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

 RODAS v. SEIDLIN (August 31, 2011)

The Crusaders Central Clinic Association is a federally funded community health center in Rockford, Illinois that serves an underserved population. Dr. William Baxter is one of the Clinic's physicians. The Clinic also contracted with the University of Illinois College of Medicine. For a fixed annual fee, the College provided backup services. When College physicians provided services, the Clinic was authorized to collect fees from its patients. One of Dr. Baxter's patients was Gloria Rodas. In the early morning of August 2, 2001, Rodas went into labor. Dr. Baxter met her at the hospital and assumed her care. The delivery turned problematic and Dr. Baxter sought the assistance of two College physicians. They eventually delivered the baby by Cesarean section, but she died within weeks. One of the College physicians prepared a bill for her services rendered and transmitted it to the Clinic -- the other physician did not. Rodas filed a medical malpractice suit in 2003. Because of the Clinic's federal funding, it and Dr. Baxter were considered to have federal status. Rodas’ suit was against the United States in federal court under the Federal Tort Claims Act. The United States removed and substituted itself as defendant. Since Rodas had not exhausted administrative remedies, she dismissed her claims against the United States The case was remanded to state court. Rodas exhausted her administrative remedies and then amended her state court complaint, adding the United States. The United States again removed. The two College physicians moved for summary judgment under the Illinois Good Samaritan Act. Under the Act, a physician who provides emergency care in good faith without a fee is not liable for malpractice. Judge Kapala (N.D. Ill.) agreed and granted summary judgment to the physicians. After that judgment was entered, the United States moved to dismiss the case on jurisdictional grounds under the doctrine of derivative jurisdiction. The district court denied that motion. Rodas appeals.

In their opinion, Seventh Circuit Judges Bauer, Flaum, and Williams reversed and remanded. The Court first addressed the jurisdictional issue. Under the doctrine of derivative jurisdiction, a federal court lacks jurisdiction of a suit removed from state court if the state court had no jurisdiction. This is true even if the suit could have been brought originally in the federal court. The Court looked at the propriety of the removal itself. Under § 1442, the federal officer removal statute, a case "commenced" in state court against the United States may be removed. The United States (as amicus) argues that the case was not commenced against it since it was not an originally named defendant. The Court rejected that argument, relying on the plain language of the statute and congressional intent. Removal was proper if the United States was named in an amended pleading, which it was. Therefore, removal under § 1441 was proper and the derivative jurisdiction doctrine would seem to lead to the conclusion that jurisdiction does not exist. The Court looked to the Supreme Court decisions in Grubbs and Caterpillar, in which the Court distinguished between procedural defects and true jurisdictional defects. In those cases, improper removals were not discovered until after judgment was entered. In both cases, the Supreme Court concluded that jurisdiction was present in cases where procedural defects were corrected before judgment. The Court concluded that the derivative jurisdiction doctrine was not an essential ingredient of subject matter jurisdiction but was more akin to a procedural defect. That the state court lacked jurisdiction does not, therefore, defeat the federal court’s jurisdiction.
          The Court turned to the merits and the interpretation of the Illinois Good Samaritan Act. The Court first rejected the defendants' argument that, because they occupy salaried positions and received no compensation from Rodas, neither received a fee. Relying on the plain language of the statute and the dictionary, the Court concluded that services can be rendered for a fee even if the rendering physician receives no compensation directly from that fee. That concluded the matter with respect to the physician who actually submitted the paperwork to the Clinic for processing the fee. The other physician never submitted the paperwork. There was no fee at all. But the physician’s general practice was to complete the paperwork. In fact, he testified that he did not recall ever providing services without preparing the fee paperwork. The Court concluded that there was a genuine issue of fact regarding whether he acted in good faith.

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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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GEORGE v. NATIONAL COLLEGIATE ATHLETIC ASSOC. (October 18, 2010)

Tom George and the other plaintiffs took part in a basketball ticket distribution system operated by the National Collegiate Athletic Association (NCAA). They submitted applications for tickets with payment for the requested tickets and a $6.00 fee for every application. Successful applicants received their tickets – unsuccessful applicants received a refund of the ticket price. Both forfeited the fee. The plaintiffs, all unsuccessful applicants, brought suit alleging that the scheme was an unlawful lottery under Indiana law. Judge Lawrence (S.D. Ind.) found that the in pari delicto defense applied and dismissed the complaint. On appeal, the Seventh Circuit reversed (opinion and intheiropinion). The Court concluded that the in pari delicto defense did not apply. It also held that the plaintiffs alleged the elements of an unlawful lottery under Indiana law and that Indiana’s “bona fide business transaction” exception did not apply. It distinguished the Indiana Supreme Court’s approval of a similar ticket distribution system used by the Indianapolis Colts. Judge Cudahy dissented, disagreeing with the majority on each of its three conclusions. The NCAA petitioned for rehearing and rehearing en banc.

