Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : GVC Ltd. Law Firm

LAWSON v. VERUCHI (January 28, 2011)

A June, 2007 confrontation inside a Target store in Rockford, Illinois spilled out into the parking lot and down the street where Kimberly Colvin was assaulted by an unknown man. She reported the matter the next day to Rockford police She described the man and provided the license plate number of the car he was driving. A follow-up investigation on the plate led Detective Veruchi to Jeffrey W. Lawson ("JW"). JW's mother told Smith that she would have JW call him. Veruchi also received a call from a courtroom bailiff, who knew JW and knew that he had had an altercation in the Target. Veruchi even received a call from JW who originally agreed to come to the station but later reconsidered and referred Veruchi to his lawyer. In the meantime, Veruchi arranged a photo array with the victim and another witness. Veruchi obtained what he thought was JW's photograph from the county jail system. What he got, however, was a picture of Jeffery A. Lawson ("JA"). What happened at the photo array is disputed. Veruchi claims that the victim and witness both identified JA's picture as the attacker. Both the victim and witness denied that they positively identified JA as the attacker. Nevertheless, Veruchi relied on his version of the facts in an affidavit for a warrant. JA was arrested on the warrant and held in custody for 34 days before his release. JA brought suit against Veruchi and the City of Rockford under § 1983, alleging that his arrest was without probable cause and that municipal liability attached because Rockford had no policy to prevent his arrest. Judge Kapala (N.D. Ill.) granted summary judgment to Veruchi and the City. JA appeals.

In their opinion, Judges Posner, Manion, and Hamilton reversed and remanded. In order to prevail on a claim of unconstitutional arrest, a plaintiff must establish the absence of probable cause. In most cases, the issuance of a warrant will shield an officer from liability even if the arrest is later determined to be without probable cause. But if the warrant is issued on an affidavit that contains statements that the affiant knows are false or made with reckless disregard for the truth, the warrant does not shield the officer. Here, JA presented sufficient evidence of just that situation. The district judge erred when he discounted the victim's testimony (that is a question for the jury) and found the plaintiffs theory incredible (it is not). Considering the evidence in the light most favorable to JA, a jury could find that Veruchi intentionally provided false information in order to obtain the warrant and that probable cause to arrest JA did not exist. Since the district court's ruling in favor of the City was based on its dismissal of the underlying claim against Veruchi, the Court also reversed that decision and remanded for further consideration.

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BEARD v. COMMISSIONER OF INTERNAL REVENUE (January 26, 2011)

In 2000, the IRS invalidated Son-of-BOSS transactions. Simply put, a Son-of-BOSS transaction is one in which the taxpayer reduces his tax liability by inflating the basis in a partnership before he sells his interest. For example, a taxpayer can achieve the inflated basis by contributing the proceeds of and obligation to consummate a short sale to the partnership. He then increases the basis by the amount of the proceeds without reducing the basis to account for the liability to close. In 1999, Kenneth Beard allegedly engaged in such a transaction. He participated in a short sale involving treasury notes, used the proceeds to buy treasury notes, and transferred both the notes and the obligation to close the short sale to two companies he owned. He then sold his interest in the companies. On their 1999 tax return, Beard and his wife reported long-term capital gains on the sale of the companies but used the inflated basis (increased by the amount of short sale proceeds contributed) to calculate their tax liability. Almost 6 years later, the IRS challenged the return and reduced the amount of the basis by the amount of the short sale proceeds. The Beards contested the recalculation. Instead of challenging the factual basis for the recalculation, however, the Beards raised a statute of limitations defense on the alleged facts. They argued that the alleged overstatement of basis does not trigger the longer six-year statute of limitations for an omission from gross income. The tax court granted summary judgment to the Beards. The Commissioner appeals.

In their opinion, Seventh Circuit Judges Rovner, Evans, and Williams reversed. The Court began with the Supreme Court's decision in Colony, on which the tax court relied. In Colony, the Supreme Court held that an overstatement of basis was not an omission from gross income and did not trigger the longer statute of limitations. The Supreme Court was interpreting the predecessor to the current statute of limitations section in the Code, but the current Code uses much the same language. Since the Code revision, some federal courts have concluded that a basis overstatement can be an omission from income notwithstanding Colony. Other courts have followed Colony. The Court decided that Colony was not controlling both because of its unique facts and the added language in the Code revisions suggesting that the purpose of the extension was to give the IRS additional time when the taxpayer's return provided no clue to the additional income. Without Supreme Court authority, the Court turned to the language of the Code. Relying on the Code’s definition of "gross income" and general rules of statutory construction, the Court concluded that an inflation of basis is an omission of gross income in that it leaves out an amount that could be included in the return's gross income. In its plain meaning approach, the Court specifically rejected the "underwater archaeology" (i.e., a deep dive into legislative history) engaged in by the Federal and Ninth Circuits in arriving at a contrary conclusion.

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ENBRIDGE PIPELINES (ILLINOIS) L.L.C. v. MOORE (January 24, 2011)

Over 70 years ago, a predecessor to Enbridge Pipelines ("Pipeline") built 120 miles of 10-inch pipeline through central Illinois. The owners of the properties under the surface of which the pipeline ran granted easements for the pipeline "so long as such pipe lines . . . are maintained." When Pipeline acquired it, the line had been inactive for almost 25 years. Pipeline wanted to replace the line with a larger one and extend it by 50 miles. Several landowners objected, claiming that the pipelines were not "maintained," under the easement, and that the easement rights were no longer valid. Pipeline brought 25 different lawsuits in two different district courts in Illinois seeking a declaration that the easements were still in effect. Judge Baker (C.D. Ill.) and Chief Judge Herndon (S.D. Ill.) granted summary judgment to Pipeline in each case that was not settled. A number of the defendants appeal. The Court consolidated the appeals.

In their opinion, Circuit Judges Bauer and Posner and District Judge Pallmeyer affirmed. The Court first addressed the jurisdictional amount requirement, which several of the defendants denied, though without any evidence or argument in support. Pipeline introduced evidence that it would cost far in excess of $75,000 per property to reroute the pipeline. The Court rejected the defendants' theory that Pipeline would not have to reroute but could acquire new easements for less than $75,000 per property. If rerouting the pipeline would cost in excess of $75,000 per property and would also result in significant delays, a rational property owner would demand at least that much. The amount in controversy requirement is satisfied. On the merits, the Court concluded that the easement's use of the word "maintain" is ambiguous. Relying on the economic value of property rights and the undesirability of demanding significant investment simply to preserve those rights, the Court concluded that the more plausible meaning of "maintain" is simply to retain or occupy. Here, the pipeline owners never deliberately abandoned their property rights. They simply chose, as the owner of a property right can, not to use that property right for a period of time. That intention, in conjunction with the considerable maintenance that was performed during that period, is enough to satisfy any reasonable interpretation of "maintain."

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ATKINS v. CITY OF CHICAGO (January 25, 2011)

In late 2003, Chicago police officers arrested William O. Atkins because they had a parole violation warrant for "William Atkins." Atkins was kept in custody overnight and then transferred to the custody of the Illinois Department of Corrections and held for 36 days. Atkins alternately claimed that he was not the warrant's William Atkins and that he was that William Atkins but that he could not violate his parole because it had expired. After his release, Atkins sued the arresting officers, the City of Chicago, and several employees of the Department of Corrections. The complaint alleged an unlawful arrest as against the City defendants and an unlawful detention as against the state defendants. Judge Shadur (N.D. Ill.) dismissed the suit for failure to state a claim. Atkins appeals.

In their opinion, Judges Posner, Manion, and Hamilton (concurring in part and concurring in judgment) affirmed. The Court began with the arrest and whether the officers had probable cause. Although the police lacked probable cause to stop the vehicle in which Atkins was a passenger, they nevertheless had an affidavit with his name on it. If he was the person named in the warrant, the absence of probable cause to stop the car does not vitiate the probable cause to arrest him. The affidavit matched Atkins’ first name, last name, gender, race, day of birth, month of birth, and the first three digits of his Social Security numbers. It did not match Atkins’ height, weight, or year of birth. Given the closeness of the match, the Court concluded that the officers did not err in arresting Atkins or, if they did, it was a reasonable error and did not violate Atkins's constitutional rights. Atkins' stronger complaint is that the state defendants held him unlawfully for 36 days, despite his protests. The Court stated that alleged parole violators must be afforded a preliminary hearing "as promptly as convenient" to determine probable cause and a full hearing within a "reasonable time." The hearings can be administrative. Atkins had an administrative hearing on the seventh day of his incarceration but failed to convince the hearing officer that he was either not the same William Atkins or that his parole has expired. It was on the 36th day that Atkins had his full hearing and was released. The Court noted a possible distinction between the due process rights of an alleged parole violator who admits the parole but denies the violation and an alleged parole violator who denies that he is even on parole. The former has already agreed to administrative adjudication of parole as one of the terms of his parole. The latter has not. But that would give every alleged parole violator an opportunity for two hearings. Particularly given the Court's belief that a judicial hearing is not necessarily superior to an administrative hearing, the Court doubted that the difference would lead to a constitutional distinction. It never resolved the issue, however, because its belief that the question was novel inescapably led to the conclusion that the defendants were entitled to qualified immunity. Finally, the Court addressed Atkins' claim that he was mistreated during the 36 days of confinement. The Court ultimately concluded that the claims were properly dismissed. Notwithstanding the fact that Atkins was represented by counsel and had already amended his complaint three times, the Court noted that some allegations were highly implausible while others were contradicted or internally inconsistent. Atkins never stated a plausible claim for a constitutional violation. In addition, Atkins has died and his the estate has no way of even presenting his version of the facts.

