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Legal and Equitable Remedies- Prof. McWilliams

Chapter 1: Introduction The Role of Remedies

• A remedy is anything a court can do for a litigant who has been wronged or is about to be wronged

• Two most common types:

• Damages: judgments that plaintiff’s are entitled to collect sums of money from defendants

• Injunctions: orders to defendants to refrain from their wrongful conduct or to undo its consequences

Classifying Remedies

• Most important categories of remedies are:

• Compensatory: Designed to compensate plaintiffs for harm they have suffered

• The most important compensatory remedy is compensatory damages:

• a sum of money designed to make plaintiff as well off as he would have been if he had never been wronged

• Preventive: designed to prevent harm before it happens, so that the issue of compensation never arises. Comes in two forms:

• Coercive: make someone do or not do something

• The most important coercive remedy is the injunction:

• A personal command from a court to litigants ordering them to do or to refrain from doing some specific thing

• Specific performance decree: a specialized form of injunction that orders defendants to perform their contract

• Declaratory: court’s declaration of party’s rights; they authoritatively resolve disputes about the parties’ rights, but they do not end in a personal command to defendant

• Generally, prevent harm to the litigants by resolving uncertainty about their rights before either side has been harmed by erroneously relying on its own view of the matter

• Restitutionary: designed to give plaintiff anything Defendant has gained at plaintiff’s expense

• Punitive: designed to punish wrongdoers

• Ancillary: designed in aid of other remedies

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• Costs and attorneys fees are one example

• Receivership is another

Substitutionary and Specific Remedies

• Remedies may be divided into two more basic categories, substitutionary and specific:

• With substitutionary remedies: plaintiff suffers harm and receives a sum of money

• Include compensatory damages, attorneys’ fees, restitution of the money value of defendant’s gain, and punitive damages

• With specific remedies: seek to avoid this exchange; they aspire to prevent harm, or undo it, rather than let it happen and compensate for it. They prevent harm to plaintiff, repair the harm in kind, or restore the specific thing that the plaintiff lost

• Include injunctions, specific performance of contracts, restitution of specific property, and restitution of a specific sum of money

Legal and Equitable Remedies

• Remedies may also be classified as legal or equitable

• Legal:

• Damages are the most important legal remedy

• Generally, compensatory and punitive remedies are legal

• Most legal are substitutionary

• Equitable:

• Injunctions and specific performance decrees are the most important equitable remedies

• Most equitable are specific

Chapter 2: Paying for Harm: Compensatory Damages

The Basic Principal: Restoring Plaintiff to His Rightful Position

US v. Hatahley (1958)

• FACTS: Indian horse trespass/glue factory case

• This case was a class action̶brings up remedy issues

• Also a bench trial, not a general verdict jury trial means that the evidence of damages must be clear

• ISSUE: Was judgment for the plaintiff’s of $186,017.50, in compensatory damages, appropriate?

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• HELD: No: plaintiffs were entitled to the market value, or replacement cost, of their horses and burros as of the time of the taking, plus the use value of the animals during the interim between the taking and the time they, acting prudently, could have replaced the animals

• The principle of (compensatory) damages is to restore the injured party as nearly as possible to the position she would have been but for the wrong

• This judgment sum was arbitrary, pure speculation, and clearly erroneous

• The right to damages does not extend forever, and is limited to the time in which a prudent person would replace the destroyed horses and burros

• The sum given each plaintiff was wholly conjectural and picked out of thin air

• Formula:

• (market value OR replacement cost) + (use value during the interim between the taking and the time they could have replaced)

• Note: use value=rent

• How do you calculate these cost, though?

• Computation of damages need not be entirely precise, just must have some basis for their calculation

• Also look @ proximate causation̶‘harms’ must be related and must stop at some point

• Must show specific causation

• Also-Plaintiffs claimed pain and suffering

• This is VERY individualized

• Hard to prove̶most times must be accompanied by physical harm

• “while damages for mental pain and suffering, where there has been no physical injury, are allowed only in extreme cases, they may be awarded in some circumstances”

• Can’t give a class award for emotional pain and suffering

NOTES ON THE BASIC PRINCIPLE

• The But-for principle:

• Hatahley’s rule̶that the fundamental principle of damages is to restore the injured as nearly as possible to the position he would have been in but-for the wrong̶is the essence of compensatory damages

• This but-for the wrong position is used in contract and tort

• The rightful position:

• We need a shorter phrase that ‘the position plaintiff would have been in but for the wrong”

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• Therefore, use “plaintiff’s rightful position”: the position he rightfully would have come to but for defendant’s wrong

• What does it mean to restore plaintiff’s to their rightful positions?

• Remedy must be in dollars

• Damage remedies are often described as substitutionary because they substitute dollars for what the plaintiff’s lost

• Corrective Justice:

• Aristotle divided justice into 2 groups̶corrective and distributive

• The traditional argument for restoring plaintiff to her rightful position is based on corrective justice:

• Plaintiff should not be made to suffer because of wrongdoing, and, if we restore plaintiff to her rightful position, she will not suffer

• Efficiency: more scholarly, economic approach those who apply this view to law believe that the law should generally encourage profitable activity, even activity that harms others and incurs liability for breach of K or unintentional torts, so long as breachers and tortfeasors pay for the damage they cause

• This is an alternative approach to damages based off of economics:

• encourage Plaintiff to sue (incentive)

• Require Defendant to bear the cost of the injury; make it a cost of their enterprise̶one way this is done is through MONEY

• Social efficiency justification of the law and economics movement

• Assigns damages by encouraging efficient action

• This isn’t based off of morality (instead, view is doing a tort, while still paying damages, is most socially efficient)

• The one-satisfaction rule: a corollary of the rightful-position standard

• Plaintiff cannot recover the same item of damage more than once

• Consequential damages: must be proven to a reasonable degree of certainty

• REMEMBER, for compensatory damages:

• Must have some basis in the fact

• Must show causation

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Value as the Measure of the Rightful Position

In Re September 11th Litigation (2008): sets for the “lesser of two” rule (a plaintiff whose property has been injured may recover the lesser of the diminution of market value or replacement cost)

• FACTS: Tort case, dude who had WTC contract sues airline on negligence

• ISSUE: Plaintiff wants replacement value: what it would cost today to rebuild the WTC (16.2 billion)

• Plaintiff disputes the “lesser of two rule” says this is specialty property and therefore replacement value should be use

• Specialty property: property of a type ‘seldom traded’ and for which there is no ‘market price’

• Because the market value cannot be measured, replacement cost is considered the proper measure of fixing damages

• Test for valuing specialty properties without market value:

• The improvement must be unique and must be specially built for the specific purpose for which it was designed;

• There must be a specific use for which the improvement is designed and the improvement must be so specially used;

• There must be no market for the type of property and no sales of property for such use; and

• The improvement must be an appropriate improvement at the time of the taking and its use must be economically feasible and reasonably expected to be replaced

• Court says WTC is not specialty property

• WTC has a market value (plaintiff bought it, therefore proving the existence of its market value)

• Also, don’t look at property itself, look at the property’s use

• HELD: Market value is the appropriate standard to apply because WTC is not specialty property

• Causation Issue: Clause in K that plaintiff responsible for rebuilding WTC…

• Plaintiff can’t recover on this too remote in causation (p. 21)

• May get direct damages (damages that flow directly from the tort) AND consequential damages (damages that are natural and probable)

• tortfeasor is responsible only for injures that are the direct, natural, and proximate result of the tortfeasor’s actions, and that the parties would have foreseen, contemplated, or expected

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• The particular features of WTCP’s contracts cannot be made the special responsibility of the Aviation Defendants, nor the natural and probable result of their negligence, nor the foreseeable consequence of their acts and omissions

• What about payment of lost Rental payment?

• Argument doesn’t work

• Can’t get a double recovery (price that WTC paid to port authority included the value of anticipated rentals)àthis is the market value

• Fair market value: “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsions to buy or to sell and both having reasonable knowledge of relevant facts”

• Use an expert to determine this

• Generally, a ‘recent sale price for the subject asses, negotiated by the parties at arm’s length, is the ‘best evidence of its market value’

• Present value: what the whole amount (of the lease payments) would be today

NOTES ON MARKET VALUE

• Uses and Measures of value:

• Familiar damage measures include:

• the value of property taken or destroyed

• the difference between the value of property before damage and the value after damage

• the difference between the contract price and the market value of property promised but not delivered

• The usual measure of damages is market value NOT value to plaintiff

• Disparities between value and replacement cost̶real property: Why might replacement cost and market value sometimes be greatly different?

• Differences in age, quality, size

• Bad location, overbuilding, excessive supply

• Special features that may be important to the owner but cannot be rebuilt at prices the market is willing to pay

• Disparities between value and replacement cost̶personal property: The gap between market value and replacement cost also arises with respect to depreciated personal property

• market value is almost always less than replacement value

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• Differences between new and used goods

• Lemon Effect: highlights the imbalance in information about used goods:

• Buyers assume the worst about used goods, so they pay low prices, so sellers won’t sell used goods of high quality, so the used goods on the market tend to be of low quality, so buyers are justified in assuming the worst, and so on in a downward spiral until lemons are a large part of inventory on the used market

• Value in which market?

• The usual rule is that plaintiffs recover value in the market in which they would have bought, which has the effect of excluding the profit plaintiff would have earned by selling the destroyed property

• If the property is replaceable, the same profits from sale can be earned with replacement goods

• Restatement notes though that if the destroyed property was already under a K to be sold, and the plaintiff cannot acquire replacement goods in time to perform the K, she is entitled to her profit on the lost sales

• Loss of Use:

• Loss of use damages do not run forever, but for a reasonable period of time in which the goods could be replaced

• A common measure of loss of use is rental value

• Courts routinely award loss of use during the time it takes to repair damaged property

• When property is destroyed, courts are divided

• A majority of courts allow prejudgment interest on the award of market value

• Interest is commonly viewed as an alternate measure of the value of loss of use

• Because the litigation seems to be taking as long as the construction of the property, this provides some compensation

NOTES ON ‘VALUE TO THE OWNER’

• The lesser of two rule: see case

• Special purpose property: see case

• Personal items and used consumer goods:

• Restatement defines value to mean “exchange value or the value to the owner it this is greater than the exchange value”

• Exchange value is synonym for market value

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• Courts disagree about how to calculate value to the owner

• For loss of consumer items that are functional and replaceable:

• Replacement cost minus some allowance for depreciation may be a guide

• Lemon effect problem: used consumer goods are far more valuable to the owner, who knows the quality and chose them because they fit his needs, than to potential buyers who may expect the worst but cannot afford better

• Consumers generally value their goods more highly than the market

• Usually value to the owner is greater than market value

• Sentimental value: some courts have allowed recovery of sentimental value for the negligent loss of sentimental items (photos, family heirlooms) on the theory that sentimental value is the only real value at issue

• But, cases that award sentimental value seem to agree that plaintiffs are limited to the usual or reasonable sentimental value, whatever that might mean, and cannot recover mawkish or excessive sentimental value

Trinity Church v. John Hancock (1987)

• FACTS: church has foundation damage due to construction of skyscraper next door

• Jury verdicts on three counts in the sum of $4,1700,300

• HELD: affirmedàchurch is entitled to be compensated for the reasonable costs of restoring the church to the condition it was in prior to the excavation; its method of damage assessment meets the test of reasonableness by quantifying the amount of the incremental damages sustained between 1968-72

• The general rule for measuring property damages is diminution in market value

• However, market value does not in all cases afford a correct measure of indemnity, and is not therefore a universal test

• For certain categories of property, termed special purpose property, there will not generally be an active market from which the diminution in market value may be determined

• Church falls within the definition of special purpose property

• Therefore, the damage to the church could not be measured on the basis of fair market value

• Special purpose property:

• In a number of cases involving special purpose property, the cost of reproduction less depreciation has been utilized as an appropriate measure of damages

• Replacement or restoration costs have also been allowed where dimunition in market value is unavailable or unsatisfactory as a measure of damages

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• Takedown level: at a certain angle of distortion, the structural damages to a building reaches a point where disassembly and reconstruction become necessary

• This is the takedown level of damage

• “the plaintiff’s method of damage assessment, based upon a percentage of reconstruction costs, is consistent with the depreciated cost of reconstruction standard applicable to special purpose property cases”

• In regards to reducing the award of future damages to their present value:

• Unless an award for future damages is reduced to present value, the award will, with interest, exceed the sum of the plaintiff’s future damages

• …the award must be reduced to present worth, allowing only that sum which, with the accumulation of interest will amount to such damages as will in the future be sustained

• DISSENT: damages are not appropriate simply to respond to an unsolicited alteration of real property, but are appropriate only as compensation for actual loss

• It is not unusual for a court to conclude in a tort case that the defendant must take the plaintiff as he finds him

• The court’s holding in this case causes a windfall to Trinity and an injustice to Hancock

NOTES ON SPECIAL PURPOSE PROPERTY

• Does the church have a value? The court tries to measure damage with a fraction of the replacement cost

• But, replacement cost might be irrelevant were it not for a second problem in the case:

• The church has little or no market value (few potential buyers for this building)

NOTES ON REPAIR COSTS

• The lesser of two rule in repair cases: remember, the lesser of two rule applies to the choice between repair costs, on the one hand, and the difference in the value of the property before and after the damage, on the other

• But, choice not so clear in repair cases as in replacement cases

• There may be no active market in damaged property

• If the repair is one that most buyers would be likely to make, repair costs may be the best evidence of the decline in market value

• Even when the loss of value can be proved directly, more courts have been willing to make exceptions to the lesser of two rule

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• Restatement: for damage to land ‘not amounting to a total destruction of value’, plaintiff can recover ‘the differences between the value of the land before the harm and value after the harm”

• Or at his election in an appropriate case, the cost of restoration that has been or may be reasonably incurred

• Environmental Restoration: The restatement applies to building as well as to land itself, but the black letter refers only to land many applications of the section have been to restoration costs for environmental damages

• Restatement also says that the courts should not award repair or restoration costs that are ‘disproportionate’ to the loss in value, ‘unless there is a reason personal to the owner for restoring the original condition’

• Residual loss of value: with damaged cars, and sometimes with other property, repair does not fully restore value

• Car that is wrecked will have a lower resale value, no matter how good its repaired

• So, can the owner recover repair costs plus the residual loss of value̶the difference between the value before the accident and the value after repair? Often times, yes.

NOTES ON PROPERTY THAT FLUCTUATES IN VALUE

• The standard rule is to value property at the time of and place of loss in tort cases, or at the time and place for delivery in K cases

• Good number of states resolve doubts against defendant by awarding the highest value between the time of the wrong and the time of the trial

• New York rule: (followed by federal court): gives plaintiff the highest value between the time he learned of the loss and a reasonable time thereafter in which he could have replaced the property

Expectancy and Reliance as Measures of the Rightful Position

Neri v. Retail Marine Corp. (1972)

• FACTS: Plaintiffs contracted for new boat for $12, 587.4̶made two deposits totaling $4290

• Then sent letter rescinding sales K because Plaintiff was ill̶“impossible to make any payments”

• Defendant declined to refund plaintiff’s deposit and this action to recover it commenced

• Defendant counterclaimed, alleging breach of K

• The boat ordered and received by defendant in accordance with plaintiff’s contract was sold four months later to another buyer for the same price as negotiated with plaintiff’s

• Plaintiff’s argues that defendants loss on K was recouped

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• Defendant argues that but for the plaintiff’s default, it would have sold two boats and would have owned two profits instead of one

• Proved that its profit would have been $2,579 and spend $674 storing the boat etc. after breach

• §2-718 provides that the buyer, despite his breach, may have restitution of the amount by which his payment exceeds:

• Reasonable liquidated damages stipulated by the contract OR

• Absent such stipulation, 20% of the value of the buyer’s total performance of $500, whichever is smaller

• Trial court award defendant on offset in the amount of $500 and directed restitution to plaintiff’s of the balance

• §2-718 (a)(3) however, establishes an alternative right of offset in favor of the seller:

• The buyer’s right to restitution under subsection 2 to offset the extent that the seller establishes (a) a right to recover damages under the provisions of this article other than subsection 1

• Among the provisions of this article other than subsection 1 are those to be found in §2-708, which the courts below did not apply

• §2-708 (1):

• The measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this article, but less expenses saved in consequence of the buyer’s breach.

• HOWEVER, this provision is made expressly subject to subsection 2, providing:

• §2-708 (2):

• If the measure of damages provided in (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with an incidental damages provided in this article, due allowance for costs reasonably incurred and due credit for payments or proceeds of resale

• HELD: plaintiff’s are entitled to restitution of the sum of $4,250 paid by them on account of the K price, less an offset to defendant in the amount of $3,253 on account of its lost profit of $2,579 and incidental damages of $674

NOTES ON §2-708(2) AND ATTEMPTS TO CODIFY REMEDIES

• Seller’s Remedies under the UCC: when a buyer repudiates the contract or refuses to accept goods that conform to the contract, the seller can:

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• Recover the difference between the K price and the market price (§2-708 (1)); or

• Resell the goods and recover the difference between the K price and the resale price (§2-706)

• In either case the seller can also recover any incidental damages §2-710 (ie costs of reselling, reshipping, or repackaging goods, less any expenses saved in consequence of the buyer’s breach)

• If buyer keeps the goods but fails to pay, seller can sue for the price (§2-709)

• If seller discovers that buyer is insolvent, seller can stop delivery or reclaim the goods (§§2-702,704), subject to limitations in bankruptcy laws

• The glitch in §2-708(2)

• In many cases, it is plain that the award of lost profits plus incidental damages is necessary to put to put a party in the position it would have been in had the contract been performed

• It is also clear that the framers of the UCC intended this remedy for the volume seller

• But, it is almost impossible to get that result from the statute

• A credit for the proceeds of resale makes perfect sense when a seller agrees to sell something he has only one of

• Any resale is a sale he would not have made but for the first buyer’s breach

• But in this case, isn’t the seller fully compensated under 2-708(1) or 20706?

• In Neri, subsection 1 does not put the seller in that position on the facts, because the market price is equal to the K price and that measure of damages does not allow for the fact that the seller could have made two sales instead of one’

• Central problem: In the cases where the ‘due credit for proceeds of resale’ clause makes sense, it never comes into effect

• In cases where it comes into effect, it makes no sense

• Would it just be better then to enact a general damages principle instead of detailed damages rules?

NOTES ON EXPECTANCY AND RELIANCE

• The three ‘ interests’ in contract remedies: in remedies terms, the question is what we mean by rightful position:

• The position plaintiff would have occupied if she had never made the K (compensating only reliance interest); or

• The position plaintiff would have occupied if the K had been performed (compensating the expectancy interest); or

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• The position defendant occupied before the contract (compensating restitution interest)

• Reliance interest: the interest of a non-breaching party, in being put in the position that would have resulted if the k had not been made, including out of pocket expenses (equitable)

• Reliance damages: damages awarded for losses incurred by the plaintiff in reliance on the K

• Expectancy interest: the interest of a non breaching party in being put in the position that would have resulted if the K had been performed

• Expectation damages: compensation awarded for the loss of what a person reasonably anticipated from a transaction that was not completed- rights at law

• Restitution: measure of recovery based on the Defendant’s gain, not the plaintiff’s loss (equitable)

• Restitution damages: damages awarded to a plaintiff when the Defendant has been unjustly enriched at plaintiff’s expense

• Lost Volume Seller: a seller of goods who, after the buyer has breached a sales K, resells the goods to a different buyer who would have bought identical goods from the seller’s inventory, even if the original buyer had not breached

• Such a seller is entitled to lost profits, rather than a k price less market price, as damages from the original buyer’s breach (§2-708)

• The limit on reliance damages: The first level statement of the rule is that plaintiff may elect recovery based on expectancy, reliance, or restitution

• Damages though for breach should not make plaintiff better off than if the contract had been fully performed

• Consequential

• Causation: but for

• Foreseeability

• Reasonable basis for calculating damages

• Mitigation by non breaching party ( all reasonable steps)

• Incidental- the costs of mitigation or of entering into a substitute

• Formula for expectancy damages

• Loss in value + other loss (consequential and incidental) - cost and loss avoided

NOTES ON COMPENSATING EXPECTANCIES

• Why the expectancy? Why does the law protect expectancies?

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• The rule is fundamentally premised on the view that the contract creates rights to which the plaintiff becomes entitled, and this contractual entitlement is what the plaintiff loses when the defendant breaches

• Efficient Breach: recall the economic view that profitable violations of law, not including intentional torts, should be encouraged so long as violators compensate their victims

• A duty to keep promises?

• The simplest explanation of expectancy damages may be the widespread belief that people should keep their promises

• Compare to Posner’s concept of efficient breach:

• Breach of K is often a good thing that should be encouraged

• Thinks that most breaches result from inability to perform, or inability to perform at reasonable cost, or from changed circumstances that make performance wasteful rather than beneficial

• Doctrines like impossibility, frustration of purpose, and mitigation of damages take account of such obstacles to performance

• Also approve breach to pursue a better deal that comes along.

• Substitutionary damages are both a floor and a ceiling

Chatlose Systems Inc. v. National Cash Register Corp (1982)

• This is an example of a breach of expressed warranty case

• Computer doesn’t conform as warranted (a promise that something will be a certain way)

• Warranties can be express or implied.

• Perfect tender rule- express warranty created and the goods tendered will be perfect. No substantial performance- needs to be perfect if warranted.

• Implied by law: fitness, merchantability, and title

• Title- if it's for sale it's warranted that they have title to give

• Fitness for a particular purpose: seller knows buyer's purpose and seller knows that buyer is relying on seller to sell the right kind of good.

