Valpo Law Blog

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

Category: Labor Law (page 1 of 2)

Justice Is Never Free… In Regard to Attorney’s Fees

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

Goesel v. Boley International (H.K.) Ltd., et al., is a very unfortunate case involving a minor child that suffered a life changing injury resulting from a negligently designed and produced toy robot. This case never made it to trial because the two parties settled the day before the trial was set to start.

Goesel, who was five years old at the time of the incident, was playing with a toy robot that was designed and produced by Boley International (Boley). The toy robot shattered which lead to pieces of the robot piercing Goesel’s right eye lens. This injury resulted in irreversible damage, and caused him great pain and suffering. Goesel’s parents hired the law firm of William, Bax & Saltzman to sue Boley for the damage they caused to their son.

This case came before the Seventh Circuit on appeal because of a disagreement between Goesel’s counsel and the presiding judge on how much the attorney’s fees would be. The parties settled on the amount of $687,500 to be paid to Goesel by Boley for the injury he sustained. Personal injury cases are, traditionally, taken on by attorneys on a contingency fee basis. This means that the attorney will only get paid if the plaintiff were to win the case. If the plaintiff were to lose the case, then the attorney will not get paid for the services provided. This is exactly the type of arrangement that was agreed upon in this case. The retainer agreement stipulated that if Goesel won the case then the firm would receive one-third (1/3) of the settlement, and all litigation expenses were to be paid by Goesel from the settlement. This type of retainer is common practice for firms that take on personal injury cases.

The seventh circuit decided that Goesel’s counsel was entitled to all of the attorney’s fees under the retainer agreement, which was reasonable, and that the trial judge was wrong in the ruling. The seventh circuit awarded the attorney’s fees saying that they were reasonable. The fees ended up being about 58% of the settlement leaving Goesel with only about 42% of the settlement. Opinions will be different on whether or not this amount was fair; however, the key principle to remember is that there is an expectation (and an obligation) for an attorney to work endless hours to get the best result for their clients. Therefore, they not be compensated reasonably and fairly.

 

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

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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.

Surveillance Cameras At Work: Invasion of Privacy?

By: Haley Holmberg
J.D. Candidate, 2017
Valparaiso University School of Law

A peeping Tom or just a supervisor doing his job? The Seventh Circuit Court of Appeals reviewed Gustafson v. Adkins to establish whether the defendants had a valid reason behind their actions and were protected by qualified immunity or whether they should be held accountable.

Renee Gustafson worked at Jesse Brown Veterans Affairs (“VA”) Medical Center in Chicago as a police lieutenant supervisor. During this time, the VA didn’t have a designated area for female officers to change so they often changed in an active supervisors’ office. In May 2007, Thomas instructed Adkins to install a hidden camera in the office to identify supervisors who slept on duty. Adkins informed Thomas about the illegality, but was instructed to install the camera anyway. The images were sent to Thomas’s office for viewing. The camera was discovered two years later and had caught images of Gustafson and other females changing. Gustafson filed suit against Thomas and Adkins alleging her privacy had been invaded and she had been the victim of an unconstitutional search under the 4th Amendment.

Adkins argues Gustafson’s claim of 4th Amendment violation is precluded by the Civil Service Reform Act (“CSRA”) and the Federal Employees’ Compensation Act (“FECA”). The CSRA establishes a framework for evaluating adverse personnel actions against federal employees and may preempt federal claims that fall within its scope. However, Adkins’s conduct does not fall within the scope and cannot be considered to have been done for “disciplinary or corrective action” as there is little evidence that the camera was being used for this purpose. Further, case law on the matter suggests Adkins’s conduct is “closer to a warrantless search outside the scope of the CSRA.”  “The FECA provides the exclusive remedy against the United States or an instrumentality thereof to compensate a federal employee for a work-related injury defined as injury by accident and disease proximately caused by the employment.” The FECA does not bar a federal employee’s suit against individual co-employees. Given the silence on co-employee suits and the difficulty of defining Adkins actions as accidental, therefore matters of the suit are not determinative based on the FECA.

