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

ATA AIRLINES v. FEDERAL EXPRESS CORP. (December 27, 2011)

The Department of Defense maintains what is known as the Civil Reserve Air Fleet. The Fleet is actually a group of commercial air carriers who commit to provide aircraft in the event of a national emergency. The carriers are not compensated for these commitments directly but are given points that are valuable in competing for the Department's non-emergency needs, for which the commercial carriers are compensated. Commercial carriers formed teams for the purposes of bidding to be included in the Fleet. FedEx is the leader of one of those teams which, prior to 2008, included ATA Airlines. Three one-year contracts among the team members defined their relationship. They allocated the non-emergency business, they fixed commission rates, and they identified each team member's emergency commitment, among other things. The team also entered into a three-year "agreement" that distributed business among the team members. That agreement was more a planning document than a contract since the Department accepted bids on an annual basis and the team members could change on an annual basis. The 2006 three-year letter agreement (effective for the 2007 - 2009 Fleet years) allocated half of the team's non-emergency business to ATA. The 2008 one-year contracts reduced ATA's allocation. FedEx then decided to drop ATA from its team, effective 2009. ATA withdrew from the team in mid-2008, went into bankruptcy, and filed a breach of contract claim against FedEx. ATA obtained a jury verdict of over $65 million. FedEx appealed. ATA filed a conditional cross-appeal from Chief Judge Young's refusal to allow it to present a $28 million promissory estoppel claim.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Posner and Wood reversed. Particularly when a contract involves sophisticated commercial entities and a lot of money, the doctrine of indefiniteness renders a contract unenforceable when a crucial term is omitted and it cannot be provided through interpretation. Under the doctrine of indefiniteness, the three-year letter agreement was unenforceable. The Court noted a number of terms that were missing, most significantly FedEx's compensation for acting as team leader. That number was negotiated annually, giving consideration to the facts and circumstances at the time. Given its reversal of the jury verdict, the Court turned to ATA's conditional promissory estoppel claim cross-appeal. First, it rejected FedEx’s assertion that the Airline Deregulation Act preempted the claim. The Act deals with state's regulatory policies, not private undertakings, and does not preempt a promissory estoppel claim. Next, the Court addressed the merits. A promise is enforceable under the doctrine of promissory estoppel if a promisee reasonably relied on it and incurred a cost and the promisor should have reasonably so anticipated. The three-year letter agreement did contain a promise that ATA would receive 50% of the team's business. Given the nature of the agreement, however, the Court concluded that ATA should not have reasonably relied on that promise. It knew that the landscape could change in any year and the one-year contracts could diverge from the three-year agreement. Having decided the appeal, the Court spent more than half of its written opinion criticizing ATA's use of regression analysis to prove its damages. It specifically alerted district court judges to their obligations to evaluate expert testimony even to the point of appointing a neutral expert, if necessary.

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PEARSON v. VOITH PAPER ROLLS, INC. (August 25, 2011)

Voith Paper Rolls terminated Kenneth Pearson's employment after 14 years on the job. Because Pearson had a potential age discrimination claim against the company, Voith offered to negotiate a severance package with a release. Joseph Booth, Voith's Human Resources Manager and the administrator of the its Pension Plan, conducted the negotiations. At the negotiations, Booth provided Pearson with his benefit calculations and gave him a benefit election form with five options. One option was a lump-sum payment -- the other four options were different variations of payments over time. Unfortunately, the calculations were not entirely accurate. The lump-sum option was stated correctly but the other four options overstated Pearson's pension benefits. Pearson negotiated his severance package with the understanding, based on the inaccurate calculations, that he would receive a monthly pension benefit in excess of $1150. Pearson signed a severance agreement and made his pension benefit election. When the company re-checked the calculations, it caught the error and sent Pearson a new election form with the corrected numbers. The numbers on his option of choice declined from $1150 to approximately $700. Pearson brought suit against the Plan for promissory estoppel. Judge Griesbach (E.D. Wis.) granted summary judgment to the plan, concluding that the Seventh Circuit had never recognized a promissory estoppel claim against a single employer pension plan and that, even if it did, Pearson could not show a knowing misrepresentation, detrimental reliance, or economic harm. The court also concluded that any misrepresentation was made by the company, not the Plan. Pearson appeals.