• Merchantability: the good will pass in the trade as a good and useful example of what it is supposed to be. Applies only to merchants (sellers)

• Most UCC litigation stems from warranties. Can disclaim warranties

• Case

• Plaintiff paid $46,020 for computer, District Court determined defendant was liable for breach of warranty and awarded $57,152 damages for breach and $63,000 for consequential

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• Defendant appeals

• Note̶Plaintiff had accepted the goods

• With nonconforming goods, buyer can refuse to accept and sue

• With accepted goods the buyer can learn later of some nonconformity and sue (as here)

• Under 2-714(2) (breach of warranty) Plaintiff can recover the difference between the value of the goods as delivered (at time and place of acceptance) and the value of goods as warranted, plus incidental or consequential damages

• DISSENT:

• “The statutory measure of damages for breach of warranty specifically provides that the measure is the difference at the time and place of acceptance between the value of the ‘goods accepted’ and the ‘value they would have had if they had been as warranted”

• The focus of the statute is upon ‘the goods accepted’̶not other hypothetical goods which may perform equivalent functions.

• This is a windfall̶damages are NOT supposed to put the plaintiff in a better position had the contract been formed

• Statutes are interpreted in different ways by different judges

• Benefit of the bargain

NOTES ON EXCESSIVE EXPECTANCIES

• Buyer’s remedies under the UCC: A seller might repudiate the contract, fail to deliver the goods, or deliver nonconforming goods that the buyer rightfully returns̶this leaves the buyer without the goods he was promised under the contract.

• Buyer in this case therefore has 2 choices:

• Recover the difference between the contract price and the market price (§2-713 (1), or

• Buy replacement goods and recover the difference between the contract price and the cost of replacement (usually called the cover price, §2-712)

• In either case, the buyer may also recover incidental damages, §2-715 (1) and consequential damages

Smith v. Bolles (1889)

• Plaintiff sues to recover damages for fraudulent representation in the sale of shares of mining stock

• Plaintiff alleged that “said stock and mining property was then, and still is, worthless”,

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• Tort case: securities fraud

• Justice Fuller says that:

• “the measure of recovery is generally the difference between the contract price and the reasonable market value, if the property had been represented to be

• Or if stock is entirely worthless, “then its value is what would it have been worth if it had been represented by the Defendant, and as my be shown in the evidence before you

• Court says this is error

• What the plaintiff may have gained is not the question, but what he had lost by being deceived into the purchase

• This case was not brought in Contract but in Tort

• Notes

• Conventional wisdom is that expectancy damages are recoverable only in contract, not in tort

• Mental element of two wrongs

• Fraud requires deliberate misrepresentation or reckless disregard of the truth

• Breach of loyalty arises if his mistake is innocent and not even negligent.

• Many state now allow plaintiffs to recover the value of what was promised whether they sue in fraud in

• Federal Rule does not follow this trend and obeys Smith: “under that measure, damages are calculated as the difference between the actual-or fraud tainted-transaction price and the true value of the security measured on the date of the transaction

Consequential Damages

• Damages that flow from the breach

• Lost profits, etc.

Buck v. Morrow (1893)

• PROCEDURAL POSTURE: Appellee lessor leased a pasture to appellant lessee for a term of five years, knowing that the lessee intended to use the land for grazing cattle.

• The lessor sold the land after two years and dispossessed the lessee.

• The lessee brought an action against the lessor to recover the losses occasioned by the dispossession.

• A trial court (Texas) rendered judgment that did not award the lessee any special damages.

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• The lessee appealed.

• OVERVIEW: When the lessor dispossessed the lessee of the pasture, the lessee was unable to find another pasture for his cattle and turned them out onto the commons.

• The lessee had to hire an extra hand to keep the cattle rounded up and lost 15 head of cattle.

• The lessee also incurred the expense of eventually pasturing the cattle in another pasture.

• The trial court limited the testimony to that evidencing the difference between the contract price and the rental value of the pasture for the unexpired term.

• On appeal, the court held that it was error to exclude evidence of the lessee's special damages.

• In addition to recovering the difference between the rent to be paid and the actual value of the unexpired term as general damages for the breach of the lease's covenant of quiet enjoyment, the lessee was entitled to recover any extra expense and damages that naturally and proximately resulted from the breach as special damages.

• The trial court's error in excluding all testimony except as to the difference between the contract price and the value of the unexpired term warranted reversal.

• General damages: benefit of the bargain (rent to be paid less actual value of unexpired term)

• Special (consequential) naturally and proximately result from the breach must be in contemplation of parties at the time the contract was made (foreseeability)

• Naturally resulted- foreseeable

• Causation- but for rule.

• Reasonable calculability

• Plaintiff much make a reasonable effort to Mitigate loss

• OUTCOME: The court reversed the trial court's judgment and remanded the cause to the trial court for a new trial.

• Note

• In k: special and consequential are the same

• In tort: special damages are much different (medicals, etc)

NOTES ON GENERAL AND SPECIAL DAMAGES

• Lingering hostility to consequentials:

• UCC §1-305(a):

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• The remedies provided by the UCC must be liberally administered to the end that the aggrieved party will be put in as good a position as if the other party had fully performed but neither consequential or special damages nor penal damages may be had as expected as specifically provided in the UCC or other rule of law

• Official comment: this is intended to make clear that compensatory damages are limited to compensation. They do not include consequential or special damages

• FRCP 9(g): pleading rule

• States if an item of special damage is claimed, it must be specifically stated

• Why hostility to consequential?

• Such damages are more speculative, less certain, more remote, and more likely to have been avoidable if the P had been more diligent

• May be speculative- hard to compute

• Distributive justice- taking money from defendant even though defendant gained nothing from causing the damages

NOTES ON THE VOCABULARY OF DAMAGES

• General, special, direct, and consequential:

• General damages are occasionally called ‘direct’ damages

• Special damages are commonly called ‘consequential damages’

• Judicial definitions: “general damages are often characterized as those that flow directly and necessarily from a wrong̶or that are a natural result

• Special damages are..secondary or derivative losses arising from circumstances that are particular to the parties

• The Restatement formulated these standards in terms of foreseeability and natural consequences

• This is a special kind of foreseeability though̶retained the overtones of inevitability and necessity of the judicial formulations

• Restatement of Tort: pain and suffering are so universally foreseeable as to be general damages but medical expenses are not

• The usage of personal injury lawyers: pain and suffering are general damages, and medical expenses and lost earnings are special damages. The definitions are flipped. Very important to remember

• More definitions:

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• General damages: the value of what P lost from the initial impact of defendant’s wrongdoing (ie the value of the property destroyed or not delivered, or the reduction in the value of property that was damaged or defective.”

• Consequential damages: everything that happens to plaintiff as a consequence of her initial loss

• UCC definitions̶buyer’s damages: Buyers consequential and incidental damages from contracts for the sale of goods in §2-715:

• Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation, and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with the effecting cover and any other reasonable expense incident to the delay or other breach

• Consequential damages resulting from the seller’s breach include

• Any loss resulting from general or particular requirements and needs of which the seller at the time of K had reason to know and which could not reasonably be prevented by cover or otherwise; and

• Injury to person or property proximately resulting from any breach of warranty

• UCC definitions̶seller’s damages: more broadly defined than buyer’s incidental damages (doesn’t mention consequential̶at least the version adopted by all states doesn’t mention consequential)

• Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the transporation, care, and custody of goods after the buyer’s breach, in connection w/ return or resale of the goods or otherwise resulting from the breach

• In sum:

• Consequential damages:

• More likely to raise issues of causation, foreseeability, remoteness, and the like, and the rules for dealing with these issues are often stated as limits on consequential damages.

• The one place where consequential damages’ meaning can be dispositive is k interpretation

• Form Ks usually disclaim liability for CDs

Meinrath v. Singer Co. (1980): court refusing to award consequential damagesàsays Meinrath’s consequential losses were too remote and speculative

• PROCEDURAL POSTURE: Plaintiff brought an action to recover three separate items of damage regarding bonus compensation payments allegedly due under an agreement.

• Defendant raised eight affirmative defenses, asserted two counterclaims, and moved for summary judgment on the last two damage claims.

• OVERVIEW: Plaintiff was a Belgian entrepreneur engaged in the marketing and distribution of computers.

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• The court granted defendant's summary judgment motion on the third claim of consequential damages because plaintiff's consequential loss was too remote from the main injury to be compensable and too speculative to be ascertainable.

• OUTCOME: The court granted defendant's motion for summary judgment on the third damage claim, dismissed the second damage claim, and struck three of the affirmative defenses. The court denied plaintiff's motion to strike the remaining defenses and for summary judgment on the first counterclaim. The court dismissed the second counterclaim.

• Note

• Insurance claim. Injured sued insurance company as well as other driver

• Insurance co has a right to defend and settle. The third party offers to settle within policy limits but insurance co refuses to settle. The reward is well beyond policy limits which doesn't matter to insurance co bc they just pay policy limits and the rest is a judgment against the driver. Courts treat bad faith refusal to settle as tort and get consequential damages.

•

• Texaco v. Pennzoil Co. (1987)

• PROCEDURAL POSTURE: Defendant oil company appealed a judgment from the 151st District Court of Harris County (Texas), which awarded compensatory and punitive damages to plaintiff oil company for defendant's tortious interference with a contract between plaintiff and a third oil company.

• OVERVIEW: Defendant oil company brought 90 points of error in its appeal of a judgment entered against it for tortious interference with a contract.

• The court denied all but one point of error.

• The court held that the jury assessment of 3 billion dollars was excessive in that it went beyond the amount needed to punish and deter future conduct.

• Plaintiff oil company was directed to file a remittitur of 2 billion dollars.

• Failure to file the remittitur would lead to reversal and remand of the judgment.

• On the remaining points of error the court held that the evidence supported the jury finding that a binding agreement existed between plaintiff and a third oil company for the purchase of the third company.

• Defendant knew of the agreement prior to its own purchase offer and tortiously induced a breach of that agreement.

• The jury charge correctly stated the law and explanatory instructions were proper to enable the jury to render a verdict.

• A retired judge was properly appointed to complete the trial when the original judge fell ill and defendant was not denied a fair trial.

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• Defendant received due process in the handling of its motion for new trial. Further, there was no jury misconduct.

• OUTCOME: The court issued an order to plaintiff oil company to file a punitive damages remittitur of two billion dollars. The judgment would then be reformed to show one billion dollars in punitive damages and would be affirmed as reformed. If plaintiff failed to file the remittitur, the judgment would be reversed and remanded. Punitive damages of three billion dollars constituted a confiscation assets rather than punishment for past action.

Limits on Damages

• Many rules limits damages, often in ways that limit the plaintiff to less than her rightful position

• These limits are closely related to distinctions between direct and consequential damages

• The primary tools for restricting recovery of consequential damages are

• Contractual limitations on remedies; AND

• Rules about avoidable consequences, remoteness, and uncertainty

•

• §2-714(2): Commonly applied formula to compute a buyer’s damages for breach of any warranty, including the repair or replacement warranty, is the difference “between the value of the goods accepted and the value they would have had if they had been warranted.”

• §2-714(3): Consequential losses constitute a recoverable item of damages in the event of breach by the seller

• §2-719: Expressly permits the limitation/exclusion of damages

• (3) “ Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.”

The Parties’ Power to Specify the Remedy

• Liquidated damages- translating value to money

• Courts don't like private remedy

• Idea of liquidating damages as discouraging breach is not ok with court- its the courts job to punish and deter

• Courts regulate private remedies

• Common law limitation of liquidated. Liquidated damages sustained if

• There is a reasonable proportion to probable loss

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• Amount of actual loss is incapable or difficult of precise estimation

• Gross disproportion and actual loss is deemed a penalty and is unenforceable

Kearney & Trecker Corp v. Master Engraving Co. (NJ 1987)

• Note, this case illustrates multiple options available other than consequential damages to a buyer relegated to a limited remedy that has failed to achieve its essential purpose:

• Repair and replacement warranty

• Issue: whether the UCC permits the enforcement of a contractual waiver of consequential damages where the buyer’s limited remedy authorized in the contract of sale has failed to achieve its essential purpose

• HELD: “We conclude that §2-719 does not require the invalidation of an exclusion of consequential damages when limited contractual remedies fail of their essential purpose

• It is only when the circumstances of the transaction, including the seller’s breach, cause the consequential damages exclusion to be inconsistent with the intent and reasonable commercial expectations of the parties that invalidation of the exclusionary clause would be appropriate under the Code.”

• Facts: With the purchase of machine came a warranty, disclaimer: UNDER NO CIRCUMSTANCES WILL SELLER BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES…

• Plaintiff claimed machine malfunctioned frequently and should be able to recover consequential

• §2-714(3)

• However, the potential significance of liability for consequential damages in commercial transactions undoubtedly prompted the Code’s drafters to make express provision for the limitation or exclusion of such damages (§2-719)

• In a commercial setting, the seller’s right to exclusion of consequential damages is recognized as a beneficial risk-allocation device that reduces the seller’s exposure in the event of a breach

• Comment 1 §2-719:

• “it is the very essence of a sales K that at least minimum adequate remedies be available…any clause purporting to modify or limit the remedial provision of this Article in an unconscionable matter is subject to deletion and in that event the remedies made available by this article are applicable as if the stricken clause has never existed. Similarly, under (2), where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this article.”

• Therefore, you can’t exclude or disclaim if:

• Doing such is unconscionable

• Or something seemingly fair fails its essential purpose

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• These (above) compelling policies (freedom to K, including the right to exclude liability for consequential damages, and the insistence upon minimum adequate remedies to redress a breach of K frame the issue of this case:

• If a limitation or exclusion of consequential damages is not unconscionable when the contract is made, must it be held unenforceable if the limited remedies provided in the contract do not achieve their intended purpose?!?

• Two public policies

• Freedom of contract

• People cannot enter transactions under UCC if there's no real remedy. UCC requires a remedy

NOTES ON LIMITATION-OF-REMEDY CLAUSES

• The ‘essential purpose’ of a limited remedy:

• The repair-and-replace remedy fails of its essential purpose when seller is unable or unwilling to repair or replace at a reasonable time

• Bargaining over remedies:

• Courts emphasize parties’ equal bargaining power

• Unconscionable limits on remedies:

• §2-719(3) makes it prima facie unconscionable to exclude liability for personal injury caused by consumer goods

• Needs to be substantive and procedural unconscionability

• Terms are so unfair that they shock the conscience of the court

• Limits on what courts think they should enforce; not within their power to enforce the terms

• Oppression, unfair surprise

In Re Trans World Airlines, Inc (1998)

• Facts: TWA leased 2 planes from Interface̶missed rental payments

• In lease §17 was a hard to read liquidated damage clause; §18 TWA expressly agreed that the liquated-damage clause was enforceable

• Court viewed it as a penalty the damages were intended to make up for depreciation of the planes and to ensure that that the defendant didn't break the lease

• The breach should have nothing to do with the drop in value of the planes.

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• NY law on enforceability of liquidated damages: “A liquidated damages provision has its basis in the principle of just compensation for loss” in the event of breach

• “As a general matter, such provisions are enforceable “provided that the clause is neither unconscionable nor contrary to public policy.”

• Contractual provision fixing damages in the event of breach will be sustained if the amount liquidate bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation…If however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.

• McWilliams says this is the general rule!

• Courts must apply this as of the date of the contract rather than from the date of the breach; AND

• Must resolve all doubts in favor of a constructions that invalidates the provision of a penalty

NOTES ON LIQUIDATED-DAMAGE AND PENALTY CLAUSES

• How much do we need to know about actual damages?

• The only fully accepted purpose of liquidated-damage clauses is to avoid litigation over difficult damage issues

• If parties feel obliged to prove actual damages in order to show the reasonableness of liquidated damages, what has been gained?

• On the other hand, if the court is too accepting of the number in the K, the rule against penalty clauses becomes illusory

• What if there are no actual damages? Sometimes, it is clear that a potentially serious breach of K caused no damage at all

• Restatement says in such cases, the liquidated damages clause becomes unenforceable, because the actual damages are so easy to measure, and it does not matter that they had been hard to predict at time of K

•

• The economic debate:

• On the one hand, scholars fear that damages in excess of lost expectancy will deter efficient breaches (a reason not to enforce penalty clauses)

• On the other hand, they think that voluntary transactions are better than court decisions at moving resources to their most valuable use

• Codification:

• UCC §2-718(1) (applies to the sale of goods):

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• Damages for breach by either party may be liquidated in the agreement but only at the amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

• Restatement (Second) of Contracts: substantially the same, but it omits the reference to the inconvenience of other remedies

• UCC § 2A-504 (1)(applies to the lease of goods)

• Damages payable by either party for default, or any other act or omission, including indemnity for loss or dimunition of anticipated tax benefits or loss or damage to lessor’s residual interest, may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of then anticipated harm caused by the default or other act or omission.

• We have 2A in South Carolina

Northern Illinois Gas Co. v. Energy Cooperative, Inc. (1984): deals with under liquidated damages

• PROCEDURAL POSTURE: Appellant gas company challenged a jury award from the Circuit Court of Grundy County (Illinois) for appellee supplier in the gas company's action seeking a declaratory judgment that it properly ceased performance under its contract with the supplier and that the supplier's damages were limited to the amount in the liquidated damages clause of the contract.

• The award was on the supplier's counterclaim for breach of contract. • OVERVIEW: The supplier provided naptha to the gas company for conversion to natural gas.

• When demand for natural gas started decreasing and the price of naphtha started increasing, the gas company terminated contract and sought declaratory judgment that the supplier was limited to the liquidated damages provided in the contract.

• The lower court held that the liquidated damages clause of the contract gave the nonbreaching party the choice of recovering either actual or liquidated damages and that the supplier elected actual damages.

• The court found that the trial court erred in finding that the supplier was not limited to the liquidated damages in the contract.

• The parties' agreement to a liquidated sum in the event of default was binding. Thus, the court reversed the lower court's order striking the liquidated damages defense.

• The court affirmed the lower court's summary judgments for the supplier on the gas company's unsupported affirmative defenses of force majeure, frustration of purpose, impracticability, fraud, and lack of good faith.

• The court affirmed the evidentiary rulings that excluded all references to the gas company's obligations as a public utility as not prejudicial.

• OUTCOME: The court reversed the trial court's striking of the gas company's defense based on the liquidated damages clause of the contract. The jury's award of damages was vacated and the cause was remanded for a determination of the supplier's damages according to the formula contained in the liquidated damages clause. In all other respects, the judgment was affirmed.

• Can a plaintiff waive liquidated damages clause? Plaintiff argues that liquidated damages are an option. • Court disagrees, can't seek a greater measure of damages. Liquidated damages are not a limitation on

remedy. 2-718 does not give the plaintiff an option • Under liquidated damages

§2-719 Contractual Modification or Limitation of Remedy

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• Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

• The agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages, recoverable under this Article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-confroming goods or parts; and

• Resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy

NOTES ON UNDERLIQUIDATED DAMAGE CLAUSES

• §2-718: Can under liquidated damages be attacked under this clause?

Substantive Policy Goals

Brunswick Corp v. Pueblo Bowl-O-Mat (1977): Plaintiff cannot use the antitrust laws to preserve a local monopoly or get compensated for the loss of one

• FACTS: Defendant acquired and operated a large number of bowling allies̶Plaintiff instituted this action contending that these acquisitions violated various provisions of the antitrust laws

• Plaintiff: these acquisitions might have substantially lessened competition or tend to created a monopoly in violation of §7 of the Clayton Act

• Pursuant to §4 of the Act, plaintiff sought treble damages for “three times the reasonably expectable profits to be made from the operation of their bowling centers”

• Plaintiff also sought a divestiture order, and injunction against future acquisitions, and such “other further and different relief” as appropriate

• Divestiture order: order to break up acquired companies of the merger

• To establish these damages, Plaintiff attempted to show that had the Defendant allowed

• the defaulting centers to close (instead of buying them for himself) Plaintiff’s profits would have increasedàthis is a “BUT for argument”…remember causation?!?

• Jury awarded $2,358,020 for the minimum estimate of additional income had the acquired centers been closed and $446,977 for costs and attny’s fees; also ordered Defendant to divest of centers

• On appeal, Defendant questions whether antitrust damages are available where the sole injury alleged is that competitors were continued in business, thereby denying Plaintiff an anticipated increase in market shares

• The Clayton Act:

• §7: prophylactic measureàbans mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly”

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• §4: remedial measureàprovides treble damages to “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws”

• Note: Treble damages are an example of statutory prescribed damages with a punitive effect

• HELD: “For plaintiffs to recover treble damages on account of §7 violations, they must prove more than injury casually linked to an illegal presence in the marketàthey must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which make defendants’ acts unlawful

• Plaintiff’s injury was not of the type that the statute intended to forestallàantitrust laws were enacted for the ‘protection of the competition not competitors’

• It is far from clear that the loss of windfall profits that would have accrued had the acquired centers failed even constitutes an ‘injury’ within the meaning of §4

• Anyone can show an injury any day̶you have to show that that injury was called by inappropriate behavior on the defendant

NOTES ON REMEDIAL IMPLICATIONS OF SUBSTANTIVE POLICY

• The exclusionary rule: No plaintiff can recover damages in federal court “for allegedly unconstitutional conviction/imprisonment, or for other harm caused by actions whose unlawfulness would render a conviction or sentence invalid,”

• Unless the conviction of sentence is first reversed or expunged on appeal, on habeas corpus, or by executive clemency

• Remedial Defenses: Wrongdoing by Plaintiffs

• To ‘fix’ this problem create a defense that bars recovery

• Unclean hands (equity)

• In pari delicto (at law)

The Requirement of Reasonable Certainty

Bigelow v. RKO Radio Pictures (1946)

• Plaintiff’s contend that Defendants entered into a conspiracy to which film was distributed among movie theaters in Chicago in that theatres owned by some of the conspirators were enabled to secure and show movies in advance̶plaintiff’s theatres were disadvantaged

• Claim loss of earnings in excess of $120,000

• Clearly, a jury cannot turn to guesswork/speculation in damage calculation̶but the jury may make a just and reasonable estimate of the damage based on relevant data, and enter its verdict accordingly

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• “The constant tendency of the courts is to find some way in which damages can be awarded where a wrong has been done. Difficulty of ascertainment is no longer confused with the right of recovery for a proven invasion of the plaintiff’s rights” Story

• FRANKFURTER’S DISSENT:

• Plaintiff has no evidence of what profits it would have earned in a competitive market

• Because it would be lawful for each of the theaters to prefers its own chain of theatres, even a market that complied with the antitrust laws would not have been fully competitive; independents like plaintiff would still have been at a disadvantage

NOTES ON THE REQUIREMENT OF REASONABLE CERTAINTY

• The requirement of reasonable certainty brings damages within the rule that wrongdoers must bear the risk of uncertainty in the amount of damages

• Special or consequential damages must also be proved with reasonable certaintyàthese damages can not be determined on speculation

• Thus, plaintiff must prove damages with as much certainty as is reasonably possible under the circumstances, and that, occasionally, that might not be good enough

• Note though, there are special circumstances (ie̶commercial damages must generally be proved with more certainty than personal injury damages)

• Also, trend is that courts demand a higher level of certainty in contract than tort

• NOTES ON LITIGATING COMMERCIAL DAMAGES

• Models:

• To prove damages use these̶what would have happened for the wrong

• Two main methods of valuing damages to a business’s ability to make profits:

• The going concern method (ex ante method)

• Conceives of all the damages as happening simultaneously with the wrong

• What was the value of the business just before the wrong, and what was the value of the business just after the wrong?

