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United States Supreme Court Decisions of Interest to Marketers - October 2010 Term

The recent Supreme Court term resulted in a number of very important decisions that will impact companies engaging in advertising and marketing in the United States. Some decisions, such as Wal-Mart v. Dukes and AT&T v. Concepcion were pro-business particularly in the class action context.

The recent Supreme Court term resulted in a number of very important decisions that will impact companies engaging in advertising and marketing in the United States. Some decisions, such as Wal-Mart v. Dukes and AT&T v. Concepcion were pro-business particularly in the class action context. Also of significance was the Court's equating data collection practices with First Amendment free speech rights and corporate privacy in connection with law enforcement investigations. Finally, the Court handed down two decisions of interest in connection with jurisdiction. Summaries of the more pertinent decisions follow.

1. Class Actions

A. Particularized Inquiry Required

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)

In Wal-Mart v. Dukes, the Court reversed the lower court's certification of a nationwide class of female employees alleging sexual discrimination. The ruling is important in the context of employment practices but the Court's analysis of common questions of fact extends well beyond employment discrimination and will impact future consumer protection class actions.

Wal-Mart v. Dukes involved an employment discrimination class action against Wal-Mart, the nation's largest private employer. There, female employees alleged that the employer was liable for disparate impact and disparate treatment under 42 U.S.C. § 2000e-2 because it gave local managers discretion over pay and promotions, which the employees alleged were exercised disproportionately in favor of men. The lower court certified a class of female employees.

In determining whether class certification is appropriate, courts look to Rule 23 of the Federal Rules of Civil Procedure which provides factors such as the size of the potential class, commonality of issues of law and fact, whether the asserted claims are typical of those of the class and whether the plaintiffs and counsel are adequate representatives of the class. If these prerequisites are met, the court will then look to other factors, including, as in this case, whether the defendant engaged in conduct applicable to the entire class so that the resolution of the class representatives claims would be applicable to the absent class members.

The Supreme Court held that the employees' class could not be certified because the action did not satisfy the commonality requirement of Fed. R. Civ. P. 23(a)(2). The employees failed to prove the employer operated under a general policy of discrimination. An expert who testified that the employer had a strong corporate culture that made it vulnerable to gender bias did not determine how often stereotypes played a meaningful role in employment decisions. The employees' statistical and anecdotal evidence did not show that a common mode of exercising managerial discretion pervaded the entire company. Because a determination of gender bias required an individualized determination of each employee's claim, plaintiffs' claims should not be adjudicated on a class-wide basis.

The decision is of great import to marketers facing potential class actions. Here, the Court stressed that commonality is a critical component. If a plaintiff cannot show pervasive corporate action intent, certification will likely be denied because the case will require scrutinization of individualized claims. This scrutiny could entail what authority was provided by a consumer in agreeing to a particular transaction or what was the take away from an advertisement.

B. Enforcement of Class Action Waiver and Arbitration Requirement

AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011)

This decision involved the enforceability of mandatory arbitration provisions in contracts for cellular services. The ruling, which came as a surprise to many, found the arbitration clauses to be enforceable, and plaintiffs were barred from filing lawsuits.

The Supreme Court ruled that the mandatory arbitration clause in the contract, including a class action waiver was enforceable. Under this provision, plaintiffs had to submit disputes to arbitration but could not arbitrate any claims on a class-wide basis. The Supreme Court disagreed with lower courts that found that such an agreement would be unconscionable under state law. Instead, the Court found that the Federal Arbitration Act, which reflects a liberal policy favoring arbitration, trumped state law to the contrary. The Court found that the arbitration provision was enforceable and barred class wide relief.

This decision is potentially very important to advertisers who seek to rely on individualized alternative dispute resolution in lieu of class action litigation. Here, the Court recognized the primary importance under federal law of arbitration. Businesses that wish to rely upon the decision should take steps to make the dispute resolution fair to consumers that is clearly and prominently disclosed prior to obtaining assent.

2. First Amendment/Commercial Speech Protections

A. Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (2011)

In Sorrell, the Supreme Court gave a strong boost to First Amendment commercial speech protection by recognizing that it should apply to data collection practices. At issue in the case was the Vermont Prescription Confidentiality Law, which restricted the sale, disclosure and use of pharmacy records revealing doctors' prescribing practices for marketing purposes. Here, a data mining company, IMS collected prescription drug prescriber information to sell to drug companies to ascertain what drugs particular doctors were prescribing. IMS and certain brand drug companies challenged the Vermont law as a violation of their First Amendment right to commercial speech.