Judge Hamilton joined the majority opinion with respect to the claims against the City defendants, the conditions of confinement claims, and the qualified immunity holding He wrote separately, however, to address the merits of the alleged due process violation. Generally, a person arrested without a warrant is entitled to a judicial hearing within 48 hours. An alleged parole violator is entitled to much less protection -- but only because he is already on parole and has a more limited liberty interest. Here Atkins claimed that he was not the parolee named in the warrant. Judge Hamilton therefore concluded that due process imposes procedural protections on identification challenges to parole violation warrants. He addressed the issue under the Matthews framework, considering: the private interest, the risk of erroneous deprivation, and the government interest. The private interest is basic liberty, the risk of error is likely significant, and the government interest is closely aligned with the private interest. Weighing those factors, Judge Hamilton concluded that a claim of misidentification should be resolved by a prompt appearance before a judge.

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APPLICATIONS OF HERAEUS KULZER, GMBH, FOR ORDERS COMPELLING DISCOVERY FOR USE IN A FOREIGN PROCEEDING v. BIOMET (January 24, 2011)

Heraeus Kulzer, a German company and a leading producer of bone cement, sued Biomet, an American company, in a German court. Heraeus Kulzer alleges that Biomet obtained confidential information from a former Heraeus Kulzer distributor and used it in a competing product. As part of its case preparation, Heraeus Kulzer sought discovery in Indiana federal court. Judge Miller (N.D. Ind.) denied the application, concluding that Heraeus Kulzer was attempting to circumvent German law and that Heraeus Kulzer's requests were overly broad.

In their opinion, Circuit Judges Bauer and Posner and District Judge Pallmeyer reversed and remanded. The Court stated that § 1782 allows a district court to order the production of documents for use in a foreign tribunal. In the sound discretion of a district court, an applicant can obtain as much discovery as if the case had been brought in that court. The Court noted however, the potential for abuse in different ways: seeking discovery that is already available in the foreign court for harassment purposes only, seeking discovery that would be inadmissible in a foreign court again for harassment purposes, inundating a foreign court with evidence that would be inadmissible in an American court, seeking discovery that the foreign court would disapprove of because of the cost of compliance, and obtaining a discovery advantage by using American discovery rules while limiting one's adversary to foreign discovery rules. The Court saw no abuse, however, in Heraeus Kulzer's application. It appeared that the requested discovery was not available under the German procedures and there was no indication that the requested evidence would be inadmissible. Biomet neither sought any relief from the German court nor sought any conditions on Heraeus Kulzer's application from the American court. Because Heraeus Kulzer had demonstrated a need for the discovery, it is Biomet’s burden to establish that the discovery would be inappropriate under the statute. Since Biomet did not do that, the Court held that the § 1782 requirements were met. The Court also stated that the district court committed error by turning down the request without requiring some negotiation as to its scope. Biomet had refused to meet with Heraeus Kulzer to negotiate restrictions on the discovery and the district court never demanded evidence from Biomet as to its alleged burden. Once a party establishes entitlement to § 1782 discovery, the matter is governed by the federal discovery rules. They Court remanded for further consideration of the request under those rules. 

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SPANO v. THE BOEING COMPANY (January 21, 2011)

Like most American companies, the Boeing Company and the International Paper Company offered their employees participation in defined-contribution benefit plans. Members in each of the plans brought suit against each company and the plans. The allegations in each of the suits were quite similar. They claimed that the plans breached their fiduciary duties by a) paying excessive fees and expenses, b) choosing to include imprudent investment options in the plans, and c) concealing information from plan participants. Chief Judge Herndon (S.D. Ill.) certified a class in each case under Rule 23(b)(1). Each class definition included all persons who are, were, or ever will be participants or beneficiaries of the plan. Boeing and IP sought review.

In their opinion, Judges Bauer, Wood, and Tinder granted the request for review, vacated each certification order, and remanded. The Court noted that the case was brought under § 502(a)(2) of ERISA, which allows a participant to bring a civil action for relief under § 409, which in turn makes a fiduciary personally liable for a breach of fiduciary duty. In 1985, the Supreme Court held, in Russell, that a fiduciary in a defined-benefit plan context was not personally liable to a participant for damages. In a defined-benefit plan, assets are held in trust and the plan is administered by a fiduciary. Obligating a fiduciary to restore funds to the plan is sufficient to make the plan whole. In 2008, the Supreme Court had an occasion to apply that principle to a defined-contribution plan in LaRue. LaRue alleged a breach by a fiduciary that affected his account only and sought restoration of that amount to his account. Relying principally on the differences between defined-benefit and defined-contribution plans, the Supreme Court held that § 502(a) does authorize recovery for breaches of fiduciary duty that impair only the assets in a particular participant's account. But LaRue was an individual claim. The consolidated appeals involve class claims. The Court had to distinguish between an individual injury and an injury that should be considered a plan injury -- only a complaint about the latter is appropriately treated as a class. The Court turned to Rule 23. In order to proceed as a class, a claim must meet all of the elements of Rule 23(a) and fit into one of the 23(b) categories. For class certification purposes, a district court should not take the facts as alleged but, rather, make any required factual determinations. If the court finds that the claims meet the Rule 23 requirements, it issues an order in which it certifies and defines the class. The class definition is a very important aspect of the order, affecting both the litigation's scope and its res judicata effect. With those principles in mind, the Court turned first to the Boeing case. Although the Court found that the class met the numerosity and commonality requirements of Rule 23(a), it concluded that it did not meet the typicality and adequacy of representation requirements. Given the breadth of the class definition and the specific objections to two of the several investment options included in the plan, it is possible that many plan participants never owned shares in the targeted funds. Because the plaintiffs could potentially correct the Rule 23(a) problems by redefining the class, the Court also addressed Rule 23(b). The Court mentioned the Supreme Court’s cautionary remarks in Ortiz regarding the use of mandatory (b)(1) classes. Again, using the class definition certified, the Court concluded that the class could not meet the (b)(1)(A) or (b)(1)(B) requirements. The class was simply too diverse to for the Court to conclude that the class members had an identity of interest or that there was a risk of incompatible standards of conduct. Turning to the IP class, the Court found some of the same problems. It addressed the theories of relief (misrepresentation, imprudent investment, and excessive fees) individually. Under the misrepresentation theory, the Court concluded that it was not clear that the class representative's claims were typical of those of the group. With respect to the imprudent investment theory, the Court concluded (like in the Boeing class) that the allegation that some funds were imprudent while others were not, in conjunction with the diversity of the class, made the claim inappropriate for class treatment. Finally, with respect to the excessive fee theory, it appears that some fees were plan specific while others were fund specific. Given the class members’ different decisions regarding specific fund investments, this theory is also not appropriate for class treatment. The Court again emphasized that its decision was based on the definition provided by the district court and that it was not holding that an appropriate class could not be defined.

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HOWELL v. MOTOROLA (January 21, 2011)

Motorola has a ERISA defined-contribution pension plan that it offers its employees. The Plan Administrator, called the Profit Sharing Committee, was appointed by the Board of Directors. The Committee selected the investments that the plan offered and monitored the plan. The participants in the plan had complete authority over their investment choices. Before 2000, the plan offered four investment options, one of which was a Motorola Stock Fund. After 2000, nine options were available, still including a Motorola Stock Fund. Motorola stock had done quite well in the 1990s, increasing in value tenfold. It was trading around $30 in May 2000. It was in May 2000 that Motorola filed an SEC report in which it reported a significant agreement with a Turkish company. The report failed to mention that Motorola had provided almost $2 billion in financing to the company. The Turkey project did not go well. By May 2001, Motorola stock was trading at about $15 a share. Bruce Howell, a former Motorola employee and plan member, filed suit in 2003. Stephen Lingis and others later intervened. The suit alleges three breaches of fiduciary duty: a) imprudence in offering the Motorola Stock Fund, b) misrepresentation or failure to disclose information about the Turkey project, and c) failure to appoint and monitor competent fiduciaries. The defendants included Motorola, the Profit Sharing Committee, and a number of individual defendants. Judge Pallmeyer (N.D. Ill.) certified a class, dismissed Howell's claims on the grounds that he signed an enforceable release, and granted summary judgment to the defendants. She concluded that no defendant breached an ERISA duty and that the defendants were entitled to the section 404(c) safe harbor. Howell and the plaintiff class appeal.

