Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

NATIONAL ROOFING CONTRACTORS ASSN. v. UNITED STATES DEPARTMENT OF LABOR (April 7, 2011)

The United States Department of Labor promulgated a regulation in 1994 that required residential construction workers to use guard rails or other fall arrest systems when they were working at certain heights. Because the Department received many comments during the rulemaking period asserting that the requirement could actually impair safety, it included an exception whereby an employer could demonstrate that compliance would create a greater hazard and be relieved from the requirement. The regulation did not satisfy either the construction industry or employee groups. In 1999, the Department issued an advance notice of proposed rulemaking seeking comments on whether the regulation should be amended. At the same time, it issued a directive that, in effect, advised its staff not to enforce the regulation if an employer used slide guards or other named methods -- methods that were not in compliance with the regulation. In 2010, the Department closed the rulemaking without changing the regulation, rescinded its 1999 Directive, and issued a new directive (the "2010 Directive") stating that the 1994 regulation will be enforced as written. The National Roofing Contractors Association, along with others, filed a petition to set aside the 2010 Directive.

In their opinion, Chief Judge Easterbrook and Judges Coffey and Rovner dismissed the petition. The Court noted that it has jurisdiction to review an "occupational safety and health standard" issued by the Department. The Department contends that the 2010 directive is not such a standard and not subject to review. The Court agreed. A reviewable standard is a standard which requires "the adoption or use of one or more practices, means, methods, operations, or processes" to provide a safe place of employment. The 1994 regulation does require certain practices or processes and is a standard subject to review. But no one timely challenged the 1994 regulation. Neither the 1999 nor the 2010 Directives changed the regulation's requirements. The 1999 Directive simply announced the parameters of prosecutorial discretion – and the 2010 Directive announced the termination of that discretion. The fact that employers must now meet a standard that they have not had to meet since 1999 does not make it a reviewable standard. The Court also rejected the petitioners' argument that the 2010 Directive was a "standard" because it actually modified the 1994 regulation. The Court found no language in the directive that did that.

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RADENTZ v. MARION COUNTY (April 5, 2011)

Prior to 2005, forensic pathologists at Indiana University performed certain services, including autopsies, for the Marion County Coroner's office under a contract. The contract terms were very favorable to the County, in that the University subsidized much of the cost. The contract expired on the last day of 2004, the day before Kenneth Ackles, an African-American chiropractor, became the new Coroner. Notwithstanding the contract expiration, the University continued to provide services at no cost for a few months but it eventually terminated the contract. The Chief Deputy Corner reached out to two of the University's pathologists who had been providing the services, Stephen Radentz and Michele Catellier. Radentz and Catellier formed a limited liability company and entered into a five-year contract with the County to provide forensic pathology services. Under the contract, the pathologists could perform autopsies for other counties, but Marion County had to furnish the supplies for those autopsies. With six months notice, either party could terminate the contract without cause and the County could amend the contract to eliminate permission for other county autopsies. In late 2005, Ackles replaced his deputy with Alfarena Ballew, an African-American woman. Ballew terminated the contract with Radentz and Catellier. They brought suit pursuant to § 1983 against the County, Ackles, and Ballew, alleging that the contract termination was based on race discrimination in violation of the Constitution. Judge Lawrence (S.D. Ind.) granted summary judgment to the defendants. Radentz and Catellier appeal.

In their opinion, Chief Judge Easterbrook and Judges Posner and Rovner reversed and remanded. The Court noted that the district court concluded that plaintiffs had met their prima facie indirect method burden, and that determination is not challenged on appeal. What is at issue is whether the defendants' nondiscriminatory reason given for the contract termination was pretextual. In order to prevail, the plaintiffs must do more than show that the decision was unwise. They must show that it was not honestly believed. There was evidence that Ballew and the County were concerned about the contract costs. Ballew was particularly concerned about the costs the County incurred providing supplies for the other county autopsies. The County received no income from these autopsies. The Court noted that the contract allowed the County to withdraw that permission with six months notice. The County never explained why it gave six months notice to terminate the contract rather than giving the six months notice to withdraw the other county autopsy permission. Their failure to explain their decision casts some doubt on it. The Court noted other evidence that was consistent with a race based decision: the County was satisfied with plaintiffs’ work, the County hired an African-American woman to replace the plaintiffs, Ackles was on record discussing his desire for more African-Americans in the Coroner’s office, the racial demographics of the office were changing, and the new hire provided no economic benefit to the County. On that record, the Court concluded that a factfinder would not have to believe the County. The factual disputes concerning the termination decision preclude summary judgment.

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BACK DOCTORS LTD. V. METROPOLITAN PROPERTY AND CASUALTY INSURANCE CO. (April 1, 2011)

Back Doctors Ltd., a medical service provider, believed that Metropolitan Property and Casualty Insurance Co. used software that resulted in medical providers being underpaid for their services. Back Doctors filed suit in Illinois state court, on behalf of a class, alleging that Metropolitan breached its contracts with its insurers and violated the Illinois Consumer Fraud and Deceptive Business Practices Act. The suit asks for $2.9 million in damages. Metropolitan removed the case to federal court pursuant to the Class Action Fairness Act. Back Doctors moved to remand on the ground that their $2.9 million demand did not meet CAFA’s $5 million amount in controversy requirement. Judge Reagan (S.D. Ill.) agreed, stating that removal is disfavored and that Metropolitan had not demonstrated a "reasonable probability" that the $5 million threshold had been met. Metropolitan petitioned to appeal.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Evans granted the petition, vacated the remand order, and remanded. The Court first noted that the Supreme Court, in St. Paul Mercury, established the “amount in controversy” test in 1938 -- the threshold is met unless plaintiff cannot possibly recover the jurisdictional minimum. The Court then recited some of the history of the Circuit’s "reasonable probability" test in reference to the amount in controversy. It arose in 1993 in Shaw in reference to a plaintiff's burden to prove jurisdictional facts by a preponderance of the evidence. But the amount in controversy is not a jurisdictional fact, like where a company is incorporated or headquartered. After several years of misapplication, the Court tried to clarify the phrase in 2005 in Brill. When that failed, the Court eliminated the phrase entirely in 2006 in Sadowski. The Court even circulated the Sadowski opinion pursuant to Circuit Rule 40(e) so that it had the effect of an en banc decision. Unfortunately, there is obviously still some confusion. Having established the correct test, the Court asked whether a $5 million recovery was possible. It concluded that it was because of the possibility of punitive damages. Back Doctors, although it has not specifically asked for punitive damages, may still recover them. They have not disavowed them, they have cited no Illinois case disallowing punitive damage coverage when it is not pleaded, and they have a fiduciary duty to other class members to maximize the class recovery. The Court added that Illinois does have a procedure whereby a plaintiff can cap its relief. Back Doctors has not taking advantage of the procedure. Since a $5 million recovery is possible, removal was appropriate.

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RANDALL v. ROLLS-ROYCE CORP. (March 30, 2011)

Rolls-Royce Corporation sets its employee compensation in three stages. First, it sets up compensation categories with broad pay ranges into which it assigns classes of employees it thinks are of equal value to the company. Second, within each compensation category, it creates narrower pay ranges for each job based on market conditions. Third, the company authorizes supervisors to adjust compensation individually. Female employees of one of the Rolls-Royce's Indiana facilities brought a class action pursuant to the Equal Pay Act and Title VII, alleging that Rolls-Royce engaged in sex discrimination by paying male employees more than female employees and by denying female employees promotions. Judge Barker (S.D. Ind.) denied class certification and granted summary judgment to Rolls-Royce. Plaintiffs appeal.

In their opinion, Judges Posner, Flaum, and Sykes affirmed. The Court noted that the average male employee compensation was approximately 5% higher than female employee compensation in the same compensation categories throughout the complaint period. But is that differential the result of sex discrimination, which would violate Title VII? The company's expert testified that the differential disappeared when adjustments were made for differences in the jobs performed. The plaintiff's expert failed to rebut this testimony. Plaintiffs’ Title VII base pay claim must therefore fail. Their Equal Pay Act claim also fails. Although that claim does not require proof of discrimination, the Court concluded that the district court was correct in finding that the plaintiffs failed to meet the statutory comparator requirement. The named plaintiffs' promotion claims also fail. Again, the company's expert corrected the data to account for male employees with the same title but substantially different responsibilities and found that females are, in fact, much more likely to be promoted that males. Again, plaintiffs failed to rebut the testimony. The Court also affirmed the district court's denial of class certification. It concluded that the named plaintiffs were not adequate class representatives because their promotion claims were weaker than many other class members and because they had a conflict of interest. They are supervisors and have some control over the compensation of both male and female employees. In reaching its conclusion, the Court rejected plaintiffs' attempt to style its action as a Rule 23(b)(2) claim (under which they might avoid the adequacy issues). The request for monetary relief and the need for individual calculations and hearings make the case inappropriate for Rule 23(b)(2) treatment.

