Court Decisions

• ADR Limitations statute runs when award is mailed The three-month statute of limitations for moving to vacate an arbitration award under American Arbitration Association (AAA) rules begins upon the placing of the award in the mail and ends upon service of the notice of the motion, the 7th U.S. Circuit Court of Appeals held on Nov. 2. Webster v. A.T. Kearney Inc., No. 06-3094. A.T. Kearney Inc. hired David Webster as general counsel in 1994. In 1995, Electronic Data Systems Corp. (EDS) acquired A.T. Kearney. Following elimination of the company’s legal department, Webster lost his job. He claimed age discrimination and breach of his employment agreement. This agreement contained a mandatory arbitration provision, according to which the parties agreed to arbitrate disputes under the procedures of the AAA. Webster filed a demand for arbitration, and the AAA-appointed arbitrator found for EDS. The award was issued on Jan. 4, 2006. That day, the award was placed in the mail and distributed to both parties’ counsel via e-mail. Webster filed a motion to vacate the award in an Illinois federal court on April 3, 2006, and served EDS with notice of the motion on April 5. The text of 9 U.S.C. 12 requires that notice of a motion to vacate “must be served upon the opposing party or his attorney within three months after the award is filed or delivered.” The court granted EDS’ motion to dismiss Webster’s motion as untimely. Affirming, the 7th Circuit said there is nothing ambiguous about the provision that the statute of limitations is tolled when notice of a motion to vacate is served upon the opposing party or his attorney. Here, the statute did not terminate until Webster served the defendants on April 5. Previous cases in the circuit may have referred to “filing,” but service “is the act that stops the . . . statute of limitations.” The 7th Circuit also held that in this case, the award was “delivered” on Jan. 4 when the AAA case manager placed it in the mail. This is so because this case involved clear mutual consent to service by mail and an agreement to abide by AAA rules, which include the definition of “delivery” as “placement in the mail.”   Full text of the decision • CIVIL PRACTICE Suit against Ohio man who fled to Canada OK’d An Ohio man who fled to Canada while under investigation by the U.S. Securities and Exchange Commission (SEC) can be sued in Ohio by the Canadian law firm seeking payment for legal services it had provided him, the Ohio Supreme Court held on Oct. 31. Prouse, Dash & Crouch LLP v. DiMarco, No. 2007-5753. After learning that the SEC was investigating him, Bruce DiMarco, an American, left Ohio and moved to Ontario, Canada, with his Canadian wife. DiMarco was arrested. His wife, Ji Hae Linda Yum DiMarco, contacted Canadian law firm Prouse, Dash & Crouch to represent him on claims arising from an assault against him that allegedly occurred while he was in a Canadian detention center. The firm represented DiMarco on several legal matters, including opposing Canada’s attempt to extradite him. There was no written contract concerning legal fees but oral agreement on the hourly rate. Once the bill topped 250,000 Canadian dollars, and no payment had been made, the firm stopped representing him and filed suit in Ohio. An Ohio state judge entered judgment against DiMarco and Yum for $206,342.97 for breach of contract. An intermediate appellate court reversed, holding that the trial court had no jurisdiction over DiMarco or Yum. The Ohio Supreme Court reversed. Ohio courts can exercise jurisdiction over residents of Ohio, the court said, noting that the pertinent issue was that DiMarco’s calculated flight to Ontario did not change his resident status. “If DiMarco had moved to Canada to take a job or for another legitimate reason that showed his intent to remain there, it is likely that his resident status would have changed,” the court said. “But DiMarco did not live in Ontario with the purpose of making it his home; he lived there in an attempt to evade criminal or civil prosecution.” His visa said he was a visitor, which did not terminate his established status as an Ohio resident, the court said. The court remanded on the issue of whether DiMarco’s wife, who is not an Ohio resident, is liable to pay the judgment under Ohio’s long-arm statute, Ohio Rev. Code Ann. � 2307.382. • CONSUMER PROTECTION No immunity from suit for state’s debt collector A Florida federal judge wrongly granted immunity from civil liability under the 11th Amendment to a company that operated a bad-check collection and education program for a state attorney’s office, the 11th U.S. Circuit Court of Appeals held on Nov. 1. Rosario v. American