court has ruled.

Workers at the plant and their unionrepresentatives, who have sought the backpay for four years, said Friday that the rulingwas a victory for themselves andmeatpacking workers across the nation.

"This band of workers here have really beensetting the bar for workers in themeatpacking industry," said Lorene Scheer,organizing director for Teamsters unionLocal 556 in Walla Walla, which representsworkers at the Wallula plant.

The ruling by the 9th U.S. Circuit Court ofAppeals, filed Tuesday, upholds a 2001 U.S.District Court order to pay more than 800workers up to $ 10,000 apiece for the timethey spent donning and doffing their gear.

The class-action lawsuit, Alvarez v. IBPInc., began in 1999, before IBP waspurchased by Tyson Foods Inc. and changedits name to Tyson Fresh Meats earlier thisyear. The suit claimed IBP violated thefederal Fair Labor Standards Act and relatedstate laws by not paying workers adequatelyfor the time it takes to dress in safety gearand clean and store tools.

Workers who use knives can spend up to 30minutes a day putting on and taking off thespecialized equipment, which includessafety boots and metal mesh vests, aprons,

leggings, sleeves and gloves, saidMelquiadez Pererya, Local 556 president.

Tyson Fresh Meats said in a news releasethat it will seek a rehearing of the case and,if necessary, appeal the ruling to the U.S.Supreme Court.

The court's decision "is in direct conflictwith other recent federal court decisions,regulations and policies of the U.S.Department of Labor, and over 50 years ofindustry precedent," Tyson spokesman GaryMickelson said in the statement.

The 9th Circuit Court also has asked U.S.District Court Judge Robert H. Whaley tocalculate into any final award the pay owedto workers who were forced to cut short the30-minute unpaid lunch break they weregiven each day, said Kathy Goater, a Seattleattorney representing the workers.

Because workers weren't allowed to eatlunch with their protective gear on, butweren't given any extra time to remove andput on the gear either, they should becompensated for free time lost during thelunch breaks, she said.

Workers sought payment for the lost lunchtime in the lawsuit, and adding thatcompensation to any final award couldincrease the amount owed to workers toabout $ 7.4 million, she said.

"It's a huge victory for these workers," shesaid. "They truly deserve this award, andwe're thrilled for them."

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The ruling may also lend weight to a secondclass-action lawsuit filed by Wallula plantworkers who weren't included in the 1998lawsuit, she said. This second lawsuit,Chavez v. IBP Inc., is scheduled to be heardby Judge Whaley in September 2004, shesaid.

Tyson Fresh Meats workers who gatheredoutside the Wallula plant Friday said thatthey were less concerned about getting acheck in the mail than about setting anexample for other meatpacking workers.

"We finally got justice," Maria Chavez, one

of the workers in the lawsuit, said inSpanish. "This is a little compensation forwhat we've suffered."

The 59-year-old Pasco woman has workedat the Wallula plant since 1983, and saidshe'll use whatever money comes to her forher retirement.

Worker Arturo Aguilar of Kennewick saidthe ruling was "an example for otherworkers" and a matter of pride for unionemployees at the Wallula plant. "This issomething you can't touch," he said,"something priceless."

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Texaco, Inc. v. Dagher

(04-805)

Ruling Below: Dagher v. Saudi Refining, Inc., 369 F.3d 1108 (9th Cir. 2004), cert. granted 125S. Ct. 1372, (U.S. June 1, 2005). The Solicitor General was invited to file a brief expressing theviews of the United States, 125 S. Ct. 1372 (2005).

Plaintiffs, a class of 23,000 Shell and Texaco service station owners represented by FouadDagher and others, sued three oil companies alleging that these companies had conspired to fixthe nationwide prices for the Shell and Texaco brands of gasoline through the creation of anational alliance consisting of 2 joint ventures. The district court granted the oil companiessummary judgment for lack of standing and because the owners failed to raise a triable issue offact as to whether the Sherman Act's per se prohibition against price fixing was applicable to theeconomic arrangements between the companies. The Ninth Circuit Court of Appeals reversed asto the owners' failure to create a triable issue of fact. The Ninth Circuit found that the absence ofpersuasive evidence showing a pro-competitive justification for initiating the price-fixingscheme, when viewed along with the owners' evidence showing anti-competitive effects, was aconvincing showing as to the applicability of the per se rule.

Question Presented: Whether it is per se illegal concerted action under § 1 of the Sherman Actfor an economically integrated joint venture to set the selling price of its own products.

Fouad N. DAGHER, Plaintiff-AppellantV.

SAUDI REFINING, INC., Defendant-Appellee


Decided June 1, 2004

[Excerpt: Some footnotes and citations omitted]

OPINION: REINHARDT, Circuit Judge:

Plaintiffs Fouad N. Dagher, et al., appealfrom the district court's award of summaryjudgment to the defendants, Texaco, Inc.,Shell Oil Co., and Saudi Refining, Inc.(SRI), et al. The plaintiffs represent a classof 23,000 Texaco and Shell service stationowners who allege that the defendantsconspired to fix the nationwide prices for theShell and Texaco brands of gasoline through

the creation of a national alliance consistingof two joint ventures. The district courtgranted two summary judgment motions:one to dismiss defendant SRI because theplaintiffs lacked antitrust standing; the otherto dismiss the complaint against theremaining defendants because the plaintiffsfailed to raise a triable issue of fact as towhether the Sherman Antitrust Act's per seprohibition against price fixing is applicableto the economic arrangements between the

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defendants. We affirm the district court'sruling as to the plaintiffs' standing to sueSRI, but reverse the district court's decisionthat the plaintiffs failed to create a triableissue of fact under the Sherman Act.

There is a voluminous record documentingthe economic justifications for creating thejoint ventures. After analysis by teamsmade up of representatives of all threecompanies, the defendants concluded thatnumerous synergies and cost efficiencieswould result. The defendants concluded thatnation-wide there would be up to $800million in cost savings annually. TheFederal Trade Commission and several StateAttorneys General approved the formationof the joint ventures, subject tomodifications demanded by both the federalagency and the various Attorneys General.

The creation of the alliance endedcompetition between Shell and Texacothroughout the nation in the areas ofdownstream refining and marketing ofgasoline. Texaco and Shell signed non-competition agreements which prohibitedthem from competing with either Equilon orMotiva and committed them "not to engagein the manufacturing and marketing ofcertain products in the [relevant] geographicareas, including fuel, synthetic gasoline, andelectricity." The two joint venturesestablished fixed ratios for profit sharing andfor bearing the risk of losses....

The various agreements between the oilcompanies allowed Texaco and Shell toconsolidate and unify the pricing of theTexaco and Shell gasoline brands within theEquilon and Motiva joint ventures. Before

creating the two joint ventures, Shell,Texaco, and Star all independently set pricesfor their wholesale and retail sales, generallythrough decisions made by their corporatepricing units. Testimony in the recordreveals that, either immediately before theformation of the joint ventures or sometimeshortly thereafter, "a decision was made thatthe Shell and Texaco brands would have thesame price in the same market areas.". . .

The alliance consolidated pricing of theTexaco and Shell brands such that a singleindividual at each joint venture wasresponsible for setting a coordinated pricefor the two brands....

The price optimization program may haveallowed Equilon and Motiva to raisegasoline prices at a time when the price ofcrude oil was low and stable. During a timewhen crude oil prices reached near-historiclows-the price of crude oil decreased from$ 10 to $ 12 per barrel between September1998 and February 1999-Equilon raised itsprices $ .40 per gallon in Los Angeles and $.30 per gallon in both Seattle and Portland.

II. Standard of Review

We review a district court's grant ofsummary judgment de novo. United Statesv. City of Tacoma, 332 F.3d 574, 578 (9thCir. 2003). Taking the evidence in the lightmost favorable to the nonmovant, we mustconsider whether there are any genuineissues of material fact and whether thedistrict court properly applied the pertinentsubstantive law.

* * *

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IV. Liability Under the Sherman AntitrustAct

The Sherman Antitrust Act makes illegal"every contract, combination in the form oftrust or otherwise, or conspiracy, in restraintof trade or commerce among the severalStates, or with foreign nations[.]" 15 U.S.C.

Price fixing is the quintessential example ofa per se violation of § ....

Notwithstanding the above, it is plain that §I's blanket prohibition on price fixing, likethe Act itself, cannot be read literally. CfProfl Engineers, 435 US. at 687 ( § I ofthe Sherman Act "cannot mean what itsays"). There are some price fixingarrangements that violate the letter of theSherman Act but are legal nonetheless. Forinstance, when two competing companiesagree to merge and to combine their productlines, or to eliminate the old product linesand create an entirely new one, theygenerally agree to adopt a uniform pricingscheme. The Supreme Court has permittedsuch arrangements....

It is not the case, however, that the mereexistence of a bona fide joint venture meansthat participating companies may use theenterprises to do anything they please withfull immunity from per se analysis under §1, including price fixing.. . . For instance, ifin reliance on the existence of a valid jointventure between Coca Cola and Pepsidesigned to research new types of sodaflavors, the two companies imposed a pricefloor on all soda sold nationwide, the pricefixing would constitute an illegal "nakedrestraint on trade." Along these lines, theSupreme Court has recognized that even

joint ventures that are lawful in their generaloperations may violate the Sherman Actwhen they engage in specificanticompetitive conduct....

The defendants' argument to the contrary-that joint ventures such as Equilon andMotiva are incapable of violating theSherman Act-ignores the lesson of CitizenPublishing Co. v. United States, 394 US.131. ... In Citizen Publishing. . . two dailynewspapers in Tucson, Arizona . . . enteredinto a joint venture agreement, which"provided that each paper should retain itsown news and editorial departments, as wellas its corporate identity." 394 U.S. at 133.The joint venture established a newcompany, Tucson Newspapers, Inc., "whichwas to manage all departments of theirbusiness except the news and editorial units.

The Supreme Court held that the confluenceof these anti-competitive restraints, in thecontext of a joint venture between twoformerly vigorous competitors in the marketarea targeted by the venture, constituted aper se violation of the Sherman Act....

The district court distinguished CitizenPublishing in three ways. Each isunsatisfactory. First, the court found thatthe Tucson newspapers in CitizenPublishing effectively eliminated "allcompetition," whereas Equilon and Motiva"continue to compete with several major oilcompanies in their relevant markets." Thisdistinction runs contrary to Supreme Courtprecedent.

Second, the district court found that theCitizen Publishing newspapers "combinedfor the specific purpose of restrictingcompetition and fixing prices," in contrast toa complete lack of evidence establishingsuch intent for the alliance ventures. Thatdistinction, if true, would speak only to the

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validity of Equilon and Motiva as a whole-it would not justify the defendants' adoptionof a price fixing scheme. ...

Third, the district court believed that theonly reason the non-competition agreementin Citizen Publishing was unlawful wasbecause the agreement joined the only twocompetitors in the market. The Western oilmarket, by contrast, is a diverse market with"several competitors," while the Equilonjoint venture has a much narrower non-competion agreement. This distinctionreturns to an analysis of market power, ananalysis which the Supreme Court has heldis inappropriate in this type of case....

The Supreme Court has upheld jointventures and other corporate combinationsinvolving fixed prices, but generally hasdone so only when it appeared plain to theCourt that the restraints undertaken by thejoint ventures were "necessary" to thelegitimate aims of the joint venture. SeeBMI, 441 US. at 23 (approving an otherwiseinvalid price restraint only because "theagreement on price is necessary to marketthe product at all"); NCAA, 468 U.S. at 117("Our decision not to apply a per se rule tothis case rests in large part on ourrecognition that a certain degree ofcooperation is necessary if the type ofcompetition that petitioner and its memberinstitutions seek to market is to bepreserved.")....

In considering the relationship of theenterprise's pricing actions to the venture'slegitimate objectives, we find it significantthat the defendants here did not simplyconsolidate the pricing decisions within thejoint ventures-they unified the pricing ofthe two brands from the time the alliancewas formed by designating one individual ineach joint venture to set a single price for

both brands. Normally, a businessdetermines the prices it will charge for itsvarious products by considering numerousfactors, just a few of which include the costsof production and marketing and thecontours of the relevant product markets. Inthis case, the defendants have stressed that,in addition to the differences in the productthemselves, the gasolines marketed underthe Texaco and Shell labels have differentreputations and consumer bases. It thusseems likely that independent price analyseswould result, at least in some circumstances,in the rational decision to sell the differentbrands at different prices. Instead, thedefendants chose to fix those pricesuniformly.

The defendants have thus far failed to offerany explanation of how their unified pricingof the distinct Texaco and Shell brands ofgasoline served to further the ventures'legitimate efforts to produce better productsor capitalize on efficiencies. . . . Theabsence of persuasive evidence showing aprocompetitive justification for initiating theprice-fixing scheme, when viewed alongwith the plaintiffs' evidence showing anti-competitive effects, convinces us that theplaintiffs have made a sufficient showing asto the applicability of the per se rule.

The defendants offer only two justificationsfor the unitary pricing scheme. First, thedefendants argue-as does our dissentingcolleague-that, as a general rule, any bonafide joint venture must be able to set pricesfor its products at whatever level it chooses:"without the ability to price its products,neither venture would have had the authorityto make fundamental decisions affecting itsfinancial performance." Appellees' Brief, at16. Second, the defendants argue thatEquilon and Motiva fixed uniform Texacoand Shell prices in order to "prevent issuesof price discrimination from arising underthe Robinson-Patman Act[.]" Id. We

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address the latter justification first.

A cursory examination of the Robinson-Patman Act, 15 US.C. § 13, which wasdesigned to prevent sellers from engaging inprice discrimination, reveals itsinapplicability here. . . . As another Circuithas explained,

. . . "[I]t is fairness, as Congressperceives it, that Robinson-Patman is all about." The Act'sgoal is to abolish unwarrantedfavoritism among all functionalcompetitors, big or small. Itsobjective is to assure "thatbusinessmen at the samefunctional level start on equalcompetitive footing so far asprice is concerned"; "to assurethat all sellers regardless of size,competing directly for the samecustomers . . . receiveevenhanded treatment fromtheir suppliers." . . .

Alan's of Atlanta, Inc. v. Minolta Corp., 903F.2d 1414, 1422 (11th Cir. 1990).

The quoted passage makes it clear that thedefendants' Robinson-Patman argument iswholly without merit. The Act wouldunquestionably be inapplicable to a decisionby the defendants to sell the distinct Texacoand Shell brands of gasoline at differentprices. Any such decision would necessarilybe predicated on the differences between thetwo brands, not upon the identity of thebuyers....

The first of the defendants' two arguments-that a joint venture must be able to setwhatever price it chooses for its products-proves too much. If that were true, anynumber of companies could create jointventures as fronts for price-fixing. The

simple answer is that the Supreme Court hasdeclined to immunize joint ventures fromper se antitrust scrutiny....

Finally, the defendants claim-as does ourdissenting colleague-that an application ofthe per se rule here would mean that jointventures could not set prices for theirproducts. We reject this argument. We ofcourse recognize that joint ventures mayprice their products; that is not the question.The question is whether two former (andpotentially future) competitors may create ajoint venture in which they unify the pricing,and thereby fix the prices, of two of theirdistinct product brands. We have held thatthe Sherman Act's per se rule applies whenthe defendant fails to demonstrate asufficient relationship between the pricefixing scheme and furthering the legitimateaims of the joint venture-a relationship thatjustifies the otherwise prohibited pricerestraints. Thus far in this litigation, thedefendants have failed to produce sufficientevidence demonstrating that their pricefixing scheme was ancillary rather thannaked and, thus, that they are entitled tosummary judgment.

DISSENT: FERNANDEZ, Circuit Judge,Concurring and Dissenting:

I agree that the plaintiffs lacked standing asto SRI and, therefore, concur in the result ofpart III of the majority opinion. However, Idissent from part IV.

While this case does involve a verycomplicated set of transactions, it presents arather straightforward antitrust law question.That is, where former competitors create abona fide joint venture to which all of theirassets and operations in segments of theirbusinesses are contributed, will there be a

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per se violation of the antitrust laws, if thejoint venture entity sets the prices of thegoods it sells? I think the answer is no....

It is plain enough that the mere creation of ajoint venture is not a per se antitrustviolation. No doubt, like mergers, jointventures are combinations ofrbusiness assetsbut "such combinations are judged under arule of reason" analysis. Copperweld Corp.v. Independence Tube Corp., 467 US. 752,768, 104 S. Ct. 2731, 2740, 81 L. Ed. 2d 628(1984). Especially should that be true of theLLC type of venture, which is not only aseparate entity, but which also functions as aseparate economic unit for all practicalpurposes. In fact, to slightly paraphrase theSupreme Court statement in Arizona v.Maricopa County Med Soc'y, 457 US 332,356, 102 S. Ct. 2466, 2479, 73 L. Ed. 2d 48(1982):

[Equilon is] . . . analogous to

partnerships or other jointarrangements in which personswho would otherwise becompetitors pool their capitaland share the risks of loss aswell as the opportunities forprofit. In such joint ventures,the partnership is regarded as asingle firm competing withother sellers in the market.

Nor does the mere fact that Equilon setsprices for the products it manufactures andsells suffice to demonstrate that its actionswere price fixing for antitrust purposes. SeeBroad Music, Inc., v. Columbia Broad Sys.,Inc., 441 U.S. 1, 8-9, 99 S. Ct. 1551, 1556-57, 60 L. Ed. 2d 1 (1979). Rather,"literalness is overly simplistic and oftenoverbroad. When two partners set the priceof their goods or services they are literally

'price fixing,' but they are not per se inviolation of the Sherman Act." Id. at 9, 99S. Ct. at 1557. So just what could make theoperation of Equilon a per se violation of theantitrust laws? Surely it is not a claim thatthe venture is a sham.

. . . Independent Operators argue, in thiscase the fixing of prices by the venture isneither essential nor "reasonably ancillary tothe legitimate cooperative aspects of theventure." Freeman v. San Diego Ass'n ofRealtors, 322 F.3d 1133, 1151 (9th Cir.2003). The majority agrees; I cannotunderstand why. The situation here is farfrom the kind of situation we faced inFreeman. There, the reason for the venturewas the unifying of disparate multiple listingdatabases. Id. at 1140-41. That done, therewas a new database entity, and thecorporations that formed it for that purposewent on operating their own businesses. Butthey all also agreed to fix a price for supportservices. That was essentially unrelated tothe database itself, and was unnecessary, andunjustified. Id. at 1151. It was the latter"price fix" that ran afoul of antitrustprinciples. Here we have nothing of thekind.

In this case, nothing more radical is afootthan the fact that an entity, which now ownsall of the production, transportation,research, storage, sales and distributionfacilities for engaging in the gasolinebusiness, also prices its own products. Itdecided to price them the same, as any otherentity could. What could be more integral tothe running of a business than setting a pricefor its goods and services? I am at a loss foran answer to that question, and nothingwritten about this case to date impartsadditional wisdom or better information.

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"Oil Giants Take on Gas Station Owners;Supreme Court to Determine Fate of Antitrust Ruling"

Houston ChronicleJuly 06, 2005Alexis Grant

WASHINGTON-The Supreme Court willhear a price-fixing case that has pitted bigoil companies against the owners of gasstations and could have an effect on some ofthe biggest names in American business.

The issue is whether a joint venture createdby Texaco and Shell Oil Co. can sellgasoline at the same price to all distributorsunder laws designed to preservecompetition.

Antitrust experts say the case, which wasaccepted at the end of the court's recentterm, is likely to be one of the moresignificant business issues it considers whenit goes back to work in October.

The case comes from the San Franscisco-based 9th U.S. Circuit Court of Appeals,which ruled in favor of the gas stationowners. Big names on the side of the oilcompanies include the U.S. government,Visa USA, Coca-Cola Co. and MicrosoftCorp.

"Beyond the implications for these verymajor industry players, the 9th Circuit'sdecision has far-reaching implications for allkinds of joint ventures," said David Price, anattorney with the Washington LegalFoundation, who filed a brief in favor of theoil companies. "It would create potential forantitrust liability when a joint venture makesroutine decisions, like pricing."

Two brands, one price

The class action lawsuit filed on behalf of

23,000 service station owners argued thatthe joint venture violated antitrust lawsmaking it illegal to limit competition bysetting a common price for a product madeby competing companies.

The creation of two refining and marketingjoint ventures in 1998 allowed Texaco andShell to continue to sell their brandsseparately but save an estimated $ 800million each year by sharing refiningcapacity and the cost of selling the fuels. Atthe pump, consumers saw Texaco and Shellas two different brands of gas, but the gaswas sold at the same wholesale price by thejoint venture.

The joint venture at the heart of the lawsuit,Equilon, operated in the western UnitedStates. Texaco and Shell were partners withSaudi Refining in a similar joint venturecalled Motiva that operated in the easternU.S.

The oil companies argue that setting a pricefor gas produced under Equilon was anecessary part of doing business, even if itwas sold under two brand names.

Price spikes

According to the 9th Circuit Court, thecompanies that joined to create Equilonsharply increased the price of their gasolinein some West Coast cities, including LosAngeles, at a time when oil prices were atnear-historic lows of $ 10 to $ 12 per barrel.Additional costs were passed by distributorsto consumers.

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Texaco's stake in the joint venture was soldto Shell Oil Co. after Texaco was taken overby ChevronTexaco Corp.

Daniel Shulman, an attorney for theplaintiffs, called the move price-fixing andsaid it falls under the "per se" rule ofantitrust law, which makes it illegalregardless of the circumstances.

"The Supreme Court has said for 50 yearsthat joint ventures are not entitled to anytype of special protection," Shulman said.

But those backing the oil company argue thesituation should be judged according to the"rule of reason," which allows joint venturesto set prices if they are efficient. The idea isthat such combinations may produce newproducts, made less expensively or moreplentiful for consumers.

Error made?

In a brief, the U.S. government urged thehigh court to overturn what it saw as an

error by the appeals court and treat Equilonas a separate company created to refine andsell fuel more efficiently, which it saidshould exempt it from price-fixing rules.

The appeals court's decision poses a threat tothe proper enforcement, both private andpublic, of the antitrust laws, wrote PaulClement, acting solicitor general.

Shulman countered that Equilon should notqualify as efficient because it did not createa product that was different from whatTexaco and Shell produced independently.

The American Antitrust Institute, a nonprofitgroup that aims to increase competitionamong businesses, has not yet taken a stanceon the issue. But its president, Bert Foer,said a reversal by the high court has thepotential to set a precedent that could hurtconsumers.

