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WEST VIRGINIA v. CHAS. PFIZER & CO.

June 24, 1970

State of West Virginia, Plaintiff
v.
Chas. Pfizer & Co., Inc., American Cyanamid Co., Bristol-Myers Co., Olin Mathieson Chemical Corp. and The Upjohn Co., Plaintiffs


Wyatt, D. J.


The opinion of the court was delivered by: WYATT

WYATT, D. J.:

This is an application by defendants and by plaintiffs in these class actions for approval of a proposed compromise under which the actions and all claims of the classes therein will be settled and dismissed with prejudice. Fed. R. Civ. P. 23(e). The application is granted and the proposed compromise is approved.

 These are 66 civil actions, 26 of which were commenced in this District and 40 of which were transferred to this District by the Judicial Panel on Multidistrict Litigation (the Panel) "for coordinated or consolidated pretrial proceedings" (28 U.S.C. § 1407; see 295 F. Supp. 1402, 297 F. Supp. 1126, 299 F. Supp. 1403, 301 F. Supp. 1158, 303 F. Supp. 1056, 309 F. Supp. 155). The 66 civil actions which are the subject of the present application are sometimes referred to in this opinion as simply "these actions".

 The same five companies are defendants in each of these actions (Squibb Beech-Nut, Inc. is also a defendant in some actions); they may be referred to as Pfizer, Cyanamid, Bristol, Squibb (a division of defendant Olin Mathieson Chemical Corporation until about January 1, 1966 and ultimately a part of Squibb Beech-Nut, Inc.), and Upjohn. They have been for some years sellers of broad spectrum antibiotic drugs, the most important of which is tetracycline and on which a patent, owned by Pfizer and often called "the Conover patent", issued on January 11, 1955. Pfizer, Cyanamid and Bristol made tetracycline and sold it in dosage form. Bristol sold tetracycline in bulk to Squibb and Upjohn which sold it in dosage form.

 Antibiotic drugs are prescription drugs used for infectious diseases. Broad spectrum antibiotic drugs, such as tetracycline, are effective against a wider range of germs than are the narrow spectrum antibiotic drugs, such as penicillin. The word "antibiotics" when used in this opinion refers to broad spectrum antibiotic drugs.

 There are in total before this Court some 150 similar civil actions against the same defendants, either commenced in this District or transferred here by the Panel. These some 150 actions are divided into the following groups: (a) the 66 actions which are the subject of the present application; (b) some actions in which plaintiffs were offered but rejected the same proposed settlement on which the present application is based; (c) some actions in which plaintiffs have not been offered any settlement by defendants; and (d) about 26 actions in which plaintiffs are private hospitals to which a separate offer of settlement has been made by defendants.

 The claim in each of the actions is that defendants violated the antitrust laws in the sale of antibiotics, specifically Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2); treble damages are sought, as authorized in 15 U.S.C. § 15.

 A. DEVELOPMENT OF BROAD SPECTRUM ANTIBIOTICS Data as to the four principal broad spectrum antibiotics are as follows: Generic Name Trade Name First Introduced By Whom chlortetracycline Aureomycin December 1948 Cyanamid chloramphenicol Chloromycetin January 1949 Parke, Davis oxytetracycline Terramycin March 1950 Pfizer tetracycline Achromycin November 1953 Cyanamid Tetracyn January 1954 Pfizer Polycycline April 1954 Bristol Steclin September 1954 Squibb Panmycin October 1954 Upjohn

 Cyanamid owns the patent for chlortetracycline (the Duggar patent) issued September 1949, and an improvement patent (Niedercorn) issued September 1952.

 Pfizer owns the patent for oxytetracycline (the Sobin patent) issued July 1950.

 When the Duggar and Sobin patents issued, the chemical structure of the antibiotics produced -- trade names, Aureomycin and Terramycin -- were not known.

 In 1952, a Pfizer research team made the first discovery of the chemical structure of Aureomycin and Terramycin. On June 17, 1952, Conover, a member of the Pfizer team, discovered tetracycline by removing the chlorine atom from Aureomycin.

 Tetracycline proved to be highly superior to the earlier antibiotics.