• Damages are that difference in value

• All evidence and calculations must be based on facts known at the time of the wrong

• Actual experience after the wrong is irrelevant

• Ex: September 11th litigation: the value of the tower before destruction less their value (presumably zero) after the destruction

• Lost profits methods (ex post method)

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• Attempts to calculate the stream of lost profits over time

• Actual profits can be proved directlyàwhat profits would have been but for the wrong must be modeled

• The new-business rule: courts give closer scrutiny to lost profits evidence proffered by new businesses

• They are quicker to say that such evidence is too speculative or insufficiently detailed

The Controversy over Tort Law

Arbino v. Johnson & Johnson (2007)

• Plaintiff Melisa Arbino sued the pharmaceutical company Johnson & Johnson in 2006 alleging that she had sustained injuries from using a birth control patch manufactured by the company. Her lawsuit included claims that four tort reform statutes enacted by the Ohio legislature in 2005 to place caps on damages were unconstitutional.

• The Ohio Supreme Court had previously reviewed Ohio state statutes that were substantially similar to those challenged by Arbino. In the court's previous reviews, it had struck down tort reform caps passed by the legislature as unconstitutional. Arbino represents a break with the Ohio high court's tradition of striking down such laws. The majority opinion in Arbino says that the legislature's 2005 laws remedied previous defects that has caused earlier courts to strike down earlier versions of tort reform cap laws.

• The court's decision upheld several tort reform laws that the Ohio state legislature had passed in 2005 that placed caps on non-economic and punitive damage recovery.

• This opinion illustrates how damages can be legislatively regulated

• Remedies can be alteredàwhy? Public policy can be more important that an jury decision

NOTES ON THE CONTROVERSY OVER TORT LAW

• Other notes: sometimes, courts can ‘close’ to some ‘types’ of plaintiffs

• Court closing statutes deny standing to plaintiff for particular purposes

NOTES ON VALUING PAIN AND SUFFERING AND HUMAN LIFE (re-read 166-70)

• Problems w/ compensation (summarized by Judge Posner)

• Damage awards for pain and suffering, even when apparently generous, may well undercompensate victims crippled by accidents

• Since the loss of vision or limbs reduces the amount of pleasure that can be purchased w/ a dollar, a very large amount of money will frequently be needed to place the victim in the same position of relative satisfaction that he occupied before the accident

• Problem most acute in death cases

• Most people would not exchange their lives for anything less than an infinite some of money if the exchange were to take place immediately

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• Yet, it cannot be correct that the proper award of damages in death cases are infinite

• The would imply that the proper rate of fatal accidents was zero, and it is plain that people are unwilling to incur the coss necessary to reduce the rate of fatal accidents so drastically

Dignitary and Constitutional Harms

Levka v. City of Chicago (1984) (this is not a constitutional rights caseàthis is a dignitary tort case)

• Plaintiff contends cops violated her civil rights when they subjected her to a strip search after her arrest for misdemeanor offense

• Awarded $50,000 as compensation for emotional injuries̶defendant moved for judgment notwithstanding the verdict or for a new trial or the entry of a remitter

• (the full amount of the $50,000 constituted compensation for emotional trauma and distress, mental and physical suffering, anguish, fear, humiliation, and embarrassment

• With respect to Plaintiff’s claims for both lost earning and loss impairment of earning capacity, jury awarded no damages

• FACTS: Chicago enforced a policy of subjecting every arrestee at the women’s prison to strip search regardless of the nature of the charge brought against her and regardless of whether reason existed to believe she carried drugs or concealed weapons

• Plaintiff testified that in the weeks following the strip search she continued to be frightened

• Offered 4 witnesses to corroborate her testimony that she has suffered continuous and deep emotional trauma as a result of her strip search

• To refute plaintiff’s claim that the strip search caused her to become a ‘prisoner in her own home’, defendant put witnesses on the stand who testified that they have seen plaintiff out her home on a number of occasions

• In reviewing the verdict to determine if its excessive, “we must defer to the judgment of the jury unless the award is ‘monstrously excessive’ or ‘so large as to shock the conscience of the court.”

• One factor we must consider in determining whether to set aside an award is whether the award is out of line compared to other similar cases

• Comparing the $50,000 in this case with the awards in other strip search cases, this award stands out as remarkable high

• Further, its inconsistent with other cases where juries returned verdicts over $30,000 because NO aggravating circumstances existed

• Plaintiff “simply has not offered any evidence to suggest that the strip search to which she was subjected was performed in an aggravated manner

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• HELD: we find that the award in this case of $50,000 is grossly excessive and must be reducedàremittitur of $25,000 appropriate

NOTES ON VALUING EMOTIONAL DISTRESS

• The constitutional nature of the claims in Levka did not affect the measure of damages

• Plaintiff invoked common law measures of damage developed for common law dignitary torts

• Dignitary torts, including assault, false imprisonment, malicious prosecution, intentional infliction of emotional distress, libel, slander, invasion of privacy, and batteries that are offensive but do no physical harm, present valuation problems comparable to those of pain and suffering

• In these cases, defendants’ motives and nature of their conduct, usually relevant to punitive damages, become relevant to compensatory damages in these cases

• The more outrageous the defendant’s behavior, the more outraged and distressed the victim will be

• The Levka court evaluates the verdict by comparing it to other verdicts in similar cases

• The traditional position̶in all cases̶not just emotional distress̶has been that other verdicts are irrelevant

• Since Levka though, several federal courts have began comparing verdicts

NOTES ON JUDICIAL REVIEW OF JURY VERDICTS

• Remittitur: the procedure by which the verdict is reduced in Levkais called remittitur:

• the court grants a new trial unless the plaintiff remits part of the verdict

• responsibility for federal remittitur is typically vested in trial judges

• Most plaintiff’s accept rather than run the risk and expense of a new trial

• Additur?...no

NOTES ON RECOVERING EMOTIONAL DISTRESS

• In Tort

• Emotional distress is recoverable in tort, but not in negligence without some additional threshold showing

• A plaintiff who suffers physical injury can generally recover for ED

• About half of states allows recover for ED by bystanders who see their loved ones hurt

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• Another quarter permit recovery for persons within the zone of physical danger created by defendant’s negligence

• Many permit recovery for specific categories of negligence that are especially likely to inflict ED:

• Sending false news of death, mishandling a corpse, leaving disgusting matter in food

• Gracey v. Eaker: holding relied on cases that asserted that physical impact is not required when ED is the principal harm to be expected from a tort

• Such is analogous to the economic loss rule

• To recover in tort for either economic loss or emotional distress, plaintiff must show something more than negligence:

• Intentional tort, negligence plus physical impact, or negligence plus one of these other options for emotional distress

• Physical Impact:

• Consolidated Rail Corp v. Gottshall:

• Adopted the zone of danger test

• Also said that plaintiffs who suffered physical impact could recover for associated mental distress

• Metro-North Commuter Railroad v. Buckly:

• Said it meant physical impact of a kind that threatened the immediate physical entry

• Severity: there is an ill defined requirement that ED be severe or substantial

• in negligence, courts often require medically demonstrable emotional distress

• in intentional tort cases, plaintiff’s testimony has traditionally been enough

• Fear of Disease: a recurring issue is whether Plaintiff exposed to toxic substances with long latency period can recover for the fear of eventually contracting the disease

• Held: Plaintiff’s with asbestosis have suffered physical injury and can therefore sue for associated emotional distress, including the fear of later contracting cancer, provided that plaintiff must ‘prove that his alleged fear is genuine and serious’

• IN contract: ED is generally not compensable in K

• But, most courts treat bad faith breach of an insurance k as a tort

• This opens the door to ED and punitive damages

• This theory has begun to spread to other contracts with a power inbalance between the parties (especially employment contracts)

• Emotional distress is often recoverable in statutory claims for employment discrimination

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Carey v. Piphus (1978)

• Plaintiff accused of having weed, not investigated, suspended for 20 days

• Plaintiff sued §1983 saying his due process rights had been violated

• Plaintiff offered no evidence of damages (wanted $3,000, declatory judgment, and injunction deleting his suspension

• §1983 was intended to create a species of tort liability, in favor of persons who are deprived of ‘rights, privileges, or immunities secured to them by the Constitution

• Basic purpose of §1983 damages award should be to compensate persons for injuries caused by the deprivation of constitutional rights

• Rights’ purpose is to protect persons from injuries to particular interests

• In order to further the purpose of §1983, the rules governing compensation for injuries caused by the deprivation of constitutional rights should be tailored to the interests protected by the particular right in question

• HELD: Although mental and emotional distress caused by the denial of procedural due process itself is compensable under §1983, we hold that neither the likelihood of such injury, nor the difficulty of proving it is so great as to justify awarding compensatory damages without proof that such injury was actually caused

• it is not a valid contention that damages should be presumed to flow from every deprivation of procedural due process

• First, it is not reasonable to assume that every departure from procedural due process, no matter what the circumstances or how minor, inherently is as likely to cause distress as the publication of defamation per se is to cause injury to reputation and distress

• Second, where a deprivation is justified but procedures are deficient, whatever distress a person feels may be attributable to the justified deprivation rather than to deficiencies in procedure

• Third, court foresees no particular difficulty in producing evidence that mental and emotional distress actually was caused by the denial of procedural due process itself

• “We believe that the denial of procedural due process should be actionable for nominal damages without proof of actual injury…plaintiff entitled to nominal damages not to exceed one dollar”

NOTES ON VALUING CONSTITUTIONAL RIGHTS

• Its difficult and arbitrary, duh.

NOTES ON DEFAMATION DAMAGES

• Actual and presumed damages: In defamation cases the common law presumed substantial general damages without proof, but the Court refused to extend that practice to Constitutional cases

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• Causation: even in public figure cases, the 1st does not require states to apply what is called the ‘incremental harm doctrine”

• The doctrine requires fact finders to separate the harm to plaintiff’s reputation into that caused by protected statements and unprotected statement, and to compensate only the latter

Chapter 3: Punitive Remedies

• Punitive remedies are unlike any other kind of remedy̶measured neither by the plaintiff’s rightful position nor by the defendant’s̶and, they do not directly restore anyone to her rightful position or maintain anyone in it

• They are justified in part by deterrence (deterrence=protecting other victims)

Punitive Damages-Common Law and Statutes

Exxon Shipping Co v. Baker (2008)

• FACTS: supertanker Valdez ran aground in Prince William Sound, spilling millions gallons of crude oil

• Joseph Hazelwood, the ship’s captain, had a blood-alcohol level of .06 11 hours after the spillàexpert testified that at the time of the spill, his bal would have been about .24

• Exxon spent $2.1 billion on cleanup efforts

• Paid $25 million criminal fine

• 100$ million in restitution in the criminal case

• Criminal “restitution” is a form of compensation to the victims

• $1.3 billion in restoration costs and compensatory damages in civil settlements with the US, Alaska, and private plaintiffs who sued in other cases

• This case consolidated class actions under the general maritime law on behalf of commercial fishermen, Native Alaskans, and local land owners

• Exxon paid about $500 million in compensatory damages to these 3 classes

• Instructed to consider the reprehensibility of defendant’s conduct, their financial condition, the magnitude of the harm, and any mitigating facts, the jury awarded $5 billion in punitive damages against Exxon and $5,000 against Hazelwood

• On first remand entered judgments for $ 4 billion; on second $4.5 billion; on 3rd appeal, reduced to $2.5 billion

• Court unanimously rejected Exxon’s argument that the Clean Water Act preempts a claim for punitive damages under the general maritime law

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• Exxon also argued that even after reduced, these damages were excessive

• BACKGROUND: Anglo-American punitive damages dates back to at least 1763̶when court of common pleas recognized the availability for damage ‘for more than the injury received’

• Early common law offered various reasons for punitive:

• Punishment for the past

• Deterrence to the future

• “need to compensate for intangible injuries, compensation which was not otherwise available under the narrow conception of compensatory damages prevalent at the time

• Today: punitive NOT aimed at compensation

• Aimed at retribution

• Deterring harmful conduct

• Retribution and deterrence are what juries are typically instructed on

• Prevailing rule today is also for American courts to limit punitive to cases where a Defendant’s conduct is outrageous (Restatement), owing to gross negligence, willful, wanton, and reckless indifference for the rights of others, or behavior even more deplorable

• Regardless of culpability, heavier punitive awards have been thought to be justifiable when wrongdoing is hard to detect (increasing chances of getting away with it)

• Or, when the value of the injury and the corresponding compensatory award are small (providing low incentives to sue)

• State regulation of punitive damages vary

• For procedure purposes, in most American jurisdictions the amount of the punitive award is generally determined by a jury in the first instance

• And that “determination is then reviewed by trial and appellate courts to ensure that it is reasonable”

• Many states have gone further by imposing statutory limits on punitive,

• In the form of monetary caps

• A maximum ratio of punitive to compensatory damages, or

• Frequently, some combination of the two

• Despite such limitations, punitive damages are overall higher and more frequent in the US than elsewhere

• Figures show an overall restraint in punitive and suggest than in many instances a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter

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• REAL PROBLEM: “stark unpredictability of punitive awards”

• A penalty should be reasonably predictable in its severity (FAIRNESS)

• “The common sense of justice would surely bar penalties that reasonable people would think excessive for the harm caused in the circumstances”

• Outlier awards: awards starkly higher than their contemporaries

• In their analysis, court must consider three basic approaches (one verbal, two quantitative)

• Instructions to juries

• These leave us skeptical that verbal formulations, superimposed on general jury instructions, are the best insurance against unpredictable outliers

• Hard dollar cap on punitive

• Also hard because there is no ‘standard’ tort of K injury

• Leave the effects of inflation to the jury or judge who assess the value of actual loss, by pegging punitive to compensatory damages using a ratio or maximum multiple

• More promising

• Treble damage discussion: congress devised the treble damages remedy for private antitrust actions with an eye to supplementing official enforcement by inducing private litigation, which might otherwise have been too rare if nothing but compensatory damages were available at the end of the day

• … “These studies cover cases of the most as well as the least blameworthy conduct triggering punitive liability”

• From malice to avarice

• Down to recklessness

• And even gross negligence in some jurisdiction

• Data from these studies puts the median ratio for the entire gamut of circumstances at less than 1:1

• Meaning, that the compensatory award exceeds the punitive award in most cases

• In this case: a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases

• Provision of the Clean Water Act respecting daily fines confirms our judgement that anything greater would be excessive here and in cases of this type

• District judge calculated the total relevant compensatory damages at $507.5 million

• A punitive-to-compensatory ratio of 1:1 thus yield maximum punitive damages in that amount

• Stevens Concurrence/DISSENT:

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• The caps and ratios that the Court relies on should be imposed by legislatures, not courts

• Breyer Concurrence/Dissent,:

• There is a need, grounded in the rule of law itself, to assure that punitive damages are awarded according to meaningful standards that will provide notice of how harshly certain acts will be punished and that will help to assure the uniform treat of similarly situated persons

• There is a limited exception to the Court’s 1:1 ratio warranted here (Exxon employed a DRUNK to drive this major tanker̶GROSSLY RECKLESS

NOTES ON PUNITIVE DAMAGES

• Why punitive damages?

• If deterrence is the rationale, why don’t compensatory damages provide sufficient deterrence?

• The dignitary tort cases provide one answer: sometimes the law systematically underestimates damages

• Posner’s economic rationale for punitive (via Kemezy):

• “damages are sometimes under-compensatory, that not all torts are detected, and that the criminal justice system is overloaded

• Carried to its logical conclusion, economic analysis suggests that reprehensibility is irrelevant, and that all that matters is under-deterrence

• The fear that compensatories will not deter

• One recurring theme is that compensatory damages̶are even punitive damages̶that are too small, may not deter

• Punitive damage awards should not be a routine cost of doing business that an industry can simply pass on to its customers through price increases, while continuing the conduct the law proscribe

• How bad must defendant be?

• Courts have struggled to define the level of culpability that juries may punish

• Cali requires, “willfull and conscious disregard of the rights and safety of others”

• Some courts have tried to require intent or actual knowledge

• But, they nearly always allos for the possibility of implied intent, which defeats their quest for a bright line and often results in a confused jumble of mental states

• Main requires clear and convincing evidence of “express” or “actual” malice (an actual motivation of ‘ill will’ toward the victim, or conduct ‘so outrageous that malice toward a person injured as a result of the conduct can be implied”

• Vicarious Liability:

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• About half of states require that managerial employees be impolicated in the outrageous conduct

• Other half apply ordinary respondeat superior rules to punitive: the employer is liable for punitive if any employee, acting with the course and scope of his employment, did something deserving of punitive

• Immune defendants:

• Punitives unavailable against municipalities in civil rights suits

• Unavailable against unions in fair duty of fair representation suites

• Court, in granting immunity, relies on the vicarious nature of liability and on the fear that the burden would fall on the innocent taxpayers and union members

• Jury trial:

• Punitive damages are a major target of the campaign to change tort law

• Many states have responded by tightening the substantive standard, by requiring clear and convincing evidence (and in Colorado, beyond a reasonable doubt)

NOTES ON MEASURING PUNITIVE DAMAGES

• The problem:

• Courts commonly mention the amount of compensatory damages and the reprehensibility of defendants conduct

• Most mention defendants wealth

• Exxon also mentions whether the wrong was likely to be detected and to provoke a lawsuit

• None of these are measures̶they are at most factors to be considered, and they leave a vast range of discretion

• Of course, punitives should be higher if conduct is more reprehensible̶but, this is hard to determine

• Many states say that there can be no punitive damages without at least some compensatory damages

• Many cases award nominal damages and punitive damages̶most of them in jurisdictions that rejects the relevance of ratios

• Considering Defendants’ Wealth: should this matter?

• Admitting evidence of defendant’s wealth is surely prejudicialàwe would not allow it in either other context

• Bifurcated trials: increasing in states

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• Exclude evidence of defendant’s financial condition from the trial on liability and compesnatories, or from the trial on liability for punitives or even the amount of punitive, but allowing or requiring such evidence at a separate hearing on the amount of punitive damages or on post trial motions to review the jury’s award of punitive damages

• Courts also disagree on how much plaintiff must show, and how far along the case must be, before she can get discovery of defendant’s financial situation

• Court has also said that punitive damages are excessive if defendant has no hope of ever paying them.

Punitive Damages: The Constitution

State Farm Mutual Automobile Insurance v. Campbell (2003)

• Man caused accident that killed one driver and permanently disabled another̶lawsuit from this stemmed in which Campbell agreed to sue State Farm

• Sued state farm, alleging bad-faith refusal to settle, Fraud, and intentional infliction of emotional distress

• This was because of scheme discovered on State Farm’s part: State Farm put false documents in claim files, removed documents that suggested liability, and destroyed claims-handling manuals that might reveal the scheme

• Jury awarded Campbell’s $2.6 million in compensatory damages and $145 million in punitive damages

• Trial court reduced to $1 million and $25 million respectively

• Utah sought to apply the three guideposts of BMW v. Gore and reinstated the $145 million punitive

• Three Guideposts:

• Degree of reprehensibility of the defendant’s conduct

• Ratio between the punitive damages award and the harm likely to result from the defendant’s conduct as well as the harm the actually has occurred

• The civil or criminal penalties that could be imposed for comparable misconduct

• While states possess discretion over the imposition of punitive damages, it is well established that there are procedural and substantive constitutional limitations on these awards

• The DPC prohibits the imposition of grossly excessive or arbitrary punishment on a tortfeasor

• To the extent an award is grossly excessive, it furthers no legit purpose and constitutes an arbitrary deprivation of property

• Although these awards serve the same purposes as criminal penalties, defendants subjected to punitive damages in civil cases have not been accorded the protections applicable in a criminal proceeding

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• Punitive damages are calculated very imprecisely

• The most important indicuium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct (BMW)

• To determine reprehensibility, court say that they have instructed courts to consider whether:

• The harm caused was physical as opposed to economic;

• The tortuous conduct evidenced an indifference to or a reckless disregard of the health or safety of others;

• The target of the conduct had financial vulnerability;

• The conduct involved repeated actions or was an isolated incident;

• The harm caused was the result of intentional male, trickery, or deceit, or mere accident

• Held: “while we do not suggest there was error in awarding punitive damages based upon State Farms toward the Campbells, a more modest punishment for the reprehensible could have satisfied the State’s legit purposes

• Also, the state tried to punish State Farm’s operations throughout the country

• A sate can’t punish a defendant for conduct that may have been lawful where it occurred

• Nor, as a general rule, does a state have a legit concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the state’s jurisdiction

• Also, Utah erred :

• The court awarded punitive damages to punish and deter conduct that bore no relation to Campbell’s harm

• A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages

• A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business

NOTES ON CONSTITUTIONAL LIMITS ON PUNITIVE DAMAGES

• The earlier cases: the Court worked its way up to State Farm over a 14 year period:

• Excessive fines: Browning-Ferris Industries, Inc. v. Kelco Disposal, Inc (1989): Court held that the Excessive Fines Clause of the 8th applies only to fines payable to the government, and not to punitive damages between parties

• Procedural Due Process: Next, Court said that procedural due process requires meaningful jury instructions on punitive damages and meaningful appellate review of punitive verdicts…but, Alabama’s

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own state procedures satisfied these criteria (gave substantial punitive discretionary power to states̶Pacific Mutual Life Insurance V. Haslip (1991)

• Damages defendant might have caused

• The Emergence of guideposts

• The effects of constitutional review: P isn’t entitled to a new trial if he rejects the lower amount offered by the court; the court can simply enter judgment for the lower amount

• Courts have said that the constitutional maximum is not a fact to be found by a jury and that anylarger verdict on retrial would again have to be rejected

Philip Morris USA. V. Williams (2007)

• PROCEDURAL POSTURE: Respondent representative of a decedent's estate sued petitioner cigarette manufacturer, alleging that the deceit of the manufacturer in minimizing the dangers of smoking cigarettes contributed to the decedent's death from smoking.