The two cases, which will be combined forargument before the court, are Texaco v.Dagher and Shell Oil Co. v. Dagher.

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"FTC, DOJ Pitch Joint Venture Ruling"

Daily DealJune 1, 2005

Cecile Kohrs Lindell

The nation's two antitrust enforcementbodies, the Federal Trade Commission andthe Department of Justice's AntitrustDivision, jointly asked the Supreme Courton Tuesday, May 31, to overturn aCalifornia appeals court ruling that a jointventure may not set the same price forseparate brands made by its parentcompanies.

The case of Texaco Inc. v. Dagher et al.centers on Equilon, one of two joint venturesformed by Texaco Inc. and Shell Oil Co. tomarket and distribute gasoline made by thetwo companies. Fouad N. Dagher,representing individual owners of Shell orTexaco gasoline retailers, argues thatEquilon's sale of Shell and Texaco productsat the same price amounts to price-fixing,which is illegal.

Central District of California Judge GeorgeH. King ruled for the oil companies, only forJudge Stephen Reinhardt of the 9th CircuitCourt of Appeals in San Francisco tooverturn him last June.

The appellate ruling, which asserts that ajoint venture approved by the FTC and fourstates may not set its own price for theproducts it sells, has caused a stir in theantitrust bar. "The implications for all kindsof extremely common business practices forjoint ventures is huge," said Roy Englert, apartner at Robbins, Russell, Englert, Orseck

& Untereiner LLP who specializes inappellate work.

The FTC-DOJ brief notes that "under theterms of the consummated joint venture,petitions granted Equilon an exclusivelicense to sell gasoline under their brandnames [Shell and Texaco] in the WesternUnited States, and they agreed to splitEquilon's profits (or losses) in a fixed ratiobased on the assets each contributed to thejoint venture."

Englert noted that the joint brief, sought bythe Supreme Court, is unusually direct inurging the top court to hear, and thenreverse, the lower-court ruling. "Theagencies tend to be institutionallyconservative in their briefs," he said,explaining that most briefs take a "on-the-one-hand, on-the-other-hand" look at thereasons for or against hearing a case.

But the clarity of the joint recommendationmakes it more likely that the Supreme Courtwill hear the case, probably next year. "Thechances are very, very high that the SupremeCourt will grant cert," Englert said.

If the Supreme Court lets the appellatedecision stand, it would "[interfere] withcommon business activity, and a lot ofcommon business practices would have tobe reconsidered," Englert said.

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"Gasoline Price-Fixing Suit Reinstated"

Ventura County StarJune 2, 2004

David Kravets

A federal appeals court on Tuesdayreinstated a lawsuit accusingChevronTexaco Corp. and Shell Oil Co. ofoperating a price-fixing conspiracy.

The suit accuses the companies' jointventures-Motiva Enterprises and EquilonEnterprises-as being part of a plan by theoil giants to inflate fuel prices beginning in1998 and ending as early as 2001, whenTexaco sold its stake to win approval of itspurchase of Chevron.

Judge Stephen Reinhardt, while noting thatTexaco and Shell charged the same forgasoline after the formation of the jointventures, ruled that "the very purpose of thealliance was to eliminate competition inorder to realize efficiency gains and gainmarket share."

Reinhardt, in a 2-1 ruling, said it was up to ajury to decide whether two competitors thatagreed to charge the same for gasolinecreated the alliance "to restrict competition."

Between September 1998 and February1999, when crude oil was at historic lows of$10 to $12 per barrel, Equilon increased theShell and Texaco brands 40 cents per gallonin Los Angeles and 30 cents in Seattle andPortland, Reinhardt said.

U.S. District Judge George King dismissedthe case in 2002, which was brought by23,000 gasoline vendors. King ruled that ajury could not find that the companies"formed Equilon and Motiva merely toachieve an ulterior anticompetitive purposeor that the ventures are patentlyanticompetitive."

In a sharp dissent Tuesday, Judge FerdinandFernandez agreed.

A lawyer for the vendors, Daniel Shulman,said the companies fixed prices in violationof federal law.

"They're not allowed to do that," he said.

The distributors, he said, paid $1 billion ormore in excessive charges, which they willseek to recoup. "They are either going topay or we're going to litigate it," he added.

While the distributors passed the allegedexcess costs to consumers, antitrust lawallows them to recover the illegal fees,Shulman said.

If the vendors prevail, consumers are noteligible for refunds, said Joseph Alioto,another attorney for the vendors.

Jeff Moore, a spokesman for San Ramon-based ChevronTexaco, said the oil concernis "confident, when this matter is finallyresolved, it will be determined that the jointventure formed by Texaco and Shell, whichreceived regulatory approval by the FederalTrade Commission after extensive review,and was also approved by several stateattorneys general, never violated anyantitrust laws."

Cameron Smyth, a spokesman for Houston-based Shell-the U.S. branch of theDutch/Shell Group, said the company wasreviewing the decision and had no comment.

The case is Dagher v. Motiva Enterprises,02-56509.

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"Gas Pains; L.A. Lawyer Tom Bleau TakesService Station Woes to the Court"

New Times Los AngelesNovember 30, 2000

Bob Burtman

Tom Bleau takes his work personally. TheLos Angeles lawyer represents service-station dealers in California, and he hasdifficulty suppressing his outrage at theirplight. "When they're on the brink," Bleausays, the companies "push up theirprices."Bleau filed two federal lawsuitsagainst the Shell-Texaco joint venture, andhe recently won a crucial injunction in oneof them after dealers were presented withnew leases that essentially guaranteed theirdemise. The injunction prevents thecompany from terminating dealers whorefuse to sign until the court case isresolved. "No dealer in his right mind wantsto sign these leases," he says.

It's not easy to sue a major oil company, nomatter how obvious the transgression. Witha seemingly unlimited legal budget, a Shellor an Exxon can throw banks of lawyers andother resources at a case that the cash-strapped dealers can't possibly afford tomatch. Even when the dealers' attorneyworks on contingency, the company candelay and obfuscate for years with relativeimpunity. In a still unresolved 1991 federalclass-action case filed in Miami againstExxon, for example, the list of motionsalone ran more than 100 pages.

Invariably the companies request thatdocuments and testimony produced in adealer case be sealed, claiming that therelease of proprietary information coulddamage their business. In the event thecases settle, the seal becomes permanent.Alabama attorney Jim Gunther would loveto share documents from his cases against

BP, but he can't. "I've got smoking-gun kindof evidence," Gunther says, "but they putthat "confidential' stamp on everything."

Smoking guns rarely escape the files, butmore are emerging, including a damagingdeposition by a former Shell marketingexecutive in a Miami case. The testimonyindicates that while the dealers thought theywere getting a break on rent if they soldmore gallons under the rent rebate program,the company was making it back bycharging them more for gas. The hiddenrent component in their wholesale gas pricehas been the basis for one of many fraudcharges against Shell.

That deposition has now made its way toother states. A judge in an Indiana casebecame so incensed by Shell's consistentrefusal to obey the rules and producedocuments as ordered that he allowed a legalteam from Texas to travel to Indianapolisand copy whatever it wanted from the casefile (though the material is still officiallysealed).

Lawyers for the dealers generally have takenthe shotgun approach in suits, tossing asmany charges as possible into every caseand seeing if anything sticks. Results todate have been decidedly mixed. Some ofthe Shell suits seem to be gainingmomentum, and the dealers have won a fewscattered victories, but a recent verdict in aSan Diego Chevron case may have a chillingeffect on future litigation. A group of 22California dealers won $3.4 million fromChevron in 1995 after a jury found the

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company illegally manipulated prices topressure the dealers financially. But a three-judge panel overturned the verdict, and ajudge recently awarded Chevron itsattorney's fees, which total $6.8 million.Most of the dealers, bled dry after the eight-year battle, will have to declare bankruptcy.

Another remedy for dealers can be found inCongress. The federal Petroleum MarketingPractices Act was designed to protectdealers from predatory practices, but the lawhas proved easy to dodge. Antitrust lawsprovide some protection, and the disparity inWest Coast gas prices has spurred a FederalTrade Commission investigation.Democratic U.S. Senator Barbara Boxer ofCalifornia has been especially active incalling for federal intervention. "Some bigoil companies appear to have embarked onan all-out campaign to drive their ownfranchisees out of business in an effort totighten their stranglehold over California'sgasoline industry," Boxer wrote in a letter toFTC chairman Robert Pitofsky.

As the oil companies like to point out,however, investigations usually die on thevine. Millions in campaign contributionsand hordes of lobbyists flooding legislativehallways probably help. In California, forexample, the major oil companies and theirtrade groups have spent more than $4.7million on lobbying alone since thebeginning of 1999. As Chevron spokesmanJack Coffey hinted recently, the money isspent "to be sure our business opportunitiescan continue in the way we want them tocontinue."

The state and local levels seem to providemore opportunities for dealer relief. Sixstates and Washington, D.C., havedivorcement laws on the books, whichgenerally prohibit refiners from running

their own retail outlets. San Francisco andSan Diego came close to passingdivorcement ordinances the last couple ofyears, though furious lobbying beat themback at the eleventh hour-the San DiegoCounty Board of Supervisors approved adivorcement bill in 1998 but withdrew itafter an industry trade group sued the boardfor $50 million.

Statewide initiatives have met similarresistance. Democratic state Senator StevePeace of San Diego sponsored an "opensupply" bill in 1999 that would have alloweddealers to buy gas from any wholesalerselling the same brand (currently, they mustbuy directly from the company at whateverprice the company sets). The bill passed theSenate but died in the Assembly Utilitiesand Commerce Committee-thanks to SouthCentral L.A. Democrat Roderick Wright, thecommittee's chairman, who refused to bringit to a vote. Last May a state task force onCalifornia's high gas prices recommendedboth divorcement and open supply asremedies, but no such legislation has yetappeared on the horizon.

Given the cool climate for reform, the courtsremain the likeliest avenue for the dealers intheir fight for survival. They recognize thelong odds of going to war with Goliath,though most say all they really want is to bebought out at a fair price or compensated fortheir years of service. "I'm just trying tominimize my losses as much as I can," saysL.A. Shell dealer Fred Dagher, a plaintiff inboth Bleau lawsuits.

But unless they're brought to their knees incourt, the companies aren't likely to pay upvoluntarily. As a Shell motion in a Texascase clearly states, "Shell does not owe aduty of good faith and fair dealing toplaintiffs."

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Illinois Tool Works Inc. v. Independent Ink, Inc.

(04-1329)

Case Below: (Independent Ink, Inc. v. Illinois Tool Works, Inc., 396 F.3d 1342 (Fed. Cir. 2005),cert. granted, 125 S. Ct. 2937, 73 U.S.L.W. 3733 (U.S. June 20, 2005)(No. 04-1329)).

Illinois Tool was sued by a competing ink manufacturer claiming a violation of the Sherman Act.Illinois Tool requires users of its patented printheads to purchase non-patented ink from them aswell. The U.S. District Court for the Central District of California granted summary judgmentfor the defendant because plaintiff had not shown that defendant had market power over thetying product. The Federal Circuit reversed, saying there is a rebuttable presumption of marketpower in patent tying cases.

Question Presented: Whether, in an action under Section 1 of the Sherman Act, 15 U.S.C. § 1,alleging that the defendant engaged in unlawful tying by conditioning a patent license on thelicensee's purchase of a non-patented good, the plaintiff must prove as part of its affirmative casethat the defendant possessed market power in the relevant market for the tying product, or marketpower instead is presumed based solely on the existence of the patent on the tying product.

INDEPENDENT INK, INC., Plaintiff-Appellant,V.

ILLINOIS TOOL WORKS, INC. and TRIDENT, INC.,Defendants-Appellees.

United States Court of Appealsfor the Federal Circuit

Decided January 25, 2005

[Excerpt: Some citations and footnotes omitted]

OPINION: DYK, Circuit Judge.

Independent Ink, Inc. ("Independent")appeals from the judgment of the UnitedStates District Court for the Central Districtof California in this patent tying antitrustaction. The district court granted summaryjudgment on plaintiff Independent'sSherman Act section I claim becauseIndependent had failed to produce anyevidence of market power over the tyingproduct. Indep. Ink, Inc. v. Trident, Inc.,

210 F. Supp. 2d 1155 (C. D. Cal. 2002). Wehold that a rebuttable presumption of marketpower arises from the possession of a patentover a tying product. Because no rebuttalevidence was submitted by the patentholder, we reverse the grant of summaryjudgment on the Sherman Act section Iclaim and remand for further proceedings.As to Independent's Sherman Act section 2claim, we affirm the district court's grant ofsummary judgment.

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BACKGROUND

Defendant Trident, Inc. ("Trident") is awholly-owned subsidiary of defendantIllinois Tool Works, Inc. ("ITW"). Tridentis a manufacturer of printheads and holds apatent over its printhead technology. SeeU.S. Patent No. 5,343, 226 ("the '226patent"). Printer manufacturers (the"OEMs") use Trident's printhead technologyto manufacture printers. The end users ofthe printers are usually productmanufacturers, who use the printers to placebar codes on cartons.

As disclosed by the '226 patent, ink jetdevices for printing bar codes consume alarge quantity of ink. The small cartridgestypical in other ink jet devices areimpractical for such applications. But theuse of a large supply of ink poses problemsfor transferring the ink from the container tothe printhead. . . . The '226 patent disclosesan ink jet device and supply system using ahand actuated peristaltic pump. The use ofhand pumping overcomes the usualcomplexity and expense of such devices.

Trident also manufactures ink for use withits patented printheads. Trident's standardform licensing agreement allowing theOEMs to use its patented product requires"OEMs to purchase their ink for Trident-based systems exclusively from Trident."(Br. of Appellees at 8.) Specifically, thelicensing agreement grants the right to"manufacture, use and sell ink jet printingdevices supplied by Trident" only "whenused in combination with ink and ink supplysystems supplied by Trident." (J. A. at 275.)There is now no claim that the ink isprotected by any of Trident's patents. Wethus have an explicit tying agreementconditioning the sale of a patented product(the printhead covered by the '226 patent

[and possibly other patents as well]) on thesale of an unpatented one (the ink).

Independent is a competing manufacturer ofink. It manufactures ink usable in Trident'sprintheads. Independent filed suit in theUnited States District Court for the CentralDistrict of California on August 14, 1998,initially seeking a declaratory judgment ofnon-infringement and invalidity againstTrident's patents. Independent subsequentlyamended its complaint to allege that Tridentwas engaged in illegal tying andmonopolization in violation of sections Iand 2 of the Sherman Act, 15 US C. § 1 etseq. Both parties moved for summaryjudgment as to the section I claim, andTrident moved for summary judgment as tothe section 2 claim. The district courtgranted summary judgment in favor ofTrident on both claims.

The district court held that for patent tyingto constitute a violation of the antitrust laws,the plaintiff must affirmatively prove marketpower. Indep. Ink, 210 F. Supp. 2d at 1162.The district court, in a footnote, dismissedseveral Supreme Court cases holding to thecontrary as "vintage," Id. at 1165 n. 10.Addressing the Supreme Court's more recentdecision in Jefferson Parish HospitalDistrict No. 2 v. Hyde, 466 US. 2, 16, 80 L.Ed. 2d 2, 104 S. Ct. 1551 (1984), it declinedto follow the rule announced by the majorityin that case that "the sale or lease of apatented item on condition that the buyermake all his purchases of a separate tiedproduct from the patentee is unlawful."Instead, relying on the concurring opinion inJefferson Parish, the dissent from a denial ofcertiorari by two members of the JeffersonParish majority, and academic criticisms ofthe presumption of market power, thedistrict court dismissed the majority opinionof Jefferson Parish as dictum that should not

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be followed. Indep. Ink 210 F Supp. 2d at1164-65. The district court found thatIndependent submitted no affirmativeevidence defining the relevant market norproving Trident's power within it, andtherefore could not prevail in either antitrustclaim. Id. at 1173-77.

The parties settled all their remainingclaims, which were accordingly dismissedwith prejudice, and final judgment wasentered. This appeal followed. Because thecomplaint originally contained a claim fordeclaratory judgment of invalidity and non-infringement of the '226 patent, we havejurisdiction pursuant to 28 US.C. §'1295(a)(1).

DISCUSSION

I

The first issue before us is whether FederalCircuit or Ninth Circuit law governs thelegality of patent tying under the ShermanAct, an issue which may arise both in thecontext of affirmative claims (as here) andin the context of a patent misuse defense.We have previously held that where anaffirmative antitrust claim or antitrustmisuse defense is based on "procuring orenforcing a patent," the central antitrustquestion is a matter governed by FederalCircuit law. Nobelpharma AB v. ImplantInnovations, Inc., 141 F.3d 1059, 1067-68(Fed Cir. 1998) (en banc in relevant part).We conclude that the antitrust consequencesof patent tying likewise is a questiongoverned by our law. However, as stated inNobelpharma, "we will continue to apply thelaw of the appropriate regional circuit toissues involving other elements of antitrustlaw," such as defining the relevant marketand determining as a factual matter whetherpower exists within that market. Id. at 1068.

II

We now address the Sherman Act section Iclaim. This case first requires us todetermine whether patent tying is illegal perse (or presumptively illegal) under theSherman Act, or whether the plaintiff isobliged to prove as part of its affirmativecase that the patent confers market power inthe relevant market for the tying product.

This case comes to us with a long history ofSupreme Court consideration of the legalityof tying arrangements. Earlier SupremeCourt cases dealing with tying agreementswere extremely hostile to them, whether thecase involved intellectual property or othertying products. The first case that foundtying to violate section I of the Sherman Actwas a patent tying case. Int'l Salt Co. vUnited States, 332 US. 392, 92 L. Ed 20, 68S. Ct. 12 (1947). n5 In Standard Oil Co. v.United States, 337 US. 293, 305, 93 L. Ed.1371, 69 S. Ct. 1051 (1949), the Courtcommented that "tying agreements servehardly any purpose beyond the suppressionof competition.". . .

Later Supreme Court cases reflecteddivergent treatment, depending on whetherstatutory intellectual property was involved.Those cases not involving patents orcopyrights refined the test, holding thattying was only unlawful if the defendant had"market power" in the market for the tyingproduct. As articulated in United StatesSteel Corp. v. Fortner Enterprises, Inc., 429U.S. 610, 620, 51 L. Ed. 2d 80, 97 S. Ct. 861(1977) ("Fortner II"), this requirement of"market power" necessitated an inquiry into"whether the seller has the power, within themarket for the tying product, to raise pricesor to require purchasers to acceptburdensome terms that could not be exactedin a completely competitive market." The

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requirement of demonstrating sufficientmarket power to raise prices was notablymore onerous than the Northern Pacificrequirement that there be some power to"appreciably restrain free competition."

The Supreme Court further explained therequirement for market power in the 1984Jefferson Parish decision, which involved anagreement requiring patients of a hospital touse a particular anesthesiology firm. TheCourt stated that "certain tying arrangementspose an unacceptable risk of stiflingcompetition." 466 U.S. at 9. But the"unacceptable risk of stifling competition"arises, and consequent liability attaches,only if there is anticompetitive "forcing."As explained by the Court:

The essential characteristic ofan invalid tying arrangementlies in the seller's exploitation ofits control over the tyingproduct to force the buyer intothe purchase of a tied productthat the buyer either did notwant at all, or might havepreferred to purchase elsewhereon different terms. When such"forcing" is present,competition on the merits in themarket for the tied item isrestrained and the Sherman Actis violated.

Id. at 12. The requirement of proving"forcing" or "market power" in cases notinvolving intellectual property necessitates adefinition of the market in which suchpower is alleged to exist and showing an"actual adverse effect on competition." Id.at 29-31. The Supreme Court reaffirmed therequirement of market power in such casesin Eastman Kodak Co. v. Image TechnicalServices, 504 U.S. 451, 462, 119 L. Ed 2d265, 112 S. Ct. 2072 (1992), where it held

that tying "violates l 1 of the Sherman Act ifthe seller has 'appreciable economic power'in the tying product market and if thearrangement affects a substantial volume ofcommerce in the tied market."

The Court's treatment of tying cases whenthe tying product is patented or copyrighted,however, has been more consistent. In the1947 International Salt case, the defendantheld patents over "machines for utilizationof salt products." 332 US. at 394. It leasedthese machines on the condition that thelessee purchase from the defendant "allunpatented salt and salt tablets consumed inthe leased machines." Id. The SupremeCourt held that this arrangement violated theSherman Act, holding that "the patentsconfer no right to restrain use of, or trade in,unpatented salt." Id. at 395-96. The Courtfound that by tying the lease of machines tothe purchase of salt, and "contracting toclose this market for salt againstcompetition, [the defendant] engaged in arestraint of trade for which its patents affordno immunity from the antitrust laws." Id. at396. The Court made no inquiry of thedefendant's market power, finding that "theadmitted facts left no genuine issue. . . . Thetendency of the [patent tying] arrangementto accomplishment of monopoly seemsobvious." Id.

In United States v. Loew's, Inc., 371 U.S. 38,9 L. Ed 2d 11, 83 S. Ct. 97 (1962), relyingon International Salt, the Court made clearthat, where the tying product is patented orcopyrighted, market power may bepresumed rather than proven. Loew'sinvolved the tying of less popular films topopular copyrighted films by moviedistributors in their licenses to televisionstations. The Court stated that in tying casesnot involving intellectual property the"standard of illegality is that the seller musthave sufficient economic power with respect

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to the tying product to appreciably restrainfree competition in the market for the tiedproduct." Id. at 45. However, "the requisiteeconomic power is presumed when the tyingproduct is patented or copyrighted." Id.The Loew's Court confirmed that patenttying is a distinct doctrine when it noteddefendants' argument "that their behavior isnot to be judged by the principle of thepatent cases . . . but by the general principleswhich govern the validity of tyingarrangements of nonpatented products." Id.at 48. The Loew's Court also stated that itneeded not inquire into whether thedistributors had market power. "The merepresence of competing substitutes for thetying product . . . is insufficient to destroythe legal, and indeed the economic,distinctiveness of the copyrighted product."Id. at 49.