 The discovery of tetracycline was announced to the world in an article on August 8, 1952 in the Journal of the American Chemical Society. On October 23, 1952, application for the Conover patent was filed. Thereafter, applications for tetracycline patents were filed by Cyanamid and by Bristol, among others.

 It eventually developed that to produce tetracycline, it was necessary to use the Duggar and Niedercorn patents for the fermentation process. If a patent on the Conover invention were issued to Pfizer, then neither Cyanamid nor Pfizer could make tetracycline except by agreement between them. Each would be blocked by a patent of the other.

 After meetings on November 7 and 15, 1953 between McKeen (Pfizer) and Malcolm (Cyanamid) an agreement was made by which Cyanamid would license Pfizer under the Duggar and Niedercorn patents; in addition, it was agreed that proofs of priority on tetracycline would be exchanged; that the party found to be prior would concede priority; and that the party receiving the patent on tetracycline would then license the other.

 Bristol began making and selling tetracycline in May 1954. It sold the drug in bulk to Squibb and to Upjohn, who in turn sold in dosage form under their respective trade names. Bristol also sold in dosage form under its trade name.

 Cyanamid brought an action against Bristol in September 1954, asserting that in making tetracycline Bristol infringed the Duggar and Niedercorn patents. This action was settled in December 1954 and Bristol received a license (with royalty to Cyanamid) for use of the Duggar and Niedercorn processes in making tetracycline.

 After an exchange of evidence as to priority, Cyanamid conceded in February 1954 that Conover was prior in discovery of tetracycline.

 The Conover patent issued on January 11, 1955 and has since been owned by Pfizer.

 On the same day the patent issued, Pfizer commenced an action against Bristol, Squibb and Upjohn in the Northern District of Georgia. The charge was infringement of the Conover patent for tetracycline.

 Bristol, Squibb and Upjohn then sued Pfizer in this Court for a declaratory judgment on the Conover patent and, over strong opposition from Pfizer, obtained transfer of Pfizer's action from the Northern District of Georgia to this Court (131 F. Supp. 21, 225 F.2d 718, 225 F.2d 720).

 The litigation between Pfizer on the one hand and Bristol, Squibb and Upjohn on the other was settled on December 15, 1955. To a considerable extent this was due to the efforts made by Schwartz, president of Bristol. Licenses under the Conover patent for tetracycline were granted by Pfizer to Bristol, Squibb and Upjohn (with royalty to Pfizer).

 B. THE CLAIMS IN THESE ACTIONS ARE BASED ON CHARGES BY THE FEDERAL TRADE COMMISSION AND IN AN INDICTMENT

 It is without dispute that the claims in the complaints are substantially the same as charges made against the defendants by the Federal Trade Commission (the Commission) and in an indictment against three of the defendants handed up by a grand jury in this District on August 17, 1961. A review of these proceedings, and of an investigation by a Senate Subcommittee, will be useful as background.

 C. PROCEEDINGS BY THE COMMISSION AND BY A SENATE SUBCOMMITTEE

 1. Investigations by the Commission

 In 1951, the Commission began an investigation of the pricing policies of Pfizer in selling "Terramycin", its trade name for an early broad spectrum antibiotic. Pfizer furnished extensive data. This lasted until 1955.

 By resolution on July 22, 1953 (amended on July 13, 1956), the Commission initiated an investigation (15 U.S.C. §§ 46, 49) of "the . . . business, conduct, practices and management of corporations engaged in the production, sale or distribution of antibiotic drugs . . .". This investigation went on until 1958. The defendants and others responded to extensive data requests of the Commission. On the basis of these responses and other material and records, the Commission in June 1958 issued an "Economic Report on Antibiotics Manufacture"; this Report was of some 360 pages.

 2. Investigation by a Senate Subcommittee

 In 1959 and 1960, the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary investigated the ethical drug industry, which included the defendants here. Senator Kefauver was Chairman of the Subcommittee and Paul Rand Dixon was its Counsel and Staff Director. At the request of the Subcommittee, defendants furnished documentary material and other information. For six days in September 1960 there were public hearings before the Subcommittee, principally about antibiotics and about many of the matters involved in these actions. A report of the Subcommittee entitled "A Study of Administered Prices in the Drug Industry" (S. Rep. No. 448, 87th Cong., 1st Sess. 1961) was transmitted to the full Committee on May 8, 1961.