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On June 13, 2011, the Court granted the Board's Petition for Rehearing, vacated this opinion, and certified three questions to the Illinois Supreme Court.

CHICAGO TEACHERS UNION v. BOARD OF EDUCATION (March 29, 2011)

Chicago's Board of Education operates the city's public school system and employs more than 20,000 teachers. In the summer of 2010, the Board laid off almost 1300 of them. The Board received an increase in federal funding toward the end of that summer and was able to recall over 700 teachers who had been given the layoff notices. The Board used no particular procedure or policy in the recall. The Board has also continued to fill vacancies as they open up in the system naturally, again without any particular policy with respect to laid off teachers. The Chicago Teachers Union filed suit complaining that the Board was filling many of those vacancies with new hires instead of recalls. They sought injunctive relief. Judge Coar (N.D. Ill.) concluded that the laid-off teachers had a property interest emanating from state law that entitled them to some retention procedures. The court also found that the Union met the other elements of injunctive relief and therefore entered an injunction ordering the Board to rescind the discharges of (although not reinstate) tenured teachers and to promulgate a set of recall rules in conjunction with the Union. The court enjoined further layoffs until such rules had been promulgated. The Board appeals.

In their opinion, Circuit Judges Manion (concurring in part and dissenting in part) and Williams and District Judge Clevert affirmed, with modifications to the injunction. In order to be entitled to Fourteenth Amendment due process protection, one must first establish the existence of a protected property (or liberty) interest. Property interest themselves are not created by the Constitution but come from independent sources, frequently state law. In the employment context, a property interest only arises when an employer's discretion to deny employment is limited. Under Illinois law, tenured teachers enjoy permanent employment, subject only to removal for clause. The Court concluded, therefore, that an Illinois tenured teacher has a property interest in continued employment. But establishing the property interest only takes us to the next question -- what process is due. Hearings are generally not necessary when the deprivation of the property interest is caused by a good faith economic layoff. Here, the Union does not challenge the good faith of the layoffs nor does it ask for hearings. Instead, it seeks opportunities for its members to compete for vacancies as they arise. The Court looked to state law prior to 1995, when Illinois had "reserve teachers." Basically, reserve teachers were competent teachers who were laid off but who had significant opportunities with respect to vacant positions. When the Legislature eliminated reserve teachers in 1995, it authorized the Board to establish procedures for layoffs and recall rights. Relying in large part on Illinois law interpreting the new provision, the Court concluded that the Board must use the "authority" given it by the Legislature to formulate layoff and recall procedures. Applying the Mathews weighing analysis, the Court noted an employee has a substantial interest in retaining her job and a significant risk of deprivation without any procedures at all. It concluded that the teachers were entitled to a recall procedure that would allow them a meaningful opportunity to demonstrate their qualifications for open positions for a reasonable period of time. With respect to the content of the injunction, however, the Court had two comments. First, it removed the requirement that the Board promulgate rules in conjunction with the Union. Nothing in the statute requires consultation with the Union -- although nothing prohibits it, either. Second, the Court emphasized that the district court's order requiring that the discharges be rescinded did not result in the recall of any teachers. The teachers are still laid-off.

Judge Manion dissented in part and concurred in part, although his concurrence was limited to the majority’s modification of the injunction. First, Judge Manion disagreed with the conclusion that the Illinois statute required the Board to enact recall procedures in the event of the layoff. He pointed out that the Board has established recall procedures in other circumstances, such as a school closing. Second, although teachers have a property interest in their employment, he noted that the Board terminated their employment and honored all process to which they were entitled. No case holds that an employee in that situation has some residual property rights. Third, Judge Manion disagreed with the majority's identification of recall rights as property rights. He pointed out the circularity of the logic. The majority concluded that the recall procedures were the property rights. In order to protect those rights, the Court ordered the Board to develop the procedures. Simply put, even if the statute and other circumstances created a property interest, the property interest cannot be the procedures themselves.

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CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND v. GEORGIA-PACIFIC (March 29, 2011)

In the early 1990s, Georgia-Pacific contributed to the multiemployer Central States, Southeast and Southwest Areas Pension Fund on behalf of employees in three different divisions. In 1994 and 1995, it laid off workers in its wood-pulp division and stopped its contributions for that division. In 1997, the company laid off workers in its building division and ceased those contributions. Then, in 2004, the company sold its building-products division. The new owner began contributing to the Fund and posted a bond. The Fund claims that Georgia-Pacific owes approximately $5 million in withdrawal liability. Georgia-Pacific, on the other hand, asserts that it has no liability under ERISA § 1384 because it ceased operations "solely because" of an arms-length sale of assets to an unrelated party. The parties proceeded to arbitration, as required by the statute. The arbitrator ruled in Georgia-Pacific's favor. Judge Pallmeyer (N.D. Ill.) enforced the arbitrator's award. The Fund appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Ripple affirmed. The Court noted that withdrawal payments are necessary to ensure the continued viability of underfunded multiemployer plans. The purpose of § 1384 is to prevent a windfall to a plan. But what does "solely because" mean? The Court found no appellate court jurisprudence on that question. The Fund argued that the arms-length sale was not the sole cause for Georgia-Pacific no longer contributing to the Fund. It cited the earlier layoffs as additional contributors. The Court identified and elaborated on the problems created by the Fund’s approach and concluded that the proper statutory construction requires consideration only of the transaction at issue. If no withdrawal liability would have accrued to the seller had there been no sale, then no withdrawal liability should accrue to the seller when the sale does go through. The Court recognized an exception to this general rule if an employer manipulates its business planning to avoid withdrawal liability. Here, the arbitrator was asked to consider whether the three stages of Georgia-Pacific's fund withdrawal should be considered as one. The arbitrator concluded that each stage was independent. The Court found that factual conclusion adequately supported by the evidence.

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CDX LIQUIDATING TRUST v. VENROCK ASSOCIATES (March 29, 2011)

Cadant was founded in 1998 to develop systems for home Internet access. It was based in Illinois but it was incorporated in Maryland. Two venture capital firms, Venrock and J.P. Morgan, invested in the company and received preferred stock in exchange. Eric Copeland, a Venrock principle, also became a Cadant board member. In early 2000, the Cadant board rejected a tentative $300 million purchase offer. Several months later, the company started experiencing financial difficulties. After considering several options, the board approved an $11 million bridge loan from Venrock and J.P. Morgan. Copeland negotiated the loan on behalf of Cadant. On January 1, 2001, the company reincorporated in Delaware. In May, the company entered into a second bridge loan from Venrock and J.P. Morgan, this time for $9 million. Again, Copeland negotiated for Cadant. The agreement provided that the lenders would be entitled to twice the outstanding principal if Cadant was liquidated. Cadant defaulted and sold its assets for stock valued at $55 million. The sale amount was just enough to pay off creditors and preferred shareholders. It was approved by the board and also a simple majority of shareholders. The common stock shareholders brought suit charging several directors with breaches of their duty of loyalty and also alleging that Venrock and J.P. Morgan aided and abetted the directors. In an earlier appeal to the Seventh Circuit, the Court held that the case was improperly brought and should be brought as a derivative suit. Judge Norgle (N.D. Ill.) bifurcated the trial and granted defendants' motion for judgment as a matter of law at the end of the plaintiffs' liability case. Plaintiffs appeal.

In their opinion, Judges Posner, Flaum, and Sykes reversed and remanded. The Court first addressed choice of law. Illinois choice of law principles direct the Court to the law of the state of incorporation in a breach of fiduciary duty case. Maryland law therefore applied to the first alleged breach (the purchase offer rejection). That allegation was properly dismissed because Maryland imposes no duty on directors to accept, or even respond, to a purchase proposal. The other allegations, relating principally to the bridge loans, straddled the Delaware reincorporation. The negotiations for the first loan began before the reincorporation but the loan was finalized shortly after. Since it could not apply the laws of both states, the Court looked to which state’s law the parties would have expected to govern and which state had the higher regulatory interest. The answer to both questions was Delaware. So the court turned to the merits, applying Delaware law. The district judge had given too grounds for granting judgment: insufficient evidence of proximate cause, and insufficient evidence of a breach of fiduciary duty. The Court disagreed with the district court's approach to causation. Under Delaware law, once a plaintiff rebuts the business judgment defense with evidence of a breach of fiduciary duty, the burden shifts to the directors to prove the transaction's "entire fairness" to the shareholders. If the transaction at issue is the sale of the company, for example, the directors can prove that they obtained the highest reasonable value and therefore "caused" no loss. Here, the defendant directors had to rebut the breach evidence by proving that their misconduct had no effect on the outcome of the deal. In addition to the fact that the district court applied the burden of causation improperly, the Court also concluded that there was enough causation evidence to send the case to a jury. A similar company brought $300 million in the marketplace shortly after Cadant brought $55 million. There is evidence that the oppressive terms of the bridge loans negotiated by Copeland contributed to Cadant's inability to bring fair value. The Court also rejected the defendant directors' argument that there could be no breach of loyalty when their conflict of interest was fully disclosed. But the directors are not accused of disloyalty because they had a conflict of interest -- they are accused of actually being disloyal. Actual disloyalty is not excused by disclosing a conflict of interest. Finally, the Court concluded that the evidence of aiding and abetting on the part of Venrock and J.P. Morgan was sufficient to get the plaintiffs to a jury.

