Valpo Law Blog

Analysis of current legal issues and cases in the Seventh Circuit Court of Appeals

Category: Business Law (page 1 of 3)

Even a Simple Contractual Mistake Can Lead to a Disastrous Outcome for Businesses

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Elias Awaad
Juris Doctor Candidate, 2016
Valparaiso University Law

It is not uncommon for a business to rely on one manufacturer to provide them with a majority or a certain amount of one product to resell to the public. Often, these businesses and manufacturers enter into contracts with one another, but sometimes one party does not truly understand what they agreed to. As illustrated in BRC Rubber & Plastics Inc. v. Continental Carbon Company, a mistaken belief in a contract can have a potentially devastating impact on all parties involved.

BRC Rubber & Plastics Inc. entered into a contract with Continental Carbon Company for Continental to supply BRC with carbon black. Continental was unable to complete orders for BRC in April 2011 based on high demand for carbon black and refused to fill additional orders by BRC. BRC subsequently filed suit, alleging breach of contract. Continental was under the belief that as long as they shipped approximately 1.8 million pounds to BRC annually, as the contract provided, they did not have to accept and fill each and every order from BRC. BRC, on the other hand, believed that Continental had to fill every order. BRC’s belief was based on its view that the parties’ agreement was a requirements contract, where a purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees, in turn, to fill all of the purchaser’s needs during the period of the contract. Because the parties’ agreement is governed by Indiana law, an unambiguous contract is interpreted by giving the terms their ordinary meanings while reading the contract as a whole, with the ultimate goal of determining the parties’ intent.

The District Court agreed with BRC that the companies had a requirements contract, reasoning that Continental’s refusal to confirm and ship some orders was a breach and repudiation of the agreement. BRC was awarded nearly $1 million in damages. However, the 7th Circuit Court of Appeals vacated the judgment, holding the lower court erred in ruling in favor of BRC after finding the agreement between the companies was a requirements contract.

Although the parties’ agreement did provide that BRC would purchase a specific amount of carbon black from Continental each year, according to the 7th Circuit Court of Appeals, the parties’ agreement did not qualify as a requirements contract. To constitute a requirements contract, BRC would not only have had to be obligated to buy some amount of carbon black from Continental but also be prohibited from buying carbon black from any other seller. Judge Williams, in vacating the judgment, stated, “In our view, neither condition is met, so we hold that the parties’ agreement was not a requirements contract.” This case has been remanded back to the District Court, who will need to make a decision that isn’t premised on the agreement being a requirements contract.

Based in the foundations of American law, we are free to contract with one another; however, as evidenced by BRC Rubber & Plastics Inc. v. Continental Carbon Company, the 7th Circuit reminds us that it is imperative that we fully understand any contract before agreeing to it and that we must contract within the law.

Business Judgment Rule: The New Corporate Mulligan

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By: Rex Hood
Juris Doctor & M.B.A. Candidate, 2015
Valparaiso University School of Law

The Seventh Circuit recently reviewed Donnawell v. Hamburger  to establish whether a corporation could use the business judgment rule in correcting a contract. The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

The case is a share-holders’ derivative suit against current and former members of DeVry‘s board of directors. An incentive plan adopted by the company in 2005 authorized the award of stock options to key employees, including the company’s CEO. The plan limited the awards to 150,000 shares per employee per year. Yet the company granted Daniel Hamburger, who became its CEO in 2006, options on 184,100 shares in 2010, 170,200 in 2011, and 255,425 in 2012. After discovering its mistake, Devry reduced each grant under the 2005 plan to 150,000 shares while at the same time it allocated Hamburger 87,910 additional shares available under the company’s 2003 incentive plan. As a result Hamburger received options in 2012 far above the 150,000 that were the most he could receive under the 2005 plan. All these grants were proposed by the company’s Compensation Committee to the company’s independent directors. The independent directors approved the award of the additional shares to Hamburger.

