The High Court Has Business Holding Its Breath

It may be one of Washington's worst-kept secrets: The conservative U. S. Supreme Court has been no friend to business. In fact, you can argue that the court isn't just hostile to business, it isn't even interested in hearing business cases. It's understandable that matters such as abortion, the death penalty, and religious freedom dominate the justices' calendar. But on a docket that's shrinking by the year, the number of business cases is falling even faster, dropping 46% since 1986, according to a report prepared for the U. S. Chamber of Commerce.

That means the few business cases the court does take assume added importance. And on Oct. 7, when the court begins its new term--most likely with new Justice Clarence Thomas--Corporate America will be watching closely. Among the issues the court will wrestle with are the deductibility of expenses in takeovers, the cigarette industry's liability for smokers' ills, and the breadth of federal environmental and antitrust laws (table).

JURORS WHIMS? The court won't wait long to consider the big issues. The day after they convene, the justices will hear oral arguments in the tobacco industry liability case, perhaps the most important business case of the term. At issue is whether the 1965 federal law requiring health warnings on cigarette packs effectively bars smokers who claim cigarettes gave them cancer from suing the industry under state law. In the case, Cipollone vs. Liggett Group et al., an appeals court barred the estate of Rose Cipollone, a New Jersey smoker who died in 1983, from seeking damages for smoking-related injuries suffered after 1965. The Supreme Court's ruling will turn on the question of whether the federal law preempts state remedies--and the result could affect far more than tobacco liabilities.

That's because other cases pending before the court involve whether federal laws preempt state airline advertising rules or bar liability suits against pesticide makers. Thus, a broad coalition of manufacturers, including Coca-Cola, General Electric, and Toyota, is urging the court to rule in favor of the cigarette makers, warning that to do otherwise would expose business to the whims of judges and juries in 50 different states. "Virtually every preemption case that's brought will be affected by the court's decision here," notes Chicago lawyer Mark I. Levy.

Another hot-button matter the court will consider is whether companies that are the targets of friendly takeovers can deduct expenses such as investment-banking advice incurred in the deal. Unilever PLC bought National Starch & Chemical Corp. in 1978 in such a transaction. While considering the offer, National Starch, later renamed INDOPCO, incurred more than $2 million in fees to Morgan Stanley & Co. and claimed the expense as a deduction. The Internal Revenue Service disallowed the charge, and the Tax Court upheld the IRS.

The agency's reasoning: The fees were related to the company's "permanent betterment." And because they generated benefits for an indefinite period, the fees couldn't be amortized, either. Some tax experts fear that if the Supreme Court sides with the IRS, it will embolden the agency to cut back other takeover costs that are now deductible, adding to the cost of such transactions. "It's not going to be a deal-killer," says Price Waterhouse mergers specialist Gregory M. Fowler. "But it's going to be a factor."

Another financial matter before the court is the question of the Federal Reserve's power to force bank holding companies to strengthen the capital of their subsidiary banks. An appeals court had invalidated the Fed's effort to force Houston-based MCorp. to pump capital into some of the troubled banks it owned. The Fed, however, says the ruling curbs its ability to promote sound banking practices and to regulate an industry in turmoil.

NERVOUS WAIT. In a case of great significance to computer and office-equipment manufacturers, the justices will ponder whether Eastman Kodak Co.'s refusal to sell replacement parts to independent companies that service Kodak photocopiers is anticompetitive and violates federal antitrust law. "The after-market service of big-ticket items is a multibillion-dollar industry," notes Philip A. Lacovara, former chief counsel to General Electric Co.

Business is awaiting the outcome of these cases with some trepidation. In recent years, industry has suffered stinging defeats on everything from punitive-damage awards to state intervention in mergers. Indeed, that has led Corporate America to borrow a page out of its opponents' playbook. After liberal activists encountered setback after setback at the high court in the 1980s, they turned to Congress and the states for help. Now, corporate lawyers and industry groups are doing the same on product liability, takeover rules, and a host of other problems. But with Congress moving at a snail's pace on these issues, business can't afford to disregard the court completely, no matter how hostile it may be.


Cipollone vs. Liggett Group et al

Does the federally required labeling on cigarette packs immunize cigarette makers from state liability lawsuits?

ENVIRONMENT Arkansas vs. Oklahoma

Can a state downstream from another state's water-treatment facility impose its environmental standards on the upstream state?

TAXATION INDOPCO vs. Internal Revenue Service

Can expenses incurred during a friendly takeover be deducted from income taxes?

ANTITRUST Eastman Kodak vs. Image Technical Services

Can Kodak refuse to sell spare parts to independent companies that service Kodak products?