The subsequent Supreme Court cases thathave required proof of market power intying cases not involving intellectualproperty have consistently reaffirmed theholdings of International Salt and Loew'sthat no proof of market power is necessaryin patent or copyright tying cases. TheFortner II Court in 1977 expressly restatedthe presumption of market power in cases ofpatent tying, stating that "the statutory grantof a patent monopoly in [international Salt]. . . represented tying products .

sufficiently unique to give rise to apresumption of economic power. 429 US.at 619. Likewise, the Jefferson Parish Courtin 1984 stated that "if the Government hasgranted the seller a patent or similarmonopoly over a product, it is fair topresume that the inability to buy the productelsewhere gives the seller market power."466 U.S. at 16.

In sum, the Supreme Court cases in this areasquarely establish that patent and copyrighttying, unlike other tying cases, do not

require an affirmative demonstration ofmarket power. Rather, International Saltand Loew's make clear that the necessarymarket power to establish a section Iviolation is presumed. The continuedvalidity of International Salt and Loew's asbinding authority, and the distinctionbetween patent tying and other tying casesthat was articulated in Loew's, have beenconsistently reaffirmed by the Court eversince.

IV

The defendants argue . . . that InternationalSalt and Loew's are no longer good law.They offer three theories in support of thiscontention. First, they point to WalkerProcess, where the Court stated in a patentantitrust case that it was "reluctant to extend[per se illegality] on the bare pleadings andabsent examination of market effect andeconomic consequences." 382 U.S. at 178.But Walker Process was a section 2 caseasserting claims of monopolization, not asection I claim for tying. Moreover, thegravamen of Walker Process was theinappropriate obtaining of the patent, id at174, not the extension of that patent beyondits terms to an unpatented article through atying arrangement, see Int'l Salt, 332 U.S. at395-96. We conclude that Walker Processdoes not articulate a rule applicable to patenttying cases.

The defendants next point to JusticeO'Connor's concurrence in Jefferson Parish,which was joined by Chief Justice Burger,Justice Powell and then-Justice (now ChiefJustice) Rehnquist, stating that it is a"common misconception . . . that a patent orcopyright . . . suffices to demonstrate marketpower." 466 U.S. at 37 n. 7 (O'Connor, J.,concurring). Defendants argue that the 1984

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Jefferson Parish concurrence, coupled witha dissent in the following year joined by twomembers of the Jefferson Parish majority,imply that a then-majority of the Courtindicated that International Salt and Loew'swere no longer good law. The district courtrelied on this reasoning. Indep. Ink, 210 F.Supp. 2d at 1164-65. It is not persuasive.Justice White's opinion in Data General,joined by Justice Blackmun, did notexpressly contradict International Salt,Loew's, Jefferson Parish, or opine that ashowing of market power was required inpatent and copyright tying cases. JusticeWhite noted that the court of appeals"viewed [a] copyright . . . as creating apresumption of market power, andseemingly concluded that forcing power issufficiently established to demonstrate perse antitrust liability if some buyers find thetying product unique and desirable." DataGen., 473 U.S. at 909. The only conclusionJustice White drew was that the case raised"several substantial questions of antitrustlaw and policy, including . . . what effectshould be given to the existence of acopyright or other legal monopoly indetermining market power." Id. This hardlyamounts to a repudiation of the presumptionof market power. More importantly, thedistrict court's practice of "nose-counting,"as one sister circuit has called it, Felton v.Sec', United States Dep't of Educ., 739F.2d 48, 72 25 n. (2d Cir. 1984), is "apastime in which we do not commonlyengage." United States v. Curcio, 712 F 2d1532, 1542 (2d Cir. 1983).

The defendants finally point to the numerousacademic articles criticizing the SupremeCourt cases relying on a presumption ofmarket power in patent and copyright cases.We recognize that the Supreme Courtprecedent in this area has been subject toheavy criticism....

The fundamental error in all of defendants'arguments is that they ignore the fact that itis the duty of a court of appeals to follow theprecedents of the Supreme Court until theCourt itself chooses to expressly overrulethem. This message has been conveyedrepeatedly by the Court. The Court's"decisions remain binding precedent until[it] sees fit to reconsider them, regardless ofwhether subsequent cases have raised doubtsabout their continuing vitality." Hohn v.United States, 524 U.S. 236, 252-53, 141 L.Ed. 2d 242, 118 S. Ct. 1969 (1998). "If aprecedent of the Court has direct applicationin a case, yet appears to rest on reasonsrejected in some other line of decisions, theCourt of Appeals should follow the casewhich directly controls, leaving to the Courtthe prerogative of overruling its owndecisions." Rodriguez de QuUas v.Shearson/American Express, Inc., 490 U.S.477, 484, 104 L. Ed. 2d 526, 109 S. Ct 1917(1989). Even where a Supreme Courtprecedent contains many "infirmities" andrests upon "wobbly, moth-eatenfoundations," it remains the "Court'sprerogative alone to overrule one of itsprecedents." State Oil Co. v. Khan, 522 U.S.3, 20, 139 L. Ed. 2d 199, 118 S. Ct. 275(1997). None of the authorities thatdefendants present, whether it be thelanguage of Walker Process, theconcurrence in Jefferson Parish, or thedissent from denial of certiorari in DataGeneral, constituted an express overrulingof International Salt or Loew's. Weconclude that the Supreme Court has heldthat there is a presumption of market powerin patent tying cases, and we are obliged tofollow the Supreme Court's direction in thisrespect. The time may have come toabandon the doctrine, but it is up to theCongress or the Supreme Court to make thisjudgment.

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V

We must therefore address the scope of therule announced by the Supreme Court'spatent and copyright tying cases.Independent submits that underInternational Salt and its progeny, patenttying is per se illegal in every case andmarket power is irrebuttably presumed. Inthis area, unfortunately, there is no SupremeCourt case directly addressing the issue, andwe are required to ascertain the rule fromdictum. Loew's expressly stated that "theremay be rare circumstances in which thedoctrine we have enunciated under § I of theSherman Act prohibiting tying arrangementsinvolving patented or copyrighted tyingproducts is inapplicable." 371 U.S. at 49-50.Jefferson Parish confirmed thatInternational Salt created only apresumption of market power: "If theGovernment has granted the seller a patentor similar monopoly over a product, it is fairto presume that the inability to buy theproduct elsewhere gives the seller marketpower." 466 U.S. at 16 (emphasis added).It would stretch the language of "fair topresume" beyond the breaking point to saythat such a presumption is irrebuttable. Weare obliged to follow such clearly articulatedSupreme Court dicta.

Other circuits have similarly interpreted theSupreme Court's patent and copyright tyingcases to create a rebuttable presumption ofmarket power. See, e.g., Digidyne Corp. v.Data Gen. Corp., 734 F.2d 1336, 1344 (9thCir. 1984) (Copyright "created apresumption of economic power sufficientto render the tying arrangement illegal perse.) The burden to rebut the presumptionshifted to defendant.

Thus, a patent presumptively defines therelevant market as the nationwide market forthe patented product itself, and creates a

presumption of power within this market.Once the plaintiff establishes a patent tyingagreement, it is the defendant's burden torebut the presumption of market power andconsequent illegality that arises from patenttying.

VI

The district court found that, even if therewas a presumption of market power inpatent tying cases, any presumption of market power was rebutted in this case because

it is undisputed that consumerscould place bar-coded labels ontheir products before othercompetitors manufactured bar-coding printers, and Plaintiffdoes not establish that thevarious labeling systems are notproper substitutes forDefendants' printhead system ordispute Defendants' argumentsthat they are. Moreover . . . at

least two other competitors . . .have designed printheads thatcan print bar codes on kraftpaper. The fact that [twocompetitors] have done soindicates that any barriers toentry, such as R & D andmanufacturing costs, are not sogreat as to prevent competitorsfrom entering the market.

Indep. Ink., 210 F Supp. 2d at 1167. Thedefendants argue that the district court wascorrect because there is testimony here bythe president of an OEM that consumers uselabels as substitutes for Trident's printheadtechnology, (J. A. at 983), and it isundisputed that two competitors offercompeting printheads.

However, "the mere presence of competing

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substitutes for the tying product . . . isinsufficient to destroy the legal, and indeedthe economic, distinctiveness of the[patented] product." Digidyne, 734 F.2d at1345 (quoting Loew's, 371 U.S. at 49).Rather, the definition of a market requirescareful consideration of both the product andgeographic markets. Bhan v. NME Hosp.,Inc., 929 F.2d 1404, 1413 (9th Cir. 1991).The presumption can only be rebutted byexpert testimony or other credible economicevidence of the cross-elasticity of demand,the area of effective competition, or otherevidence of lack of market power. On thepresent record there is not sufficientevidence to rebut the presumption of marketpower resulting from the patent itself, or tocreate a genuine issue of material fact on theissue.

Accordingly, we reverse the district court'sgrant of summary judgment on the ShermanAct section I claim. Because plaintiffssummary judgment motion appeared to restentirely on a theory that the presumption ofmarket power is irrebuttable, we remand tothe district court to permit defendants anopportunity to supplement the summaryjudgment record with evidence that mayrebut the presumption. Should thedefendants on remand fail to presentsufficient relevant evidence to create agenuine issue of material fact as to whetherthe presumption has been rebutted, partialsummary judgment on liability under sectionI of the Sherman Act should be granted.

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"High Court to Re-Evaluate Precedent Affecting Antitrust Law"

The RecorderJune 21, 2005Tony Mauro

The U.S. Supreme Court on Monday agreedto consider overturning a 43-year-oldprecedent that has been interpreted to makeit easy for competitors to sue patent holdersfor antitrust violations.

In agreeing to hear the case of Illinois ToolWorks v. Independent Ink in the fall, thecourt was responding to pleas by majorpatent holders as well as the AmericanIntellectual Property Law Association andthe American Bar Association on behalf ofits 9,000 antitrust lawyer members and its19,000 intellectual property members.

The Bush administration has not weighed inyet, but in a recent speech, AssistantAttorney General for Antitrust R. HewittPate said the case provided a "goodopportunity" to resolve an importantantitrust issue. Andrew Pincus of Mayer,Brown, Rowe & Maw, lawyer for IllinoisTool, informed the court of Pate's June 3speech.

"This is an important case at the intersectionof patent and antitrust law," Pincus said onMonday. "It is increasingly significant asour economy is driven more and more byintellectual property."

Under the 1962 ruling United States v.Loew's Inc., the fact that a defendant holds apatent on a product creates a presumptionthat it exerts enough power over themarketplace to be guilty of illegal "tying"under the Sherman Act.

Illegal tying occurs when a companyrequires customers who want one of its

products to buy another one. Thepresumption makes it easier to make tyingclaims and get them to trial when the targetof the claim is a patent holder.

In the case before the court, Illinois ToolWorks is accused of requiring customers tobuy its ink when they buy its patented"printheads," which are used to apply barcodes onto packaging. Independent Ink,which markets compatible inks, made aSherman Act tying claim against IllinoisTool, invoking the Loew's precedent. Ajudge in the U.S. District Court for theCentral District of California sided withIllinois Tool, but the Federal Circuit U.S.Court of Appeals reversed.

In the circuit ruling, Judge Timothy Dyksaid that even if the Loew's decision restedon "wobbly, moth-eaten foundations" thathave been overtaken by market realities, hiscourt is still bound by the Supreme Courtprecedent that created the presumption. Dykadded that it is up to the Supreme Court, notlower courts, to overturn one of itsprecedents, and up to Congress to changethe law if it wants to.

In his brief for the American IntellectualProperty Law Association, Patrick . . . saysthe Federal Circuit ruling conflicts withdecisions by the Sixth and Seventh Circuits,a conflict that reflects growing disagreementover the basis of the presumption.

"The mere issuance of a patent does notconvey market power in a relevant market,except in very rare cases," Coyne wrote.

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"Asserting Old Standard in Patent-Tying Case"

National Law JournalFebruary 28, 2005

Pamela A. MacLean

After a decade of reluctant flirting betweenthe antitrust and patent bars, the U.S. Courtof Appeals for the Federal Circuit acted asmatchmaker recently to the arrangedmarriage of lawyers in both specialties.

And the progeny may be something only aplaintiffs' lawyer would love.

The Federal Circuit put a stop to the slowdrift of legal commentators and a smatteringof federal courts away from the SupremeCourt notion that patents confer marketpower in tying cases. The court forcefullyreasserted a long-standing Supreme Courtprecedent that the burden of proof falls tothe defendant patent holder to show lack ofmarket power in an antitrust suit allegingillegal product tying of a patented product.

Traditional antitrust cases not involvingintellectual property obligate the plaintiff toshow that a defendant company possessesthe market power to affect prices and limitthe ability to compete. In this case, theFederal Circuit made clear that it is thedefendant's duty to rebut a presumption ofmarket power based on the ownership of apatent. Wrote Judge Timothy Dyk: "Once aplaintiff established a patent tyingagreement, it was the defendant's burden torebut the presumption of market power andconsequent illegality that arose from patenttying," Independent Ink Inc. v. Illinois ToolWorks, No. 04-1196.

The decision of Jan. 25 rebuffs a host oflegal commentators and smattering of judgesaround the country who have suggested in

recent years that the Supreme Court's 20-year-old precedents on market power arehopelessly out of date and have been all butabandoned.

That all changed with the Independent Inkdecision.

"I expect that the presumption of marketpower has been the dirty linen of circuitfolklore," said Herbert Hovenkamp, aprofessor at the University of Iowa Collegeof Law. "Courts have bent over backwardsto distinguish [the presumption] away.

"There have been very few cases in the last10 years that based a presumption-of-market-power conclusion solely on the factthat a product was patented. I expect therewill be more now. The Federal Circuit hasbreathed new life into this," saidHovenkamp, who has written extensively onthe need for the Supreme Court to update itsthinking on patent tying and market power.

"This is not a rational presumption," headded. "It grew out of a time when theSupreme Court was hostile to patents. Thecourt assumed that if you had a patent youhad a monopoly," he said.

The Jefferson Parish precedent

If the ruling is appealed, it could open theway for the Supreme Court to confront forthe first time the meaning of a rebuttablepresumption of market power in a patent-tying case and to potentially re-examine its1984 decision on market power. Jefferson

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Parish v. Hyde, 466 U.S. 2 (1984).

In that case, Justice Sandra Day O'Connorstated in a footnote in a concurring opinionsigned by three other justices that it is a"common misconception . . . that a patent orcopyright . . . suffices to demonstrate marketpower."

Jefferson Parish and a subsequent decisionby the court one year later with similarlanguage has been the slender reed used formuch of the commentary and some courtrulings pushing away from the presumptionthat patent holders enjoy market power.

Among those who have suggested that thepower of the patent is overrated has beenJudge Richard A. Posner of the 7th Circuit.He wrote in a 2001 article, "Most patentsconfer too little monopoly power to be aproper object of antitrust concern. Somepatents confer no monopoly power at all."

Hovenkamp wrote last year, "Most patentsconfer absolutely no market power on theirowners. . . . The economic case forpresuming sufficient market power . . .simply because the tying product is patented. . . is very weak."

Not so fast, came the response inIndependent Ink.

"The time may have come to abandon thedoctrine, but it is up to the Congress or theSupreme Court to make this judgment," Dykwrote.

Patents and antitrust law make for a legalodd couple. Antitrust law is intended toprotect and foster competition, while patentscreate a temporary monopoly for the owner.

Patent specialist Dennis Crouch of

McDonnell Boehnen Hulbert & Berghoff inChicago said the majority of patent casesnow also involve an antitrust claim. "Whensomeone is sued for infringement, thedefendant shoots back a counterclaim thatthe plaintiff improperly used the patent andviolated antitrust law."

This has prompted closer ties betweenantitrust and patent practitioners, both insidecompanies and in private practice, Crouchsaid.

In this case, Illinois Tool Works Inc. and itssubsidiary, Trident Inc., license a patenteddevice that prints bar codes on corrugatedboxes. Illinois Tool required users of itspatented printhead to use it in combinationwith the company's ink and ink supplysystems.

Independent Ink sought a declaratoryjudgment in 1998 that it did not infringe theIllinois Tool patents. That was followed byTrident's filing of a patent infringement suit.Independent Ink responded with a claim thatTrident orchestrated an illegal tyingarrangement, restraining trade, in violationof § I of the Sherman Antitrust Act.

Companies create tying arrangements whena seller ties the purchase of one product withthe obligation to buy a second product; inthis case the purchase of a patentedprinthead was tied to buying ink made bythe same firm.

U.S. District Judge Nora Manella of LosAngeles dismissed Independent Ink's claimsin a summary judgment in 2002. TheFederal Circuit overturned her decision andreinstated Independent Ink's § 1 ShermanAntitrust Act claim over tying the purchaseof printheads and ink. The panel gaveinstructions to allow Illinois Tool to rebut

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the market power presumption, if it could.

Precedent was never revoked

Edward O'Connor, attorney for IndependentInk, insisted that the Federal Circuit simplyreaffirmed a doctrine that is wellestablished. "The commentators are sayingthe doctrine is dead or doesn't exist and haveextrapolated from the Patent Misuse ReformAct. But the precedent was never revokedby the Supreme Court."

Patent and copyright holders can bejustifiably nervous because the potentialcosts can be enormous. Violations ofantitrust law carry treble damages.

O'Connor pointed out that his case involvesgross sales of the tied product, the ink, for10 years. "When you start adding it upyou're talking about hundreds of millions ofdollars," he said.

"[The defendants] will probably try to take itto the Supreme Court, but if the courtreversed, it would have to reverse threeSupreme Court decisions," said O'Connor ofO'Connor, Christensen & McLaughlin inIrvine, Calif.

Illinois Tool's attorney, Jordan Sigale, apartner in the Chicago office ofSonnenschein Nath & Rosenthal, declined tocomment on a potential Supreme Courtappeal.

He did say, "Nobody believes, long term,this is a viable rule. The trend since the1970s has been to whittle back on per serules." He said the Department of Justiceand many people felt that the "SupremeCourt had moved away" from its 1984Jefferson Parish opinion.

"One way or another this is a short-term

blip, a glitch," Sigale said. "In the shortterm, businesses will be wary but in the longterm it will be corrected."

The Independent Ink decision set off redlights in the intellectual property bar.

Edward Filardi, who heads the antitrustcommittee of the American BarAssociation's Section of IntellectualProperty Law, said, "We are in the midst oflooking at this. My view is we will end upsupporting reversal of the [market power]presumption.

"It places too much burden on patentholders," said Filardi of Skadden, Arps,Slate, Meagher & Flom in New York.

"I think the policy and the writing of manythird parties and nonjudicial types hascreated a dynamic where people think thepractices are OK," said Alexander Hadjis, apatent specialist in the Washington office ofNew York-based Weil, Gotshal & Manges."There has been less focus on precedentthan the rationale by the parties."

"No matter how you look at this case, theFederal Circuit got it right. They had to dowhat they did," he said.

Whether the Supreme Court would evenconsider the case brought bets from bothsides.

Hal S. Shaftel of Proskauer Rose in NewYork, an antitrust litigator who handlespatent issues, said the appellate court "isspeaking at the intersection of severalcutting-edge issues on the role of patents inantitrust and the standards we are going toassess in tying practices."

Shaftel said that not long ago the SupremeCourt opted to defer a question of how tying

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practices may violate antitrust law. Theissue of rebuttable presumption may attractthe court, he said.

"But I think the likelihood is the court willallow, at the district court level, furtherpercolation of these issues. They may seehow courts start to scrutinize how a patentholder can rebut the presumption and howexacting a test is applied," Shaftel said.

Randal Picker, a University of Chicago LawSchool professor, said, "What you're seeingis an increasingly strong intersection ofpatent and antitrust." A number of yearsago, the antitrust bar became very concernedabout the Federal Circuit. "The FederalCircuit was patent friendly and antitrustunfriendly, and that gave you a broad shieldfrom antitrust actions," he said.

He suggested that the Supreme Court

probably should take the opportunity toreview the case and see if its precedent isoutdated.

Deborah A. Coleman, a litigation partnerwith Hahn Loeser + Parks in Cleveland whohas written about antitrust and infringementsaid, "The Federal Circuit has provided animportant service to those like me who aretrying to counsel IP rights owners in regardto restrictive terms in licensing contracts,since the inconsistency between the FederalCircuit decision and decisions of regionalcircuits may compel the Supreme Court tofinally weigh in to provide clarity."

Shaftel said that on a day-to-day basispractitioners will deal with the ruling bydeveloping the proof to rebut the assumptionof market power. "That's where thereactions to the decision are going tobecome apparent," he said.

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"What Antitrust Law May Tell Us about Abortion"

SCOTUSblogJuly 3, 2005

Tom Goldstein

In previous posts, we identified as the "mostimportant" cases of the Term several thatpresent hot-button social issues such asabortion. In light of Justice O'Connor'sretirement, the most overlooked case of theterm is a little-noticed antitrust case, IllinoisTool Works v. Independent Ink. The casepresents a somewhat esoteric issue-whether the tying of the sale of a patentedproduct to a non-patented product gives riseto a presumption that the seller has marketpower.

Despite the narrowness of the issueinvolved, Illinois Tool Works may provequite noteworthy because the answer to thatquestion is already very well settled. InInternational Salt Company v. United States(1947) and United States v. Loew 's (1962)the Supreme Court held that the answer is"yes," courts should presume market powerwhen a patented product is tied with a non-patented product.

The actual question presented by IllinoisTool Works is thus whether the SupremeCourt should overrule International Salt andLoew 's. The case will accordingly providethe Court with its most direct explicitopportunity in the near term to address thecircumstances in which one of its priorprecedents should be overruled or insteadadhered to as a matter of stare decisis.

To be sure, Illinois Tool Works is a

statutory case, and the standards for staredecisis in the statutory context traditionallydiffer from those in constitutional cases.The Supreme Court traditionally has beenmore willing to overrule constitutionalprecedents, which in contrast to statutorydecisions cannot be formally overruled byCongress.

Nonetheless, Illinois Tool Works remainsvery significant. As Marty Lederman'searlier post discussed, many significantstatutory precedents are potentially open tooverruling in light of Justice O'Connor'sretirement. For example, federal civil rightsand habeas corpus standards are almost allcreatures of statute rather than theConstitution. Moreover, the gap betweenthe Court's standards for overruling statutoryand constitutional precedents is not as greatas is sometimes thought, for the basicprinciple that the law should retain itscontinuity applies equally in both contexts.It was on that basis, for example, that theCourt in Planned Parenthood v. Casey votedto sustain Roe v. Wade and that the Court inthe Dickerson case voted to sustainMiranda.

So, the Court's willingness to overrule itsprior precedents in Illinois Tool Workscould serve as a bellwether for its opennessto revisiting a broad swath of law decidedover the past decade by narrow majoritiesthat included Justice O'Connor.