Adkins also claims his motion on summary judgment should have been granted based on qualified immunity. “The doctrine of qualified immunity protects government officials from liability for civil damages when their conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known.”  In order to determine if Adkins can invoke qualified immunity the court must inquire whether the constitutional right was clearly established at the time of the alleged violation. According to case law, the essential principle is that an employer’s workplace search must be reasonable. “Reasonableness depends upon the circumstances presented in a given situation and upon balancing the public, governmental, and private interests at stake in that situation.” At the time the camera was installed, the right of employees to be free from unreasonable employer searches was already established. Therefore, Adkins did not meet the requirements of qualified immunity.

For the foregoing reasons, the court affirmed the judgment of the district court. This case is a prime example of why we must never just do as we are told, even in employment. To further demonstrate this, refer to Yale University psychology professor Stanley Milgram’s 1961 study on authoritarian obedience. When others are allowed to make decisions for us, it may not always lead to an outcome in our best interest.

Weighing the Options of Care

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

Over 23,000 mentally disabled people were on the waiting list to receive housing and medical care from any of the eight state-operated developmental centers (SODC) in Illinois.  Another 600 were in emergency situations awaiting services. The State of Illinois could not provide essential services to those on the waitlist because it already cared for nearly 25,000 people.  In 2012, Illinois planned to close roughly a third of its SODCs to save costs. The state chose to close the Warren G. Murray Development Center, an SODC. Residents of Murray faced relocation due to the planned closure. The state tried to shift the residents of the SODCs to community-based facilities because it is cost effective.

Before the residents are moved, the state must assess their fitness. The assessment determines what kind of facility the disabled person will be placed in. Standing in the state’s way were the guardians of the Murray residents; the guardians wanted to prohibit the state from carrying out the assessment without their consent. The Illinois League of Advocates for the Developmentally Disabled represented the plaintiffs. They sued the Illinois Department of Human Services under 42 U.S.C. § 12132 of Title II of the American with Disabilities Act.  Plaintiffs alleged discrimination by a public entity.

The guardians claimed treatment of residents at community-based facilities are worse than at SODCs.  In addition, the guardians claimed the state left them with no other choice but to accept the relocation of the wards. Plaintiffs filed for a preliminary injunction against the assessment and transfer of the wards.  The case went before the district court of Northern Illinois.  The district court denied the plaintiff’s request.  Plaintiffs appealed to the Seventh Circuit Court of Appeals.

Judge Posner, Manion, and Hamilton presided over Illinois League of Advocates for the Developmentally Disabled, et al. v. Illinois Department of Human Services, et al. and affirmed the district court’s holding.  Plaintiffs failed to prove mistreatment of their wards at community-based facilities. The judges relied on factors such as emotional benefits of community-based facilities, the likelihood of residents having his or her own room, and the lack of irreparable harm on the plaintiffs in affirming the decision.

First, the judges reasoned that community-based facilities are emotionally beneficial for the residents. Being near stores, parks, restaurants, or movie theaters bring emotional benefits that allows them to feel free. Second, the chances of residents having his or her own room is better than at SODCs where less than 29 percent have their own room. Community-based facilities are less crowded than SODCs.  Finally, the judges thought that granting the preliminary injunction would impose irreparable harm on the state because of the financial distress.

SODCs are isolated medical centers cut off from society. Although the mentally disabled are severely hindered in life, it does not mean that they cannot experience the joy of being a part of the community. Academic studies show that severely disabled persons feel less isolated at community-based facilities.  Yes, parents or guardians should have the ultimate say in the care of their wards, but at times the state is in a better position to know what’s best in weighing the options of care.

Retaliation Claim for Workplace Discrimination

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By: Macey Albert
J.D. Candidate, 2017
Valparaiso University School of Law

Eric Harden sued the Marion County Sherriff Department for retaliation under title Title VII of The Civil Rights Act of 1964. Harden alleged that the Department fired him in retaliation for testifying on behalf of African-American police officers in a race discrimination investigation.  The Court reviewed two issues: evidentiary and retaliation.

