Amount In Controversy In Lawsuit Challenging Arbitration Award Includes The Full Matter At Stake In The Arbitration

If a defendant removes a case to federal court but the plaintiff successfully moves to remand the case, 28 U.S.C. § 1447(c) provides that a district court "may require payment of just costs and any actual expenses, including attorney fees, incurred as the result of the removal."

In Sirotsky v. New York Stock Exchange, No. 02-3240, 2003 WL 22442988 (7th Cir. Oct. 29, 2003), as the losing party in an NYSE arbitration, plaintiff was ordered by the arbitrators to pay the NYSE's $4,800 arbitration fee. Plaintiff sued her opponent and the NYSE in Illinois state court to vacate that order on the ground that her opponent's lawyer was not licensed to practice in Illinois. Defendant believed plaintiff was litigating both over the $4,800 fee and over the original arbitration in which she sought $242,000, and therefore removed on diversity grounds. The court determined that only the $4,800 fee was at stake, and remanded based on failure of the jurisdictional minimum. Plaintiff then asked for an award of attorneys' fees under § 1447(c), but the district court denied the motion.

On appeal, for the first time in the case, plaintiff clarified that she only was litigating over the $4,800 fee. However, the Seventh Circuit held that it was reasonable for defendant to assume that plaintiff would not have made a federal case out of the fee award alone, and had the right to assume plaintiff was intending to reopen the arbitration. As such, the amount in controversy in any new arbitration proceeding that plaintiff hoped to commence would have been the original $242,000. Thus, it was clear at the time of removal that defendant properly removed a case with an amount in controversy exceeding $75,000.

Regarding the denial of attorneys' fees, the Seventh Circuit found no abuse of discretion. It clarified that although the statue does not set forth the criteria for awarding fees and costs, the cases are in agreement that the plaintiff must show that removal was improper and need not establish that defendant acted in bad faith. Furthermore, the court noted that the Seventh Circuit has taken the further step of holding that, provided removal was improper, there is a rebuttable presumption that the plaintiff is entitled to an award of fees, as under standard fee-shifting statutes. Here, the removal itself was not even improper.

Supreme Court To Consider Whether Defect In Diversity Jurisdiction Is Curable

The U.S. Supreme Court has agreed to hear an appeal from a Fifth Circuit case involving diversity jurisdiction.

In Atlas Global Group, L.P. v. Grupo Dataflux, 312 F.3d 168 (5th Cir. 2002), cert granted, No. 02-1689, 2003 WL 21229394 (Oct. 14, 2003), a partnership sued a Mexican corporation in federal court for breach of contract, but diversity jurisdiction was lacking because two partners were residents of Mexico. Before defendants complained, plaintiff dismissed those two partners and "cured" the defect. After a jury verdict for plaintiff, defendant successfully moved to dismiss for lack of jurisdiction arguing diversity is determined at the time the complaint is filed. The Fifth District reversed because plaintiff dismissed its Mexican partners sua sponte before any challenge, and starting over would be wasteful. One judge dissented against the creation of a “new exception” just to save judicial resources.

Litigants May Not Defend Against Opponents' Claims By Filing Separate Lawsuits Seeking To Stay Them

Some litigants believe the best defense is a good offense. However, the Seventh Circuit recently confirmed that a "good offense" does not include filing a separate lawsuit seeking a stay of the first.

In Buntrock v. SEC, No. 03-1890, 2003 WL 22442993 (7th Cir. Oct. 29, 2003), the SEC authorized its legal staff to bring a civil complaint in federal court against Dean Buntrock charging him with violations of federal securities laws. Buntrock filed his own lawsuit against the SEC, seeking to stay the SEC's filing of a case against him; when the SEC actually filed its case (Buntrock had not sought an injunction), Buntrock amended his complaint to seek a stay of the SEC's case. Both cases were consolidated, and on the SEC's motion the court dismissed Buntrock's case for lack of subject-matter jurisdiction.

The Seventh Circuit affirmed the dismissal because Buntrock's case had "no basis in law or common sense." The jurisprudence of federal jurisdiction includes a line of cases holding that a plaintiff's case might be so completely frivolous that it does not even trigger the jurisdiction of the federal courts. The Seventh Circuit found this to be such a case. One reason for disallowing such a tactic is that defendant's approach would "turn every case in which there is a defense into two cases." The rules of federal procedure provide litigants with the opportunity to present their defenses in a single action. Put simply, if you have a defense to a plaintiff's claims, you must plead it in the case plaintiff has filed.

Another, more technical, approach is that Buntrock has an adequate remedy at law -- to interpose his defense in the SEC's case -- and is unable to satisfy the prerequisites for equitable relief, i.e., a stay. While Buntrock argued that his remedy was not adequate because he would have to go through a whole trial, and the purpose of his complaint was to prevent that, the Seventh Circuit held that did not render his remedy inadequate as a matter of law.

Supreme Court Vacates Punitive Damages Awards

In the wake of its decision in State Farm Mut. Automobile Ins. Co. v. Campbell, 123 S. Ct. 1513 (2003), regarding the due process limits on awards of punitive damages, the U.S. Supreme Court has granted 10 petitions for writ of certiorari and summarily vacated and remanded the cases for further consideration to a variety of state and federal courts.

