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

UNITED STATES v. THOUVENOT, WADE & MOERSCHEN (February 18, 2010)

The Equal Access to Justice Act allows a party that prevails against the United States in litigation to recover its attorneys' fees unless the position of the United States is found to be "substantially justified." Three cases before the Court allowed it to address that standard. In the first, the United States charged an apartment complex site engineer with violating the Federal Housing Act. The trial court denied defendant's motion for summary judgment and its motions for judgment as a matter of law. After the jury returned a defense verdict, however, the court awarded fees to the defendant. Because the defendant's insurer paid for much of its defense, the insurer would receive much of the award. The United States appeals. In the second case, the court affirmed the denial of a Social Security claimant's application for benefits. After the Seventh Circuit reversed and remanded, concluding that a crucial consultant's opinion was entitled to no weight, the court denied an award of fees. The claimant appeals. In the third case, the district court reversed the administrative denial of Social Security benefits but denied the claimant's application for fees. The basis for the reversal was the administrative law judge's possible mischaracterization of some testimony and failure to fully explain the connection between the claimant's condition and his ability to work. The claimant appeals.

In their opinion, Judges Posner, Flaum, and Sykes reversed, reversed, and affirmed. The Court first noted that "substantially justified" was not defined in the statute nor, in their view, was its meaning self-evident. Relying on the title of the statute and its limited application only to persons of lesser means, the Court concluded that the government's position need not be frivolous to justify an award of fees. The Court identified a threshold between frivolous and meritorious, at which a case has a reasonable basis in law and fact, that the United States must meet to be "substantially justified." Applying that standard to the first case, the Court held that there was a presumption that the United States’ position is substantially justified if it survives summary judgment. Just because the jury ultimately decided in favor of the defendant does not mean that the government fell short of its threshold. Although the Court reversed the award of fees, it decided to provide guidance to the lower courts on the additional issue of the impact of a liability insurer on an award of fees. In its view, the Act should not be applied differently if a party otherwise entitled to a fee award his had some of its fees paid by its insuror. In the second case, the Court concluded that the lower court was wrong in denying a fee award. Even though the lower court was originally convinced of the merits of the government's position, the court must be guided by the appellate opinion. If an appellate court reverses in a case it considers a close call, the fact that the lower court was convinced of the merits may support a substantial justification finding. Here, however, the Court made it clear in its earlier opinion that the government's position was not justified. Finally, in the third case, the district court had reversed an administrative denial of benefits but refused to award fees. Like the prior case's "close call" reference, the Court concluded that the lower court was well within its discretion to reverse a denial of benefits but to conclude that the position taken was "substantially justified."

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THOROGOOD v. SEARS, ROEBUCK & CO. (February 12, 2010)

Stephen Thorogood filed a state court class-action on behalf of the purchasers of stainless steel dryers in multiple states. He alleged that the defendant’s representation that the dryers were made of stainless steel violated the consumer protection acts of those states. The defendant removed the case to federal court under the Class Action Fairness Act (CAFA). Although the district court certified a class, the Seventh Circuit reversed and ordered the class decertified (intheiropinion.com post). The Court thought the case was not only a weak candidate for class certification, but also flimsy on its own merits. On remand, the defendant made an offer of judgment, inclusive of attorneys fees, of $20,000. Finding that that offer exceeded plaintiff's maximum recovery under state law of $3,000 and therefore the amount in controversy, the district court dismissed the case as moot. Thorogood appeals.

In their opinion, Judges Posner, Kanne, and Evans affirmed. The Court first rejected plaintiff's argument that the case should have been remanded upon class decertification, relying upon its decision in Cunningham Charter (intheiropinion.com post) just three weeks earlier. Then, the Court rejected the plaintiff's argument that the case was not moot because of his entitlement to significant attorneys’ fees. First, an award of fees for value conferred beyond the relief obtained must generally be relief ordered by the court. Second, the court was within its discretion in deciding that no fees were warranted. Finally, the Court noted that most of the fees were incurred pursuing the failed class action, not the $3,000 individual action.

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GASTINEAU v. WRIGHT (January 19, 2010)

James and Christy Gastineau were plaintiffs in a Fair Debt Collection Practices Act (FDCPA) case. They were represented by Robert Duff. Although Duff was not their original counsel and did not become so until about three years into the case, he did negotiate the settlement of the case on the first day of trial. He asked for attorney's fees of approximately $140,000. The district court judge awarded approximately $50,000, reducing both the number of hours and the hourly rate in setting that amount. Duff appeals.