The plaintiff argues that the award is improper because only the company’s Plan Committee, and not the Compensation Committee, was authorized to grant stock options under the 2003 plan. But there was no Plan Committee in 2012. Likewise no harm was done by allowing the Compensation Committee to do over, in effect, the erroneous grant of stock options under the 2005 plan, by invoking the 2003 plan. The court held that drafters of contracts are not omniscient; they are not gifted with exact knowledge of what the future holds and, furthermore, literal interpretation can produce absurdities when applied to unforeseen occurrences. The nonexistence of the Plan Committee created an unforeseen hole in the 2003 incentive plan, and the company plugged the hole by substituting the Compensation Committee a substitution that might well make the shareholders better off, and would be very unlikely to make them worse off, than if there had been a Plan Committee. It makes no sense to allow a harmless error to drive a judicial decision.

This court in their ruling has avoided a company suffering from an unforeseen effect but, has this court decision created a corporate do over or “mulligan” provision? By allowing a company to use the business judgment rule in this manner you can expect we will see companies attempt to utilize this rule in other unforeseen ways in the future.

No Wonder People Do Not Like Insurance Agents

insurance-management

By: Jeremy M. Schmidt
J.D. Candidate, 2017
Valparaiso University School of Law

Ohio National Life Assurance Corp. v. Douglas W. Davis, et al. came before the Seventh Circuit on appeal from a summary judgement decision at the trial court. Mavash Morady (Morady), a defendant in this case, was a contracted insurance agent with Ohio National Life Assurance Corp. (Ohio National). Douglas Davis (Davis), another defendant in this case, was working with Morady to defraud Ohio National by using an investment strategy known as Stranger-Owned Life Insurance (STOLI).

Davis and Morady devised a scheme where they chose people that were older because they believed that they would be prime candidates for their scheme. It would begin by Davis approaching an individual, and then asking them to take out a life insurance policy. These people would receive a compensation from Davis for taking out a life insurance policy.

Morady, being the life insurance agent, would meet with the chosen people and have them fill out all of the forms to apply for life insurance. Morady would then fraudulently alter the documents to make these potential clients look like they are younger, and healthier, than they actually were. Ohio National would confirm that these prospective clients were actually people, but they did not check further into any of the clients to ensure the paperwork was completely accurate.

Davis and Morady then would contact the clients about a month after the life insurance went into force. The two then would have the clients sign the policy over to a irrevocable trust that was managed by a company that Morady’s husband owned. The life insurance policy then was owned by the company, and the beneficiary was also the company. The clients never paid any of the premiums because the company paid the premiums for them. The company then would sell the life insurance polices to investors. By doing this, Morady was violating her employment contract with Ohio National because the employment contract does not allow for an agent to sell policies that will be involved in a scheme where a third party will pay the premium, and will thus benefit from the death of the insured.

Once Ohio National found about the scheme Davis and Morady had been carrying out, they voided out all the policies that were involved. Ohio National then filed a complaint against Davis, Morady, Morady’s husband, and other investors. The two sides filed briefs that had a common fact pattern, which means that there was no dispute to the events and how they happened. Ohio National filed a motion for summary judgement, which the court granted in their favor. The court gave Ohio National everything they asked for with the exception for the judgment against Steven Egbert (Egbert). The court reasoned that Egbert was an innocent bystander in the scheme when he made an investment into a life insurance policy, and could not have known the policy was created through fraudulent acts.

The Seventh Circuit decided that summary judgement in favor of Ohio National was correct and the damages awarded were reasonable because Davis and Morady were found to have committed a tort of civil conspiracy.

Practicality of Actual Injury in Data Breach

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By: Duke Truong
J.D. Candidate, 2017
Valparaiso University School of Law

Imagine being one of four million members under the care of Advocate Health and Hospitals Corporation (Advocate) and waking up to news that thieves have stolen your confidential information.  This is exactly what happened the morning after July 15, 2013, when burglars stole four password-protected computers from Advocate.   The computers contained patient’s confidential information: social security numbers, Medicare and Medicaid data, medical record numbers, health insurance data, and medical diagnoses along with names, addresses, and date of birth.  Advocate, whom patients entrusted with the duty of protecting their data, did not notify them of the breach until August 23, 2013.  Despite these facts, no proof of improper access or improper use of the confidential information actually occurred.