In their opinion, Judges Bauer, Wood, and Tinder affirmed. The Court first addressed Howell's appeal. He had signed a General Release as part of a severance program in 2001. The release specifically included ERISA claims but excluded claims under the "employee benefits plan" and claims which could not be released by law. Howell claimed that the release was either not voluntary or fit within one of the exclusions. On the voluntariness point, the Court concluded that Howell failed to create an issue of fact. The Court addressed the "benefits plan" exclusion as a contract matter and concluded that the only rational reading of the clause was that Howell reserved the right to assert a claim for benefits already accrued but waived the right to challenge the plan as a whole. Finally, the Court rejected the argument that the release was an agreement that purported to relieve a fiduciary from responsibility prohibited under ERISA § 410(a). The release does not relieve any fiduciary of responsibility, it merely settles claims he might have. Turning to the merits of the class appeal, the Court identified three issues: a) which of the defendants were fiduciaries, b) whether there was a breach of a fiduciary duty, and c) whether the class was harmed. On the question of which defendants were fiduciaries, the Court addressed them in categories. With respect to Motorola and the Committee, as entities, the Court identified some thorny issues. Since it would later conclude that there was no breach, it assumed that both the company and the Committee fiduciaries. The Court then concluded that each of the individual defendants was an ERISA fiduciary, either as a Committee member, a Board member responsible for selecting Committee members, or as the Vice President of benefits. The Court thus turned to the evidence of a breach. It addressed each of the three theories of liability separately. On the theory that the fiduciaries were imprudent in even offering the Motorola Stock Fund, the Court found that the “safe harbor" did not apply. The safe harbor only protects a fiduciary from responsibility as a result of choices made by someone beyond his control. The choice of funds to offer, however, is exclusively within the fiduciary's control -- the safe harbor is unavailable. It found the class' evidence on the imprudence theory quite thin, however. The participants were always provided with other options, they were almost always allowed to move investment money out of the Motorola Stock Fund, and Motorola was a fundamentally sound company. It concluded that offering a Motorola Stock fund was not a breach. The class’ failure to disclose theory is that the fiduciaries breached a duty by failing to provide information on the Turkey project to the plan participants. The same failure to provide information, argued the class, defeats their safe harbor argument. In fact, the Court accepted the district court's approach that basically equated the two standards. The Court concluded, however, that the class presented insufficient evidence of an intentionally misleading statement or material omission. Therefore, the defendants did not violate a fiduciary duty and were entitled to the safe harbor. Finally, on the failure to monitor allegations, the Court found that the same safe harbor analysis it undertook with respect to disclosure theory applied. Even without safe harbor, there would be no liability as the Court thought the allegations were close to frivolous.

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PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST v. WALGREEN COMPANY (January 21, 2011)

Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust uses a Pharmacy Benefit Manager (PBM) to administer its relationships with pharmacies that the Trust's members use to fill prescriptions and that the Trust then reimburses for amounts in excess of the members’ co-pays. The PBM sets the maximum reimbursable price for the most frequently used prescriptions. Reimbursement for less popular medications is the average wholesale price, set by the manufacturers. The average wholesale price is almost always more than if the price had been set by a PBM. In the case of two particular drugs, Ranitidine and Fluoxetine, one form of the drug (i.e., capsule versus tablet) was on the controlled price list and the other was governed by the average wholesale price. It is illegal in Illinois for a pharmacy to dispense a drug in a form other than that which was prescribed. The Trust brought suit against Walgreens, alleging that the pharmacy filled members' prescriptions for those two drugs in the form that provided them the greatest reimbursement, regardless of which form was prescribed. The complaint cited several grounds for the Trust's belief that Walgreens committed this fraud: a) a preliminary review of its own reimbursement data that showed 12 members had prescriptions filled at Walgreens with the more expensive form of one of the drugs, and that three of those 12 members had apparently the same prescriptions filled at other pharmacies with the less expensive form of the drug, b) the allegations of a 2003 whistleblower suit that alleged that Walgreens filled prescriptions for the drugs with the more expensive form, and c) the data collected by a different PBM that compared Walgreens’ choice of drug form with other pharmacies and concluded that Walgreens’ rate of filling prescriptions with the higher priced drugs was overwhelmingly greater. The suit was originally brought as a class action and encompassed prescriptions in 35 states. It scope was narrowed, however to Illinois only and the Illinois Consumer Fraud and Deceptive Business Practices Act. The Trust also included an unjust enrichment claim under Illinois law. Judge Kendall (N.D. Ill.) granted Walgreens' motion to dismiss on the grounds that the Trust failed to adequately plead fraud and that it failed to allege that it had been injured. The Trust appeals.

In their opinion, Judges Flaum, Manion, and Tinder affirmed. The Illinois Act does make it unlawful to use fraud in trade or commerce. But it also is governed by the heightened fraud pleading requirements of the federal rules. The general rule is that a plaintiff cannot satisfy that heightened standard with allegations "on information and belief." Although the plaintiff does not use those words, the allegations fit the concept. There is an exception to that general rule where the plaintiff has no access to the facts constituting the fraud and where he adequately provides the grounds for his suspicions. The Court considered the support cited in the complaint in that light. First, it gave little weight to the allegations of the whistleblower suit. Allegations in other lawsuits are typically given little weight, particularly here, when those allegations themselves, for the most part, are made on information and belief. Second, the Court afforded little weight to the data set collected by the other PBM. Although that data does support a belief that a third party payor was injured, it does little to support the Trust, particularly since it is based on a different set of reimbursement data. The Trust had available its own reimbursement data. Third, the Court turned to that reimbursement data and found it wanting as well. There is not much data to begin with and the Court wondered why the Trust's pre-filing inquiry could not have resulted in a more robust data set. The suspicious examples themselves were few. In a universe of thousands of members and thousands of pharmacies nationwide, 12 erroneous prescriptions is not evidence of fraud. The Trust simply did not provide enough data and context to meet the heightened standard. Although the Trust may be correct that the small subset of members who had their prescriptions filled differently at Walgreens and other pharmacies is "suspiciously consistent" with fraud, it is not enough to satisfy the fraud pleading requirement. The district court was correct in dismissing the statutory count. Finally, the Court concluded that the district court was correct in dismissing the unjust enrichment claim. In Illinois, an unjust enrichment claim is not a separate cause of action but an equitable remedy. The Trust pleads its unjust enrichment claim on the same facts as it pleads its statutory claim. Those allegations of fraud are governed by the same pleading standard and must be dismissed for the same reason.

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PUNZIO v. ASTRUE (January 21, 2011)

Patricia Punzio's life has been difficult -- alcoholic parents, sexual abuse, attempted suicide, dyslexia, depression, and alcohol abuse all by the time she was 26. Although she stopped drinking at that time, she still had few job skills and had trouble maintaining employment. In 1998, at the age of 40, she sought psychiatric treatment. For the next several years, she participated in treatment and took medication. She was diagnosed with depression and bipolar disorder. Her condition and symptoms improved at times and, at other times, regressed. Her therapist, who saw her in weekly sessions in 2005 and 2006, concluded that she was incapable of holding down a job as a result of her mental illness. Punzio applied for disability benefits in 2005. At an ALJ hearing in 2007, she testified that her condition had improved with treatment but that she still had days when she could not leave the house, that she was still troubled by dyslexia and poor memory, that she mixes up numbers, that she has trouble remembering directions, and that she spends most of her time at home. In response to a question from the ALJ proposing certain limitations on Punzio's capacity to work, a vocational expert testified that Punzio could return to her prior work and would also be able to do factory work. Punzio's lawyer added additional restrictions to the question, including an inability to stay on task and to understand instructions and a likelihood to miss work three days a month. The vocational expert testified that any of those restrictions would eliminate any potential employment. The ALJ commented that the record did not support those added restrictions and asked for supplemental evidence. Punzio solicited an opinion from her treating psychiatrist. The psychiatrist submitted a report that supported the conditions suggested by Punzio's lawyer. The ALJ denied benefits, assigning no weight to the psychiatrist assessment because it was solicited by her attorney for purposes of the hearing and because it was inconsistent with other treatment notes. He also rejected the therapist’s opinion and Punzio's own testimony (as "not entirely credible"). Judge Darrah (N.D. Ill.) affirmed. Punzio appeals.

In their opinion, Judges Posner, Rovner, and Tinder reversed and remanded for the award of benefits. The Court first noted that the ALJ's failure to give any reason whatsoever for the belief that Punzio's testimony was not credible was grounds for reversal itself. The Court has commented several times recently on this unacceptable but frequent practice. (See Martinez, Spiva, and Parker). But another, more serious problem attracted the Court's attention. A treating physician's opinion is entitled to "controlling weight" if it is supported by competent evidence and not inconsistent with other evidence. Here, the ALJ rejected the treating physician's opinion, citing both that it contradicted her treatment notes and that it was solicited by her lawyer. The Court rejected both reasons. It found no contradiction between her diagnosis and her notes, when viewed as a whole, and criticized the ALJ’s “cherry-picking” the record to find an arguable, fleeting contradiction. As for the opinion being requested by the lawyer, the Court noted that the practice was endorsed by the agency's regulations and even encouraged on the agency's website. The Court recognized that sometimes treating physicians are not objective, but noted that the concern is addressed by the regulations. Given the treating physician's opinion and supporting evidence and the vocational expert's testimony that no jobs are available to someone with Punzio's mental condition, the Court concluded that a remand for further consideration was unnecessary. Instead, it remanded for an award of benefits.

