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

WELLS FARGO BANK v. LAKE OF THE TORCHES ECONOMIC DEVELOPMENT CORPORATION (September 6, 2011)

Lake of the Torches Economic Development Corporation is chartered under tribal law. It operates the Lake of the Torches Resort Casino in northern Wisconsin. Several years ago, the company issued $50 million in revenue bonds in order to finance a riverboat casino in Mississippi. The accompanying indenture named Wells Fargo Bank as trustee. Under the indenture, Wells Fargo was given certain oversight powers with respect to casino revenues. Lake of the Torches also agreed to a limited waiver of its sovereign immunity with respect to lawsuits related to the bonds. The Mississippi casino investment was not a success. Lake of the Torches stopped depositing casino revenue into the Wells Fargo trust account and ultimately repudiated its $46 million bond obligation. Wells Fargo brought suit for breach of the Indenture and sought the appointment of a temporary receiver. Without any notice or hearing, Judge Randa (W.D. Wis.) dismissed the case for lack of jurisdiction. He concluded that the Indenture was a management contract under the Indian Gaming Regulatory Act, that the Indenture was not approved by the National Indian Gaming Commission as required by the Act, that the Indenture was therefore void, that the waiver of sovereign immunity was also void, and that the district court lacked jurisdiction. The court also denied Wells Fargo's request for leave to file an amended complaint asserting claims under the bond documents only. Wells Fargo appeals.

In their opinion, Seventh Circuit Judges Flaum, Ripple, and Evans (who, as a result of his death, did not take part in the decision) affirmed in part and reversed and remanded in part. The Court first addressed its jurisdiction, given that the defendant was a tribal Corporation. It noted that most courts agree that Indian tribes themselves are not citizens of any state for diversity purposes. However, the 9th and 10th Circuits have held that a tribal Corporation is the equivalent of a Corporation created under state law. The Court agreed and concluded that there was no reason to treat a tribal Corporation that engages in commerce differently than its non-tribal counterparts. Turning to the merits, the Court noted that Congress passed the Act in 1988 to provide a comprehensive framework for tribal gaming. The Act requires that any management contract entered into by a tribe for the operation and management of the casino must be reviewed and approved by the Commission Chairman. Failure to do so renders the contracts void. The principal issue on appeal is whether the Indenture is a management contract under the Act. Unfortunately, the term is not defined in the statute. The Court turned to the language and overriding purpose of the Act. Although it conceded that some of the Act's provisions seemed directed at the more traditional management contracts, in which a third-party actually operates the facility, it also found some provisions that seemed to apply more broadly. Ultimately, the Court could find no strong indication that Congress intended to limit the breadth of the term. The Court also looks to statements from the Commission and from its Acting General Counsel, even recognizing that they were not entitled to any particular deference. In the end, it was clear to the Court that Congress was not simply concerned with traditional management contracts but was concerned about any agreement that allowed for some influence in management decisions. Examining the Indenture Agreement in that light, the Court concluded that it was a management agreement under the Act. In doing so, the Court focused on certain indenture provisions that gave Wells Fargo control over the trust account, limited capital expenditures, and allowed, in certain circumstances, the bond holder to retain experts to make recommendations concerning casino operations. The Court also concluded that the regulatory framework did not allow for reformation of the Indenture and removal of any offending provisions. The district court erred, however, in denying Wells Fargo leave to amend. It is premature, on the face of the complaint, to conclude that the bond documents are collateral documents under the Act or that the sovereign immunity waivers contained in those documents are also void as part of the same transaction. The Court remanded to allow Wells Fargo an opportunity to file an amended complaint.