Matias Maglio and other affected patients brought a class action suit against Advocate in the circuit court of Lake County and Kane County.  Both lawsuits alleged claims of negligence, invasion of privacy, and violations of the Consumer and Deceptive Business Protection Act and the Illinois Personal Information Act.  Yet, plaintiffs failed to allege any unauthorized uses of their private information.  Despite the fact plaintiffs did not suffer any actual injury, they moved forward with their lawsuits anyhow.

Advocate moved to dismiss the complaints under the Rules of Civil Procedure for failure to state a claim and for lack of standing.  The plaintiffs did not suffer an injury-in-fact and only speculated that their stolen confidential information may lead to increased risk of identity fraud.  The doctrine of standing requires a plaintiff to raise issues of a real injury to which the law can recognize so to provide a remedy.  The complaints only alleged future, uncertain risk of identity fraud. The district courts of Lake County and Kane County dismissed the complaints in May and July of 2014, respectively.

However, the plaintiffs appealed to the Appellate Court of Illinois on grounds that the lower courts erred in its decisions.  The appellate panel consolidated the cases from the two counties and affirmed the district court’s decisions in Maglio v. Advocate Health and Hospitals Corporation on August 6, 2015.

The appellate panel reiterated that plaintiff’s failure to establish any specific injury makes the lawsuits insufficient.  To date, only two of the 4 million members suffered actual identity theft and they are not parties in the lawsuits.  The court held that this fact alone does not prove that plaintiffs face certain imminent risk of substantial harm.  Speculating about a future injury or harm is not grounds for a claim in the court of law.  To move forward, plaintiffs must show that their medical records were in fact disclosed to third parties.

Although the breach did not result in unauthorized use of information, speculation is not a cause for action.  To help lessen the burden on the courts, plaintiffs have to make sure their claims contain actual injuries otherwise it is a waste of resources for parties involved.  It may seem minor to determine actual injury, but the practicality is priceless.  As society increasingly depend on technology to store confidential information, employers (especially healthcare providers) should make data security one of the top priorities.  Employers should consider safeguards such as encryption and periodic audits to lessen the likelihood of a data breach. Proper training about HIPAA, security regulations and data privacy laws will further guard against a breach.

The Not-So Merry Gentleman: A Critically Acclaimed Flop

By: Jonathan E. Joseph, MBA, CPA
Juris Doctor Candidate, 2016
Valparaiso University School of Law

Who is to blame when a motion picture receives critical acclaim yet is a commercial failure? In Merry Gentlemen, LLC v. George and Leona Productions, Inc. & Michael Keaton, Merry Gentleman, LLC blamed leading man and director Michael Keaton and George and Leona Productions, Inc. for the fact that the  2009 film The Merry Gentleman failed to show a profit and tried to use breach of contract to make the point.

The plaintiff argued that Keaton violated his directing contract by (1) failing to prepare the first cut of the film in a timely fashion; (2) submitting a first cut that was incomplete; (3) submitting a revised cut that was not ready for the producers to watch; (4) communicating directly with officials at the Sundance Film Festival and threatening to boycott the festival, if they did not accept his director’s cut instead of the producers’ preferred cut; (5) failing to cooperate with the producers during the post-production process; and (6) failing to promote the film adequately. The plaintiff asked the Court for its full investment of $5.5 million.

Had the case gone to trial, it would have been difficult to prove the plaintiff’s claims that his actions amounted to breach of contract. Keaton did complete the film, which was subsequently accepted at the prestigious Sundance Film Festival. It received critical praise—Roger Ebert, for example, gave it 3.5 stars out of 4 and called it “original, absorbing and curiously moving.” And the film’s executive producer, Paul Duggan, admitted during his deposition that he was “unaware of any director who did more publicity than Keaton did for a movie with a comparable budget.” Instead, Keaton moved for summary judgment on the “narrow ground that the plaintiff had failed to produce sufficient evidence that his alleged breaches of the directing contract caused it damages. On appeal, the district court assumed that Keaton had breached the contract and examined the issue of damages, as well as the causation of resulting harm from the alleged breach of contract.