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Volvo Trucks North America v. Reeder-Simco GMC

(04-905)

Case Below: Reeder-Simco GMC, Inc., v. Volvo GM Heavy Truck Corp., 374 F.3d 701 (8th Cir.2004), cert. granted 125 S.Ct. 1596, 161 L.Ed.2d 276, 73 U.S.L.W. 3529 (U.S. March 7, 2005) (No.04-905).

Reeder-Simco GMC, a dealer in large trucks, sued Volvo under the Robinson-Patman Act (RPA),claiming that Volvo had engaged in price discrimination by providing larger price concessions toReeder's competitors. Dealers request price concessions from manufacturers when bidding on salesto third parties. The difference between concessions to separate dealers will affect the final price ofthe trucks. The Eighth Circuit affirmed the United States District Court for the Western District ofArkansas in ruling for Reeder. Volvo appeals, arguing primarily that Reeder is not a "purchaser"for purposes of the RPA.

Question Presented: The Robinson-Patman Act prohibits specified forms of price discrimination"between different purchasers" where the effect of "such discrimination" may be harm tocompetition "with any person who knowingly receives the benefit of such discrimination." Thequestion presented is: Whether an unaccepted offer that does not lead to a purchase-so that thereis not "discriminat[ion] between different purchasers" as the statutory language contemplates-maybe the basis for liability under the Act.

Reeder-Simco GMC, Inc., Appellee,V.

Volvo GM Heavy Truck Corporation, now known as Volvo TrucksNorth America, Inc., Appellant.

United States Court of Appealsfor the Eighth Circuit

Decided July 12, 2004

[Excerpt: Some footnotes and citations omitted]

OPINION: BYE, Circuit Judge. a commercially reasonable manner under theArkansas Franchise Practices Act (AFPA),

Volvo Trucks North America, Inc. (Volvo) Ark. Code Ann. § § 4-72-201 through 4-72-appeals from a judgment entered in the 209. We affirm.district court in favor of Reeder-SimcoGMC, Inc. (Reeder) on claims alleging Iunfair price discrimination under theRobinson-Patman Act (RPA), 15 U.S.C. § This is an appeal from the denial of a motion13, and a failure to deal in good faith and in for judgment as a matter of law (JAML)

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following a jury verdict; consequently werecite the evidence in the light mostfavorable to the verdict holder, Reeder. SeeJones v. Swanson, 341 F.3d 723, 731 (8thCir. 2003).

Reeder sells new and used trucks, includingheavy-duty trucks, out of a dealershiplocated in Fort Smith, Arkansas. Volvomanufactures a broad line of heavy-dutytrucks for both over-the-road and vocationaluse (dump trucks, mixer trucks, etc.). In1995, Reeder signed a franchise agreementwith Volvo to become an authorized Volvotruck dealer for a five-year term expiringMarch 31, 2000. The agreement providedfor automatic one-year extensions of thefranchise if Reeder met certain salesobjectives established unilaterally by Volvo.

The majority of heavy-duty trucks sold bydealers are manufactured only after a retailcustomer has solicited and accepted bidsfrom several dealers. During thiscompetitive bidding process, dealers seekconcessions from Volvo for a price belowthe initial wholesale price (80% of thepublished retail price) which then allows thedealers to offer lower prices to theircustomers. This is an industry-widepractice. To remain competitive with othertruck manufacturers, Volvo does not revealits method of calculating concessions. Thecrux of this case is Reeder's claim thatVolvo gave other dealers more favorableprice concessions than Volvo grantedReeder, which concomitantly reducedReeder's profits on successful bids andincreased the number of Reeder'sunsuccessful bids.

Reeder filed this action in February 2000alleging Volvo violated the RPA and AFPAand tortiously interfered with Reeder'scontracts....

Reeder presented the following evidence attrial. In December 1997, Volvo announcedthe "Volvo Vision" in an email distributed toits dealers, including Reeder. The email hada list of Volvo's challenges, which included"too many dealers" and "under performingdealers." App. 576. The Volvo Visioncalled for "fewer dealers, larger markets."Id. The email further indicated Volvowanted to more than double the averagemarket size of its dealers and decrease thenumber of dealer owners from 146 to 75.

In March 1998, Volvo held its annual NorthAmerican Dealer Conference in MarcoIsland, Florida. Marc Gustavson, a Volvoexecutive, was the conference's keynotespeaker. He elaborated on the Volvo Visionby indicating 50% of current Volvo truckdealers would not be in business in the nextfew years. Unlike Volvo's past annualdealer conferences, where Volvo featuredmotivational speakers who got dealers"revved up" to sell more trucks, id. at 1119,the featured guest speaker of the 1998conference was Jon Krakauer, author of IntoThin Air: A Personal Account of the Mt.Everest Disaster. Krakauer spoke of fallingshort of his goal to reach the summit of Mt.Everest and told the dealers sometimes theyhad to learn to give up without achievingtheir goals.

Prior to and during this same time frame(1996-1998), Reeder noticed an increase inthe sales objectives Volvo expected of it,coupled with a decrease in the pricingconcessions it obtained from Volvo. Afterlearning of the Volvo Vision and its statedgoal of reducing the number of authorizedVolvo dealers, as well as mistakenlyreceiving faxes from Volvo intended forother dealers which listed larger concessionsthan Reeder was getting, Reeder came tosuspect it was one of the dealers Volvosought to eliminate.

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A. Head-to-Head Competition with AnotherDealer for the Same Customer.

Reeder presented evidence that in thesummer of 1999, it bid on the sale of twelvetrucks to Hiland Dairy Company located inSpringfield, Missouri. Reeder requested a12% concession, but Volvo authorized only7.5%. Another Volvo authorized dealer,Southwest Missouri Truck Center inSpringfield, successfully obtained theHiland Dairy contract when Volvo granted itan 8.5% concession. As a result of thedifference in price concessions, Southwestcould offer the Missouri customer a price of$ 62,890 per truck, while Reeder's price pertruck was $ 63,632.69. Had Reederobtained the account, it would have realizeda gross profit of $ 30,000 on the sale.

B. Contemporaneous Sales of Like Gradeand Quality Trucks in Which Favored VolvoDealers Received Greater Price Concessions

than Reeder.

In March 1998, Reeder successfully bid onthe sale of thirty trucks to Lane Freightlocated in Tulsa, Oklahoma, involving amixture of over-the-road day-cab andsleeper-cab trucks. Reeder initiallyrequested a 12.5 1% concession on this sale.When Volvo denied the request, Reederasked for a 10% concession on the day-cabtrucks and 8.4% on the sleepers. Volvoultimately granted a 9% concession on bothtruck types. Two months earlier, Volvo hadgranted a dealer located in Tyler, Texas, a12.3% concession on the sale of twelvetrucks of like grade and quality toBrookshire Grocery located in Tyler. As aresult of the difference in concessions, theprice Reeder's customer paid for each truckwas $ 2,606 higher than the price the Texasdealer provided to its customer. Had Volvooffered Reeder the 12.3% concession theTexas dealer received, Reeder would have

realized $ 52,120 in additional profits. [Thecourt noted other examples.]

C. Unsuccessful Sales Following Volvo'sRefusal to Grant Requested Price

Concessions.

In a third category of evidence Reederpresented to prove price discrimination,Reeder recounted numerous situations inwhich it unsuccessfully requested particularconcessions from Volvo to close sales, whileduring the same time frame Volvo grantedhigher concessions to other Volvo dealerswho were able to close sales. For example,in . . . May 1998, Reeder sought a priceconcession of 21% on a sale of five trucks.Volvo approved only 2%. Reeder did not getits contract, During the same time, Volvogave another dealer a 10.6% concession on asale of three trucks of like grade and quality.The other dealer got its contract.

The jury returned a verdict in favor ofReeder on both claims and awardeddamages of $ 1,358,000 on the RPA claimand $ 513,750 on the AFPA claim. The trialcourt trebled the RPA damages pursuant to15 U.S.C. § 15a and awarded Reederattorney fees. Volvo brought a motion forJAML following trial. The district courtdenied the motion, and Volvo filed a timelyappeal with this court.

II

"We review the denial of a motion forJAML de novo." Naucke v. City of ParkHills, 284 F. 3d 923, 929 (8th Cir. 2002).Although our review is de novo, a partyseeking posttrial JAML based on thesufficiency of the evidence "faces anonerous burden [because we must] view theevidence in a light most favorable to the

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jury's verdict [and reverse only] when thereis a complete absence of probative facts tosupport the conclusion reached." InacomCorp. v. Sears, Roebuck & Co., 254 F.3d683, 689 (8th Cir. 2001).

A. The RPA Claim

The RPA provides, in pertinent part:

It shall be unlawful for anyperson engaged in commerce . .. to discriminate in pricebetween different purchasers ofcommodities of like grade andquality, where either or any ofthe purchases involved in suchdiscrimination are in commerce,. . . and where the effect of suchdiscrimination may besubstantially to lessencompetition or tend to create amonopoly in any line ofcommerce, or to injure, destroy,or prevent competition with anyperson who either grants orknowingly receives the benefitof such discrimination, or withcustomers of either of them.

15 US.C. § 13(a).

There are three types of violations under theRPA. Primary-line violations occur when aseller's price discrimination adverselyimpacts competition with its owncompetitors. Secondary-line violationsoccur when a seller's price discriminationinjures competition among its customers.Tertiary-line violations occur when adiscriminating seller's purchasers do notcompete directly, but their customerscompete within a unified market region.Godfrey v. Pulitzer Publ'g Co., 161 F.3d1137, 1140 (8th Cir. 1998) (Godfrey I). Inthe instant case, Reeder avers a secondaryline violation, claiming Volvo's price

discrimination injured competition amongVolvo's customers, i.e., Reeder and otherVolvo dealers.

To prove its claim, Reeder had to show 1)Volvo discriminated in price betweenReeder and the favored dealers, 2) this pricediscrimination substantially affectedcompetition between Reeder and the favoreddealers, 3) the truck sales occurred ininterstate commerce, and 4) the trucks soldby Reeder and the other dealers were of likegrade and quality. Godfrey v. PulitzerPubl'g, Inc., 276 F.3d 405, 408 (8th Cir.2002) (Godfrey II). In addition, because theRPA prohibits price discrimination"between different purchasers," 15 U.SC. §13(a), Reeder had to show there were actualsales at two different prices to two differentVolvo dealers, i.e., a sale to itself and a saleto another Volvo dealer. Fusco v. XeroxCorp., 676 F.2d 332, 335 (8th Cir. 1982).In other words, as a threshold matter Reederhad to show it was a "purchaser" within themeaning of the RPA. Id, at 334.

1. Two-Purchase Requirement

Volvo contends competitive biddingsituations do not implicate the RPA becausean unsuccessful bidder is not a purchaser.Volvo emphasizes that much of Reeder'sproof involved situations where Reeder didnot purchase trucks from Volvo....

We agree an unsuccessful bidder is not apurchaser within the meaning of the RPA.In Fusco, we said a purchaser is one whoactually makes a purchase, not "one who[merely] seeks to purchase, a person whogoes into the market-place for the purpose ofpurchasing." 676 F.2d at 335 (quotingShaw's, Inc. v. Wilson-Jones Co., 105 F.2d331, 333 (3d Cir. 1939)). "Thus, a sale atone price plus either an offer to sell at ahigher price or a refusal to sell at any priceis generally thought not to violate the

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[RPA]. " Id. (citing MC. Mfg. Co. v. TexasFoundries, Inc., 517 F.2d 1059, 1065 n.11(5th Cir. 1975)). When Reederunsuccessfully bid on contracts becauseVolvo's price concessions were notfavorable enough to obtain the contracts,Reeder did not actually purchase trucks fromVolvo. Thus, Reeder was not a purchaser inthose instances, but merely went into themarket-place for the purpose of purchasing.Volvo may have offered to sell trucks toReeder at a higher price than it offered toother dealers, but mere offers to sell do notviolate the RPA.

This conclusion is consistent with theconclusion of many courts that hold pricediscrimination in the competitive biddingprocess does not violate the RPA becauseonly one of the two competitors actuallymakes a purchase.

In this case, however, Volvo concedesReeder was more than an unsuccessfulbidder. Reeder gave four examples where itactually purchased Volvo trucks followingsuccessful bids on contracts. Reedercompared those successful sales to actualsales made by other dealers during the sametime period (Reeder purchased fifty-fivetrucks and compared those purchases toother dealers' purchases of twenty-twotrucks). Although Volvo challenges thesufficiency of these actual purchase-to-purchase comparisons on other grounds(addressed below), these successful bidsclearly gave Reeder "purchaser" status. As aresult, it follows Reeder was entitled topursue a claim for price discriminationunder the RPA.

2. Actual Competition

Volvo argues Reeder failed to show it was inactual competition with the favored dealers.The standard for showing actual competitionis whether, "as of the time the price

differential was imposed, the favored anddisfavored purchasers competed at the samefunctional level, i.e., all wholesalers or allretailers, and within the same geographicmarket." Best Brands Beverage, Inc. v.Falstaff Brewing Corp., 842 F.2d 578, 585(2d Cir 1987). Here there is no dispute thedealers all competed at the same functionallevel, but Volvo contends Reeder did notcompete within the same geographic marketas the favored dealers. We disagree.

Although Reeder had an assignedgeographic area (ten counties in westernArkansas and two counties in easternOklahoma), it was free to sell outside thatarea, and did so. Reeder introduced evidencethat it looked to the entire continental UnitedStates in making its sales, and had sold ordelivered trucks in Arkansas, Oklahoma,Missouri, Texas, Iowa, Illinois, Minnesota,Ohio, Pennsylvania, North Carolina,Georgia, Colorado, and Oregon. Reederalso established that end-buyers of the trucksare very mobile and price-shop nationwide.

Reeder's evidence focused upon sales andbids made in the southwest region of theUnited States. Reeder presented evidence ofsales or bids it made in three states in thesouthwest region (Arkansas, Missouri, andOklahoma) and compared the sales or bidsto those made by other dealers in four statesin the southwest region (Arkansas, Missouri,Texas, and Tennessee). Reeder presented atleast two instances where it competeddirectly with a favored dealer-the head-to-head competition with Southwest MissouriTruck Center in Springfield, Missouri, for atwelve-truck deal to Hiland Dairy, and aconcession request from Reeder for a five-truck deal to Tommy Davidson which alsoinvolved a bid made by a Volvo dealer inSpringdale, Arkansas. . . . From thisevidence a jury could reasonably decideReeder was in actual competition withfavored dealers.

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3. Like Grade and Quality; ReasonablyContemporaneous in Time

To establish an RPA violation, Reeder hadto show the comparative sales involvedtrucks of like grade and quality. Id. at 408.Products are not of like grade and quality "ifthere are substantial physical differences inproducts affecting consumer use, preferenceor marketability." Checker Motors Corp. v.Chrysler Corp., 283 F. Supp. 876, 889 (S.D.N.Y 1968), affd, 405 F.2d 319 (2d Cir.1969). Volvo argues the sales-to-salescomparisons made by Reeder involvedtrucks with different major components thataffected consumer preference andmarketability. In support of its positionVolvo points to trial testimony whichshowed differences in truck componentsinfluence consumers' decisions to buy-particularly engine types and gear ratios.

Reeder offered testimony, however, showingthat any differences in components wereinconsequential-in all cases the truckswere the same model and same year, withcomparable engines and largely similarcomponents. Also, Reeder providedevidence that the differences in componentswere taken into account in the calculation ofthe price quotes and concessions, so the jurycould reasonably conclude that when thecomparisons involved trucks with somewhatdifferent components, the differences did notsubstantially affect the concessions Volvooffered.

We note the RPA says the commoditiesinvolved must be of like grade and quality,not identical grade and quality. We havepreviously indicated the concept "wasdesigned to serve as one of the necessaryrough guides for separating out thosecommercial transactions insufficientlycomparable for price regulation by thestatute." Moog Indus. v. Fed. TradeComm'n, 238 F.2d 43, 50 (8th Cir. 1956)[.]

Here, the jury was instructed on the conceptof like grade and quality, and Volvo doesnot argue the district court erred in itsinstructions. The jury found by specialinterrogatory the comparisons involvedtrucks of like grade and quality. Weacknowledge there was conflicting evidenceon the substantiality of the differences incomponents, but there was ample evidencesupporting the jury's determination thedifferences were immaterial....

Reeder also had to show the comparativesales were reasonably contemporaneous intime, but "there is no requirement that thetwo sales be made at precisely the same timeor place." DeLong Equip., 990 F.2d at 1202(11th Cir. 1993). The four sales-to-salescomparisons offered by Reeder werebetween one and four months apart, withone exception . . . Volvo argues the saleswere not contemporaneous because as littleas a single-month gap could make asubstantial difference in the price concessionit offered due to changes in model-yearavailability or backlog or both. . . . Volvonever presented evidence, however, to showthe gaps between the sales comparisonsinvolved in this case did make a differencein the price concessions it offered. Again,the jury was instructed on the issue whetherthe comparative sales occurred at about thesame time, found by special interrogatorythat they did, and Volvo does not challengethe district court's instructions. Under thestandard we must apply in reviewing amotion for JAML, we find no basis fordisturbing the jury's verdict.

4. Injury/Damages

a. Competitive Injury

The RPA prohibits price discrimination"where the effect of such discriminationmay be substantially to lessen competition. .. or to injure, destroy, or prevent

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competition." 15 US.C. § 13(a). The RPA"guards against injury to competition, notinjury to individual competitors." RoseConfections, Inc. v. Ambrosia ChocolateCo., 816 F2d 381, 387 n.3 (8th Cir. 1987).The RPA does not, however, "require thatthe discriminations must in fact have harmedcompetition, but only that there is areasonable possibility that they 'may' havesuch an effect." Corn Prods. Ref Co. v.Fed. Trade Comm'n, 324 US. 726, 742, 89L. Ed 1320, 65 S. Ct. 961, 40 F.TC. 892(1945).

A plaintiff may demonstrate a reasonablepossibility of competitive injury in twoways. "First, plaintiff may introduce directevidence that disfavored competitors lostsales or profits as a result of thediscrimination." Rose Confections, 816F 2d at 385 (citing Falls City Indus., Inc. v.Vanco Beverage, Inc., 460 U.S. 428, 437-38,75 L. Ed. 2d 174, 103 S. Ct. 1282 (1983)).In other words, while the RPA does notguard against injury to individualcompetitors, proving injury to individualcompetitors is one way to demonstrate adiscriminatory practice likely injuredcompetition. "Second, [a plaintiff] can showthat the favored competitor received asubstantial price reduction over a substantialperiod of time, which gives rise to apermissible inference of competitive injury."Id. (citing Fed Trade Comm'n v. MortonSalt Co., 334 US. 37, 50-51, 92 L. Ed. 1196,68 S. Ct. 822, 44 F T. C. 1499(1948)).Volvo argues Reeder failed to demonstrate areasonable possibility of competitive injurybecause Reeder did not prove the lowerconcessions Volvo granted to other dealersdrew sales away from Reeder. We disagree.

The evidence presented by Reeder wassufficient for the jury to conclude Volvo'sdiscriminatory concessions resulted in lostprofits and sales to Reeder and other dealers,

and that favored competitors receivedsubstantial price reductions over asubstantial period of time. As stated above,Volvo acknowledged in December 1997 thatit wanted to cut the number of its dealers inhalf as part of its "Volvo Vision." At trial,Volvo acknowledged it had, in fact,succeeded in reducing the numbers of itsdealers. . . . From this evidence, the jurycould properly infer Volvo's intent to reducethe number of its dealers manifested itself inthe discriminatory concession practices.

Reeder also presented evidence that it lostprofits and sales as a result of Volvo's priceconcession practices. . . .

Reeder showed its sales of Volvo trucks hadbeen solid prior to the period of Volvo'sprice discrimination (1996-2000). Duringthe period of discrimination, Reeder's salesdecreased substantially and its profitmargins were lower despite increased salesefforts. In all, Reeder's gross profits fellfrom $ 165,499 in 1996 to $ 26,327 in 2000.At the same time, favored dealers' sales andoverall market sales stayed strong. Based onthis evidence, the jury could reasonablyconclude Reeder's average gross profit waslower than the average of favored Volvodealers because Volvo discriminated againstReeder in its price concessions.

Reeder also presented evidence that Volvo'spractice extended over a substantial periodof time (1996-2000). In addition, theevidence established that dealer profitmargins were narrow during that time.Thus, the jury could reasonably concludeeven small differences in price concessionshad a substantial impact on competition.

b. Actual Injury

Although Reeder only needed to provecompetitive injury may result to establish a

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violation of 15 US.C. § 13(a), it had tomake some showing of actual injury to itselfto recover treble damages under 15 U.S.C. §15(a). Volvo argues Reeder did not showactual injury because Reeder offered too fewexamples of Volvo's discriminatorypractices, there was no evidence the favoreddealers sold the trucks to end-users at lowerretail prices, and no evidence the end usersselected the favored dealers' bids because ofthe lower prices. We believe Volvoconstrues too narrowly the requirements forproving actual injury.

In addressing whether Reeder proved it wasactually injured by Volvo's pricediscrimination, Volvo would have us limitour analysis to the one instance of directhead-to-head competition with SouthwestMissouri Truck Center for the Hiland Dairycontract and the four sales-to-salescomparisons Reeder offered to prove itspurchaser status, while disregarding all theother evidence offered to prove actualinjury. We believe such an approach isinconsistent with the Supreme Court'steachings, both with respect to the rolecircumstantial evidence plays in RPA claimsand the scope of injury to be remedied bythe RPA.

Reeder presented other substantial evidenceto prove competitive and actual injury.Reeder presented numerous instances of itsunsuccessful sales due to Volvo's failure togrant requested price concessions, andevidence of Volvo's admitted intentions toreduce the number of its dealers. Indeed,Reeder showed Volvo successfully reducedthe number of its dealers and placed manymore on probation during a "record" salesperiod. Reeder presented evidence that itsown sales and profits were substantiallyreduced during this boom in the heavy truckindustry, despite an increase in its own salesefforts. From this evidence the jury could

reasonably infer Volvo's discriminatorypractice and Reeder's injuries extendedbeyond the five specific head-to-head andsales-to-sales comparisons.