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STATE OF MICHIGAN v. UNITED STATES ARMY CORPS OF ENGINEERS (August 24, 2011)

The Chicago Area Waterway System is a system of canals and channels with locks and dams in northeastern Illinois. The System links Lake Michigan with the Mississippi River. Although it has been a boon to commerce, tourism, transportation, and public health, it has created some problems. Two particular species of carp that could wreak monumental ecological damage to the Great Lakes have migrated up the Mississippi River and have entered the System. The Army Corps of Engineers and the Metropolitan Water Reclamation District of Greater Chicago have taken and are taking many steps to prevent the carp from reaching the Great Lakes. But the States of Michigan, Minnesota, Ohio, Pennsylvania, and Wisconsin filed suit under the federal common law of nuisance and § 702 of the Administrative Procedure Act, alleging that the Corps and the District are not taking sufficient steps to avert the potential crisis. Judge Dow (N.D. Ill.) denied the plaintiffs' motion for a preliminary injunction. The States appeal.

In their opinion, Seventh Circuit Judges Manion, Wood, and Williams affirmed. The Court first stated the familiar elements needed for a preliminary injunction: likely to succeed on the merits, likely to suffer irreparable harm, the harm without an injunction is greater than the harm an injunction would impose on the defendants, and the injunction is in the public interest. The Court first addressed likelihood of success and expressed its disagreement with the district court's assessment of that as "modest." The Court concluded that the federal common law of nuisance applied to the State's allegations, rejecting defendants' arguments that it did not apply because either the defendants were not physically moving the fish themselves or that the allegations did not involve a traditional pollutant. The Court briefly addressed, without deciding, the underdeveloped argument that a federal common law of nuisance claim it does not stand against the United States. Although it found that excluding such claims would be consistent with the origins of the tort, it also questioned why the claim could not lie against the United States as an owner of a dam or other facility that might create a nuisance. In any event, given its ultimate conclusion, the Court proceeded on the assumption that the claim was appropriate. Next, the Court addressed the Corps' claim of sovereign immunity and concluded that APA § 702 waives sovereign immunity for these declaratory and injunctive claims. The Court moved to the defendants’ displacement doctrine argument. That doctrine addresses the relationship between the courts and Congress and provides that the exercise of federal common law by the courts in an area is no longer necessary once Congress addresses the question. The question presented here is whether Congress has done enough to displace the common law. In Milwaukee I, Supreme Court said that Congress had not displace the federal common law even though it had enacted several laws touching upon the subject matter. In Milwaukee II and American Electric Power, however, the Supreme Court held that more comprehensive legislation in the areas did displace the federal common law. Here, although the Court recognized some Congressional activity (for example, the National Invasive Species Act) in the area, it concluded that it fell far short of the comprehensive schemes in Milwaukee II and American Electric Power and did not displace the federal common law. The Court turned to the actual evidence presented by the plaintiffs on their claim and considered whether the identified activity was a nuisance and whether it was sufficiently threatening to require equitable relief. Although the Court found little error in the district court's factual findings that the potential for harm was significant, it disagreed with its conclusion that the risk of that harm occurring was not sufficient to warrant injunctive relief. The Court noted that the magnitude of the potential harm was tremendous, that it was increasing, and that it probably could not be undone if once it occurred. It therefore gave the benefit of the doubt to the plaintiffs that the risk was imminent and concluded that they satisfied the likelihood of success element needed for a preliminary injunction. With respect to plaintiffs' likelihood of success on its APA claim, the Court concluded that that claim was co-extensive with the federal common law claim and need not be addressed separately. The second element required for a preliminary injunction is irreparable harm. The Court concluded that plaintiffs met their burden of showing irreparable harm, relying on much the same evidence relevant to the likelihood of success element. Again, it concluded (as, apparently, did the parties) that the harm, if it occurred, would be genuinely irreparable. And again, given the severity of that harm, it gave the States the benefit of the doubt on the degree of risk that the harm would actually occur. The Court turned to the balancing of harms -- comparing the harm that would occur in the absence of an injunction with the harm an injunction would impose on the defendants. It concluded that the harm to the defendants in the event the injunction issued substantially outweighed any benefit to the plaintiffs for two reasons. First, it evaluated the specific requests for relief individually and found substantial problems inherent in the requests. Some of the requests provided little benefit at significant cost. At least one of the request was already under study by the Corps. Simply put, the record did not establish that the requested relief would do much to address the problem and, to the extent it would, it created other risks. It compared that "benefit" with the harm an injunction would impose on the defendants. It concluded that it would impose significant cost, it would increase the risk of flooding, it would negatively impact commercial and recreational boating, and it would interfere with police and fire protection services on the Chicago River. Second, the Court concluded that an injunction would interfere with the ongoing efforts of the federal and local agencies already addressing the problem. Federal courts, it said, should tread carefully when federal and state agencies, expert in the area, are already addressing a problem. In concluding that the district court did not abuse its discretion in denying injunctive relief, the Court emphasized that the landscape could change at any time. New evidence is being developed on an almost daily basis and the agency response is subject to political pressures and budgets. Any significant change in that landscape could be grounds for the district court's re-examination of the issue.