 3. The Complaint of the Commission; Taking of Evidence

 On July 28, 1958, the Commission issued a complaint charging the defendants with unfair methods of competition and unfair acts and practices in the sale of antibiotics, all in violation of Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45).

 The charges made by the Commission in summary were these:

 
a. that Pfizer secured issuance of the Conover patent by fraud on the Patent Office and, aside from such fraud, secured issuance of the patent despite the fact that the invention was obvious and in public use before the Conover application was filed;
 
b. that by conspiracy all five defendants secured issuance to Pfizer of the Conover patent; that Pfizer made false representations to the Patent Office; that Pfizer, Bristol and Cyanamid withheld material information from the Patent Office; and that the other four defendants obtained licenses from Pfizer with knowledge of the fraud on the Patent Office and with knowledge that the invention was not patentable; and
 
c. that by conspiracy all five defendants fixed prices and, by keeping out competitors, monopolized antibiotics.

 The defendants by October 15, 1958 had served their answers, denying the charges in the Commission's complaint.

 Evidence was taken before Robert L. Piper, a Hearing Examiner, between January 1959 and February 1960. There was testimony by witnesses, apparently all in New York, on 86 days. The Commission 45 witnesses; and 3 witnesses (accountants) were considered as called by the Hearing Examiner. The testimony appears to have run to some 9,000 pages in the stenographic transcript. The documentary exhibits were massive in number and extent; they occupy at least 12 printed volumes and consist of some 8,000 pages.

 The witnesses before the Hearing Examiner included the chief executives of each of the defendants: Malcolm of Cyanamid, McKeen of Pfizer, Schwartz of Bristol, Toohy of Squibb, and Gilmore of Upjohn. They each denied categorically that they were parties to any conspiracy or any other sort of price fixing agreement.

 4. Initial Decision of Hearing Examiner

 The Hearing Examiner filed an Initial Decision on October 3, 1961. This is a detailed document of about 270 printed pages. The Decision was completely in favor of defendants, exonerating them from any violation of the Federal Trade Commission Act and ordering that the complaint be dismissed.

 5. Decision of Commission

 The matter was then taken to the full Commission.

 Meanwhile, in March 1961, Paul Rand Dixon had been named Chairman of the Commission; as already mentioned, he had been Counsel and Staff Director to the Senate Subcommittee which investigated the drug industry, including these five defendants, and made a report thereon.

 The defendants moved that Chairman Dixon be disqualified. The Commission on December 20, 1961 denied the motion on the ground that disqualification was "for determination by the individual member concerned". Chairman Dixon declined to withdraw from participation in the proceeding.

 The Commission (Dixon, Anderson, Elman, MacIntyre, Higginbotham) on August 8, 1963 filed its opinion, findings of fact and conclusions of law written by The Honorable A. Leon Higginbotham, Jr., then a Commissioner and now a United States District Judge for the Eastern District of Pennsylvania. The Commission issued orders on August 8 and December 17, 1963.

 The opinion of the Commission disagrees in large part with that of the Hearing Examiner.

 The Commission decision may be summarized as follows:

 
a. Pfizer by misrepresentations to and withholding information from the Patent Office prevented an accurate decision on the issuance of a patent on tetracycline on the Conover application;
 
b. the conduct of Cyanamid before the Patent Office was the same as that of Pfizer;
 
c. that it was not proven that a conspiracy existed between Pfizer and Cyanamid before the Patent Office, or any conspiracy among the five defendants to exclude others;
 
d. there was no misconduct before the Patent Office by Bristol, Squibb or Upjohn; and
 
e. the five defendants conspired to fix prices for tetracycline.

 The final order of the Commission was that the five defendants cease and desist from any and all forms of price fixing agreements, that they each take specific steps in respect of independent pricing activities, that Pfizer grant to any applicant a license under the Conover patent for a royalty of not more than 2-1/2% of net sales, and that Cyanamid grant to any applicant a license under the Duggar and Niedercorn patents for a royalty of not more than 2-1/2% of net sales. See Note: Improperly Procured Patents: FTC Jurisdiction and Remedial Power, 77 Harv. L. Rev. 1505 (1964).