The two most recent of those rulings are Philip Morris USA v. Williams, No. 02-1553, 2003 WL 21020159 (U.S. Oct. 6, 2003); and Chrysler Corp. v. Clark, No. 02-1748, 2003 WL 21313765 (U.S. Oct. 6, 2003). Philip Morris USA involved an Oregon case in which the jury had awarded over $79.5 million in punitive damages, which the judge reduced to $32 million. The appellate court had affirmed in 2002, allowing punitive damages with a ratio of more than 60:1. In Chrysler Corp., the Sixth Circuit had affirmed a jury award of $3 million in a products liability case where compensatory damages were $236,000 (more than 12:1). The Supreme Court's order suggests that even low awards are constitutionally suspect if the ratio to compensatory damages exceeds a single-digit number.

The other vacated cases are:

• Cass v. Stephens, [02-983] 123 S.Ct. 2213 (May 27, 2003), vacating No. 08-97-00582-CV, 2001 WL 28092 (Tex. App. 8th Dist. Jan. 11, 2001) (25 times compensatory damages after remittitur)

• Ford Motor Co. v. Ramon Romo, [02-1097] 123 S.Ct. 2072 (May 19, 2003), vacating 99 Cal.App.4th 1115, 122 Cal. Rptr. 2d 139 (5th Dist. 2002) (46.4 times original compensatory damages, or 58.6 times reduced compensatory damages)

• Ford Motor Co. v. Smith, [02-1096] 123 S.Ct. 2072 (May 19, 2003), vacating 83 S.W.3d 483 (Ky 2002) (reducing award of 6.7 times compensatory damages to 5 times compensatory damages)

• DeKalb Genetics Corp. v. Bayer CropScience, S.A., [02-130] 123 S.Ct. 1828 (Apr. 21, 2003), vacating 272 F.3d 1335 (Fed. Cir. 2002) (3.33 times compensatory damages)

• National Union Fire Ins. Co. of Pittsburgh, Pa. v. Textron Financial Corp., [02-966] 123 S.Ct. 1783 (Apr. 21, 2003), vacating No. G020323, 2002 WL 1399105 (Cal. App. 4th Dist.
June 28, 2002) (10.2 times compensatory damages after remittitur)

• San Paolo U. S. Holding Co., Inc. v. Simon, [01-1722] 123 S.Ct. 1828 (Apr. 21, 2003), vacating No. B121917, 2001 WL 1380836 (Cal. App. 2d Dist. Nov. 7, 2001) (340 times compensatory damages)

• Key Pharmaceuticals, Inc. v. Edwards, [02-342] 123 S.Ct. 1781 (Apr. 21, 2003), vacating Bocci v. Key Pharmaceuticals, Inc., 178 Or.App. 42, 35 P.3d 1106 (2002) (45
times compensatory damages)

• Anchor Hocking, Inc. v. Waddill, [02-370] 123 S.Ct. 1781 (Apr. 21, 2003), vacating 175 Or.App. 294, 27 P.3d 1092 (2002) (9.9 times compensatory damages)

Of those ten cases, three have been decided on remand. The DeKalb court has reconsidered its
original decision and held that the award of $50 million in punitive damages was not unconstitutional under State Farm when compared with the $15 million in compensatory damages awarded (a ratio of 3.33:1). Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 345 F.3d 1366 (Fed. Cir. Sept. 29, 2003). In Key Pharmaceuticals, the punitive damages award was vacated and remanded with instructions to allow defendants' motion for a new trial unless plaintiff agreed to remittitur of punitive damages to $3.5 million, down from $22.5 million. The remittitur would result in a ratio of 7:1, down from 45:1. Bocci v. Key Pharmaceuticals, Inc., 189 Or.App. 349, 76 P.3d 669 (Sept. 10, 2003). In the Anchor Hocking case, the appellate court ordered a new trial unless plaintiff agreed to remittitur of punitive damages to $403,416, down from $1 million. The reduction would yield a ratio of 4:1 instead of 9.9:1. Anchor Hocking, Inc. v. Waddill, 190 Or.App. 172, 2003 WL 22404943 (Oct. 22, 2003).

Seventh Circuit Affirms Large Punitive Award After State Farm

Although the Supreme Court limited punitive damages in State Farm Mut. Automobile Ins. Co. v. Campbell, 123 S. Ct. 1513 (2003), and has vacated numerous cases in light of State Farm (as discussed here), the Seventh Circuit has affirmed a punitive damages award representing over 37 times the compensatory damages awarded, finding that the language in State Farm regarding single-digit ratios was discretionary.

In Mathias v. Accor Economy Lodging, Inc., No. 03-1010, 2003 WL 22389863 (7th Cir. Oct. 21, 2003), the jury awarded plaintiff $10,000 in compensatory damages and $372,000 in punitive damages, where a hotel deliberately assigned plaintiffs a room it knew was infested with bedbugs. Defendant appealed, in part arguing that the amount of punitive damages was unconstitutionally excessive under State Farm. However, the court stated that State Farm "did not lay down a . . . single-digit ratio rule – it said merely that 'there is a presumption against an award that has a 145-to-1 ratio' – and it would be unreasonable to do so." Applying various other factors from State Farm and other recent Supreme Court precedent on punitive damages, the court upheld the full award.

Federal Agency's Choice Of Forum Entitled To Same Weight As Non-Government Plaintiff

Under traditional forum non conveniens analysis, a plaintiff's choice of forum will rarely be disturbed unless the balance is strongly in favor of the defendant. However, the Seventh Circuit recently considered a matter of first impression: when the plaintiff is a federal agency, how much weight should be given to its choice of forum. In re Nat'l Presto Industries, Inc., No. 03-1873, 2003 WL 22389815 (Oct. 21, 2003).