In their opinion, Circuit Judges Cudahy and Kanne and District Judge Darrah granted the petition for rehearing, vacated the earlier opinion, and certified three questions to the Indiana Supreme Court. The Court noted that the question was a close one that could have significant consequences on sports ticket distribution systems. It certified to the Indiana Supreme Court three questions: a) do the complaint allegations state the elements of an unlawful lottery, b) if a), does the NCAA system meet the “bona fide business transaction” exception to an unlawful lottery, and c) if a), are the claims subject to the in pari delicto defense.

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WICKENS v. SHELL OIL CO. (August 31, 2010)

Daniel and Pamela Wickens owned a small parcel of land in central Indiana that had previously been the site of a Shell gasoline station. During preparations for the sale of the parcel, they discovered that the soils were contaminated. Their attorney, Mark Shere, began negotiations with Shell -- under the Indiana Underground Storage Tank Act (the “Act”), a person who takes steps to remedy soil contamination caused by an underground storage tank may be reimbursed by the owner and may recover his attorneys' fees if he brings a successful suit. When a neighbor's property (also the site of a former gasoline station -- but not owned by Shell) was also found to be contaminated, the parties fought over the source and responsibility for the contamination. The Wickenses brought suit in early 2005. The district court denied Shell's summary judgment motion, concluding that it probably bore full responsibility for the contamination. Although the Wickenses continued to control the investigation and rack up remediation costs and attorneys' fees, the parties could not seem to reach a settlement. The court adopted a three month freeze on the parties' liability for each other's fees and costs in early 2007 in an attempt to foster a resolution. She also instructed the parties to select and retain an independent consultant to investigate the properties. Notwithstanding the court's order, the parties continued to incur substantial fees and costs during and after the freeze. The parties finally reached an agreement -- Shell purchased the property, made a payment for property damages, and agreed that the Wickenses were entitled to their costs and fees. They left the calculation up to the court. Judge Barker (S.D. Ind.) awarded all of the Wickenses' costs and fees up to the point of her freeze order, after which she disallowed all costs (with the exception of some corrective action costs pursuant to a state work plan) and fees. On post-judgment motions, the court a) deducted the amount of fees billed as attorney services by Shere’s wife, a non-attorney, and b) admonished Shere for concealing the fact that his fees were largely paid by an insurance company throughout the litigation but granted Shell no relief. Shell appeals. Shere (after being allowed to appear as a real party in interest) cross-appeals.

In their opinion, Circuit Judges Bauer and Wood and District Judge Kennelly affirmed in part and reversed and remanded in part. The only issues on appeal relates to the award of expert costs and attorneys' fees. The Court first concluded that the lower court correctly applied a statutory purpose test for calculating a fee award under the Act. Second, the Court ruled that the lower court did not abuse its discretion in concluding that the statutory purpose was satisfied as of January 2007. The Court rejected Shell's suggestions that an earlier date was appropriate and the Wickenses's suggestions that a later date was required. Next, the Court upheld (with a small clerical error reversed and remanded) the deduction for fees incurred by Shere’s wife. There was nothing wrong with the her time entries. They could have been billed as non-attorney time -- but were improperly billed as attorney time. Finally, the Court concluded that the district court did not clearly err in its award of expert costs after January 2007. On Shere’s cross-appeal, the Court a) found no abuse of discretion in denying prejudgment interest, b) concluded that Shell suffered no prejudice from Shere’s insurance concealment and found no error in the court's denial of relief, and c) refused to consider Shere’s complaint that the district court was unduly critical of his litigation conduct.

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BAUER v. SHEPARD (August 20, 2010)

Indiana Right to Life, Inc. sends questionnaires to judicial candidates for election or retention. The questionnaires seek information on the recipient's views on abortion. The organization filed suit challenging certain provisions of Indiana's Code of Judicial Conduct relating to the political activities of judges and candidates for judicial office. The suit was dismissed for lack of standing. In the present suit, the organization is joined by a sitting judge and a candidate for judicial office. The plaintiffs challenge five provisions of the code, four current and one which was in effect in 2008: a) the current and former rules forbidding "commitments that are inconsistent with the impartial performance of judicial office," b) the rule requiring recusal of a judge if he or she made a public statement "that commits or appears to commit the judge to reach a particular result," c) the rule limiting the partisan political activities of judges, and d) limits on fundraising. Judge Springmann (N.D. Ind.) concluded that the challenge to the earlier version of the code was moot and concluded that the challenged sections of the current code were all constitutional. Plaintiffs appeal.

