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

TRUSTMARK INSURANCE CO. v. JOHN HANCOCK LIFE INSURANCE CO. (U. S. A.) (January 31, 2011)

Trustmark Insurance Company agreed to reinsure certain risks underwritten by John Hancock Life Insurance Company. Their agreement contained a broad arbitration clause. When a dispute arose regarding one of the agreement's exclusions, the companies submitted it to arbitration. The arbitration panel consisted of one person selected by each company and a third person selected by the first two. The panel's award, which was affirmed by district court, supported Hancock. The parties entered into a confidentiality agreement that precluded them from discussing the proceedings or the award. When Trustmark refused to pay, Hancock instituted a second arbitration. Hancock named as its arbitrator the same person who had arbitrated the earlier dispute. The other two arbitrators were not involved in the earlier dispute. After the panel decided that it could consider the evidence and result from the first arbitration, but before it addressed the merits, Trustmark brought suit. It sought to enjoin any further arbitration while Hancock's chosen arbitrator remained on the panel. Its position was that the arbitration clause required "disinterested" arbitrators and that Hancock's arbitrator was not disinterested because of his knowledge of and participation in the first arbitration. Trustmark also argued that the panel could not interpret the confidentiality agreement from the first arbitration because that agreement did not contain its own arbitration clause. Judge Zagel (N.D. Ill.) issued the injunction. Hancock appeals.

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THE NATIONAL SPIRITUAL ASSEMBLY OF THE BAHÁ’ÍS OF THE UNITED STATES OF AMERICA UNDER THE HEREDITARY GUARDIANSHIP v. NATIONAL SPIRITUAL ASSEMBLY OF THE BAHÁ’ÍS OF THE UNITED STATES OF AMERICA (November 23, 2010)

The Bahá’í faith dates back to Persia and the mid-19th century. Its original group of followers in the United States formed the National Spiritual Assembly (the "Assembly") in 1909. In 1964, a group led by Charles Remey split off from the Assembly because of a disagreement over the line of succession. That group formed the National Spiritual Assembly Under the Hereditary Guardianship (the "Guardianship"). The Guardianship brought a lawsuit against the Assembly in the Northern District of Illinois. The suit sought possession of the Assembly's properties, including its magnificent house of worship in Wilmette, Illinois. The Assembly counterclaimed for trademark infringement and unfair competition. The district court held for the Assembly, finding that it was the highest authority for the Bahá’í Faith in the United States and was entitled to the exclusive use of its marks. In 1966 , the court entered an injunction prohibiting the use of the Assembly's marks by the Guardianship. The Guardianship dissolved shortly thereafter. Forty years later, the Assembly returned to court seeking contempt sanctions against the several individuals and organizations: a) Joel Marangella, who was Remey's assistant and actively involved in the Guardianship, but who later split off from Remey and organized several religious assemblies, including the Provisional National Bahá’í Council (the "Council") b) Franklin Schlatter, who was a founder, officer, and active member of the Guardianship, but who also later joined the Council, c) the Council, and d) two organizations created by Dr. Leland Jensen (Jensen served at one time as a Guardianship Board member but was no longer active in the organization at the time of the earlier litigation), one of which handles administrative matters and the other of which publishes books regarding the Bahá’í faith. After a thorough evidentiary hearing, Judge St. Eve (N.D. Ill.) concluded that the respondents were not in privity with the Guardianship and were thus not bound by the injunction. In so holding, she expressly rejected the Merriam decision from the First Circuit. The Assembly appeals.