[T]here was sufficient evidence from whichthe jury could infer favored dealers receivedlower prices from Volvo than did Reeder,and this price advantage allowed otherdealers to undercut Reeder's prices, hurtingReeder's sales and profits. There was alsoevidence Volvo was aware thisdiscriminatory practice could destroyReeder's business; indeed, the elimination ofsome dealers like Reeder appeared to beVolvo's intent. This is precisely the type ofinjury the antitrust laws were meant toprevent. See Zenith Radio Corp. v.Hazeltine Research, Inc., 395 U.S. 100, 125,23 L. Ed. 2d 129, 89 S. Ct. 1562 (1969)(permitting causality to be inferred fromcircumstantial evidence where the injuryinvolved was "precisely the type of loss thatthe claimed violations of the antitrust lawswould be likely to cause."). Moreover,Reeder was not required to prove Volvo'sprice discrimination was the only reason forits injuries, or the only reason for heavytruck customers' purchasing decisions-itwas enough that Reeder showed the pricediscrimination was a "material" cause of itsinjuries. Id. at 114 n.9

III

We affirm the judgment entered in thedistrict court in all respects.

DISSENT: HANSEN, Circuit Judge,concurring in part and dissenting in part.

Although I do not disagree with the court'sresolution of the state law issue, I write

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separately to express my view that Reederhas failed to make out a claim under theRobinson-Patman Act. Even viewing all ofthe evidence in the light most favorable tothe verdict, I conclude that Reeder cannotprove the necessary elements to recovertreble damages in this case. Specifically,Reeder has not proven a violation of § 13(a)because the facts fail to show injury orlikelihood of injury to actual competitionbetween Reeder and the "favored" Volvodealers. Furthermore, even if we assumethat Volvo violated § 13(a), there isabsolutely no indication that any suchviolation was the cause of Reeder's injury,for the purpose of recovering damages under§ 15(a). I therefore respectfully dissentfrom Section II(A) of the court's opinion.

There is little doubt that the facts of this casefail to fit neatly into the framework thatcourts have established in analyzingRobinson-Patman Act secondary-lineclaims. Much of my disagreement in thiscase stems from what I perceive as thecourt's attempt to fit a square peg into around hole. Traditional RPA cases involvesellers and purchasers that carry inventory ordeal in fungible goods. By contrast, theparties in this case operate in a uniquemarketplace where special order productsare sold to individual, pre-identifiedcustomers only after competitive bidding.By its very nature, this process will neverproduce the kind of competition the RPAwas designed to protect because it will neverresult in the type of two purchase transactionthat itself creates a market for the goods thatare sold. Indeed, where, at the time of theend purchase, only one possible seller andone possible buyer exist, competition istotally absent. It is the nature of competitivebidding, not price discrimination, that makesit so.

The court properly recognizes that acompetitive bidding situation will never

involve two "purchasers," and thus alwayswill fall outside of the purview of the RPA.Despite this determination, however, thecourt goes on to conclude that Reeder'spurchases with respect to four transactionsgive it "purchaser status" as to separateinstances in which it did not make apurchase, and therefore was not in fact apurchaser. I disagree with this proposition.Reeder cannot piggyback nonpurchasertransactions onto purchaser transactions forpurposes of recovering under the RPA. Myconcern does not stem from a strictadherence to the two purchase requirement,but rather from my belief that "purchaserstatus" is inextricably intertwined with theexistence of actual competition and thepossible threat thereto. Because my primaryobjection to the court's opinion is that itoverlooked this important aspect of actualcompetition, I turn next to that issue.

Despite the fact that Reeder operates at thesame functional level as the "favored" Volvodealers and that they may do business in thesame or overlapping geographic areas, Inevertheless conclude that Reeder has failedto prove that it was in actual competitionwith the "favored" Volvo dealers. Therecertainly may exist a national market inwhich heavy-truck dealers compete toreceive the opportunity to bid on potentialsales to customers. The Volvo dealers inthis case very well may have competedagainst each other in this market on a regularbasis. However, any difference in price thatVolvo eventually may quote to a dealer whoactually bids on a potential sale has no effecton this market. The evidence shows that anend user's decision to request a bid from aparticular dealer or to allow a particulardealer to bid is controlled by such factors asan existing relationship, geography,reputation, and cold calling or othermarketing strategies initiated by individualdealers. Once bidding begins, however, therelevant market becomes limited to the

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needs and demands of a particular end user,with only a handful of dealers competing forthe ultimate sale. Thus, although Reederand other "favored" dealers may havecompeted generally with each other in thelarger market for obtaining bids, there isevidence of only two occasions whereReeder competed with a "favored" Volvodealer for an actual sale....

It is my view that an injury to competitioncan be proven only where the factorsnecessary to state an RPA claim all arepresent in the same relevant transaction. Tothe extent that the court looks for theexistence of one factor in one transactionand the existence of another factor in asecond transaction, I conclude that the proofin this case is too tenuous and requires toomany inferences piled atop inferences toreach the court's result.

Nevertheless, even if we assume that Volvoviolated § 13(a) of the RPA, I would reverseReeder's RPA damage award becauseReeder has failed to prove that it wasactually injured by Volvo's pricediscrimination as required by § 15(a). See J.Truett Payne, 451 US. at 562 ("To recovertreble damages, then, a plaintiff must makesome showing of actual injury attributable tosomething the antitrust laws were designedto prevent."). Although Reeder may haveestablished that it lost sales and profits toother non-Volvo competitors, there can beno inference of actual injury for the purpose

of the RPA without some evidence (andthere is none in this record) that thediscriminatory pricing caused those salesand profits to be diverted from Reeder toanother Volvo dealer who received morefavorable terms from Volvo.

Although it is possible that Reeder lost salesor profits to non-Volvo dealers because itdid not receive a sufficiently highconcession from Volvo in the first threescenarios, the difference in concessionsoffered to Reeder and the "favored" Volvodealers did not cause the lost sales or profitson those deals. In order to prove that the §13(a) violation caused its injuries, Reederessentially must show that absent a pricedifference, it would not have lost those salesor profits. However, even if Volvo had notoffered the "favored" dealers greaterconcessions, i.e., not discriminated, therestill is no proof that Reeder would havemade the sales. Furthermore, as to the salesthat Reeder did make, it would be improperto calculate lost profits based on whatReeder otherwise characterizes as illegalprice discrimination.

The fact that the sales and profits were notdiverted from Reeder to "favored" Volvodealers demonstrates not only a lack ofcausation of actual injury under § 15(a), butalso seriously undermines our court'sconclusion that there is any likelihood ofinjury to competition between Reeder andthe "favored" Volvo dealers. . ..

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"High Court Takes Volvo Appeal on Discounts to Truck Dealers"

Transport TopicsMarch 14, 2005

Roger Gilroy

The Supreme Court said it would hear anappeal by Volvo Trucks North America of afederal appeals court decision that found thetruck manufacturer had illegally offered oneof its dealers smaller discounts than itoffered other dealers.

Two lower courts had backed the contentionof an Arkansas Volvo dealer, Reeder-SimcoGMC Inc., which said price concessions itreceived from Volvo violated the federalRobinson-Patman Act, which regulatesdiscounting practices in commercialtransactions.

"Volvo is pleased the Supreme Court agreedto hear our case. This involves an issue thatis important to us and we did not take thisstep lightly. We hope that the court will findour arguments compelling and will act tooverturn the lower court's ruling," VTNAspokesman Jim McNamara told TransportTopics March 9.

Volvo's said the case is about whether itviolated the law by offering different pricesto two different dealers "when either thosedealers are not competing with each other,or they are competing, but only one of thetwo actually makes a purchase," said RoyEnglert Jr., VTNA's outside counsel withRobbins, Russell, Englert, Orseck &Untereiner LLP in Washington, D.C.

Joe Byars Jr., a lawyer with Christian &Byars in Fort Smith, Ark., representingReecler-Simco, told Transport Topics themain question was whether the federal lawwould "prevent a manufacturer fromdiscriminating in price between dealers in

similar, reasonably contemporaneoustransactions, where the effect may be toinjure competition."

The Supreme Court agreed March 7 to hearVolvo s appeal of the case sometime duringthe nine-month term that would begin inOctober, Bloomberg News reported.

Englert told Transport Topics the initialbriefs both sides filed in February with theSupreme Court simply argued why the court"should or shouldn't hear the case."

Volvo attorney Englert argued the appealscourt's interpretation of the law "cannot bereconciled with the text of the statute orprior interpretations of it by other courts ofappeals." He said VTNA would file anotherbrief outlining the merits of its position.

Byars argued for the dealer that the appealscourt "did not create 'new law,' but appliedthe law, as announced in long-standingprecedent, to the specific facts in this case."

David Price, an attorney with theWashington Legal Foundation, who filedarguments supporting VTNA, said the casecame up now because the Supreme Court"typically waits until there is a conflictamong the lower courts before it steps in toresolve an issue."

In July, the Court of Appeals for the EighthDistrict affirmed Reeder-Simco's claim ofprice discrimination.

The court said there was "sufficientevidence" that allowed a jury to "inferfavored dealers received lower prices from

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Volvo than did Reeder, and the priceadvantage allowed other dealers to undercutReader's prices, hurting Reeder's sales andprofits."

The court said Volvo was aware thisdiscriminatory practice "could destroyReeder's business; indeed, the elimination ofsome dealers like Reeder appeared to beVolvo's intent. This is precisely the type ofinjury the antitrust laws were meant toprevent."

A dissenting appeals court judge said, "The

parties in this case operate in a uniquemarketplace where special-order productsare sold to individual, pre-identifiedcustomers only after competitive bidding.By its very nature, this process will neverproduce the kind of competition the RPAwas designed to protect."

Earlier, the U.S. District Court for theWestern District of Arkansas awardedReeder-Simco $1.4 million in damages plusattorney fees, which were tripled as requiredby law to about $4 million.

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"U.S. Supreme Court Grants Certiorari inSignificant Robinson-Patman Act Case"

MondaqMay 12, 2005

William Hohengarten

The Supreme Court recently grantedcertiorari in a case under the Robinson-Patman Act that is of substantial interest tothe business community. The Robinson-Patman Act makes it unlawful "todiscriminate in price between differentpurchasers of goods of like grade andquality, . . . where the effect of suchdiscrimination may be substantially to lessencompetition, . . . or to injure, destroy, orprevent competition with any person who . .. knowingly receives the benefit of suchdiscrimination." 15 U.S.C. § 15(a).

In Reeder-Simco GMC, Inc. v. Volvo GMHeavy Truck Corp., 374 F.3d 701 (8th Cir.2004), a divided panel of the Eighth CircuitCourt of Appeals upheld a multimilliondollar treble damages award, plus attorneys'fees, in a Robinson-Patman suit brought bythe respondent heavy truck dealer, Reeder,against the petitioner manufacturer, Volvo.The damages award rested on the "industry-wide practice" whereby heavy truckmanufacturers grant discretionary discountsto dealers that are bidding on orders fromspecific customers. Reeder showed thatVolvo offered different discretionarydiscounts to different dealers on differentpotential retail sales. However, other federalcourts of appeals have held that Robinson-Patman liability does not arise in this type ofcompetitive bidding market. Those courtshave reasoned that when a dealer who doesnot obtain the most favorable discount isunsuccessful in making a sale, there is no"purchase" by the dealer, as required forliability under the Act.

In departing from the rule adopted by othercircuits and upholding liability under thesecircumstances, the decision of the EighthCircuit potentially expands Robinson-Patman liability. The Eighth Circuitallowed Reeder to compare discounts on itspurchases from Volvo for sales to specificretail customers with the deeper discountsobtained from Volvo by other dealers forsales to different customers, even thoughVolvo claimed there was no head-to-headcompetition between Reeder and the otherdealers on those sales. In addition, theEighth Circuit allowed Reeder to obtaindamages for sales lost to dealers for othermanufacturers, even though Reeder was nota "purchaser" on those sales.

The Supreme Court's decision in this casewill likely have major significance for anyindustry in which manufacturers offerdiscretionary discounts to dealers biddingagainst other manufacturers' dealers for thebusiness of specific retail customers-apractice that promotes interbrandcompetition. In addition, as this is the firstRobinson-Patman case the Supreme Courthas taken in more than a decade, the Court'sreasoning on the liability and damagesissues could have a substantial impact on allcases arising under the Act.

Briefs for petitioner Volvo and amici curiaesupporting Volvo and urging reversal aredue May 20. Briefs for respondent Reederand amici supporting respondent will be dueJune 24. The case is No. 04-905, VolvoTrucks North America, Inc. v. Reeder-Simco GMC, Inc.

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Lockhart v. United States

(04-881)

Ruling Below: (Lockhart v. United States, 376 F.3d 1027 (9th Cir. 2004), cert. granted, 125 S.Ct. 1928, 161 L. Ed. 2d 772, 73 U.S.L.W. 3630 (U.S. Apr. 25, 2005) (No. 04-881)).

James Lockhart is 67 years old and has roughly $80,000 in unpaid student loans. He defaultedon his loans in 1991 when he became unemployed due to disability. The federal governmentbegan withholding money from his Social Security disability benefit in 2002 in order to repaythose loans. That amount increased when Lockhart began receiving an old-age benefit.Lockhart claims that the Government cannot reclaim the amount due on the loans because it hasbeen more than ten years since the loans became outstanding. Two federal laws appear to be inconflict. One provides for aggressive collection of loans and removes the statute of limitations,while the other prohibits the offset of Social Security benefits to pay debts that are more than tenyears old. The U.S. District Court for the Western District of Washington dismissed the case forlack of subject matter jurisdiction and failure to state a claim for relief. On appeal, the NinthCircuit held that, despite the confusion, Congress intended to repeal the ten year limit on SocialSecurity offsets, and therefore affirmed the judgment.

Question Presented: Do the Social Security Act and the Debt Collection Improvement Act barthe United States from withholding social security benefits to collect student loan debt that hasbeen outstanding for more than ten years, as the Eighth Circuit has held, or does the HigherEducation Act eliminate any such bar, as the Ninth Circuit held below?

NOTE: In a conflicting case, the Eighth Circuit held last year in Lee v. Paige, 376 F.3d 1179(8th Cir. 2004), cert. filed, 73 USLW 3531 (Feb 25, 2005) (NO. 04-1139) that the statute oflimitations still applies. That case follows on pages 373-374.

James LOCKHART, Plaintiff-AppellantV.

UNITED STATES OF AMERICA, ET AL., Defendants



[Excerpt: Some citations and footnotes omitted.

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OPINION: Noonan, Circuit Judge:

PROCEEDINGS

On March 20, 2002, Lockhart filed acomplaint against the United States, theAttorney General and the Secretaries ofEducation and the Treasury alleging that hehad received notice from the United StatesDepartment of Education that it intended tooffset a portion of his monthly SocialSecurity benefits to secure repayment of hisgovernment educational loans. Lockhartasserted that, because "more than 10 yearshave passed since [his] education loansbecame outstanding," the attempt to collectthem by offset was "time barred under 31U.S.C. § 3716(e)(1)."

This claim was buried in a barrage of othercontentions which the district courtunderstandably found confusing and whichLockhart failed to clarify when ordered toshow cause why his case should not bedismissed for failure to show a basis forjurisdiction and to state a claim for whichrelief could be granted. On June 4, 2002,the complaint was dismissed in its entirety,and judgment was entered for thedefendants.

Lockhart appeals.

JURISDICTION and STANDARD OFREVIEW

We have jurisdiction over the final judgmentof the district court pursuant to 28 U.S.C. §1291. We review de novo both a dismissalfor want of subject matter jurisdiction and adismissal for failure to state a claim.

ANALYSIS

Construction of Lockhart's Complaint. In

compliance with precedent, we bend overbackwards to pluck a viable claim fromLockhart's wide-ranging complaint. Thecontention that the government's offset isbarred by statute is such a claim. Byimplication, the claim also alleges federalquestion jurisdiction.

The Statutes At Issue. Four statutes must beconsidered. The Debt Collection Act of1982 provided for administrative offset as away of collecting debts of the United States,at the same time stating:

(e) This section does notapply-

(1) to asubchapteroutstandingyears; or

claim under thisthat has been

for more than 10

(2) when a statute explicitlyprohibits using administrativeoffset to collect the claim ortype of claim involved.

Pub. L. No. 97-365, 96 Stat. 1754 (1982)(codified as amended in 31 U.SC. §3716(e)).

Social Security benefits once appeared tofall squarely within the Act's exception. §3716(e) (2). The Social Security Act, 42US C. § 407 was amended in 1983 to read:

(a) The right of any person toany future payment under thissubchapter shall not betransferable or assignable, atlaw or in equity, and none of themoneys paid or payable orrights existing under this sub-chapter shall be subject toexecution, levy, attachment,garnishment, or other legal

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process, or to the operation ofany bankruptcy or insolvencylaw.

(b) No other provision of law,enacted before, on, or afterApril 20, 1983, may beconstrued to limit, supersede, orotherwise modify the provisionsof this section except to theextent that it does so by expressreference to this section.

Id. Notably, this amendment did notmention offset by the government.Arguably, offset is included under "otherlegal process." Offset, however, is a form ofself-help that may not fall within the term.Congress, having so recently amended theDebt Collection Act to provide foradministrative offset, may not have intendedto deny this remedy to the government. Todecide this case we need not resolve thequestion.

In 1991, the Higher Education AssistanceAct was amended to read as follows:

(1) It is the purpose of thissubsection to ensure thatobligations to repay loans andgrant overpayments areenforced without regard to anyFederal or State statutory,regulatory, or administrativelimitation on the period withinwhich debts may be enforced.

(2) Notwithstanding any otherprovision of statute, regulation,or administrative limitation, nolimitation shall terminate theperiod within which suit may befiled, a judgment may beenforced, or an offset,garnishment, or other action

initiated or taken by-. . . .

(D) the Secretary, the AttorneyGeneral, the administrative headof another Federal agency . . .for the repayment of [a studentloan] . . . that has been assigned

to the Secretary....

20 US.C. § § 1091a(a)(I)-(2). As of 1991,therefore, the statute of limitations containedin the Debt Collection Act no longerprevented the collection of student loans,and the only restriction the governmentarguably faced in collecting delinquentstudent loans was that it could not useadministrative offset to reach social securitybenefits. See 42 U.S.C. § 407.

However, in 1996, Congress amended theDebt Collection Act by adding:

(c)(3)(A)(i) Notwithstandingany other provision of law(including sections 207 and1631(d)(1) of the SocialSecurity Act (42 US.C. 407 and1383(d)(1)) . . . all paymentsdue to an individual under theSocial Security Act . . . shall besubject to offset under thissection.

(ii) An amount of $ 9,000 whicha debtor may receive underFederal benefit programs citedunder clause (i) within a 12-month period shall be exemptfrom offset under thissubsection.

31 US.C. § § 3716(c)(3)(A)(i)-(ii). Thisstatute explicitly removes any protectionunder section 407 that Social Securitybenefits may have had from offset, and thusallows the government to reach Lockhart's

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benefit in order to collect on his debt.

This amendment was inserted in the DebtCollection Act without removing thelanguage already quoted about the non-applicability of "this section" to claimsoutstanding for more than 10 years or tostatutes explicitly prohibiting administrativeoffset. See 31 US.C. § §3716(e)(1)-(2).

A puzzle has been created by the codifiers.But it seems clear that in 1996, Congressexplicitly authorized the offset of Social

Security benefits, and that in the HigherEducation Act of 1991, Congress hadoverridden the 10-year statute of limitationsas applied to student loans. That thecodifiers failed to note the impact of the1991 repeal on section 3716(e) does notabrogate the repeal. Because the DebtCollection Act's statute of limitation isinapplicable here, the government's offset isnot time-barred.

Accordingly, we affirm the judgmententered against Lockhart.

372

Dee Ella LEE, Appellee,V.

Roderick PAIGE, Secretary of the Department of Education,Appellant.

United States Court of Appealsfor the Eighth Circuit


Note: The following Eighth Circuit Court decision conflicts with the Ninth CircuitCourt's decision in Lockhart v. United States. Petition for cert. was filed February25, 2005.

[Excerpt: Some citations and footnotes omitted]

OPINION: PER CURIAM.

Roderick Paige, Secretary of the UnitedStates Department of Education, appealsfrom a grant of summary judgment enteredin favor of Dee Ella Lee, contending that thedistrict court incorrectly barred thedepartment from garnishing Ms. Lee's socialsecurity benefits on account of heroutstanding student loans. We affirm.

Ms. Lee defaulted on two student loans in1984. The Department of Education tookassignment of the loans in the late 1980'sand has sought repayment ever since. InOctober, 2001, the government beganwithholding a portion of Ms. Lee's socialsecurity benefits, applying the amount toMs. Lee's outstanding loan balance. Shefiled suit to stop the government fromgarnishing her benefits.

The dispute between Ms. Lee and SecretaryPaige requires the synthesis of three separateacts: the Social Security Act, the DebtCollection Act (as amended by the DebtCollection Improvement Act), and theHigher Education Act.

The Higher Education Act, passed in 1991,eliminated statutes of limitations on the

government's right to seek repayment ondefaulted federal student loans. . . . At thetime that the Higher Education Act becamelaw, the Debt Collection Act authorized thegovernment to offset unpaid debt balancesfrom some federal payments but not fromsocial security benefits. Congress laterpassed the Debt Collection ImprovementAct, which authorizes federal agencies torecover money owed on delinquent studentloans (as well as some other debts) byoffsetting a debtor's social security benefits.The Debt Collection Improvement Act leftunchanged, however, the original DebtCollection Act's limitation on the right ofoffset, under which government agencies arenot allowed to use the remedy ofadministrative offset on claims that havebeen outstanding in excess of ten years.

Though he concedes that the claims againstMs. Lee had been outstanding for more thanten years, Secretary Paige nonethelessargues that the ten-year limitation in theDebt Collection Act did not prohibit theadministrative offset of Ms. Lee's benefitsbecause that would be contrary to §1091a(a)(2) which had eliminated statutesof limitations. Instead, he maintains that theten-year disabling provision in § 3716(e)(1)

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should control all claims except those likethe collection of student loans, whereCongress eliminated all statutes oflimitation. Ms. Lee argues that the disablingprovision of § 3716(e)(1) was intentionallyleft in the statute and that it controls thiscase.