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FAULKENBERG v. CB TAX FRANCHISE SYSTEMS (March 29, 2011)

In late 2007, Jon Faulkenberg and Byron LeMaster inquired about owning a CB Tax franchise. The company, headquartered in Texas, sent them an offering circular that summarized the franchise agreement. In particular, the circular disclosed that the agreement required all disputes to be arbitrated in Texas and required all litigation to be brought in Texas. The parties ultimately entered into a franchise agreement, although there is some dispute about how and where the parties executed the agreement. Faulkenberg and LeMaster eventually opened five franchises. Four of them were located in Missouri and one in Illinois. CB tax asserts that the agreement was intended to cover only Missouri franchises. Within a matter of months, Faulkenberg and LeMaster closed all the franchises and filed suit against CB Tax in Illinois state court. They alleged violations of the Illinois Franchise Disclosure Act as well as common law fraud. CB Tax removed the case to federal court and moved to dismiss, citing both the arbitration clause and the forum selection clause. Judge Stiehl (S.D. Ill.) dismissed the complaint on the forum selection clause grounds. Faulkenberg and LeMaster appeal.

In their opinion, Circuit Judges Evans and Sykes and District Judge Der-Yeghiayan affirmed. The Court noted that the Illinois Franchise Act nullifies forum selection clauses in franchise agreements. The district court was not clear in its rationale for not applying the Act. The Court presumed that the court rejected plaintiffs' argument that the franchise was located in Illinois. But that was error. The court was obliged to accept plaintiffs' version of the facts and plaintiffs alleged that one of the franchises was located in Illinois. They also submitted evidence in support of the allegation in the form of two e-mails and a reference on CB Tax's website. Although the Court concluded that the lower court was wrong to dismiss pursuant to the forum selection clause, it nevertheless concluded that there was an alternative ground for dismissal -- the arbitration clause. Before addressing the substance of the argument, the Court disposed of several preliminary matters. First, the Illinois Franchise Act specifically permits parties to agree to arbitrate outside of Illinois. Second, CB Tax did not waive its right to arbitration when it filed its motion to dismiss. Third, a Rule 12(b)(3) motion is the proper vehicle, rather than a motion to compel arbitration, when the arbitration locale is outside the district. So, if the parties agreed to arbitrate in Texas, the case was properly dismissed for improper venue. The court concluded that the evidence strongly supported an agreement to arbitrate. The circular discussed the arbitration clause. The franchise agreements contained the arbitration clause in plain terms. Faulkenberg and LeMaster received the circular and signed the franchise agreement. They also signed an acknowledgment stating that they had read and understood the agreement. The Court rejected their arguments that they failed to read or understand the franchise agreement and that they did not know they were signing a franchise agreement.

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RUBIN v. THE ISLAMIC REPUBLIC OF IRAN (March 29, 2011)

A number of American citizens suffered physical and emotional injuries in a September 4, 1997 suicide bombing in Jerusalem. Several of them brought suit and obtained a $71.5 million default judgment against Iran, based on the country's training and support of Hamas. In an effort to collect on its judgment, the plaintiffs registered the judgment in Illinois and served Citations to Discover Assets on the Oriental Institute and the Field Museum. The Oriental Institute holds two collections of Persian antiquities on loan from Iran for academic study. The Field Museum holds a collection of Persian pottery and metalworks although the Field Museum claims ownership of these works and Iran does not dispute the claim, the plaintiffs assert that Iran does own the collection because they were stolen and smuggled out of the country decades ago. The museums asserted that the collections were immune from attachment under § 1609 of the Foreign Sovereign Immunities Act. Judge Manning (N.D. Ill.) ruled that only a foreign state can raise § 1609 immunity. Soon thereafter, Iran appeared and asserted its immunity. But Iran's appearance changed the litigation’s direction. The plaintiffs served Iran with discovery requests and deposition notices that sought information not only regarding the Chicago collections but also with respect to Iran's assets in the United States generally. Iran sought a protective order and moved for summary judgment on the immunity issue. The court granted the plaintiffs additional discovery before having to respond to the motion and ordered Iran to respond to general asset discovery. Iran appeals the general asset discovery order as well as the earlier order requiring it to appear and assert its immunity.

In their opinion, Circuit Judges Bauer and Sykes and District Judge Simon reversed and remanded. The Court first addressed its appellate jurisdiction, given the general rule that a order authorizing discovery is not immediately appealable. Orders denying immunity are appealable under the collateral order doctrine, and the district courts decision ordering discovery, in effect, did just that. The earlier order appealed presented a slightly different question. That order denying immunity was immediately appealable under the collateral order doctrine. But the museums did not appeal and that time has run. The effect of the museums' failure to immediately appeal is that the order is appealable the next time an appealable order is entered. Although the Court noted that, in most cases, the next appealable order is the final judgment, it is not necessarily so. Here, there is a second appealable order so the first order is properly under review. The Court turned to the merits and the interpretation of the Foreign Sovereign Immunity Act. The Act generally codified the common law of sovereign immunity. It contains two principal sections: § 1604 makes a foreign state immune from the jurisdiction of United States courts and § 1609 makes a foreign state's property in the country immune from attachment. Each section has exceptions. For example, jurisdiction in this case was premised on a § 1605 exception for cases involving money damage claims resulting from torture or killing. Similarly, the plaintiffs rely on a § 1610 exception to attachment immunity when the foreign state's property in the country is used for commercial activity. But the district court never ruled on the exception’s merits. Instead, it ruled that Iran had to appear and affirmatively plead the exception and then, once it did appear, the court focused on discovery issues rather than the merits. The Court concluded that the district court failed to appreciate the tension between ordering discovery and the sovereign’s right to immunity. Immunity generally protects its beneficiary not only from liability but also from the burdens of litigation, like discovery. Iran is presumed immune from attachment – the plaintiffs must identify particular property and demonstrate that it fits one of the exceptions. The Court noted that the Second, Fifth, and Ninth Circuits agree that discovery should be allowed to proceed narrowly in these circumstances. Therefore, a plaintiff must identify specific property and set forth a plausible argument for an exception to immunity before a court orders discovery. With respect to the district court’s order that Iran had to appear, the Court also reversed. The Act provides that a sovereign’s assets in the country “shall be” immune from execution. Relying on that statutory language, the rest of the Act, the common law immunity history, and decisions from the Fifth and Ninth Circuits , the Court held that a foreign state need not appear to assert that its property is immune from attachment. The argument can be raised by the holders of the property or by the court itself.

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COLE v. COMMISSIONER OF INTERNAL REVENUE (March 28, 2011)

Scott Cole is a licensed attorney in Indiana, specializing in business law and tax consulting. Beginning in the 1990s, Scott and his brother, also an attorney, created what the court referred to as a "web of corporate and partnership entities serving dubious purposes." In 2001, Scott's law practice had a banner year. He received $1.2 million that year from one client alone. But when Scott and his wife Jennifer filed their joint tax return for 2001, they reported only about $100,000 total income. The IRS conducted an audit. The Coles kept very few records, requiring the IRS to reconstruct their earnings indirectly. They used both the "specific items" and "bank deposits" methods. The former looks for specific amounts of unreported income and the latter assumes that money in a taxpayer's account is income. The IRS ultimately concluded that the Coles underreported their income by over $2.5 million. They assessed a deficiency of over $500,000 and imposed a fraud penalty of over $400,000. The Coles petitioned the Tax Court for relief. The Tax Court found against the Coles and assessed the same deficiency and fraud penalty calculated by the IRS. The court found that: a) the IRS was justified in its indirect income reconstruction because of the Coles’ failure to maintain adequate records, b) the indirect reconstruction was reasonable, and c) there was "clear and convincing" evidence of fraud. The Coles appeal.