In their opinion, Seventh Circuit Judges Bauer, Manion, and Sykes affirmed. The Court first commented briefly on the content of the original injunction. A few years after it was entered, the Supreme Court decided Presbyterian Church, in which it stated that a civil court could decide church property claims based on "neutral principles of law," but could not resolve underlying disputes over doctrine. The Court found certain aspects of the original injunction in tension with Presbyterian Church. Although the content of the injunction was not under review, the Court stated that it would proceed with some sensitivity to the constitutional issue. On the merits, the principal issue was whether the respondents, all non-parties to the original litigation, were nonetheless bound by the terms of the injunction. The general rule is that one is not bound by a judgment in litigation in which one is not a party. One exception is for a party's officers or agents. But that exception only applies when they act in their official capacities. Since the Guardianship dissolved decades ago, that exception cannot apply. Another exception applies to people acting in concert with a bound party. On the facts in this record, the exception also is not implicated. Finally, there is an exception for those in "privity" with a bound party. Although there is no hard and fast rule for what constitutes privity, the Court emphasized that the doctrine is bound by due process and it is restricted to those so closely tied with bound parties that it is reasonable to conclude that their interests were represented in the original litigation. The Court identified two categories of parties in privity -- successors in interest and those "legally identified" with a bound party. The two principal authorities on "legally identified" are Judge Hand's decision in Alemite and the First Circuit's decision in Merriam. The district court declined to follow Merriam because of a perceived tension with Alemite. The Court disagreed, concluding that the opinions could be reconciled. While Alemite's conclusion was that a salesman was not bound by an injunction issued against his corporation, the court recognized that a class of persons that are legally identified with the bound party could be bound. In Merriam, the court held that a key employee could be bound if there is a very close identity of interest combined with significant control in the organization and an involvement in the underlying litigation. Although the Court concluded that the district court erred in not following Merriam, it ultimately concluded that the court reached the right result. The Merriam inquiry includes factors such as a person’s position and degree of responsibility in a corporation, the person's participation in the original litigation, and the similarities between the activities of the bound party and the respondent. Here, with respect to Marangella, Schlatter, and the Council, the Court identified the significant dissimilarities between the activities of the Council and those of the Guardianship. Although Marangella and Schlatter participated in the Guardianship to varying degrees, they broke off and formed a new organization that was not a mere continuation of the old. In fact, the district court found a "robust doctrinal divide" between the organizations. They should not be considered "legally identified" with the Guardianship. Next, with respect to the Jensen organizations, the Court focused on Jensen's disassociation from any active governing role in the organization before the injunction was issued. Thus, Jensen does not even satisfy the “key employee” prong of the Merriam test. Finally, the Court rejected the argument that a trademark registration filing that claimed a path of successorship from Remey to the current president of Jensen’s organizations established legal successorship so as to bind those organizations. There was no evidence of any link between Remey and the organizations other than the filing.

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FTC v. TRUDEAU (August 27, 2009)

Kevin Trudeau is an author and a marketer, particularly in the medium of infomercials. In that capacity, he has dueled with the FTC for years. The parties entered into a Consent Order in 2004. The order, in part, prohibited Trudeau from using infomercials to advertise a product. An exception to the prohibition was that Trudeau could market publications as long as the infomercial did not misrepresent the content of the publication. The Consent Order bought a few years of peace, until 2007. That all changed with the publication of his book, Weight Loss Cure. The weight-loss program contained in the book prescribes, in part: organic six meals/day diet, enema-like procedures performed by specialists, daily hormone injections, avoidance of any medications and a host of other dietary and lifestyle restrictions. Trudeau began appearing in infomercials touting the book. He called the program “easy,” “simple,” and said that it could be completed in the home. He failed to mention many of the restrictions. The FTC sought a contempt finding against Trudeau for violating the Consent Order. The district court agreed. The FTC sought a sanction of $46 million to reimburse the purchasers of the book and a modification of the Consent Order to require a performance bond before any further infomercials. The court instead required Trudeau to disgorge $5 million in profits and banned him completely from infomercials for three years. On an FTC motion to correct a mathematical error, the court increased the monetary sanction to $37 million. Trudeau appeals.

In their opinion, Judges Ripple, Manion and Tinder affirmed in part but vacated and remanded with respect to the sanctions. On the merits of the contempt finding itself, the Court upheld the district court. It concluded that Trudeau had agreed not to misrepresent the content of the book, that he had misrepresented it in numerous ways, that the fact that the book itself described the program as “easy” did not excuse the misrepresentations, and that many of his statements were patently false. The Court then addressed the remedies. With respect to the $37 million, the Court noted that it had to be a civil, rather than a criminal, sanction since the proceedings did not have criminal sanction protections. Although a criminal sanction can simply be a fine, a civil sanction must either compensate the complainant or coerce future conduct. If the latter, it must afford an opportunity to purge. The Court concluded that the sanction was not coercive – therefore, it had to compensate. But here, the court below did not describe how it reached the figure or what was to happen to the money. The Court concluded that the court’s failure to describe the methodology it used, to adequately substantiate the award with factual findings, and to address the administration of the funds required remand. The Court deferred to the lower court on remand the exact particulars of both the methodology for computing the award and the method of distribution. The Court also rejected Trudeau’s request for additional procedural safeguards on remand. Finally, with respect to the infomercial ban, the Court concluded that it was a coercive, rather than compensatory, civil sanction and it could not stand without an opportunity to purge.

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UNITED STATES v. APEX OIL CO. (August 25, 2009)

Years ago, a corporate predecessor of Apex Oil Co. owned a refinery near Hartford, Illinois. According to the EPA, the operation of the refinery contributed to the contamination of the groundwater in the area. The United States brought an action, pursuant to the Resource Conservation and Recovery Act (RCRA), for an injunction to require Apex to clean up the site. Apex argued that its earlier discharge in bankruptcy relieved it of any cleanup obligation. The district court issued the injunction. Apex appeals.