In their opinion, Judges Kanne and Tinder and District Judge Griesbach affirmed. The Court first noted that an award of attorney's fees is reviewed on a "highly deferential" version of the already deferential abuse of discretion standard. The district court concluded that Duff’s hours were excessive. He noted that Duff was inexperienced in FDCPA cases and became involved fairly late in the case, after most of the discovery and motion practice had been completed. Much of the time spent was learning the law. The court also concluded that Duff’s rate was excessive for the subject matter. He relied on an affidavit of an experienced lawyer in the area who believed that to be so. The Court found no impediment to the combined reduction of both hours and rate. Having found no abuse of discretion, the Court affirmed.

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MACH v. WILL COUNTY SHERIFF (September 1, 2009)

Michael Mach was a Will County Deputy Sheriff assigned to the traffic division. For years, he maintained a satisfactory performance record. That changed after 2003. Because of budget pressure, the department notified the deputies in the traffic division that they could be temporarily assigned to the patrol division. Mach and other deputies were not happy. He started acting out, failing to follow directives, disregarding instructions, and neglecting his duties. After reprimands and warnings, he was permanently transferred to the patrol division. Mach brought an action pursuant to the Age Discrimination in Employment Act (ADEA). In addition to his transfer, he stated five other grounds for his claim. In response to the defendants’ opening briefing on summary judgment, he abandoned all five of those other grounds. The court granted summary judgment to the Sheriff and also awarded fees of 5/6 of the costs of preparing the summary judgment motion, reflecting effort that went into attacking the "worthless" claims. Mach appeals.

In their opinion, Judges Bauer, Flaum and Kanne affirmed. On the merits, Mach relied on the direct method of proof, which required him to produce evidence that he was transferred because of his age. The Court noted an absolute lack of evidence in the record supporting any such inference. His poor job performance was well documented by the department. The only circumstantial evidence of age discrimination was one stray comment made by an individual who had no influence on the transfer decision. Mach's ADEA claim fails. With respect to the fee award, the Court noted a prior holding that ADEA does not preclude an award of fees to a prevailing defendant if a plaintiff litigates in bad faith. Here, the Court concluded that the district court did not abuse its discretion in ruling that Mach litigated the five claims in bad faith. The Court noted its belief that such sanctions would be rare -- here the district court explicitly held that the five claims were "worthless."

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ANDERSON v. AB PAINTING AND SANDBLASTING (August 20, 2009)

Under its collective bargaining agreement, AB Painting and Sandblasting was required to make contributions to several union benefit plans. The trustee of the plans brought an action under ERISA to collect overdue contributions. The court granted summary judgment to the fund for the entire amount claimed ($6,500). The court awarded attorneys’ fees of only $10,000, however, on a request in excess of $50,000. The amount claimed, stated the district court, was “disproportionate” to the amount at stake. The trustee appealed.

In their opinion, Judges Bauer, Manion and Sykes reversed and remanded. The Court noted that ERISA requires an award of “reasonable” attorneys’ fees in a successful action to recover overdue contributions. The district court should begin with the “lodestar” (hours times a reasonable rate)and adjust it upon consideration of a number of factors, including the amount at stake and the results obtained. The Court cited its own jurisprudence, however, where it has rejected any requirement of proportionality between the result and the fee award. In fact, one of the policy reasons behind fee-shifting statutes is the promotion of meritorious claims that would not be brought otherwise. In a situation where Congress has spoken by including a fee-shifting provision in a statute, a court should only look at whether the time expended was a reasonable approach to the desired end. Here, the lower court did not opine on the reasonableness of the hours spent achieving the outcome. The Court remanded for such a recalculation.

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SCHLACHER v. LAW OFFICES OF PHILLIP J. ROTCHE AND ASSOCIATES (August 3, 2009)

Jean Schlacher got a root canal but fell behind in payments to her dentist. Her dentist obtained a judgment against her. Again, Schlacher fell behind on her payments on the judgment. The debt-collection law firm representing the dentist became quite abusive and threatening. Jean sought legal advice. Unfortunately, due to various lawyers' schedules and skill sets, she ended up with four different lawyers assisting her in her Fair Debt Collection Practices Act ("FDCPA") suit against the law firm. Fortunately, the suit was resolved in a short time, before any discovery, for a total of $6,500. Unfortunately, the parties were unable to agree on a fee award. The plaintiff petitioned for fees in excess of $12,000. The defendants objected to the attorneys’ hours and rates. The court awarded $6,500 in fees. Schlacher appeals.