 6. Decision of the Court of Appeals (363 F.2d 757)

 The defendants obtained a review of the Commission's order by the Court of Appeals for the Sixth Circuit (15 U.S.C. § 45(c)).

 The decision of the Court was handed down on June 16, 1966.

 The Court first decided that the active part played by Chairman Dixon while counsel to the Senate Subcommittee caused him to form opinions as to facts which later became "inseparably a part of the ultimate findings of fact of the Commission" (363 F.2d at 765). The Court concluded that the participation of Chairman Dixon in the decision of the Commission was a denial of due process to the defendants, requiring that the decision be set aside and the matter remanded for a fresh consideration by the Commission without any participation by Chairman Dixon.

 The Court expressed no opinion whether there was substantial evidence to support the findings of the Commission that there was price fixing by defendants.

 As to the issue of misconduct before the Patent Office, the Court expressed its opinion at some length.

 The Court found that the fundamental question was whether coproduction (or inherent production) of tetracycline in the fermentation broths from which chlortetracycline (Aureomycin) had been recovered was material to the issuance of the Conover patent. There is a distinction between coproduction of tetracycline in the broths and the presence of tetracycline in the resultant product (Aureomycin). In this connection, the Court believed that there were many questions as to the actions and purposes of Patent Examiner Lidoff, who allowed the Conover patent, and was surprised that Lidoff, because of Patent Office policy and practice, had not been called as a witness. The Court saw no reason why Lidoff should not be required to testify and the Court framed about 12 specific questions for him. The Court found that, absent any testimony from Lidoff, the order of the Commission on the Patent Office misconduct issue was not supported by substantial evidence.

 7. Initial Decision on Remand

 On remand, it appeared that Mr. Piper was no longer employed by the Commission. The matter was referred to Abner J. Lipscomb, as Hearing Examiner, for taking the testimony of Lidoff and of any witnesses who had already testified on the issue of misconduct before the Patent Office.

 There were hearings before Mr. Lipscomb in Washington on September 12 and 13, 1966. Lidoff was called for the Commission and testified; Hutz, a patent attorney for Pfizer, and Murphy, who did patent work for Pfizer, were called for Pfizer and testified.

 The testimony of Lidoff in summary was that on November 24, 1954 he rejected the Conover product claims because he believed it probable that tetracycline had been produced along with chlortetracycline (Aureomycin) in the broths of the Duggar and Niedercorn processes; that thereafter he accepted the statements of tests by Pfizer that no identifiable tetracycline was produced in the Duggar-Niedercorn process; that had he known there was in fact such coproduction, the Conover patent would not have issued; that he was interested in whether there was coproduction in the broths, not whether tetracycline was present in the product Aureomycin; that he did not know tetracycline was present in the product Aureomycin; that had he known this, he would have rejected the Conover application on this ground, a different ground and one which related to prior public use rather than to disclosure in published patents (the basis on which he was interested in the Duggar-Niedercorn broth production).

 The assignment to Hearing Examiner Lipscomb was solely for decision whether Pfizer and Cyanamid made misrepresentations, etc. to the Patent Office and thus caused Lidoff to allow a patent which otherwise would not have been allowed. Hearing Examiner Lipscomb accepted the testimony of Lidoff and adding this to the evidence already in the record found substantial evidence that there was misconduct by Pfizer and Cyanamid before the Patent Office as a result of which the Conover patent issued. The initial decision of the Hearing Examiner on remand was made on November 9, 1966.

 8. Decision of the Commission on Remand

 The matter then went to the Commission. Chairman Dixon did not participate. Since the time of the first decision, Commissioners Anderson and Higginbotham had been replaced by Commissioners Reilly and Jones. The four Commissioners who decided the matter on remand were thus Elman, MacIntyre, Reilly and Jones.

 The Commission on September 29, 1967 filed its opinion and on the same day issued its order.

 As to the patent issue, the Commission found that the testimony of Lidoff supported the earlier findings and opinion of the Commission rather than those of the first Hearing Examiner, Mr. Piper. It was concluded that Pfizer and Cyanamid in substance were guilty of fraud on the Patent Office, as a result of which the Conover patent issued.