In their opinion, Judges Kanne, Tinder, and Hamilton affirmed. The Court first noted that the Coles waived most of the issues they raised in their 71-page brief because they failed to adequately develop the arguments. The Court identified two issues (of 15 total) that the Coles adequately developed -- whether the Tax Court was wrong in a finding that they omitted income and whether the Tax Court was wrong in finding fraud. On the first issue, the Coles have a heavy burden. An IRS deficiency assessment is entitled to a presumption of correctness and the Court's review of the Tax Court's findings of fact is under a clearly erroneous standard. The Court concluded that the Coles failed to overcome the presumption and failed to show any clear error. On the fraud issue, the Coles have a somewhat lighter burden. Although the clearly erroneous standard still governs the Court's review, there is no presumption of fraud. Instead, the IRS must prove fraud by "clear and convincing evidence." In order to meet that burden, the IRS must show that the taxpayer had specific intent to evade the tax. The IRS can show that intent with circumstantial evidence. The Supreme Court and other courts have identified certain "badges of fraud" that can be used in making a circumstantial case: a double set of books, false entries, destruction of records, covering up income, understatement, failure to file, filing late, co-mingling assets, and failing to keep adequate records. Courts also are allowed to consider a taxpayer's education and intelligence. Here, the Tax Court relied on the Coles’ education and intelligence (Scott is a lawyer, Jennifer is an accountant), their income understatement, their elaborate corporate structures, their failure to maintain adequate records, the co-mingling of business and personal assets, and their concealing of assets. The Court found no clear error in the Tax Court's fraud finding.

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GROESCH v. CITY OF SPRINGFIELD (March 28, 2011)

Kevin Groesch, Greg Shaffer, and Scott Allin are all white males, were all police officers in the Springfield, Illinois Police Department, all voluntarily resigned from the department, all sought reemployment with the department, and all were ultimately rehired between 1989 and 1996 as entry-level officers pursuant to City policy. Donald Schluter, on the other hand, is African-American. He also was a Springfield police officer who sought reinstatement after a voluntary resignation. He was rehired in 2000 -- but he was given a retroactive leave of absence and he returned to the force with full credit for his prior years of service. The City policy had not changed but the City Council enacted a special ordinance allowing the exception. The police union challenged the ordinance in state court but it was upheld. The City ignored the white officers' request to be credited with their prior years of service. A state court dismissed, on statute of limitations grounds, the officers’ lawsuit alleging disparate treatment under the Illinois Constitution. The officers then filed race discrimination claims under Title VII in federal court in 2004. Judge Scott (C.D. Ill.) denied the City's motions for summary judgment in late 2006, relying on the "paycheck accrual" rule, under which each department paycheck amounted to a separate discriminatory act. Five months later, however, the Supreme Court decided Ledbetter and rejected the paycheck accrual rule. The district court reversed course and granted the City's motion. The court also ruled that the officers' § 1983 claims were barred by res judicata because they could have been brought in the state court action. The officers appeal.

In their opinion, Judges Bauer, Wood, and Hamilton affirmed in part, reversed in part, and remanded. The Court first noted that Congress enacted the Lilly Ledbetter Fair Pay Act of 2009 during the pendency of the appeal. In effect, the Act reinstated the paycheck accrual rule and also made the reinstatement retroactive to any claim pending on the day of the Supreme Court's decision or later. The City attempted to avoid application of the Act or distinguish the case -- but to no avail. The Court reversed the district court with respect to the Title VII claims relating to the time period after the state court dismissal. Next, although the Act only directly applies to Title VII actions, the Court concluded that the paycheck accrual rule applied to pay discrimination claims under § 1983, as well. Finally, the Court considered the impact of the earlier state court decision. Under Illinois law, res judicata requires a final judgment, an identity of causes of action, and an identity of parties. The district court correctly concluded that res judicata bars recovery for claims that arose before the date of the final judgment. But each individual paycheck after that final judgment supports a separate cause of action and triggers a new statute of limitations. They therefore do not share an identity of causes of action and are not barred by res judicata. The Court emphasized that the state court had never ruled on the merits, therefore not implicating collateral estoppel or issue preclusion.

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RENNELL v. ROWE (MARCH 25, 2011)

Richard Rennell and Randall Rowe created a joint venture in 2004 to own and manage manufactured-housing communities in several states. Rowe provided the financing and Rennell managed the properties. After a few years, notwithstanding excellent results from Rennell, Rowe hired someone to manage the properties and no longer needed Rennell. In 2007, Rowe told Rennell that he was terminating the joint venture. He offered Rennell approximately $300,000 for his share in the venture, notwithstanding that they had recently valued it at $3.5 million. Rowe also demanded an answer within 24 hours and threatened to make the termination public if Rennell did not accept the offer. Rennell did sign the termination agreement and promised not to sue Rowe. Notwithstanding that promise, Rennell filed suit alleging two different theories of RICO liability. Judge Pallmeyer (N.D. Ill.) dismissed the complaint. Rennell appeals.

In their opinion, Judges Posner, Kanne, and Wood affirmed. The Court began its analysis with RICO's definition of "racketeering activity" as "any act or threat involving . . . extortion." Thus, the critical question for the Court was whether the complaint’s allegations described an act of extortion. The Court’s own jurisprudence establishes that extortion exists when one uses violence or threat of violence to obtain property, even if one has a claim to the property. In addition, if one has no claim to property, the use of fear, even economic fear, may amount to extortion. Economic pressure is not extortion if one has a claim to the property issue. Turning first to the question whether Rowe had a claim on Rennell's joint venture interest, the Court examined the contractual relationship between the parties. The joint venture agreement itself could be terminated only for cause -- but one of the "causes" was the termination of any one of the property management agreements. The property management agreements could be terminated without cause. Therefore, Rowe was contractually entitled to terminate a property management agreement and then terminate, for cause, the joint venture agreement. Rennell argued that even if the termination was proper, Rowe's conduct was improper because of the small payment offered, the narrow time frame for acceptance, and the threat to make the termination public. The Court rejected this argument. Rowe was a hard bargainer. But Rennell was free to reject the offer and sue for what he thought he was owed. And the threat to make the termination public, even if it would negatively impact Rennell’s business, is not extortion. The Court ended by noting that Rennell could still pursue his state law claims in state court.

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BCS SERVICES v. HEARTWOOD 88 (March 24, 2011)

Cook County, Illinois obtains tax liens on properties whose owners fail to pay their taxes on time. The County, in turn, sells the liens at auction. The bidders at the auction must agree to pay the amount of the lien and can bid a percentage penalty in addition. In theory, the lien is sold to the bidder who bids the lowest penalty. In actuality, almost 85% of the bids include no penalty. The auctioneer is supposed to award the bid to the first bidder to raise her hand but, given the speed with which the bids are made, it is unlikely that she is able to do that. One way the County attempted to ensure that the bids are fair is to allow only one bidder to represent a buyer or group of buyers. Therefore, a buyer cannot increase his chances of getting a lien by flooding the room with bidders. One of the bidders at these auctions brought suit against three groups of bidders who allegedly sent multiple agents to each auction in violation of the County's rules. The plaintiffs alleged RICO violations. The district court dismissed for lack of standing because the plaintiffs had not relied on the fraud. The Seventh Circuit reversed and the Supreme Court affirmed the reversal. On remand, Chief Judge Holderman (N.D. Ill.) granted summary judgment to the defendants on the ground the plaintiffs failed to prove proximate cause. Again, the plaintiffs appeal.

In their opinion, Judges Bauer, Posner, and Manion reversed and remanded. The Court discussed, at some length, the doctrine and background of the concept of proximate cause. It concluded that discussion by noting that the concept helps the principal tort victims get compensation, simplifies litigation, appreciates the fact that people do not make decisions based on the unforeseeable consequences of their conduct, and eliminates liability in some situations where the act is only a minor clause of an injury. On the record before it, the Court then concluded that the concept had no application. The only injury was to the plaintiffs. The district court was wrong when it required the plaintiffs to prove the absence of a superseding cause rather than requiring the defendants to present evidence of the existence of such causes. Here, the defendants failed to do so. The Court also rejected defendants' alternate argument that plaintiffs could not prove damages. Relying on statistical evidence, the Court concluded that plaintiffs met their burden, at least at this stage of the case. Finally, the Court also disagreed with the district court's conclusion that plaintiffs’ inability to show an actual expectancy of a particular lien purchase doomed their intentional interference claim. On the contrary, the plaintiffs met their burden. The expectancy identified was their expectation that they would be allowed to purchase liens at a County auction conducted without fraud.

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STAMAT v. NEARY (March 24, 2011)

Nicholas and Penny Stamat filed a joint petition for bankruptcy in May 2007. Nicholas is a pediatrician with his own practice. Penny is a college graduate and handles the billing for Nicholas' practice through her own billing company. The Stamat’s sought the discharge of over $1.5 million in debt. The couple's Statement of Financial Affairs (SOFA) was inaccurate with respect to their 2006 gross income, past investment interests, part-time employment, among other things. The Trustee objected to the discharge on the grounds that the Stamat's concealed property, made false oaths with fraudulent intent, and failed to explain the loss of substantial assets. After a bench trial, the bankruptcy court agreed and determined that the debts were not dischargeable. Judge Gottschall (N.D. Ill.) affirmed, relying solely on the false oath grounds. The Stamat's appeal.