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CZARNIECKI v. CITY OF CHICAGO (January 21, 2011)

For a few months in late 2006 in early 2007, Wojciech Czarniecki was a probationary police officer with the Chicago Police Department. He alleges that Assistant Deputy Superintendent Tobias made several negative references to his Polish ancestry in a discussion about Czarniecki's use of exam study guides. He alleges that his dismissal followed shortly thereafter and that another Polish probationary officer was dismissed at about the same time. He brought suit under § 1983 against the City and Tobias, alleging national origin discrimination in violation of the 14th Amendment. The district court granted summary judgment to the City. Shortly before trial, the court granted Czarniecki's motion to dismiss his claim against Tobias without prejudice - but conditioned the dismissal on a requirement that he seek her permission if he ever wanted to refile it. Czarniecki appealed that order because of its refiling condition, then sought permission to refile and appealed that order when the court denied permission on the grounds that his first appeal deprived her of jurisdiction. A few months later, Czarniecki filed a new complaint alleging national origin discrimination in violation of Title VII of the Civil Rights Act of 1964, naming only the City. Judge St. Eve (N.D. Ill.) dismissed the complaint on res judicata grounds. Czarniecki appeals.

In their opinion, Seventh Circuit Judges Bauer, Flaum, and Hamilton consolidated the three appeals, affirmed the res judicata dismissal, and dismissed the other appeals as moot. The Court noted the three familiar ingredients of federal res judicata (federal res judicata applies when the earlier judgment was in federal court): a final decision, a dispute arising out of the same operative facts, and the same parties. The Court found that the three requirements were met here. There is no dispute that the earlier decision against the City was final, the parties are the same (the fact that Tobias is not a defendant in the second suit is of no consequence), and the claim arises from the same operative facts. The fact that he sets forth a new theory of liability, even with different proof requirements, does not change the res judicata result. The Court also rejected Czarniecki's argument that res judicata should not apply because he lacked a "right to sue” letter at the time of his first complaint and could not have brought a Title VII claim. The Court concluded that Czarniecki had several ways in which he could have dealt with that situation -- splitting his claims was not one of them. Finally, the Court dismissed as moot Czarniecki's two other appeals since both only dealt with his ability to refile.

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SUTHERLAND v. WALMART STORES (January 21, 2011)

Arturo Aguas and Maria Sutherland worked together in the deli section of a Walmart store in Seymour, Indiana. They had worked together for years without incident -- but that changed on December 11, 2006. On that day, Aguas assaulted Sutherland in the deli cooler. He kissed her and fondled her and gave her an inappropriate Christmas card. Sutherland reported the incident to her supervisor the following day. A Walmart manager interviewed one co-worker on that day and another co-worker the following day. They continued their investigation throughout December, while Aguas was on vacation. When confronted upon his return, Aguas admitted some inappropriate conduct but denied the most serious allegations. The company decided that it could not substantiate all the allegations but disciplined Aguas severely for those that they could substantiate. The company also adjusted both employees' time schedules so that they rarely worked at the same time and also assigned them to workstations almost 80 feet apart when they did work together. Not satisfied with the company's response, Sutherland filed a police report. The police investigation was more successful than the company's. Aguas ultimately admitted the allegations and pled guilty to a sexual battery charge. Walmart revisited its investigation and terminated Aguas' employment. Sutherland took medical leave shortly thereafter for stress. Walmart terminated her employment when she failed to return to work, even after her leave expired. Sutherland brought suit against Walmart, alleging a hostile work environment and negligent infliction of emotional distress. Judge Lawrence (S.D. Ind.) granted summary judgment to Walmart. Sutherland appeals.

In their opinion, Seventh Circuit Judges Cudahy, Flaum, and Kanne affirmed. The Court assumed that the harassment was severe enough to create a hostile work environment and addressed only the issue of employer liability. Sutherland presented two theories -- a failure to prevent the assault theory based on an incident two or three years earlier in which Aguas was accused of harassment and a failure to investigate theory. The Court rejected the first theory based on its opinion in Longstreet in which it found no employer liability on very similar facts (one prior incident, probably not rising to the level of actionable harassment, properly investigated). On the second theory, the Court conceded that employer liability can arise when its investigation is not prompt and adequate. Here, the Court found that Walmart's investigation was prompt and adequate and that its corrective actions were reasonably likely to end the harassment. There is, therefore, no basis for employer liability and summary judgment was proper. The Court also rejected Sutherland's "underdeveloped" negligent infliction of emotional distress claim. To the extent the claim is based on pre-assault actions, it fails because Walmart was not on notice that Aguas was likely to assault her. To the extent that the claim is based on post-assault actions, it fails because Sutherland has not even alleged a physical impact, a requirement of Indiana law.

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ARLIN-GOLF v. VILLAGE OF ARLINGTON HEIGHTS (January 21, 2011)

Ronald Popp and Victor Valenti purchased the Arlin-Golf Shopping Center in the Village of Arlington Heights, Illinois in 2001. Within a year, the Village implemented a Tax Increment Financing District and announced that the Center would be demolished and the property redeveloped within months. The Village never followed through with its plan, however. The owners claim that they did encourage Center tenants to leave, discouraged prospective tenants from renting, and generally continued to announce falsely that the property would be condemned and redeveloped. The owners sued the Village in state court challenging the ordinance itself and alleging that the Village's actions constituted a taking under Illinois' Constitution. In 2008, the owners and the Village settled their lawsuit. Under the terms of the settlement, the owners dismissed the suit with prejudice and the Village purchased the property for $1.6 million. A few weeks after the sale closed, the owners brought suit in federal court against the Village, several Village officials, a brokerage firm that had assisted the owners in trying to sell the property before the settlement, a local bank, and the bank's chairman. Their complaint included allegations of violations of the Equal Protection, Due Process, and Takings Clauses, among others. Essentially, their claim was that the defendants' actions resulted in significant financial losses in connection with their ownership of the Center. Judge Coar (N.D. Ill.) dismissed the complaint on res judicata grounds. The owners appeal.

In their opinion, Judges Cudahy, Flaum, and Kanne affirmed. The Court noted the three res judicata requirements: a) a final judgment, b) identity of cause of action, and c) the identity of the parties. Under Illinois law, identity of cause of action exists if the claims arise from the same operative facts, even if they assert totally different theories of relief. The Court found that test met here. Both suits arise from the Village's implementation of its ordinance and the conduct of the defendants that allegedly led to the owners’ financial losses. The federal suit does not allege any material facts that occurred after the state court settlement. The Court also found no error in the district court's refusal to allow the owners to amend their pleadings, noting that the owners did not submit a proposed amended complaint to the district court in order to show that an amendment would not be futile.

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FOLLETT HIGHER EDUCATION GROUP v. BERMAN (January 21, 2011)

Berman & Associates (“B&A”) is an Illinois advertising brokerage firm. It places ads in media outlets for a fee. One of its clients is Follett Higher Education Group, a college bookstore management company. Under their contract, Follett agreed to pay B&A 110% of the purchased ads. B&A then paid the outlet directly, retaining the 10% as its fee. In mid-2006, Follett discovered that B&A had not paid for some of the purchased advertising. Follett paid the bills directly. In August of that year, Jay Berman (the sole shareholder of B&A) petitioned for personal bankruptcy. He listed B&A’s debts in his petition. Follett brought an adversary proceeding in bankruptcy, asserting that the debt was non-dischargeable under § 523(a)(4) because Berman had breached a fiduciary duty. The bankruptcy court found for Berman, concluding that Follett had failed to prove that Berman or B&A was a fiduciary. Judge Dow (N.D. Ill.) affirmed. Follett appeals.

