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

VIRNICH v. VORWALD (December 20, 2011)

Daniel Virnich was a director of Communications Products Corporation. CPC had a banking relationship with American Trust and Savings Bank. When CPC was experiencing financial difficulties in the early 2000s, the Bank asked for additional collateral or repayment and sought personal guarantees. Virnich alleges that it was at this time that the Bank's loan officer concocted a plan to damage Virnich’s reputation. He alleges that the loan officer contacted other banks, tried to instigate an FBI investigation, and conspired with Michael Polsky to act as a receiver. In fact, the Bank brought an ex parte motion for a receiver and Polsky was appointed. CPC's owners agreed to sell its assets and released Polsky and the bank. They also sought permission from the receivership court to bring a derivative action on behalf of CPC against the Bank. But Polsky, as receiver, had already brought a lawsuit against Virnich and the co-owner for breach of fiduciary duty. A jury awarded CPC over $6 million in damages, which Polsky tried to collect from Virnich. The appellate court reversed the jury verdict. Meanwhile, Virnich filed suit in federal court against the Bank, the loan officer, and Polsky for tortious interference with contract, negligence, and a violation of a Wisconsin statute which prohibits conspiracies to maliciously injure the business of another. Judge Crabb (W.D. Wis.) dismissed most of the claims on the grounds that they were derivative and should have been brought by CPC and dismissed the Wisconsin statutory claim for failure to state a claim. Virnich appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Hamilton affirmed. Under Twombly, a complaint must state a claim that is "plausible on its face." The Wisconsin statute requires allegations that the defendants acted in concert, with a common purpose, to injure Virnich's reputation or business, maliciously, resulting in financial harm. The district court concluded that Virnich failed to allege a plausible conspiracy, given that Polsky was a professional receiver and that it was not plausible that he would engage in the alleged conspiracy, and failed to allege malice. The Court disagreed. Notwithstanding Polsky's role as a professional receiver, the Court concluded that Virnich adequately alleged conspiracy. Similarly, Virnich adequately alleged that the defendants irrationally wanted to cause him harm. Therefore, Virnich adequately alleged a statutory violation. Nevertheless, the Court affirmed the district court for a different reason. Every alleged action by Polsky was taken in his role as the court-appointed receiver. Virnich had an opportunity to contest Polsky's appointment in the receivership court and he did not. When he sought leave to file a derivative action against the Bank, the receivership court concluded that he had waived that right. Under principles of collateral estoppel, Virnich is precluded from relitigating issues already litigated in the receivership court. The Court also concluded that precluding Virnich's statutory claim would be consistent with fundamental fairness, which is a necessary finding for collateral estoppel in Wisconsin.

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DEGUELLE v. CAMILLI (December 15, 2011)

Michael DeGuelle worked for S. C. Johnson & Son, Inc. in its tax department. In the early 2000s, he came to believe that the company was submitting false income tax reports to the IRS. He discussed his concerns with several others within the company to no avail. He complained to Human Resources that Global Tax Counsel Wenzel was creating a hostile work environment by instructing him to engage in what he considered illegal activity. Wenzel criticized DeGuelle for taking his complaints outside the department, even becoming physically aggressive, and gave DeGuelle a negative performance review. The tension between the two continued for months. Finally, DeGuelle indicated that he was going to file a whistleblower complaint with the Department of Labor. The company offered to pay some of his attorney's fees if he would sign a release and confidentiality agreement. He declined and filed the complaint, attaching financial documents and internal communications. He continued to press the issue internally at the company as well. He provided company counsel with a lengthy memorandum detailing his concerns. The company offered one-year severance if he resigned and signed a confidentiality agreement. DeGuelle refused. A few weeks later, the company began an investigation of DeGuelle relating to the documents he disclosed in his complaint. He was eventually terminated for disclosing company documents. The company filed suit in state court for breach of contract and for the recovery of documents. DeGuelle filed suit in federal court, alleging RICO violations, breach of contract, wrongful termination, and defamation. Judge Stadtmueller (E.D. Wis.) dismissed the RICO claims with prejudice and declined to exercise jurisdiction over the state law claims. DeGuelle appeals.

