Sotomayor on Court: The Upshot for Investors

What would Supreme Court nominee Sonia Sotomayor mean for investors if she was to weather the contentious Congressional vetting process and take her place on the bench? Experts say they can expect a nuanced voice whose record on business issues supports investors and will likely skew toward a tighter regulatory climate and stricter interpretations of antitrust laws.

If approved, Sotomayor will become the third woman to join the Court and its first Hispanic. She will take the seat left vacant by David Souter, who is retiring after 19 years. Souter leaned toward the court’s liberal side, but was also viewed as one of its most pro-business jurists. Since Sotomayor’s judicial track record is similar, or, at least, doesn’t swing to the polar opposite, her appointment will probably not alter the court’s balance. Indeed, while previous nomination hearings have had plenty of fireworks, hers is widely expected to go smoothly.

"She's no flaming liberal, but she's certainly not as free market as the current conservative majority on the Court," says Ken Goldstein, an economist for the Conference Board.

Her nomination is a significant milestone not only for the Obama administration that came to power amidst a brutal economic crisis, but also to Hispanics, an increasingly important voting block among both political parties. Sotomayor is the daughter of Puerto Rican parents. She grew up in public housing in the Bronx and eventually made her way to Princeton and Yale Law School. She worked as a prosecutor in the district attorney’s office in New York City before heading into private practice. She was nominated to the federal district court by President George H.W. Bush and then elevated to the appeals court by Bill Clinton in 1998.

Now plunged into the national spotlight, legal experts will be picking over her career record. John Coffee, a professor of securities law at Columbia Law School, says Sotomayor was heavily influenced early on by her time as a prosecutor in Manhattan. She is "at least receptive and more favorably disposed to government regulators and their roles as enforcers."

Coffee points to a case involving the New York Stock Exchange and alleged violations by the seven specialist firms that control its trading. "She ruled that the New York Stock Exchange had absolute immunity against certain claims" by the California Public Employees’ Retirement System, the nation's largest public pension fund. "But it was also a careful, nuanced opinion that upheld the right of the plaintiff to sue for other grounds, and to that extent, you can call it a pro-investor opinion."

That fine line — backing regulators while leaving the door open for investors — may be comforting to the parties caught up in the saga playing out in Detroit. Goldstein says the next court may face many business-related cases, including the federal bailout of the auto industry and the government’s settlement with General Motors (GM) bondholders. “If you take the [conservative Justice Antonin] Scalia side of the court, they’d fall back on the view that a contract is a contract is a contract. That would imply the bondholders would have to get paid off, though not necessarily at 100 cents to the dollar. She’s not necessarily on the other side of that view – it’s much more nuanced,” says Goldstein. Sotomayor also sided against baseball owners during a contentious 1995 strike. The ruling upheld free agency for players.

Sotomayor will certainly be grilled on one of her most controversial decisions. In a ruling on the Second Circuit, Sotomayor wrote the opinion that backed New Haven, Conn.’s decision to scrap the results of a promotion exam for the city fire department because almost no minorities scored well enough to qualify for management positions. The 2008 ruling, based in large part on the 1964 Civil Right Act, prompted the firefighters to appeal on grounds of reverse discrimination. The Supreme Court agreed to take the case, Ricci v. DeStefano, which it began hearing last month.

One area of interest for the business world will be antitrust. As the Obama administration pursues stricter antitrust enforcement, those cases could make their way to a court that includes Sotomayor. Because her philosophy is seen as so similar to her predecessor Souter's, the court's stance won't change any time soon, but her arrival heralds a longer-term shift in legal interpretation. Seven of the nine sitting justices were named by Republican presidents, and Obama is widely expected to make at least one more nomination to the Court in his current term of office.

"She's more of a centrist, but the perception fits the overall sense we're getting – in terms of economic policy – that we went a little too far in deregulation, though she's not necessarily more regulation-oriented than Souter," Goldstein says. "But this puts the administration in position when they get the next vacancy on the court, that they can move it back toward the center."

Investors shouldn’t make any knee-jerk decisions based on her possible appointment, though. Jeffrey Kleintop, chief market strategist for LPL Financial, says Sotomayor will likely be more inclined to hear cases on intellectual property rights, copyrights and patents, but "unless you know of a case that's just about to reach the Court that involves a small company with a lot at stake, there really isn't an investment decision that can be rendered here."

Adds Sean West, a policy analyst for the Eurasia Group: "My big takeaway from all of this is that investors are much better suited to focus their time on what's going on in Congress and what the administration wants to accomplish right now. That's more important in the short and medium term."