• Upon the grant of a writ of certiorari, the manufacturer challenged the judgment of the Oregon Supreme Court which upheld a punitive damages award against the manufacturer

• OVERVIEW: The manufacturer contended that the jury was impermissibly permitted to calculate punitive damages based on harm to parties who were not parties to the litigation.

• The representative asserted that the jury was entitled to consider harm to nonparties in assessing the reprehensibility of the manufacturer's conduct for purposes of punitive damages.

• The U.S. Supreme Court held that, if the punitive damages award was based in part on the jury's desire to punish the manufacturer for harming nonparties, such an award amounted to a taking of property from the manufacturer without due process.

• While it was permissible to consider nonparty harm in determining reprehensibility, the punitive damages award to punish the manufacturer for injury inflicted on strangers to the litigation, without an opportunity to defend the charge, violated due process.

• Thus, procedures were required to inform the jury that, while harm to nonparties was relevant to reprehensibility, punitive damages could not be awarded to punish the manufacturer for such harm.

• OUTCOME: The judgment upholding the punitive damages award was vacated, and the case was remanded for reconsideration of the award.

MORE NOTES ON CONSTITUTIONAL LIMITS ON PUNITIVE DAMAGES

Punitive Damages in Contract

- basic rule- there are no punitive damages in K; perfectly possible to plead tort and K in a case- can only get one judgment if they win in both.

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Formosa Plastics Corp. USA v. Presido Engineers And Contractors, INC. (1998)

• FACTS: Formosa (D) sent an invitation to bid to Presido (P) on a major construction project

• Contract entered into between parties̶job not completed because not really what was offered

• P sued D for breach of K

• Also brought fraudulent inducement of contract and fraudulent performance of K claims based on false representations made

• P asserted D had intentional, premeditated scheme to entice contractors

• D counterclaimed with breach of K, urging that P had not completed its work

• Jury awarded :

• Presido $1.5 million for fraud

• Presido $10 million in exemplary (punitive) because the fraud was done willfully, wantonly, intentionally, or with conscious indifference to the rights of Presido

• Presido $1.267 for breach of K

• Formosa $107,000 for breach of K

• Trial court then remittited:

• Tort damages $700,000

• Contract damages to $461,000

• That Presido accepted.

• Based on Presido’s election to recover torts rather than contract damages, the trial court rendered judgment in favor of Presido for $700,000 in actual damages, $10 million in punitive, prejudgment interest, attorney fees, and costs. Formossa’s damages offset

• ISSUE: D argues that this is strictly a breach of K case̶and therefore punitives should not be awarded: “…fraud claim cannot be maintained because “Presido’s losses were purely economic losses related to performance and the subject matter of the K”

• HELD: Court says no way jose. “Tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a K or whether the plaintiff only suffers economic loss related to the subject matter of the K”

• fraud in the inducement was outside the scope of the K- there was no K. Tort damages are not precluded when fraud only caused economic damages- it’s a tort, even if it causes the parties to enter into a K

• court focuses on the behavior of the ∆, not the loss.

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• need bad intent when representation was made. elements: before K was formed + bad intent + reasonable reliance + damages.

• fraud in inducement- can elect to enforce it or not- voidable

• There exists a distinction between tort and contract cases

• When the injury is only the economic loss to the subject of a contract itself, the action sounds in K alone

• A mere breach of K does not support punitive damages

• However, a party is NOT bound by a contract procured by fraud

• The legal duty not to fraudulently procure a contract is separate and independent from the duties established by the K itself

• Further, precedent shows that tort damages are not precluded simply because a fraudulent representation causes only an economic lossàthis is an EXCEPTION to the economic loss rule

• If you have a fraudulently induced K, you can still get tort damages because of the fraud (even if only economic)

• Graham v. Roder (1849): tort damages are recoverable when Plaintiff claims that he was fraudulently induced to exchange a promissory note for a tract of land

• Although plaintiff only had ECONOMIC damages, court ruled that tort damages, including exemplary damages, were recoverable

• Since Graham: it has been continually recognized the propriety of fraud claims sounding in tort despite the fact that the aggrieved party’s losses were only economic

NOTES ON PUNITIVE DAMAGES IN k

• The requirement of an independent tort: It is still the general rule that punitive damages CANNOT be awarded for breach of K

• But, if an independent tort is committed in a contractual setting, punitive damages can be awarded for the tort

• The damages in Formosa: Texas follows the widespread state rule that fraud plaintiffs can recover the benefit of the promised bargain̶what they would have made if the false representations had been true

• (Expectancy damages)

• Independent damages? The court’s holding on compensatory damages set up an important issue̶is the tort independent of the contract if it did no damages independent of the contract damages?

• Formosa says there must be an independent tort, and there must be tort damages, but the damages need not be independent.

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• Empirical data: In 2005 trials̶punitive damages awarded 5% of K cases but 1.5% of tort cases

• Why this trend?

• Commercial dishonesty/sharp dealing

• Commercial disputes involve more deliberate decisions

• Why no punitive in K?

• In part just tradition

• Deterrent effect huge: “public interest cannot be served by any policy that deters resort to the courts for the determination of bona fide commercial disputes.”

• Potentially independent torts:

• Bad Faith Breach

• Well established in insurance Ks, but nowhere else

• Fraud

• Fraud in the inducement (this case)

• Fraud factum

• Fraud (ie misrepresentation)

• Conversion

• Tortuous interference with K or business relations

• Negligence

• Gross negligence is NOT an independent tort

Other Punitive Remedies: Statutory Recoveries by Private Litigants

• Common law punitive damages are the best-known punitive remedy (and perhaps most important)

• But, many statutes provide punitive remedies

• Statutes provide for multiples of actual damages, for recoveries based on statutory formula, or for minimum statutory recoveries

• Antitrust: plaintiffs may recover three times their compensatory damages

• Secured credit: §9-625 says that is a secured party violates any of the rules governing repossession and sale of consumer collateral, the debtor may recover actual damages or all the interest PLUS 10% of the principle sum of the transaction

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• Truth in Lending: recover actual damages plus twice the finance charge

• Produced huge liability in class actions, because a form with a defective disclosure would be used in thousands of transactions

• Privacy Act: actual damages, ‘but in no case shall a person entitled to recovery receive less than the sum of $1,000

• In South Carolina, if someone is wrongfully deprived of wages and bring an action and win, they get treble damages plus cost and fees

• Pros and Cons of Statutes:

• Pros:

• Replace jury’s largely unguided discretion with a fixed standard

• Ensure that all plaintiff’s and defendants are treated equally

• Avoid shocking verdicts

• Cons:

• Inappropriate in some cases

• Disregards reprehensibility, difficulty of proof, amount of compensatory damages, etc.

• “formula doesn’t fit the offense”

Other Punitive Remedies: Civil Penalties Payable to the government

• In many situations, government imposes civil penalties (usually financial)

• may feel just like criminal penalties to defendants̶raise serious issues (note̶only criminal activities can be FINED; civil are PENALIZED)

• seriously undermine protections of criminal procedure

• imposed without jury trial

• without proof beyond a reasonable doubt

• without protection against a 2nd trial/2nd punishment

• without right to appointed counsel

• and enacted often by administrative agencies rather than courts

• In SC, the attorney general can impose in security cases

• Court typically upholds penalties on the grounds that they are remedial, NOT punitive

• Excessive Fines Clause: VII Amendment… “nor excessive fines imposed…”

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• Applies to both civil and criminal fines

• Statutory Reform: Civil Asset Forfeiture Reform Act of 2000

• Requires notice, appointed counsel for indigents, proof by preponderance of the evidence, and a substantial connection between the property and the offense”

• The Double Jeopardy Clause:

• Defendant claims that the civil penalty is a punishment for the purposes of DJC, so the government cannot impose a second punishment in a criminal prosecution

• Defendant usually won’t win on this

• Civil Jury Trial: civil penalties assessed by admin. Agencies are imposed without civil jury

• If civil penalty is collected in court, defendant then is entitled to a civil jury trial on liability but NOT on the amount of the penalty

• The court avoided the constitutional requirement of civil jury trial by holding that this penalty was punitive

• Limits:

• no cases allow imprisonment as a civil penalty

Chapter 4: Preventing Harm: The Measure of Injunctive Relief (Start of Equitable Remedies)

The Scope of Injunctions: Preventing Wrongful Acts

• injunction- drastic remedies

• must show: risk of immediate or irreparable injury and no adequate remedy at law.

• show a substantial and immediate threat- needs to be proven

Almurbati v. Bush (2005)

• FACTS: Plaintiffs are six Bahraini nationals who have been classified as ‘enemy combatants’ and held at Guantanamo Bay

• They filed a petition for habeas corpus seeking their release

• They then filed a motion for a preliminary injunction forbidding the government to transfer them out of Guantanamo without 30 days notice

• RULE: To obtain injunctive relief, the petitioners must show that the threatened injury is not merely ‘remote and speculative’

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• HELD: Here, the petitioners have failed to show that their threatened injuries are not remote and speculative

• They heavily rely on news that suggest the government is involved in a conspiracy to ship the Guantanamo detainees to countries where they will be tortured and detained indefinitely

• No evidence of this̶only evidence submitted is from the government that they will NOT be subject to such conditions

• Court cannot conclude that plaintiffs would suffer IMMEDIATE and IRREPARABLE harm if transferred from Guantanamo Bay

• Immediate and irreparable harm are the two main elements of when an injunction will be issued

NOTES ON RIPENESS

• Injunctions, ripeness, and the rightful position:

• The injunction against future violations of law seeks to maintain plaintiff in his rightful position̶to ensure that he is not illegally made worse off

• Seeks to prevent harm rather than compensate for harm already suffered

• This is the hallmark of preventive relief (injunctions are the most important example of preventive relief)

• INJUNCTION:

• a court order

• Enforceable by sanctions for contempt of court

• Directing defendant to do or refrain from doing some particular thing

• It is a preventive remedy:

• Seeks to prevent harm rather than let it happen and compensate for it

• Remember, like compensatory remedies too, preventive remedies’ goal is to restore or maintain plaintiff’s rightful position

• It is also a coercive remedy:

• Seeks to accomplish its preventive goals by coercing the Defendant’s behavior

• The injunction against future violations of law is the simplest use of the injunction

• Defendants may be ordered not to torture, discriminate in employment, etc.

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• RIPENESS: plaintiff must first make a threshold showing that a preventive order is necessaryàthis is the ripeness rule: Before an injunction will issue, the threat of injury must be ripe.

• Ripeness: the state of a dispute that has reached, but has not passed, the point when the facts have developed sufficiently to permit an intelligent and useful decision to be made

• The essence of ripeness is not how ‘immediate’ a purported event may occur, but the likelihood that it will happen

• Focusing the issue:

• “When the party who seeks an injunction shows potential irreparable injury, he has established merely one essential condition for relief.”

• He must demonstrate in addition that there is real danger that the acts to be enjoined will occur…

• The proper case for an injunction must be made out by the plaintiff, and it does not suffice to say, “Issue it because it won’t hurt the other party.”

• Again, the two elements of an injunction:

• 1. Irreparable injury;

• 2 That is immediate.

• Individuation: ( focusing the injunction on a particular person under particular circumstances; a showing of some propensity to do the ‘thing’ that is being prevented)

• One function of injunctions is to invdividuate the law’s command, specifying its application to a particular defendant in a particular situation

• Compare to automatic injunctions (such as Tennessee’s divorce code) that give sweeping ‘rules’ to entire classes of people

• The Contempt power: violating an injunction is contempt of court

• Criminal Contempt: contempt is a criminal offense if done willfully

• Plaintiff may bring the offense to the attention of the court, and the court decides whether to ask the prosecutor to prosecute the contempt.

• Defendant is entitled to most of the protections of crim pro.

• Compensatory Civil Contempt: Plaintiff may also cite defendant for civil contempt

• This is a remedial proceeding, and plaintiff prosecutes it himself.

• The court grants compensation for any harm plaintiff suffered as a result of defendant’s violation of the injunction

• Compensation generally includes attorneys’ fees and generally is awarded without jury trial

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• Coercive Civil Contempt: most important

• The court imposes conditional penalties to coerce defendant into obedience

• Civil, but may include fines or imprisonment, or both

• No fixed limit to the penalties that can be imposed, but penalties must be condition: defendant must be able to avoid them

• Contempt generally is a pretty powerful remedy:

• Contempt citations often go to the head of the docket

• Can be adjudicated promptly and as summarily as the facts permit

• Contempt can be ‘delicate’ though:

• Especially when the defendants are government officialsàfining government agencies for contempt tends to be reserved for the most egregious cases, and imprisoning them is even rarer

• Problems of Proof: The rule (ripeness rule) does not require that defendant already have committed one violation before he can be enjoined from committing another

• Also doesn’t require that defendant explicitly threaten a violation or admit his intention to violation

• It is enough that there is a substantial or realistic threat of violation

• A threat, admission, or past violation greatly simplifies the threat thought

• Note, a lot of plaintiff’s fail because they provide no real evidence of defendant’s propensity to violate the law

• Plaintiff’s intentions:

• In addition to a real threat of a wrongful conduct, plaintiff must show a real threat that she will personally be harmed by it

• Again…irreparable injury that is iniment

• Preliminary and Permanent injuctions:

• Note: 3 types of injunctions:

• TRO

• Preliminary Injunction

• Permanent Injuction

Marshall v. Goodyear Tire & Rubber Co. (1977)

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• FACTS: Secretary of Labor sued Goodyear alleging a violation of the Age Discrimination in Employment

• Included in his request of damages was a nationwide injunction against further violation

• ISSUE: Scope of the injunction

• The court found a single violation̶Plaintiff’s discharge̶involving only the actions of one branch’s store manager

• HELD: This limited finding does not warrant such broad injunctive relief

• Issuance of an injunction rests primarily in the informed discretion of the DC

• Injunction relief is a DRASTIC remedy, not to be applied as a matter of course

• Cases all establish that a nationwide or companywide injunction is appropriate only when the facts indicate a company policy or practice in violation of the statute.

• “Absent a showing of a policy of discrimination which extends beyond the individual offices at issue…there is NO basis for nationwide injunction.”

• Plaintiff’s discharge was the isolated action of one store and one store manager

• Injunction should only be granted to THIS store, not ALL stores

NOTES ON THE SCOPE OF INJUNCTIONS TO PRESENT WRONGFUL ACTS

• The remedies for Reed: Two remedies in this case:

• Compensatory remedy: the back pay to the plaintiff

• The injunction against future violations:

• Secretary is empowered by statute to seek an injunction that protects all employees, not just Reed.

• But, the Secretary is not exempt from the ripeness requirementàthis injunction is aimed at preventing violations that have not happened and may never happen

• The Court holds that the scope of the past violation determines the scope of the remedy against future violations.

•

• The scope of defendant’s wrongful policy:

• “…the mere fact that a court has found that a defendant has committed an act in violation of a statute does not justify an injunction broadly to obey the statute and thus subject the defendant to contempt proceedings if he shall at an time in the future commit some new violation unlike and unrelated to that which he was originally charged.”

• Court has disapproved injunctions that forbade statutory violations ‘in any matter’ or ‘in any other matter’

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• But has affirmed an injunction forbidding statutory violations ‘’in any like manner”

• Companywide injunctions: should bigger companies be more insulated from companywide injunctions

• Intellectual Property Examples: cheese case….

• FRCP 65(d)(1) and obey the law injunctions: This rule provides an independent ground for objecting to injunctions that forbid all violations. Provides:

• Contents: Every order granting an injunction and every restraining order must:

• State the reasons why it was issued;

• State its terms specifically; and

• Describe in reasonable details̶and not by referring to the complaint or other document̶the act or acts restrained or required.

• This rule generally precludes injunctions that merely tell defendant to ‘obey the law’ or that are written in terms as broad as the underlying legal standard.

NOTES ON INDIVIDUAL AND CLASS INJUNCTIONS

United States v. WT Grant Co. (1953)

• Complaints asked the court to order the particular interlocks terminated and to ENJOIN future violations of §8 of Clayton Act by the individual and corporate defendants

• In this case, the individual’s tendency to violate the statute need not be inferred from the fact that three violations were charged

• HELD: Refusal to grant injunction is appropriate in this case

• RULE: along with its power to hear the case, the court’s power to grant injunctive relief survives discontinuance of the illegal conduct

• Purpose of the injunction is to prevent future violations

• Can be utilized without showing of past wrongs

• Moving party must prove that relief is needed

• Must exist some cognizable danger of recurrent violation̶must be more than mere possibility which serves to keep the case alive

• When deciding whether to grant an injunction, Judge must look at all the circumstances

• Her discretion is broad and a strong showing of abuse must be made to reverse it

• Considered in the decision:

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• Bona fides of the expressed intent to comply

• Effectiveness of the discontinuance

• Sometimes, the character of past violations

NOTES ON VOLUNTARY CESSATION OF WRONGFUL ACT

• Jurisdiction and discretion: mootness and ripeness can be both ‘constitutional’ and ‘equitable’

• Cessation and propensity:

• Voluntary Cessation: when Defendant stops doing what he was doing, duh. (as in this case)

• Defendant’s voluntary cessation is one common source of claims that the case is moot̶that not injunction is needed

• Burden of Proof: Plaintiff has the burden of proving propensity at the start of the case

• But, defendant has the burden of proving that an injunction is no longer needed

• Voluntary cessation of wrongful conduct is generally not enough

• Defendant has ‘heavy’ burden of proof

• Must show that ‘subsequent events make it absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.’

• Note disjoint between ‘absolutely clear’ and ‘reasonably expected’…consider:

• Degree of scienter involved;

• Isolated or recurrent nature of the infaction;

• Defendant’s recognition of the wrongful nature of his conduct;

• The extent to which the defendant’s professional and personal characteristics might enable or tempt him to commit future violations;

• And the sincerity of any assurances against future violations

• Mootness and monetary relief: a claim for damages is never moot

• Similarly, a claim for restitution of defendant’s unjust gain is never moot.

Preventing Lawful Acts That Might Have Wrongful Consequences

Nicholson v. Connecticut Half-Way House, Inc. (1966)

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• FACTS: Defendants planned to open halfway house for parolees from state prison̶Plaintiffs property owners in neighborhood

• Before house could open, the trial court enjoined it as a nuisance̶Defendant appealed

• nuisance a really long definition by Marty Mac.

• TEST: whether a proposed use constitutes a nuisance is ‘the reasonableness of the use of the property in the particular locality under the circumstances of the case”

• The only factual grounds offered to support the relief granted are the fears of the plaintiffs that the residents of the defendant’s halfway house will commit criminal acts in the neighborhood and the finding that the proposed use has had a depreciative effect on land values in this area

• This is speculative and intangible fear

• Plaintiffs have neither alleged nor offered evidence to prove any specific acts or pattern of behavior which would cause them harm so as to warrant the drastic injunctive relief granted by the court

• Granting an injunction may only occur under demanding circumstances:

• No court of equity should ever grant an injunction merely because of the fears or apprehensions of the party applying for it

• Such fears/apprehension can exist without any substantian reason

• Here, Plaintiff’s claim mere speculationàcannot justify granting injunctive relief

NOTES ON RIPENESS AND UNCERTAIN CONSEQUENCES

• Propensity but still unripe: Nicholson can be thought of as a ripeness caseàthe dispute about the effects of the halfway house is not yet ripe

• Mostly the issue in Nicholson is about the uncertain consequences of Defendant’s conduct

• Prophylactic Relief: Nicholson can also be thought of as a request for a prophylptic injunction

• In Nicholson, the law of nuisance opens up the possibility of prophylactic relief

• If the halfway house is sufficiently dangerous or disruptive, it will be a nuisance in this location, and if it’s a nuisance, it is illegal to operate it in this location at all

• There is no doubt that the court can enjoin operation of an existing nuisance̶what about an anticipated notion?

• The nuisance cases: certainty is the common theme in cases where plaintiff seeks to enjoin the activity that might turn out to be a nuisance

• The fact that it will be a nuisance if so used must be made clearly to appear, beyond all ground of fair questioning---standard paraphrased as ‘reasonable certainity’

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Pepsico, Inc. V. Redmond (1995)

• Plaintiff Pepsi sought preliminary injunction against defendants to prevent Redmond, a former pepsi employee, from divulging Pepsi trade secrets and confidential info in his new job with Defendant

• Pepsi asserted that Redmond cannot help but rely on Pepsi trade secrets as help plot Quaker’s new products, and that these secrets will enable Quaker to achieve a substantial advantage by knowing exactly how Pepsi will price, distribute, and market its drink and respond accordingly

• This is inevitable-disclosure theory

• Affirm district court’s order enjoining Redmond from assuming his responsibilities at Quaker through May, 1995, and preventing him from forever disclosing pepsi trade secrets and confidential info

NOTES ON PROPHYLACTIC INJUNCTIONS

• Prophylactic relief: To what extent can the court enjoin conduct that is lawful in itself in order to prevent, or reduce the likelihood of, possible wrongful consequences?