In their opinion, Seventh Circuit Judges Kanne, Tinder, and Hamilton affirmed. The Court noted that generally a debtor's debts are discharged in bankruptcy. One of the exceptions to that rule comes in § 523(a)(4), which applies to a "defalcation while acting in a fiduciary capacity." In order to establish the exception, the creditor must establish that the debtor was a fiduciary to the creditor when the debt originated and that the debt was caused by defalcation or fraud. The only issue on appeal was whether Berman or B&A acted as a fiduciary. The Court rejected both of Follett's theories. The first theory was that Berman was a fiduciary and relied on the Illinois principle that a corporate director owes a fiduciary duty to the corporation, its shareholders, and (upon insolvency) its creditors. But the Court noted that not every fiduciary created by state law acts "in a fiduciary capacity" under § 523. The special relationship must have existed before and be unrelated to the alleged wrong. Therefore, a director's fiduciary obligation to a creditor, created upon insolvency, does not transform the pre-insolvency relationships to fiduciary ones. Berman is therefore not a § 523 fiduciary to Follett. Under Follett's second theory, B&A is the fiduciary under the contract and Jay Berman is personally liable under a veil piercing argument. The Supreme Court has cautioned against finding a fiduciary duty in a ordinary commercial transaction, even though most commercial transactions involve some semblance of trust. A § 523 fiduciary should be found only where there is an express trust or an implied fiduciary status imposed by law. The Court addressed each in turn. With respect to an express trust, the Court found nothing in the contracts that supported an intent to create a trust. There were neither separate accounts nor segregation of funds. The Court turned to the implied fiduciary status issue. Generally speaking, contract obligations do not establish a § 523 fiduciary relationship. The Court referred to its decision in Frain, were it found that relationship in the context of a contract among shareholders. But in Frain, the debtor was the corporation's CEO and thus had a natural knowledge advantage. He also had "ultimate power" through his day-to-day control of the business. Here, there are no special confidences, no knowledge or power disparity, and no duties created by law. The relationship is simply a contractual one and does not fit within the § 523(a)(4) exception.

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HOSKINS v. DART (January 20, 2011)

Joshua Hoskins had a number of complaints about the way he was treated in an Illinois prison. They included the use of excessive force, the denial of medication, and the inadequate processing of grievances. He brought five separate complaints under § 1983 against the Cook County  Sheriff and prison officials. He used a court-issued form for each of his complaints. The form contained a section which required him to list any prior lawsuits that he had filed. Hoskins listed none although he had filed three earlier civil rights lawsuits and, indeed, was still litigating them. The form contained several notices that severe sanctions, including dismissal, could result from a failure to fill out the forms correctly. During screening, the district court discovered the omission. Judge Manning (N.D. Ill.) concluded that the omissions were fraudulent and dismissed the complaints with prejudice. Hoskins appeals.

In their opinion, Judges Bauer, Tinder, and Hamilton affirmed. First, the Court found no clear error in the district court's finding of fraud. Although Hoskins claimed that the error was innocent in that it was based on another inmate's instructions, the court was well within its rights to reject that explanation. Second, the Court found no abuse of discretion in the district court's choice of sanction. Courts generally have significant discretion in imposing sanctions on those who violate its rules. Here, the district court considered lesser sanctions but chose dismissal because of the inadequacy of monetary sanctions in a pauper proceeding, the importance of the information requested in administering the three strike rule, and the multiple warnings on the form itself of the consequences of dishonesty. 

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BETTENDORF v. ST. CROIX COUNTY (January 20, 2011)

John Bettendorf has owned a parcel of property in St. Croix County in west-central Wisconsin for decades. In the 1970s and early 1980s, Bettendorf operated a carpet sales business on the property although it was zoned agricultural-residential. In 1985, Bettendorf sought and received permission to use the property for commercial purposes. The ordinance granting permission also provided, however, that the permission was personal to Bettendorf and could not be transferred. Almost 20 years later, Bettendorf sought a declaration in state court that the limitations on the rezoning were void and should be stricken. Unfortunately, the state court declared the entire ordinance void. The County withdrew its permission for commercial operations. Bettendorf filed suit in federal court alleging an unconstitutional taking and violations of his procedural and substantive due process rights. Judge Crabb (W.D. Wis.) granted summary judgment to the County. Bettendorf appeals.

In their opinion, Judges Bauer, Flaum, and Hamilton (concurring in part and dissenting in part) affirmed. The Court first addressed the takings claim. It stated that Bettendorf had to establish that government action had deprived him of "all or substantially all" use of the property. The relevant factors are the nature of the regulatory scheme, the severity of the economic impact, and the degree of interference with the owner's investment opportunities. Here, there was no government intrusion or interference with investment opportunities because Bettendorf himself brought the state action that resulted in the declaration that the ordinance was void. Bettendorf also has not lost the use of the property. He is free to use the property for the agricultural and residential purposes for which it is zoned. The Court thus rejected the takings claim. On the substantive due process claim, the Court stated that Bettendorf would have to establish that the County's decisions were "arbitrary, oppressive, or unreasonable." But here, the County's actions were taken in response to a court order invalidating the ordinance. The Court rejected the substantive due process claim, finding that action utterly reasonable. Finally, the Court addressed and rejected Bettendorf's procedural due process claim. Bettendorf's due process claim is that he was not afforded the typical County appeals process in a rezoning case. The Court noted, however, that it was Bettendorf who chose to challenge the ordinance in state court in lieu of the local appeals process. Bettendorf was afforded adequate process in those state court proceedings. Even if the local appeals process was a superior method for resolving the issue, due process does not require superior process -- only constitutionally adequate process.

Judge Hamilton concurred with the majority's treatment of the due process claims but dissented from its treatment of the takings claim. He relied on the "vested rights" theory that the majority concluded was inadequately presented. Judge Hamilton surveyed the "long and winding history" of the concept in American law. Under the concept, an existing and lawful property use is a critical consideration in a takings claim. Judge Hamilton thus addressed the three factors quite differently than did the majority. First, the nature of the government interference is significant in that it prohibited a long time existing and lawful property use. Second, the economic impact appears to be significant although unclear on the pleadings. Third, although Bettendorf did agree to the condition, the withdrawal of permission substantially interfered with his investment expectations. Judge Hamilton recognized that his consent to the condition limited his expectations to continued commercial use only as long as he owns the property and would thus negatively affect any compensation due.

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PROTECTIVE LIFE INSURANCE CO. v. HANSEN (January 19, 2011)

B&K Enterprizes, a Wisconsin limited liability company, operated a gasoline service station in Manitowoc, Wisconsin. Richard McDonald was a founding member of B&K and managed the station’s day-to-day affairs. B&K purchased a $1 million life insurance policy on McDonald from Protective Life Insurance Co. It then financed the operations by assigning its interest in the insurance proceeds as security for several loans. After an audit established that McDonald had misappropriated funds from and mismanaged B&K, the other LLC members removed McDonald -- but it was too late. The members hired Michael Culligan to wind up operations and liquidate the company. Culligan submitted a form to Protective to transfer ownership of the insurance policy from B&K to McDonald. Because the policy erroneously identified B&K as a corporation, Protective returned the form to Culligan for a second officer’s signature (one signature was sufficient for an LLC). Culligan never resubmitted the form. Under the impression that he was the new owner of the policy, McDonald submitted a change of beneficiary form substituting Megan Hansen, a woman he had been dating, for B&K. McDonald then committed suicide. Protective filed an interpleader action naming both B&K and Hansen. Judge Griesbach (E.D. Wis.) entered judgment for B&K. Hanson appeals.

In their opinion, Seventh Circuit Judges Bauer, Wood, and Williams affirmed. The Court noted that Hansen presented a multi-layered argument. She first asked that the original contract be reformed to accurately indicate B&K’s status as a limited liability company instead of a corporation. She then asks that Culligan's request to transfer ownership to McDonald be effectuated on the theory that Protective's policy was to grant such a request from a limited liability company on one signature. Finally, she asks to give effect to McDonald's request to change beneficiaries. The Court assumed, without deciding, that Hansen could succeed in reforming the policy to reflect B&K’s accurate corporate form. It rejected, however, her additional requests. Reformation is available only if the document fails to reflect the parties' intent. Hansen's requests to give effect to Culligan’s request to change ownership and McDonald’s request to change beneficiaries do not fit within that legal theory – and the Court could identify no other theory that could achieve Hansen's goals. What matters is what happened – not what Hansen speculates would have happened if the policy properly identified B&K. The Court also rejected Hansen’s third party beneficiary argument. Finally, the Court noted its agreement with the district court's conclusion that reformation, as an equitable remedy, would be inappropriate even if all of its elements were satisfied. Here, the equities heavily favor being B&K and reformation would be improper.

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MARTINEZ v. ASTRUE (January 19, 2011)

Anita Martinez and her five children live in her mother's basement. Martinez suffers from depression, bipolar disorder, and severe arthritis. She is on medication for both her mental and physical complaints. An ALJ denied her claim for disability benefits. Francis Rider is 61 years old, extremely obese, has severe arthritis in her right knee, and suffers from back pain. An ALJ denied her request for disability benefits. Christine Pound is 60 years old and suffers from coronary artery disease, cartoid artery disease, back pain, and restless leg syndrome. But Pound only had Social Security coverage through the end of 2003. At that time, her conditions were under control and she used only mild medication to treat her pain. An ALJ denied her request for disability benefits. Martinez, Rider, and Pound appeal.

