What will Souter's retirement mean for business?

NEW YORK (Fortune) -- Though no one would ever pigeonhole U.S. Supreme Court Justice David Souter as having been a pro-business judge, the announcement this month that he'll be stepping down in June has some top appellate advocates for the business community expressing some separation anxiety.

"Better the devil we know than the devil we don't know," says Evan Tager, a partner in Mayer Brown's supreme court and appellate practice group in Washington, D.C. "I prefer the status quo to having to worry about whether the next justice will be more consistently anti-business."

In fact, with respect to at least one bread-and-butter issue for big business - constitutional limits on punitive damages - pro-business lawyers are positively fretting over Souter's departure.

"There is at this point a narrow coalition in favor of constitutional limits on punitives," says Meir Feder, who heads the appellate practice in Jones Day's Manhattan office. "It would be very easy for the next nominee to be somebody who takes a very different, more pro-plaintiff view."

Souter's pre-Supreme Court resume - which included just two years in private practice, both spent at a small firm in Concord, N.H. in the mid-1960s - afforded him little exposure to the concerns of big business. On the contrary, most of his early career was spent either in the state attorney general's office or on the state bench, where he naturally developed a healthy respect for the need to uphold state laws, whether they are being prosecuted directly by a state regulator or by a private plaintiffs lawyer suing within the framework of the state's tort system. Since business corporations are constantly running afoul of such assertions of state law, one of their standby "best friends" is the federal preemption doctrine - the notion that an existing federal regulatory framework should bar state regulators (including private plaintiffs lawyers invoking state tort law) from meddling in the same arena. Though never thrilled about the prospect of federal regulation, most corporations would rather cope with a single federal regulatory scheme than with fifty different state frameworks.

Vis-à-vis such preemption issues, says Carter Phillips, "Souter has often been a hard vote for the business community to get. Hopefully, his replacement will be easier to persuade." Phillips, a partner at Sidley Austin's Washington, D.C., office, has argued 65 cases before the Supreme Court.

Nevertheless, Justice Souter's apparent desire to curb certain civil litigation abuses has sometimes made him a valuable ally to business. Two years ago, for instance, Souter wrote the potentially momentous, pro-business ruling in Bell Atlantic v. Twombley, in which the Court heightened the preliminary showings that plaintiffs lawyers must make before they will be permitted to kick a case into its most expensive, full-throttle, discovery gear.

But Souter's desire to rein in litigation abuse has been most apparent in his consistent votes to slash punitive-damage awards imposed by emotional juries. Last term, for instance, he authored the Court's decision in Exxon Shipping v Baker, which pared nearly $2 billion off a jury's punitive assessment against Exxon stemming from the 1989 Exxon Valdez oil spill. Though the case was not a constitutional ruling and related only to federal maritime cases, Souter suggested in a footnote that a 1:1 ratio between compensatory and punitive damages should represent a "fair upper limit" for punitive damages in nearly any case - a bright-line rule that, if ever adopted, would be a dream-come-true for the business community.

Where a judge will come down with respect to whether there should be constitutional limits on punitive damages can't be divined from traditional "liberal" or "conservative" labels. Though political conservatism is often associated in the popular mind with pro-business, anti-plaintiff sentiments, conservative justices Antonin Scalia and Clarence Thomas have each been fairly consistent "anti-business" votes in punitive-damages cases. That's because each espouses austere, text-based interpretations of the Constitution that, each insists, afford no basis for federal judges to prune back state court jury awards.

The justices who think the Constitution permits and, in fact, requires such trimming rely on the the so-called "substantive due process" concept, which is a controversial interpretation of explicit bans in the Fifth and Fourteenth amendments against state or federal deprivations of life, liberty or property without due process of law. But while no one disputes that these Due Process clauses bar certain government actions that are not preceded by, for instance, certain notice and hearing requirements - i.e., the "process" that is "due" under the circumstances - some justices also believe that certain government actions are so intrinsically beyond the pale that they "shock the conscience" and are forbidden regardless of whatever procedural measures may have preceded their adoption. Court scholars refer to these murkier outer reaches of the due process clause as "substantive due process" - a concept that many conservative jurists categorically reject. Not coincidentally, it is the open-ended substantive due process concept that has also served as the Court's root basis for striking down state laws banning abortion.

The Court's two other most conservative justices, Chief Justice John Roberts and Associate Justice Samuel Alito, have yet to weigh in on whether they believe the Constitution imposes any restrictions on punitive damages awards. On the contrary, since joining the Court - Roberts in September 2005 and Alito in January 2006 - each has repeatedly ducked apparent opportunities to address the question.

If politically conservative judges can't be counted on to favor constitutional limits on punitive damages, neither can politically liberal ones. While a liberal justice, like Ruth Ginsburg, might have no qualms about invoking the substantive due process clause in appropriate cases, she has seldom, if ever, had her conscience "shocked" by seeing a jury clobber a big corporation with a fat damage award. Thus, she is typically an "anti-business" vote in these cases. Liberal Justice Stephen Breyer, on the other hand, has been just as reliably pro-business in these matters.

What makes business lawyers worry all the more about Justice Souter's replacement is that a parochial, relatively below-the-radar issue like punitive damages - at least when compared to issues like abortion rights or the constitutionality of campaign finance reform - is very unlikely to be a factor that enters into either President Barack Obama's selection of a nominee or the Senate's approval of one.

So far, the hints President Obama has dropped about who he's looking for have been, for our purposes, unhelpfully vague and demographic. He will evidently choose a woman, would prefer that she be Hispanic, and will seek someone with "empathy" for the impact that High Court rulings have in the real world.

None of the short-list names that have been bandied about so far appear to have track records that foreshadow predispositions on issues of importance to business. Nevertheless, lawyers interviewed for this story appeared to welcome the prospect of either Diane Pamela Wood, a judge on the U.S. Court of Appeals for the Seventh Circuit - who has a reputation for both top-notch intellect and polite, even temperament - or Elena Kagan, who was confirmed as the U.S. Solicitor General in March. Several noted with admiration that Kagan, as the former dean of the notoriously fractious Harvard Law School, had somehow managed to earn the respect of both the liberal and conservative factions there, demonstrating both useful diplomatic skills and an apparent absence of ideological rigidity.

In any case, all the business community can realistically hope for is the selection of a open-minded moderate with a first-rate intellect, a judicial temperament, and a pragmatic, case-by-case judicial philosophy.

Someone sort of like David Souter, in other words.