The district court agreed with Ms. Lee. Thecourt reasoned that when "Congressremoved all statute of limitations obstaclesin § 1091a, it could not have contemplatedthat its actions would have any effect onSocial Security payments, because suchpayments were not yet subject to offset," id.at 984, and subsequent Congressionalapproval of offsetting social securitybenefits did not import § 1091a into thesocial security context, because Congressexpressly left the ten-year disablingprovision intact. Had Congress intended to

limit the disabling provision to allow thegovernment unlimited offset opportunitiesfor the collection of delinquent studentloans, the district court reasoned, it wouldhave done so explicitly. In the absence ofCongressional language authorizingapplication of § 1091a to social securityoffsets, the district court concluded that thespecific limitations in § 3716(e)(1) prevail.

We review de novo a district court'sinterpretation of a statute. Loehrer v.McDonnell Douglas Corp., 98 F3d 1056,1061 (8th Cir. 1996). We affirm thejudgment for the reasons given in the districtcourt's well-reasoned opinion. TheDepartment of Education remains free topursue payment on the defaulted loans fromMs. Lee; it simply cannot take money fromher monthly social security check to reducethe debt.

374

"Justices to Decide if Social Security Can Be Seized"

Los Angeles TimesApril 26, 2005David Savage

In the latest installment of the babyboomers-reach-retirement-age saga, theSupreme Court said Monday that it woulddecide whether the government could seizeSocial Security benefits from individualswho failed to repay decades-old studentloans.

At issue is $3.6 billion in student loans thathave gone unpaid for more than 10 years.

One federal law says Education Departmentofficials should aggressively try to collectmoney from those who defaulted on theirgovernment-backed loans by garnishingtheir wages or seeking other sources ofmoney.

But a second law says the governmentshould not take Social Security benefits torepay debts that are more than 10 years old.

Not surprisingly, lower courts are split onwhich law to follow.

To resolve the dispute,.the justices voted tohear the case of James Lockhart, aWashington state man who went to fourcolleges in the 1980s with the help offederally guaranteed student loans. Hebecame disabled as a result of diabetes andheart disease, and was unemployed in 1991when he defaulted on nine student loans.

In 2002, Lockhart was living on his SocialSecurity disability benefit of $874 a month.At the same time, he had $80,000 in unpaidstudent loans.

To repay his debt, the government took $93a month from his disability benefit. A year

later, Lockhart reached age 65 and beganreceiving an old-age benefit instead of adisability benefit. Now, the government istaking $143 a month.

Under the law, the government can seize15% of a recipient's monthly benefit torepay the loans.

The Education Department said the seizureshad proved to be an effective means ofrecovering unpaid students loans. In 2003,the collection effort brought in $400 millionfrom reclaimed Social Security benefits.

Lockhart sued three years ago to block theseizure, but he lost before a federal judge inSeattle and the U.S. 9th Circuit Court ofAppeals in San Francisco. Its judgespointed to the education law that encouragedthe government to collect on the unpaidloans.

In a different case, the U.S. 8th CircuitCourt of Appeals in St. Louis came to theopposite conclusion by pointing to the DebtCollection Act, which bars the governmentfrom seizing Social Security benefits to paydebts that are more than 10 years old.

The Public Citizen Litigation Group, apublic interest law firm, appealed onLockhart's behalf. Its lawyers argued thatmany people, like Lockhart, had no incomeother than Social Security, and thatCongress did not want agencies to seize thebenefits of such individuals.

The high court said it would hear the case ofLockhart vs. US. in the fall....

375

"Government Can't Offset Student Loanswith Social Security"

Consumer Financial Services Law ReportAugust 25, 2004

A senior citizen prevailed over thegovernment's attempt to collect on heroutstanding student loans by seizing part ofher Social Security payments. The 8th U.S.Circuit Court of Appeals upheld the DistrictCourt's decision that the government had noright to offset because the loans were morethan 10 years old. (Lee v. Paige, No. 03-3819 (8th Cir. 08/04/04).)

In making this determination, the 8th Circuitanalyzed the Social Security Act, the DebtCollection Act and the Higher EducationAct. Congress passed the HEA in 1991.The court pointed out that the HEA, 20 USC1091a(a)(2), eliminated the statutes oflimitations on the government's right to seekrepayment on defaulted federal studentloans. At that time, the DCA, 31 USC 3716,authorized the government to offset unpaiddebt balances from some federal paymentsbut not from Social Security benefits, thecourt noted.

Congress then amended the DCA,authorizing federal agencies to recovermoney owed on delinquent student loans byoffsetting a debtor's Social Security benefits.However, the DCA had a limitation on theright of offset, which was not affected by theamendments. Under 31 USC 3716(e)(1), thegovernment cannot offset claims that have

been outstanding for more than 10 years.

In this case, Dee Ella Lee defaulted on herstudent loans in 1984, and the governmentbegan garnishing her benefits in 2001.

Contrary to HEA

The government argued that the 10-yearlimitation should not apply because it wascontrary to the HEA, which eliminatedstatutes of limitations for collecting studentloans. The 10-year provision should controlall claims except student loans, thegovernment argued.

The District Court pointed out that when thestatute of limitations obstacles wereremoved, student loans were not subject tooffset from Social Security payments.When Congress amended the law to allowoffsetting, it could have removed the 10-year limitation, but didn't.

"While the Department of Educationremains free to pursue payment on. thedefaulted loans from Ms. Lee, it simplycannot take money from her Social Securitycheck to reduce the debt," the 8th Circuitsaid.

The court affirmed the District Court'sopinion.

376

United States v. Philip Morris

(No. 05-92)

Case Below: (US. v. Philip Morris USA Inc., Et al., 396 F3d 1190 (D.C. Cir. 2005), petition forcert. filed, (U.S. Jul. 18, 2005)(No. 05-92)).

As part of ongoing litigation against the tobacco industry for concealing the danger posed bysmoking and for marketing to minors, the United States sought disgorgement of past profitsunder the Racketeer Influenced and Corrupt Organizations Act (RICO). The governmentestimates those profits to total $280 billion. The United States District Court for the District ofColumbia denied the manufacturers' motion for partial summary judgment on this issue. TheD.C. Circuit reversed, saying disgorgement is not within the express terms of the statute, norcould the court include disgorgement as an expansion on those remedies already enumerated,because the statute is directed toward future conduct.

Question Presented: Whether the district court's equitable jurisdiction to issue "appropriateorders" to "prevent and restrain" violations of the Racketeer Influenced and CorruptOrganizations Act (RICO), 18 U.S.C. 1964(a), encompasses the remedial authority to orderdisgorgement of illegally-obtained proceeds.

UNITED STATES OF AMERICA, APPELLEEV.

PHILIP MORRIS USA INC., ET AL., APPELLEES

United States Court of Appealsfor the District of Columbia Circuit

Decided February 4, 2005

[Excerpt: some citations and footnotes omitted]

OPINION:

SENTELLE, Circuit Judge: A group ofcigarette manufacturers and related entities("Appellants") appeal from a decision of theDistrict Court denying summary judgmentas to the Government's claim fordisgorgement under the RacketeerInfluenced and Corrupt Organizations Act("RICO" or "the Act"), 18 US. C. § § 1961-68. The relevant section of RICO, 18 US.C.§ 1964(a), provides the District Courts

jurisdiction only for forward-lookingremedies that prevent and restrain violationsof the Act. Because disgorgement, a remedyaimed at past violations, does not so preventor restrain, we reverse the decision belowand grant partial summary judgment for theAppellants.

I. Background

In 1999 the United States brought this claimagainst appellant cigarette manufacturers

377

and research organizations, claiming thatthey engaged in a fraudulent pattern ofcovering up the dangers of tobacco use andmarketing to minors. The Governmentsought damages under the Medical CareRecovery Act ("MCRA"), 42 US.C. §2651 -53, and the Medicare SecondaryPayer ("MSP") provisions of the SocialSecurity Act, 42 U.S.C. § 1395y to recoverhealth-care related costs Appellantsallegedly caused. The United States alsoclaimed that Appellants engaged in acriminal enterprise to effect this cover-up,and sought equitable relief under RICO,including injunctive relief and disgorgementof proceeds from Appellants' allegedlyunlawful activities. The Government soughtthis relief under 18 US.C. § 1964(a), whichgives the District Court jurisdiction

to prevent and restrainviolations of [RICO] by issuingappropriate orders, including,but not limited to: ordering anyperson to divest himself of anyinterest, direct or indirect, inany enterprise; imposingreasonable restrictions on thefuture activities or investmentsof any person, including, butnot limited to, prohibiting anyperson from engaging in thesame type of endeavor as theenterprise engaged in, theactivities of which affectinterstate or foreign commerce;or ordering dissolution orreorganization of any enterprise.

18 U.S.C. § 1964(a).

Appellants moved to dismiss the complaintin 2000. The District Court did dismiss theMCRA and MSP claims, but allowed theRICO claim to stand. United States v. Philip

Morris, Inc., 116 F Supp. 2d 131, 134(D.D.C. 2000).

Section 1964(a) conferred jurisdiction on theDistrict Court only to enter orders "toprevent and restrain violations of thestatute." In considering witherdisgorgement came within this jurisdictionalgrant, the court relied on a decision of theSecond Circuit, the only circuit then to haveconsidered "whether . . . disgorgements . . .are designed to 'prevent and restrain' futureconduct rather than to punish past conduct."United States v. Carson, 52 F.3d 1173, 1182(2d Cir. 1995) (emphasis in original). . . .The District Court accepted the SecondCircuit's suggested holding that theappropriateness of disgorgement depends onwhether the proceeds are available for thecontinuing of the criminal enterprise, butruled that the question was premature, anddenied the motion for dismissal on theRICO-disgorgement claim. Philip Morris,116 F. Supp. 2d at 151-52. Neither partysought leave to file an interlocutory appealof that ruling.

The case proceeded, and the Governmentsought disgorgement of $ 280 billion that ittraced to proceeds from Appellants' cigarettesales to the "youth addicted population"between 1971 and 2001. This populationincludes all smokers who became addictedbefore the age of 21, as measured by thosewho were smoking at least 5 cigarettes a dayat that age.

After discovery, Appellants moved forsummary judgment on the disgorgementclaim arguing that (1) disgorgement is notan available remedy under § 1964(a), (2)even if disgorgement were available, theGovernment's model fails the Carson testfor permissible disgorgement that will"prevent and restrain" future violations, and(3) even if disgorgement were available, the

378

Government's proposed model isimpermissible because it includes bothlegally and illegally obtained profits inviolation of SEC v. First City FinancialCorp., 281 US App. D.C. 410, 890 F.2d1215 (D.C. Cir. 1989). The District Courtdenied this motion in a memorandum orderdesignated " # 550." On motion of thedefendants, the District Court certified Order# 550 for interlocutory appeal pursuant to 28U.S.C. § 1292(b)....

II. Analysis

A. Scope of Review

We review an order denying summaryjudgment de novo. Obedient to Yamaha, wewill review Order # 550 denying summaryjudgment applying anew the standards ofRule 56, and will not simply review that partof the District Court's thinking directed tothe applicability of the Carson standard orthe consistency of the Government's profferswith that standard. Therefore, we mustaddress the issue, logically prior to theCarson question, of whether disgorgement isavailable at all. We hold that the languageof § 1964(a) and the comprehensiveremedial scheme of RICO precludedisgorgement as a possible remedy in thiscase.

B. The Availability of Disgorgement

The Government argues that § 1964contains a grant of equitable jurisdiction thatmust be read broadly to permit disgorgementin light of Porter v. Warner Holding Co.,328 US. 395, 90 L. Ed. 1332, 66 S. Ct. 1086(1946), and its progeny. The Porter Courtconsidered reimbursement awards under theEmergency Price Control Act of 1942("EPCA") and concluded that where a

statute grants general equitable jurisdictionto a court, "all the inherent equitable powers... are available for the proper and completeexercise of that jurisdiction." Porter, 328U.S. at 398. This grant is only to be limitedwhen "a statute in so many words, or by anecessary and inescapable inference,restricts the court's jurisdiction." Id. In thiscase the text and structure of the statuteprovide just such a restriction.

As the Supreme Court has repeatedlyobserved: "Federal courts are courts oflimited jurisdiction. They possess only thatpower authorized by Constitution andstatute, which is not to be expanded byjudicial decree." Kokkonen v. Guardian LifeIns. Co. of America, 511 U.S. 375, 377, 128L. Ed. 2d 391, 114 S. Ct. 1673 (1994)(citations omitted). Reading Porter in lightof this limited jurisdiction we must not takeit as a license to arrogate to ourselvesunlimited equitable power. We will notexpand upon our equitable jurisdiction if, ashere, we are restricted by the statutorylanguage, but may only assume broadequitable powers when the statutory orConstitutional grant of power is equallybroad.

As our dissenting colleague correctly notes,the Court in Porter was considering whethera district court acting under the authoritygranted in the EPCA had the authority toorder restitution for overcharges. ...

The Supreme Court did not have to makemuch of a stretch to determine that thephrase "enforcing compliance with suchprovision," and expressly referring to "apermanent or temporary injunction,restraining order, or other order," wouldinclude restitution for amounts collectedexceeding the ceilings determined under thestatute. The Government in the present caseasks us to work a far greater expansion of

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the statutory grant enabling the DistrictCourt in a civil RICO action brought by theGovernment under § 19 64(a). We furthernote that the Court in Porter was orderingrestitution, under a statute designed tocombat inflation. Restitution of overchargeworks a direct remedy of past inflation,directly effecting the goal of the statute.The Court in Porter set forth two theoriesunder which "an order for the recovery andrestitution of illegal rents may be considereda proper 'other order"' under the applicablestatute. 328 U.S. at 399. First, the recoveryof the illegal payment by the victim tenant"may be considered as an equitable adjunctto the injunction decree," as it effects "therecovery of that which has been illegallyacquired and which has given rise to thenecessity for injunctive relief." Id. Theequitable jurisdiction of the Court havingbeen properly invoked, the Court then hadthe power "to decide all relevant matters indispute and to award complete relief. . . ."Id. Also, and more to the point, the Courtwas authorized "in its discretion, to decreerestitution of excessive charges in order togive effect of the policy of Congress." Id. at400. The policy of Congress under theEPCA was to prevent overcharges withinflationary effect. The goal of the RICOsection under which the government seeksdisgorgement here is to prevent or restrainfuture violations. We therefore mustconsider the forward-looking nature of theremedy in a way not applicable to a differentremedy in Porter for the accomplishment ofa different goal under a different statute.

Section 1964(a) provides jurisdiction toissue a variety of orders "to prevent andrestrain" RICO violations. This languageindicates that the jurisdiction is limited toforward-looking remedies that are aimed atfuture violations. The examples given in thetext bear this out. Divestment, injunctionsagainst persons' future involvement in the

activities in which the RICO enterprise hadbeen engaged, and dissolution of theenterprise are all aimed at separating theRICO criminal from the enterprise so that hecannot commit violations in the future.Disgorgement, on the other hand, is aquintessentially backward-looking remedyfocused on remedying the effects of pastconduct to restore the status quo. It ismeasured by the amount of prior unlawfulgains and is awarded without respect towhether the defendant will act unlawfully inthe future. Thus it is both aimed at andmeasured by past conduct.

The Government would have us interpret §1964(a) instead to be a plenary grant ofequitable jurisdiction, effectively ignoringthe words "to prevent and restrain"altogether. This not only nullifies the plainmeaning of the terms and violates our canonof statutory construction that we shouldstrive to give meaning to every word, butalso neglects Supreme Court precedent. InMeghrig v. KFC Western, Inc., 516 U.S.479, 488, 134 L. Ed. 2d 121, 116 S Ct. 1251(1996), the Court held that compensation forpast environmental cleanup was ruled out bythe plain language of the ResourceConservation and Recovery Act whichauthorized actions "to restrain" persons whowere improperly disposing of hazardouswaste. If "restrain" is only aimed at futureactions, "prevent" is even more so.

The order of disgorgement is not within theterms of that statutory grant, nor anynecessary implication of the language of thestatute.

* * *

In RICO ... Congress has laid out elaborateenforcement proceedings. One of those

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proceedings is a government action broughtunder § 1964(a). That one does not providefor disgorgement. That one provides onlyfor orders which "prevent or restrain" futureviolations. Disgorgement does not do that.

It is true, as the Government points out, thatdisgorgement may act to "prevent andrestrain" future violations by generaldeterrence insofar as it makes RICOviolations unprofitable. However, as theSecond Circuit also observed, this argumentgoes too far. "If this were adequatejustification, the phrase 'prevent and restrain'would read 'prevent, restrain, anddiscourage,' and would allow any remedythat inflicts pain." Carson, 52 F 3d at 1182.

The remedies available under § 1964(a) arealso limited by those explicitly included inthe statute. The words "including, but notlimited to" introduce a non-exhaustive listthat sets out specific examples of a generalprinciple. Applying the canons of noscitur asociis and ejusdem generis, we will expandon the remedies explicitly included in thestatute only with remedies similar in natureto those enumerated. The remediesexplicitly granted in § 1964(a) are alldirected toward future conduct andseparating the criminal from the RICOenterprise to prevent future violations.Disgorgement is a very different type ofremedy aimed at separating the criminalfrom his prior ill-gotten gains and thus maynot be properly inferred from § 1964(a).

The structure of RICO similarly limitscourts' ability to fashion equitable remedies.Where a statute has a "comprehensive andreticulated" remedial scheme, we arereluctant to authorize additional remedies;Congress' care in formulating such a"carefully crafted and detailed enforcementscheme provides strong evidence thatCongress did not intend to authorize other

remedies that it simply forgot to incorporateexpressly." . . . In a criminal RICO actionthe defendant must forfeit his interest in theRICO enterprise and unlawfully acquiredproceeds, and may be punished with fines,imprisonment for up to twenty years, orboth. 18 U.S.C. § 1963(a). In a civil casethe Government may request limitedequitable relief under § 1964(a). Individualplaintiffs are made whole and defendantspunished through treble damages under 18U.S.C. § 1964(c). This "comprehensive andreticulated" scheme, along with the plainmeaning of the words themselves, serves toraise a "necessary and inescapableinference," sufficient under Porter, 328 US.at 398, that Congress intended to limit reliefunder § 1964(a) to forward-looking orders,ruling out disgorgement.

Congress' intent when it drafted RICO'sremedies would be circumvented by theGovernment's broad reading of its §1964(a) remedies. The disgorgementrequested here is similar in effect to therelief mandated under the criminal forfeitureprovision, § 1963(a), without requiring theinconvenience of meeting the additionalprocedural safeguards that attend criminalcharges, including a five-year statute oflimitations, 18 U.S.C. § 3282, noticerequirements, 18 U.S.C. § 1963(1), andgeneral criminal procedural protectionsincluding proof beyond a reasonable doubt.Further, on the Government's view it cancollect sums paralleling-perhaps exactly-thedamages available to individual victimsunder § 1964(c). Not only would theresulting overlap allow the Government toescape a statute of limitations that wouldrestrict private parties seeking essentiallyidentical remedies, but it raises issues ofduplicative recovery of exactly the sort thatthe Supreme Court said in Holmes v.Securities Investor Protection Corp., 503US. 258, 269, 117 L. Ed 2d 532, 112 S. Ct.

381

1311 (1992), constituted a basis for refusingto infer a cause of action not specified by thestatute. Permitting disgorgement under §1964(a) would therefore thwart Congress'intent in creating RICO's elaborate remedialscheme.

A note appended to the statute stating thatRICO "shall be liberally construed toeffectuate its remedial purposes" does noteffect this structural inference. OrganizedCrime Control Act of 1970, Pub. L. No. 91-452, § 904(a), 84 Stat. 947 (codified in anote following 18 U.S.C. § 1961). Thisclause may warn us against taking an overlynarrow view of the statute, but "it is not aninvitation to apply RICO to new purposesthat Congress never intended." Reves v.Ernst & Young, 507 U.S. 170, 183, 122 L.Ed. 2d 525, 113 S. Ct. 1163 (1993). Thetext and structure of RICO indicate thatthose remedial purposes do not extend todisgorgement in civil cases.

The Second Circuit in Carson hasinterpreted "prevent and restrain" not toeliminate the possibility of disgorgementaltogether, but to limit it to cases wherethere is a finding "that the gains are beingused to fund or promote the illegal conduct,or constitute capital available for thatpurpose." Carson, 52 F.3d at 1182. TheFifth Circuit adopted this interpretation in acase holding that disgorgement after thedefendant had ceased production of anallegedly defective product would beinappropriately punitive rather than directedtoward future violations. While we avoidcreating circuit splits when possible, in thiscase we can find no justification forconsidering any order of disgorgement to beforward-looking as required by § 1964(a).The language of the statute explicitlyprovides three alternative ways to depriveRICO defendants of control over the

enterprise and protect against futureviolations: divestment, injunction, anddissolution. We need not twist the languageto create a new remedy not contemplated bythe statute.

III. Conclusion

Because we hold that the District Courterred when it found that disgorgement wasan available remedy under 18 U.S.C. §1964(a), we reverse the District Court andgrant summary judgment in favor ofAppellants as to the Governmentsdisgorgement claim.

* * *

DISSENT:

TATEL, Circuit Judge, dissenting:

. . . Philip Morris asks us-and the courtnow agrees-to decide an issue (1) notbriefed in the motion leading up to thecertified order, (2) not decided in the districtcourt's opinion accompanying the certifiedorder, (3) not raised by Philip Morris in itsrequest for certification, (4) not discussed inthe order granting certification, (5) notraised by Philip Morris in its section 1292(b)petition before this court, and (6) decided inan entirely different order which PhilipMorris could at any time have asked thedistrict court to certify. This presentsserious questions on two separate fronts: ourjurisdiction over this appeal under section1292(b), and our general policy of decliningto consider arguments not made to thedistrict court in the motion leading to theorder under appeal. Unlike the court, I

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cannot brush these concerns aside.

I would therefore dismiss the interlocutoryappeal....

But the court disagrees with my position.The appeal stands before us, so in thefollowing sections I exercise a dissenter'sprerogative to address the merits.

II.

Like my colleagues, I begin with thestructure and language of RICO's remedialprovisions. RICO authorizes criminalpenalties and civil remedies against thoseengaging in patterns of racketeeringbehavior. 18 US.C. § 1963 sets out thecriminal penalties: guilty persons shall "befined under this title or imprisoned . . . orboth, and shall forfeit to the United States"any illegally acquired interest. Section 1964provides for the civil remedies. At issue inthis case is subsection (a), [supra].

Another subsection, § 1964(c), authorizesinjured persons to sue RICO violators fortreble damages and to recover attorneys'fees. Finally, Congress directed that RICO"shall be liberally construed to effectuate itsremedial purposes[.]"