Corrective Counseling Services Inc., No. 06-16507. Under Fla. Stat. ch. 832.08, state attorneys can create a bad-check collection, diversion and education program through independent contractors. The state attorney for Florida’s 20th Judicial Circuit contracted with American Corrective Counseling Services Inc., a private California company, to operate its bad-check restitution program. Lydia Rosario and Audra Phillips each had a check referred to the program and received notices and letters sent on state attorney’s office stationery. The letters sought payment of the bad check as well as $125 in fees that included an educational class. The letters also stated that failure to participate in the program may result in criminal prosecution. Rosario and Phillips sued in a Florida federal court, claiming that the program violated the Fair Debt Collection Practices Act, 15 U.S.C. 1692, by, among other things, making deceptive claims regarding criminal justice powers. The suit also alleged violations of the Florida Consumer Collection Practices Act, Fla Stat. ch. 559.72. The judge granted the company summary judgment, finding it to be an agent of the state attorney and hence immune from suit under the 11th Amendment to the U.S. Constitution. The 11th Circuit reversed, noting that language in the contract between the company and the state attorney specifically prohibits it from acting as an agent of the state. The company is an independent contractor paid only when it successfully collects on a bad check, the court said. The company fails to meet any of the requirements warranting immunity. If a state agency is legally liable for a judgment but indemnified by a nonstate entity, then 11th Amendment immunity would still apply, the court said. However, in this case, the state attorney is not being sued. “It cannot have legal liability in this action . . . .The standard for Eleventh Amendment immunity has never been held to apply simply because an independent contractor performs some government function.” • CRIMINAL PRACTICE Using minors as decoys merits sentence increase A federal court committed no error in enhancing the marijuana importation sentence of a woman who used minors in her crime even though her children did not actively participate in the smuggling, the 9th U.S. Circuit Court of Appeals held on Oct. 31. U.S. v. Preciado, No. 06-50649. Two weeks after agreeing to smuggle marijuana into the United States, Carina Preciado left one of her five children with her sister in Mexico and traveled with her other four children to the U.S. border, where she was detained after border agents discovered 150 pounds of marijuana hidden in the dashboard and side panels of the vehicle. Preciado pleaded guilty to marijuana importation in a California federal court, and � pursuant to U.S. Sentencing Guidelines Manual � 3B1.4 � the court enhanced her sentence for using minors in committing the crime, reasoning that she used her children to avoid detection as she crossed the border. Affirming, the 9th Circuit held that, although her children were not actively involved in the crime, the court committed no error in enhancing Preciado’s sentence because her sister’s availability to care for the children and the two-week delay between the planning and the commission of the crime indicated that Preciado used her children as decoys when crossing the border. The court said, “[a] defendant who has sufficient advance notice can generally make child care arrangements rather than bring a child along while committing a crime. Under such circumstances, the district court can plausibly infer that defendant brought her four children so as to facilitate her passage across the border by making it look like she was on a family visit.” Sentencing guidelines variance requires notice The requirement of Fed. R. Crim. P. 32(h) that a court give the parties “reasonable notice” of a contemplated departure from the Federal Sentencing Guidelines continues to apply, even after the U.S. Supreme Court’s 2005 Booker decision, which had changed the mandatory nature of the guidelines, the 1st U.S. Circuit Court of Appeals ruled on Oct. 31. USA v. Vega-Santiago, No. 06-1558. A Puerto Rico federal jury convicted Manuel Vega-Santiago of armed carjacking and a related weapons charge. Although the carjacking offense carried a maximum statutory penalty of 15 years’ imprisonment, Vega’s offense level and criminal history produced an advisory guidelines range of 57 to 71 months. The court however imposed two consecutive 10-year sentences. The court justified the sentence by noting that this carjacking involved particularly egregious circumstances. Vega did not receive notice of the contemplated