The SEC sued National Presto Industries in federal court in Chicago, although defendant was based in Eau Claire, Wisconsin. Defendant moved for transfer of venue, but the district court denied the motion in an interlocutory order not ordinarily appealable. Defendant sought mandamus in the Seventh Circuit. In considering the case, the Seventh Circuit rejected as "unrealistic" the argument that the federal government has such vast resources that no venue could ever be thought to be inconvenient. "Federal agencies have limited resources, and the SEC in particular is often outgunned by the affluent defendants that it sues." The court credited the SEC with choosing to bring the case in a federal district in which the SEC's closest regional office resided.

Having said that, the court concluded that the balance of conveniences in this particular case was a close call that might actually favor defendant. Nevertheless, noting the heavy burden on mandamus, the appellate court held that even though defendant might be able to satisfy the irreparable harm requirement in a denial of a forum non conveniens motion, and even though the balance actually might favor defendant, the balance was not sufficiently "askew as to justify the extraordinary relief" sought through the writ of mandamus.

State Prior Pending Action Statute Unavailable In Federal Cases

The State of Illinois enacted a statute that allows a defendant to move to dismiss if another action involving the same parties was filed first and is pending elsewhere. In AXA Corporate Solutions v. Underwriters Reinsurance Corp., No. 02-3795, 2003 WL 22359249 (7th Cir. Oct. 17, 2003), the district court applied that statute in a diversity case where the same parties were pursuing litigation in Texas state court, and dismissed the federal case.

However, clarifying a matter over which its district courts have split, the Seventh Circuit held that Illinois' statute is not available in federal court. Instead, federal courts rely on federally-developed abstention doctrines, such as the Colorado River doctrine, to determine whether it is appropriate to reject jurisdiction over matters filed before it. Here, the Seventh Circuit concluded that Colorado River abstention, which the U.S. Supreme Court cautions must be used only in "exceptional circumstances," would not be appropriate, and it reinstated the case.

Supreme Court Vacates California Case Allowing Class-Wide Arbitration

In Garcia v. DirecTV, Inc., No. B158570, 2002 WL 31769224 (Cal. App. (2d Dist) Dec. 11, 2002) (unpublished), independent dealers commenced an arbitration, and also filed a class action, alleging that DirecTV had failed to pay them certain compensation. The trial court ordered arbitration on a class-wide basis as permitted under state law.

DirectTV appealed, arguing that the parties agreed to be governed only by federal law, which bars class-wide arbitration; however, the Court of Appeals affirmed. The U.S. Supreme Court summarily vacated the case and remanded "for further consideration in light of Green Tree Financial Corp. v. Bazzle [123 S. Ct. 2402 (2003)]." Hughes Elect. Corp. v. Garcia, No. 02-1752, 2003 WL 21313782 (U.S. Oct. 6, 2003). In Green Tree, the Court held that the arbitrator, not the court, decides whether an arbitration contract forbids class arbitration.

Pennsylvania Intermediate Appellate Court Abolishes Common-law Marriage

Following guidance in dicta from the state’s highest court, the Pennsylvania Commonwealth Court announced in PNC Bank Corp. v. Workers’ Comp. Appeal Bd., 831 A.2d 1269 (Sept. 17, 2003), that the concept of common-law marriage no longer would be recognized. That decision will only apply prospectively, and affects only matters heard in the Commonwealth Court, a special intermediate appellate court that hears cases brought against and by the Commonwealth. Three of the seven judges concurred solely in the judgment, two of whom joined in a scathing dissent accusing the majority of usurping the function of the legislature and acting without authority. Eleven other states continue to recognize common law marriage.

District Court May Not Dismiss With Prejudice If Applying Rooker-Feldman Doctrine

The Rooker-Feldman doctrine holds that a federal district court lacks jurisdiction over any case where the issues presented are inextricably intertwined with questions that a state court already has adjudicated, such that it might have to revisit the state court’s decisions. In Mills v. Harmon Law Offices, P.C., 344 F.3d 42 (1st Cir. Sept. 12, 2003), the district court found that Rooker-Feldman applied to a removed case, but also found pleading deficiencies and dismissed the case with prejudice. By dismissing under Rooker-Feldman, the court necessarily found that no federal jurisdiction existed, and therefore it was error to dismiss with prejudice — a form of dismissal on the merits that would have precluded refilling in state court — rather than to remand to state court under 28 U.S.C. § 1447(c).

Action to Compel Arbitration Satisfied Diversity Jurisdiction Amount

Sometimes it can be difficult to determine whether a plaintiff has presented a diversity case alleging an amount in controversy exceeding the federal minimum of $75,000. In an action to compel arbitration, for example, the relief sought from the district court is not a damage award. In Woodmen of the World Life Ins. Society v. Manganaro, 342 F.3d 1213 (10th Cir. Sept. 9, 2003), the Tenth Circuit adopted the technique of several other circuits that “look through to the possible award resulting from the desired arbitration.” Here, although the policyholders claimed that only $13,000 was at stake, they also demanded a mass mailing costing over $75,000 plus attorney’s fees and punitive damages that could not be considered unattainable “to a legal certainty.”