In their opinion, Judges Posner, Ripple, and Rovner consolidated the three appeals and reversed and remanded in Martinez and Rider and affirmed in Pound. In these consolidated appeals, the Court again (as in Spiva (opinion and intheiropinion) and Parker (opinion), both opinions also written by Judge Posner) took the opportunity to criticize the Social Security Administration and its handling of benefit claims. It specifically disapproved of the common ALJ practice of concluding a claimant's statements are not credible without explanation and also noted many ALJs’ apparent lack of familiarity with mental illness. On the merits of the appeals, the Court: a) reversed and remanded the benefits denial in Martinez because the ALJ's superficial opinion discounted Martinez' testimony as "not entirely credible" without explanation, ignored much of the evidence, overlooked the fact that she stopped taking her medication at times because of her condition, and never considered the cumulative impact of her various problems, b) reversed and remanded the benefits denial in Rider because the ALJ ignored the treating doctor's opinion that she was not capable of prolonged standing or walking, relied on contrary opinions of non-treating physicians, made findings inconsistent with the evidence, ignored the uncontroverted testimony that Rider could not afford a knee replacement, and failed to consider the impact of her obesity on her physical condition, and c) affirmed the benefits denial in Pound because, although her condition deteriorated rapidly after 2004, the ALJ conducted a thorough analysis and denied benefits in a thorough opinion that concluded that Pound could perform sedentary work (and was therefore not disabled) when her coverage expired. 

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SMITH v. PETERS (January 19, 2011)

Anthony Smith was incarcerated in Indiana state prison. He brought suit against prison employees, alleging violations of the First and Eighth amendments. According to the allegations of his complaint, he was a) forced to work outside in freezing conditions without protective equipment (including gloves), b) forced to work in a group with axes and shovels without receiving safety instruction, and c) retaliated against for filing grievances complaining about the work conditions. Chief Judge Young (S.D. Ind.) dismissed the complaint, concluding that a) the outdoor work was merely "the usual discomforts of winter" and b) Smith's fear of dangerous working conditions was not actionable in the absence of a physical injury. He did not address the First Amendment claim. Smith appeals.

In their opinion, Seventh Circuit Judges Posner, Wood, and Williams reversed and remanded. On the protective clothing claim, the Court stated that the allegations of forcing Smith to work in freezing conditions without gloves is sufficient to state an Eighth Amendment Claim. On the dangerous conditions claim, the Court agreed that Smith was not entitled to injunctive relief (because he had been transferred to another prison) or compensatory damages (because of 42 U.S.C. § 1997e(e)’s a physical injury requirement). However, the complaint's allegation of a reckless exposure to serious physical injury does state an Eighth Amendment claim and the Court concluded that Smith is entitled to seek remedies not precluded by § 1997e (including nominal and punitive damages). Finally, the Court noted that the complaint stated a claim for a First Amendment violation and the district court erred by not addressing it.

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HYPERQUEST v. N'SITE SOLUTIONS (January 19, 2011)

Safelite Group owns the copyright for a claims processing software program. Its predecessor granted a non-exclusive license to N’Site Solutions in 2001 limited to in-facility use only. A dispute arose between the parties in late 2003 regarding agreement terms and fees. Attempts to renegotiate the agreement in early 2004 were unsuccessful. At about the same time, Safelite entered into a licensing agreement with HyperQuest. The HyperQuest agreement granted significantly greater rights than the N’Site agreement did. However, Safelite retained certain rights and the agreement recognized the then-ongoing renegotiation efforts with N’Site. HyperQuest filed a Copyright Act suit against N’Site and Unitrin Direct Insurance Company. It alleged that N’Site infringed its copyright by using the software outside of its own facilities, by modifying and creating derivative works, and by selling the software or derivative works to Unitrin. Judge Shadur (N.D. Ill.) dismissed the case with prejudice, concluding that HyperQuest lacked standing to sue. The court also awarded fees and costs to N’Site. HyperQuest appeals both the merits and the fee award -- Unitrin cross-appeals the reduction of its requested fees.

In their opinion, Seventh Circuit Judges Flaum, Wood, and Evans affirmed. Under the Copyright Act, only a person with enforceable rights may bring an action. That person must be a "legal or beneficial owner of an exclusive right." The Act lists six exclusive rights - the right to: a) reproduce the work, b) prepare derivative works, c) distribute copies, d) perform the work publicly, e) display the work, and, f) perform the work digitally. The Court noted that a copyright owner could convey various rights to different parties and that HyperQuest need only show its ownership of one of the exclusive rights. HyperQuest claims to own three of the six identified rights -- the rights to reproduce, prepare derivative works, and distribute copies. The Court turned to the language of the license agreements and the rights held by each of the parties to resolve the claim. It noted that N’Site had a limited right to use the software in its own facilities and no rights to reproduce, prepare derivative works, or distribute copies. But HyperQuest's license was not only subject to N’Site actual rights but was also subject to any rights that would have been granted to N’Site in the renegotiated license. In addition, Safelite itself retained substantial rights with respect to derivative works. The Court concluded that the lines of ownership were "blurry at best" and that HyperQuest failed to meet its burden of showing ownership of an exclusive right. Turning to the fee award, the Court first addressed a jurisdictional issue. The original judgment on the fee award ran in favor of Unitrin only. Two days later, the district court on its own motion amended the judgment to add N’Site. Unitrin's notice of appeal is timely only if the amended judgment started anew the period within which to appeal. The Court concluded that the change was not a clerical error correctable under Rule 60(a) but that it was akin to a new trial order under Rule 59(d) and that the notice of appeal was timely. The Court found no abuse of discretion in either the award of fees or the reduction in the amount requested.

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ERVIN v. OS RESTAURANT SERVICES (JANUARY 18, 2011)

OS Restaurant Services operates an Outback Steakhouse in Calumet City, Illinois. It has both hourly and tipped employees. A number of its former employees brought suit, alleging that certain of its employment practices violated the Fair Labor Standards Act as well as the Illinois Minimum Wage Law and theIllinois Wage Payment and Collection Act. The plaintiffs sought to pursue their federal claims as an FLSA collective action and their state law claims as a Rule 23 class action. Judge Guzman (N.D. Ill.) refused to certify the class. He concluded that the plaintiffs failed to meet the superiority requirement because of a conflict between Rule 23's opt-out approach and the FLSA's opt in approach. The plaintiffs petitioned for an interlocutory appeal.

In their opinion, Seventh Circuit Judges Flaum, Wood, and Hamilton granted the petition and reversed and remanded. The only issue on appeal was whether the plaintiffs satisfied the Rule 23(b)(3) superiority requirement. Although Outback argued that the Court could affirm on the ground that individual issues predominated, the Court concluded that the district court's treatment of that issue was not clear enough to support alternate ground affirmance. On the superiority issue, the Court agreed that the two vehicles had different approaches. An FLSA collective action allows participation only upon the written consent of a party -- while a Rule 23(b)(3) class action includes all potential class members who do not affirmatively opt out of the class. Notwithstanding this distinction, however, the Court found nothing in the FLSA that precluded a companion class action on state law claims. Because the district court concluded that the two claims could not proceed simultaneously as a matter of law, the Court remanded for further consideration of the Rule 23 requirements.

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IN RE: TRANS UNION CORP. PRIVACY LITIGATION (January 14, 2011)

A number of Fair Credit Reporting Act class actions against Trans Union were consolidated in the Northern District of Illinois. Lawyers for some of the plaintiffs ("MDL Counsel") agreed with Trans Union in 2006 to settle the case for $40 million (including $20 million cash). Dawn Wheelahan was counsel for another set of plaintiffs. She and counsel for yet a third set of plaintiffs ("Texas Counsel") opposed the settlement and persuaded the district court to reverse its earlier approval of the settlement. A few years later, the case settled for $110 million (including $75 million cash). The settlement agreement capped lawyers' fees at $18.75 million (17% of the settlement amount), which the lawyers asked for. Judge Gettleman (N.D. Ill.) reduced the fees to $10.83 million but then referred the matter to a special master and approved the special master's recommendation of a $13 million award, allocated 63% to MDL counsel, 22% to Wheelahan, and 15% to Texas counsel. Wheelahan appeals.

In their opinion, Judges Posner, Kanne, and Wood modified and remanded. The Court noted that the special master relied on four things in quantifying the amount of his recommended award: a) an academic study that found an average fee award of 17.6-19.5% in settlements between $79-$190 million, b) a group of securities cases (that have higher discovery costs and therefore should allow for higher fees) from which he extrapolated a fee award of 3.8-23.2% in a settlement this size, c) the fact that the settlement contained $35 million in non-cash value (which he viewed as having less value than cash and on which he awarded only a 5% fee), and d) the risk of losing. The Court found that the special master erred in at least three ways. He did not resolve the wide range of fees in the securities cases or quantify a reduction for the reduced cost of discovery. His reduction of the fee award for the non-cash component of the settlement was arbitrary and unwarranted. His analysis of the risk of losing was weak and inconclusive. The Court noted that simply eliminating the discount on the non-cash value brought the fee award back up to $16.5 million. But it ultimately concluded, because of the combination of errors, that the master’s rationale for reducing the $18.75 million originally requested was not persuasive. Turning to the allocation recommendation, the Court stated that the special master gave MDL Counsel full credit for the $40 million component and 50% credit for the additional $70 million component. The master also noted that MDL Counsel's investment in the case was valued at 4.3 times Wheelahan's investment. The Court noted that this ratio is considerably higher than the fee recommendation and ultimately concluded that the special master's allocation recommendations were appropriate. Against the backdrop of an appropriate allocation but an unsupported reduction in total award, the Court turned to Wheelahan's request. It concluded (applying “rough justice”) that she was entitled to her allocation recommended by the master (22%) but that she was entitled to that percentage of the amount originally requested. Therefore, the Court ordered that she be awarded an additional $1.425 million.