In their opinion, Judges Rovner, Wood and Williams affirmed. The Court first rejected the plaintiff’s argument that the district court abused its discretion in awarding an amount in fees equal to the amount of the judgment. The Court explained that the district court reduced the requested amount because of its view that the work of the four attorneys was duplicative and excessive. The fact that the court noticed a coincidence that the amount of the fee equaled the amount of the judgment is irrelevant. The Court also rejected the argument that the lower court's fee award was an abuse of discretion because of its lack of specific findings and calculations. When a fee award is substantial, the Court cautioned that a district court must be precise in its calculations. Here, when the amount is not substantial, less precision is required. The court questioned the hourly rates for several of the attorneys because of their lack of experience in FDCPA cases, noted the lack of complexity in the case, and believed that one attorney would have been sufficient. That explanation is sufficient to sustain the award.

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WOLF v. KENNELLY (July 23, 2009)

Ford Kennelly, an Indiana citizen, received a $1.3 million arbitration award, jointly and severally, against commodities brokers Rosenthal Collins Group ("RCG") and Ken Wolf. Wolf filed a petition to vacate in state court. He included a request for declaratory relief against RCG, alleging that RCG had made a demand for indemnity against him. Kennelly removed the petition to federal court and asked that RCG be realigned as a petitioner. RCG was an Illinois citizen. Its presence as a defendant prevented removal. Wolf moved to remand, opposing the realignment of RCG. Several months later, the parties discovered that one of RCG's limited partners was an Indiana citizen. Since Kennelly was also an Indiana citizen, diversity would be destroyed if RCG was realigned as a petitioner. The district court granted the motion to remand. The court then denied Wolf's request for attorneys' fees, concluding that the case was an exceptional one not warranting a fee award. Wolf appeals.

In their opinion, Judges Bauer, Flaum and Kanne reversed and remanded. The Court first rejected Wolf's argument that the court's brief minute order, without much discussion or analysis, was an abuse of discretion. The Court noted that the issue had been fully briefed and the judge explained his rationale on the record, although not repeating it in the minute order. On the merits, the Court concluded that Wolf did not have an objectively reasonable basis for seeking removal. The "objectively reasonable basis" standard is similar to the qualified immunity doctrine. A district court may award fees if "clearly established" law prevents removal. At the time Kennelly sought removal, the long-standing precedent in the circuit was that realignment of a party was improper if an actual and substantial controversy existed between the plaintiff and that party. The fact that Wolf and RCG shared an interest in escaping liability altogether did not justify the realignment. The Court remanded for consideration of the fee petition.

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ESTATE OF ANGELA ENOCH v. TIENOR (June 29, 2009)

Angela Enoch committed suicide while a prisoner in a Wisconsin state prison. Her estate brought a lawsuit alleging violations of her rights. The plaintiffs accepted the defendants' $635,000 offer of judgment. The offer of judgment did not include attorneys’ fees. On the plaintiffs' request for fees in excess of $300,000, the court awarded only $100,000. The court's rationale was that the plaintiffs recovered only a small fraction of the $10 million sought in their complaint. The Estate appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Evans reversed and remanded. The Court held that the lower court erred in relying on the Supreme Court’s Farrar decision. Farrar deals with fee awards for plaintiffs who prevail but receive only nominal damages (Farrar asked for $17 million and received $1). Here, although the Court believed the $10 million sought was absurdly high, it concluded that a recovery of $635,000 in prison litigation is significant. A fee award need not be proportional to the recovery or to the amount recovered versus the amount requested. The Court remanded for a recalculation of the award using the lodestar as a starting point and also considering the result obtained, any claims on which plaintiffs did not prevail, the adequacy of the documentation, and any social benefits obtained.

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 WALKER v. CALUMET CITY (May 15, 2009)

Calumet City passed an ordinance under which real property had to pass an inspection and be in compliance with city codes before it could be sold. Ayanna Walker sued the City. She alleged that the ordinance unreasonably restrained her ability to sell her property, that the ordinance violated procedural due process, and that the ordinance prevented her from selling her “non-conforming" property. While the complaint was pending, the property was inspected under a different city ordinance. Once the property was certified as in compliance, the City moved to dismiss the case as moot. The district court dismissed the case as moot and also awarded Walker her attorney fees. The City appeals the award of fees.