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BOARD OF REGENTS OF THE UNIVERSITY OF WISCONSIN SYSTEM v. PHOENIX INTERNATIONAL SOFTWARE (August 5, 2011)

Phoenix International Software and the University of Wisconsin each registered the mark CONDOR with the Patent and Trademark Office. Phoenix has used the mark since 1978 and registered it in 1997. Wisconsin registered its mark in 2001. Each mark refers to computer software, although the Phoenix system is designed principally for mainframe systems and the Wisconsin system is designed principally for individual computers. Phoenix petitioned theTrademark Trial and Appeal Board to cancel Wisconsin's mark on the ground that it creates confusion. The Board granted the petition and canceled the mark. Wisconsin challenged the Board's decision by filing an action in federal district court. Phoenix counterclaimed for trademark infringement and false designation of origin. Judge Crabb (W.D. Wis.) reversed the Board’s determination on Wisconsin's motion for summary judgment and also dismissed Phoenix's counterclaims on sovereign immunity grounds. Phoenix appealed.The Seventh Circuit reversed and remanded that part of the district court's judgment granting summary judgment on the trademark dispute but affirmed the district court (with Judge Wood dissenting) with respect to its finding that the university was entitled to sovereign immunity. Phoenix petitioned for rehearing.

In their opinion, Seventh Circuit Judges Flaum, Wood, and Tinder granted the petition for rehearing limited to the sovereign immunity question, reaffirmed its earlier ruling reversing summary judgment, and also reversed the district court on its finding of sovereign immunity. Although the rehearing was limited to the sovereign immunity issue, the Court did readdress the summary judgment issue. It concluded, as it had done earlier, that the district court erred when it granted summary judgment to the Board of Regents, particularly in light of the TTAB finding and the standard of review. The central question is whether customers are likely to be confused. The TTAB applied the correct standard and looked at the right factors. The district court was wrong when it criticized the TTAB be for considering the actual nature of the products and it was also wrong when it focused so heavily on the registration materials themselves. The TTAB gave three reasons for canceling Wisconsin's mark: they were identical, they performed similar functions, and a sophisticated purchaser would likely believe that there was some relationship between them. Although Wisconsin put on additional evidence challenging these conclusions, it was not sufficient to eliminate any fact issue. The Court turned to sovereign immunity. Although the Eleventh Amendment confers immunity upon a state, it is not absolute. First, Congress can authorize suits against states. Although Phoenix's counterclaims did rely on statutes in which Congress subjected states to liability, the Court doubted that either would survive a constitutional challenge. The Supreme Court has already struck down provisions for state liability in the false advertising and patent infringement areas. Second, a state may voluntarily waive sovereign immunity by its litigation conduct. In Lapides, the Supreme Court held that Georgia waived its sovereign immunity when it removed to federal court a complaint that had been filed in state court. The Supreme Court stated that it would be "unfair" to allow a state to both invoke federal jurisdiction and then to assert sovereign immunity to deny that very jurisdiction. The Court found that the majority of its sister courts had read Lapides to state a general rule, as opposed to being limited to its facts. The Court also concluded that the general rule need not be limited to instances of removal. Here, Wisconsin did not raise sovereign immunity during the administrative proceedings and chose to challenge the findings of those proceedings by filing a separate federal lawsuit. The Court explored the four alternative paths that Wisconsin could have taken that would not have resulted in a waiver -- do nothing after the TTAB finding, refuse to participate at all in the administrative proceedings, file suit in state court, and appeal the administrative findings to the Federal Circuit. One principle that stands out in Lapides is that a state should not be able to advance its litigation position by choosing a federal forum and then asserting sovereign immunity. The Court identified at least three advantages that inured to Wisconsin's benefit because of its choice of the federal forum. The Court then had to resolve whether Wisconsin's waiver extended far enough to permit Phoenix’s federal counterclaims. Relying on guidance from the Supreme Court and its sister circuits, the Court concluded that the waiver was broad enough to encompass compulsory counterclaims. Under Rule 13(a), a compulsory counterclaim is one that arises out of the same transaction or occurrence. The Court had no difficulty, applying the "logical relationship" test, to conclude that the Phoenix counterclaims arose out of the same occurrence as Wisconsin's challenge. Phoenix, therefore may pursue its counterclaims on remand.