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JONES v. CLARK (January 14, 2011)

Early one August morning, Christina Jones had begun her job reading meters for Commonwealth Edison. Jones is African-American. On this particular day, her job took her to Braidwood, Illinois. Braidwood, a small town about 50 miles southwest of Chicago, has an almost exclusively white population. Apparently, a "concerned citizen" thought that she was something other than a meter reader and called the police. [According to her complaint:] Officer Clark was the first to arrive and question her. Although she wore numerous articles of clothing with her employer's logo and provided two separate pieces of identification, Clark would not let her go. When he asked for her date of birth, she stepped away and started to call her supervisor on her cell phone. At that point, Officer Kaminski arrived. He screamed at her, knocked the phone out of her hand, cuffed her hands behind her back, threw her against the car, and arrested her. She was charged with obstructing a peace officer and released on bond. The charges were later terminated in her favor. Jones brought suit, alleging Fourth Amendment violations. Judge Andersen (N.D. Ill.) concluded that disputed issues of fact precluded resolution either of the merits or defendants' request for qualified immunity. Defendants appeal.

In their opinion, Judges Wood, Evans, and Sykes affirmed. The Court first addressed its appellate jurisdiction. Although the "collateral orders" exception to the finality rule does apply to the appeal of qualified immunity denials, it does so only in so far as the appeal raises an issue of law. Even in a case, like this, where there are disputed issues of fact, defendants can (and these defendants have) get their appeal if they limit it to plaintiffs version of the facts. Comfortable with its jurisdiction, the Court turned to the merits. Qualified immunity has two prongs: was there a constitutional deprivation and were the constitutional rights at issue clearly established. With respect to the second prong, the constitutional right at issue here -- the right to be free from an arrest without probable cause -- was certainly clearly established. Therefore, the only question for the Court on the merits is whether Clark and Kaminski violated Jones' rights. The Court appeared to have little difficulty in answering that question affirmatively (again, on Jones' version of the facts). The Court noted that there was nothing in the record that would provide reasonable suspicion that she was engaged in unlawful activity. Their initial detention of her was therefore a constitutional deprivation. In addition, her actual arrest was a constitutional violation. Since the officers had no reason to detain her in the first place, anything supporting probable cause to arrest her must have occurred after her detention. Her post-detention conduct does not support probable cause either for disorderly conduct or for obstructing a peace officer. With respect to the former, she acted professionally at all times. With respect to the latter, the offense requires a physical act rather than just an argument with a policeman. The officers are therefore not entitled to qualified immunity on this record.

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R.G. WEGMAN CONSTRUCTION CO. v. ADMIRAL INSURANCE CO. (January 14, 2011)

Brian Budrik suffered serious injuries in a fall at a construction site where he was working. He brought a negligence action against several parties, including R.G. Wegman Construction Company, which managed the site. Wegman was an additional insured on a $1 million policy with Admiral Insurance Company. Wegman also had an excess policy with a $10 million limit. Wegman tendered the case to Admiral, which accepted and controlled the defense. According to Wegman, Admiral knew fairly early on that Budrik's injuries were quite serious, and knew that there was a significant possibility that the ultimate loss would exceed the policy limits, and yet failed to advise Wegman of that risk. Wegman claims that it did not appreciate the risk until right before trial. It advised its excess carrier immediately but the carrier refused coverage because of the late notice. Budrik prevailed at trial and the court entered a judgment in excess of $2 million against Wegman. Wegman filed suit against Admiral, alleging that it breached its duty of good faith. Judge Zagel (N.D. Ill.) dismissed the complaint. Wegman appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Tinder reversed and remanded. The Court first had to deal with a jurisdictional issue. After Admiral removed the case to federal court, Wegman amended its complaint to add Budrik as a defendant. Since Budrik and Wegman are both Illinois citizens, the federal court may not have had diversity jurisdiction. But the Court noted that Wegman sought no relief against Budrik. Since there was no basis for adding him, and he is not necessary to resolve the case, the Court dismissed him and proceeded to the merits. The Court noted that a defendant with insurance coverage frequently has no interest in the litigation. If there is no reason to believe that the outcome will exceed the policy limits, only the insurer has a financial stake in the case. In those cases, it makes sense for the insurer to control the defense, to retain competent counsel, and to stay informed of the progress of the litigation. But here, accepting the allegations as true, Admiral learned early on that the outcome could exceed the $1 million policy limit. This fact created a conflict of interest between Admiral and Wegman. The existence of the conflict of interest requires the insurer to notify the insured. Admiral was duty bound to advise Wegman so that Wegman could take whatever steps were necessary to protect its own interest. Of course, the Court emphasized that it was relying only on the pleadings and that Wegman would still have to prove its allegations.

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ALLORD v. ASTRUE (January 13, 2001)

Gary Smith served as a Marine in Vietnam. He now suffers from post-traumatic stress disorder. He applied for disability benefits in October of 1996. He asserted that he suffered from the disability since his retirement from the Marine Corps in 1987. Since he was last eligible for Social Security benefits in December of 1992, he had to show that he was disabled at that time. He is entering his fifteenth year of trying to do just that. A local agency denied his claim, an ALJ denied his claim, the agency stipulated on review to a remand for consideration of additional evidence, a different ALJ denied his claim, a district court affirmed the denial, the Seventh Circuit reversed and remanded to the Agency, a third ALJ denied his claim, and a district court has reversed and remanded. Judge Crabb (W.D. Ill.) identified two errors in the last ALJ decision. First, he failed to follow the directions from the Seventh Circuit in assessing a witness's credibility. Second, he did not adequately explain his reasons for discounting a treating physician's opinion and adopting the opinion of another. Nevertheless, the district court declined Smith's request to remand with instructions to award benefits. Smith appeals.

In their opinion, Seventh Circuit Judges Kanne, Williams, and Tinder affirmed. The only issue on appeal is whether the record below requires a finding that Smith was disabled in December 1992. The Court first noted that it would apply an abuse of discretion standard rather than the de novo review typically applied in a Social Security benefits case. That is because it is the claimant appealing the district court's refusal to remand for the award of benefits. The Court found no abuse of discretion. First, although Smith is correct that the ALJ erred in not adequately describing why he discounted the treating physician's testimony, the record does not support the conclusion that he could not do so. In fact, the district court itself noted that contradictory inferences could be drawn from the testimony and Smith does not challenge that reasoning. Second, the Court rejected Smith's argument that the agency’s "obduracy" is sufficient reason to award benefits. The record must provide the reason to award benefits. Third, the Court rejected Smith's argument that a remand would be futile. He expressed confidence that the agency would not continue to ignore its directions and those of the district court.

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LEITGEN v. FRANCISCAN SKEMP HEALTHCARE (January 13, 2011)

From 1993 to 2006, Dr. Christine Leitgen was a physician in the Department of Obstetrics and Gynecology at a hospital owned by Franciscan Skemp Healthcare. She was one of the busiest and highest paid doctors in the department. She also served as chair of the Department from 1999 to 2004. The Hospital distributed the revenue it received for deliveries equally among the physicians in the department, regardless of the number of deliveries each performed. Since the female physicians usually performed more deliveries, they were generally unhappy about the Hospital's compensation scheme. Leitgen herself complained to the Department chair several times. The issue came up while Leitgen herself was the Department chair, as well. She chose not to address the issue for fear that it would affect morale. Leitgen and another female physician complained to Dr. Sandy, Leitgen's successor as chair. She claims that she identified the flaws in the compensation system as gender discrimination. The issue was discussed several times at department meetings but never voted on -- and never changed. Leitgen complained to the Hospital's CFO in August and September of 2006. Again, she alleges that she framed the issue as one of gender discrimination. Throughout her employment, Leitgen's was the subject of numerous complaints from both staff and patients. In fact, as early as 2003, one of the Hospital's managers recommended that she be fired. In her March 2006 performance review, Leitgen was told that she had shown "some improvement" in the area. In July of 2006, a nurse complained that Leitgen humiliated her in front of the patient. The complaint prompted Sandy to consider discipline. The complaints continued through September. In early September, Sandy and Leitgen's supervisor began to prepare a termination recommendation. The collected information about all the complaints. Sandy made a recommendation to the executive committee that Leitgen be terminated on October 31, 2006. On November 14, Leitgen was told to resign or be fired. She resigned the following day. She brought suit under Title VII of the Civil Rights Act, claiming that her termination was in retaliation for her complaints about gender discrimination. Judge Crabb (W.D. Wis.) granted summary judgment to the defendants. Leitgen appeals.