The government argues that district courtshave authority to order any remedy,including disgorgement, within theirinherent equitable powers. More narrowly,the government argues that assuming thedistrict courts may only impose equitableremedies for the purpose of keepingdefendants from committing RICOviolations, disgorgement-by reducing theincentives for the tobacco companies toviolate RICO in the future-will accomplishthat purpose in this case. These two distinct

arguments present very differentconsequences for district courts: under thefirst theory, courts may order disgorgementany time they find the remedy necessary toensure complete relief, while under thesecond theory courts may orderdisgorgement only to prevent ongoing orfuture violations. In this case, the districtcourt accepted only the second argument.See 321 F. Supp. 2d at 74-80. The courttoday rejects both.

A.

In dismissing the argument that districtcourts may impose any equitable remedy forRICO violations, the court distinguishes-unconvincingly, in my view-the twoSupreme Court cases relied on by thegovernment, Porter v. Warner Holding Co.,328 US. 395, 90 L. Ed. 1332, 66 S. Ct. 1086(1946), and Mitchell v. Robert DeMarioJewelry, Inc., 361 US. 288, 4 L. Ed 2d 323,80 S. Ct. 332 (1960). I believe these twocases control this case and compel theconclusion that district courts may imposeany equitable remedy for RICO violations.

In Porter, the Supreme Court consideredwhether a district court had authority toorder restitution in a suit brought by thePrice Control Administrator against alandlord who had violated the EmergencyPrice Control Act (EPCA) by charging toomuch rent. The act contained no specificprovision for restitution or disgorgement,but-like RICO-authorized a broad arrayof other remedies, both criminal and civil.

. . . [T]he Court concluded-and I quote atlength since the language is so critical to thedisposition of this case-that

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such a jurisdiction is anequitable one. Unless otherwiseprovided by statute, all theinherent equitable powers of theDistrict Court are available forthe proper and completeexercise of that jurisdiction.And since the public interest isinvolved in a proceeding of thisnature, those equitable powersassume an even broader andmore flexible character thanwhen only a private controversyis at stake. . . . The court maygo beyond the mattersimmediately underlying itsequitable jurisdiction anddecide whatever other issuesand give whatever other reliefmay be necessary under thecircumstances. Only in thatway can equity do completerather than truncated justice.

Moreover, thecomprehensiveness of thisequitable jurisdiction is not tobe denied or limited in theabsence of a clear and validlegislative command. Unless astatute in so many words, or bya necessary and inescapableinference, restricts the court'sjurisdiction in equity, the fullscope of that jurisdiction is tobe recognized and applied.

Id. at 398 (citations omitted). The Courtconcluded that because the EPCA, despitethe very detailed and specific nature of theauthorized remedies, did not rule outrestitution by a "necessary and inescapableinference," the district court could orderrestitution even if not expressly authorizedby the statute. See id at 398-400; see also

Mitchell, 361 U.S. at 291 (discussingPorter).

The court's opinion today sounds a lot likethe Porter dissent. The court observes thatthe language of section 1964(a)-a court has"jurisdiction to prevent and restrainviolations"-does not explicitly open thedoor to all of equity, but neither did EPCAsection 205(a) (a court may issue orders"enjoining" violations or "enforcingcompliance"). The court asserts that readingfull equitable jurisdiction into RICO willrender section 1964(a)'s language largelymeaningless, but Porter rejected just thisconcern with regard to EPCA section205(a). The court emphasizes that RICO"already provides for a comprehensive set ofremedies," majority op. at 18, but the EPCAhad at least as comprehensive a remedialstructure. The court further points out thatshould restitution be available, thegovernment could obtain duplicativerecovery (given RICO's criminal forfeitureprovisions) and also escape the applicablestatutes of limitations, but the Portermajority dismissed similar concerns, 328U.S. at 401-02; see also id at 406-08(Rutledge, J., dissenting). Finally, the courtattempts to distinguish Porter on thegrounds that the EPCA had a differentpolicy goal than RICO (preventing inflationrather than seeking to eradicate organizedcrime), but this has no effect on Porter'sessential holding that "the court may gobeyond the matters immediately underlyingits equitable jurisdiction . . . and givewhatever other relief may be necessaryunder the circumstances," see id. at 398. Insum, the court offers no basis for concludingthat RICO's structure and language get thestatute past Porter's high bar for finding by a"necessary and inescapable inference" that

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Congress intended to empower districtcourts to order only limited equitable relief.

Nor does Philip Morris point to anything inRICO's legislative history that creates such a"necessary and inescapable inference.". . .

Mitchell, the second Supreme Court decisionthe government relies on, consideredwhether district courts could orderrestitution of wages lost from unlawfuldischarge in suits brought by the Secretaryof Labor under section 17 of the Fair LaborStandards Act (FLSA), 29 U.S.C. § 217(1960). Relying on Porter, the Courtconcluded that where the statute providedthat "the district courts are given jurisdiction. . . for cause shown, to restrain violations"of the act, 29 US.C. § 217, district courtshad full equitable powers, 361 U.S. at 291-95; see also id at 289. ...

Mitchell reinforces the proposition thatdistrict courts may order any equitable reliefin civil RICO suits brought by thegovernment. My colleagues suggest that in"the RICO Act, Congress provided a statutegranting jurisdiction defined with the sort oflimitations not present in the FLSA."Majority op. at 16. The only jurisdictionalhook in the FLSA's text, however, was itslanguage: "the district courts are givenjurisdiction . . . for cause shown, to restrainviolations" of the act, 29 U.S.C. § 217. Ifthis language opens the door to all equitablerelief, then RICO's language-"the districtcourts . . . shall have jurisdiction to preventand restrain violations"-certainly does thesame. And if the possibility of duplicativerecovery did not circumscribe the districtcourt's equitable authority under the FLSA,then neither should that possibility underRICO do so.

Instead of following Porter and Mitchell, thecourt relies on a later Supreme Courtdecision, Meghrig v. KFC Western, Inc., 516US. 479, 134 L. Ed. 2d 121, 116 S. Ct. 1251(1996). In Meghrig, the Supreme Courtconsidered whether private citizens couldseek restitution under the ResourceConservation and Recovery Act (RCRA) forthe cost of having cleaned up a priorlandowner's toxic waste. The statuteprovided that the "district court shall havejurisdiction . . . to restrain any person whohas contributed or who is contributing" towaste problems, "to order such person totake such other action as may be necessary,or both." Id. at 482 n.* (quoting 42 U.S. C. §6972(a)). The Court held that it was"apparent from the two remedies described .. . that RCRA's citizen suit provision is notdirected at providing compensation for pastcleanup efforts." Id. at 484. While notexplicitly defining the limits of the tworemedies described, the court suggested thatthese remedies should be equated withprohibitory and mandatory injunctions. Id.Moreover, relying in part on the fact that ananalogous statute expressly authorizeddamages, the Court concluded that "neitherremedy . . . contemplates the award of pastcleanup costs, whether these aredenominated 'damages' or 'equitablerestitution."' Id at 484-85. According tothe Court, it "'is an elemental canon ofstatutory construction that where a statuteexpressly provides a particular remedy orremedies, a court must be chary of readingothers into it."'

The Meghrig Court noted that in arguingthat the district court had inherent authorityto award equitable remedies, the plaintiffsrelied on Porter and its progeny. Id. at 487.Without expressly distinguishing thosecases, the Court explained that "the limitedremedies described in [RCRA], along withthe stark differences between the language

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of that section and the cost recoveryprovisions [of the analogous statute], amplydemonstrate that Congress did not intend fora private citizen to be able to undertake acleanup and then proceed to recover its costsunder RCRA." Id. at 487. Notably for ourpurposes, Meghrig did not overrule Porter.Indeed, even after Meghrig, the SupremeCourt has cited Porter for the propositionthat "we should not construe a statute todisplace courts' traditional equitableauthority absent . . . an 'inescapableinference' to the contrary." Miller v. French,530 U.S. 327, 340, 147 L. Ed. 2d 326, 120 S.Ct. 2246 (2000).

At one level, reconciling Meghrig withPorter and Mitchell is difficult. . . . Thesetensions cannot be dealt with simply bydismissing Porter and Mitchell....

In my view, Porter and Mitchell, notMeghrig, "directly control" this case.Several reasons support this conclusion, andnothing points the other way. First, RICO'sstatutory scheme resembles the EPCA morethan the RCRA. Both RICO and the EPCAstand alone in grappling with a broad socialissue, whereas the RCRA had a closelyrelated statute on which the Court inMeghrig relied heavily. Second, as in bothPorter and Mitchell, the government broughtthe suit rather than a private party like theMeghrig plaintiff, and Porter makes clearthat district courts may have "even broaderand more flexible" equitable powers wherethe public interest is involved, 328 U.S. at398. This point has particular traction if thegovernment is the only party that may seekequitable relief under RICO. Finally,Meghrig's suggestion that "restrain" in theRCRA refers only to prohibitory injunctionscannot apply to section 1964(a), since thatsection explicitly authorizes otherremedies-e.g., divestment-to "preventand restrain" RICO violations. For these

reasons, in determining whether the phrase"prevent and restrain" limits the districtcourt's equitable powers, I think it makesmore sense to look to Porter and Mitchell,not Meghrig.

Finally, while Congress modeled section1964(a) on the antitrust laws. I disagreewith Philip Morris that the Supreme Court'santitrust decisions provide useful guidanceas to whether the phrase "prevent andrestrain" limits the equitable remediesavailable to district courts. On the one hand,the Court once ignored, though did notexplicitly reject, an invitation by JusticeDouglas to apply Porter to antitrust actions.On the other hand, some antitrust casessuggest that courts may impose equitableremedies beyond those intended merely tostop future violations from occurring. Asthese cases illustrate, antitrust precedentoffers little reason to doubt the applicabilityof Porter and Mitchell to the case at hand.

To sum up, Porter and Mitchell rather thanMeghrig control this case, and no "necessaryand inescapable inference" limits the districtcourt's jurisdiction in equity. If the districtcourt concludes that the government hasshown that the tobacco companies havecommitted RICO violations by advertisingto youth despite assertions to the contraryand by falsely disputing smoking'saddictive, unhealthy effects, then it mayorder whatever equitable relief it deemsappropriate. Of course, the court must workwithin the bounds of equitable doctrines,recognizing defenses like laches and uncleanhands, paying due regard for the rights ofthe innocent, and generally exercising itsdiscretion. With these principles in mind,the district court can "do complete ratherthan truncated justice," Porter, 328 U.S. at398.

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B.

In addition to rejecting the government'sargument that district courts may imposeany equitable remedy on RICO violators, thecourt rejects the government's alternative,narrower argument-that even if districtcourts may order only remedies that"prevent and restrain" RICO violations,disgorgement can appropriately accomplishthat purpose. Because the court's analysis ofthis argument is as flawed as its analysis ofthe government's broader argument, I addthis discussion of the issue. In my view, thecourt transforms what should be a questionof fact-what remedies appropriatelyprevent and restrain future violations-intoa question of statutory interpretation in away that disregards section 1964(a)'s plainlanguage and ignores Supreme Courtprecedent recognizing the equitableflexibility of district courts.

The government offers expert testimony tothe effect that a disgorgement order willdeter the tobacco companies from violatingRICO in the future--in the dictionary'slanguage, it will deprive them of the hope ofsucceeding in benefiting from future RICOviolations and hold them back fromcommitting such violations. In essence, thegovernment claims that the tobaccocompanies, having engaged in a persistentpattern of deceptive representations overdecades, will be less likely to continue thisillegal behavior if they must surrender theirpast ill-gotten profits. Treating thegovernment's expert testimony as correct, aswe must at this stage of the litigation, seeAnderson, 477 US. at 255, I think it enoughto forestall summary judgment in PhilipMorris's favor. Indeed, the Supreme Courthas accepted just this theory of deterrence,stating in Porter that restitution "could be

considered as an order appropriate andnecessary to enforce compliance with theAct" since "future compliance may be moredefinitely assured if one is compelled torestore one's illegal gains." 328 US. at 400.If restitution helps enforce compliance, thenwe should have little doubt thatdisgorgement helps prevent and restrainviolations.

This court does not conclude thatdisgorgement can never have a restrainingeffect on future conduct of the defendants-the only conclusion that could justify aholding that district courts can never orderdisgorgement under section 1964(a).Instead, the court offers severalunpersuasive reasons for its conclusion thatas a matter of statutory interpretationdisgorgement is not a permissible remedyunder section 1964(a).

First, the court states that disgorgement "is aquintessentially backward-looking remedy."Majority op. at 15. Although I agree that acourt sitting in equity cannot orderdisgorgement that exceeds a defendant's pastill-gotten profits, this does not meandisgorgement is always backward-lookingand can never have a forward-looking effecton the defendants....

Second, the court concludes that districtcourts are limited not merely by the words"prevent and restrain," but also "by those[three remedies] explicitly included in thestatute" by application of the canonsnoscitur a sociis and ejusdem generis. Evenassuming we should apply these canons,however, they spell out nothing more thanwhat everyone agrees on: that the only"appropriate" orders under this section areequitable ones.

More important, I doubt the canons applyhere at all. While the canons can prove

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useful where there is otherwise "no generalprinciple in sight," here the statute providesthe general principle of preventing andrestraining violations. Indeed, the SupremeCourt declined to use these canonsaltogether in interpreting a statute whichgave the EEOC the power of enforcement"through appropriate remedies, includingreinstatement or hiring of employees with orwithout back pay," 42 US.C. § 2000e-16(b). See West, 527 U.S. at 218[.] I see noreason why we should do otherwise here,especially since section 1964(a) uses theeven more expansive language: "including,but not limited to." Finally, noscitur a soclisand ejusdem generis should not be used tolimit the types of equitable relief available todistrict courts given Congress's instructionthat RICO "shall be liberally construed toeffectuate its remedial purposes," see supraat 14, one of which is preventing andrestraining future violations-an aim that,far from being a "new purpose[ ] thatCongress never intended," expressly appearsin the statute's text. If an equitable remedyachieves this goal, then the statuteauthorizes it.

Third, the court suggests that disgorgementshould be unavailable because it allows thegovernment to achieve relief "similar ineffect" to criminal forfeiture, raisingconcerns that the government can achieveduplicative recovery and evade theprocedural safeguards girding the forfeitureprovision. See majority op. at 19. To besure, such concerns are relevant inconsidering whether to infer additionalcauses of action. As discussed earlier, supraat 18, however, given the Supreme Court'sexplicit rejection of similar concerns inPorter and Mitchell, they cannot carry theday. ...

Of course, that disgorgement maysometimes serve to prevent and restrain

defendants from committing RICOviolations does not mean that it will alwaysaccomplish that purpose. As the districtcourt here recognized, a court must first findthat the defendants are likely to commitfuture RICO violations. 321 F Supp. 2d at75-76. This is not a foregone conclusion.... Assuming district courts are limited toremedies that prevent and restrain, but seesupra Part II.A, I also share the SecondCircuit's apparent conclusion thatdisgorgement may be ordered only toprevent and restrain a defendant from futureRICO violations[.] Because any remedyimposed for a solely exemplary purpose(i.e., to dissuade others from committingRICO violations) would amount topunishment, it goes beyond what Congressintended, see S. Rep. No. 91-617, at 81, aswell as pushing the boundaries of whatequity permits, cf Tull, 481 U.S. at 422. Inthis case, however, the government offersevidence that the defendant companiesthemselves are likely to commit futureRICO violations by misleading the publicabout the health consequences of smokingand the addictive effects of nicotine, as wellas by persisting in marketing to youngpeople.

[A]s noted earlier, record evidence in thiscase suggests that disgorgement will in fact"prevent and restrain" defendants fromcommitting future RICO violations. As oneof the government's experts stated,"Requiring defendants to pay proceeds willaffect their expectations . . . about thereturns from future misconduct." Appellee'sApp. at 813. The expert added that, even ifcoupled with an injunction laden withcontempt penalties, disgorgement will"provide additional economic incentives todeter future misconduct" by "strengtheningthe credibility of existing laws" which the

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defendants have allegedly violated in thepast. Id. at 814. . . . At this stage of thelitigation, then, we must assume that thegovernment expert is correct and thatdisgorgement will "prevent and restrain"future RICO violations. Should PhilipMorris offer expert testimony along the linessuggested by the concurrence, then it will beup to the district court to evaluate thecompeting evidence and make appropriatefindings of fact. Should either party appeal,this court, unrestrained by the inferencesrequired at summary judgment, would thenreview that factual determination pursuant toRule 52's clear error standard.

C.

In sum, were this case properly before us, Iwould hold, in accordance with Porter andMitchell, that district courts have authorityto order any remedy, includingdisgorgement, necessary to ensure completerelief. As the concurrence points out, sep.op. at 9 (Williams, J., concurring), my

approach would create a circuit split, sinceCarson did not apply Porter and Mitchell toRICO (and, indeed, the parties do not appearto have brought these cases to the SecondCircuit's attention). Even if, as Carsonholds, district courts may only imposeequitable remedies for the purpose ofkeeping defendants from committing RICOviolations, I would still affirm the denial ofsummary judgment, leaving it to the districtcourt to determine, on the basis of a fullydeveloped record, whether disgorgementwill help accomplish this purpose. Idisagree with my colleagues' conclusionsnot because they have created a circuit splitof their own by rejecting Carson's holdingthat disgorgement may prevent and restrainRICO violations, but because they havedone so by accepting an interlocutory appealthat we should not hear and by disregardingboth Supreme Court precedent and section1964(a)'s plain language.

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"U.S. Seeks Higher Damages inTobacco Industry Suit"

New York TimesJuly 19, 2005Eric Lichtblau

The Justice Department on Monday askedthe Supreme Court for the legal authorityonce again to seek $280 billion in damagesfrom the tobacco industry in a lawsuit thathas become a growing political liability forthe Bush administration.

Even though the trial judge in the case hasnot yet issued a final ruling, the JusticeDepartment asked the Supreme Court tointervene by overturning an appellate rulingin February that limited the damages it couldseek.

The department said that the Februarydecision, if allowed to stand, would hurt thegovernment's ability to bring similarracketeering cases against businesses andindustries and that it would have "enormousconsequences for the American public."

The decision to appeal was another shift forthe government in the six-year-old case. Atthe close of a nine-month trial, JusticeDepartment lawyers stunned a federalcourtroom last month by cutting the amountof damages they were seeking to $10 billionfrom $130 billion.

Senior Justice Department officials said theyhad little choice but to reduce their demands,in light of the adverse decision in Februaryby the circuit court for the District ofColumbia.

But internal Justice Department documentsshowed that the decision drew fierceobjections from the career lawyers on thetobacco team, who said it was legally

groundless, would be seen as politicallydriven and would undermine thedepartment's position in possible settlementdiscussions with the tobacco industry.Several members of the trial team threatenedto quit over the decision, officials said.

Health advocates and Democrats inCongress also objected to the decision toreduce the requested damages, promptingthe Justice Department to open an ethicsinquiry, still under way, into charges ofpolitical interference.

While the Justice Department said itsdecision was driven solely by legalconsiderations, Democrats pointed to thetobacco industry's frequent politicalcontributions to the Bush administration andits ties to some senior Justice Departmentofficials as evidence of possible politicalmotivations.

Justice Department officials declined todiscuss their thinking in their decision to askthe Supreme Court to overturn the damagelimit. Some tobacco industry lawyers andothers involved in the case speculated thatthe public reaction last month might haveplayed a role.

"Nothing in this case surprises meanymore," said William B. Schultz, a formerJustice Department lawyer who led thetobacco team at the outset of the lawsuit. "Ithink the government has beenschizophrenic in how they've litigated thiscase, but maybe now they've resolved totreat it as an advocate would."

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The Justice Department maintains that thenation's tobacco companies have engaged ina half-century pattern of fraud and deceit inmarketing cigarettes and have been runningwhat amounts to a criminal enterprise. Butin February the appellate court ruled that thegovernment could not seek $280 billion indamages against the industry. It said federalracketeering laws did not allow thegovernment to recover illegally generatedprofits as a way of preventing futureviolations.

In its request for Supreme Court review, theJustice Department said the ruling wouldhave "potentially far-reaching implications"for the government's ability to collectfinancial damages in racketeering cases.The decision, government lawyers said, was"a mistaken precedent that will continue tomisdirect other courts."

Tobacco opponents said they were pleased

by the Justice Department's move.

The ruling "had really tied the hands of theJustice Department in pursuing the mostserious racketeering cases," said Matthew L.Myers, who is president of the Campaign forTobacco-Free Kids and testified for thegovernment in the case. "The concept thatsomeone could engage in a massive criminalenterprise without any risk of giving up theirill-gotten gains turned the racketeeringstatute into a paper tiger."

The tobacco industry has 30 days to respondto the request for a Supreme Court review.An industry lawyer, speaking on conditionof anonymity because he did not want togive away legal strategy for a case still inlitigation, said the cigarette makers wouldprobably argue that the appeal was "ill-timed," because the judge in the case,Gladys Kessler, has not yet ruled ondamages.

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"Government Appeals on Tobacco Remedy"

SCOTUSblogJuly 18, 2005

Lyle Denniston

The Justice Department on Mondayafternoon asked the Supreme Court to rulethat the tobacco industry may be ordered togive up corporate revenues obtained from analleged four-decade campaign of deceptionabout the health hazards of smoking. (Anearlier post, below, examines some of thereasons for and against Supreme Courtreview of the case.)

The industry has not yet been found by aU.S. District Court to have violated thefederal anti-racketeering law, popularlyknown as "RICO." The surrender of gainswould be a remedy only if the SupremeCourt allowed it, and only if liability werefirst found at the trial that is ongoing. Thegovernment has said the industry should berequired to surrender $280 billion in "ill-gotten gains."

Ending uncertainty about whether it wouldtake the long-running case on to the highestcourt, the Department filed a petition forreview (U.S. v. Philip Morris USA, Inc., etal., docket 05-92). It poses a singlequestion:

"Whether the District Court's equitablejurisdiction to issue 'appropriate orders' to'prevent and restrain' violations of theRacketeer Influenced and CorruptOrganizations Act (RICO), 18 USC 1964-a,encompasses the remedial authority to orderdisgorgement of illegally-obtainedproceeds."

Solicitor General Paul D. Clement is nottaking part in the appeal. The petition said,without explanation, that he "is disqualifiedin this case." The lead attorney on the case

is one of his deputies, Acting SolicitorGeneral Edwin S. Kneedler.