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UNIVERSITY OF WISCONSIN v. PHOENIX INTERNATIONAL SOFTWARE (December 28, 2010)

The Court withdrew this opinion on February 10, 2011 and granted Phoenix’ Petition for Rehearing limited to the sovereign immunity issue. Supplemental briefing and oral argument will focus on:
       Whether the district court erred in concluding that plaintiff‐appellee Board of Regents of the University of Wisconsin (Wisconsin) did not waive any sovereign immunity it may have had
to the counterclaims asserted by defendant‐appellant Phoenix International Software (Phoenix),
or otherwise consent to their adjudication in this case?
       Whether the counterclaims brought by Phoenix against Wisconsin are compulsory or
permissive counterclaims under FED. R. CIV. P. 13? 

Phoenix International Software and the University of Wisconsin each registered the mark CONDOR with the Patent and Trademark Office. Phoenix has used the mark since 1978 and registered it in 1997. Wisconsin registered its mark in 2001. Each mark refers to computer software, although the Phoenix system is designed principally for mainframe systems and the Wisconsin system is designed principally for individual computers. Phoenix petitioned the Trademark Trial and Appeal Board to cancel Wisconsin's mark on the ground that it creates confusion. The Board granted the petition and canceled the mark. Wisconsin challenged the Board's decision by filing an action in federal district court. Phoenix counterclaimed for trademark infringement and false designation of origin. Judge Crabb (W.D. Wis.) reversed the Board’s determination on Wisconsin's motion for summary judgment and also dismissed Phoenix's counterclaims on sovereign immunity grounds. Phoenix appeals.