Offer of Judgment Did Not Include Attorney’s Fees Where Plaintiff Was Not Prevailing Party Under State Law

In Marek v. Chesny, 473 U.S. 1 (1985), the U.S. Supreme Court held that the amount of an offer of judgment under Fed. R. Civ. P. 68 implicitly included attorney’s fees where plaintiff’s claims were brought under a federal statute entitling a prevailing plaintiff to fees. When the plaintiff prevailed but the verdict did not exceed the offer, plaintiff received no fee award. In Champion Produce, Inc. v. Ruby Robinson Co., Inc., 342 F.3d 1016 (9th Cir. Sept. 8, 2003), an analogous situation under state law produced a similar result. The court held that Rule 68 “does not permit an award of post-offer attorneys’ fees when the underlying state statute authorizes an award of attorneys’ fees to a prevailing party as part of costs, but when the party seeking attorneys’ fees under the rule is not a prevailing party within the meaning of that statute.”

No Appeal of District Court’s Refusal to Allow Appeal of Bankruptcy Court Injunction

When a bankruptcy court enters certain interlocutory orders, the aggrieved party may seek an appeal from the district court under 28 U.S.C. § 158(a)(3), but the district court has discretion to decline such an appeal. Under Connecticut Nat’l Bank v. Germain, 503 U.S. 249 (1992), if the court accepts the appeal and enters a ruling, a further appeal may be taken to the circuit court of appeals under 28 U.S.C. § 1291. However, as the Second Circuit recently held in In re Kassover (Gibson v. Kassover), 343 F.3d 91 (2d Cir. Sept. 5, 2003), a denial of leave to appeal is not a decision on the merits and is not among the types of interlocutory decisions listed as appealable in § 1291.

Contingency Fee Payments to Attorneys Not Taxable to Oregon Plaintiffs

When plaintiff Sigitas Banaitis won $8.7 million after a successful appeal of his wrongful termination action, $3.8 million of his award was paid directly to counsel to satisfy his attorney’s contingency fee. On his federal tax return, Banaitis claimed that the $3.8 million was not includable in his gross income, but the IRS disagreed. In Banaitis v. CIR, No. 02-70421 (9th Cir. Aug. 27, 2003), the Ninth Circuit sided with the taxpayer because of state law. While federal law governs taxation of particular legal interests and property rights, state law defines those interests and rights. Here, unique features of Oregon law established that fees paid directly to counsel should be excluded from Banaitis’ gross income. The court distinguished its own decisions applying California or Alaska law, noting that Oregon law was substantially different and controlling.

Sixth Circuit Joins Other Circuits In Requiring Defendants’ Unanimity In Removal

Although not expressly contained in the removal statue, 28 U.S.C. § 1446, federal courts have required that all defendants unanimously join in a petition to remove a state case to federal court. Adopting the position of the Third, Fifth, Seventh, Eighth, Ninth and Tenth Circuits, the court in Loftis v. United Parcel Service, Inc., 342 F.3d 509 (6th Cir. Aug. 26, 2003), held that “all defendants in the action must join in the removal petition or file their consent to removal in writing within thirty days of receipt of (1) a summons when the initial pleading demonstrates that the case is one that may be removed, or (2) other paper in the case from which it can be ascertained that a previously unremovable case has become removable.” Otherwise, they lose the opportunity for removal under § 1446.

Defendant Corporation’s Officer Not Sued Individually Could Be Liable for Contempt

After judgment was affirmed against Gary’s Electric Service Co. in a labor proceeding, plaintiff moved to hold the company’s owner in contempt for violation of the judgment. The district court denied the motion, citing the fact that the owner was not an actual party in the case. However, in Elec. Workers Local 58 Pension Tr. Fund v. Gary’s Elect. Serv. Co., 340 F.3d 373 (6th Cir. Aug. 18, 2003), the appellate court reversed. Because “a command to the corporation is in effect a command to those who are officially responsible for the conduct of its affairs,” Wilson v. United States, 221 U.S. 361, 376 (1911), a person intentionally causing the company to take specific actions to avoid compliance with the judgment (here, the company’s owner) could be held in contempt.

Eleventh Circuit Adopts “Revenue Rule” Abstention Doctrine

The Eleventh Circuit recently considered a group of consolidated cases in which the countries of Honduras, Ecuador and Belize alleged that American tobacco companies violated RICO by engaging in tax avoidance schemes. In Republic of Honduras v. Philip Morris Companies, Inc., 341 F.3d 1253 (11th Cir. Aug. 14, 2003), the court affirmed the district court’s decision to abstain under the “revenue rule,” which prevents the courts of one sovereign from enforcing or adjudicating tax claims from another sovereign. Observing that the doctrine has a long history, the appellate court adopted it as law of the circuit and held that plaintiffs could not avoid the rule by invoking the RICO statute.

Seventh Circuit Clarifies Screening Process For Proposed Amicus Briefs

In National Organization for Women, Inc. v. Scheidler, 223 F.3d 615 (7th Cir. 2000), the Seventh Circuit announced that it would not automatically grant leave to file amicus briefs. The court recently clarified its position on the subject. In Voices for Choices v. Illinois Bell Telephone Co., 339 F.3d 542 (7th Cir. Aug. 6, 2003) (Posner, J., in chambers), the court noted that the test for allowing amicus briefs is “whether the brief will assist the judges by presenting ideas, arguments, theories, insights, facts, or data that are not to be found in the parties’ briefs.”