In their opinion, Chief Judge Easterbrook and Judges Manion and Evans affirmed as modified. The Court first concluded that the individual plaintiffs had standing because of the threat to prosecute and the probability of future injury. Next, the Court addressed the challenge to the no-longer current section of the code. It disagreed with the lower court's finding of mootness. The code's amendment in 2009 did not eliminate the possibility of a prosecution for an earlier violation. Nevertheless, given the significant number of unlikely steps that must occur before such a prosecution, the Court concluded that the matter was not ripe for adjudication. The Court then addressed the merits of the challenge to the four current provisions in light of the Supreme Court's decision in White and the Court's own decision earlier this year in Siefert. The Court held: 1) The solicitation prohibition is fundamentally the same as the one the Court upheld in Siefert. It is not facially unconstitutional and the state should be given an opportunity to make exceptions as appropriate. 2) Although Siefert did not address political leadership roles and speechmaking, it did uphold a prohibition on public political endorsements. Its analysis led the Court to conclude that the preservation of public confidence in the judiciary is enough of a compelling interest to uphold the leadership and speechmaking prohibitions of the Indiana code. White dealt with limitations on the judge's own positions -- it did not affect precedent dealing with a judge's impact on the other elections. 3) With respect to the "commits" provision, the Court distinguished between the questionnaire, which asked for a candidate's views on certain topics and which the Supreme Court said was allowable, and the code provision, which only prohibits commitments "inconsistent with the impartial performance" of one's office. The Court did recognize some vagueness in the language. However, instead of identifying hypothetical situations in which the state may act too broadly, the Court chose to assume that the state would act reasonably and continue to refine the meaning of the provision through the administrative processes. 4) Finally, with respect to the recusal provision, the Court found no constitutional issue at all. The recusal clause does not address a judge's role as candidate -- it addresses a judge's role as public employee. Under Garcetti, a judge's speech in his role as a judge is not protected speech. Furthermore, a state has every right to allocate a court case to a judge whose impartiality is not open to debate.

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FUSION CAPITAL FUND II v. HAM (August 2, 2010)

In 2004, Sutura, Inc. was a privately-held medical device manufacturer in search of new equity capital. Millenium Holding Group was an insolvent publicly-held company with no business and few assets. The companies entered into a merger agreement under which Sutura was to merge into the Millenium shell followed by a name change of the shell back to Sutura (known as "going public by the back door"). Fusion Capital Fund II agreed to provide equity capital for the new enterprise. Fusion agreed with Millennium to invest $15 million, conditioned on the consummation of the merger. When the merger was not consummated by October of 2004, Fusion withdrew. Sutura terminated the merger agreement. Millennium brought suit against Fusion in Nevada for tortious interference with the merger agreement. Fusion prevailed. Fusion then brought suit in Illinois for its attorney's fees in defending the Nevada suit. Fusion added as defendants Richard Ham and Carla Aufdenkamp, Millennium's sole board members and majority shareholders. Judge Shadur (N.D. Ill.) found for Fusion and awarded $1.2 million. He also found the shareholders personally liable. Ham and Aufdenkamp appeal.

In their opinion, Chief Judge Easterbrook and Judges Posner and Kanne reversed. Under Nevada law, a shareholder or director is not liable for a debt of the corporation unless it acts as its alter ego. The statutory alter ego test has three parts: a) the person must influence and govern the corporation (Ham and Aufdenkamp concede this point), b) there must be a unity of interest (the Court found this point amply supported), and c) adherence to the corporate fiction would "sanction fraud or promote a manifest injustice." It is on this third point that the Court found error in the district court's analysis. There was no fraud. As the Court put it, Fusion always knew that Millennium was a "husk without any corn inside." In fact, it was Millennium's financial position that made the merger attractive. The more advisable course of action for Fusion would have been to get a personal guarantee from the shareholders -- and they did not even ask for one. The district court relied on the questionable financial maneuverings between Millennium and Ham and Aufdenkamp. But none of that made any difference to Fusion.

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GEORGE v. NATIONAL COLLEGIATE ATHLETIC ASSOCIATION (July 16, 2010)

The National Collegiate Athletic Association (NCAA) sponsors annual championship tournaments in several sports, including men's basketball. The NCAA uses a ticket distribution system for many of those tournaments. For example, in the 2009 men's basketball championship tournament, a person who wanted tickets to the final games of the tournament was required to submit an application, advance the cost of any tickets desired, and include a $6.00 nonrefundable fee. The NCAA selected the "winners" at random. It returned to the others the amount advanced for the tickets. It kept the fees from all entries. Several non-winning applicants brought a class action against the NCAA. They allege that the distribution system is a lottery in violation of Indiana law. The complaint also includes claims for unjust enrichment, civil conspiracy, monies had, and violations of the Indiana Deceptive Consumer Sales Act. Judge Lawrence (S.D. Ind.) dismissed the complaint with prejudice. Plaintiffs appeal.