In their opinion, Judges Rovner, Judge Evans, and Williams affirmed. The Court noted that the "fresh start" afforded by the Bankruptcy Code has exceptions. One of those exceptions is for the debtor who "knowingly and fraudulently" makes a false oath. In order for the exception to apply, the Trustee must prove, by a preponderance of the evidence: an oath, that is false, that the debtor knew was false, that was made with fraudulent intent, and that was materially related to the petition. The Stamats raised several arguments on appeal: a) that some of the alleged omissions disclosures were not required, b) that some of the transactions were "in the ordinary course" and did not require disclosure, c) that they had no fraudulent intent, d) that they amended their filings, and e) that the filings were not material. The Court rejected each of these arguments and affirmed, relying heavily on the bankruptcy court’s findings of fact and discussion of the Trustee’s evidence. The Court did hold that transactions outside the “ordinary course” were not limited to those where there was evidence of an intent to conceal or fraudulently convey. They can simply be not normal or ordinary.

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MARCUS & MILLICHAP INVESTMENT SERVICES OF CHICAGO v. SEKULOVSKI (March 23, 2011)

Marcus & Millichap Real Estate Investment Services (M&M) is a national commercial real estate brokerage firm with subsidiaries operating in several states. The subsidiaries operate independently, as distinct entities, and enter into their own contracts with their salespersons as independent contractors. The subsidiaries are required to incorporate M&M's independent contractor policies into these agreements. Tony Sekulovski worked as a salesperson with M&M’s Ohio subsidiary from 1999 until 2005, when he moved to Chicago and began working with the company's Illinois subsidiary. Contrary to the policy, Sekulovski never entered into a written independent contractor agreement. Salespeople were not paid a salary but were compensated with commissions. Generally, a salesperson and the subsidiary divide project commissions evenly. A salesperson can enjoy up to a 70/30 split, however, as he reaches certain annual sales thresholds. In addition, if more than one salesperson is involved in a deal, they split the salesperson's side of the commission based on an allocation reflecting the contribution each made to the deal. In 2006, Sekulovski and another agent, Mark Luttner, collaborated on many deals. Throughout most of the year, they shared the salespersons' commission equally. Once Sekulovski reached his commissions target, however, they began submitting allocations that attributed a much higher portion of the commission to Sekulovski. M&M claims that he did so in order to increase the salespersons' share of the total commission and that he kicked back an appropriate allocation to Luttner. Smith left M&M Chicago in June 2007. Before he did so, he directed two commissions be paid to him rather than the company. He also later retained commissions for deals that began while he was in Chicago but did not close until later. The company sued Sekulovski for breach of contract, unjust enrichment, conversion, fraud, and tortious interference. Sekulovski counterclaimed for breach of contract, unjust enrichment, unlawful withholding of wages, and tortious interference. At trial, Luttner testified that he and Sekulovski artificially inflated Sekulovski’s allocation in order to maximize the salespersons' commissions. Judge Leinenweber (N.D. Ill.) granted judgment as a matter of law to M&M on Sekulovski’s statutory wage claim and a jury found for M&M and against Sekulovski on all other claims. Sekulovski appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Kanne affirmed. As a preliminary matter, the Court concluded that the parties had an implied contract and that the terms of M&M’s independent contractor policy governed. The Court then addressed Sekulovski’s arguments on appeal, which it placed in four categories: evidentiary rulings, jury instructions, the Illinois Wage Payment and Collections Act, and post-trial motions. The evidentiary objections went principally to the district court's limitation on Sekulovski’s ability to cross-examine Luttner on bias. Although the Court conceded that witness bias is generally admissible for impeachment purposes, it concluded that the district court did not abuse its discretion. The district court found some of it to be of little value, some that would cause confusion, and some that was inadmissible hearsay. The Court added that the jury heard plenty of evidence of Luttner's hostility toward Sekulovski. The only jury instruction objection that Sekulovski preserved was his argument that M&M’s damages should have been calculated based on its loss rather than Sekulovski’s overpayments, arguing that part of the overpayments would have rightfully gone to Luttner. The Court concluded that the appropriate measure of damages was the amount of commissions that Sekulovski received that he would not otherwise have received but for his fraud. With respect to the Wage Payment Act, the Court questioned the district court's finding of fact that Sekulovski was an independent contractor rather than an employee. Notwithstanding its lack of confidence in the district court's rationale, the Court affirmed the dismissal on the basis of the jury's finding that Sekulovski was not due the commissions he claimed were due him under the Act. Finally, the Court found that the district court did not abuse its discretion in denying Sekulovski's post trial motions.

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KOTWICA v. ROSE PACKING CO. (March 22, 2011)

Teresa Kotwica was employed as a general laborer at the Rose Packing Company's facility on the south side of Chicago from 1996 to 2006. General laborers perform a number of functions and are purposely rotated through different positions on a regular basis. Rose adopted this work policy in order to be able to reassign workers easily as demand fluctuated and to minimize repetitive motion injuries. Rose also required its employees to have unconditional medical releases before returning to work after a non-work related injury. On the advice of her doctor, Kotwica had a total hip replacement in late 2005. She tried to return to her job after 12 weeks leave, but her doctor included several conditions on her work authorization letter. Rose's in-house physician also conducted an evaluation but could not give her an unconditional clearance. Rose terminated Kotwica's employment in March of 2006 in accordance with its policy. Kotwica brought suit alleging that Rose violated the Americans with Disabilities Act (ADA). Judge Lefkow (N.D. Ill.) granted summary judgment to Rose. Kotwica appeals.

In their opinion, Circuit Judges Cudahy and Rovner and District Judge Adelman affirmed. The Court noted that the district court considered only one of the three requirements of a prima facie case -- whether Kotwica was a qualified individual with a disability. The ADA, at the time, defined a "qualified individual" as an individual with a disability who can perform the "essential functions" of her position. In order to qualify as a person with a disability, Kotwica must show that she had an impairment that limited a major life activity, that she had a record of such an impairment, or that Rose considered her to have such an impairment. She cannot. First, she denies having an impairment. Second, she failed to show that she has a record of an impairment. Third, she failed to show that Rose believed that she suffered from an impairment that substantially limited her ability to work. On this third prong, the Court stated that Kotwica had to produce evidence that Rose thought she was disqualified from a broad category of jobs. That is not what the record shows. Rose only considered her precluded from a general laborer’s job because she was unable to perform the entire job rotation. The ADA does not require an employer to create a new job that consists only of a subset of an employee's prior position.

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LEE v. COOK COUNTY (March 22, 2011)

Twelve African-American Cook County employees believed that the County discriminated against them on account of their race in making promotions. They filed a charge with the EEOC. The EEOC issued right-to-sue letters in March 2008. The employees brought suit pursuant to Title VII in May of 2008, well within the 90-day window. Judge Castillo (N.D. Ill.) did not think that the twelve plaintiffs belonged in the same suit. So, in a September 18 order, he dismissed the complaint without prejudice and gave each individual plaintiff 40 days within which to file an individual action. But three of the plaintiffs waited over seven months before filing their individual actions. Judge Kendall (N.D. Ill.) and Judge St. Eve (N.D. Ill.) dismissed the individual actions as untimely. Plaintiffs appeal.

In their opinion, Chief Judge Easterbrook and Judges Cudahy and Posner affirmed -- and issued sanctions. The Court first pointed out that there was nothing improper about the original filing. Rule 20 only requires multiple plaintiffs to share a common question of law or fact, which we have here. It does not require that a common question predominate, as do the class action rules. The district court therefore erred when it dismissed the complaint. The plaintiffs should have appealed, but they did not. Instead, the plaintiffs waited several months, refiled, and appeal the dismissal of the refiled complaints. So the Court turned to the merits of the actual appeal and agreed with the district courts that refiled actions were untimely. First, the district court's order directing the plaintiffs to file individual actions within 40 days did not extend the statute of limitations or the EEOC filing window. Second, equitable tolling requires a litigant to pursue his rights diligently. Plaintiffs' lawyer did anything but. Third, the Court rejected plaintiffs' argument that the defendants either waived or waited too long to assert the limitations defense. Having resolved the merits of the case against the plaintiffs, the Court turned to their lawyer. It noted his "calamitous handling" of the case in the district court, the "sloppy performance" in the appellate court, his several procedural gaffes, his failure to file required pleadings, his grossly inadequate response to the Court’s order to show cause, and his numerous violations of the Circuit Rules. The Court reprimanded the attorney, fined him $5000, and ordered him to send a copy of the opinion to his clients.