Failure To File Revised Pleading After Defendant’s Death Results In Dismissal

Under Fed. R. Civ. P. 25(a), if a party dies and the claim is of a type that survives, the relevant party must file a motion for substitution within 90 days. Russell v. City of Milwaukee, 338 F.3d 662 (7th Cir. July 28, 2003), illustrates that, although a district court has the discretion to allow a late filing, it will not be reversed for enforcing the Rule and dismissing the case instead. The Seventh Circuit was not persuaded by plaintiff’s argument that the clock did not start to run because notice of death was served on him but never filed with the court.

Plaintiff Requesting Electronic Discovery Required To Pay Part Of The Cost

As reported in an earlier post, the Southern District of New York recently developed an approach to determining who should pay the costs for restoring otherwise unavailable electronic documents. Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. May 13, 2003). Since then, defendant restored a sampling of e-mail backup tapes, and based on that sample plaintiff demanded that defendant pay the cost of full production. In Zubulake, 216 F.R.D. 280 (July 24, 2003), the court applied its new approach and concluded that plaintiff must pay 25% of the cost of restoration; however, once data is restored the “usual rules of discovery apply” -- defendant must pay the costs of production, such as attorneys’ review for privilege. The court suggested that defendant potentially could shift those costs by making a Rule 68 offer of judgment.

Excessive Punitive Damages Claim Does Not Confer Diversity Jurisdiction

In Smith v. American General Life and Accident Ins. Co., 337 F.3d 888 (7th Cir. July 24, 2003), plaintiff alleged bad faith against an insurance company, and claimed actual damages well below $75,000. Defendant argued that plaintiff’s additional claim for $1 million in punitive damages conferred diversity jurisdiction. However, in part relying on State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (Apr. 7, 2003) [see my post here], the Seventh Circuit disagreed, finding that a federal court must take a "realistic look" at punitive damages when considering whether the jurisdictional amount is satisfied for removal.

Removal Improper Where ESOP Participants’ Claims Did Not Implicate ERISA

In Husvar v. Rapoport, 337 F.3d 603 (6th Cir. July 23, 2003), plaintiffs brought claims in Ohio state court alleging common law breach of fiduciary duty for alleged mismanagement of their ESOP. Defendants removed the case by arguing that it implicated ERISA. The district court agreed, and subsequently granted a motion to dismiss. The Sixth Circuit found that the claims did not challenge the actions of the plan fiduciary, but rather attacked the actions of the company’s board of directors in compensating the plan fiduciary. The complaint could not be characterized as preempted by ERISA. Therefore, federal subject-matter jurisdiction was absent and the case was remanded to state court.

Order Remanding Case Not Appealable Regardless Of Whether Erroneous

In Medisys Health Network, Inc. v. Local 348-S United Food & Comm’l Workers, 337 F.3d 119 (2d Cir. July 17, 2003), the Second Circuit explained that once a district court has determined that a matter removed to federal court should be remanded back to the state court, 28 U.S.C. § 1774(c) precludes federal appellate jurisdiction even if the district court erred in its determination of the facts or the law. Any such determinations are not preclusive and can be litigated again in the state court. The court rejected defendant’s claim that the “independent relevance” exception under Waco v. U.S. Fidelity & Guar. Co., 293 U.S. 140 (1934), applied to confer jurisdiction.

Offer Of Judgment That Did Not Quantify Damages Was Impermissibly Vague

An offer of judgment under Fed. R. Civ. P. 68 requires a plaintiff to make a choice between a proposed settlement and risking continued litigation with the possible addition of costs. In Basha v. Mitsubishi Motor Credit of America, Inc., 336 F.3d 451 (5th Cir. July 14, 2003), the court held that the offer was too vague to allow plaintiff to make an informed decision. The faulty language stated that the offer “envisions the attorneys for the parties agreeing upon reasonable compensation for Plaintiff’s claimed ‘actual damages,’ and that said amount is added to this Offer of Judgment.”

Courts May Not Increase Amount Of Preliminary Injunction Bond Retroactively

The Third Circuit has reversed a district court’s amendment of an injunction bond to almost 20 times the original amount after the defendants’ costs of compliance appeared to escalate. In Sprint Communications Company L.P. v. CAT Communications Int’l Inc., 335 F.3d 235 (3rd Cir. July 11, 2003), the court held that an injunction bond constitutes the “price” to the movant of an injunction and limits its total exposure in the event the injunction is found to have been wrongfully entered. The court sets the amount after hearing evidence of the harm that the injunction will cause to the non-movant. Retroactive increases impermissibly alter the bargain after the fact.

Ninth Circuit Clarifies When Stare Decisis Gives Way To Intervening Opinions

The Ninth Circuit has issued an en banc decision clarifying the circumstances under which an appellate panel may reexamine normally controlling circuit precedent in the face of an intervening U.S. Supreme Court decision, or a decision on controlling state law by a state court of last resort. In Miller v. Gammie, 335 F.3d 889 (9th Cir. July 9, 2003), the court held that where the reasoning or theory of prior circuit authority is clearly irreconcilable with the reasoning or theory of intervening higher authority, a three-judge panel should consider itself bound by the later and controlling authority, and should reject the prior circuit opinion as having been effectively overruled.