• Culpability: the more egregious the violation, the greater the fears of further defiance or evasion, and the greater desire for prophylactic injunctions that give a margin of safety to plaintiffs and the court

AN ASIDE: PREVENTIVE RELIEF AT LAW

• Law and Equity:

• The most common legal remedy is damages

• Compensate harm

• The most common equitable remedy is injunctions

• Seek to prevent harm

• Mandamus: an order to a public or corporate official, directing her to perform a ministerial duty

• Prohibition: an order to an inferior court or a quasi-judicial agency to prevent it from exceeding its jurisdiction or abusing its authority

• Certioriari: order to a lower court directing it to deliver the record in the case for discretionary review by a higher court

• Habeas Corpus: an order to a person holding another in custody, directing him to bring the prisoner to court and to justify his further detention

Repairing the Consequences of Past Wrongful Conduct- undo the consequences. (reparative injunctions)

Forster v. Boss (1990)

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• PROCEDURAL POSTURE: Defendant sellers appealed the judgment of the United States District Court for the Western District of Missouri, which awarded plaintiff buyers compensatory damages for fraud and breach of contract and also awarded punitive damages and a permanent injunction.

• OVERVIEW: The sellers represented that the buyers could obtain a permit for a boat dock in front of their newly acquired property. The seller's permit made it impossible for the buyers to obtain a permit. The sellers did not keep a promise to remove a swim dock.

• The jury awarded the buyers compensatory damages and punitive damages based on the seller's fraud regarding the conflicting permit and awarded damages for the breach of contract regarding the swim dock. The buyers secured a permit and a permanent injunction ordering the sellers to remove the dock. The sellers appealed.

• The court found that the fraud verdict was supported by sufficient evidence that the value of the property transferred without the permit was a certain amount less than it would have been with the permit. The court refused to set aside the breach of contract verdict, although it was unable to ascribe a more precise value to the dock of substantial value.

• The court allowed the punitive damages, but required the buyers to elect either damages, which paid them in full for the deprivation of their littoral rights or an injunction because the award of both was a double recovery.

• OUTCOME: The court affirmed the judgment to the extent that it held the sellers liable and awarded punitive damages. The court reversed and remanded the judgment to the extent that it allowed the buyers to receive both compensatory damages and an injunction.

• Defendants argue that the injunction has made plaintiffs whole:

• If plaintiffs also receive, as damages, money to compensate them for the difference in the value of the property as property as promised and the value of the property at transferred, they have received a DOUBLE RECOVERY

• They have both the money and the property, and are in a better position than they would have been in had there been no fraud or breach of contract in the first place

• Case must be remanded̶plaintiff can elect which remedy they want̶compensatory damages or the inunction.

NOTES ON REPARATIVE INJUNCTIONS

• Injunctions after the wrong: In this case, the wrongful conduct̶the fraud with respect to the permit and the breach of K with respect to the swim dock̶is in the past.

• These wrongful acts cannot be prevented

• But, it is still possible to under their consequences, or, more precisely, it is still possible to prevent the future harm those wrongful acts threaten to cause

• “Preventive” and “reparative” injunctions: all injunctions are preventive in the most fundamental senseàthey seek to prevent harm from wrongful conduct. Distinction is:

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• Preventive injunctions: preventing the wrongful act

• Reparative injunctions: preventing some or all of the harmful consequences of that act

• Ripeness, causation, and scope:

• Reparative injunctions do not raise ripeness issues̶the wrongful act has already occurred

• But, they may raise issues of causation, or remoteness

• Were all the harms plaintiff complains of actually caused by defendant’s wrongful conduct? How far should defendant be required to go in eliminating every vestige of harm she caused?

• The scope of preventive injunction is based on the scope of the threatened violation;

• The scope of reparative injunction is based on the scope of the harms flowing from the past violation.

• Timing: preventive injunctions could have issues with timing̶if not litigated in time, the wrongful act could STILL occur

• With reparative, not as big an issue: such cases can be litigated on the court’s reg. schedule.

• Practicality: reparative injunctions are more likely to raises issues of practicality̶sometimes is it difficult or impossible to reverse the consequences of a past violation of law

• Preventive, reparative, and prophylactic injunction: The distinction between preventive and reparative injunctions is independent of the distinction between prophylactic and nonprophylactic injunctions

• Either preventive or reparative injunctions can contain prophylactic positions

• The availability of reparative injunctions: defendants occasionally argue that the court cannot order repariative relief̶that it cannot attempt to undo the past violation (this is frivolous, overbroad)

NOTES ON COORDINATING MULTIPLE REMEDIES

• Damages, reparative injunctions, and the rightful position: for each element of harm, the rightful position requires that the court do one or the other, but not both

• Just as there can be no double recovery in damages, there can be no double recovery in injunctions, or in a combinations or damages and injunctions

Winston Research Corp. v Minnesota Mining & Manufacturing Co. (1965)

• PROCEDURAL POSTURE: Appellees, a mining company and others, sued appellants, a research company and others, alleging that former employees of appellees developed a precision tape recorder for appellants by using confidential information that they had acquired while working for appellees.

• Both appellants and appellees appealed an order of a United States district court that granted appellees an injunction but denied damages for trade secret violations.

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• OVERVIEW: The trial court found that the general approach taken by appellees' former employees in developing appellants' machine was not a trade secret because it consisted of general engineering principles in the public domain.

• However, the specifications of the basic mechanical elements and their relationship to each other as embodied in appellees' machine were not publicly known and were arrived at only after extensive research by appellees.

• The trial court found that such specifications constituted appellees' trade secrets that were improperly utilized in developing appellants' machine. This finding was upheld on appeal as supported by substantial evidence. The trial court enjoined appellants from disclosing or using appellees' trade secrets for two years from the date of judgment.

• The duration of the injunction was approved on appeal as based upon the approximate time that it would require a legitimate competitor to develop a successful machine after public disclosure of the secret information.

• The court modified the injunction to remove provisions prohibiting the use of personal knowledge by the former employees because the provisions were too broad and indefinite to be enforced.

• OUTCOME: The court affirmed the trial court's judgment with modifications striking certain language that unduly restricted appellants' legal conduct.

NOTES ON REPARATIVE INJUNCTIONS AND THE RIGHTFUL POSITION

• Codification: the substantive rule in Winston has been codified, with a procedural change, in §2 of the Uniform trade secret act:

• “Actual or threatened misappropriated may be enjoined. Upon application to the court, an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misspapropriation.

Baily v. Proctor (1947): this is not a case about injunctions!

• PROCEDURAL POSTURE: Appellant shareholders sought review of the judgment that the United States district court entered in favor of appellees, receivers and others, ordering the liquidation of an investment trust and denying the shareholders' initiatives to resuscitate it.

• OVERVIEW: Gross abuse of trust by the officers and trustees led the trust into receivership and eventual liquidation. The shareholders filed suit, proffering reorganization plans, seeking a meeting of all trust shareholders, and contesting the trial court's liquidation order. The trial court denied all relief.

• The shareholders appealed, but the court affirmed. The court held that the trial court's action in ordering the trust into receivership was a permissible exercise of its inherent equity jurisdiction. The court noted

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that the trial court's jurisdiction in receivership did not lapse by virtue of an improvement in the trust's fortunes sufficient to make it solvent.

• The court ruled that the trial court had sound reasons for exercising its discretion to deny the shareholders' request that a meeting of all shareholders be permitted. Neither did the trial court abuse its discretion in finding that none of the shareholders' proffered reorganization plans was "fair and feasible."

• The court concluded that, there being no adequate reorganization plan, the trial court properly ordered the liquidation and distribution of the trust assets.

• OUTCOME: The court affirmed the trial court's judgment and remanded the cause for further proceedings in accord with the court's opinion.

NOTES ON EQUITABLE DISCRETION

• Two competing traditions:

• Winston: represents one tradition, which is to restore the plaintiff as near as may be to the position it would have occupied but for the violation (THE RIGHTFUL POSITION APPROACH)

• Bailey: represents THE EQUITABLE DISCRETION APPROACH: once there is a violation that brings a case into the equity court, the chancellor has a roving commission to do good

• He should see that equity is done to all within its jurisdiction;

• He should liquidate the trust because that is fair, even though it is not legally required and not necessary to restore the Plaintiffs to any position they would have occupied but for the wrong

Other Examples, and the current Law in the Supreme Court

Hutto v. Finney (1978)

• FACTS: this litigation began in 1969̶is a sequel to two earlier cases holding that conditions in the Arkansas prison system violated the 8th and 14th Amendments

• PRO HISTORY: District court found prison confinement cases unconstitutional

• However, did not immediately impose a detailed remedy of its ownàinstead, directed the Department of corrections to make a ‘substantial start’ on improving conditions

• More hearings later heldàthe district court concluded that continuing supervision no longer necessary

• COA reversed DC’s decision to withdraw its supervisory jurisdictionàDC held a 4th set of hearings

• It entered an order that placed limits on the number of men that could be confined in one cell, required that each have a bunk, discontinued the ‘grue’ diet, and set 30 day s as the maximum isolation sentence

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• ISSUE: No doubt that prison system violated cruel and unusual punishment lawàsingle issue is whether the federal court can draw brightline tests for punitive isolation on how long is ok to be there (court says 30 days, max)àdefendants say this is very arbitrary

• HELD: we find no error in the court’s conclusion that, taken as a whole, conditions in the isolation cells continued to violate the prohibition against cruel and unusual punishment

• In fashioning a remedy, the DC had ample authority to go beyond earlier orders and to address each element contributing to the violation

• DISSENT: the Court’s affirmance of a DC’s injunction against a prison practice which has not been shown to violate the Constitution can only be considered an aberration

• The Court has allowed itself to be moved beyond the well-established bounds limiting the exercise of remedial authority by the federal district courts

• This is nothing more than a prophylactic rule

• The provision is not remedial in the sense that it “restores the victims of discriminatory conduct to the position they would have occupied in the absence of such conduct.”

• The sole effect of the provision is to grant future offenders against prison discipline greater benefits than the Constitution requires; it does NOT remedy the plight of past victims of conditions in which may well have been unconstitutional”

MORE NOTES ON THE MEASURE OF INJUNCTIVE RELIEF: THE INSTITUTIONAL REFORM CASES

• The prison cases: it was easy to conclude that the conditions and practices in Hutto violated the Cruel and unusual punishment clause; it was far more difficult to show the constitutional basis for all the details judges eventually ordered in their efforts to make things better

• In the prison cases, as in the desegregation cases, most judges let defendants take the lead in proposing remedies

• Legislation: The Civil Rights of Institutionalized Persons Act authorizes the attorney general to sue states to correct “egregious or flagrant conditions’ that violate the constitutional rights of persons housed in prisons, mental hospitals, etc.

Lewis v. Casey (1996)

• FACTS: this was a class action by Arizona prisoners complaining that inadequate law libraries and legal assistance in the state prisons interfered with their right of access to the courts under Bounds v. Smith (1977)

• Bounds: a prisoner could not show a violation of Bounds unless he showed that he was unable to filed some other nonfrivolous complaint,

• Or had some other nonfrivolous complaint dismissed, because of inadequate access to legal info

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• HELD: all nine justices appeared to agree that the proven inadequacies in the libraries were scattered and nonsystematic

• The requirement that an inmate alleging a violation of Bounds must show actual injury derives ultimately from the doctrine of standing (a constitutional principle that prevents courts of law from undertaking tasks assigned to the political brances

• In the present case:

• It is for the Court’s to remedy past or imminent official interference with individual inmates’ presentation of claims to the courts

• It is for the political branches of the state and federal governments to manage prisons in such fashion that official interference with the presentation of claims will not occur

• Of course, these two roles briefly and partially coincide when a court, in granting relief against actual harm that has been suffered, or that will imminently be suffered, by a particular individual or class of individuals, order the alteration of an institutional organization or procedure that causes the harm

• But, the distinction between the two roles would be obliterated if, to invoke intervention of the courts, no actual or imminent harm were needed, but merely the status of being subject to a governmental institution that was not organized or managed properly

• ISSUE: whether [the two proven] injuries, and other findings of the DC, support the injunction ordered in this case

• The actual-injury requirement would hardly serve the purpose we have described above̶of preventing courts from undertaking tasks assigned to the political branches̶if once a plaintiff demonstrated harm from one particular inadequacy in government administration, the court were authorized to remedy all inadquaceis in that administration

• The remedy must be limited to the inadequacy that produced the injury-in fact that the plaintiff has established

• In the single case of one prisoner: Was his injury (that inadequacy) widespread enough to justify systemwide relief?

• No̶one, or two, instances are patently inadequate basis for a conclusion of system wide violation and imposition of systemwide relief

• The constitutional violation has not been shown to be systemwide, and granting a remedy beyond what was necessary to provide relief for the two prisoners was therefore improper

• Also note, this injunction was inordinately̶ indeed widely̶ intrusive.

• CONCURRENCE: it was an abuse of discretion for the DC to aggregate discrete, small borne problems in individual prisons and to treat them as if each prevailed throughout the prison system, for the purpose of justifying a broad remedial order covering virtually every aspect of each prison library

• It is overreaching of the evidentiary record…should be reversed

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MORE NOTES ON THE MEASURE OF INJUNCTIVE RELIEF: RECOMMITMENT TO THE RIGHTFUL POSISTION?

• The Prison Litigation Reform Act: a wide-ranging effort to constrain what Congress says is frivolous claims by prisoners and excessive structural remedies by federal judges:

• “prospective relief in any civil action with respect to prison conditions shall extend no further than necessary to correct the violation of the Federal right of a particular plaintiff or plaintiffs. The Court shall not grant or approve an prospective relief unless the Court finds that such relief is narrowly drawn, extends no further than necessary to correct the violation of the Federal right, and is the least intrusive means necessary to correct the violate of the Federal right

• Lewis: ponders that proof of a systemwide violation would justify a systemwide remedy, although the facts did not require definition of a ‘systemwise violation”

• The ACT does not mentional classa actions, but its provision for deference to the ‘operation of the criminal justice system,” and provisions for ordering the release of prionsers and less intrusive remedies to ease crowding, all seem to contemplate that broad relief might sometimes be necessary to remedy the rights of particular plaintiffs

United States v. Virginia (1996)

• FACTS: SC affirmed the holding that the male-only program at VMI was unconstitutional̶then turned to the adequacy of the remedy

• RULE: a remedial decree must closely fit the constitutional violationàit must be shaped to place persons unconstitutionally denied an opportunity or advantage in ‘the position they would have occupied in the absence of [discrimination]

• The constitutional violation in this case is the categorical exclusion of women from an extraordinary educational opportunity afforded men

• A proper remedy for an unconstitutional exclusion, aims to “eliminate [so far as possible] the discriminatory effects of the past and to bar like discrimination in the future’

• Having violated the Constitution’s equal protection requirement, Virginia was obliged to show that its remedial proposal “directly addressed and related to the” violation.

• HELD: Valuable as VWIL may prove for students who seek the program offered, Virginia’s remedy offers no cure at all for the opportunities and advantages withheld from women who want a VMI education and can make the grade

• Virginia’s remedy does not match the constitutional violation

• CONCURRENCE: The court implies that the only adequate remedy would be the admission of women to the all-male institution…

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• I would NOT define the violation this way

• It is not the “exclusion of women” that violates the EPC, but the maintenance of an all-men school without providing any̶must less a comparable̶institution for women

• VWIL fails as a remedy because it is distinctly inferior to the existing men’s institution and will continue to be for the foreseeable future

NOTES ON PAYING FOR THE REMEDY

• Rightful position, equitable discretion, and funding: all the desegregation and institutional reform cases order remedies that require the expenditure of public funds

Chapter 5: Choosing Remedies a. Substitutionary or Specific Relief

Irreplaceable Losses: Injunctions

Pardee v. Camden Lumber Co (1911): illustrates and interprets the rule that courts will not grant an equitable remedy if a legal remedy would be adequate

• FACTS: order dissolving an injunction awarded to prevent the cutting of timber on a tract of land is appealed

• HELD: this injunction would fail if we adhered to rule of this court that we normally assert̶instead, court reinstates the injunction

• RULE: Unless the trespass itself constitutes irreparable injury, none is shown, for there is no allegation of insolvency of the trespasser nor of any other circumstance precluding recovery of such compensation in money as the law gives for the injury done and threatened by an action

• If the legal remedy is not adequate, the whole doctrine necessarily fails

• Compensation in damages is adequate in all those instances in which the property (that) is injured or destroyed may be substantially replaced with the money recovered as its value

• If a man threatens to take away or kill his friend’s horse, a court of equity will not interfere by injunction, because the owner may recover the value of that horse and buy another in the general market of substantially the same kind or value

• But, if a man is about to destroy his neighbor’s heirlooms, things having a peculiar value and insusceptible of replacement by purchase in the market, the legal remedy is NOT adequate

• A court of equity will thus protect the possession and title of the owner by the exercise of its extraordinary powers

• In the case at hand, standing timber is everywhere regarded as part of the real estate upon which it grows

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• The cutting thereof converts it into personal property, and wholly changes its legal nature and incident

• Being a part of the land itself, it has no legal equivalent in nature or value, for no two pieces of land are alike in all respects, nor is a piece of land, stripped of its timber, with a right of action for the felled timber or for damages, the equivalent of the same land with timber on it

FW Maitland, Equity (1969)

• Equity now is that body of rules administered by our English courts of justice which, were it not for the operation of the Judicature Acts, would be administered only by those courts which would be known as Courts of Equity

NOTES ON EQUITY IN THE UNITED STATES

• Article III authorizes equity jurisdiction for the federal courtsàfederal district courts had a law side and an equity side

• A case had to be on one side or the other; it could not be both

• Merger of the two began in late 1840s

NOTES ON THE REASONS FOR THE IRREPARABLE INJURY RULE

• Inadequate remedy and irreparable injury: hornbook law that equity will not act if there is an adequate remedy at law

• Another formulation of the rule is that equity will act only to prevent injury that is irreparable

• “The very things which makes an injury “irreparable” is the fact that no remedy exists to repair it.”

• The most useful attempted distinction is to use the ‘adequate remedy’ formulation to refer to the choice of remedies at final judgment, and the ‘irreparable injury’ formulation to refer to the requirements for interim relief pending final judgment̶for preliminary injunctions and TROs

• Author thinks “we would do better to draw the distinction in plain English̶not to artificially distinguish irreparable injury from inadequate remedy, but to say, when we mean to emphasize the real distinction, ‘irreparable injury before judgment’ and ‘irreparable injury after judgment’

• The sources of inadequacy: the typical modern application of the irreparable injury rule is to a comparison between some equitable remedy that will prevent a threatened injury and money damages that will compensate for the injury after it has occurred

• if money damages will be “adequate”, then the injury is not irreparable and will not be prevented

• Modern justifications? Would any purpose be served in Pardee by denying the injunction and making plaintiff sue for the value of the timber?

• Burdens on the court: it is sometimes said that injunctions impose a greater burden on the court, because they have to be enforced over time.

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• The injunction eliminates the need to measure damages in moneyàa whole issue is removed from the trial

• Defendant’s liberty: it is sometimes said that the injunction is a greater intrusion on defendant’s liberty

• Jury Trial: in most jurisdictions, there is a right to jury trial at law but not in equity.

• Thus, it is often said that the irreparable injury rule protects the right to jury trial; plaintiff should not be able to deprive defendant of a jury by asking for an injunction instead of damages

• Timing: to prevent harm, the court must resolve the liability issue before the harm has happened

• Compensation can be litigated at leisure, after the harm is done

• Timing is probably the most important practical reason why plaintiffs seek damages more often than injunctions

• Economic Analysis: Remember the economic view that profitable violations of law should sometimes be encouraged if the violator compensates his victims…(where transaction costs are high, the usual remedy should be damages; where transaction costs are low, the usual remedy should be injunctionl

• Transaction costs: where the cost of negotiating a voluntary transaction would be high, Judge Posner would deny the injunction and leave victims to their damage remedy

• There are many sources of high transaction costs, but two are both common and easy to explain

• One is transaction with so many parties that it is difficult or impossible to reach agreement among them all

• Another is bilateral monopoly: when two parties have no alternative but to deal with one another

•

• Property rights? Epstein’s view of remedy choices:

• “property rules” are typified by injunctions;

• ‘liability rules’ are typified by damages

• Epstein argues that among a property owner’s core rights is the right to refuse to sell except on her own terms, that this is inconsistent with any right in others to take her property and pay damages, and that the law of remedies reflects this understanding of property and prefers remedies that protect possession and ownership over remedies that award damages

Brook v. James A. Cullimore & Co (1967)

• PROCEDURAL POSTURE: Defendant appealed from the judgment of the District Court of Oklahoma County (Oklahoma) that ordered defendant to deliver the property sought in plaintiff's suit for replevin, and to withdraw the deposits defendant made to the clerk's office for a money judgment.

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• Replevin: an action for the repossession of personal property wrongfully taken or detained by the defendant, whereby the plaintiff gives security for and holds the property until the court decides who owns it

• OVERVIEW: Plaintiff sued defendant for replevin claiming a special interest in items of personal property by virtue of chattel mortgage securing a note and sought possession of the personalty.

• Defendant appealed from the lower court's judgment that ordered defendant to deliver the property sought in plaintiff's suit for replevin, and to withdraw the deposit defendant made to the clerk's office as a redelivery bond.

• Defendant argued that the cause should have been remanded with directions to take evidence of the value of the property sought by replevin, and to enter a money judgment for its value.

• The court affirmed the lower court's judgment because plaintiff had the right to elect either return of the property or a money judgment.

• Defendant, against whom judgment for possession was rendered, did not have the power to retain the property and pay its value as stated in the affidavit for replevin.

• The property was shown to be available for delivery and was of substantial value and far from being worthless or materially deteriorated. Plaintiff was willing to accept the property. As the prevailing party, plaintiff had a right to insist on its return.

• OUTCOME: Lower court's judgment was affirmed because plaintiff as the prevailing party in this replevin action had the right to elect either the return of the property or a money judgment.

NOTES ON REPLEVIN AND INJUNCTIONS

• Replevin: replevin in common law (and I still think today) is a legal remedy

• The means of enforcement: one important difference between replevin and injunction has been the means of enforcement

• Injunctions are enforced by the contempt power

• Replevin was traditionally enforced by the sheriff seizing the propery and delivering it to plaintiff

• The irreparable injury rule has been brought to bear on these choices:

• If the goods are irreplaceable, plaintiff may get an injunction ordering return of the goodsàshe need not rely on the riskier enforcement mechanisms of replevin.