 As to the price fixing issue, the four Commissioners were evenly divided. On the basis of new firms entering the field and of a decline in prices, Commissioners Elman and Reilly believed it was not necessary to decide the price fixing issue, which (in simple terms) was whether the earlier uniform prices were the result of conspiracy among the five defendants. Commissioners MacIntyre and Jones believed that the earlier findings and order as to price fixing should be adhered to and issued. There being no majority of the Commission in support of findings and an order as to price fixing, the complaint so far as it charged price fixing was dismissed.

 The final order of the Commission dealt only with misconduct of Pfizer and Cyanamid before the Patent Office and as to this the final order was the same as the earlier order. No part of the order was directed against Bristol, Squibb or Upjohn; as to them the complaint was dismissed completely.

 9. Second Decision of the Court of Appeals (401 F.2d 574)

 Pfizer and Cyanamid obtained a review of the Commission's order by the Court of Appeals for the Sixth Circuit (15 U.S.C. § 45(c)).

 The decision of the Court was handed down on September 30, 1968.

 It was found that Lidoff had answered the material questions framed in the Court's first opinion and that this testimony supported the original findings of the Commission and contradicted the findings of Hearing Examiner Piper. The misconduct of Pfizer and Cyanamid was shown by substantial evidence and justified the compulsory licensing order of the Commission. The Court declined to pass on the credibility of Lidoff, saying that it would not "second-guess the Hearing Examiner and the Commission" (401 F.2d at 584). The order of the Commission was affirmed.

 It may be noted that the Court did not decide whether the views of Lidoff as to patent law were correct or not. Lidoff testified that had he known what Pfizer and Cyanamid knew as to coproduction of tetracycline and as to its presence in Aureomycin, he would not have allowed the patent. As will be mentioned later, there may be some question whether this would be good patent law. Decisions such as Parke-Davis & Co. v. H.K. Mulford Co., 189 F. 95 (C.C. S.D.N.Y. 1911), affirmed 196 F. 496 (2d Cir. 1912) raise difficult issues in this connection. The Court of Appeals for the Sixth Circuit stated that it "did not undertake to pass upon the validity of the Conover patent" (401 F.2d at 586).

 10. Denial of Certiorari

 The Supreme Court denied certiorari on March 24, 1969 (394 U.S. 920) and the Commission proceedings came to an end.

 D. THE CRIMINAL PROCEEDINGS TO DATE

 1. The Indictment; its Dismissal as to Individual Defendants

 A grand jury in this District returned an indictment (61 Cr. 772) on August 17, 1961 naming as defendants Pfizer, Cyanamid, Bristol, McKeen (of Pfizer), Malcolm (of Cyanamid) and Schwartz (of Bristol). Squibb and Upjohn were named as co-conspirators.

 The indictment charged in three counts a conspiracy in restraint of trade, a conspiracy to monopolize trade, and a monopoly of trade, in broad spectrum antibiotics. It was charged that Sections 1 and 2 of the Sherman Act had been violated.

 The indictment covered the same ground as that covered by the complaint of the Commission. It was charged that defendants, pursuant to a conspiracy, misled the Patent Office, used patents to exclude competitors, and fixed prices. All defendants pleaded not guilty.

 After the return of the indictment, a grand jury in January 1962 was empanelled in the District of Columbia and investigated the conduct of a government official in transactions with drug firms, including these defendants. Under subpoena, McKeen, Malcolm and Schwartz testified before this Grand Jury (which returned no indictment). On motion of these individual defendants and over the Government's opposition, Judge Ryan, by order with opinion filed September 9, 1965, dismissed the indictment as to them (245 F. Supp. 801). The reason was that by testifying before the grand jury in the District of Columbia the individual defendants became immune from prosecution on the indictment in this District (15 U.S.C. §§ 32, 33).

 2. The Criminal Trial

 Trial of the indictment took place between November 23 and December 29, 1967 before Judge Frankel and a jury.

 Nearly all the testimony offered by the government came from employees or former employees of the three defendants and the two alleged co-conspirators. The government called six witnesses from Pfizer, four from Cyanamid, three from Bristol, four from Upjohn, and one from Squibb; in addition, the government read the testimony in the Commission proceedings of Malcolm of Cyanamid (ill at time of trial) and Niedercorn of Cyanamid (who had died). The government called six witnesses who had not been connected with any defendant or alleged co-conspirator; these included Patent Examiner Lidoff. Most of the documentary evidence offered by the government came from the defendants or from alleged co-conspirators.