Missouri Deceptive Trade Practices Statute Protects Nonresidents From Missouri Misconduct

Various states have grappled with the question of whether their deceptive trade practices statutes can be applied to nonresidents, such as through certification of a nationwide class. The intermediate appellate court of Missouri recently held that the state’s Merchandising Practices Act expressly anticipated protection of victims of deceptive trade practices, regardless of residence, if the trade or commerce occurred in or from the state of Missouri. State ex rel. Nixon v. Estes, 108 S.W.3d 795 (Mo. Ct. App. (W. Dist.), June 30, 2003). The court distinguished cases considering the broader question of whether a state constitutionally could “project its legislation into other states” because (1) Missouri’s statutory language was unique, and (2) under the facts of this case there was no doubt that the defendant victimized consumers through a business originating trade or commerce from Missouri.

Supreme Court Declines to Hear Commercial Speech Case After All

The Supreme Court has declined to decide a closely-watched dispute involving free speech rights in the commercial context, although it had granted the writ of certiorari. Nike v. Kasky, 539 U.S. 654 (June 26, 2003). Plaintiff sued Nike under California’s Unfair Competition Law and False Advertising law, claiming that Nike’s public statements in response to criticism of its treatment of workers at factories abroad were false and were made to maintain or increase sales. The U.S. Supreme Court granted certiorari to consider the extent to which commercial speech is protected under the First Amendment, received briefing on the merits (including 31 amicus briefs) and heard oral argument, but then declined to decide the case. Three Justices supplied reasons, while three Justices dissented.

Use Of Incorrect ZIP Code Destroys Presumption Of Proper Service By Mail

The Ninth Circuit has concluded that service of a hearing notice was never made because the serving party used an incorrect ZIP code. Busquets-Ivars v. Ashcroft, 333 F.3d 1008 (9th Cir. June 24, 2003). The sender used certified mail with return receipt service, but could not produce a receipt. Relying on a Supreme Court case from 1884, the court noted that mail is presumed to have been delivered if properly addressed, but it found that use of the wrong ZIP code rendered the notice improperly addressed. The dissent argued that “a plethora of cases” hold that error in a ZIP code does not render an address insufficient for delivery.

Bankruptcy Filing Extends Time For Filing Notice Of Appeal

A motions panel of the Second Circuit has denied a motion to dismiss as untimely an appeal that a debtor filed more than 30 days after the entry of judgment. In Local Union No. 38 v. Custom Air Sys., Inc., 333 F.3d 345 (2d Cir. June 24, 2003), the Second Circuit adopted the reasoning of the only other appellate decision on point, Autoskill, Inc. v. National Educ. Support Sys., Inc., 994 F.2d 1476 (10th Cir. 1993). The court held that if a party wishing to appeal from an adverse judgment files for bankruptcy before the 30-day period under Fed.R.App.P. 4(a) expires, Bankruptcy Code §108(b) gives the trustee or debtor in possession an additional 60 days in which to file the notice of appeal.

No Federal Diversity Jurisdiction Exists Over Complaint For Equitable Relief If Value Of Relief Sought Cannot Be Determined

A federal complaint invoking diversity jurisdiction under 28 U.S.C. §1332 must concern an amount in controversy exceeding $75,000. If the only remedy sought is equitable relief, the plaintiff must make a good faith estimate of the value of the relief sought – which can be difficult to do at times. As recently observed in Macken v. Jensen, 333 F.3d 797 (7th Cir. June 24, 2003), a plaintiff who is unable to value that relief at all must commence the case in state court. According to the court, a plaintiff is not permitted to file in federal court and then place the burden on the defendant of demonstrating that $75,000 or less is at stake; rather, Fed.R.Civ.P. 11(b)(3) requires plaintiff to establish sufficient support for federal diversity jurisdiction before filing in federal court.

U.S. Supreme Court Reaffirms Doctrine of Foreign Affairs Preemption

In American Ins. Assn. v. Garamendi, 539 U.S. 396 (June 23, 2003), the U.S. Supreme Court reaffirmed the doctrine of “foreign affairs preemption,” invalidating a California statute that required insurance companies to disclose Holocaust-related information. Congress can preempt state law by enacting laws with which state legislative action is in conflict (i.e., “conflict preemption”), or by so fully occupying a particular field of rulemaking that there can be no room for state legislation (i.e., “field preemption”). Here, the Court primarily relied on conflict preemption to find that the state law was in conflict with foreign agreements the President had made. While the Court, therefore, did not reach the field preemption issue, it relied heavily on precedents holding that the Constitution entrusts “the field of foreign affairs” to the President and Congress. The decision implicates similar statutes and pending bills in at least eight other states.

Ninth Circuit Establishes Procedures For Obtaining Access To Documents Under Protective Order In A Different Case

Defendants often request blanket protective orders in an attempt to limit the use of discovery to a particular case, and many plaintiffs will agree merely to facilitate discovery. However, in Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122 (9th Cir. June 18, 2003), the court allowed plaintiffs in a different case to obtain access to protected documents. In a thorough analysis of the relevant issues, the court established procedures for handling requests to obtain (a) sealed filings, and (b) discovery designated confidential but not filed in court. In both situations, the court that entered the protective order must weigh the relevance of the documents sought against the producers’ reliance interest and the policy interest of avoiding duplicative discovery. If that court permits access, the court handling the collateral litigation becomes responsible for resolving specific disputes over the discoverability of particular documents. There is a presumption of access to documents filed under seal in support of dispositive motions only, for which “compelling reasons” must be shown to maintain the seal.