In their opinion, Judges Cudahy, Posner and Kanne affirmed. The Court identified the principal issue on appeal as whether the government's claim for the injunction was discharged in bankruptcy. Under the bankruptcy laws, the Court stated that a debtor is discharged from any "liability on a claim." A "claim" is further defined as a "right to payment" or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment." The Court concluded that the natural reading of the bankruptcy provision is that an equitable claim is dischargeable if the holder can obtain a money judgment in lieu of the injunction under certain circumstances. Here, however, the statute under which the government sought the injunction (RCRA) does not authorize any form of money judgment -- the only remedy available to the government is a cleanup order. The fact that the cleanup order would require a significant payment by Apex did not convert the injunction into a money judgment. The Court distinguished the Supreme Court's opinion in Kovacs. In Kovacs, the plaintiffs were seeking money from the debtor. Apex also challenged the injunction itself on vagueness grounds. The Court actually agreed that the injunction was vague and that it has in the past insisted on compliance with the requirement that an injunction describe in some reasonable detail the acts required. However, the Court concluded that that policy applies when compliance with the rule is feasible. Here, the subject of the injunction is a complicated refinery remediation. In such cases, more leeway is necessary.

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UNITED STATES v. BENSON (April 6, 2009)

William Benson claims to believe that the 16th Amendment to the United States Constitution was never properly ratified and that, as a result, the federal income tax system is unconstitutional. Benson has written a book on the subject and promotes and sells a package of materials that he claims will allow citizens to refuse to file federal income tax returns and still avoid liability as a result. The United States brought an action against Benson in federal court pursuant to 26 U.S.C. § 6700. The United States sought an injunction preventing Benson from promoting and selling his tax avoidance materials and also sought a list of Benson's customers. The district court enjoined Benson from promoting and selling his package of materials but declined to order him to produce a list of his customers. Benson and the United States appeal.

In their opinion, Judges Bauer, Ripple and Evans affirmed in part, reversed in part and remanded. The Court affirmed the lower court's grant of injunctive relief. The Court first concluded that Benson's activities fit within the broad definition of a § 6700 "plan." Second, the Court concluded that Benson knew or should have known that many of the statements included in the materials were false. Finally, the Court concluded that the statements were material because they could have a substantial impact on a person's decision to purchase his package of materials. Next, the Court concluded that the United States met the injunctive relief threshold contained in the statute. Considering the totality of the circumstances, the court relied on the facts that Benson's violation was not isolated and that he was not likely to stop without the injunction. With respect to Benson's First Amendment claim, the Court concluded that the language of the injunction was specific enough to prohibit only false or deceptive commercial speech -- -- speech not protected by the First Amendment. Benson is still free to encourage political action, communicate a political message, and otherwise share his views about the 16th Amendment or the federal tax system. The Court reversed the lower court with respect to its decision on the customer list. A district court has the authority to issue orders that may be necessary for the enforcement of the tax laws. The Court noted that such an order would not harm Benson but would serve the public interest by allowing the government to both warn Benson's customers of the falsity of his claims and also to enforce the income tax laws of the United States.

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HEITMANN v. CITY OF CHICAGO (March 25, 2009)

The City of Chicago and the police officers' union have agreed to a procedure for police officers to take compensatory time off in lieu of overtime pay. Under the Fair Labor Standards Act, a public employee who has accrued compensatory time off and has requested to use it is permitted to "use such time within a reasonable period after making the request if the use of the compensatory time does not unduly disrupt the operations of the public agency." Several officers with accumulated compensatory time off brought a suit against the City. They contend that they should be allowed to take a particular days of their own choosing unless their absence at that time would result in a shortage of available officers. Conversely, the City contends that it is the department's choice. In their view, an officer may submit a generic request for compensatory time off. The City then decides what days, if any, to allow. The magistrate judge below concluded that the City had no set procedure. The lack of procedure failed to ensure the rights of the officers. He issued a detailed injunction specifying the process the City must use in response to future applications. The City appeals.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Williams vacated the injunction and remanded. As an initial matter, the Court noted that the Fair Labor Standards Act only allows injunctions in suits by the Secretary of Labor and only when the remedy at law is inadequate. Here, any failure of the City to honor the officers' time off rights is compensable by money. The unavailability of an injunction, however, does not mean that the officers are not entitled to a remedy. The Court concluded that the statutory language was not clear and included such open-ended words as "reasonable" and "undue." But the Court looked to an agency regulation that does address the issue. The agency's approach is not unreasonable and is thus entitled to deference under Chevron. The regulation defines "reasonable period" and "unduly disrupt" - and it does so in the same way that the officers do. The Court vacated the injunction and remanded for an award of non-injunctive relief to be determined by the magistrate judge.

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