In their opinion, Judges Flaum, Manning and Rovner reversed. The Court recognized the prior rule that a court may award attorney fees if a defendant voluntarily provides the relief sought by the plaintiff. In Buckhannon, however, the Supreme Court held that courts may not award fees unless there is a "material alteration" in the relationship of the parties. The Supreme Court gave two examples: a) when the plaintiff has a judgment on the merits, and b) when the plaintiff obtains a consent decree from the court. The Court first noted that Walker's case did not fit within the "judgment on the merits" prong of Buckhannon. With respect to the second prong, the Court, citing its own precedent, concluded that it may allow an award in the case of a settlement agreement if: a) it was mandatory, b) it was captioned "Order", c) it was signed by a judge, and d) it provided for judicial enforcement. Although Walker attempted to fit her award into this framework, she failed to do so and was not entitled to a fee award.

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THE CORNUCOPIA INSTITUTE v. UNITED STATES DEPARTMENT OF AGRICULTURE (March 26, 2009)

The Cornucopia Institute submitted three separate FOIA requests to the United States Department of Agriculture ("USDA"). When the USDA failed to respond within the required time period, Cornucopia filed suit for injunctive relief, a writ of mandamus and attorneys fees. While the suit was pending, the USDA produced the responsive documents. The court dismissed the case as moot. The court also denied the request for fees on the grounds that Cornucopia had not "substantially prevailed." Cornucopia appeals.

In their opinion, Judges Manion, Kanne and Kendall affirmed. First, the Court rejected Cornucopia's argument that the lower court’s ability to still grant declaratory relief renders the case not moot. Declaratory relief is appropriate only when the ruling would have an impact on the parties. Cornucopia has failed to make such a showing. The Court concluded that a case must be dismissed when it is impossible for the court to grant any effectual relief – as is the case here.

With respect to attorneys’ fees, the district court concluded that Cornucopia was not a prevailing party under Buckhannon because it obtained no judicial relief. The Court pointed out that Buckhannon’s requirement of judicial relief was eliminated in the OPEN Government Act of 2007 (enacted while the appeal was pending). Because Cornucopia waived any argument that the Act applies retroactively, however, the Court concluded that the district court acted within its discretion in denying the request for fees.

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MIRFASIHI v. FLEET MORTGAGE (December 30, 2008)

This suit was originally brought years ago on behalf of 1.6 million people whose mortgages were owned by Fleet Mortgage Corporation (“Fleet”). The allegations of the class action complaint are that Fleet shared personal information from the class members’ mortgage files with telemarketers, in violation of the Fair Credit Reporting Act (“FCRA”) and various state laws. The class was divided into a very large class of persons whose information was shared but who purchased nothing as a result (the “non-purchasers”) and a small (~190,000) class of people who did make purchases (the “purchasers”). The court certified the class and approved a settlement in 2002. The settlement provided nothing to the non-purchasers. The Seventh Circuit reversed and remanded, at the request of two intervening objectors. On remand, the court again approved a settlement. Again, the non-purchasers received no direct benefit. The court concluded that their claims were of no value. Fleet was required, in addition to the payment to the purchasers, to make a payment of at least $243,000 to organizations concerned with consumer privacy issues. The Seventh Circuit again reversed on the grounds that the court’s valuation of the non-purchasers’ claims was inadequate. On remand, the court conducted a more thorough survey of the state consumer protection laws and, once again, concluded that the non-purchasers’ claims had no value. The court awarded class counsel $750,000 and objectors’ counsel $18,750 in fees. The objectors appeal.

In their opinion, Judges Bauer, Posner and Williams affirmed. The Court first noted that no member of the non-purchasers class suffered actual harm. Although nineteen states and the District of Columbia allow individual (not class) actions with statutory penalties ranging from $25-$10,000, the parties failed to identify one person who would bring such an action. Although the Court noted that the state law limitations on class actions may not be binding in federal court, it held that the objectors waived any right to raise that issue. The Court also held that the objectors forfeited any claim that FCRA provided a statutory penalty remedy for the non-purchasers, adding, however, that such a claim would be frivolous. Concluding that the non-purchasers’ claims were indeed worthless, the Court approved the $243,000 settlement.

The Court used objectors’ counsel’s request for additional fees to again express its frustration with the inherent conflicts in class actions. (For another recent expression of Judge Posner's frustration, see his opinion in Thorogood here and my summary here.) One of those conflicts resulted in objectors’ counsel exaggerating the value of the non-purchasers’ claims in order to be entitled to an award of fees. Here, objectors’ counsel asked that the $750,00 awarded to class counsel instead be awarded to him. The Court conceded that objectors do frequently assist the class action settlement process, but an award of fees must be balanced by their degree of success. Here, the objectors extended the litigation by years. They improved to some degree the value of the purchasers’ settlement but did not do much to improve the settlement for the non-purchasers. They did not participate constructively in the litigation – in fact, they conducted themselves irresponsibly. The Court approved as “barely justified” the fee awarded below.