Under Illinois law, a “party injured by another’s breach or repudiation of a contract usually seeks recovery in the form of damages based on his ‘expectation interest,’ which involves obtaining the ‘benefit of the bargain,’ or his ‘reliance interest,’ which involves reimbursement for loss caused by reliance on a contract.” With this being said, in essence, the plaintiffs were seeking the amount of the movie’s budget in full—or in other words, a free movie. The court held in Keaton’s favor, finding that the plaintiff had failed to present a genuine issue of material fact regarding causation and resulting damages.

The plaintiff might have received part of its investment, if it had claimed that Keaton’s performance slowed production, accrued extra costs, or caused other negative financial consequences. Instead, The plaintiff asked for its entire investment as damages for breach of contract, which was impossible to justify because Keaton had not walked away from his contract. They were merely making he argument that they had relief on Keaton’s performance with the expectation interest of receiving a profitable movie.

Recovering one’s investment is a theory of reliance damages. Extra costs would also look like a theory of reliance damages in the sense that increased costs could affect any expected downstream profits (this is really complicated, because downstream profit is actually a form of consequential damage that could be thought of as reliance). As for expectation, it is possible for someone to perform his contract duties so poorly, that the expectation interest is completely frustrated. This all needs to be related to the legal standards given above about expectation and reliance damages in a more clear way, if, in fact, that was what the court’s concern.

He had made the movie and it had generated critical acclaim. If the court had sided with the plaintiff and awarded the damages it was seeking, the plaintiff would have had more than it started with; it would have been awarded a free film. More specifically, the plaintiff would have received back the money it put out in reliance on Keaton’s promise, so it would be put back in the status quo ante. Even if Keaton had breached, there was still some benefit the plaintiff received the form of a movie that was a critical success and earned some money.

On appeal, the Court found that the plaintiff “effectively wants to shift the entire cost—and risk—of producing The Merry Gentleman to Keaton for his alleged breaches, giving it a windfall and placing it in a better position than it would have been in had the contract never been signed.Reliance damages are not insurance. Courts “will not ‘knowingly put the plaintiff [receiving a reliance recovery] in a better position than he would have occupied had the contract been fully performed.’” In general, reliance damages are capped by the expectation interest and this is the  reasoning the court used.

The Court dryly noted that the plaintiff might have been able to recover some damages for specific failures by Keaton, but in this case it “shot for the moon and missed.” Keaton fulfilled his contract and made a movie.  The plaintiff was not entitled to something for nothing. Its investment – and its contract with Keaton – involved a degree of risk, and it was unreasonable for the plaintiff to expect the court to find in its favor simply because it didn’t like the final result.

Motion to Dismiss? Seventh Circuit Says “Not So Fast.”

By: Jeremy M. Schmidt
J.D. Candidate, 2017
Valparaiso University School of Law

Recently the Seventh Circuit  decided that the Federal District Court for the Southern District of Illinois erred when it dismissed Dr. Robert L. Meinders, D.C., Ltd., v. UnitedHealthcare, Inc., et al. because the district court denied Dr. Meinders (Meinders) due process when it dismissed the case without allowing Meinders reasonable time to respond. Meinders filed a complaint against UnitedHealthcare (United) in Illinois State court in 2014. Meinders claimed that United violated the Telephone Consumer Protection Act (TCPA) and the Illinois Consumer Fraud and Deceptive Practices Act when they sent him unsolicited junk faxadvertisements. United had the case removed to the Federal District court because it involved a federal question since the TCPA is a federal Statute.

In 2013, Meinders and ACN Group, Inc., a subsidiary of United, entered a provider agreement. After Meinders entered this agreement, he started to receive junk faxfrom United. Under the provider agreement, any dispute arising from the agreement were subject to arbitration. United claimed that they were protected by this agreement because ACN Group was one of their subsidiaries. Therefore, United argued that this dispute needed to go through arbitration as was priorly agreed to. However, the Seventh Circuit said United is not protected by the agreement because they, themselves, were not a party to the agreement. The seventh circuit continued by explaining that a parent company cannot enforce an arbitration agreement of a subsidiary when only the subsidiary was a party to the agreement.