Because content-based speech was at issue (the restrictions only applied to the use of the data for marketing purposes), the Court analyzed the Vermont statute under heightened judicial scrutiny. The Court found that the burden on the protected speech could not be justified by Vermont's asserted interests in physician confidentiality, protecting doctors from harassing sales behaviors, and protecting the doctor-patient relationship. Furthermore, the Court found that the statute did not permissibly advance Vermont's goals of lowering the costs of medical services and promoting public health. Accordingly, the Court affirmed the Second Circuit's decision striking down the Vermont statute as unconstitutional.

The decision reflects the Court's support of data collection and use for marketing purposes as First Amendment protected speech. States that seek to restrict such practices must meet a heavy burden to show the reasons justifying the restrictions meets a heightened level of judicial scrutiny supporting the restriction. The Court's First Amendment recognition of data collection practices will likely be of critical importance to the extent Congress or other states enact data collection restrictions that permit the use of data by certain constituents over others.

B. Brown v. Entertainment Merchants Association, 131 S. Ct. 2729 (2011)

In Brown, the Court found that video games qualify for First Amendment protection and that the state's attempt to regulate their sale to minors was unconstitutional because California failed justify the restriction or show that the law was narrowly tailored. The Court also gave strong support to self-regulatory programs established and implemented to address the state's concerns.

The California law at issue prohibited the sale or rental of "violent video games" to minors, and required that violent video games be placed in packaging labeled "18." An association that represented the video-game and software industries filed a pre-enforcement action against the Governor of California claiming that the statute violated the First Amendment's freedom of speech guarantee. The district court enjoined California authorities from enforcing the statute, and the decision was affirmed by the Ninth Circuit. On appeal, the Supreme Court affirmed, finding that video games were a protected means of expression under the First Amendment, and that the state's attempt to regulate their sale required strict scrutiny; i.e., was the statute's restriction of speech justified by a compelling government interest and narrowly tailored to serve that interest.

The Court found California could not meet the strict scrutiny standard. It failed to show that violent video games caused minors to act aggressively, and any demonstrated effects were small and indistinguishable from those produced by other media, such as Saturday morning cartoons. For this reason, the statute was under-inclusive, causing concern that the State was disfavoring a particular type of speaker (video game makers). Moreover, California could not show its restrictions met the alleged needs of parents wishing to restrict their children's access to these violent games (i.e., it was over inclusive). The Court also found that the state's goals were met by a self-regulatory ratings practice.

The decision is important to marketers because it represents a potential expansion of free speech rights. The decision is also of interest because it demonstrates that an effective self-regulatory practice can be recognized as a viable alternative to formal legislation in evaluating the government's needs.

3. Do corporations have privacy rights?

Federal Communications Commission v. AT&T, Inc., 131 S. Ct. 1177 (2011)

The Court's decision in FCC v. AT&T may significantly limit a corporation's right to claim privacy protections relating to its affairs, particularly as it relates to information disclosed in law enforcement investigations. While the decision was limited to the "personal privacy" exemption regarding law enforcement activities in connection with Freedom of Information Act (FOIA) requests, the Court's harsh criticism of the corporate position does not bode well for future corporate protections.

In 2004, the Federal Communications Commission (FCC) and AT&T agreed to produce a program called "Education-Rate" that would enhance access for schools and libraries to advanced telecommunications and information services. When AT&T disclosed to the FCC that it might have overcharged the government for their services, an investigation into AT&T's company documents (including emails, pricing and billing information, employees' names and job descriptions, and responses to interrogatories) was conducted. This matter was resolved between AT&T and the FCC when AT&T agreed to pay the government $500,000 and institute a plan to comply with the program. In the settlement, AT&T did not concede liability. Thereafter, a trade association, CompTel, on behalf of AT&T's competitors, submitted a FOIA request from the FCC Bureau seeking all pleadings and correspondence between AT&T and the FCC. AT&T objected to the disclosure on the grounds of personal privacy.