• Scope: replevin is of narrower scope than injunctions

• Replevin lies only to recover goods̶it does not lie to prevent a threatened destruction or dispossession

Continental Airlines Inc. v. Intra Brokers, Inc. (1994)

• PROCEDURAL POSTURE: Defendant broker sought review of the permanent injunction granted by the United States District Court for the Central District of California in favor of plaintiff airline, which prevented defendant from selling any more of plaintiff's discount travel coupons to travel agencies.

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• OVERVIEW: Plaintiff airline filed a claim against defendant broker seeking damages, a declaratory judgment, and an injunction, after defendant refused to stop selling plaintiff's discount travel coupons to travel agencies in violation of express restrictions on transfer.

• Defendant counterclaimed, alleging fraud, negligent misrepresentation, and interference with prospective economic advantage.

• The district court dismissed the counterclaims on the basis of federal preemption and granted summary judgment to plaintiff on its claims for declaratory and injunctive relief.

• Defendant appealed the injunction and the court of appeals affirmed.

• The court held that plaintiff's claims were not barred by waiver or estoppel even though plaintiff had allowed the sale of the coupons in violation of the anti-assignment provision in the past.

• The court found that plaintiff had no adequate legal remedy.

• OUTCOME: The court affirmed the district court's order granting plaintiff airline a permanent injunction against defendant broker. The court held that neither waiver nor estoppel barred plaintiff's claim and plaintiff had no adequate remedy at law.

NOTES ON THE CONTENT OF THE IRREPARABLE INJURY RULE

• Irreplaceability:

• Personal Property: why is the rule said to be different for personal property?

• Intangible Rights: the principle that damages are an inadequate remedy for the loss of something irreplaceable is not limited to land and unique tangible property

• Injunctions standard remedy in civil rights or environmental litigation

• Personal injuries can rarely be anticipated in time to prevent them by injunction, but where an injunction is possible, the irreparable injury rule is obviously satisfied

• this is why there can be injunctions against domestic violence and against conduct that creates a risk of serious injury

• The Right to control your own business: Continental’s right to control its own business cannot be replaced in the market

• How the rule acquired its content: via 1616:

• “…equity interpreted the irreparable injury rule in ways that expanded its jurisdiction…

• The most important and most general rule limiting the impact of the irreparable injury rule is the definition of adequacy. A legal remedy is adequate only if it is as complete, practical, and efficient as the equitable remedy.

• This definition of adequacy was well established before the merger, and it is the prevailing definition today

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• As a defender of the traditional understanding acknowledges, t he legal remedy almost never meets this standard

• Today, courts have held that being choked to death, or dying from cancer, are injuries that cannot be adequately remedied by damages

Irreplaceable Losses: Specific Performance of contracts

Campbell Soup co. v. Wentz (1948)

• Campbell (Plaintiff), had a contract with Defendants for certain special carrots; suspected that Defendant was selling carrots against K to someone else (spot buyers)àCampbell refused to purchase any more carrots and instituted these suits against Carrot sellers and the other buyers of the carrots to enjoin further sale of the K carrots to others, and to compel specific performance of the K

• Trial court denied equitable relief

• RULE: a party may have specific performance of a K for the sale of chattels if the legal remedy is inadequate

• Inadequacy of the legal remedy is necessarily a matter to be determined by an examination of the facts in each particular instance

• HELD: specific performance should be granted from the below facts…but contract separately held unconscionable to begin with so denied

• The preservation of uniformity in a food article marketed throughout the country and sold under the manufacturer’s name is a matter of considerable commercial significance and one which is properly considered in determining whether a substitute ingredient is just as good as the other

• There is considerable authority, old and new, showing liberality in the granting of an equitable remedy

• We see no reason why a court should be reluctant to grant specific relief when it can be given without supervision of the court or other time-consuming processes against one who has deliberately broken his agreement

• Here, the goods of the special type contracted for were unavailable on the open market, the plaintiff had contract for them long ahead in anticipation of its needs, and had built up a general reputation for its products as part of which reputation uniform appearance was importantàfor this, specific performance appropriate

NOTES ON SPECIFIC PERFORMANCE OF CONTRACTS

• What is specific performance? Remember, it is a coercive remedy…

• A specific performance decree is a specialized form of injunction, an order to defendant to perform his K

• Typically requires affirmative conduct, but that does not make it unusual

• Its availability is historically conditioned on a showing that legal remedies would be inadequate

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• The facts in Campbell: the carrots have long since been sold and the parties are fighting over money

• Normally, that would make the issue mootàthe money value of a right to specific performance is expectancy damages

• Specific performance thus is not often an option because courts move too slowlyàthe parties must go about their business and then litigate their damages

• Campbell is not a flukeàcourts often grant specific performance of contracts for the sale or ordinary goods if scarcity, time constraints, or the sheer size of the K make it difficult or impossible to cover

• Codification: The UCC codified specific performance of sales Ks “if the goods are unique or in other proper circumstances.” (§2-716(1)).

• Once goods are identified to the K, §2-716(3) allows the buyer to replevy the goods if he can’t cover

• Replevin traditionally protected property rights and not contract rightsàits use in this section is an extension

• Plaintiff’s return performance: if the court orders defendant to perform the contract, it obviously must ensure that plaintiff performs in return

• This can be done by requiring simulateous performance, or if that is impractical because defendant’s performance takes time, by requiring plaintiff to pay the purchase price into court or otherwise secure her obligation to pay

• Many cases state an additional requirement: that plaintiff must show that she is (or in some formulations, was) “ready, able, and willing” to perform.

NOTES ON EFFICIENT BREACH OF K ( mcwilly says author goes into wayyy too much detail here…)

• The basic idea: one argument against specific performance is that the spot buyers offering $90 for carrots may have a more valuable use for them

• And forcing a sale to Campbell for $30 may cause the carrots to be wasted in a less valuable use

• This is based on the economic view that individual willingness to pay is a good proxy for societal value

• If kept how it is…The spot buyers are better off, the defendant farmers are better off, Campbell is no worse off, and the carrots are put to a more valuable use, so society as a whole is better off

• The asking-offering problem: there is another ambiguity in the economists’ assumption that price is the measure of value

• Asking price likely to be higher than its offering price

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• Individual willingness to pay is a proxy for societal value, but it is a quite imperfect proxy

• The effect on contracts: even if we assume that allowing the farmers to sell the carrots to the highest bidder produces some economic gains, is there any reason to believe those gains exceed the economic losses from making long-term K’s less reliable?

• The risk shortage may be the most important reason Campbell wanted a long-term K

• Transaction costs again: scholars on all sides of the controversy have mostly recognized that if there were no transaction costs, the parties would always transfer the carrots to the party with the most valuable use.

• Thus, the economic wisdom was to select the rule with the lowest transaction costs, and much of the literature turn on ever-more-detailed speculative analyses of the likely transaction costs of each remedy

• Bishop argues that specific performance more expensive

• Ulen argues that damages are far more expensive

• Transaction costs are likely to be high either way

• A specific performance decree cuts out the farmers and leave Campbell to negotiate with the new buyer

• A damage remedy cuts out Campbell and leaves the farmers to negotiate with the new buyer

• Either solution involves the threat of litigation between two of the parties and a voluntary transaction between two of the parties

• Is there any basis for a general prediction about which will involve higher transaction costs?

• Judge Posner says ‘yes’:

• A judgment ordering the farmers to perform creates a bilateral monopoly:

• Only farmers can comply with the decree, and only Campbell can release them

• Bargaining over Campbell’s damage claim is also a bilateral monopoly, but the two sides’ predictions about the damage judgment may narrow the settlement ran and make it easier to reach agreement

• The relevance of shortage:

• If there is a shortage, so that one side must do without, it becomes meaningful to speak of allocating the resource to the more efficient use

• But, in times of shortage, damages are an inadequate remedy and the positive law allocates the resource to the party who was promised it under a valid K

• The principle of allocation is entitlement, and the entitlement is created by K

• Whatever its normative or heuristic merits, efficient breach theory does not describe the law in shortage cases

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• Irreplaceability and transaction costs: the law is also in tension with the more general economic claim that specific relief should be denied where transaction costs are high

• If plaintiff cannot replace the thing she lost

• Either she has the only one and it is about to be destroyed or taken away; or

• Defendant is the only source of supply

• Either way, one of the parties is a monopolist

• Plaintiff usually therefore has a substantive legal right that defendant must comply with or pay for

• Monopoly is thus a correlate of irreplaceability, and bilateral monopoloy is not unusual.

• In the economic view, bilateral monopoly is a source of high transaction costs and thus a reason to deny specific relief

• If the positive law, irreplaceablilty is the most common reason to grant specific relief

• The OTHER common source of high transaction costs is large numbers of parties

• Yet, class action injunctions are common̶civil rights, environmental, etc.̶although the costs of buying a release from the injunction form every class member are plainly probhitive.

• Opportunistic Breach: Judge Posner recognizes a category of opportunistic breach of K that should be deterred:

• Promisor breaks his promise merely to take advantage of the promisee’s vulnerability in the normal contract setting in which performance is sequential rather than simultaneous (A pays B in advance for good and instead of delivering them B uses the money to build a pool)

• Restitution appropriate in a case like this

• Thin Markets: markets for items with no exact substitutes or for items specially built to plaintiff’s specifications

• Contract market damages may not so neatly equal the profits from breach in markets like these

NOTES ON SPECIFIC PERFORMANCE WHERE COVER IS POSSIBLE

• Kinda sorta replaceable…

• There are very few cases in which the goods appear entirely fungible and plaintiff seeks specific performance anywayàgoods are replaceable only with difficulty, or only with similar but not identical goods

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• Where replacement is difficult, a majority of cases grant specific relief, but a substantial minority do not

• So long as the rule lasts that damages are an adequate remedy for loss of goods that are availiaby elsewhere, some cases will far near the line and some near the line will be decided each way

• Why is Plaintiff seeking specific performance anyway? Debate exists over making specific performance available even when damages could be used to cover

• Schwartz argues that damages are generally undercompensatory in such casesàthe time required to arrange for a replacement purchase is hard to monetize, and that it is wasteful to litigate over damages that specific performance could have prevented

• Schwartz also says that a request for specific performance proves the inadequacy of damages…

Van Wagner Advertising Corp v. S&M Enterprises (1986)

• HELD: specific performance of a K to lease ‘unique’ billboard space is properly denied when damages are an adequate remedy to compensate the tenant and equitable relief would impose a disproportionate burden on the defaulting landlord.

• Undisputed that breach of k occurred̶however̶specific performance in this case inappropriate

• RULE: the point at which breach of K will be redressable by specific performance thus must lie not in any inherent physical uniqueness of the property but instead in the uncertainty of valuing it:

• What matters, in measuring money damages, is the volume, refinement, and reliability of the available info about substitutes for the subject matter of the breached K

• When the relevant info is thin and unreliable, there is a substantial risk that an award of money damages will either exceed or fall short of the promisee’s actual loss

• Restatement of K also “lists the difficulty of proving damages with reasonable certainty” as the first factor affecting adequacy of damages”

• Thus, the fact that the subject of the K may be ‘unique as to location for the particular advertising purpose intended” by the parties does not entitle a plaintiff to the remedy of specific performance

NOTES ON IRREPARABLE INJURY AND UNDUE HARDSHIP

• The undue hardship defense: do we REALLY want to prevent redevelopment of a block of midtown Manhattan because of a billboard?

• Many cases where specific performance is burdensome to the D (D unable to perform…)

• But, the irreparable injury rule does not solve these cases; whether the legal remedy is adequate for plaintiff has little to do with whether the equitable remedy would be a hardship on a defendant

• Undue hardship to defendant is an independent reason, both of doctrine and policy, for denying specific relief

• Note: undue hardship cases are cases where it is impossible or very expensive for defendant to perform

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• Shavell: thinks parties to contracts to make something/do something would prefer damagesàthis is because there is a risk that production costs might run particularly high

• Thinks that parties to contracts to convey property already in existence would prefer specific performance

• The two doctrines in Van Wagner: the court applies both doctrines in Van Wagner (plaintiff’s legal remedy is adequate, and specific performance would impose undue hardship)

• Irreparable injury in regards to real estate: the traditional rule is that damages are never an adequate remedy for the loss of real estate or damage to real estate.

• this rule is routinely applied to leases as well as to sales

• Plaintiff in Van Wanger might have done better to asserts its property rights instead of contract rights…

• Irreparable injury and the difficulty in measuring damages: one of the most common reasons for holding legal remedies inadequate is that damages are difficult to measure, and one of the most common applications of this rule is to lost profits.

• Corporate Acquisitions: in complex contracts, damages are likely to be hard to measure, but specific performance may also be more burdensome to the parties or the court

• Replaceability and damage measurement: difficulty of measuring damages is a corollary of difficulty of replacement

• Any case where the loss is irreplaceable on the market can also be described as a case where damages are hard to measure

NOTES ON PERSONAL SERVICE CONTRACTS

• Promises to work: courts will not order specific performance of an employee’s promise to work.

• Other promises in an employee K̶to preserve trade secrets or not to compete against the employer̶are subject to sometimes stringent review for reasonableness, but if held reasonable, they can generally be specifically enforced

• The promise to work is different, because courts think it is impractical to force an employee to work against her will, and they think that an order to work on pain of punishment for contempt might violate the 13th amendment.

• Liquidated Damages: there may be great judicial willingness to enforce if the employee expressly agrees to a liquidated damage clause

• Reinstatement: the equivalent of specific performance against employers is now routine

• Reinstatement is the standard remedy for employees discharged in violation of labor laws, civil laws, employment discrimination laws, constitutions, and collective bargaining agreements

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Burdens on Defendant or the Court

Whitlock v. Hilander Foods, Inc. (1999)

• FACTS: plaintiff noticed that Defendants’ wall footings were on his property

• Lawyers exchanged written offers and counter-offers off and on; plaintiff’s eventually sued for an injunction ordering that the footings be removed from his property

• Trial judge granted summary judgment for defendant, holding that the encroachment was not intentional and that plaintiff had unreasonably delaying in filing suit

• HELD: Trial court erred in concluding that, as a matter of law, the encroachment on plaintiff’s property was not intentional

• ISSUE: whether to categorize defendant’s encroachment as intentional or unintentional is potentially of crucial significance

• In deciding whether to order a defendant to remove an offending structure, the trial court must balance the hardship to the defendant against the benefit to he plaintiff;

• If the former is great and the latter slight, the court will ordinarily leave the plaintiff to his remedy at law

• However, if the encroachment is deliberate, the court may issue the injunction without considering the relative hardships

• Here, the balance of hardships decisively favors defendant, as mandatory injunction would require it to undo at least in large part a $1.5 million construction project, while the benefit to plaintiff would at most be far less clear

• A fact finder could infer that, when defendant’s agents started to put in the footing, they knew or could easily have learned that they were standing on plaintiff’s land as they worked.

• In any event, a mistaken belief by defendant that it was on the right side of the line would not save if form an injunction if it could have ascertained the truth by reasonable care

• Defendant kept on building the new south wall even though it had not obtained permission from the plaintiff

• Defendant knew that it was approaching plaintiff’s property and pressed ahead anyway

• SECOND ISSUE: laches will bar relief where, as a result of the plaintiff’s unreasonable delay in asserting his right, the defendant has been misled or prejudiced

• Court must ask whether the defendant has contributed to the delay of which it complains and whether the defendant knew it was violating a right and went ahead anyway in disregard of the consequences

• HELD: the trial court erred in holding that, as a matter of law, plaintiff’s delay in bringing suit bars it from obtaining any relief

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• If plaintiff establishes that the encroachment was deliberate or intentional, he need not show that he will suffer substantial immediate harm from the violation of his property right

• Equity only helps those with CLEAN HANDS

NOTES ON UNDUE HARDSHIP

• The remand in whitlock: injunction cases are tried without juries in most other states

• Bomer v. Atlantic Cement Co: The most famous undue hardship case

• Defendant’s cement plant was pouring dust on plaintiff’s

• Court held that the plant was a nuisance, but it refused to enjoin operation of the plant, because defendant had invested $45 million and employed over 300 workers at the plantàinstead, it gave damages for the reduced value of their homes ($185,000)

• On remand, settlements and one litigated damages judgment were based not on market values before plant entered the neighborhood but on the above-market prices Atlantic had paid to assemble its tract of more than five square miles ($710,000)

• A multifactored defense: The defense in these cases is called ‘undue hardship’ or ‘balancing the equities’

• Hardship to defendant is common to all cases, and generally the hardship must be disproportionate to any benefit plaintiff will derive from the injunction.

• But, courts also give heavy weight to defendant’s culpability and to plaintiff’s diligence

• The rule is a litigation doctrine and not a planning doctrine

• Defendant’s culpability:

• In the nuisance cases, courts will certainly care that defendant is (intentionally) doing less than it reasonably should to avoid the problemàthey are less likely to care that it intentionally built the business that is the source of the problem

• In studies of injunctions: “most frequently and significantly relied upon as an affirmative basis for injunction was the defendant’s willfulness.”

• The cases about with such appraisals as deliberate, defiant, flagrant, intentional, premeditated, and at his peril

• Laches: laches is an equitable defense, based on delay in filing suit with resulting prejudice to defendant

• Suing early prevents defendant from claiming acquiescence or reliance, but it doesn’t guarantee a decision for plaintiff

• The damage remedy:

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• When the court denies the injunction because of undue hardship, plaintiff generally gets damages instead.

• Damages are generally inadequate in the sense that an injunction would be a better remedy; in many of these cases, plaintiff loses an interest in land that is presumed to be unique

• Sometimes, especially when defendant is a government agency or plaintiff is an organization of many slightly affect individuals, it is clear that there will be no damage remedy even if the injunction is denied

• Undue hardship in damage cases: the conventional wisdom is that undue hardship is a problem only of specific relief

• but similar concerns underlie rules against disproportionate measures of damage

• Peevyhouse v. Garland Coal & Mining (1962): coal company breached a promise to restore plaintiff’s land to its prior condition after exhaustion of a strip mine

• Restoration would have increased the value of the land by $300 at a cost of $29,000

• Court held plaintiffs were not entitled to the cost of restoration

• Court denied restoration cost because that cost was ‘grossly disproportionate’ to the lost value

• Similarly, Restatement (Second) of K says plaintiff can recover the cost of completing construction contracts unless that cost is “clearly disproportionate” to benefit

NOTES ON THE ECONOMICS OF UNDUE HARDSHIP

• Comparing the doctrine to the law-and-economics approach

• Courts allow the undue hardship defense only to defendants who acted in good faith

•

• Bilateral monopoly:

• Granting or withholding the injunction allocates power to be unreasonable between bilateral monopolists

• That is, if the court grants the injunction, plaintiff gets enormous bargaining leverage;

• If the court denies the injunction, defendant get enormous bargaining leverage

• A damage remedy fixes a price;

• Equally important, the parties’ predictions about a damage remedy provide a basis for bargaining.

• The prospect of a damage remedy thus reduces the cost of bargaining, eliminates the distributional consequences of giving one side all the bargaining leverage, and eliminates the risk of tearing down the more valuable use if the parties fail to agree.

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Co-Operative Insurance Society Ltd. v. Argyll Stores (Holdings) LTD (1998)

• English case

• FACTS: defendants, Argyll, decided to close their store in shopping center because it was losing moneyàthis was a breach of covenant in their lease, which contained in clause 419 a positive obligation to keep the premises open for retail trade during the usual hours of business

• Injunction ordering Argyll to trade on the premises during the remainder of the term or until an earlier sublet, was issued

• At trial, the judge refused to order specific performance…a resumption of business would be expensive (refitting the shop was estimated to cost over 1 million pounds)

• RULE: Specific performance is traditionally regarded in English law as an exceptional remedy, as opposed to the common law damages to which a successful plaintiff is entitled as or right

• Specific performance will not be ordered when damages are an adequate remedy

• The most frequent reason given in the cases for declining to order someone to carry on a business is that it would require constant supervision by the court

• The prospect of committal or fine, with the damage to commercial reputation which will be caused by a finding of contempt of court, is likely to have at least two undesirable consequences

• First, the defendant, who did not think that it was in his economic interest to run the business at all, not has to make a decision under the arm of the court (and resultant punishments) if the way the business is run does not conform to the terms of order (no way to run business)

• Secondly, the seriousness of a finding of a contempt for the defendant means that any application to enforce the order is likely to be a heavy and expensive piece of litigation

• The possibility of repeated applications over a period of time means that, in comparison with a once and for all inquiry as to damages, the enforcement of the remedy is likely to be expensive in terms of the cost to the parties and the resources of the judicial system

• Orders that require a defendant to carry on an activity (running a business) VERSUS orders which require him to achieve a result

• Even if the achievement of the result is a complicated matter which will take some time, the court, if called upon to rule, only has to examine the finished work and say whether it complies with the order

• This distinction between orders to carry on activities and orders to achieve results explains why the courts have in appropriate circumstances ordered specific performance of building contracts and repairing covenants.

NOTES ON PRACTICALITY AND PRIVATE LITIGATION

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• American cases: an American opinion would differ in style but almost certainly not in result

• Universal Health Services v. Thompson (2000): trial court refused specific performanceà “it could not require the hospital to stay open” permanently

• Burden on the Court: The considerations of Argyll can be divided into two groups:

• 1. Undue hardship to defendant (more familiar)

• 2. Burden on the court in enforcing and supervising performance

• Balancing the injunction’s burden and the legal remedy’s inadequacy: how do the legal remedies compare in these cases?

• Argyll: damages would presumably be the lost rent, offset by the current market rent or the actual rent paid by a new tenant

• City Stores: damages would be the present value of profits for the life of the mall, a period of many years

• In addition, this was to be plaintiff’s first suburban store, and the court thought that expanding into that market would bring almost “incalculable future advantages”

• Adequacy is a comparative judgment

• The damage remedy is more nearly adequate in Argyll than in City stores

• Another look at the adequate remedy rule: the additional burdens of litigating and supervising equitable remedies are sometimes offered as a justification for the adequate remedy rule

Other Reasons (and more of the same reasons)

• Looking at the ‘better rule’ between deciding between damages and injunctions

Ebay inc. v. Mercexchange LLC (2006)

• PROCEDURAL POSTURE: In a patent infringement suit, a jury found that respondent patent holder's patent was valid, that petitioner Web site operators had infringed that patent, and that an award of damages was appropriate.