variance before the sentencing hearing, as required by Rule 32(h); the pre-sentencing report said that the probation officer “has not identified any information that would warrant a departure from the guidelines.” The court rejected the notice argument, explaining that Rule 32(h) applies only to formal “departures,” which are based on specific provisions of the advisory guidelines, and not to “variances” from the guidelines. The 1st Circuit affirmed and remanded. The U.S. Supreme Court’s U.S. v. Booker, 543 U.S. 220 (2005), made the Federal Sentencing Guidelines advisory, rather than mandatory. The 1st Circuit said the notice requirement of Rule 32(h) survives Booker and applies to any nonguidelines sentence. To hold otherwise would be “inconsistent with Rule 32′s purpose of promoting focused, adversarial resolution of the legal and factual issues relevant to” sentencing. In this case, Vega learned of the court’s intention to sentence outside the guidelines range during a colloquy that preceded the formal sentencing, and Vega’s attorney had the opportunity to respond at length. Moreover, no sentencing occurred. The the court offered an “entirely plausible explication of why it chose [this] sentence.” • DAMAGES Exxon didn’t perpetrate fraud, so punitives nixed The state of Alabama’s disagreement with Exxon Mobil Corp. over the calculation of natural gas royalties is merely a contract dispute, not a deliberate fraud warranting punitive damages, the Alabama Supreme Court held on Nov. 1. Exxon Mobil Corp. v. Alabama Dept. of Conservation and Natural Resources, No. 1031167. Exxon Mobil agreed to pay Alabama royalties for developing a large natural gas field in Mobile Bay. The state’s Department of Conservation and Natural Resources devised a lease to maximize royalties, assigning costs and expenses to the oil company. Typical lease agreements prepared by oil companies base royalty payments on the net profits accrued after deducting for the costs of extracting and processing the product. But Alabama assigned those costs to the company by requiring that royalties be calculated on “gross proceeds.” Exxon executed multiple leases containing these provisions, but calculated royalties on net proceeds. In 1993, during state audits, conflict arose over the lease and royalties, resulting in litigation. In 1999, Exxon sued the state, seeking a declaratory judgment over the method of calculating royalties. Alabama filed a counterclaim, alleging breach of contract and fraud and seeking punitive damages. In 2000, an Alabama state jury awarded the state more than $63.8 million in compensatory damages for unpaid royalties and found Exxon liable for fraud, awarding punitive damages of $11.8 billion. The trial judge reduced punitives to $3.5 billion. Reversing, the Alabama Supreme Court held that no fraud had been proven under Alabama law. The court rejected the state’s arguments that Exxon knowingly failed to pay the amounts required under the leases, knowingly falsified its documentation and knowingly withheld supporting information. The court said that the trial judge wrongly denied Exxon’s motion for a judgment as a matter of law on the fraud claim. “The State bore the burden of proof on its fraud claim, and it did not present substantial evidence that Exxon made any misrepresentations, that the State reasonably relied on any of Exxon’s alleged misrepresentations, or that the State suffered damage as a result of that reliance,” the court said. The case involved a contract dispute, not fraud. The court affirmed judgment of $51.9 million in compensatory damages for breach of contract. • GOVERNMENT State not liable for city’s welfare program failures Prospective food stamp recipients could not show that the state had improperly supervised New York City’s welfare-to-work transition programs, the 2d U.S. Circuit Court of Appeals ruled on Oct. 31. Reynolds v. DeBuono, No. 06-0283. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act, which shifted the focus of welfare programs from food stamps and other cash assistance to employment. A group of welfare applicants sued both New York City and the state of New York under 42 U.S.C. 1983, claiming that the city had discouraged them from obtaining cash-assistance benefits to which they were entitled and that the state had failed to oversee and supervise properly the city’s administration of assistance programs. A New York federal court awarded the plaintiffs permanent injunctive relief, directing the city to comply with specified provisions of federal and state law, and directing the state to supervise the city’s adherence to the injunction. The state, though not the city, appealed. The 2d Circuit reversed. According