In their opinion, Seventh Circuit Judges Flaum, Wood (dissenting in part), and Tinder reversed and remanded for trial on the likelihood of confusion issue but affirmed on the sovereign immunity issue. The Court first addressed the likelihood of confusion issue and specifically the standard of review. Wisconsin had two choices to challenge the Board's decision: a direct appeal to the Federal Circuit limited to the record below and decided on a substantial evidence standard, or a new action in the district court allowing it to supplement the record below. Since Wisconsin chose the latter course, the Court's standard of review is layered. The Board's findings are owed typical administrative appeal deference while the new evidence is treated like a typical summary judgment record and viewed in the light most favorable to the non-moving party. That required the Court to distinguish the Board's findings from new evidence below. The Court concluded that the district court erred in reversing the Board. The principal issue in the case is the likelihood of confusion. The Board considered the actual nature and use of the software while the district court focused its analysis on the description of the products in their registration materials. But whether the public may be confused (i.e., attribute the products to a single source) is the real focus of the multiple factor likelihood of confusion test. The district court was wrong when it focused principally on the products' similarities and matters of use (and doubly wrong when it focused exclusively on the written descriptions). On the other hand, the Board was right when it focused on the facts that the marks were identical, their functions were similar, and sophisticated purchasers were likely to believe that their sources were related. The Court reinstated the Board's findings. It considered Wisconsin's new evidence but found it not sufficient to overcome those findings and compel summary judgment in Wisconsin's favor. It therefore remanded for a trial on likelihood of confusion. The Court next considered Phoenix's counterclaims, which the district court dismissed on sovereign immunity grounds. There are two exceptions to the Eleventh Amendment's grant of sovereign immunity. The first is when Congress regulates state behavior pursuant to the Fourteenth Amendment. The second is when a state waives its immunity and consents to suit. The Court noted that the Supreme Court has already found unconstitutional the Patent Remedy Act's creation of state liability for patent infringement in Florida Prepaid. Given the similarities between the two statutes, the Court found the decision controlling. With respect to waiver, the Court first rejected the argument that Wisconsin's participation in the regulated trademark process amounted to waver, again relying on Florida Prepaid. Lastly, the Court addressed and rejected the argument that Wisconsin voluntarily waived its sovereign immunity when it chose to challenge the Court's decision by filing a suit in the district court. The Court distinguished the Supreme Court's Lapides decision, in which Georgia was not allowed to invoke sovereign immunity after it removed a case from state court. Here, Wisconsin's filing simply reflected its choice of a forum for judicial review. It did not alter the nature of the proceedings in any way.

Judge Wood agreed with the majority on the likelihood of confusion with issue and also with respect to whether Wisconsin's participation in a federal regulatory program constituted a waiver of sovereign immunity. She dissented, however, on the issue of whether Wisconsin's district court challenge to the Board’s decision constituted a waiver. The issue is not, she said, whether the state is a defendant, a plaintiff, an intervenor, or an appellant. It is, instead, the voluntariness of the decision and its consequences. Here, Wisconsin chose to file a case. Lapides controls -- Wisconsin has waived sovereign immunity. Wisconsin was not even required to appeal. It could have accepted that the Board's decision. Similarly, it could have appealed to the Federal Circuit, where Phoenix would not have been able to file a counter court. Instead, Wisconsin chose to gain a litigation advantage by filing in the district court. Just like in the Lapides case, Wisconsin was using its sovereign immunity to gain a litigation advantage. Finally, Judge Wood wrote at length suggesting that it may be time to reconsider a "commercial act" exception to the scope of sovereign immunity.

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INDIANA PROTECTION AND ADVOCACY SERVICES v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION (April 22, 2010)

In 1986, Congress enacted the Protection and Advocacy for Individuals with Mental Illness Act (the "Act"). The general purpose of the Act was to protect the rights of individuals with mental illnesses and specifically to assist states in operating protection and advocacy systems for those individuals. States are entitled to federal funds if they create such a protection and advocacy system. The system can be either a private entity or an independent state agency. Indiana created Indiana Protection and Advocacy Services ("Services"), an independent agency. The Act gives Services the authority to investigate instances of abuse and requires that Services have access to patient records. In 2006, Services opened investigations into two instances of possible abuse or neglect at the LaRue Carter Memorial Hospital. LaRue Carter is a psychiatric hospital operated by the Indiana Family and Social Services Administration ("FSSA"). In both investigations, Carter withheld patient records requested by Services. Services brought an action against the State of Indiana, FSSA, and three state officials in their official capacities. The complaint sought only injunctive and declaratory relief. The district court granted the relief. A panel of the Seventh Circuit reversed. The panel concluded that Services did not have a private right of action under the Act, could not sue under § 1983 because it was not a "person" under that section, and that the Eleventh Amendment barred the suit. Services sought rehearing en banc.