Meinders heavily relied on the contract theory of “If your are not a party to the agreement you cannot make a claim under that agreement.” In response, United introduced new evidence stating that they were a party to the agreement. Colleen Van Ham, President and CEO of UnitedHealthcare of Illinois, stated that ACN Group was a wholly owned subsidiary, thus making United a party to the agreement. United also argued that it assumed important obligations under the provider agreement such as  ACN Groups obligation to coordinate and transmit payments to providers.

Meinders asked the federal district court to strike the new evidence from the brief, or to allow them to file a reply brief to counter the new evidence. The federal district court denied Meinders request, and allowed Uniteds motion to dismiss so that the case could move to arbitration, as according to the providers’ agreement. Meinders then filed for appeal. The seventh circuit concluded that Meinders did not have a fair and reasonable opportunity to respond to Uniteds reply brief that introduced new evidence. So the court reversed the federal districts court decision to dismiss, and remanded the case for further proceedings.

The Wealthy’s “Get Out of Jail Free” Card

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By: Ashley Merritt
J.D. Candidate, 2017
Valparaiso University School of Law

Should wealthy criminal defendants be given lesser sentences compared to their more modest counterparts? This question has left many contemplating if wealth is distorting the criminal justice system and sending the wrong message to the public. This was the very issue that was demonstrated in the case of United States v. Warner.

Billionaire H. Ty Warner is the founder of the company Ty, Inc., which was made famous for creating a popular toy in the 1990s, called the Beanie Baby. As the Beanie Baby’s popularity skyrocketed, so did Warner’s wealth. Soon after Beanie Babies became a success, Warner opened an off-shore bank account in Switzerland and began depositing funds to hide his assets. Within several years, the account balance was over $93 million. Warner even went as far as instructing the bankers to destroy any correspondence, documentation, and evidence of the bank account after five years. Accordingly, he did not report the account to the Internal Revenue Service (IRS).

In 2013, the federal government charged Warner with tax evasion in violation of 26 U.S.C. § 7201. He pled guilty to one count of tax evasion, made full restitution, and paid $53.6 million in civil penalties. According to the Federal Sentencing Guidelines, the recommended term of imprisonment for tax evasion is between forty-six and fifty-seven months. However, the district court judge gave Warner a much more lenient sentence, consisting of two years’ probation, 500 hours of community service, and $100,000 in fines and costs. The court based its decision on a series of letters demonstrating Warner’s contributions and donations to public charities. At the time of his sentencing, his net worth was about $1.7 billion.

In the decision by the Seventh Circuit Court of Appeals, Warner’s probationary sentence was upheld. The court reasoned that Warner’s character was “one of a kind” and that his $53.6 million penalty provides enough deterrence for him to escape imprisonment.

How should other, more typical criminal defendants and the general public feel about this decision? On one hand, Warner’s generous contributions to society are applaudable, but on the other hand it sends a message that wealthy criminal defendants are “above” the law. The implications of the case may create a slippery slope in which wealthy defendants are given lighter and lighter punishments for serious crimes.

When the Milk Goes Sour: Manipulating the Commodities Trading Market

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By: Anjelica Violi
J.D. Candidate, 2016
Valparaiso University School of Law

Commodities trading affects everyday life with buying and selling and prices rocketing and plummeting. The Seventh Circuit decided a new case in this field on September 1, 2015: Indriolo Distribs., Inc. v. Schreiber Food, Inc. Indriolo Distributors, Inc., Knutson’s, Inc., and Valley Gold, LLC filed a class action against Dairy Farmers of America (“DFA”), two DFA officers, and Keller’s Creamery L.P. Keller’s Creamery is a butter manufacturer and DFA is a dairy marketing cooperative.

An amended class action complaint was filed in 2012, which added Schreiber Foods, Inc as a defendant. It alleged that Schreiber violated §§ 1 and 2 of the Sherman Act, the California Cartwright Act, the Commodity Exchange Act, and RICO, with additional unjust enrichment and restitution claims. Schreiber manufactures and sells cheese products to restaurants and food service distributers. Schreiber purchases directly from suppliers but a minimal fraction of purchases are on the Chicago Mercantile Exchange (“CME”). (In 2004 Schreiber purchased 350 million pounds of bulk cheese at $1.2 billion. This is how much cheese we are talking about.)