In their opinion, Seventh Circuit Judges Flaum, Kanne, and Hamilton reversed and remanded. The Court addressed the RICO pleading requirements. Under §1964(c), DeGuelle must allege that he was injured by reason of a § 1962 violation. DeGuelle alleged violations of subsections 1962(c) and 1962(d). Subsection (c) requires a "pattern of racketeering activity" allegation. Northwestern Bell requires that the alleged predicate acts of racketeering be related to each other and that there is a continuing threat. Finally, subsection (c) requires "but for" causation between the racketeering activity and the plaintiff's injury. Since DeGuelle’s alleged injuries were related only to the retaliation and since the retaliatory attacks were not themselves a pattern of racketeering activity, the Court concluded that the retaliatory activity must be related to the tax fraud activity. The Court found the district court erred in concluding that they were unrelated because they involved different people, motives, and victims. The retaliatory conduct was inherently related to the scheme that DeGuelle exposed. Specifically relying on the Sarbanes-Oxley whistleblower provisions, the Court stated that courts must examine the facts in each case to determine if the retaliation is related to the underlying wrongdoing. The Court concluded, on the record before it, that DeGuelle satisfied the Northwestern Bell test for his subsection (c) allegation. DeGuelle also alleged a subsection (d) claim. Under subsection (d), DeGuelle must allege an agreement to commit at least two predicate acts. The Court concluded that DeGuelle adequately alleged an agreement among the tax department defendants. Again, since DeGuelle's alleged injury was related only to the retaliatory conduct, the Court inquired whether DeGuelle adequately alleged an agreement between the participants in the tax fraud and the participants in the retaliation. It concluded that the complaint adequately, although sparsely, alleged that the retaliatory actors aided the tax fraud actors in concealing their conduct and thus were part of the original tax fraud conspiracy.

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VANCE v. RUMSFELD (August 8, 2011)

In 2005 and 2006, American citizens Donald Vance and Nathan Ertel were working for a privately owned security company in Iraq. They allege that: a) they came to believe that their employer was engaged in illegal activity, b) they reported their suspicions to the FBI, c) they continued to share information with American officials in Iraq, d) their employer became suspicious and confiscated their credentials, e) American officials "rescued" them and seized their personal property, and f) they were detained, physically and psychologically abused, tortured, treated inhumanely, and assaulted for weeks. They were never charged with a crime and were eventually released. Plaintiffs brought suit against former Secretary of Defense Donald Rumsfeld and other, unidentified defendants. The complaint alleged unconstitutional inhumane treatment, denial of procedural due process, and denial of access to the courts. They also brought a claim against the United States for the return of their personal property. Judge Andersen (N.D. Ill.) dismissed the due process and access claims but refused to dismiss the inhumane treatment claim or the personal property claim. Rumsfeld appeals the inhumane treatment claim -- the United States appeals the personal property claim.

In their opinion, Seventh Circuit Judges Manion (concurring in part, dissenting in part), Evans, and Hamilton affirmed in part and reversed in part. The Court first addressed the Bivens claim against Rumsfeld. It identified three issues: whether there were adequate allegations of Rumsfeld's personal responsibility, whether Rumsfeld was entitled to qualified immunity, and whether a Bivens remedy is even available to a United States citizen in a war zone. First, the Court concluded that the complaint adequately alleged Rumsfeld's personal involvement and responsibility under Rule 8 and Iqbal and Twombly. The complaint alleged, among other things, that Rumsfeld approved a list of interrogation techniques contrary to the Army Field Manual, that he directed that those techniques be used in Iraq, that he was well aware of detainee abuse generally, that he took no action in response to the Ronald W. Reagan National Defense Authorization Act's directive to ensure that detainees were treated in a humane manner, that he continued to approve interrogation techniques not authorized by the Army Field Manual even after the Detainee Treatment Act's limitations of techniques to those authorized in the manual, and that he did not investigate or correct detainee abuse. The Court found that those allegations sufficiently alleged his personal involvement in the policies that led to plaintiffs’ torture and that he was deliberately indifferent to their mistreatment. The Court turned to the issue of qualified immunity and the Saucier two-step test. The Court had little difficulty in concluding that the alleged treatment, if true, "shocks the conscience" and violates substantive due process. In fact, Rumsfeld did not really argue otherwise. Likewise, the Court had little difficulty in concluding that a reasonable United States official would have known that the alleged treatment, if true, would amount to a constitutional violation. Finally, the Court turned to the central issue -- whether Bivens allows a suit for damages by a United States citizen alleging unconstitutional treatment occurring in a war zone. The Court applied the Supreme Court's two-step test: 1) is there a sufficient alternative remedy for the wrong and 2) do "special factors" weigh against recognizing the remedy. Finding no alternative remedy, it focused on the second step. In addressing in the second step, the Court emphasized that the complaint was not a broad challenge to the country’s interrogation or detention policies. It was, instead, a narrow claim for damages. The court found its key elements familiar: a) Bivens has been used by prisoners who have asserted abuse in federal prisons, b) Bivens has been used by civilians who have asserted violation of constitutional rights by military personnel, and c) Bivens has been used against high-ranking government officials, including cabinet members. The Court rejected the defendants’ arguments that a wartime or national security environment counsel against judicial intervention. Finally, the Court emphasized the fact that plaintiffs were United States citizens and distinguished a line of cases that concluded that Bivens did not provide a damages remedy to aliens. It ultimately concluded that there were no special factors standing in the way of a Bivens remedy. With respect to the personal property claim, the Court reversed the district court. It concluded that the "military authority" exception in the Administrative Procedure Act precludes judicial review.