In their opinion, Chief Judge Easterbrook (dissenting) and Judges Posner (concurring), Flaum, Kanne, Rovner, Wood, Williams, Sykes, and Hamilton affirmed the judgment of the district court as modified to provide relief only against the named state officials. The Court first held that the Eleventh Amendment did not bar the suit. Although that amendment typically prevents a state or its agencies and officials from being sued in federal court by its own citizens, there are exceptions. Under the Ex parte Young exception, a state official who violates a federal law is considered to be acting outside his or her authority and not immune from suit. The required inquiry is whether the complaint seeks prospective relief for an ongoing violation of federal law. The Court found that inquiry satisfied with respect to the individually named state officials, although not with respect to the state and FSSA. Next, the Court concluded that the Act authorized Services’ suit. The Court undertook an analysis of whether Congress intended to create a private right and private remedy in the Act. Citing several provisions of the Act and interpreting the language, structure and purpose of the Act, the Court concluded that Congress did create a private right of action for access to patient records for protection and advocacy systems such as Services. In doing so, it rejected the defendants' arguments that the Act is simply an exercise of Congress's spending power, that the obligation to provide access to patient records is simply a condition inherent in accepting federal funding, and that the only remedy for the violation is to cut off the funding. Finally, on the merits, the Court had little difficulty in rejecting defendants' argument that the peer review records sought by Services were not "records" under the Act. It simply adopted the unanimous treatment given the question by the four circuits that have addressed the issue.

Judge Posner joined the Court's opinion "without reservation" but wrote separately on whether the Act provided a private cause of action. He wrote of several practical considerations that he believed supported the conclusion that the Act contained a private right of action.

Chief Judge Easterbrook dissented. Although he agreed with the conclusion that the Ex parte Young exception to Eleventh Amendment immunity applied, he disagreed with the conclusion that Services had a private cause of action. With respect to § 1983, Services is not a "person" and therefore cannot sue under that section. With respect to the Act itself, Chief Judge Easterbrook concluded that the Supreme Court's cases do not support the conclusion that a right of action can be implied in the Act.

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TALLEY v. UNITED STATES DEPARTMENT OF AGRICULTURE (February 12, 2010)

Wayne Talley used to have a loan from the United States Department of Agriculture. Although he repaid it, the Department reported to a credit bureau that he was delinquent. Four times he complained to the credit bureau -- four times the credit bureau investigated -- four times the Department reported that the loan was repaid – four times the credit bureau fixed his credit report. Each time, however, the Department followed up with the another report of delinquency. Tally brought an action under the Fair Credit Reporting Act for damages for the Department's inaccurate reporting. The Department did not deny that it violated the Act but contended that sovereign immunity precluded any monetary relief. The district court awarded $10,000 in compensatory damages and $20,000 in attorney's fees. The Department appeals.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Tinder affirmed. The Court first addressed jurisdictional issues, both at the district court and appellate court level. The Tucker Act has provisions allocating jurisdiction both at the lower court level (between the district court and the Court of Federal Claims) and at the appellate level (between regional circuits and the Federal Circuit). In order to determine the impact of the Tucker Act, the Court fleshed out the specific argument of the Department. On appeal, the Department conceded an argument that it had made at the lower court that the Department was not a "person" under the Act. It argued simply that the Fair Credit Reporting Act did not expressly authorize monetary relief against the United States. The Court concluded, however, that the Tucker Act waived sovereign immunity generally and authorized money damages for a statutory claim. Although that resolved the merits, the Court now had to circle back to see if there was jurisdiction. The Tucker Act provides that the case should be brought in the Court of Federal Claims if the plaintiff seeks in excess of $10,000. The Court concluded that the $20,000 in attorney's fees should be classified as costs under the Fair Credit Reporting Act and not counted toward the $10,000 threshold. Therefore, the district court had jurisdiction. With respect to appellate jurisdiction, the Tucker Act sends a case to the Federal Circuit if jurisdiction in the district court depended "in whole or in part" on the Tucker Act. The Court concluded that, although the Tucker Act could be a basis for jurisdiction, Talley did not invoke it as such. Because he relied on section 1331 and on the Fair Credit Reporting Act's jurisdictional provisions, appellate jurisdiction was present.