FOIA requires federal agencies to make records and documents publicly available upon request, subject to several statutory exemptions. 5 U.S.C. §552. The exceptions to this Act include §552(b)(4), which excuses disclosure of trade secrets and commercial or financial information, and §552(b)(7)(C), which exempts law enforcement records if disclosure would constitute an unwarranted invasion of personal privacy. The FCC argued that while AT&T should be afforded some protection under §522(b)(4), the exemptions afforded under §522(b)(7)(C) should not be granted because a corporation is not considered a person and therefore should not be conferred a benefit it is not owed. AT&T unsuccessfully argued that Congress previously defined the word "person" to include corporations, and therefore Corporations are entitled to the exemption.

While the Third Circuit agreed with AT&T, the Supreme Court did not. In a unanimous decision, the Supreme Court found that while corporations may be entitled to personal rights against unreasonable search and seizure under the Fourth Amendment and freedom from double jeopardy, these rights are not extended to FOIA's personal privacy exemption. Additionally, the Court explained that while Congress intended for §522(b)(4) to apply to corporations, §522(b)(7)(C) was intended only to apply to the privacy right of individuals. Accordingly, the exemption afforded under §522(b)(7)(C) is not extended to corporations and the FOIA disclosure was authorized.

The decision should be of concern to advertisers. While other exemptions may apply, information produced to the government in connection with law enforcement investigations and actions will not be protected under the "personal privacy" exemption where the party making the production is a business entity. Beyond the direct ramifications of the decision, the Court may be signaling an overall anti-corporate right to confidentiality.

4. Jurisdiction

The Court announced two important decisions relating to foreign jurisdiction. The cases are discussed below.

A. Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846 (2011)

In Goodyear v. Brown, the Supreme Court found that Goodyear's foreign subsidiaries who did not conduct business in the United States were not amenable to suit in North Carolina since the claims were unrelated to any activity by them in that state. At issue was a wrongful death claim on behalf of two North Carolina boys who died in a bus accident that occurred in France. Attributing the accident to a tire that failed, their parents alleged negligence in the design, construction, testing, and inspection of the tire, which was manufactured in Turkey by a foreign subsidiary. The three subsidiaries were incorporated in Turkey, Luxembourg, and France and manufactured tires primarily for sale in Europe and Asia. A small percentage of their tires were distributed in North Carolina by other affiliates. The state court relied on the subsidiaries' placement of their tires in the "stream of commerce" to justify general jurisdiction over the subsidiaries. The Supreme Court determined that the subsidiaries were not amenable to general jurisdiction in North Carolina because the attenuated connections there fell far short of the continuous and systematic contacts necessary to entertain an action against them on claims unrelated to anything that connected them to North Carolina. The sporadic sales in North Carolina through subsidiaries were insufficient to warrant general jurisdiction. The decision illustrates the Court's recognition that subsidiaries' actions must be examined distinctly from their parent or affiliates for jurisdictional purposes.

B. J. McIntyre Machinery Ltd. v. Nicastro, 131 S. Ct. 2780 (2011)

In this case, Robert Nicastro sued J. McIntyre Machinery in New Jersey state court after he injured himself on one of the company's machines. Although the accident happened in New Jersey, the machine was manufactured in England. J. McIntyre had very few contacts with New Jersey; although a distributor sold the machines in the United States, only four at most were located in New Jersey. The New Jersey Supreme Court ruled the four machines were sufficient to exercise jurisdiction over J. McIntyre in New Jersey.

The Supreme Court, in a plurality opinion by Justice Kennedy, disagreed, finding that the defendant had not done sufficient in-state business to be governed by the state's laws. The Court found it insufficient to exercise jurisdiction simply because a company's products might be sold in a particular state. Rather, the test was whether the company conducted commercial activity in the state or benefited from New Jersey's laws. Here, the company did neither, so jurisdiction was lacking.

The decision similarly highlights the importance of examining a foreign company's activities in a particular state. Here, the Court expressed recognition of a lack of jurisdiction because the company did not intend to engage in New Jersey commerce. The sharply divided opinion is somewhat of a surprise given that the actual product at issue was sold and caused the injury in New Jersey.

CONCLUSION

The decisions in the October 2010 Term will have significant impact to marketers in the future. The Court seems keenly aware of the importance of First Amendment free speech rights relating to commercial speech. In addition, the Court has shown a strong willingness to limit consumer class actions.

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