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AARON v. MAHL (December 18, 2008)

Jim Aaron and Susan Scott (f/k/a/ Mahl) were cohabiting lovers in the 1990s until Aaron left Scott. At about the same time that Aaron left, Scott was sued by her former law firm for embezzlement. The firm obtained a judgment of more than a million dollars against Scott that they then assigned to Aaron. Aaron has been attempting to collect the judgment for years, following Scott from California to Indiana to South Carolina. Aaron found some assets in Indiana in a Merrill Lynch account. A state court ordered Merrill Lynch not to transfer or dispose of the assets. Aaron nevertheless obtained a writ of execution, with which Merrill Lynch refused to comply. Scott moved to quash the writ. Aaron filed suit in district court to enforce the writ and require Merrill Lynch to turn over the funds. Merrill Lynch counterclaimed and also filed for interpleader against Aaron and Scott. At Scott’s request, the court stayed the suit pending the state court’s consideration of her motion to quash the writ. The state court quashed the writ, an order upheld on appeal. The district court lifted the stay and granted Merrill Lynch summary judgment on its interpleader claims, entered final judgment pursuant to FRCP 54(b), and awarded attorney’s fees from the interpleader stake. Scott appeals from both the grant of interpleader and the award of attorney fees.

In their opinion, Judges Bauer, Wood and Tinder affirmed. Interpleader, said the Court, is used when a stakeholder is exposed to double liability or must litigate conflicting claims. The stakeholder must have a “real and reasonable” fear. Scott raise two arguments in support of her assertion that Merrill Lynch’s fear was not real: 1) that res judicata bars Aaron’s claims because of the state court rulings, and 2) that Aaron’s federal complaint was frivolous. The Court found Scott’s position incredible, noting that Merrill Lynch had been embroiled for five years in what was at its core a dispute between Aaron and Scott over Scott’s assets. Merrill Lynch had been sued or threatened with suit by both of them. The Court concluded that: 1) Scott was simply wrong in her interpretation of the res judicata effects of the state court judgments, and 2) the fact that Scott proceeded under a different legal theory after the stay was lifted than before did not make the claim frivolous. Merrill Lynch had a real and reasonable fear of competing claims and was properly granted interpleader.

On the issue of attorney fees, the Court rejected Scott’s argument that the fees should not have been awarded out of the stake while she was appealing the very order granting interpleader. Its decision on that issue rendered her argument moot. As for her claim that fees should have been charged against Aaron, the Court stated that the trial court had discretion to order that attorney’s fees be paid to a disinterested stakeholder out of the stake itself.

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BINGHAM v. NEW BERLIN SCHOOL DISTRICT (December 4, 2008)

Sam Bingham was a Wisconsin high school student. His parents petitioned their school district to provide special education services for him. The district did not do so. Sam transferred to a private school. After Sam graduated, his parents filed a request for a hearing with the Wisconsin Department of Public Instruction. They alleged that the school district had failed to comply with the Individuals with Disabilities Education Act (“IDEA”). They asked for reimbursement of their private school tuition costs. Before a hearing was held, the district reimbursed the Binghams for the full amount they requested. The administrative law judge dismissed the petition as moot. The Binghams asked for a declaration that they had “prevailed” for purposes of seeking attorneys’ fees under IDEA. The administrative law judge refused. The Binghams appealed to the district court. The court concluded that the Binghams were not prevailing parties and denied their motion for attorneys’ fees. The Binghams appeal.

In their opinion, Judges Flaum, Rovner and Williams affirmed. In fact, the Court very quickly and easily resolved the sole issue presented by the appeal – whether the Binghams were entitled to attorneys’ fees under IDEA – against the Binghams. In Buckhannon, the Supreme Court in 2001 held that a voluntary monetary settlement by a defendant does not entitle a plaintiff to “prevailing party” status. The Court further noted that every circuit that has considered the issue has applied Buckhannon to IDEA cases.

The Court went on because it was troubled by the plaintiffs’ conduct. The plaintiffs and their counsel were well aware of Buckhannon and yet did not even cite it in their papers. The Court emphasized that it was not the fact that they appealed which was disturbing. Buckhannon has been the target of much criticism, especially when applied to IDEA. The Court allowed for the possibility that the Binghams could have elected to appeal solely for the purpose of preserving an argument for the Supreme Court. Having decided instead to ignore binding precedent, the Court ordered the Binghams and their counsel to show cause why they should not be ordered to pay the defendant’s costs and fees of the appeal. 