Indriolo, Knutson’s, and Valley Gold maintain that Schreiber conspired with DFA to purchase cheese traded on the Chicago Mercantile Exchange to manipulate the price of Class III milk futures so Keller’s and DFA could benefit. Class III milk futures refer to cow’s milk as a commodity, which is traded on the CME.

According to the comlaint, Schreiber and DFA would purchase cheese to stabilize prices and then unwind their milk futures positions at a profit, before they ceased purchasing cheese. This led to the crash of cheese prices at the end of June 2004. Schreiber denied this activity and moved for summary judgment, which the district court granted, and the Seventh Circuit affirmed.

While the Seventh Circuit said evidence of Schreiber’s alleged manipulation of Class III milk futures was “ambiguous” at best, it does pose the question of how often companies might try to manipulate trading prices. Furthermore, should this be a concern for other traded commodities as well? For example, it was discovered this year that BP manipulated the natural gas market in Texas back in 2008. The Wall Street Journal  wrote it was “the latest sign of increasing oversight of physical and financial commodities markets…” So how often is the market manipulated?

While the arguments on appeal had to do with summary judgment being inappropriate and the district court erring in its decisions, this case exemplifies how important soft commodities are on global and domestic scale. How often do you eat cheese or purchase a gallon of milk? (Unless you happen to be lactose intolerant.) Is there a way to better regulate trading, and if so, how?

To learn more about the dairy market, click here for more information, and feel free to snack on a side of cheese.

A Proper Proffer, After All

PyramidSchemeMS

By: Jonathan Joseph,  MBA, CPA
J.D. Candidate, 2016
Valparaiso University School of Law

Larry Pust was convicted of four counts of wire fraud after a jury trial in March 2013. On appeal, Pust’s attorney argued that Pust’s conviction should be overturned, on two grounds: First, that the evidence presented by prosecutors was insufficient to establish that he acted with intend to defraud the victims, and second, that the district court’s decision to admit evidence under Federal Rule of Evidence 801(d) (2) (E) was improper.

His conviction, which was upheld by the Seventh Circuit U.S. Court of Appeals, demonstrates the court’s familiarity with fraudulent practices in Ponzi schemes and the defense attorney’s missed opportunities to oppose evidentiary proffers during trial.

In 1919, a Boston clerk named Charles Ponzi devised an investment scheme in which new investors paid interest to earlier backers. The scheme collapsed then Ponzi was unable to recruit enough new capital to pay promised returns on investments. Over the years, other Ponzi schemes have made headlines, most recently an effort by financier Bernard Madoff (2008) that is considered the largest financial fraud in United States history. In Pust’s scheme, he and co-conspirator Robert Anderson, recruited investors for several phony investment schemes, among them Rosand Industries, a low-income housing project in Chicago. Pust and Anderson promised their investors that their monies would be held in an attorney’s escrow account that was “absolutely secure” and guaranteeing returns “as high as 20%.” No real estate was ever purchased, and Anderson and Pust were indicted for wire fraud in violation of 18 U. S. C. §1343. Anderson pled guilty, but Pust went to trial.

With regard to the defense failing to prove that Pust intend to defraud investors, the court noted that in none of the 7500+ emails between Anderson and Pust was there any mention of real estate transactions, permits, or any of the logistics that would have been involved in a project of that score. Furthermore, the emails included statements that proved Pust knew that monies were not being held in an escrow account as he had promised investors and that they needed additional monies to get “caught up” on certain investors’ interest payments through the infusion of new capital. In an email to an investor, Pust stated that the cost of inner-city real estate in Chicago had increased, which is why the investor would only be receiving 10 percent interest on his investment rather than the 20 percent he had been promised. These emails, combined with witness statement and other evidence presented by the government, proved that Pust had lied to investors in his effort to defraud them.

On the second point, the court examined how the government had introduced evidence in Pust’s original trial. In pre-trial proceedings, prosecutors made a Santiago proffer to admit statements made by Anderson against Pust under FRE 801(d)(2)(E). This type of proffer is a “road map” of the government’s case – it ties co-conspirators together, presents a specific, detailed outline of the witnesses and evidence that connect back to the defendant. The government also presented evidence in the form of over 7500 emails between Anderson and Pust and the testimonies of several investors Pust recruited for the Rosand Industries project.