• The United States District Court for the Eastern District of Virginia denied the holder's motion for permanent injunctive relief. The United States Court of Appeals for the Federal Circuit reversed. The Supreme Court granted certiorari.

• OVERVIEW: According to well-established principles of equity, a plaintiff seeking a permanent injunction had to satisfy a four-factor test before a court could have granted such relief.

• RULE: The four factor test…plaintiff must demonstrate:

• That is has suffered an irreparable injury

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• That remedies available at law, such as monetary damages, are inadequate to compensate for the injury

• That, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and

• That the public interest would not be disserved by a permanent injunction

• The Supreme Court found that these familiar principles applied with equal force to disputes arising under the Patent Act.

• A major departure from the long tradition of equity practice should not have been lightly implied.

• Nothing in the Patent Act indicated that Congress intended such a departure.

• To the contrary, the Patent Act expressly provided that injunctions could have issued in accordance with the principles of equity, under 35 U.S.C.S. § 283.

• This approach was consistent with the Supreme Court's treatment of injunctions under the Copyright Act.

• Neither the district court nor the court of appeals fairly applied these traditional equitable principles in deciding the holder's motion for a permanent injunction. The decision whether to grant or deny injunctive relief rested within the equitable discretion of the district courts, and such discretion had to be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.

• OUTCOME: The judgment of the court of appeals was vacated. The case was remanded for further proceedings.

NOTES ON CONFUSION IN THE SUPREME COURT

Willing v. Mazzocone (1978) (Free speech issues and damages)

• PROCEDURAL POSTURE: Defendant former client challenged the order of the Superior Court (Pennsylvania) that modified and affirmed an injunction granted to plaintiff law firm in its action to enjoin defendant from protesting outside of its place of business.

• Defendant argued that the injunction violated her constitutional right to freedom of speech.

• OVERVIEW: Defendant former client protested in front of the building in which plaintiff law firm was located.

• Defendant wore a placard that proclaimed plaintiff had stolen money from her and rang a cowbell and blew a whistle to attract attention.

• The trial court's grant of injunctive relief to plaintiff was slightly modified and affirmed by the appellate court.

• On review, defendant argued that the injunction against further demonstrations violated her constitutional right to freedom of speech.

• The court agreed and modified the decrees of the lower court.

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• The court held that the injunction constituted a prior restraint of speech that violated both the federal and state constitutions.

• The court also determined that plaintiff was not entitled to equitable relief because it had an adequate remedy at law by way of an action for defamation.

• The court vehemently rejected the notion that plaintiff should not be required to pursue its available legal remedies simply because defendant was unable to pay a damage award.

• OUTCOME: The court reversed an order modifying and affirming an injunction granted to plaintiff law firm in its action to enjoin defendant former client from protesting outside its place of business.

• The injunction was a prior restraint of plaintiffs constitutional right to free speech, and the available remedy of an adequate remedy at law precluded plaintiff from seeking equitable relief.

NOTES ON DEFAMATION DAMAGES AND INSOLVENT DEFENDANTS

• Defamation damages are so unmeasurable that courts traditionally allowed juries to presume damages

• Impossible to collect?

• Does it make any sense at all to say that a damage judgment is adequate if it can never be collected?

• The Penn. Rule is in a tiny minority it might not even be the rule in Pennsylvania if the issue were squarely presented outside a free speech context

• Remember, Pardee v. Camden Lumber treated D’s insolvency as an uncontroversial ground for holding the damage remedy inadqueate

• Preferring one creditor over the other?

• It is essential to distinguish threatened violations, which can be prevented by enjoining future harmful conduct, from past violations, the effects of which can be corrected only by requiring the insolvent D to spend some of her scarce remaining assets.

• If D doesn’t have enough assets to go around, the legal remedy is still inadequate, but there are independent reasons not to prefer one creditor over all the others

NOTES ON PRIOR RESTRAINTS see pg. 436 if issue on exam

• Protected and unprotected speech

• Reckless / deliberate libel not constitutionally protected

• Statements made in ‘reckless disregard for the truth’ would permit a judgement against D for compensatory damages, which could be presumed in the absence of proof, plus punitives

• Prior restraints against unprotected speech

• Obscenity another category of unprotected speech

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• SC has upheld injunctions against obscene expression if there is an adjudication of obscenity prior to the injunction or, if later, after “the shortest fixed period compatible with sound judicial resolution.” Freedom 1965

• "The special vice of a prior restraint is that communication will be suppressed, either directly or by inducing excessive caution in the speaker, before an adequate determination that it is unprotected by the first amendment" Pittsburgh Press

NOTES ON THE RIGHT TO JURY TRIAL see pg. 428 if issue on exam

NOTES ON AVOIDING A MULTIPLICTY OF SUITS see pg. 439 if issue on exam

Preliminary or Permanent Relief

The Substantive Standards for Preliminary Relief

Winter v. Natural Resources Defense Council, Inc.

• PROCEDURAL POSTURE: Plaintiff environmental groups sued defendant Navy, seeking declaratory and injunctive relief on the grounds that training exercises violated the National Environmental Policy Act of 1969 (NEPA) and other federal laws.

• The U.S. Court of Appeals for the Ninth Circuit upheld a preliminary injunction imposing restrictions on the Navy's sonar training. The Navy filed a petition for a writ of certiorari which was granted.

• OVERVIEW: Sharing the waters in the Navy's Southern California operating area were at least 37 species of marine mammals, including dolphins, whales, and sea lions.

• The parties strongly disputed the extent to which the Navy's training activities, specifically its use of active sonar, would harm those animals or disrupt their behavioral patterns.

• The Court agreed with the Navy that the Ninth Circuit's "possibility" of irreparable injury standard for preliminary relief was too lenient.

• The frequently reiterated standard required parties seeking preliminary relief to demonstrate that irreparable injury was "likely" in the absence of an injunction.

• The district court did not reconsider the likelihood of irreparable harm in light of four restrictions not challenged by the Navy (the Navy was only challenging two out of six restrictions in the injunction).

• Even if plaintiffs had shown irreparable injury from the Navy's training exercises, any such injury was outweighed by the public interest and the Navy's interest in effective, realistic training of its sailors.

• A proper consideration of such factors alone required denial of the requested injunctive relief.

• OUTCOME: The judgment of the U.S. Court of Appeals for the Ninth Circuit was reversed, and the preliminary injunction was vacated to the extent it was challenged by the Navy. 6-3 decision; one opinion; one concurrence in part/dissent in part; one dissent.

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NOTES ON PRELIMINARY RELIEF(SEE THESE NOTES p. 444 important (and didn’t type))

• The problem to be solved:

• A preliminary injunction is one issued before final judgment, based on a preliminary assessment of facts and law

• The central problem that gives rise to the need for preliminary injunctions in the risk that plaintiff will be irreparably injured before the slow process of litigation can reach a final decision

• The Four Part Test:

• A plaintiff seeking a preliminary injunction must establish:

• That he is likely to succeed on the merits

• That he is likely to suffer irreparable harm in the absence of prelim relief

• That the balance of equities tips in his favor;

• And that an injunction is in the public interest

• This is a balancing test

• In the lower courts, the majority treats the four prongs as a balancing test on a sliding scale

• So if injury is severe, a lesser showing of likelihood of success will be sufficient.

• Preliminary v. Permanent Injunctions

• Preliminary injunctions: (TRO in same category)

• No wrongdoer has been finally identified

• Relative hardships must be balanced in light of the relative probability of success

• Much harder to get than permanent injunctions vast majority of cases reciting the irreparable injury rule are preliminary relief cases

• Can be done ex parte

• Permanent:

• D is adjudicated wrongdoer and p is victim

• P wins unless the hardship to D is substantially disproportionate to the benefit

Coyne-Delany Co. v. Capital Development Board (1983)

• PROCEDURAL POSTURE: Defendant sought review of a decision of the United States District Court for the Northern District of Illinois, Eastern Division, which denied damages to defendant resulting from preliminary injunction that was later reversed on appeal.

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• OVERVIEW: Plaintiff brought a suit alleging civil rights violations resulting from defendant's contract action and, as a result, obtained a preliminary injunction against defendant awarding a contract.

• On appeal, the injunction was reversed.

• Defendant filed a motion under Fed. R. Civ. P. 65.1 requesting damages for the wrongfully issued preliminary injunction and statutory costs.

• The district court refused to award either costs or damages based on its finding that the case was filed in good faith and without malice.

• Defendant appealed, and the court reversed based on its holding that the court should have been guided by the implicit presumption in Fed. R. Civ. P. 54(d) and 65(c) in favor of awarding costs and damages, and the ingredients of a proper decision would have been objective factors such as the resources of the parties, defendant's efforts or lack thereof to mitigate his damages, and the outcome of the underlying suit.

• The court remanded for a determination of the amount of damages, if any, due to defendant.

• However, because it was stipulated that plaintiff acted in good faith, the court held that defendant would not be entitled to damages in excess of the bond posted.

• OUTCOME: The decision was reversed and remanded based on the court's holding that the lower court applied an incorrect standard in refusing to award damages and costs to defendant because plaintiff acted in good faith when it sought a preliminary injunction that was later reversed.

THE PROCEDURE FOR OBTAINING PRELIMINARY RELIEF

Carroll v. President and Commissioners of Princess Anne (1968)

• PROCEDURAL POSTURE: Petitioners challenged a decision of the Court of Appeals of Maryland that affirmed a 10-day temporary restraining order but reversed a 10-month order on the ground that the period of time was unreasonable and that it was arbitrary to assume that a clear and present danger of civil disturbance would persist for 10 months.

• The issue arose after respondents applied for and obtained a restraining order to keep petitioners from engaging in a rally.

• OVERVIEW: Petitioners were identified as a white supremacist organization and they held a public assembly in a town in the State of Maryland.

• The authorities did not attempt to interfere with the rally.

• In the course of the proceedings, it was announced that the rally would continue the next night. Respondents applied for and obtained a restraining order.

• The proceedings were ex parte and no notice was given to petitioners.

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• The order restrained petitioners from holding their rallies or meeting for 10 days and, after trial, the order was extended to restrain them from such activities for a period of 10 months.

• The appellate court affirmed the 10-day order but reversed the 10-month order. The Court reversed the lower court's decision.

• The Court found that petitioners' case was not moot and that the injunction constituted a prior restraint on speech.

• Therefore, the issuance of the injunction violated the principles of the First Amendment.

• Because petitioners were not afforded notice of the injunction proceedings, the injunction violated petitioners' rights under the First Amendment.

• OUTCOME: The Court reversed the lower court's decision.

NOTES ON TEMPORARY RESTRAINING ORDERS

• The Federal Rule:

• TROS are designed to prevent irreparable harm that will occur even before a preliminary injunction hearing can be held

• In a sufficiently urgent case, a judge will issue a TRO from home, in the middle of the night

• TROs without notice used to be ten days but now it is 14 days but you count weekends now

• Defendant is not bound by an order that he does not know about.

FRCP 65 Injunctions and Restraining Orders:

(a) Preliminary Injunction.

(1) Notice.

The court may issue a preliminary injunction only on notice to the adverse party.

(b) Temporary Restraining Order.

(1) Issuing Without Notice.

The court may issue a temporary restraining order without written or oral notice to the adverse party or its attorney only if:

(A) specific facts in an affidavit or a verified complaint clearly show that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and

(B) the movant's attorney certifies in writing any efforts made to give notice and the reasons why it should not be required.

(2) Contents; Expiration.

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Every temporary restraining order issued without notice must state the date and hour it was issued; describe the injury and state why it is irreparable; state why the order was issued without notice; and be promptly filed in the clerk's office and entered in the record. The order expires at the time after entry ̶ not to exceed 14 days ̶ that the court sets, unless before that time the court, for good cause, extends it for a like period or the adverse party consents to a longer extension. The reasons for an extension must be entered in the record.

(3) Expediting the Preliminary-Injunction Hearing.

If the order is issued without notice, the motion for a preliminary injunction must be set for hearing at the earliest possible time, taking precedence over all other matters except hearings on older matters of the same character. At the hearing, the party who obtained the order must proceed with the motion; if the party does not, the court must dissolve the order.

(4) Motion to Dissolve.

On 2 days' notice to the party who obtained the order without notice ̶ or on shorter notice set by the court ̶ the adverse party may appear and move to dissolve or modify the order. The court must then hear and decide the motion as promptly as justice requires.

•

Sampson v. Murray (1974)

• PROCEDURAL POSTURE: Certiorari was granted to the United States Court of Appeals for the District of Columbia Circuit, which affirmed the issuance of a restraining order temporarily enjoining respondent's dismissal, pending her pursuit of an administrative appeal to the Civil Service Commission.

• OVERVIEW: The Court held that respondent's showing fell far short of the "irreparable injury" required to justify issuance of a restraining order temporarily enjoining respondent's termination from employment with the General Services Administration.

• Respondent contended that her termination was based in part on her activities while in the course of her previous employment in the Defense Intelligence Agency, and that she was therefore entitled to an opportunity to file an answer.

• The Court held that respondent, at the very least, had to make a showing of irreparable injury sufficient in kind and degree to override the factors that cut against the general availability of preliminary injunctions in government personnel cases.

• The Court disagreed that either loss of earnings or damage to reputation would afford a basis for a finding of irreparable injury and thus provide a basis for temporary injunctive relief.

• Therefore, the Court reversed the decision of the lower court.

• OUTCOME: The Court reversed the decision of the court of appeals.

NOTES ON PRELIMINARY PROCEDURE̶see p. 466 for Preliminary Injunction v. TRO hearings

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• Preliminary injunction hearings - the scope of a hearing on a motion for TRO or preliminary injunction depends on the complexity and urgency of the case. Can be extremely long and complicated

• TRO hearings hearings on motions for TRO are less complicated and much shorter. Sometimes there is a real hearing sometimes only a conference.

Prospective or Retrospective Relief

Suits against Officers in Their Official Capacities

Edelman v. Jordan (1974)

• PROCEDURAL POSTURE: Petitioner, the Director of the Illinois Department of Public Aid, sought review of the judgment of the United States Court of Appeals for the Seventh Circuit, which held in favor of respondent in respondent's suit against petitioner and prior directors alleging that they had administered federal-state programs in a manner inconsistent with federal regulations and with U.S. Const. amend. XIV.

• OVERVIEW: Petitioners were the director of the state's department of public aid.

• Respondent filed suit against petitioner and past directors alleging aid was being administered to the federal-state programs of Aid to the Aged, Blind, or Disabled (AABD) in a manner inconsistent with federal regulations and with U.S. Const. amend. XIV.

• The district court held in favor of respondent and ordered petitioner and past directors to release the AABD benefits wrongfully withheld.

• On appeal petitioner asserted that U.S. Const. amend. XI barred the award of retroactive benefits. The appeals court affirmed the district court and petitioner sought the Court's review.

• The Court held while U.S. Const. amend. XI did not bar a suit against a state by the state's citizens, the Court had consistently held that an unconsenting state was immune from suits brought the states' citizens as well as by citizens of another state.

• Further, because an in an action for the recovery of money from the state, the state is the real party in interest, the rule that a suit by private parties seeking to impose liability which must be paid from public funds in the state treasury was barred by U.S. Const. amend. XI applied.

• OUTCOME: The Court reversed the judgment of the lower court.

• NOTES ON PROSPECTIVE-ONLY REMEDIES

• The core compromise: Edlemen’s central distinction as a rule for choosing remedies:

• Injunctions to comply with the law in the future are permitted

• Prospective remedies are generally permited

• Compensation for past violations is forbidden unless the sovereign consents to be sued

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• Retrospective remedies generally forbidden

• The dominant theme in governmental immunity law is that injunctions are the preferred remedy, and that damages are mot instructive into the legit operations of government, and more in need of restriction

• Sovereign immunity and irreparable injury: harm inflicted by an immune D is irreparable injuryàthe nonexistent damage remedy is inadequate

• Toomer v. Witsel (1948)̶SC Case

• Supreme Court enjoined South Carolina officials from discriminating against out-of-state shrimpers

• See p. 476

Chapter 7: Preventing Harm Without Coercion: Declaratory Remedies A. Declaratory Judgments

Nashville, Chattanooga, & St. Louis Railway v. Wallace (1933)

• PROCEDURAL POSTURE: Appellant railroad sought review of a judgment by which the Tennessee Supreme Court affirmed a decree dismissing a bill by which the railroad challenged an excise tax imposed by appellee state under 1923 Tenn. Pub. Acts 58, as amended by 1925 Tenn. Pub. Acts 67 on gasoline that the railroad stored within the state. The railroad filed its action under the Tennessee Declaratory Judgments Act, claiming that the tax was unconstitutional.

• OVERVIEW: The railroad maintained storage facilities in Tennessee for gasoline that it shipped to other states.

• The state levied taxes on the gasoline and the railroad filed an action for a declaratory judgment, claiming that the tax was unconstitutional because it imposed an impermissible burden upon interstate commerce because the gasoline was only stored in Tennessee after being shipped from other states and before being shipped to other states.

• The trial court disagreed, as did the Tennessee Supreme Court.

• On further review, the court affirmed, finding first that although the action was for declaratory relief, it presented a case or controversy.

• The court reasoned that the case presented for determination the railroad's liability for the tax and not an abstract determination of the validity of a statute.

• The court determined that the tax did not violate the Commerce Clause because the gasoline was not a subject of transportation in interstate commerce once it was unloaded and stored.

• The court reasoned that the railway had not arranged shipment of the gasoline to other states before unloading and storing it in Tennessee.

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• OUTCOME: The court affirmed the decree by which the railroad's action for a declaratory judgment was dismissed.

NOTES ON DECLARATORY JUDGMENTS AND RIPENESS

• The federal act: The Uniform Act has been very widely adopted in the states. Congress responded to Wallace by enacting the federal Declaratory Judgment Act in 1934 (loosely based on §1 §8 of the Uniform Act, as quoted in Wallace

• The federal act explicitly requires an ‘actual controversy’ and does not authorize declarations of status

• Preliminary Disputes: A declaratory claim is unlikely to be ripe if it seeks only to resolve disputes about the procedures or substantive guidelines under which more specific disputes would be resolved

NOTES ON DECLARATORY JUDGMENTS, IRREPARABLE INJURY, AND SUPPLEMENTAL RELIEF

• Negating the irreparable injury rule: As Wallace notes (and dominant view!), P need not show irreparable injury to get a DJ

• The only reference to other remedies in the uniform Act is §1, which says courts can declare rights ‘whether or not further relief is or could be claimed.”

• The Federal Rules are more explicit: “The existence of another adequate remedy does not preclude a declaratory judgment that is otherwise appropriate” FRCP 57

• Supplemental Relief: SR can also be compensation for damages caused by failure to comply with the declaratory judgment

• When is a DJ appropriate? When is a DJ ‘appropriate’ under rule 57?

• Claim and issue preclusion: A DJ has ‘the force and effect of a final judgment or decree.” 28 USC §2201 (a) (2006); Unif. Act §1

• DJ therefore is issue preclusive in subsequent litigation with respect to all issues actually decided

• Claim preclusion a bit different

• RULE: a request for such further relief is not barred because it was not included in the original request for DJ

• Rule has limits though

• If the initial action sought more than just a declaratory judgment, most courts hold that all related relief should have been south at the same time

• Insurance Disputes:

• In order to get to opponents insurance, plaintiff may bring suit as a negligence suit even if defendant's actions were clearly intentional. This is known as under-pleading

•

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Cardinal Chemical Co. V. Morton International, Inc. (1993)

• PROCEDURAL POSTURE: Certiorari was granted to the United States Court of Appeals for the Federal Circuit, which, in conjunction with affirming the trial court's finding that petitioner, an alleged infringer, did not infringe respondent patentee's patents, vacated a declaratory judgment that held the patent invalid after determining the issue was moot.

• OVERVIEW: The patentee sued the alleged infringer for patent infringement.

• The alleged infringer filed a counterclaim for a declaratory judgment that the patents at issue were invalid.

• The trial court entered judgment for the alleged infringer and declared that the patents invalid.

• On appeal, the lower court affirmed the finding of no infringement but vacated the judgment of invalidity as a matter of policy.

• Specifically, the lower court, convinced that the finding of non-infringement had entirely resolved the controversy between the litigants, followed its established process of dismissing the declaratory judgment as moot.

• The court took issue with the lower court's procedure.

• Finding that the lower court did have jurisdiction to review the declaratory judgment of invalidity, even in light of its non-infringement affirmation, the court clarified that the lower court's practice was not compelled by federal case law, nor supported by the case or controversy requirement of U.S. Const. art. III.

• The court held, moreover, that the practice was impermissible as implemented. The judgment of the lower court was thus vacated, and the case was remanded for further proceedings.

• OUTCOME: The court held that the lower court had jurisdiction to review the declaratory judgment of the patent's invalidity, even in light of its affirmation of the finding of non-infringement.

• Accordingly, the judgment was vacated and remanded to give the lower court opportunity to consider the merits of that issue.

NOTES ON THE YOUNG DILEMMA

• The risk of ever expanding liability: DJ plaintiffs often sue because they fact a threat of ever-expanding liability if the litigation is delayed

• The injunction remedy: With or without DJ acts, potential Ds in such situations generally have an injunction remedy

• a potential civil D can sue to enjoining the potential plaintiff from filing suit

• One who believes that a criminal or regulatory law is unconstitutional can sue the prosecutor to enjoin enforcement of the law

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• Ripeness: the ripeness requirement for a suit to prevent the DJ defendant from suing the declaratory P is that the declaratory P have a reasonable fear of liability

Chapter 8: Benefit to the Defendant as Relief: RESTITUTION

Restitution from Innocent Defendants̶and Some Who Are Treated as Innocent

Introducing Restitution̶Mistake

Blue Cross Health Services v. Sauer (1990)

• PROCEDURAL POSTURE: Plaintiff appealed from an order of the Circuit Court of St. Louis County (Missouri), which granted defendants a new trial after the court ordered that plaintiff was entitled to recover from defendants, in an action where plaintiff alleged that defendants collected funds that plaintiff mistakenly mailed to defendants.