Judge Manion concurred in the personal property portion of the majority's opinion but dissented from the Bivens portion. Judge Manion stated that special factors counsel against applying Bivens in this context and that the majority ignored precedent to that effect and, instead, extended the principle beyond where it has ever been applied. Judge Manion was particularly sensitive to the risks posed by the judiciary getting involved in matters of national security and wartime decisions.

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IN RE: TEXT MESSAGING ANTITRUST LITIGATION (December 29, 2010)

Class-action plaintiffs assert that the four defendants violated federal antitrust law by conspiring to fix the prices of text messaging services. Over the defendants' objection, Judge Kennelly (N.D. Ill) allowed the filing of a second amended complaint. The defendants sought certification for an interlocutory appeal on the adequacy of the complaint under Twombly. The court so certified. Defendants appeal.

In their opinion, Seventh Circuit Judges Posner, Wood, and Tinder accepted the appeal and affirmed. The Court first addressed plaintiffs' argument that they not even consider the appeal because it does not involve a "controlling question of law" as required by the rules. The Court rejected that argument. Certainly the question is controlling, since an adverse decision would probably terminate the case. And, although it is not a strict question of law like the interpretation of a statute or the Constitution, it does require the interpretation and application of the Twombly legal standard. Since the development of the standard is relatively recent and its interpretation and application not yet routine, the Court granted the application. On the merits, the Court agreed with the district court that the complaint's allegations were sufficiently plausible to satisfy Twombly. The complaint does allege parallel behavior -- the kind of allegation that was found insufficient in Twombly. But it alleges more: that the four defendants control 90% of the market, that the four defendants belonged to a trade association and exchanged information, that the four defendants each increased its prices at a time of falling costs, and that the four defendants each moved from very different and complex pricing structures to a uniform approach. There is no smoking gun, no direct evidence of conspiracy, but the allegations do amount to the "parallel plus" behavior required by Twombly. The plaintiffs should be allowed to proceed with discovery.

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LABELLA WINNETKA, INC. v. THE VILLAGE OF WINNETKA (December 29, 2010)

LaBella Winnetka operated as a restaurant in Winnetka, Illinois since 1993. It occupies a leased space and renews the lease from time to time. It also has a liquor license. Each year, Winnetka sends it a renewal form. Each year LaBella completes the form and Winnetka renews the license. A fire at the building in early 2007 damaged the roof over the LaBella dining room and forced its closure. The Village refused to allow repairs to the restaurant’s interior until the roof was fixed. It also refused to allow LaBella to reopen the undamaged portion of its leased premises. At the same time, other restaurants, even one operating out of the same building, were allowed to reopen in allegedly similar circumstances. LaBella's most recent liquor license was due to expire in March of 2008. Winnetka never sent a renewal form and terminated the license went LaBella did not file for renewal. LaBella brought suit against the Village and the Village Manager, alleging a violation of its equal protection, substantive due process, and procedural due process rights. The complaint alleged that the benefits bestowed on the other restaurants came about because of their friendships with the Village Manager. Judge Kendall (N.D. Ill.) granted defendants' motion to dismiss. LaBella appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Sykes affirmed. The Court first considered the "class of one" equal protection claim. In order to state such a claim, one must allege treatment different from others "similarly situated." LaBella concedes that the restaurants that were allowed to reopen did not incur the same major fire damage as the LaBella roof. They are therefore not "similarly situated" and the equal protection claim fails. The Court next considered and rejected LaBella's substantive due process claim relating to its property interest in its lease and business. In order to prevail on that claim, LaBella had to show an independent constitutional violation or the inadequacy of state law remedies. It did neither. Finally, the Court rejected LaBella's procedural due process claims related to the liquor license non-renewal. First, to the extent the claim is based on the Village's simple failure to send a renewal form, there was no constitutional deprivation. Second, to the extent the claim is that the Village revoked the license without notice or hearing, the allegations of the complaint fall far short of even the notice pleading requirements of the federal rules. Finally, the claim fails because LaBella does not even allege that it took advantage of post-deprivation remedies or that they were inadequate.