In their opinion, Seventh Circuit Judges Rovner, Evans (who, due to his death, did not participate in the decision), and Williams affirmed. The Court decided not to resolve whether a promissory estoppel claim can lie against a defined benefit, funded pension plan. Instead, it resolved the appeal assuming that such a claim is viable. Estoppel will only lie in extreme circumstances, which are shown by a knowing misrepresentation in writing that the plaintiff reasonably relied on to his detriment. Here, Pearson fails to make that case. First, the record shows no evidence of the Plan’s intentional misrepresentation. Although Voith may have had an incentive to overstate the pension in order to negotiate a better severance package, the Plan had no such incentive. The Court refused to attribute the employer’s motivation to the Plan. Furthermore, if there was an incentive to overstate the numbers, there was an incentive to overstate all the numbers. The Court found it unbelievable that Booth would overstate four of the five options but communicate the fifth one accurately when he had no idea which option Pearson would elect. The best the evidence supports is negligence, which is not enough for a knowing misrepresentation. The Court also found no evidence of detrimental reliance. Detrimental reliance requires an economic harm. Pearson's contention that he would have achieved a better package had he known the real number is entirely speculative. Furthermore, he testified that he does not want to rescind his severance package and renegotiate it, further supporting the speculative nature of any economic harm.

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RABE v. UNITED AIR LINES (February 28, 2011)

United Air Lines hired Laurence Rabe as a flight attendant in 1993. Although United assigned her to fly out of Paris , she signed an employment agreement in Chicago. Pursuant to the terms of the agreement, she was to perform her work on United's aircraft, she was required to join the flight attendants' union in the United States, she agreed that her employment would be governed by United States law, and she agreed that only a United States court would have jurisdiction over any employment claim. Rabe transferred to Hong Kong in 1997. She was on leave between 2002 and 2005, when she returned to Hong Kong. She was fired in 2008 amid allegations that she had misused travel vouchers. Rabe brought suit pursuant to Title VII, the Age Discrimination and Employment Act, and the Illinois Human Rights Act. She alleged that the real reason for her termination was the fact that she was a lesbian. Judge Pallmeyer (N.D. Ill.) dismissed the complaint, concluding that she lacked subject matter jurisdiction because Rabe was a non-citizen working principally outside of the country. The court did not address United's argument that the claims were precluded or preempted by the Railway Labor Act. Rabe appeals.

In their opinion, Chief Judge Easterbrook and Judges Coffey and Hamilton reversed and remanded. The Court first corrected the nature of the issue. Although Title VII and ADEA generally do not protect non-citizens working outside the country, it is not because district courts lack subject matter jurisdiction. The Supreme Court, in Arbaugh, held that Title VII's minimum employee threshold is a merits question, not a jurisdictional one. That same analysis applies here. Therefore, the Court concluded that the district court should have treated United’s argument as a motion to dismiss for failure to state a claim. On that issue, the Court stated that whether Rabe was protected by the statutes was debatable. Her recent employment involved very few flights to or from the United States, but her earlier employment mostly involved United States flights. The Court also noted without deciding that the United States registration of the aircraft on which she worked might be enough to justify statutory protection. Ultimately, though, the Court concluded that United’s motion to dismiss should have been denied for other reasons. United elected to protect itself from the uncertainties associated with international employment by insisting, in the employment agreement, that Rabe's employment was to be governed by United States law. She agreed. Therefore, in addition to her colorable statutory claims, she has state law claims for breach of contract or promissory estoppel. She should have been allowed to proceed on those claims. The Court also decided to address the Railway Labor Act question, although the district court did not. It concluded that the claims were not precluded or preempted because they are not based on the collective bargaining agreement and will not require a construction of that agreement.

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R. R. STREET & CO. v. VULCAN MATERIALS CO. (June 25, 2009)

R. R. Street has been the exclusive distributor for a dry cleaning solvent manufactured by Vulcan since 1961. Street alleges that Vulcan promised, in 1992, to and indemnify and defend Street for claims brought with respect to the solvent. Several lawsuits of that type are now pending against both Street and Vulcan. Several of Vulcan's insurers, including National Union, brought suit in California for a declaration that they are not required to defend Vulcan. National Union is also Street's insurer and has been defending Street in those lawsuits because Vulcan has refused to do so. Street and National Union sued Vulcan for breach of contract, promissory estoppel and indemnity. In addition, they asserted a claim for a declaration that Vulcan must defend and indemnify Street. Vulcan moved to either dismiss or stay the case pending resolution of the California case. The district court dismissed the case pursuant to theWilton/Brillhart doctrine. Vulcan appeals.