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MERRYMAN EXCAVATION v. INTERNATIONAL UNION OF OPERATING ENGINEERS (March 21, 2011)

Merryman Excavation and Local 150 of the International Union of Operating Engineers entered into a Memorandum of Agreement in 2000. The agreement basically adopted the terms of Local 150's Collective Bargaining Agreement. In addition to setting wages and describing working conditions, the agreement provided that all disputes were to be resolved by an informal process. The final phase of this process was a hearing before the joint grievance committee. The committee is comprised of an equal number of employer and union members. A majority decision of the committee on a dispute is final and non-appealable. On two different occasions in 2006, a joint committee heard a total of 13 grievances initiated against Merryman. Some of the grievances were settled, some resulted in a committee deadlock, and some were resolved in the union's favor. In total, Merryman was ordered to pay almost $100,000. At the two hearings, Merryman objected to the committee's jurisdiction, objected to proceeding with only two voting members on each side, objected to proceeding before an attempt to settle, and objected to "unbiased" committee members on the union side. Merryman brought suit pursuant to § 301 of the Labor Management Relations Act. The complaint alleged violations of the agreement and sought to set aside the awards. Local 150 counterclaimed for enforcement of the awards. Judge Kendall (N.D. Ill.) granted summary judgment to Local 150. Merryman appeals.

In their opinion, Chief Judge Easterbrook and Judges Manion and Hamilton affirmed. The Court first identified some confusion in the briefing and even in its own jurisprudence. It pointed out that the joint committee proceeding is not an arbitration subject to the Federal Arbitration Act and its impartiality requirements. Rather, it is a creature of contract -- a failure to honor a valid award is simply a breach of contract. The Court categorized Merryman's arguments into three categories: procedural errors, orders to pay the union assistance fund instead of union members, and bias. The Court quickly disposed of the alleged procedural errors. First, most of the alleged "errors" were contract disputes and the joint committee had the absolute authority to resolve them without appeal. Second, with respect to the composition of the committee and whether a quorum was required, the Court concluded that Merryman received all the procedures to which it was entitled under the agreement. With respect to the awards to the assistance fund, the Court also concluded that the issue involved construction of the agreement and was within the joint committee's authority to resolve without appeal. Finally, with respect to bias, the Court conceded that bias is one of the few grounds to attack the decision of a supposedly unbiased arbitrator or panel. But the agreement here does not require a neutral committee members. Instead, it strives to achieve achieves fairness by requiring an equal number of voting members from each camp. There is no evidence that that requirement was not met in this case. Whether any particular voting individual lacked impartiality is irrelevant.

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SILVERMAN v. BOARD OF EDUCATION (March 21, 2011)

Amy Silverman taught special education at a Chicago public high school during the 2004-2005 school year. Because she was a probationary teacher, her contract was subject to annual renewal. In early 2005, the Board of Education decided to eliminate a special education teacher slot at her school. The principal decided not to renew Silverman's contract. Silverman was pregnant at the time. She complained to the EEOC. A few months later, the Board offered her a position at the same school for the 2005-2006 school year. Silverman accepted the position, although she thought it was a more difficult assignment. The Board did not renew her contract for the 2006-2007 school year. Silverman brought suit under Title VII, alleging that the Board discriminated against her as a result of her gender by not renewing her contract when she was pregnant and also retaliated against her, after she filed an EEOC charge, by offering her a more difficult assignment and, again, not renewing her contract. Judge Manning (N.D. Ill.) granted summary judgment to the Board. Silverman appeals.

In their opinion, Circuit Judges Tinder and Hamilton and District Judge Murphy affirmed. Before addressing the merits, the Court rejected Silverman’s argument that the district court erred by not considering the EEOC's reasonable cause finding. A district court has much discretion in how it treats a reasonable cause determination. On the merits, the Court noted that Silverman chose to proceed under both the direct and indirect methods of proof. Silverman had no direct evidence of discriminatory intent so she attempted to create a "convincing mosaic" of circumstantial evidence under direct method. She attempted to do so almost exclusively with what these she thought was evidence of suspicious timing and her principal’s ambiguous comment regarding her maternity leave. The Court was not convinced. First, suspicious timing is rarely enough by itself. Second, although the principal decided not to renew Silverman's contract shortly after learning of her pregnancy, the Board’s records actually show that the principal decided to renew her contract on two separate occasions after learning of her pregnancy. The decision not to renew only came after the Board decided to eliminate a position. With respect to the indirect method, the Board stipulated to a prima facie case for summary judgment purposes. The only issue on appeal, therefore, was whether the Board articulated a nondiscriminatory reason for its actions and whether that reason was a pretext. The Board did offer such a reason. It argued that Silverman was the weakest of the probationary teachers, based on performance evaluations. Although Silverman disagreed with the evaluations, that is not enough to make the reason a pretext. Silverman raised no issue regarding the honesty of the evaluations, only their accuracy. The Court also rejected Silverman's speculation arising out of the fact that the principal interviewed other candidates for the position that she offered Silverman in 2005. The Court also rejected Silverman's retaliation claim. Under the direct method: a) the offering of a "more difficult" position is not an adverse employment action since the Board was not obligated to offer her any position, b) the negative performance evaluations could amount to an adverse employment action but there is no evidence that they were causally related to the EEOC charge, and c) the Board's 2006 decision not to renew was an adverse employment action but, again, is not causally connected to the charge. Under the indirect method, the Court concluded both that Silverman failed to identify a similarly situated individual and failed to offer sufficient evidence of pretext.

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CE DESIGN LIMITED v. KING ARCHITECTURAL METALS (March 18, 2011)

CE Design is a small engineering firm near Chicago. It has a website where it posts its fax number and says "Contact Us." It also publishes its fax number in an online building industry directory. The directory requires a that its users allow all other directory users to communicate with it by fax or e-mail. King Architectural Metals is one of those other directory users. In 2009, King conducted a fax marketing campaign. It faxed over 50,000 advertisements, two of which went to CE Design. Design brought suit on behalf of a class pursuant to the Telephone Consumer Protection Act. Judge Bucklo (N.D. Ill.) certified a class of persons who received the fax without having given express permission. King petitions for permission to appeal from that certification.

In their opinion, Judges Posner, Manion, and Hamilton granted the petition, vacated the class certification, and remanded. The Act forbids unsolicited fax advertisements. An unsolicited advertisement is one sent without "express invitation or permission." Whether the "Contacts Us" language and the directory publication constitutes an unsolicited advertisement is a question that neither the statute, the case law, nor agency interpretations answer. Design's president testified at his deposition that he did not know that directory publication granted permission to others to communicate with Design by fax. Rule 23 requires that the class representative’s claim be typical of all claims and that the class representative will "fairly and adequately" represent the class. The Court stated that a plaintiff is not an appropriate class representative if it is subject to a defense that other class members are not subject to -- its claim is no longer typical. Likewise, a class representative should not have credibility problems. Here, the district court expressed doubts about the president's truthfulness but dismissed it as a immaterial. Questions about his credibility and the presence of a potential defense based on the expressed consent given through the directory detract from Design's ability to adequately represent the class. The Court remanded for reconsideration of the identity of the class representative. The Court emphasized that it was not questioning the viability of the class action itself.

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OWENS v. HINSLEY (March 18, 2011)

While imprisoned in the Menard Correctional Center, James Owens became unhappy with prison conditions and with the prison's response to his complaints. So he started a hunger strike. He spent 21 days in his cell and four in the infirmary before he ate again. He lost 20 pounds but suffered no medical complications. Within weeks, he began a second hunger strike. This time, he spent 25 days in his cell and almost 3 weeks in the infirmary. He ate again only after the prison began force-feeding him. He lost 30 pounds on his second hunger strike but again suffered no medical complications. He submitted an informal grievance complaining that he should have been moved to the infirmary sooner. His counselor ignored the grievance. The following year, on two separate occasions, Owens was assaulted by cellmates, complained to guards, and was assaulted again before the guards did anything. Owens brought suit pursuant to § 1983. The complaint contained seven separate claims against 15 different defendants. Chief Judge Herndon (S.D. Ill.) dismissed five of the seven claims at screening and granted summary judgment to the defendants on the other two. Owens appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Wood affirmed. The Court first noted that the complaint violated the rules of civil procedure regarding joinder and should either have been severed into two separate actions or dismissed for improper joinder. However, since improper joinder is not jurisdictional, the Court addressed each claim's merits in turn. His claim that prison officials violated the Constitution when they ignored his grievances is frivolous -- prison grievance procedures are not required by the Constitution. His claim that his First Amendment right to demonstrate was violated when the prison force-fed him is frivolous -- there is no constitutional right to refuse life-saving medical treatment. His claim that the guards failed to protect him from cellmate assaults fails -- no reasonable juror could find that the guards deliberately ignored a substantial risk of serious harm. His claim that the prison was deliberately indifferent when it did not move him from his cell to the infirmary during his hunger strikes fails, although not for the reason relied upon by the district court. His allegation, in his verified response to summary judgment,  that he submitted an informal grievance is the equivalent of an affidavit. The court should have considered it. The claim still fails because he failed to exhaust administrative remedies when he did not follow up his informal grievance with a written grievance to a designated prison official. The district court dismissed the other three claims without prejudice because the allegations of misconduct were not linked to a particular defendant. Although an amended complaint may have corrected some of that problem, the Court concluded that the district court did not abuse its discretion in denying leave to amend when Owens failed to comply with local procedure, failed to follow the court's instructions for refiling, and filed claims that had already been dismissed at screening.