Seventh Circuit Clarifies Standards For Dismissal As A Discovery Sanction

In Maynard v. Nygren, 332 F.3d 462 (7th Cir. June 10, 2003), the Seventh Circuit considered an appeal from the entry of dismissal as a sanction under Fed.R.Civ.P. 37(c). Reconciling earlier cases, the court clarified that dismissal based on discovery misconduct requires a finding of willfulness, bad faith or fault, and an express determination that lesser sanctions would not suffice. The court distinguished dismissal under Rule 37(c) from dismissal for want of prosecution or for failure to comply with court orders (see Rule 41(b)), which require a record of delay, contumacious conduct or failure of prior sanctions. While the bases for all of these dismissals differ, Maynard established that “clear and convincing” evidence is required now across the board.

Federal Appellate Panel Must Be Composed Of Article III Judges

In Nguyen v. United States, 539 U.S. 69 (June 9, 2003), the U.S. Supreme Court invalidated an appeal where the panel included a judge from the U.S. District Court for the Northern Mariana Islands. Non-Article III judges are not authorized panelists under 28 U.S.C. § 292(a), which permits district judges to sit by designation. Petitioner raised this argument for the first time in his certiorari petition, but that was not too late to attack jurisdiction.

Complete Preemption Allows Removal Of State Usury Claim

A defense based on federal law ordinarily is not a sufficient basis to remove a case to federal court under 28 U.S.C. § 1441. The U.S. Supreme Court, however, clarified that an exception exists for cases in which a federal statute wholly displaces the state-law cause of action through complete pre-emption. Resolving a split between the Eighth and Eleventh circuits, the Court in Beneficial Nat’l Bank v. Anderson, 539 U.S. 1 (June 2, 2003), held that a state usury case brought against a national bank could be removed because the National Bank Act provides the exclusive cause of action for such claims.

Delaware Expands Role Of Chancery Court To Include “Technology Court.”

On May 29, 2003, the Governor of Delaware signed into law Senate Bill 58, legislation that adds two new sections to the Delaware Code concerning the jurisdiction of the Court of Chancery. The first section provides that the Chancery Court is empowered to both hear and conduct mediations regarding “technology disputes” where the parties have stipulated to Delaware jurisdiction, no party is a consumer, at least one is a business formed under Delaware law or with its principal place of business in Delaware, and, if involving solely a monetary claim, the amount in controversy is at least $1 million. The statute bars punitive damages and juries, and provides a definition for “technology dispute.” The second section authorizes the Chancery Court to mediate “business disputes” under certain defined circumstances.

The bill's sponsor stated: "In sum, the Act provides additional benefits for businesses choosing to domicile in Delaware. It seeks to keep Delaware ahead-of-the curve in meeting the evolving needs of businesses, thus strengthening the ability of the State to convince such businesses to incorporate and locate operations here. Notably, all elements of the Act only increase the jurisdiction of the Court of Chancery to handle matters in situations involving parties who have agreed that Chancery is the forum that should resolve their dispute; that is, the Act does not compel any party that has not agreed to Chancery’s jurisdiction to submit to it, unless pre-existing law would enable Chancery to hear the case."

Click here for a copy of Delaware's press release on this new measure.

Mississippi Adopts Special Electronic Discovery Rule

The Mississippi Rules of Civil Procedure generally track the Federal Rules of Civil Procedure. However, on May 29, 2003, Rule 26(b)(5) was added specifically to authorize and regulate discovery of electronic data. Recognizing that special problems may exist in the retrieval of such data, the rule limits the duty of production of electronic data to that which is reasonably available to the responding party in its ordinary course of business. Further, if extraordinary steps are required to comply with the request, the court may require the requesting party to pay the expense of those steps.

Indiana Punitive Damages Allocation Statute Survives Review

Indiana, like a number of other states that enacted similar “tort reform" legislation, limits the amount of benefit that a plaintiff can receive from a punitive damages award by allocating a percentage to a state fund (here 75%). In Cheatham v. Pohle, 789 N.E.2d 467 (Ind. May 30, 2003), plaintiff argued that it was unconstitutional for the state to “take” $75,000 of her $100,000 punitive damages award. However, in a 3-2 decision, the Indiana Supreme Court reversed the intermediate appellate court and upheld the statute because a plaintiff has no right to punitive damages and, therefore, no property interest for the state to “take.” This decision brings Indiana into line with all other state courts considering similar laws, except for Colorado.

Value of “Potential Harm” Is Important In Assessing Whether Punitive Damage Award Is Excessive

In one of the first district court decisions applying the U.S. Supreme Court’s State Farm test, the trial court affirmed an award of punitive damages against an insurer for bad faith where the ratio of punitive damages to compensatory damages was 75:1 ($150,000 versus $2,000). In The Willow Inn, Inc. v. Public Serve Mutual Insurance Company, No. Civ. A. 00-5481, 2003 WL 21321370, 2003 U.S. Dist. LEXIS 9558 (E.D. Pa. May 30, 2003), the compensatory damages were low because the insurance carrier ultimately paid the claim, albeit two years late. The district court concluded that the award comported with the Supreme Court’s recent holding in State Farm because (1) the amount of punitive damages awarded was equal to the value of the plaintiff’s original insurance claim, and thus, this translated into a ratio of 1:1; and (2) the statute permits the recovery of attorneys’ fees, and fee awards in this amount have been upheld.