A witness accused Lt. Frasier of stealing money from a man Harden arrested. The Department argues that the summary judgment motion  relied on inadmissible hearsay.  Harden wanted to offer the statement of the witness to prove that the Department was aware of—and ignored—another suspect. The evidence offered did not warrant the decision even if the statement was considered.

Title VII  prohibits employers from retaliating against employees from testifying, assisting, or participating in a race discrimination investigation. Retaliation may be established by either direct or indirect methods of proof. The Court limited their inquiry to whether Harden has presented sufficient evidence that his protected activity was a substantial and motivating factor in Harden’s eventual termination.

The plaintiff sought damages against the defendant for retaliation. Therefore, Harden had the burden of proving each of the following elements by a preponderance of the evidence:

  1. The plaintiff engaged in or was engaging in an activity protected under federal law, that is known as activity;
  2. The employer subjected the plaintiff to an adverse employment action, that is known as adverse employment action; and
  3. The plaintiff was subjected to the adverse employment action because of his participation in protected activity.

The defendants conceded the first two elements. This left Harden with the burden establishing that the discrimination that he suffered was caused as a result of the protected activity; meaning, the employer action was at least, in part, motivated by the employee engaging in protected activity.

Harden had to rely on circumstantial evidence to satisfy the element, or a a casual link between his protected activity and the adverse action. There are three categories that go into circumstantial evidence: suspicious timing, ambiguous statements, and other information from which an inference of retaliation intent might be drawn.

Harden offered no evidence that proved that his termination happened at a suspicious time. Harden, next, offered evidence to show a continuous pattern of harassment. The evidence included Lt and the Deputy encouraging workers to discipline Harden for no reason. Even though Harden introduced this evidence, a link between the evidence and his termination was missing.

Harden alleges that the Internal Affairs investigation was unworthy of credence. The investigation concluded that Harden was, ultimately, responsible for the theft. The court did not evaluate whether the stated reasons were inaccurate, but whether the employer honestly believed the reason it has offered to explain the discharge. The investigation consisted of more people being suspected other than Harden. There was a thorough investigation and the investigation offered a legitimate explanation for their conclusion that Harden was the thief.

The Seven Circuit ruled that there was not enough evidence to suggest that the Internal Affairs investigation was a sham or that the relevant decision makers at the Department did not legitimately rely on the investigators’ conclusion in terminating him. Harden argued that he immediately became the primary suspect and the department, which ignored the accusation of another officer. The Court found that there was no evidence in the person who heard the accusation told the investigators during the interview. Because no reasonable jury could find that the Internal Affairs investigation was pretextual, the District court’s ruling was affirmed. Therefore, summary judgment was granted in favor of the Department.

Inconsistent Story Brings Nothing But Trouble and a Frivolous Law Suit

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

The Seventh Circuit decided on Afram Boutros v. Avis Rent A Car System, LLC, which serves as an important reminder for all attorneys to carry out their due diligence before filing a suit (or appeal), because they could be sanctioned for filing a frivolous suit or appeal.

Afram Boutros (Boutros) worked for Avis Rent a Car System (Avis) as a courtesy bus driver at the company’s O’Hare Airport location. In May, 2008, Boutros informed a shift manager that a fire extinguisher inexplicably discharged next to the drivers seat of the bus he was driving. Boutros claimed that a passenger had knocked it over, even though it was found there were no passengers aboard. The shift manager told him to take the bus to the mechanic’s area to have them clean the bus, and that if there was no mechanic available to take the bus out of service. The shift manager concluded by instructing Boutros to use a different bus to finish his shift.

During the same shift, Boutros told another shift manager what happened, and the shift manager told him to do the same as the first shift manager instructed. However, Boutros stated that the fire extinguisher fell by itself, and was not knocked over by a passenger this time. Secondly, he stated that the fire extinguisher sprayed him on his pants and his face. Finally, Boutros said that he cleaned the bus by himself because there were no mechanics available.