to the U.S. Supreme Court’s ruling, Monell v. Dep’t of Social Servs. of the City of N.Y., 436 U.S. 21 658 (1978), a state may be liable if state policy or custom results in violation of a plaintiff’s federal rights. The district court had concluded that any violations in the city’s administration of the programs give rise to corresponding claims against the state. But this sidestepped Monell‘s “rigorous culpability and causation standards.” Liability occurs under Monell if a local government is faced with a pattern of misconduct and does nothing, compelling the conclusion that the local government has acquiesced in, or tacitly authorized, its subordinates’ unlawful actions. However, the state in this case had taken affirmative steps to investigate and correct the city’s misconduct, including specific directions to the city agency to correct incidents of noncompliance. There is no evidence the state had tacitly authorized violations that it has vocally and actively opposed. • MEDIA LAW No constitutional right to mug-shot confidentiality The substantive due process right in protecting disclosure of one’s “personal matters” does not extend to a criminal suspect’s attempt to keep her mug shot or copy of her police report out of the public realm, the 6th U.S. Circuit Court of Appeals ruled on Nov. 1. Bailey v. City of Port Huron, No. 06-2375. Dorothy Bailey and her husband, an undercover deputy sheriff, were involved in an alcohol-related car crash. Bailey lied, saying she was driving, rather than her husband. Bailey was charged with resisting and obstructing an officer (because she had lied about who was driving the car), and her husband was charged with operating a motor vehicle while impaired. The couple pleaded no contest to the charges. The police faxed a press release identifying Bailey to the press and released to the press, in response to Michigan’s Freedom of Information Act requests, Bailey’s mug shot and a copy of the accident report, which included Bailey’s phone number and her husband’s occupation. Bailey filed suit in a Michigan federal court, under 42 U.S.C. 1983, claiming the city had violated her right to privacy by releasing her photograph and other “personal information” to the public. The court ruled for the city. The 6th Circuit affirmed. In Paul v. Davis, 424 U.S. 693 (1976), the U.S. Supreme Court held that there is no constitutional right to privacy for a criminal suspect who claims that “the State may not publicize a record of an official act.” The 6th Circuit cited its own precedent holding that “not all . . . interests in nondisclosure of private information are of constitutional dimension, so as to require balancing government action against individual privacy.” As a matter of federal constitutional law, a criminal suspect does not have a right to keep her mug shot and the information contained in a police report outside of the public domain � least of all from legitimate requests for the information from the press. • TAXATION Early retirement buyouts are wages, hence taxable Early retirement buyout packages paid to tenured faculty members in exchange for their tenure rights were wages for Federal Insurance Contribution Act (FICA) purposes and thus taxable, the 3d U.S. Circuit Court of Appeals held on Nov. 2 in an issue of first impression. University of Pittsburgh v. U.S., No. 06-1276. For 17 years, starting in 1982, the University of Pittsburgh made five early retirement offers to tenured faculty members. Payments made under the plans were made in exchange for the employees’ relinquishment of their tenure rights. The university paid more than $2 million in FICA taxes on the payouts from 1996 to 2001 before asking the Internal Revenue Service for a refund. The IRS denied the request, arguing that the payments were “wages” with respect to “employment” under FICA statutes. “Employment” is defined as “any service, of whatever nature, performed . . . by an employee for the person employing him.” The university sued in a Pennsylvania federal court. The court ruled that the payments were not wages because they marked the beginning of a new employment relationship distinct from prior service. The 3d Circuit reversed. Because tenure is a form of compensation for past services, payments offered as a substitute for tenure are compensation and therefore taxable as wages. Job-related benefits constitute part of an employee’s total compensation package and, thus, constitute wages. When job-related benefits are relinquished in favor of a lump-sum payment, the transaction amounts to a redemption, paid in cash, of wage amounts previously paid in kind. “What were wages at the start remain wages at the end,” the court said.