In their opinion, Judges Rovner, Sykes, and Tinder affirmed. As Leitgen proceeded under the direct method of proof, she was required to establish that she engaged in protected conduct, that she suffered an adverse employment action, and that there was a causal connection. In order to establish protected conduct, she need not prove that the Hospital’s compensation system was discriminatory, but she must prove that she had a reasonable and good faith belief that it was. At this summary judgment stage, the Court concluded that there was sufficient evidence that she had such a belief and that her conversation with the CFO was therefore protected conduct. With respect to the causal connection, however, the Court concluded otherwise. In order for her to meet that requirement, she must show that her complaints were a "substantial or motivating factor" in the Hospital's decision. Her reliance on the temporal proximity between the communication with the CFO and her termination did not persuade the Court. First, suspicious timing is almost never enough. Second, her conversation with the CFO was not the first time she raised the complaint. Third, the conversation was not even the first time she raised the complaint outside her department. Fourth, Sandy and Leitgen's supervisor began their discipline discussions before Leitgen's meeting with the CFO. Leitgen failed to establish the required causal connection and summary judgment was appropriate.

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DETATA v. ROLLPRINT PACKAGING PRODUCTS (January 12, 2011)

Sherry DeTata had a rather short career at Rollprint Packaging Products. She was fired after only eight days -- allegedly a few days after she complained about sexual harassment. She sought advice from Jewell Bracko, the Director of the American Civil Rights Trust. Although Bracko wrote a letter to Rollprint on her behalf, his role and relationship with DeTata is not clear on the record. In any event, she filed a charge with the EEOC in December of 2008. The agency issued a right to sue letter on March 2, 2009. Although the letter was addressed to DeTata, it was sent to Bracko. DeTata alleges that Bracko never received it. It was returned to the EEOC as undeliverable. When DeTata later called the agency to inquire about her case, she was told that the letter had been issued but was also told that her file had been lost. The EEOC eventually resent the letter on June 18. Of course, the letter stated that she had 90 days after her receipt of the notice to file a lawsuit. She filed her suit pro se on August 18. Rollprint moved to dismiss on the grounds that she did not meet the 90-day requirement. Judge Pallmeyer (N.D. Ill) held an evidentiary hearing. Based on DeTata's testimony that her conversation with the EEOC occurred in April, the district court granted Rollprint's motion. It concluded that the 90-day period began running when she had actual oral notice. DeTata hired an attorney and filed an amended complaint, which was also dismissed. On a motion for reconsideration, she explained that she misspoke when she stated that the call was in April and that it was really in May. The court denied the motion. DeTata Appeals.

In their opinion, Chief Judge Easterbrook and Judges Wood and Evans vacated and remanded. The statute requires the agency to notify a party when it dismisses a discrimination charge but it does not elaborate on either the form or content of that notice. The Court noted that it has consistently held that written notice is required and that the 90-day period does not run until actual receipt of the letter. It also noted, however, that cases from both the 6th and the 11th Circuits held that oral notice was sufficient. In both those cases, the court believed that the plaintiff was at least partially at fault for the delayed actual receipt, which is not the case here. But even if oral notice is sufficient, it must be sufficient notice. The Court held that proper notice must include authorization to institute an action within 90 days and advice regarding the institution of the action, if appropriate. The record does not establish that the oral notice received here met that threshold. Rollprint has the burden to show that the case was filed late -- it has not met that burden. The Court also rejected Rollprint's request to affirm the district court on the grounds that the initial notice sent to Bracko was sufficient. The Court noted that the undisputed facts surrounding that notice were insufficient for it to conclude at this stage that it constituted adequate notice.

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ESTATE OF DOROTHY DAVIS v. WELLS FARGO BANK (January 12, 2011)

In 1999, Dorothy Davis lived in a single-family home in Kankakee, Illinois. She was a widow, she was elderly, and she was African-American. A man approached her and offered to make some repairs to her home – and get a new home loan to pay for them. She ended up borrowing almost $90,000 from Mortgage Express and paying over $30,000 in settlement charges. She sued Mortgage Express. A jury found (apparently in Mortgage Express’ absence) in her favor. The court entered judgment for over $135,000 – a judgment she has since been unable to collect. Before Mortgage Express went out of business, it transferred her loan. The loan is now held by Wells Fargo Bank and serviced by Litton Loan Servicing. Wells Fargo and Litton have continued their attempts to collect on the loan. They proposed a modification, demanded payment, and pursued a foreclosure action. Davis, and now her estate, sued Wells Fargo and Litton. She asserted fraud and unconscionability claims under state law, race discrimination claims under both the Fair Housing Act and the Equal Credit Opportunity Act, and a claim for violating the Home Ownership and Equity Protection Act. Judge Aspen (N.D. Ill.) dismissed all of the claims except the FHA claim, on which he granted summary judgment to the defendants. The Estate appeals.

In their opinion, Seventh Circuit Judges Evans, Sykes, and Hamilton affirmed. The Estate’s biggest problem lies in the statutes of limitations, which vary from one to five years. There are only three acts that occurred within even the longest of those periods that could support the Estate's claims: Litton's modification proposal, Wells Fargo's failure to tell Davis that it had acquired the mortgage, and Litton's payoff demand. The Court addressed each of the claims in that light. With respect to unconscionability, the allegations must relate to the formation of the contract. None of the allegations within the limitations periods do so -- the claim was properly dismissed. With respect to fraud, a plaintiff must show reliance. The only possible allegation within the limitations period relating to fraud is Wells Fargo's failure to advise Davis of the loan transfer. Assuming that could amount to a fraudulent omission, Davis never alleged that she relied on it -- the claim was properly dismissed. With respect to the Home Ownership and Equity Protection Act, that statute requires lenders to make certain disclosures in connection with a loan. None of the allegations within the limitations period trigger the disclosure requirements -- the claim was properly dismissed. With respect to the Equal Credit Opportunity Act, the Court stated that that Act prohibits race discrimination against an "applicant," which is further defined as a person who receives an "extension of credit." The Court concluded that Litton's offer to modify the loan, which occurred within the limitations period, was an "extension of credit." Davis further alleged that the offer was racially discriminatory. The Court therefore concluded that the claim should have survived a motion to dismiss. The Court nevertheless affirmed the district court. It found that the defendants would have prevailed on summary judgment for the same reason they did on the FHA claim. Davis simply failed to put forth evidence of discrimination. Finally, the Court considered that FHA claim, the only claim that survived a motion to dismiss in the district court. Davis was given the opportunity, on summary judgment, to come forward with evidence that the defendants discriminated against her on the basis of race. Again, she was limited to conduct occurring within the limitations period. That "evidence" consisted of a) two unsigned and undated affidavits, which the court struck because they did not comply with the rules, b) the declarations of two former Wells Fargo employees, which the court struck because Davis never disclosed the declarants during discovery, and c) Davis' testimony that she believed she was the victim of race discrimination. Davis waived any complaint regarding the affidavits or declarations because she failed to raise any meaningful opposition to the district court’s reasoning on appeal. Her unsubstantiated personal beliefs are simply insufficient to support her claim.

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THOMAS v. H&R BLOCK EASTERN ENTERPRISES (January 12, 2011)

Amorita Thomas worked as a seasonal tax preparer for H&R Block for the 2005-06 and the 2006-07 tax seasons. Her employment agreement provided for two different types of compensation. First, she was paid hourly. Second, she was eligible for compensation at the end of the tax season to the degree that the sum of several identified amounts exceeded her total hourly income for that season. Those other amounts included incentives for products sold, return clients, and number of returns prepared. The returns prepared number was based on fees collected. Thomas received her hourly wages on a biweekly basis but did not receive her seasonal compensation until sometime in May of each year, even though she stopped working several weeks earlier. Thomas brought suit against H&R Block pursuant to Indiana's Wage Payment Statute, which requires "wages" to be paid within 10 days after they are earned. Then-Judge Hamilton (S.D. Ind.) granted summary judgment to the defendant. Thomas appeals.

In their opinion, Judges Flaum, Ripple, and Evans affirmed. The Court noted that it was its obligation to apply the law of Indiana, as the Indiana Supreme Court has or would determine. The only issue on appeal was whether Thomas’ seasonal compensation amounted to “wages" in the Indiana Wage Payment Statute. Although the term is not defined in that particular statute, Indiana courts have looked at the definition in the Wage Claims Statute and the Indiana Supreme Court's decision in Highhouse. Considering that, the Court found the answer dependent on several factors. Compensation is less likely to be considered "wages" if: a) it is linked to a contingency, b) it would be hard to calculate and pay it within the statutory period, c) is not directly related to hours worked, and d) is paid in addition to other compensation. In this case, the Court found that each of those factors weighed against Thomas: a) the amount of the compensation for returns prepared is contingent on collections, b) evidence in the record indicates it would be almost impossible to calculate and pay the compensation within 10 days, c) the compensation was not directly related to hours worked, and d) the compensation was paid in addition to her hourly wages. Thus, the compensation is not "wages" under Indiana law. The Court rejected Thomas' request to certify the question to the Indiana Supreme Court in light of Highhouse and the fact that any decision of the state court would have limited application, given the unique compensation scheme.

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