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

NATIONAL INSPECTION & REPAIRS v. GEORGE S. MAY INTERNATIONAL (April 9, 2010)

National Inspection & Repairs (“NIR”) is a trucking company located in Topeka, Kansas. When one of its employees accidentally caused its accounting systems to crash, NIR sought help from George S. May International (" May"), a business consulting firm. The parties entered into a consulting agreement. The agreement required NIR to approve any effort recommended by May. It also prohibited NIR from hiring any May employee for a year after the date of the agreement. May submitted five progress reports over the course of the three-week engagement. Each report was approved by NIR. As soon as the engagement was complete, NIR hired the May project manager as its Controller. NIR alleges that the project manager embezzled hundreds of thousands of dollars from NIR while acting as its Controller. NIR brought a breach of contract action against May. It alleged that May breached the contract by failing to "implement" its duties and for negligently hiring and supervising the project manager. The district court granted summary judgment to May. NIR appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Sykes affirmed. They Court first quickly addressed its appellate jurisdiction. The district court had dismissed without prejudice a claim brought by each of the parties, which made its order non-final. The Court noted its own precedent the lifts the jurisdictional bar when each party agrees at oral argument to treat the dismissals as with prejudice. Here, the parties were not explicit at oral argument. However, they were explicit in post-argument briefing. The Court concluded that that was sufficient to lift the jurisdictional bar. On the merits of the "failed to implement" allegation, the Court noted that NIR cannot prevail because it never pointed to a specific obligation or provision of the agreement that May is alleged to have failed to implement. On the merits of the negligent hiring claim, the Court concluded that it was NIR that in fact breached the contract by hiring the project manager. Finally, the Court addressed NIR's breach of implied warranty and negligence claims. NIR has a tort claim under Kansas law only if there is a violation of a duty imposed by law, as opposed to by agreement. Since Kansas law does not impose any duty on the parties to a consulting services agreement, there is no action for breach of a duty.

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MILLER v. HERMAN (March 25, 2010)

John Miller and his wife entered into an oral agreement with James Herman and his company to build the Millers a new home in Lakemoor, Illinois. As part of the construction, Herman purchased and installed windows made by Pella Products. According to Miller, the windows leaked from the time of their installation. Herman provided some additional caulking and Pella inspectors reinstalled one of the windows – but nothing helped. Miller filed an eight-count complaint against Herman and Pella in federal court. The federal claims were breach of warranty claims pursuant to the Magnuson-Moss Warranty -- Federal Trade Commission Improvement Act (the “Act”). In effect, the Act provides a federal forum to consumers for breach of warranty claims. Miller also pleaded state law counts for breach of contract, breach of implied warranty of habitability, common law fraud, and a violation of the Illinois consumer fraud act. Herman moved to dismiss the federal claims for lack of subject matter jurisdiction, contending that the fact that the windows were not "consumer-products" under by the Act deprived the court of jurisdiction. Pella filed a motion for summary judgment, also contending that the windows were not "consumer-products," but casting its argument as Miller’s inability to satisfy the elements of the claim as opposed to a failure of jurisdiction. Miller filed a consolidated response to the motions. The district court concluded that it lacked subject matter jurisdiction and granted the motion to dismiss. Miller appeals.

In their opinion, Judges Bauer, Manion, and Tinder affirmed, as modified, the dismissal of the federal counts and vacated and remanded the dismissal of the state law claims. The Court first addressed the jurisdiction versus merits confusion below -- whether, if the windows are not covered by the Act, the court lacks jurisdiction or the plaintiff simply loses on the merits. The Court recited the Supreme Court's "bright line" test. In Arbaugh, the Supreme Court stated that a statutory limitation should be treated as non-jurisdictional unless Congress clearly states that it is jurisdictional. The "consumer product" language in the Act is not part of the jurisdictional section or otherwise clearly treated as jurisdictional. The Court concluded that it was therefore not facing a jurisdictional limitation. On the merits, the central issue in both the motion to dismiss and motion for summary judgment is whether the windows were "consumer-products" under the Act. Finding the statutory definition both expansive and "somewhat hazy," the Court directed its attention to the FTC interpretations of the Act. It decided to give the interpretations a significant degree of deference since they were issued by the administering agency, they were issued using notice and comment procedures, they have stood the test of time, and they are based on the legislative history of the Act. The parties argued competing interpretations. Miller relied on 16 C.F.R. § 700.1(e), particularly on language that stated that construction products are "consumer products" when they are sold over-the-counter. The defendants, on the other hand, relied on 16 C.F.R. § 700.1(f), and specifically on language stating that construction materials are not "consumer products" when a consumer enters into a contract with a builder to construct a new home. Although the Court conceded that the FTC interpretations cited by the parties drew a fine line between what is and what is not a consumer product, it saw no reason to not respect the line. Following the interpretations, and the application of those interpretations by other courts, the Court concluded that the windows were not "consumer-products" within the meaning of the Act. As modified to reflect the merits rather than jurisdictional dismissal, the Court affirmed the dismissal of the federal counts. The district court dismissed the state law claims because it thought it had to, since it concluded that it lacked subject matter jurisdiction. Although the general rule is that a federal court will not retain wholly state law claims once federal claims are dismissed before trial, it is not required to. Since the district court did not even consider its authority to retain the state law claims, the Court reversed and remanded for that purpose. 

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