 The defendants put in their case through the cross-examination of the government witnesses, most of whom were their employees or former employees.

 In its bill of particulars, the government had stated that McKeen, Malcolm and Schwartz were responsible for the "pricing policy" of their respective companies. McKeen and Schwartz were called by the government and testified at trial and (as already noted) testimony of Malcolm was read by the government to the jury. They each categorically denied doing any of the acts charged in the indictment.

 It was developed at trial that Parke Davis & Co. was a maker of broad spectrum antibiotics, was second in volume of sales of such antibiotics, followed the same prices and practices as the defendants on trial, and was concededly not a member of any conspiracy.

  After the government rested on December 8, 1967, one witness was recalled by Pfizer for relatively short testimony concerning exhibits dealing with financial matters. This was the comptroller of Pfizer and after his testimony all defendants rested.

  The case was submitted to the jury at 3:45 p.m. on December 28, 1967. The jury suspended its deliberation at 10:15 p.m. that night and resumed at 9:30 a.m. the following morning.

  During its deliberation, the jury asked for and was given a copy of the Court's charge, the charts used by the government in summation, the charts showing the share of Parke Davis in the broad spectrum antibiotics market, and the evidence referred to in the Court's charge as to the dosages, prices and market techniques of Parke Davis.

  The jury returned a verdict of guilty on all three counts as to each defendant on December 29, 1967 at 9:45 p.m.

  3. Reversal of the Convictions

  The judgment of conviction was appealed. The appeal was argued on May 7, 1969. The record on appeal fills 21 printed volumes, covering some 12,500 pages.

  On April 16, 1970 -- after the hearing before this Court on the issue of approval of the proposed compromise -- the Court of Appeals handed down its decision, reversing the judgments of conviction and directing a new trial. 426 F.2d 32. Judge Moore wrote the opinion; Judge Friendly concurred; Judge Hays dissented.

  The reversal was for errors in the charge of the Court; whether the evidence was sufficient to support the conviction was not decided nor were any questions of patent law decided.

  The Court noted that "the government's case, insofar as actual proof is concerned, rests almost entirely upon oral and written statements from defendants themselves. . . . the facts may be said to be virtually undisputed".

  The Court placed great stress on the denials of the officers of the three defendants that any agreements as charged in the indictment were made at their meetings; the Court also stressed that the documents agreed to at the meetings showed nothing illegal. The Court stated that because conviction thus depended on the drawing of inferences by the jury contrary to this evidence, "the importance of instructions cannot be overemphasized".

  The errors in the Court's charge were in summary as follows:

  
a. proper attention was not given to the "key issue", namely, the specific conspiracy charged, but the jury was permitted to infer conspiracy from the course of conduct shown by all the evidence;
  
b. the testimony of McKeen, Malcolm and Schwartz as to their meetings was "vital to any jury decision as to the existence of a conspiracy" but the testimony was "slighted and rather deprecated" in the charge;
  
c. by failing to explain that the Patent Office proceedings were only relevant to a consideration whether Pfizer and Cyanamid had agreed to exclude others at their November 1953 meetings, the charge "virtually diverted" the indictment "from an antitrust conspiracy case to a patent fraud case";
  
d. the jury's attention was "diverted" to an "inflammatory" issue, namely, whether there were "unreasonably high prices" (it is not clear whether this issue was considered irrelevant or whether it was felt to have been overemphasized in the charge);
  
e. the jury was improperly limited in considering the "all-important" evidence as to Parke Davis; there was no explanation of the significance of the Parke Davis evidence; and defendants were improperly restricted in argument from such evidence;
  
f. an "incorrect" interpretation was made of the November 1955 Bristol-Squibb-Upjohn agreements; these had no such "limitation on Squibb and Upjohn which barred them from manufacturing" as the Court charged; and
  
g. there should have been, but were not, "the clearest instructions that the jury should not consider Bristol's part in any of the events prior to December 14-15, 1955 as proof of Bristol's being in any conspiracy".

  While Judge Hays voted to affirm and found the evidence for the government "sufficient" in the "perspective" of a "limited scope of review" he did note ...


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