The federal government may have to pay when faulty drugs and vaccines cause serious harm. The U.S. Court of Appeals in San Francisco recently joined other circuit courts in rejecting Justice Department arguments that the government is immune in such suits.

The case was brought by a polio victim who says he contracted the disease from being with an infant nephew who had just been inoculated with oral polio vaccine. It is known that the live virus in the oral vaccine can spread to those in close contact with patients who have been immunized, but federal purity and potency standards are supposed to ensure that the virus will not actually cause the disease.

The allegation in Baker v. U.S. is that the Department of Health and Human Services fell down on the job in overseeing the testing of the vaccine.

The federal government can be sued only with its permission, but Congress, in the Federal Tort Claims Act, has given broad permission for victims to sue in instances where plaintiffs would have the right to sue private parties. That law has limitations, and one of them rejects suits based on how well civil servants perform "discretionary functions."

It is not always clear, however, just what a "discretionary function" is. In 1984, the U.S. Supreme Court said the task of okaying which aircraft could be used in commercial aviation is discretionary, so the Federal Aviation Administration could not be sued if it was negligent in making its assessments. Despite that precedent, the U.S. Court of Appeals in New Orleans last year gave the green light to a suit when the claim that a federal employe had refused to enforce a mandatory regulation.

On May 18, in the Baker case, the San Francisco judges decided to follow their peers in New Orleans. When dealing with drug safety and similar issues, they said, it is wise to take a very limited view of the "discretionary functions" exception to the FTCA. The regulation calling for tests before licensing and marketing of the vaccine is mandatory, the ruling notes, so if the allegation that they were not done properly is true, the government can be held liable.

The ruling gains added import because attempts to sue the maker of oral polio vaccine -- American Cynamid's Lederle Laboratories -- have been running into legal trouble. Last month the U.S. Court of Appeals in New York threw out a $3.2 million verdict against Lederle; a jury had found the company had not given adequate warnings of the danger of contracting polio from the oral vaccine, but the appellate judges said the warnings met the legal standards. State appellate courts in three jurisdictions also have approved the Lederle notices. In other cases, courts ruled that: If an underwriting deal goes sour, the company involved can insist that the broker settle all claims through arbitration. The code of the National Association of Securities Dealers requires members to take any dispute to binding arbitration "upon the demand of a customer." When a plan to sell the public shares in a greyhound breeding firm fell apart, the underwriter said the arbitration provision applied to persons buying investments, not firms issuing the investments. But the U.S. Court of Appeals in Philadelphia said both are "customers" protected by the ethics code. Patten Securities v. Diamond Greyhound, May 21

Suicide may be a work-related injury. The widow of a police officer asked for workers' compensation benefits after her husband killed himself and was turned down by the state industrial commission, which said suicide was not an ailment for which the system provided benefits. But the North Carolina Court of Appeals told the commission the record didn't support that finding, that the psychiatrist hired by the widow made a convincing case that on-the-job stress led to the suicide. The benefits should be paid, the ruling says. Harvey v. Raleigh Police Department, May 5

An investment in a questionable tax shelter scheme may not be a total loss. The U.S. Tax Court recently told an investor he could take a theft loss on the money he put into a cattle buying plan that was supposed to produce deductions and credits on his income tax returns.

The company receiving the money kept title to the cattle rather than transferring it to the investor; the Internal Revenue Service refused to recognize the deductions or credits, and the Securities and Exchange Commission accused the firm selling the deal of violating the law. That all adds up to larceny under state law, Judge Julian T. Jacobs ruled; that gives the taxpayer a theft loss deduction for the year the investor realized something was wrong. Kay v. Commissioner, June 3

If you can do it, you can advertise it. Courts have recently been struggling mightily with just how far governments can go in curbing advertising of activities that are allowed but clearly could be prohibited. When it comes to medical specialties, the U.S. Court of Appeals in Cincinnati recently threw out a Kansas law that forbade dentists who are not licensed as specialists to hold themselves out as specialists. Anyone with a general dental license, however, may perform the specialized services. Parker v. Kentucky, May 5Moskowitz covers legal affairs for McGraw-Hill World News.