Avis offered medical assistance to Boutros the night the incident occurred. Boutros declined. The next day Boutros requested immediate medical assistance so Avis sent him to a local clinic. Boutros ended up in an emergency room because he claimed the clinic doctors sent him there with concerns about cancer caused by the chemicals used in making fire extinguishers. It turned out that there were no cancer concerns and the doctors at the clinic did not tell Boutros to go to an emergency room.

Avis launched an investigation into this incident. Avis interviewed both shift managers that Boutros discussed the incident with. Avis also had the fire extinguisher inspected and it was determined that only 5.5 oz were discharged, which conflicted with Boutros claim that a lot was discharged from the fire extinguisher. Avis determined that there were multiple mechanics available at the time to clean the bus, and that Boutros should have never cleaned it himself. Avis concluded the investigation with firing Boutros for dishonesty and insubordination.

Boutros filed suit alleging that he was fired for his race, which violates Title VII. At the end of the trial, the jury found for Avis on all claims. Boutros fired his attorney, and then hired an attorney who filed the appeal with the seventh circuit. Avis asked the seventh circuit to dismiss the appeal because it was frivolous. The seventh circuit declined to dismiss a case on a procedural error, but instead would rather decide a case on its merits.

Boutros claimed that the lower court erred in the limiting instructions to the jury. The seventh circuit found that there was no error because Boutros agreed to the instructions. Finally, Boutros claimed that the lower court erred in not allowing his motion for a new trial to succeed. The seventh circuit found no error here because this case was found to be frivolous on appeal.

The seventh circuit concluded that the lower court did not error in any of the  rulings during trial, and did not error on any of the post trial motions as well. Additionally, the seventh circuit invoked Rule 38 which requires attorneys show good cause in why sanctions should not be issued for filing a frivolous appeal.

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.

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.

Potential Strengthening of the Corporate Veil?

 

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

During this past summer, the seventh circuit court of appeals held that the parent of a subsidiary–created solely for the purpose of purchasing assets–was not liable for breach of contract because it was not a party to the contract in Northbound Group, Inc., v. Norvax, Inc., et al. A basic rule in contract law is that you cannot be held liable for a breach of contract if you are not a party to that contract. However, this decision could potentially be used to undermine the ability of future litigants to “pierce the corporate veil.” The idea of “piercing the corporate veil” is the legal argument that a business is merely a cover for individual actions, and thus, not deserving of the protections afforded corporations.

Norvax and Northbound Group (Northbound) both operate in the insurance lead industry. Northbound and Norvax came to a deal that Norvax would buy out Northbound’s assets through Leadbot LLC. Leadbot is the Norvax subsidiary t created for the sole purpose of purchasing Northbound’s assets.

Northbound argued that Norvax was a party to the contract and that if they were not parties to the contract then Northbound should be allowed to pierce the corporate veil because of evidence showing Leadbot was only a shell corporation. The evidence supporting this theory came from a deposition with the CEO of Norvax, Clint Jones, and affidavits containing financial information.

First, Clint Jones stated in a deposition that Leadbot LLC was a brand under the Norvax umbrella. This shows that Norvax did in fact own Leadbot. Second, the affidavits provided that Norvax, not Leadbot, paid the purchase price to acquire Northbound’s assets and that Norvax paid all Leadbot the salaries. Northbound claimed that this information alone proved that Leadbot is run directly by Norvax, and that Northbound should be allowed to pierce the corporate veil to sue Norvax directly.

The seventh circuit did not agree with Northbound on the breach of contract claim nor would they allow Northbound to pierce the corporate veil. The seventh circuit acknowledges that piercing the corporate veil has no place in breach of contract cases. However, they said that they will let the state courts determine the finality of that issue. The seventh circuit concluded that Northbound has no claim against Norvax because contracting parties have the ability to dictate the terms of the contract, and if they do not agree to the terms, the party can reject the offer.

Did the seventh circuit inadvertently weaken the theory of piercing the corporate veil in deciding Northbound v. Norvax? Have they given corporations a new strategy to help them avoid risky contracts? Did they set a precedent that will negatively affect other areas of law? Only time–-and more litigation—can accurately answer these questions.

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