Pust’s attorney did not object to these admissions either during pre-trial proceedings or during the trial itself. In its decision, the Court cited specific instances where Pust’s attorney stated specifically that he had “no objection” to the proffers and determined that Pust had waived his rights to challenge the admission of these statements, citing United States v. Natale: “When a defendant intentionally relinquished or abandons a known right, the issue has been waived and cannot be reviewed on appeal, not even for plain error.” Therefore, the appellate court upheld Pust’s conviction on this point.

There are two lessons to be learned from Pust’s case, conviction, and failed appeal. First, the time to object to a proffer is when it is made. Pust’s attorney had numerous opportunities to object to any or all of the government’s proffer, but repeatedly failed to do so. The introduction of the defense attorney’s decision not to object to proffered evidence during pre-trial and trial proceedings made any subsequent appeal on the grounds of improper admission of evidence invalid. Second, the overwhelming amount of evidence contained in the email traffic between Anderson and Pust created a clear case of intent after prosecutors connected the dots between the co-conspirators and their victims. The importance of these emails cannot be overstated and illustrated the ways that our digital technology can still provide an old-fashioned “paper trail.”

Seventh Circuit Takes Stance on Foreign Subsidiaries

World

By: Alex Salvi
Valparaiso University Law School
J.D. Candidate, 2016

Last month, the Seventh Circuit Court of Appeals limited antitrust laws’ ability to reach sales made to foreign subsidiaries of U.S. companies. This was done when they denied Motorola Mobility, LLC’s request to rehear its $3.5 billion price-fixing case against foreign manufacturers dealing with its subsidiaries. Motorola’s ten foreign subsidiaries sought liquid crystal display (“LCD”) panels used to manufacture Motorola cellphones outside the US. Motorola contended that companies selling to two of its subsidiaries were fixing their prices in order to eliminate competition in the market in violation of the Sherman Act. These defendant companies included Samsung Electronics Co. Ltd., Toshiba Corp., AU Optronics Corp., and others.

Motorola’s case came up against the Foreign Trade Antitrust Improvements Act (FTAIA). Congress passed the FTAIA to give a definitive limitation as to the international reach of the Sherman Act. In essence, passage of the act limited federal courts’ subject matter jurisdiction in regard to issues of antitrust law. Motorola argued that the alleged conspiracy was not governed by the act because it was aimed at a U.S. parent corporation. In other words, defendants purposefully did business with Motorola and knowingly engaged in anticompetitive behavior that passed into U.S. commerce through Motorola’s importation and sale of the cellphones.

One of the disadvantages to a U.S. company outsourcing its manufacturing, however, is that the FTAIA can block any action from being taken against companies that affect its foreign subsidiaries. In this case, although Motorola is an American company headquartered in Schaumburg, Illinois, the defendants in question sold LCD panels to Motorola’s overseas subsidiaries, not the parent company itself. In fact, not only were the panels purchased abroad, but they were used in the manufacturing of phones built abroad and never reached the United States until they were ready to be sold. Under FTAIA, claimants that purchase indirectly and/or suffer derivative harm lack antitrust standing to bring suit in the United States.

However, Motorola argued that the FTAIA should not apply to defendants because they set up offices in Illinois and deal directly with Motorola and is subsidiaries as if they were one company. In this way, the defendants integrated themselves into the United States stream of commerce. In an opinion by Judge Posner, the panel rejected the argument because Motorola was only injured indirectly—through its subsidiaries. Judge Posner further argued that the corporate formalities of the U.S. parent and its foreign subsidiaries should be respected. Motorola decided to have its subsidiaries incorporated and pay taxes in foreign jurisdictions, and therefore, the subsidiaries should be treated as separate and must seek relief in the countries in which they are incorporated. A parent does not have a right to sue for damages on behalf of its foreign subsidiaries in the United States.

Despite its basic approach, the decision allows the court to impose damages if the future conspiracy has a “direct, substantial and reasonably foreseeable effect on U.S. commerce.” Additionally, the FTAIA does not block the U.S. Department of Justice from seeking injunctive or criminal relief when these instances do indeed occur.

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