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TURPIN v. KOROPCHAK (June 5, 2009)

Christi Turpin thought she obtained a Ph.D. from Southern Illinois University. She completed all her coursework and she wrote and defended her thesis. She alleges that each member of her dissertation committee approved the defense of her thesis. Years later, she learned that the school had not recorded her degree. When she made inquiry, several members of the committee allegedly denied that they approved the thesis. Turpin brought suit against the thesis committee members for specific performance to confer her degree and damages. The district court dismissed the case for lack of subject matter jurisdiction. It held that the suit was actually against the State of Illinois and belonged in the Court of Claims. Turpin appeals.

In their opinion, Judges Kanne, Evans and Dow affirmed. Sovereign immunity, stated the Court, precludes federal jurisdiction of the action if the allegations of misconduct arise out of a breach of a duty imposed on the defendant solely because of his or her state employment. Here, the only duties of the defendants with respect to Turpin's degree arise out of their employment by the state university. The case belongs in a Court of Claims.

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BURRUS V. STATE LOTTERY COMMISSION  (October 6, 2008)

Indiana created the State Lottery Commission of Indiana (the “Commission”) in 1989 to operate lottery games in the state. The legislature set it up to operate as a “separate body politic and corporate” from the rest of state government. The legislature authorized up to $18 million in start up costs. The Commission only used $6 million and repaid that within the year. The lottery has been quite successful. It has generated over $3 billion in profits since its inception. The governor appoints the director and five commissioners who operate the lottery. The Commission has the authority to sue and be sued. It operates independently of the state, although it is heavily regulated by the state.  The Commission deposits all of its revenue into a fund separate from the state’s general revenue fund. The funds are first used to pay for the prizes and operating costs. Each quarter, the remaining funds are disbursed to the credit of the state teachers’ retirement fund ($7.5 million) and the pension relief fund ($7.5 million). Any quarterly surplus is transferred to a fund which is used to support local and state capital projects.

Between January and May of 2005, seven employees of the Commission were fired. They all sued the Commission under 42 U.S.C. § 1981 and Title VII of the Civil Rights Act of 1964. Each alleged that he or she was fired as a result of his or her race. The Commission moved to dismiss the § 1981 claims on the grounds of sovereign immunity. The district court denied the motion. The Commission appeals.

In their opinion, Judges Bauer, Ripple, and Manion affirmed. The appeal raised only one issue – whether the Eleventh Amendment shields the Commission from the §1981 claims. The Court began with the basic proposition that unconsenting states, and their agencies, are immune from federal lawsuits under the Eleventh Amendment. Here, the parties simply disagreed over whether the Commission is a state agency. The Court listed the two factors that generally determine that issue. The first, and most important, is the degree of financial autonomy from the state. The other factor is the general legal status of the entity. The Court observed that the Commission’s complete lack of financial reliance on the state and the total lack of responsibility by the state for any of the Commission’s obligations strongly weighed against finding the Commission to be an agency of the state. While it is true that a judgment against the Commission would deprive the state of revenues it otherwise would have received but for the judgment, the panel noted that the Supreme Court had rejected that “state-benefit” theory of financial dependence.

The second prong of the test, general legal status, also supports the Court’s conclusion that the Commission is not an agency of the state. The Court pointed to a number of factors to support its conclusion: a) it sets its own budget, b) it controls its day-to-day operations, c) it sues in its own name, and d) it enters into contracts in its own name. The fact that the governor appoints the commissioners was given little weight by the Court given the Commission’s financial independence. Finally, the Court noted that the fact that the lottery is the subject of much state regulation does not change the result that the Commission is not an agency of the state and not immune from suit.

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