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O’ROURKE v. PALISADES ACQUISITION XVI (March 17, 2011)

Michael O'Rourke accumulated several thousand dollars of debt on his credit card but never paid it. In fact, he assumed the statute of limitations barred any payment obligations. So, when lawyers for Palisades Acquisition XVI, the debt's owner, sent him a collection notice, he ignored it. Palisades filed suit in state court and attached an exhibit that appeared to be, but was not, a credit card bill issued by Palisades to O'Rourke. Palisades eventually dismissed the state court case. O'Rourke brought suit against Palisades in federal court, alleging that the exhibit violated the Fair Debt Collection Practices Act. His theory was that Palisades included the exhibit in order to mislead the state court judge into thinking that it was an accurate statement of the actual debt. Judge Norgle (N.D. Ill.) granted summary judgment to Palisades. O’Rourke appeals.

In their opinion, Judges Flaum, Manion, and Tinder (concurring in the result) affirmed. The Court stated that the Act prohibits both the false representation of a debt's "character, amount, or legal status" and the use of deceptive means to collect a debt. On its face, the Act does not say whether it includes statements made to a state court judge. The Court concluded that it did not. The Act is intended to protect consumers. Courts have extended its protection to third parties only when there is a special relationship (e.g., attorney, executrix) with a consumer. The Court held that the Act only applies to statements directed to consumers, and those with a special relationship to a consumer. Since a state court judge is an impartial decision-maker, the exhibit is not a covered communication.

Judge Tinder concurred in the result but disagreed with the Court’s rationale. He noted that the language of the Act is quite expansive, that its goal is to reduce abusive debt collection practices, and that state judges are powerful participants in the debt collection process. Why, then, should a false and misleading court submission not be a violation of the Act? Judge Tinder did not answer that question because he did not believe it necessary or prudent. Even assuming that the Act applies to communications to judges, O'Rourke loses. Because the exhibit was not misleading on its face, O'Rourke was required to submit extrinsic evidence. Although he submitted an expert report, the trial court excluded it. Without any extrinsic evidence, O'Rourke is unable to establish a genuine issue of material fact and summary judgment for Palisades was proper.

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VODAK v. CHICAGO (March 17, 2011)

In early 2003, a group of people in Chicago opposed to the United States' anticipated invasion of Iraq wanted to express their opposition. They wanted to hold a march at the same time as the invasion, but they did not know when that would happen. A Chicago ordinance requires a permit for a demonstration and typically requires five days notice of the march's date and route. For "good compelling cause," the City will act within two days. When, as here, the two-day requirement cannot be met, the City has an informal practice of waiving the permit requirement. Although non-permitted demonstrations typically use the same standard route, the police and demonstrators never agreed on a route. The invasion took place on March 19. The protesters gathered on March 20. Part of the way along their announced route, thousands of the protesters detoured. They marched toward Michigan Avenue, a major commercial thoroughfare in Chicago. The police blocked access to the street and told the march organizers to return to their starting point or disperse. They threatened to arrest anyone entering Michigan Avenue. The police claim they also shouted these warnings through bullhorns. Most of the marchers either dispersed or began to return to their starting point. Along the way, hundreds of marchers started approaching Michigan Avenue again on a different cross street. There is a dispute in the record regarding the marchers' presence on that street -- there is some evidence that at least some of the marchers thought they were directed there by the police. The police again blocked Michigan Avenue. This time, however, they also sealed off the marchers in the other direction. They started arresting the marchers and any other person who happened to be on that one block stretch of Chicago Avenue. Most of those arrested were released without being charged -- others had their charges dismissed. Two lawsuits were filed against the City and several police officers pursuant to § 1983, alleging violations of the First and Fourth amendments, as well as state law. Judge Kendall (N.D. Ill.) dismissed both suits against the officers on qualified immunity grounds and against the City because no policymaker had been responsible for the officers' conduct. Plaintiffs appeal.

In their opinion, Circuit Judges Posner and Wood and District Judge Adelman reversed and remanded. The Court first noted that the police were well within their rights in blocking Michigan Avenue. A large protest march was getting out of control. They could, and did, order the crowd to disperse or return to their starting point. But, on the undisputed record, they only communicated their orders to the organizers. According to hundreds of affidavit filed in the record, many of the marchers were unaware of any order to disperse or return. The Court emphasized this point because the only reason the police gave for the arrests several blocks away from where they gave the orders is the marchers' defiance of these orders. At the time of the arrest, the police had no good reason to believe that the people they were arresting knew they were violating a valid police order. Of course, the police only needed probable cause to make the arrests. But because there was no permit, no agreed-upon route, and no effective means of communicating an order to the thousands of marchers, a police officer on Chicago Avenue could not have a reasonable belief that the hundreds of marchers there knew of the orders. The Court rejected the District Court's conclusion that the right allegedly violated was not "clearly established" at the time. Decades before the march, the Supreme Court held that, if police revoke permission to march, they must give notice of the revocation before arresting alleged violators. In fact, the Court even stated that this is one situation that is so obvious that precedent is not required. The police cannot give permission to march, then withdraw the permission without telling anyone, and arrest the marchers. With respect to the dismissal of the City, the Court also disagreed with the district court. In order to hold the city liable, plaintiffs must show that the conduct was authorized or directed by a policymaker. But that does not mean only the City Council. Here the City Council defers to the Superintendent of Police as the sole policymaker with respect to demonstrations. In addition to his sole policymaking role, the Superintendent monitored and approved the very police conduct at issue. That satisfies Monell.

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SILIVEN v. INDIANA DEPARTMENT OF CHILD SERVICES (March 16, 2011)

Teresa and Mark Siliven’s two-year-old son had been in daycare with Ashley Woods for almost a year. When Teresa picked him up one day in January 2008, Woods told her that the boy had been acting up. Later that evening, Teresa noticed bruises on her son's arm. Mark said he knew nothing about them, so they filed a child-abuse report with the Richmond, Indiana Police Department. The report was forwarded to the Indiana Department of Child Services(DCS). DCS caseworker Amber Luedike investigated. She interviewed Mark and Teresa, as well as Woods. Luedike also asked the Siliven’s to take their son to the emergency room for an examination. Although the emergency room report reached no conclusion as to the cause of the bruises, another doctor to whom Luedike showed the bruises opined that they were consistent with an adult grabbing the boy's arm. Six days into her investigation, Luedike learned that the DCS had substantiated an incident of child abuse involving Mark and his 15-year-old stepdaughter five years earlier. Luedike met with her supervisor, a staff attorney, and a DCS director. She recommended that DCS remove the boy from his home. She based her recommendation on the likelihood that he had been injured by an adult, the fact that the parents had not been eliminated as the cause, and Mark’s earlier incident. The others agreed, and also agreed that they should remove him on an emergency basis because they would be unable to obtain a court order before the upcoming weekend. Luedike and several sheriff’s deputies went to the Siliven's home, intending to take the boy into protective custody. The DCS director eventually agreed, however, to allow Teresa to take the boy to his grandmother's home in Ohio. The following Monday, a judge concluded that probable cause to believe that the boy’s physical health was seriously endangered did not exist. DCS closed its investigation. The Silivens filed suit against Luedike and the DCS director, alleging federal Constitutional and state law violations. Judge Lawrence (S.D. Ind.) granted summary judgment to the defendants based on qualified immunity. He did not address whether there was a constitutional violation but, under the second prong of the qualified immunity test, held that the constitutional rights allegedly violated were not clearly established at the time of the conduct. The Silivens appeal.

In their opinion, Judges Flaum, Manion, and Evans affirmed. The Court’s two-part test is familiar: whether the complaint alleges a constitutional violation and whether the rights allegedly violated were clearly established at the time of the conduct. Unlike the district court, which ignored the first prong and found the second prong dispositive, the Court started with the first prong and found it dispositive. With respect to the Fourth Amendment unreasonable seizure claim, the Court assumed without deciding that there was a seizure (remember that the boy never left his mother's side) but concluded that the defendants' acts were reasonable under an objective test. There was physical evidence of abuse, Mark had access to the boy, and the DCS had substantiated an earlier abuse claim against Mark. Those facts, particularly combined with the fact that the boy remained with his mother at all times, were enough for the Court to find reasonableness. With respect to the substantive due process claim, the Court noted that the constitutional right to familial integrity has to be balanced against the public interest in child safety. A caseworker need only have reasonable suspicion of past or threatened abuse to take a child into custody. Since that threshold is less demanding than the Fourth Amendment threshold the Court already discussed, the Court had no difficulty in concluding that there was no substantive due process violation. Finally, the Siliven's also alleged a procedural due process violation. Due process does require a pre-deprivation hearing before a child is removed from his home, unless there are exigent circumstances. This also requires an objective test, whether a reasonable caseworker would have believed the child was in immediate danger. Again, that test is less stringent than the Fourth Amendment test. The Court concluded that the defendants met the test.