The appeal, calling the case "extraordinarilyimportant," challenges a February 4 rulingby the D.C. Circuit. Dividing 2-1, a panel ofthe Circuit Court ruled that RICO does notgive federal judges power to require aviolator to disgorge its gains from pastillegal activity, as a remedy for a civilviolation of the Act. The civil remediesallowed by RICO, the panel found, must belimited to "forward-looking remedies thatare aimed at future violations."

That ruling, the Justice Department appealcontended, "is inconsistent with this Court'sdecisions, squarely conflicts with thedecisions of other courts of appeals, wronglydecides an important issue and, if leftuncorrected, will impede, rather thanadvance, the ultimate resolution of theproceedings in this extraordinarily importantcase."

"The court of appeals," the governmentcontends in the petition, "has disabled thegovernment from employing a criticallyimportant remedial tool-equitabledisgorgement-for achieving Congress'sobjectives. That court has done so in a caseof vital interest to the American public."

The government did not ask the Court toexpedite its handling of the new appeal, so itwill come up in regular order in the CourtTerm that starts Oct. 3. The industry has 30days to file its opposition. Thegovernment's appeal is from a Circuit Courtso it is not mandatory that the Court hearand decide it; that is a matter left to its

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discretion.

In arguing for review, the petition not onlylaments the denial of a disgorgementremedy, but also complains that the CircuitCourt ruling threatens the scope of any otherremedy that could emerge if a RICOviolation is found. The petition noted thatthe industry is now arguing in District Courtthat the February ruling prohibits anyremedy that would cure the ill effects of pastunlawful conduct, including a stop-smokingcampaign aimed at those who previouslyhad become addicted to nicotine-lacedcigarettes.

The government noted that U.S. DistrictJudge Gladys Kessler had not yet issued afinal ruling on remedies, but that she hadcommented that the Circuit Court ruling"simply does not permit non-disgorgementremedies to prevent and restrain the effectsof past violations."

As a result, it noted, the government hascurtailed its proposal for remedies, cutting acessation and education program down to$14 billion lasting no longer than ten years.

(It had previously sought a $130 billionplan, to run for 25 years.)

Even though the case is not yet over inDistrict Court, the new appeal argues thatthe Supreme Court should step in now toresolve the availability of a disgorgementremedy. "If the Court postpones correctionof the court of appeals' mistaken guidanceuntil after the district court issues anartificially constrained final judgment andthis complex case traces a new route throughthe court of appeals, then the district courtwill be precluded from correctly resolvingthis litigation until remand proceedings canbe convened at a far distant date."

The petition suggested that the case mightnot get back to the Supreme Court until thesummer of 2007, putting off a final decisionuntil 2008. If the Court takes the case in itsnext Term, and resolves it by the summer of2005, the District Court could issue a finalruling by the summer of 2006, it said.

The case has already run on in the lowercourts for nearly six years.

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"Huge Tobacco Case Seems Court-Bound"

SCOTUSblogApril 20, 2005

Lyle Denniston

A 3-3 split in the D.C. Circuit onWednesday, denying rehearing en banc on akey remedies issue in the government'smassive and long-running lawsuit againstthe tobacco industry, probably will be thesignal for the Bush Administration to moveon to the Supreme Court. Indeed, it wouldbe astonishing if the government were nowto abandon its attempt to recoup $280 billionof profits made by six tobacco companies-a goal it has pursued relentlessly for nearlysix years.

The tobacco case, now rivaling the fabledJarndyce v. Jarndyce in Charles Dickens'Bleak House, has just gone through its 95thtrial day this week. District Judge GladysKessler in Washington has issued 927orders, and there have been 5,261 docketentries. No entry in that case was morecontroversial than Kessler's Order No. 550,issued on April 24 last year, refusing tothrow out the government's plea that thecompanies "disgorge" corporate earningsmade on sales of nicotine-containingtobacco products. That claim has been apart of the case since it was first filed, onSeptember 22, 1999, under the anti-racketeering RICO Act of 1970.

That order was overturned by the D.C.Circuit, in a 2-1 ruling on February 4 thisyear (Philip Morris USA, et al., v. U.S.,docket 04-5252). Judge Kessler has sincedescribed the decision as "a body blow tothe government's case." The JusticeDepartment sought rehearing en banc,arguing that the panel ruling threatened tocripple the "remedial force" of RICO. Thatwas the request turned down on Wednesday.

Three judges on the D.C. Circuit did nottake part, without saying why, and theremaining six divided evenly; under Circuitrules, five votes were necessary to grant enbanc review. Kessler has said she expectedthe government to take the case on to theSupreme Court if it lost in the Circuit Court.Nothing in the government's actions up tothis point suggests it would surrender now.

Here is the way Kessler, in her Order 550 ayear ago, described the issue: "Thegovernment seeks. .. disgorgement of $280billion dollars of ill-gotten gains for what italleges to be defendants' unlawfulconspiracy to deceive the American public.The government's amended complaintdescribes a four-decade long conspiracy,dating from at least 1953, to intentionallyand willfully deceive and mislead theAmerican public about . . . the harmfulnature of tobacco products, the addictivenature of nicotine, and the possibility ofmanufacturing safer and less addictivetobacco products." The disgorgement wassought under RICO. Kessler ruled thatRICO did not bar a disgorgement remedyeven if it was aimed, at least in part, atpunishing the companies for past conduct, asa deterrent to prevent future violations. Shethus refused to grant the industry summaryjudgment on the point.

The six companies took the issue on to theD.C. Circuit, and the divided panel ruledthat RICO only allowed "forward-looking"remedies. The Act, the majority said, givesfederal courts authority to issue orders "toprevent and restrain" RICO violations."This language indicates that the jurisdiction

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is limited to forward-looking remedies thatare aimed at future violations. . . .Permitting disgorgement . . . would . . .thwart Congress' intent in creating RICO'selaborate remedial scheme."

The appeal was interlocutory, and the trialcontinues before Kessler, with heavy newcontroversy already developed over whatother remedies the government may stillseek if Kessler, in the bench trial, rules thatthe companies did violate RICO. The latesttussle there was over a government requestto call a Harvard Business School professor,Max Bazerman, as a witness to discusspossible removal of senior executives of thetobacco companies, as one possible remedy.

The industry denounced that as "a draconiannew remedy to replace its now-dismissed$280 billion disgorgement claim."

Judge Kessler on April 9 refused to strikeBazerman as a witness or to take any'corporate restructuring remedy" off thetable. The government has not yet begun itscase-in-chief on the remedies issue, so the"corporate restructuring" dispute is likely torecur. The judge and the Justice Departmentcontend that the entire remedies case hasshifted as a result of the D.C. Circuit rulingon the disgorgement question. That, nodoubt, will be a key facet of any appeal thegovernment takes to the Supreme Court.

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"Political Leanings Were Always Factor in Tobacco Suit"

New York TimesJune 19, 2005Eric Lichtblau

The case started as a bombshell: deep intohis State of the Union address in 1999,President Bill Clinton surprised even themost ardent antismoking advocates byannouncing that he was unleashing theconsiderable resources of his JusticeDepartment to prepare a lawsuit against BigTobacco.

Nine months later, a team of lawyersworking in the bowels of the JusticeDepartment made good on the president'spromise by filing what amounted to one ofthe biggest federal lawsuits in history,accusing cigarette makers of a half-centuryof fraud, deceptive advertising anddangerous marketing practices.

The career lawyers working the case sawthemselves on the cutting edge of a novel ifcontroversial piece of litigation, severalrecalled in interviews. But exuberanceturned to trepidation for some of the lawyers15 months later when the Bushadministration inherited the case. Somesenior officials in the new administrationsaw the case as an albatross that promptedclear ambivalence, if not outright hostility.

John Ashcroft, who had opposed the lawsuitwhile a senator, pronounced it weak aftertaking over as attorney general, and tried tocut the money for it. And President Bushhimself, asked about the lawsuit in aninterview in early 2001 on Fox News, said,"I worry about a litigious society." Notingthat many states had already sued thetobacco industry and forced settlements, Mr.Bush said, "At some point, you know,enough is enough."

Nearly six years after the lawsuit wasbrought, that point may finally have come.

At the close of a nine-month trial, the JusticeDepartment has now reduced the penalties itwas seeking from the tobacco industry to$10 billion from $130 billion. Seniorpolitical appointees at the department madethe move despite strong objections fromleaders of the trial team running the case,who argued that the decision was not basedon the facts of the case, would appearpolitically motivated and would underminethe government's position in a possiblesettlement, according to a May 30memorandum disclosed last week in theNew York Times. With speculation swirlingabout a possible settlement, the governmentfiled a sealed motion in the case late onThursday. The judge, who must now decidewhat penalties, if any, to impose against thetobacco industry, scheduled a last-minutehearing for Monday, which will apparentlybe closed to the public. Officials would notdiscuss the nature of the government'smotion or the topic of the hearing.

The case has created a political tempest forthe Bush administration, as health advocatesand Democrats in Congress have protestedthe decision as politically calculated, and ithas prompted an internal ethics investigationby the Justice Department.

"There is no clearer example of thisadministration's view that government andthe courts should protect big corporationsfirst and real people last," Senator EdwardM. Kennedy, Democrat of Massachusetts,said in a speech on the Senate floor. "They

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made a political decision to back BigTobacco."

Janet Reno, the attorney general under Mr.Clinton, who brought the case in 1999, saidthe Bush administration needed to do abetter job of explaining why it changedcourse so abruptly at the 11th hour in thecase.

"I've never heard of a party changing itsposition in a manner so inconsistent with itspast positions," Ms. Reno said in atelephone interview. "To have this casepulled out from under the career lawyerslike this deserves an explanation, and ifthere was no political interference, we candispel that notion."

The district court judge hearing the case inWashington, Gladys Kessler, said in court ofthe Justice Department's abrupt shift,"Perhaps it suggests that additionalinfluences have been brought to bear onwhat the government's case is."

But the Justice Department has resolutelydefended its position, saying that itsdecisions have been based not on politicalconsiderations but on legal ones, particularlyin light of a February appellate courtdecision that limited the types of penaltiesthe government could seek.

The tobacco case has always been politicallytinged, whether a Democrat or a Republicanwas in the White House. Mr. Clinton'scritics accused him of demonstratingexcessive exuberance and an overly litigiousnature in ordering up the lawsuit, while Mr.Bush's critics see his administration'sambivalence toward the lawsuit as evidenceof its close ties to big business in generaland the tobacco industry in particular.

Past and present members of the tobacco

trial team say that during the Clinton and theBush administrations, the political leaningsof whichever administration was in chargewere always a factor in a case involving somuch money and so many powerful players.

"I don't know that what the Bushadministration has done is any morepolitically based than what Clinton did inbringing the case in the first place," saidPaul Honigberg, a lawyer who worked onthe Justice Department's case from itsinception and left as deputy director of thetrial team in September 2001. "A high-profile case like this represents a placewhere policy and the law inevitably cross,and you have to figure senior officials in theJustice Department have a right to makedecisions based on their view of policy andthe law," he said.

At the center of the shifting politicaldynamics are the several dozen careerJustice Department lawyers on the trialteam, who have reviewed millions of pagesof documents and interviewed hundreds ofwitnesses over the last six years. Lawyerstraveled to far-flung spots from Minnesotato England and Australia in search ofevidence to corroborate their theories offraudulent conduct by the tobacco industry.The cost of prosecuting the case topped$135 million as of the latest official tallyfrom the Justice Department last October.

At the outset of the case, recalled Thomas J.Perelli, a Justice Department official in theClinton administration who oversaw thelawsuit's inception, skeptics among thelawyers doubted whether a huge civil casecould be brought. The lawyers threw outsome theories altogether, like an antirustclaim.

"But the more people started getting into thefacts of the case and saw the pattern of fraud

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by the industry, the more people started toreally believe in the case," Mr. Perelli said.

The Justice Department has had its share oflegal setbacks in court. Early on in the case,Judge Kessler threw out one of thegovernment's central claims-that thetobacco industry should reimburse thegovernment for the Medicare costs forpeople made sick by smoking in pastdecades.

And an appellate decision in Februarydenied the government the chance to seizeany ill-gotten profits from the tobaccoindustry's past practices and imposed a"forward-looking" model on any penalties,That decision, Judge Kessler acknowledgedin a February order, "struck a body blow tothe government's case," and it forced thegovernment to rely on what some lawyerscalled a Plan B, seeking damages from thetobacco industry to pay for a program tohelp nicotine addicts stop smoking. Monthsafter the appellate court ruled, the JusticeDepartment put on a health expert who saidthe smoking cessation plan would cost $130billion over the next 25 years, and it filed amotion just a month ago, signed by seniorofficials, backing that plan.

The Justice Department said the appellatedecision left it with little choice but to limitthe damages it sought from the tobaccoindustry. In the view of the tobaccoindustry, that department's decision to scaleback reflected years of over-reaching by the

career lawyers in the case.

"The government lawyers running this casewere creative and tenacious and werebasically pounding a square peg in a roundhole," said William S. Ohlemeyer, a vicepresident with the Altria Group, which ownsPhilip Morris USA, one of the tobaccodefendants. "But sooner or later, the lawcatches up with a case like this."

Health advocates and Democrats maintainthat it was not the law, but politics, thatdrove the recent turn of events. Democratshave circulated a long list of financial tiesthat they say run deep between the Bushadministration and the tobacco industry.Those ties include $2.7 million in industrycontributions to Republicans in 2004, thepast work of several senior JusticeDepartment officials at law firms that haverepresented tobacco companies, and politicalconsulting work that Karl Rove, a seniorBush advisor, did for Phillip Morris in the1990's.

The Justice Department's decision to cut itsproposed penalties "was a decision thatlooks like it was made for other than legalreasons," said Matthew L. Myers, who ispresident of the Campaign for Tobacco-FreeKids and testified for the government in thecase. "All too often, the Republicanleadership has been perceived as doing thebidding of the American tobacco industry,and I'm afraid that's what we may be seeinghere."

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Bank of China v. NBM, LLC

(03-1559)

Ruling Below: Bank of China v. NBM, LLC, 359 F.3d 171 (2nd Cir. 2004), cert. granted 125 S.Ct. 2956 (U.S. June 27, 2005).

Bank of China sued defendants, individuals and companies, allege a civil RICO claim based onbank fraud. A jury trial returned verdict in favor of the bank, finding that the defendantsbreached contracts with the Bank of China. The district court entered judgment for the bank inan amount in excess of $106 million. The Second Circuit Court of Appeals vacated thejudgment and remanded, holding that the district court erred in instructing the jury that the bankcould be defrauded regardless of whether its officers and employees were aware of orparticipated in the fraud. The district court also erred in not requiring the bank to prove"reasonable reliance." The Second Circuit held that this was not harmless error because it failedto inform the jury of an essential element of a civil RICO action predicated on fraud.

Question Presented: Did the Court of Appeals for the Second Circuit err when it held that civilRICO plaintiffs alleging mail and wire fraud as predicate acts must establish "reasonablereliance" under 18 U.S.C. § 1964(c)?

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"Second Circuit Reverses $106 Million Fraud AwardDue to Erroneous Jury Instruction on Reliance"

Commercial Lending Litigation NewsMarch 5, 2004

In a case that proves the devil is in thedetails, a lender lost a 106 million award forbank fraud because a District Courtmisstated the applicable law when it gave ajury instruction. The 2d U.S. Circuit Courtof Appeals ruled that the instruction, whichdid not require the lender to show that itreasonably relied on borrowers' fraudulentmisrepresentations, relieved the lender of itsburden of proof and warranted a reversal ofthe verdict. (Bank of China v. NBM LLC, elal., No. 02-9267 (2d Cir. 02/17/04).)

The Bank of China sued severalcorporations and individuals, including aformer employee, claiming they defrauded itof 34 million over a 10-year period througha series of loan transactions. A juryawarded the lender 35.4 million incompensatory damages, and the U.S.District Court, Southern District of NewYork trebled the award as permitted underthe Racketeer Influenced and CorruptOrganizations Act (see Oct. 3, 2002 issue, p.2). The debtors appealed.

To prevail on a civil RICO claim, a plaintiffmust show that the defendant's fraudulentacts were the proximate cause of its injury.For certain types of fraud, including mail,wire or securities fraud, a plaintiff canestablish proximate causation by provingthat it reasonably relied on the defendants'representations. The debtors argued that theDistrict Court's jury instruction, stating thatthe bank could be defrauded even if itsemployees knew the true nature of the loantransactions, was erroneous because it didnot require the bank to prove reasonablereliance.

U.S. District Judge Shira A. Scheindlin,sitting with the 2d Circuit by designation,noted that no Circuit or District Courts hadexplicitly addressed whether a plaintiff mustprove reasonable reliance when it bases aRICO claim on bank fraud. However, thejudge pointed out that civil RICO plaintiffsmust satisfy the proximate causerequirement, regardless of whether thedefendant committed bank fraud or someother prohibited action. Determining thatrecovery is not warranted unless a plaintiffcan show that the defendants caused itslosses, the court concluded that the Bank ofChina needed to prove it reasonably reliedon the debtors' misrepresentations.

Although the District Court instructed thejury that the lender needed to provereasonable reliance to establish common lawfraud, it also stated that the lender could be avictim of bank fraud even if its officers andemployees participated in the debtors'fraudulent activities. If the lender'semployees knew the true nature of the loantransactions, the lender could not have reliedon the debtors' misrepresentations when itapproved the loans.

"These two instructions are at bestconfusing, at and worst irreconcilable," thejudge wrote.

Because the cumulative jury instructionsfailed to inform the jury about an essentialelement of the lender's bank fraud claim,Judge Scheindlin explained, the lender didnot have to sustain its burden of proof andthe debtors were not able to present theirbest defense. The jury could have inferred

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from the evidence that the lender'semployees knew about the debtors'fraudulent misrepresentations and that thelender did not rely on the statements.

Concluding the error was not harmless, the2d Circuit reversed the lender's 106 millionaward and remanded the case for a new trial.

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Wachovia Bank, National Association v. Daniel G. Schmidt III, et. at

(04-1186)

Ruling Below: (Wachovia Bank, National Association v. Daniel G. Schmidt, 388 F.3d 414 (4thCir. 2004), cert. granted, 125 S.Ct. 2904, 73 U.S.L.W. 3540, 73 U.S.L.W. 3713, 73 U.S.L.W.3718 (U.S. June 13, 2005) (No. 04-1186)).

Wachovia is a national banking association with a principal place of business in Charlotte, NorthCarolina. Wachovia has branch offices in several other states, including South Carolina. DanielG. Schmidt is a citizen of South Carolina. Schmidt accused Wachovia of fraud, and filed suitagainst Wachovia in South Carolina state court. Wachovia removed the case to federal districtcourt, claiming that the federal district court had diversity subject matter jurisdiction. Thedistrict court ruled against Wachovia on the merits of the claim, and Wachovia appealed to theFourth Circuit Court of Appeals. At the court of appeals, Schmidt argued that there was nodiversity of citizenship between Wachovia and Schmidt. He claimed that according to 28U.S.C.S. § 1348 Wachovia was "located" in South Carolina for purposes of determiningcitizenship because Wachovia had branch offices within the state. The court of appeals agreedwith Schmidt, concluding that a national bank is the citizen of any state in which it operatesbranch offices. This ruling contradicts with decisions in the Fifth and Seventh Circuit Court ofAppeals.

Questions Presented: Whether, for purposes of federal diversity jurisdiction, a national bankingassociation is "located" in, and thus deemed to be a citizen of, every state in which theassociation maintains a branch, as held by the court below, or instead has a more limitedcitizenship, as held by three other courts of appeals; and (ii) whether the word "located," as usedin, 28 U.S.C.S. § 1348 is ambiguous?

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"National Bank's Branches DestroyDiversity Jurisdiction, 4th Circuit Holds"

Daily Record (Baltimore, MD)November 8, 2004

Barbara Grzinci

National banks with branches in Marylandcannot use the federal courts to litigate state-law claims by or against Maryland citizens,the 4th U.S. Circuit Court of Appeals hasheld.

The court broke ranks with two other federalappeals courts that recently decided thesame issue, setting the stage for a possibleSupreme Court battle-a fact that left the 2-1 majority unconcerned.

"Questions of statutory interpretation are notdecided by majority vote of the courts ofappeals"," Judge J. Michael Luttig wrote forthe majority. "That our sister circuits maydisagree with us in any given case issignificant only insofar as their reasoning ispersuasive. Here, that reasoning is simplyunconvincing."

The disagreement arose over the properboundaries of a federal court's diversityjurisdiction, that is, its authorization to heardisputes between citizens of different states.

Federal law provides that, for purposes ofdiversity jurisdiction, national banks aredeemed to be "citizens of the States in whichthey are respectively located."

Under the plain meaning of the statute, "anational banking association is 'located'wherever it operates branch offices," Luttigwrote.

That decision echoes a comment made lastyear by the 2nd U.S. Circuit Court ofAppeals interpreting the same federal law,

28 U.S.C. §1348, Luttig noted.

However, the 5th and 7th Circuits reachedthe opposite conclusion in opinions this yearand last; so, too, did the 9th Circuit in 1943,interpreting a 19th-century version of thelaw.

The majority last week foundinterpretations "utterly implausible."

those

Writing in dissent, Judge Robert B. Kingsaid national banks should have the sameaccess to federal courts as state banks andcorporations, for which a branch office inone state does not automatically destroydiversity jurisdiction.

"The Comptroller of the Currency has alsoendorsed this view," King noted. "[O]urcreation of a circuit split on this issue isunwarranted," he wrote. "Because themajority has unjustifiably circumscribedfederal court jurisdiction of disputesinvolving national banks, I respectfullydissent."

Last week's decision sends a disputebetween North Carolina-based WachoviaBank N.A. and a South Carolina investor,Daniel G. Schmidt III, back to the SouthCarolina state court where it was filed.

Schmidt and other plaintiffs claimedWachovia fraudulently induced them toengage in a risky, tax-motivated investmentscheme.

Wachovia removed the action to federal

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court and appealed to the 4th Circuit afterthe federal judge refused to compelarbitration.

On appeal, Schmidt argued for the first timethat the federal court lacked diversityjurisdiction because Wachovia had branches

in South Carolina. The majority agreed andvacated the ruling, ordering the caseremanded to state court.

The 4th Circuit's decision is binding onfederal courts in Maryland, North Carolina,South Carolina, Virginia and West Virginia.

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Documents

Section 6: Business Law