In their opinion, Circuit Judges Cudahy (dissenting) and Kanne and District Judge Darrah reversed and remanded. The Court looked to Indiana law for the elements of a prohibited lottery. There are three: a prize, an element of chance, and consideration. The Court concluded that plaintiffs had sufficiently alleged each of the three elements. In the process, the Court distinguished Lesher, an Indiana court of appeals case. Lesher held that a professional football season ticket distribution scheme did not constitute an unlawful lottery. Here, the prize element is met by the allegation that the tickets are actually more valuable than their face price, an allegation made but not established on summary judgment in Lesher. The chance element is obvious from the random drawing aspect of the distribution scheme. The Court rejected, at this motion to dismiss stage, the NCAA's argument that there may be times when no chance is involved (for example, if the demand for tickets does not exceed the supply). The consideration element is supplied by the allegation that the NCAA keeps the handling fee for every entry. The Court rejected the NCAA's argument that the "bona fide business transactions" exception to the Indiana gambling statute applied. It concluded both that the ticket distribution scheme was not a "bona fide business transaction" and that, in any event, the exception only applies to gambling, not to lotteries. Finally, the Court addressed the principle of in pari delicto. The Lesher court noted that it would have used the concept to dismiss the lottery count, concluding that the plaintiffs were equally at fault for participating in the scheme. Here, the Court first noted that the Lesher statements were dicta but then concluded that the complaint's allegations were that the plaintiffs participated unwittingly. Since all of the counts of the plaintiffs' complaint incorporated and relied on the lottery count, the Court reversed as to all counts.

Judge Cudahy dissented. He concluded that the case was fundamentally indistinguishable from Lesher. He cited several reasons for affirming the district court: a) that the nonrefundable nature of the fee (the primary Lesher distinction) did not elevate the scheme to a lottery, b) that the in pari delicto logic of Lesher was persuasive and should be applied to the plaintiffs, c) that the fact that scarce tickets might command a resale price higher than face price is irrelevant, and d) that the NCAA's conduct fell within the "bona fide business transaction" exception.

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FMS, INC. v. VOLVO CONSTRUCTION EQUIPMENT NORTH AMERICA, INCORPORATED (March 4, 2009)

In 1997, FMS and Samsung entered into a dealer agreement under which FMS was authorized to sell Samsung construction equipment in Maine. The next year, Samsung sold its construction equipment business to Volvo. Volvo acquired the division, the factory, the design, and the franchise relationships -- but not the name. It was only authorized to sell under the Samsung name for three years. Volvo did manufacture and sell equipment under the Samsung name. In short order, however, it redesigned the equipment and rebranded it with the Volvo name. It then terminated the agreements with most of the Samsung dealers. FMS and other dealers brought an action against Volvo, alleging a breach of contract and wrongful termination. The District Court granted summary judgment to Volvo. On appeal, the Seventh Circuit affirmed in large part but reversed with respect to FMS's Maine franchise law claim. The Court held that there was a genuine factual dispute about whether Volvo had "good cause" under the Maine statute to terminate the franchise. On remand, a jury found for FMS. Volvo appeals.

In their opinion, Judges Flaum, Rovner and Sykes reversed and remanded. The court first considered the Maine franchise law. That law requires "good cause" for a manufacturer to terminate a franchisee. A manufacture’s discontinuation of the production of the franchise goods constitutes good cause under the statute. Volvo argued that it's redesign and rebranding of the equipment constituted a discontinuation of the franchise goods. The Court turned its analysis to the statutory definition of “franchise goods.” It found that the definition centered on the grant of a license to use a trademark or trade name. Considering that definition in conjunction with the dealer agreement, which defined the target of the franchise to be “all Samsung construction equipment,” the Court concluded that the contract only covered equipment that was branded Samsung. The Court then addressed whether the contractual inclusion of "later improved or superseding models" in its definition of “product” was enough to include the Volvo equipment. The Court cited the contract interpretation principle that when a contract refers to items “including” other items, the latter must be a subset of the former. It therefore concluded that that phrase included only later models that were branded Samsung. Concluding that the franchise covered only Samsung branded equipment, the Court had little difficulty in finding that Volvo met the good cause requirement when it discontinued the production of Samsung-branded equipment. Volvo is therefore not liable for improper termination under the Maine franchise statute and was entitled to summary judgment in its favor.

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