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SMITH v. MEDICAL BENEFIT ADMINISTRATORS GROUP (March 15, 2011)

Brenner Tanks of Fond du Lac, Wisconsin employs Jeffrey Smith. It also offers a group health plan, to which Smith belongs. Taking the allegations of the complaint as true: In 2006, Smith's doctors advised that he undergo gastric bypass surgery. Smith sought preauthorization for the surgery from the plan's third party claims administrator, Auxiant. Auxiant took four months to act on his request and authorized the surgery, but they later denied his claims based on a plan exclusion for obesity related surgeries. In fact, according to Smith, Auxiant routinely takes a long time in responding to authorization requests and routinely denies coverage for procedures that it has already preauthorized. Smith brought suit under ERISA, seeking damages, restitution, and other relief. Judge Randa (E.D. Wis.) dismissed the complaint, concluding that Smith was not entitled to the relief he sought under ERISA. Smith appeals.

In their opinion, Judges Flaum, Rovner, and Sykes affirmed in part and reversed and remanded in part. The Court first concluded that Smith had adequately alleged that Auxiant breached a fiduciary duty. Auxiant is an ERISA fiduciary, has a duty of loyalty, must exercise reasonable care, and must not mislead an insured. Accepting the factual allegations as true, the Court concluded that Auxiant’s preauthorization practices could be considered a breach of a fiduciary duty. But is Smith entitled to relief? The Court identified three possibilities. Under § 502(a)(1)(B), a plan beneficiary is entitled to recover benefits due him -- but Smith has conceded that Auxiant’s ultimate denial of benefits was proper under the plan terms. Under § 502(a)(2), a plan beneficiary is entitled to recover losses to the plan that result from a breach of fiduciary duty -- but Smith is seeking damages for himself, not the recovery of plan losses. The plan had no losses. Finally, under § 502(a)(3), a plan beneficiary may seek to enjoin an improper practice or obtain other equitable relief for ERISA or plan violations. Smith has a cause of action under (a)(3), but only for equitable relief. The Court concluded that Smith adequately requested such relief in his complaint. The Court warned that any such relief should be carefully crafted so as not to modify the plan terms.

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REEVES v. DAVIS (March 14, 2011)

Linda Reeves hired Gerald Davis to help her with some home renovations. Although he represented himself to be licensed and insured, he was not. After she paid him almost $60,000, Davis left the job incomplete. A state court entered judgment in Reeves' favor, concluding that Davis violated the Indiana Home Improvements Contracts Act. The court specifically found that Davis committed a "deceptive act" under the statute. The court also made a factual finding that the contract covered the construction of a porch, although it did so by concluding that the contract lacked specificity and that any uncertainty should be resolved against Davis. Before Reeves collected any money, Davis petitioned for bankruptcy. Reeves filed an action asserting that the debt was non-dischargeable under § 523(a)(2)(A), which does not discharge a debt that is obtained by "false pretenses, a false representation, or actual fraud." The bankruptcy court rejected her collateral estoppel argument, held its own trial, found that the contract may not have included a porch, concluded that Davis did not have the requisite § 523 fraudulent intent, and ruled the debt discharged. Judge Magnus-Stinson (S.D. Ind.) affirmed. Reeves appeals.

In their opinion, Circuit Judges Flaum and Williams and District Judge Herndon affirmed. The Court stated that § 523 requires, among other things, a showing that Davis possessed an intent to deceive. Reeves argued that the state court's factual finding that the contract included the porch coupled with Davis' admission that he never intended to build one established that intent. The Court agreed with Reeves on the first point and concluded that the bankruptcy court should have deferred to the state court’s factual finding. But the state court did not make a finding regarding his intent. The Court noted that his own testimony that he never intended to build a porch must be taken in context with his testimony that he did not believe the contract called for one. The bankruptcy court did not clearly err when it concluded that Davis did not possess fraudulent intent.

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ACTIVE DISPOSAL v. DARIEN (March 14, 2011)

Many Illinois municipalities have exclusive contracts for waste removal. These contracts limit the choices that consumers of waste removal services have and prevent other waste removal providers from competing for their business. Groups of waste removal companies and businesses wanting more choices banded together and brought suit against these municipalities, alleging violations of federal antitrust laws. Judge Kennelly (N.D. Ill.) dismissed the suit, concluding that the municipalities' actions were protected by the state-action exception to federal antitrust law. The plaintiffs appeal.

In their opinion, Circuit Judges Manion and Williams and District Judge Clevert affirmed. The Court first had to determine the provenance of the municipalities' power to contract with waste haulers. In the Illinois statute governing municipalities’ powers, § 1 (titled "Contracts") grants the power to make contracts relating to the "disposition . . . of garbage." Section 5 (titled "Method Of Disposition") grants the power to dictate an exclusive method for the "disposition of garbage," and adds that items intended to be recycled are not garbage. Plaintiffs argued that the municipality's power to enter into exclusive waste hauling contracts arose from § 5 and that the recycling exclusion prevented an exclusive contract when the waste material included recyclables. The Court rejected that argument for several reasons: a) § 5 never mentions contracts, b) the term "exclusive" refers to disposal methods , not contracts, and c) the titles of the sections are inconsistent with plaintiffs' argument. The Court also rejected plaintiffs' argument that the recycling exclusion in § 5 limited the power granted in § 1. Applying standard rules of statutory construction, the Court concluded that plaintiffs' proposal would lead to confusion, create anomalies, and render certain statutory terms superfluous. Having decided that § 1 covered the municipalities' contracting power, the Court applied the state-action doctrine test. Under that test, the Court asks if the statute authorizes the conduct and whether the anti-competitive effects were foreseeable. Both questions must be answered affirmatively for the state-action exemption to apply. Here, the Court already answered the first question affirmatively -- § 1 authorizes the garbage collection contracts. The Court also answered the second question in the affirmative. The power to contract implies a power to exclusively contract. Garbage collection is a traditional municipal concern. When a legislature grants contract authority to a municipality, it is certainly foreseeable that a municipality will enter into an exclusive contract that will affect competition. The state-action doctrine therefore applies.

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JOSEPH v. ELAN MOTORSPORTS TECHNOLOGIES RACING CORP. (March 14, 2011)

Timothy Wardrop had a written employment agreement with Elan Motorsports Technologies, Inc. ("Inc."). Several years ago, he filed a complaint alleging a breach of the agreement. Unfortunately, he named as the only defendant Elan Motorsports Technologies Racing Corp. ("Corp."), Inc.'s parent. Eventually, Wardrop discovered his mistake and asked for leave to file an amended complaint naming Corp. He also asked that the amendment relate back to the filing of the complaint since the statute of limitations had long run. Judge McKinney (S.D. Ind.) concluded that the amendment could not relate back and dismissed the case. Wardrop appeals.

In their opinion, Circuit Judges Posner and Wood and District Judge Adelman reversed and remanded. The Court first pointed out the district court's procedural error after it concluded that the amendment would not relate back. Instead of dismissing the case, the court should have allowed the amendment under Rule 15(a)(2) and then entered judgment both for the original defendant (since it was not a party to the contract) and the added defendant (because the statute of limitations had run). But the Court identified a more fundamental error. The district court erred when it concluded that the amendment did not relate back. Its error, however, was understandable since the Supreme Court decided Krupski after the district court’s decision. Before Krupski, the Court's jurisprudence focused on what the plaintiff knew or should have known. Here, Wardrop's almost six-year delay in discovering his mistake was inexcusable. But the Supreme Court has now held that a district court makes only two inquiries: whether the defendant sought to be added to the complaint knew or should have known that it was the intended target of the litigation, and whether the plaintiff's delay has prejudiced the new defendant. A plaintiff's carelessness may still be relevant, but only to the prejudice prong of the test. That test is satisfied here. Inc. knew from the moment of service that Wardrop intended to sue the firm with whom he had employment contract -- and that was Inc. And any harm that Inc. has suffered is the direct result of its own failure to advise Wardrop of his mistake. The Court did comment that the amended complaint contained both additional legal theories and legal claims. A complaint need not allege legal theories so the inclusion of additional ones does not affect its relation back. That may not be true with respect to the new claim (quantum meruit). But the Court left it up to the district court to consider that issue in the first instance.

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