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KELLEY v. MED-1 SOLUTIONS  (November 25, 2008)

Brian Kelley received medical treatment at St. Vincent Carmel Hospital (“St. Vincent”). When Kelley failed to pay for the services, St. Vincent hired Med-1 Solutions, LLC (“Med-1”) to collect the amounts due. Although St. Vincent always owned the debt, it gave Med-1 the right to collect it. Med-1 sued Kelley in an Indiana small claims court. It attached documents to the small claims court form which indicated that the debt was owed to St. Vincent. Med-1 also attached Kelley’s financial responsibility form he had signed prior to receiving medical treatment. That form provided for payment of “reasonable attorney fees” if the debt was assigned to a collection agency. St. Vincent paid Med-1’s fees and costs and a percentage of the amount collected. Med-1’s in-house attorneys received a percentage of the attorney fees collected by Med-1. Med-1 obtained a judgment against Kelley for $892.09. Kelley and several others in a similar situation brought suit against Med-1, its owner, and its in-house attorneys. Plaintiffs alleged violations of the Fair Debt Collection Practices Act (“FDCPA”), claiming that Med-1 was not entitled to attorney fees and that its claims that it was were false and deceptive. The district court dismissed the complaint. Plaintiffs appeal.

In their opinion, Judges Bauer, Flaum and Williams affirmed. The issue before the Court was whether the case was controlled by the Rooker-Feldman doctrine. That doctrine, taken from two Supreme Court decisions, Rooker v. Fidelity Trust Co. and District of Columbia Court of Appeals v. Feldman, prohibits a lower federal court review of a decision of a state court. Plaintiffs attempted to avoid the application of Rooker-Feldman by characterizing their complaint as one attacking defendants’ representations and requests for attorneys fees, not the actual state court judgment awarding the fees. The Court did not accept the distinction. It concluded that if it found that defendants were not entitled to fees and therefore violated the FDCPA, it was also determining that the state court judgments were in error. The Court next addressed the “reasonable opportunity” exception to the Rooker-Feldman doctrine. Plaintiffs contended that they were unable to raise their FDCPA claims in the Indiana small claims venue. The Court disagreed. The plaintiffs could have transferred their case out of the small claims venue and litigated their FDCPA claims. The Court concluded that plaintiffs had a “reasonable opportunity” to litigate their claims and their complaint was properly dismissed. In addition, the Court questioned the continued viability of the “reasonable opportunity” exception since the Supreme Court’s decision in Exxon Mobil Corp. v. Saudi Basic Industries.

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LEISTER v. DOVETAIL, INC.  (October 23, 2008)

Sandra Leister and Michelle and Evan Peterson worked together at a company that provided employee assistance programs to employers. In 1997, the Petersons purchased some of their employer’s program contracts and formed Dovetail to administer those contracts. They hired Leister, a psychologist, to work for Dovetail. As one of the benefits of employment, they agreed to deposit a percentage of her salary into a 401(k) account. They complied with their promise for about a year and then began diverting Leister’s money to their own benefit. They also refused to provide Leister with documentation of her rights under the plan. Leister brought this action under ERISA to recover the contributions that Dovetail was obligated to make to her account and for statutory penalties. The district court found a willful breach of the defendants’ fiduciary duties and awarded Leister $82,741 for the contributions not made. The court declined to impose statutory penalties for the Peterson’s failure to provide plan documents, relying on their dire financial circumstances. The defendants and Leister each appeal.

In their opinion, Judges Bauer, Posner, and Williams affirmed in part, reversed in part, and remanded. The Court first addressed two preliminary matters – whether there was enough of a writing to satisfy ERISA and the impact of Leister’s failure to name the plan as a defendant – and resolved each of them in Leister’s favor. It then proceeded to the statute of limitations issue. ERISA complaints are governed by two limitations provisions. Complaints for breach of a fiduciary duty under sections 1101 to 1114 must be brought within the shorter of six years from the breach or three years from the date when the plaintiff had actual knowledge of the breach. Complaints for benefits due under the plan pursuant to section 1132(a)(1)(b) are governed by the most analogous state limitations period, in this case Illinois’ ten-year statute for breach of a written contract. Leister sought relief under both sections 1104 and 1132(a)(1)(b), but the district court based its judgment only on section 1104. Since Leister’s complaint was filed more than six years after the defendants’ first breach, her recovery would be limited under 1104. The Court found that a) she was entitled to relief under both sections, b) she was entitled to more relief under section 1132(a)(1)(b), and c) she met the ten-year statute of limitations. Under 1132(a)(1)(b), Leister was entitled to the unpaid contributions as well as a reasonable estimate of their investment growth over time. The Court accepted Leister’s cross-appeal argument that the district court erred in not considering the tax-free status of the contributions. It directed the court to recalculate the benefits on remand.