Removal Not Barred By Statute Allowing Proceeding In State Court

Under 28 U.S.C. § 1441(a), state court actions may be removed to federal court “except as otherwise expressly provided by Act of Congress.” Resolving a split between the First and Eleventh circuits, on the one hand, and the Eighth circuit, on the other, the U.S. Supreme Court held that by providing that an action under the Fair Labor Standards Act “may be maintained” in either federal or state court, Congress did not intend to preclude removal. Breuer v. Jim’s Concrete of Brevard, Inc., 538 U.S. 691 (May 19, 2003). Note: similar language exists in other statutes including the Age Discrimination in Employment Act and the Family and Medical Leave Act.

N.Y. Federal Court Releases Significant E-Discovery Opinion

In a discovery dispute involving a large broker-dealer, a federal court established a new framework for analyzing who must bear the cost of searching computer media for e-mail. The court found that a cost-shifting analysis is not triggered by the mere presence of electronic documents; rather, cost-shifting should be considered “only when electronic discovery imposes an undue burden or expense” – which usually is a function of how it is stored. The court established a new 7-factor test for situations eligible for cost-shifting. Here, the court required defendant to pay for searching all e-mail still on its servers or optical media; however, restoration and searching of backup tapes would be subject to sampling followed by a cost-sharing analysis. Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. May 13, 2003).

Counsel May Not Sign Client’s Name On Interrogatory Answers

Addressing a topic that arises in practice but rarely is the subject of court opinions, a federal district court has held that the requirement in Fed.R.Civ.P. 33 that interrogatory answers to be “signed by the person making them” means that an answering party may not authorize litigation counsel to sign the respondent’s name. In the rush of meeting a response deadline, attorneys often face logistical hurdles in obtaining the client’s signature. However, in MomsWIN, LLC v. Lutes, No. 02-2195-KHV, 2003 WL 21077437 (D. Kan. May 9, 2003), the court found counsel’s solution unacceptable — signing the clients’ names for them. It did not help that the attorney disguised his handwriting and had his paralegal notarize the forgery. The court treated the interrogatories as unanswered, set a deadline for answers to be served with valid signatures and without objections, ordered payment of attorney’s fees for plaintiff’s Rule 37 motion, and reported the notary to the State.

Consent To Trial Before Magistrate Judge May Be Implied

The U.S. Supreme Court has relaxed the requirement that consent to trial before a Magistrate Judge under 28 U.S.C. § 636(c) and Fed. R. Civ. P. 73(b) must be in writing. In Roell v. Withrow, 538 U.S. 580 (Apr. 29, 2003), the Court held that the consent necessary for jurisdiction before a full-time Magistrate Judge may be inferred where the litigant was aware of the need for consent and the right to refuse it, but voluntarily appeared and tried the case before the Magistrate Judge. This decision overrules circuit decisions which had required written consent.

Supplemental Jurisdiction Tolling Provision Is Constitutional

If a federal court declines to exercise its supplemental jurisdiction over state claims, the plaintiff may refile those claims in state court. To prevent the expiration of statutes of limitations governing such claims while pending in federal court, 28 U.S.C. § 1367(d) requires state courts to toll the local limitations period. In Jinks v. Richland County, South Carolina, 538 U.S. 456 (Apr. 22, 2003), the U.S. Supreme Court rejected the argument that the statute was an unconstitutional intrusion into states’ powers.

Foreign Sovereign Removal Limited To Direct Majority Ownership

Civil actions may be removed under 28 U.S.C. § 1441(d) if a defendant is an instrumentality of a foreign state, defined as an entity “a majority of whose shares” are “owned by a foreign state.” In Dole Food Co. v. Patrickson, 538 U.S. 468 (Apr. 22, 2003), the U.S. Supreme Court clarified that the foreign state must directly own a majority of the defendant’s shares, and that indirect ownership through subsidiaries is insufficient. The Court broadly described veil-piercing as a “rare exception,” stressing that “[i]n issues of corporate law structure often matters.”

Federal Rules Changes Approved, Effective 12/1/2003

The U.S. Supreme Court has approved and sent to Congress amendments to Federal Rule of Civil Procedure 23, relating to class actions. The amendments spell out requirements for the contents of notice to a Rule 23(b)(3) class, describe procedures for settlement approval, establish standards for the appointment of class counsel, and set procedures for fee petitions in class actions. Unless the subject of a legislative veto, the amendments will take effect December 1, 2003.

In addition, the U.S. Supreme Court also has approved changes to rules of civil procedure and evidence governing jury instructions and the use of masters. These amended rules are Fed.R.Civ.P. 51, 53, 54 and 74A, and Fed.R.Evid. 608(b). Absent Congressional action, all of these changes will take effect on December 1, 2003 in pending cases, unless not “just and practicable,” as well as in all new cases.

Click here to see the changes to the Federal Rules of Civil Procedure in non-redline and redline form with commentary, and here to see the changes to the Federal Rules of Evidence in non-redline and redline form with commentary.

Punitive Damages Exceeding Single-Digit Multiplier Likely Excessive

In State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (Apr. 7, 2003), the U.S. Supreme Court revisited the issue of when an award of punitive damages is unconstitutionally excessive, and, among other things, limited the types of reprehensible conduct that may be considered in calculating a punitive damages award. Amplifying its decision in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), the Court held that while a punitive damage award is to be based on the degree of reprehensibility of the defendant’s conduct, the disparity between the actual or potential harm and the punitive damage award, and the difference between the punitive damage award and available civil penalties, a court may not consider dissimilar acts or punish a defendant for conduct directed at another person in another state unless that other plaintiff is joined and an appropriate choice of law analysis applied. The Court also reiterated that “few [punitive] damage awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” State Farm Mutual, 538 U.S. at 425.