In their opinion, Judges Manion, Rovner and Tinder reversed and remanded. The Court noted that the relief provided in the Declaratory Judgment Act is discretionary. In Wilton and Brillhart, the Supreme Court held that district courts had much discretion in deciding whether to even entertain a declaratory judgment action. It is undisputed, the Court continued, that a district court can dismiss a complaint where only declaratory relief is requested. Here, however, plaintiffs seek both declaratory and non-declaratory relief. The Court noted that it had never ruled on that issue -- although several other courts of appeal had. The Fifth Circuit holds that Wilton/Brillhart is inapplicable when a non-frivolous claim for non-declaratory relief is present. The Second, Tenth and Fourth Circuits endorse similar results. The Ninth Circuit, on the other hand, rejects a bright line rule. It first asks whether non-declaratory claims exist that are independent of the declaratory relief requested. Independent claims are those that have a separate basis for jurisdiction and that can be resolved without the declaratory relief. If these independent claims exist, at least in the Ninth Circuit, the district court has almost no discretion to refuse to entertain them. The Court, upon reflection, thought the Ninth Circuit's approach was preferable and adopted a test whereby a district court should first determine whether the non-declaratory claims are independent of the declaratory claims. The Court defined "independent claim" as one which has its own jurisdictional basis and is viable without regard to the declaratory claim. If the non-declaratory claims are independent, Wilton/Brillhart doctrine should not be applied and the court should hear the claims. A court should also retain the declaratory claims for the sake of efficiency. Here, the non-declaratory claims are independent -- the district court would have diversity jurisdiction over the claims and declaratory relief is not a prerequisite for the resolution of the claims. The district court should have retained both the non-declaratory and declaratory claims.

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CLASSIC CHEESECAKE CO. v. JP MORGAN CHASE BANK  (October 17, 2008)

Classic Cheesecake Co. (“Classic”) is a bakery that successfully generated some interest from several Las Vegas casinos and hotels in its products. It needed additional capital to fund its expansion. In July of 2004, Classic’s principals made a pitch to Dowling, a vice president at JP Morgan Chase Bank (“Bank”). After receiving documentation, Dowling assured Classic that its loan would be approved, provided that one of its principals repaid an old student loan. Dowling continued to provide assurances to Classic as late as September 19. Meanwhile, as early as August 19, Dowling’s superior at the Bank advised her that he was “still declining” the request for funds. Dowling finally advised Classic on October 12 that the loan was not approved. [These are allegations of the complaint, taken as true.] Classic brought suit under the Equal Credit Opportunity Act (“ECOA”) and for breach of contract under Indiana law. It alleged losses of more than $1 million. The district court resolved the ECOA claim in Classic’s favor (with only modest relief) but dismissed the breach of contract claim.  Classic appeals. 

In their opinion, Judges Posner, Flaum, and Evans affirmed. The Court first rejected Classic’s attempts to cast the controversy as one of simple promissory estoppel or fraud. It limited Classic to its breach of contract remedy. The Court turned to the Indiana statute of frauds. Although the statute of frauds requires that contracts to lend money be in writing, Indiana courts have created an exception. Oral agreements unenforceable under the statute of frauds will be enforced if a failure to enforce the agreement would create an “unjust and unconscionable injury and loss” that is independent of the benefit of the bargain. The Court’s task was to decide whether the allegations of Classic’s complaint could meet that standard. The task was not an easy one, given the “vague . . . and redundant” nature of the test and the relative dearth of case law. The Court explored some history of the exception to the statute of frauds:

• The California Supreme Court’s (Traynor, J.) 1950 decision in Monarco that first allowed promissory estoppel as a defense to the statute of frauds but only if “unconscionable injury or unjust enrichment” would otherwise result
• Restatement (Second) of Contracts section 139(1) which allows promissory estoppel as a defense if “injustice” is avoided but which Indiana has not embraced
• The only two cases (Madison Tool & Die and Keating) that survived summary judgment under the Indiana formula

The Court noted that Monarco contained an element of unjust enrichment but neither Madison nor Keating did. Each of the cases contained significant “reliance” losses beyond the loss of the contract bargain, but the Court said that simple reliance losses (i.e., promissory estoppel) certainly does not meet the Indiana test. The Court held that the Indiana test, a compromise between the policy behind the statute of frauds and the desire to protect reasonable reliance, requires proof of "enhanced" reliance. The common thread among Monarco, Madison, and Keating was a time factor. In each case, the reliance continued for a longer time (20, 3, and 1.5 years) than the few months at issue for Classic. The Court also observed that Classic’s reliance may not have been totally reasonable. The Court concluded that Classic did not meet the enhanced promissory estoppel test and the complaint was properly dismissed.

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