Leister also “shoehorn[ed]” a claim for sales commissions into her ERISA claim. The Court found that the district court erred in treating it as an ERISA claim even though Leister alleged that she would have deposited the commissions into her 401(k) account. Nevertheless, the Court noted that the claim was also pleaded as a state law claim and would be considered in that context on remand. The Court offered guidance to the district court on the state law claim: a) it has a shorter limitations period than the ERISA claims because it is not a written contract, b) Leister cannot recover tax benefits as if she would have deposited the money into her 401(k), and c) an Illinois statute may allow for an award of attorneys’ fees. Lastly, the Court addressed Leister’s argument that the court erred in not awarding statutory penalties. The Court observed that penalties, in whatever form, are meant to deter. Although deterrence can be achieved with smaller awards against poorer defendants, an award of no penalties against a solvent defendant who commits a willful breach is unreasonable. The district court’s decision was an abuse of discretion.

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ORTH v. WISCONSIN STATE EMPLOYEES UNION  (October 22, 2008)

Ron Orth retired in 1998. The collective bargaining agreement covering his employment required his employer to provide health insurance to retirees. It also required the employer to pay 90% of the premium. Finally, it stated that the monetary value of an employee’s unused sick leave upon retirement, if any, would be used to pay the employee’s share of the premium. Notwithstanding these provisions, the benefits plan of Orth’s former employer deducted all of the premium amounts from Orth’s sick leave account, using it up in eight years. Orth brought this action, with his wife, against his former employer and its benefits plan, alleging that they violated ERISA. The defendants admitted that the terms of the written plan were as alleged by the Orths but maintained that the plan had been modified through the conduct of the parties over time. The district court granted summary judgment to the Orths and awarded attorneys’ fees. The defendants appeal.

In their opinion, Judges Bauer, Posner, and Williams affirmed. The Court observed the general rule that a contract can be modified by the subsequent dealings of the parties. ERISA, however, requires that plans be in writing. The Court held that amendments to plans must be in writing as well. The ERISA plan, therefore, could not be amended by conduct. The Court went on to consider whether the fact that the plan was a creature of a collective bargaining agreement made a difference. Collective bargaining agreements are often modified orally or by subsequent dealings. Employees are not even parties to the agreements. A collective bargaining agreement can be modified without an employee’s consent, as it was here. The union does owe a fiduciary duty to its members, but the Orths do not complain of a breach of the union’s fiduciary duty. But, the Court went on, the welfare plan also owes a fiduciary duty to its participants. Although the plan can be changed without the consent of the participants, the change in this case was made without notice to the participants. That, said the Court, is a violation of the plan manager’s fiduciary duty to the participants (as well as a violation of law).

The defendants also quarrel with the award of damages and fees. The Court agreed that ERISA does not allow consequential damages, but it declined defendants’ invitation to characterize the award of premiums the Orths paid to maintain coverage after their sick leave account was drained as consequential damages. The Court roundly rejected defendants’ argument that the district court erred when it awarded fees on a finding of “no substantial justification” for their position. To the contrary, the Court said, it questioned whether the district court was even correct in its opinion that the defendants acted in good faith. Finally, the Court found no merit in defendants’ argument that the $41,000 fee award was excessive given that the damages awarded to the Orths was about the same. The Court found no error, remarking that one reason fee awards exist is to allow people with small losses the ability to recover those losses.

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DEICHER v. CITY OF EVANSVILLE, WISCONSIN (September 19, 2008)

Mary Mezera divorced Jimmy Reiners after years of alleged physical and psychological abuse. She remarried and moved from Evansville, Wisconsin into a new community, keeping her location secret from Reiners. In February 2006, Reiners phoned the Evansville Police and asked for Mezera’s current address, claiming he needed to contact her in relation to past due mortgage payments. The police obtained her address from the state motor vehicle records and gave it to Reiners. He began to contact Mezera, putting her and her husband in fear of their safety. Mezera and her husband sent a Notice of Claim to the Police Department on April 22. They filed suit on June 30, alleging a violation of the Driver’s Privacy Protection Act (“DPPA”). During damages deliberations at trial, the jury asked for the date of the filing of the complaint, a date which was not in the record. The plaintiffs asked that instead they be given the Notice of Claim, which was a trial exhibit. The trial judge gave the jury the date of the complaint and refused to provide the Notice of Claim. The jury awarded $25,000 in compensatory and punitive damages. The district court granted plaintiffs’ request for attorney fees under DPPA but reduced the amount from almost $200,000 to $25,000 on the ground that the fee award should not exceed the damage award. Then he reduced their request for fees in preparing the fee petition by an equal percentage on the ground that that was the degree to which their petition was successful. Plaintiffs appeal.