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BAUSCH v. STRYKER CORP. (December 23, 2010)

Several days after the FDA advised the Stryker Corp. that its Trident hip replacement system’s manufacturing process was deficient, Margaret Bausch received a new hip -- a Trident. Bausch's Trident failed, she required additional surgery, and she experienced a number of medical problems. Bausch brought a negligence and strict liability suit under state law, alleging that the device violated federal law. Judge Der-Yeghiayan (N.D. Ill) granted the defendants' motion to dismiss on the grounds that the claims were preempted by federal law. The court also entered final judgment without allowing Bausch an opportunity to amend. Bausch appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Manion and Hamilton reversed and remanded. The Court first considered express preemption. Class III medical devices such as the Trident system are granted an express, but limited, preemption defense from product liability claims by the Medical Device Amendments of 1976. Citing the Supreme Court's decisions in Lohr and Riegel, the Court stated that the preemption protection applies to devices that comply with federal law and does not preclude claims based on a violation of federal law. Although expressly not deciding whether Bausch would be able to prove the allegations of her complaint that the device violates federal law, the Court concluded that the express preemption defense should not preclude her from trying. The Court also rejected the defendants' implied preemption defense under Buckman. Buckman involved an allegation of fraud on the FDA -- the Supreme Court expressly distinguished that type of claim from a traditional state court claim. Having concluded that the claims alleged were not preempted, the Court next addressed whether they were adequately stated under Iqbal and Twombly. The Court concluded that both the original complaint and the proffered amended complaint met that standard. With respect to the original complaint, although it did not specify the specific federal violation, it did provide enough information to put defendants on notice of the nature of the claim. This is particularly true in the situation here, because the victim of a defective product frequently does not know the exact nature of the defect and much information regarding Class III medical devices is kept confidential by law. The Court also concluded that the proffered amended complaint was sufficient and should not have been rejected. It provided additional factual detail as well as a clarification that Bausch was proceeding under a federal violation theory. The Court found no merit in any of the district court's rationales for denying leave to amend and cautioned district courts to allow a party an opportunity to amend after dismissal for failure to state a claim, even if the court is skeptical of the party's ability to successfully do so. 

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SWANSON v. CITIBANK (July 30, 2010)

Gloria Swanson, an African-American, brought suit against Citibank and its appraiser alleging violations of the Fair Housing Act and common law fraud. She alleged the following facts: She applied for a home equity loan at a local Citibank branch. She became suspicious that the bank was trying to discourage African-American applications when a bank representative told her she had to be accompanied by her husband (a joint owner of the property). She was also told that Citibank's loan standards were stricter than those of a competing bank which had already denied her a loan. Nevertheless, she returned the following day and completed the application process. Based in large part on Swanson's statement that the home was worth $270,000, Citibank conditionally approved a $50,000 loan. However, when an independent appraiser retained by Citibank appraised the home at only $170,000, Citibank rejected the application. Swanson later ordered her own appraisal, which came in at $240,000. Judge Zagel (N.D. Ill.) granted defendants' motions to dismiss. Swanson appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner (dissenting in part) and Wood affirmed in part and reversed in part. The dismissal gave the Court the opportunity to review the pleading standards in light of the recent Supreme Court decisions in Twombly, Erickson, and Iqbal. First, the Court noted that none of the decisions questioned the validity of Rule 8's requirement of a "short and plain statement of the claim." Nevertheless, Twombly and Iqbal referred to a "plausibility" requirement. The Court viewed that requirement as one in which a court asks if whether it could happen, not whether it did happen. Applying those principles to Swanson's allegations against Citibank, the Court concluded that her bare-bone allegations of the type of discrimination, the discriminator, and the setting of the discrimination were sufficient to state a Fair Housing Act claim. Her fraud claim, however, implicated the "state with peculiarity" requirement of Rule 9(b) and an actual damages pleading requirement. Since Swanson did not plead any damages, her fraud claim was properly dismissed. Applying the principles to Swanson's claims against the appraiser, the Court again concluded that her bare-bone allegations that the appraiser understated the value of her home because of her race stated a claim under the Fair Housing Act. The Court affirmed the dismissal of the fraud claims for the same reason as it did those against Citibank.

Judge Posner agreed with the majority's treatment of the fraud claims but dissented from their treatment of the housing discrimination claims. He believed that the complaint set out an "obvious alternative explanation" for the actions of both the bank and the appraiser. With respect to the bank, Judge Posner cited the economic downturn, the fact that Swanson had already been denied a loan by another bank, and the fact that the appraisal suggested any loan would be undersecured. With respect to the appraiser, he noted the inexact nature of the business and the fact that errors are frequently made. Iqbal teaches us that if there is an "obvious alternative" to the invidious discrimination alleged by the plaintiff, the discrimination alternative is not a plausible one.

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