in their opinion, Judges Posner, Rovner, and Williams reversed and remanded for a new trial on damages. The Court considered whether the lower court erred in providing the date of the complaint to the jury or erred in not providing the Notice of Claim. First, the Court held that the date of the filing of the complaint is a public record, not extrinsic evidence, and therefore the court did not err. Next, the Court observed that it is generally within the trial court’s discretion to determine which exhibits are provided to the jury. Thus, a trial court’s decision is reviewed under a clear abuse of discretion standard. Nevertheless, the court found a clear abuse of discretion here. At trial, the plaintiffs argued that the police officer who gave the address to Reiners had fabricated his report in order to come within an exception to DPPA liability. The date on which the police first learned of the claim (i.e., the date of the Notice) was a key part of this argument. The plaintiffs argued to the trial court that the real target of the jury’s inquiry during their deliberations was the date of the Notice, not the date of the complaint (which had not even been discussed at trial). The Court emphasized that the error was not in failing to provide the Notice but the possible prejudice in providing the date of the complaint without providing the Notice, thus possibly creating confusion in the eyes of the jury.
Although the Court did not rule on the plaintiffs’ objections to the district court’s fee decisions because of the remand, it did note that the automatic reduction of trial fees to the amount of the damage award and the automatic reduction of the fee petition fee in the same ratio were “likely unreasonable.”
 

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TATE V. LONG-TERM DISABILITY PLAN FOR SALARIED EMPLOYEES OF CHAMPION INT’L CORP. #506 (September 19, 2008)

in 1988, Jo Ann Tate left her job with Nationwide Papers as a sales representative because of problems with anxiety and depression. Her employer’s benefits plan (the “Plan”), governed by ERISA, gave her the right to short-term and long-term disability benefits. The long-term disability program was divided into two stages. A person could receive up to two years of long-term disability on a showing that she was unable to perform the duties of her job. After two years, a person had to show that she was unable to perform the duties of any job for which she was or could be qualified. Tate received short-term disability benefits for six months and applied for and was granted long-term disability benefits in 1999. In 2003, the Plan notified Tate that she was no longer eligible for benefits because she did not meet the second stage (i.e., any job) test. The Plan based its decision terminating her benefits on the report of a physician who had not examined Tate but had access to her file. Tate appealed the denial. A second physician reviewed her file and came to the same conclusion. She based her conclusion on the facts that Tate kept her home, complied with her treatment schedule, and experienced some benefit from medication. Tate challenged the determination in district court. On cross motions for summary judgment, the court found that the Plan’s decision to terminate her benefits was arbitrary and capricious in that it consisted only of conclusory statements unsupported by fact. The court specifically noted the absence of any employability review or identification of jobs available to Tate. The Plan appeals. In addition, the court remanded in order for the Plan to make a proper determination of benefits and denied Tate’s request for attorneys’ fees. Tate appeals.

In their opinion, Judges Posner, Kanne, and Williams affirmed all aspects of the district court’s decision. On the Plan’s appeal, the Court noted its de novo review of the district court’s decision and the highly deferential, “arbitrary and capricious,” standard of review of the denial of benefits. Nevertheless, the panel found that it was arbitrary and capricious because neither physician’s report was based on any explanation or reasoning. The first physician apparently did not even review her employment file. The second physician reviewed her employment file but did not tie the conclusion that Tate was unable to work to anything that was relevant to that issue. ERISA requires the Plan to assess her qualifications to work and relate those to jobs she might be able to perform.

Tate’s appeal argued that reinstatement, not remand, was appropriate because the Plan terminated previously awarded benefits, and did not simply deny benefits. Tate relied on the fact that the Plan provided benefits for two years after the “any job” standard took effect. The Court was puzzled by the Plan’s continued payments of benefits after two years without any determination but still found no such determination and held that a remand was proper. The panel also agreed with the district court’s conclusion that obtaining a remand in an ERISA case is not equivalent to “prevailing” for purposes of attorneys’ fees awards. 

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