• OVERVIEW: Plaintiff was an insurance provider.

• Plaintiff had mistakenly mailed 66 checks to defendants.

• Once plaintiff discovered the mistake, plaintiff demanded payment from defendants.

• Plaintiff sought to impose a constructive trust upon the funds of defendants for the use and benefit of plaintiff based on unjust enrichment and mistake.

• After the circuit court entered judgment for plaintiff, defendants requested a new trial and claimed entitlement to a trial before the jury.

• The court determined that plaintiff was entitled to restitution in the undisputed amount of the checks that were endorsed by defendants as a matter of law.

• Had the case been tried to a jury, plaintiff would have been entitled to a directed verdict at the close of the evidence.

• The court remanded for the circuit court to order restitution to plaintiff.

• OUTCOME: The court reversed the order for a new trial and remanded for the circuit court to reinstate the judgment in favor of plaintiff, because plaintiff sustained the burden of proving that plaintiff was entitled to restitution of the money paid to defendants by mistake

INTRODUCTORY NOTES ON RESTITUTION

• The Source of Liability: Why are the ‘innocent’ defendants in this case liable?

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• The source of liability, and the cause of action, is unjust enrichment: Plaintiff (blue cross) sent the checks by mistake, and it would be unjust for the Defendants to keep the money

• The fault could be entirely on Blue Cross, and the Defendants could be absolutely innocent, but they would be liable in unjust enrichment

• Vocabulary: “unjust enrichment” generally describes the benefits that D has received and also the cause of action to recover those benefits

• “Restitution” may mean either the cause of action or the remedy

• Restitution remedies are generally based on unjust enrichment,

• But restitution is also applied to some older contract remedies that predate the modern usage and the association with unjust enrichment.

• Literally, ‘restitution’ is just a synonym for restoration: Nonlegal dictionaries define it as restoration of property to its true owner, and despite the modern association with unjust enrichment, judges sometimes think of restitution as a way of making plaintiff whole or restoring a previous status quo

• Restitution and damages: Think of restitution as an alternative measure of monetary recovery, entirely distinct from damages

• Damages are based on Plaintiff’s loss; restitution is based on D’s gain

• Measuring Restitution: In this case measure of restitution seems obvious: it is the amount of case that each D has received, presumably with interest, although the court does not mention that

• Restatement 3rd: interest should run against an innocent recipient from the date she had notice of P’s rights

• Also says that where a D is enriched by a money payment, the primary measure of restitution is ‘the resulting increases in the defendant’s net assets.”

• Law and equity:

• Important Restitution remedies that originated in equity (including constructive trusts)

• P needs a constructive trust when she seeks to recover a specific asset or from a specific fund

• “money had and received aka quasi-K”

• For money paid by mistake, and for most other forms of unjust enrichment, a p could recover a simple money judgment in the common law courts, in a contractual form of action that became known as quasi-contract

• Change of position: D’s knowledge is not an element of Blue Cross’s claim to recover money paid by mistake

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• But defendants’ lack of knowledge̶more precisely, lack of notice̶is an element of their claimed defense of change of position

• One who receives an unusual amount of money in addition to her regular income may make some unusual expenditure that she would not have made if she had not received the extra money

• This is the change of position

NOTES ON THE GROUNDS FOR RESTITUTION

• Mistake: mistake large source of restitution litigation

• Restatement 3rd states a general right to recover benefits conferred by mistake in §5, and works through various kinds of mistake in §§6-12

• People mistakenly pay money they don’ owe, or pay more than they owe, or pay to to the wrong person

• Specific grounds: the other approach to defining unjust enrichment is illustrated by the first paragraph=listing specific grounds for restitution

• The preference for a K: another general principle is that restitution is generally unavailable to a claimant who should have made a K with the recipient but failed to do so

Sommerville v. Jacobs (1969)

• PROCEDURAL POSTURE: Defendant property owners appealed from the judgment of the Circuit Court of Wood County (West Virginia) in the action brought by plaintiff neighbors for equitable relief from their mistaken improvement of the property owners' land.

• The property owners were ordered to elect either to retain the property and incur liability for the value of the improvements or to sell the lot to the neighbors. Intervenor lender was a defendant in the case.

• OVERVIEW: The neighbors brought the action for equitable relief against the property owners, on whose land the neighbors mistakenly constructed a bottling plant.

• The property owners asserted entitlement to the bottling plant under the doctrine of annexation and refused to pay the neighbors the value of the improvements.

• On review of the circuit court decision in favor of the neighbors, the court held that the neighbors erected the building on the land due to a factual mistake by the surveyor, reasonably believing it was their property.

• The court further found that the property owners did not discover the error until the building was completed and were not guilty of fraud or inequitable conduct constituting an estoppel.

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• In order to prevent unjust enrichment benefitting the property owners, the court affirmed the judgment directing the property owners to either sell the land to the neighbors for the fair market value of the unimproved lot, or compensate the neighbors in the amount of the fair market value of the bottling plant.

• OUTCOME: The court affirmed the judgment directing the property owners to elect to either sell the improved lot to the neighbors at fair value, minus the value of the improvements, or to incur liability to the neighbors in the amount of the improvements.

NOTES ON MISTAKEN IMPROVEMENT

• Improvements v. encroachments: some courts speak of mistaken improvements as a form of encroachmentèno bright line distinctions between two

• Practical distinction: in the encroachment cases, there is no unjust enrichment

•

RECOVERING MORE THAN PLAINTIFF LOST

Disgorging the Profits of conscious Wrongdoers

Olwell v. Nye & Nissen Co.

• PROCEDURAL POSTURE: Plaintiff complainant sued defendant company in an action in quasi contract to recover damages for the use of a machine owned by the complainant.

• The Superior Court for Pierce County (Washington) entered judgment in favor of the complainant. The company appealed.

• OVERVIEW: The complainant left a machine stored in a space adjacent to the company's leased premises.

• The company began to use the machine without the complainant's permission and that usage was discovered three years later.

• The complainant offered to sell the machine to the company, but the parties could not agree on a price.

• The complainant commenced an action to recover the reasonable value of the company's use of the machine, praying for a specified monthly amount from the commencement of the unauthorized use until the time of trial. T

• he trial court entered judgment for the complainant in an amount in excess of that prayed for by the complainant.

• The company argued that the judgment was excessive and that the complainant had an adequate remedy in an action for replevin or claim and delivery, and any damages should be related to the use or rental value of the machine.

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• The court determined that the complainant could recover the profit derived by the company from the use of the machine. The court further determined that the judgment was excessive because it was more than prayed for by the complainant.

• OUTCOME: The trial court's judgment in favor of the complainant was affirmed, but it was reduced to an amount equal to the amount prayed for in the complaint.

NOTES on RECOVERING MORE THAN PLAINTIFF LOST

• Olwell in modern vocab: Defendant was unjustly enriched by his unauthorized use of the machine, and the plaintiff can recover restitution of the amount of the unjust enrichment

• and because D was a conscious wrongdoer̶because it took without asking something that it knew belonged to another̶restitution is measured by the largest measure of restitution rather than smallest, recovering all the profits defendant earned by using the machine

• Vocabulary for the measures of restitution: The choice between fair rental value and the $1560 in profits as measured by the court is fundamental to the law of restitution. But the vocabulary for expressing that distinction is not very clear---see p. 654

Maier Brewing Co. V. Fleishmann Distilling Corp (1968)

• PROCEDURAL POSTURE: Appellants sought review of a decision from the United States district court, granting an accounting by the appellants of their profits accrued from the sale of products under the trade name registered to appellees.

• OVERVIEW: Appellees sued appellants for trademark infringement.

• The district court awarded an accounting by appellants of their profits accrued from the sale of beer under the appellees' trade name.

• Appellant sought review.

• This court affirmed the district court's award. Appellants knowingly, willfully, and deliberately infringed plaintiffs' trademark.

• Appellants had not sustained their burden of proof as to the claimed deductions.

• Finally, the dollar amount of the recovery in an accounting for profits under the unjust enrichment rationale has no relation to the damages, if any, sustained by plaintiff.

• OUTCOME: The court affirmed the decision of the district court.

MORE NOTES ON RECOVERING MORE THAN PLAINTIFF LOST

• Accounting for profits: Accounting for profits is the equitable remedy for recovering the profits of wrongdoing

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RESTITUTIONARY RIGHTS IN SPECIFIC PROPERTY

Constructive Trusts

Paoloni v. Goldstein (2004)

• FACTS: D created ABG program that fraudulently obtained assetsàto manage these fraudulently obtained funds sets up trusts̶one of these was the Iglesias Family Trust

• A constructive trust is an equitable device used to compel one who unfairly holds a property interest to convey that interest to another to whom it justly belongs

• The equitable remedy may be imposed when property has been acquired in such circumstances that the holder of legal title may not in equity and good conscience retain the beneficial interest

• The beneficiary may obtain, through tracing, not merely what was lost but also other property or profits traceable to that lost property

• The party holding the subject property need not have performed a wrongful act for a constructive trust to be imposed, and such trust have been imposed in a wide variety of cases in which equity dictated this remedy

• The purpose of the constructive trust is to prevent the D from being unjustly enriched at the P’s expense

• HELD: P’s entitled in equity to an accounting from the Trust to enable them to determine if the Trust holds any other property or assets derived from or traceable to the ABG and to a permanent injunction barring the Trust and related people from disposing of any property or assets derived from or traceable to this source

• Condo subject to a constructive trust of which the Iglesias Family Trust is the trustee and the Plaintiffs are the beneficiaries

• As Trustee of the constructive trust, the Iglesias Family Trust shall execute a Quit Claim Deed conveying the referenced condo to plaintiffs

• Plaintiffs shall have an equitable lien on the referenced condo

• Iglesias Family Trust shall give complete accounting

• Iglesias Family Trust permanently enjoined from using, disposing etc assets and property derived from the sale of vatical settlement Ks

NOTES ON CONSTRUCTIVE TRUSTS

• Express Trusts: a trust is a device for separating the legal ownership and control of property from its beneficial enjoyment

• an owner conveys property to a trustee for the benefit of one or more named beneficiaries the trustee agrees to hold the property subject to the trust

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• Substantive law: the trustee is the legal owner; beneficiary is the equitable owner

• Trusts can be used to provide professional money management, consolidate control of a business, divide the beneficial interest among multiple beneficiaries, to avoid taxes, probate, or creditors

• To combat a trustee’s temptation to use trust assets as her own, equity courts developed strict rules of fiduciary duty

• Trustees can collect fees for their services in amounts authorized by the trust instrument or approved by the court, but they are not permitted to profit from the trust in any other way

• Constructive Trust in Paoloni:

• Fundamentally, the constructive trust is a remedy for unjust enrichment

• The identification requirement: Plaintiff’s have to prove the connection between their money and what it was used for (fraudulently)

• Disgorgement claims vs. constructive trust claims

• Disgorgement: plaintiff must show that D earned profits from the fraud

• Must show causation (that the profits were derived from the fraud̶and she must quantify profits

• But, she need NOT show what happened to the money (can collect the judgment out of any of D’s nonexempt assets

• Constructive trust: plaintiff must trace the money from herself to the fraudster to the property she wants claim in constructive trust (extra burden)

• Implementing the Constructive Trust

• As set out in Paoloni: D must convey the condo to Ps D must also account for anything else it might have received from the proceeds of the fraud

• Constructive trust and accounting for Profits: Defendant must also account for any profits it earned w/ the trust property

• Anderson v. Bellino: parties joint owners of one gambling place

• Defendant formed another corporation to acquire another license to run a similar establishment under a very similar name

• HELD: D had breached his fiduciary duty to P when he took his opportunity for his own newly created company.

• Thus, D held his new company in constructive trust for P

• While litigation was going on though, D’s company took salary and management fees and used corporate funds to pay personal expenses

• Court treated these funds company as profits defendant had earned from the trust property

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• The actual money paid out was probably no longer identifiable, but the court entered a money judgment against D for the amount of these profits

• Constructive trust and equitable lien: A constructive trust treats the P as owneràan equitable lien treats defendant as owner but gives P the lien

• Any P entitled to constructive trust can choose to have̶in addition or instead, an equitable lien

Ruffin v. Ruffin (2000)

• FACTS: wife owed child support, husband didn’t make payments, instead bought $2 lottery ticket that one him $4.9 million wife says that husbands lottery winning were subject to a constructive trust for her benefit and the children’s benefit

• HELD: no constructive trust̶wife failed to present sufficient evidence of fraud or unjust enrichment to warrant the imposition of a constructive trust in hubby’s winnings

• Constructive trusts:

• Arise, independently of the intention of the parties, by construction of law;

• Being fastened upon the conscience of him who has the legal estate, in order to prevent what would other wise be fraud.

• They occur not only where property has been acquired by fraud or improper means, but also where it has been fairly and properly acquired, but it is contrary to the principles of equity that it should be retained, at least for the acquirer’s own benefit.

• Also, in order to be entitled to the benefit of a constructive trust:

• Claimant’s money must be ‘distinctly traced’ into the chose in action, fund, or other property which is to be made the subject of the trust

MORE NOTES ON CONSTRUCTIVE TRUSTS

• Unjust enrichment and unpaid debt: constructive trust is a remedy for unjust enrichment

• The enrichment must be acquired from P, or at least acquired at the expense of the P, as in cases of conscious wrongdoers who enrich themselves by violating P’s rights

• And, the enrichment must be traceable to particular property in D’s hands

• Remember: there can be no unjust enrichment claim where there is an enforceable K

• Preferring property rights: the whole point of Constructive trust is to prefer property rights over lesser rights arising from K and other sources of obligation to pay

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• Family property disputes: Constructive trusts are commonly used to restore ownership of property in disputes with families

• The Restatement (Third): addresses constructive trusts in §55:

• Makes constructive trust available in any case in which D is ‘unjustly enriched by the acquisition of legal title to specifically identifiable property at the expense of the claimant or in violation of the claimant’s rights”

• If D has acquired possession but not title, the remedy is replevin or ejectment and not constructive trust

• Irreparable injury: the irreparable injury rule is often ignored in constructive trusts

• Damage remedy usually inadequate anyway damages unmeasurable/uncollectible

In re Leitner (1999) (constructive trusts in bankruptcy case)

• FACTS: Wetherill hired Leitner to perform accounting/legal services for Wetherill’s business

• Between 1986-92 Leitner embezzled a large amount of money from company

• Put some of embezzled funds into a new home

• Wetherill sued, alleging Leitner’s fraud created a constructive trust

• Leitner then filed bankruptcy and the trustee, Carl Clark, brought this adversary proceeding contesting the existence of a constructive trust

• HELD: Clarks motion for summary judgment denied because Wetherill is the beneficiary of a constructive trust on the home, which prevents the home from becoming the property of the estate

• The issue of constructive trusts in bankruptcy proceedings has two views

• The prejudgment attachment was sufficient judicial action to recognize Wetherill’s equitable interest in home̶which Leitner held in Constructive trust

• This prebankruptcy activity was sufficient to establish the construct trust

• Omegas Group Inc (1994): a constructive trust is fundamentally at odds with the general goals of the Bankruptcy code court then goes to cite cases, law that contradicts this holding

• Under state constructive trust law generally, if a wrongdoer obtains property by fraud or other improper means, a court can impose a constructive trust to protect the injured party

• CT declares that beneficiary owns an equitable interest in property

• CT imposes a duty on the trustee to hold the equitable property interest in trust for its owner, the beneficiary

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• Note though̶when a debtor has not been declared a constructive trustee before filing a petition in bankruptcy (Issue in this case), there is a problem̶problem involves the status of state law on when a constructive trust becomes effective

• Majority rule on issue:

• Although a CT may not be judicially decreed until many years subsequent to the transaction giving rise to the trust, the accepted theory is that the CT is in existence at the INCEPTION of the transaction…and the beneificary is possessed with an equitable interest in the trust property prior to the declaration of the CT

• Thus, Wetherill owned the equitable interest in the house on the date Leitner filed bankruptcy

• Leitner only had bare legal title to the property, which he was obligated to convey to P

• The equitable interest in the home was owned by Wetherill, and that interest was not Leitner’s property when he filed bankruptcy

• It did not become property of the estate

NOTES ON CONSTRUCTIVE TRUSTS IN BANKRUPTCY

• Equality in bankruptcy: a trustee in bankruptcy is appointed to represent the creditors of a bankrupt debtor

• In liquidation, the simplest and most common type of bankruptcy, the trustee’s job is to gather all the assets of the bankrupt, convert them to case, and divide the proceeds among creditors

• Secured creditors generally get to keep their collateral

• In addition, Congress has conferred special priority on some unsecured claims, such as unpaid taxes and wages

• Each remaining creditor gets a pro rata share of the assets that are left are secured creditors and priority creditors have been paid

• The basic principle of bankruptcy is that all unsecured nonpriority creditors should share equally

• Creditors and Owners: the real debate in Leitner is whether the victim of embezzlement should be treated as an owner or as just another creditor

• Leitner illustrates the traditional view: Ps who have restitution claims and can still identify their property in D’s hands can reclaim their property

• Thus, these Ps recover in full and fewer assets remain for creditors to share pro rata

• Note 2 requirements

• Ps with restitution claims get no preference if they can’t identify their property or its proceeds

• And ordinary creditors get no preference even if they can identify the proceeds of their loan

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• P must have a claim to restitution in kind his substantive claim must be one that lets him claim to be a disposed owner and not a mere creditor

• Typical claims involve fraud, misappropriation, or mistake

• Fraud in the Extension of Credit:

• Settled that failing to disclose our desperate financial condition (vs. affirmatively misrepresenting it) is NOT fraud

• Why two requirements?

• The identification requirement is a rough-and-ready compromise between the interests of fraud victims and the interests of other creditors

• In bankruptcy, the question is not whether the bankrupt fraudster is unjustly enriched but whether his creditors would be unjustly enriched if they were paid with the fraud victims’ property

• The backlash: constructive trusts are controversial among bankruptcy lawyers, duh

• The Bankruptcy Code:

• §541: courts that enforce constructive trust in bankruptcy use this (11 USC 541(d): clearly says that the bankruptcy estate does not include the equitable interest that the debtor didn’t own

• The traditional doctrine, as explained in Leitner, is that the trust arises at the moment of the facts giving rise to it, and that the eventual court decree just recognizes the consequences of what the parties have done

• §544(a) and 547(b): part of the trustee’s avoiding powers (a series of sections that enable the trustee in bankruptcy to set aside transaction that would otherwise remove property from the estate)

• The Supreme Court: The SC has recognized constructive trusts in bankruptcy (Cunningham-1924) and in subrogation rather than constructive trust (Pearlman)

• Has repeatedly held that the 1978 recodifciation of bankruptcy should not be interpreted to radically change historic practice without some indication that Congress intended such a change.

• However, in some cases not held if federal statute trumps

• The Restatement (Third): says that the right to restitution from identifiable property is superior to the claims of creditors, including claims to creditors who have acquired a lien by any form of involuntary process

2. Tracing the Property (must prove by clear-and-convincing evidence- NOT preponderance of the evidence)

In Re Erie Trust Co. (1937)

• PROCEDURAL POSTURE: Appellant beneficiaries challenged the decision of the Court of Common Pleas (Pennsylvania), which denied their right to a preference over general creditors in the distribution of an estate.

• OVERVIEW: On review of the denial for a right of preference, the court reversed.

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o The court found that claims for trust property must be recognized above all others if the trust res could be identified.

o The court held that the deposits of appellee trustee company in other banks were to be considered, together with the cash on hand and the cash items, as constituting a single fund, sufficiently differentiated from the company's general assets to meet the requirements of the law in regard to the tracing of trust property.

o The court determined, therefore, that even though the beneficiaries failed to trace the money from the estate into any particular fund or bank deposit, they were entitled to the lowest level of the cash and cash items, and funds of the company on deposit in other banks, reached between the time when the conversion occurred and when the secretary of banking took possession of the assets of the company.

o The court also determined that investments made by the company, after the time of the conversion, from funds on deposit in other banks, were also subject to the claim of the beneficiaries.

• OUTCOME: The decree was reversed and the record remitted.

NOTES ON TRACING

• Tracing through exchanges: tracing is a step-by-step process

o Each step illustrates the essential concept of the tracing rules: Courts trace through physical exchanges

• Commingled funds: The misappropriation victims in Erie cannot identify their property in the obvious way that Wetherill could id his

o The money wrongfully taken from the Gingrich estate was promptly comingled with the bank’s own money

• Yet, the Court invokes tracing rules that enable the victims to identify particular dollars or assets as the ones they lost

• The Lowest Intermediate Balance Rule: if the balance in the account ever drops below he amount of plaintiff’s money deposited in the account, the lowest balance the account ever reaches is a limit on the plaintiff’s claim to the accout

o That is, if at some point the balance drops to $10, plaintiff had at most $10 in the account, and subsequent deposits of the banks own money can’t change that

In Re JD Services, Inc (2002)

• PROCEDURAL POSTURE: The debtor filed a Chapter 11 petition under the U.S. Bankruptcy Code. The bank filed a motion for summary judgment regarding the recovery of funds the debtor received as a result of a bank error.

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• OVERVIEW: The dispute involved a transfer that resulted in an incorrect amount being credited to the debtor's bank account because of a bank encoding error.

o It was undisputed that the encoding error and the transfer of the disputed funds took place postpetition, and that prior to the transfer, the debtor held no claim or interest in the disputed funds.

o The bank argued that the disputed funds remained the bank's property, while the trustee claimed that the estate's interest was more than a possessory interest and that the encoding error and transfer of disputed funds should place the bank on the same level as any other postpetition administrative creditor.

o The court found that unjust enrichment would support a constructive trust and that the facts supported the imposition of a constructive trust in the bank's favor on the disputed funds. However, the disputed funds had been commingled with other estate assets.

o The court used the available balance approach to trace the actual funds that were placed into the account and for purposes of computing the lowest intermediate balance of funds held in constructive trust.

• OUTCOME: The court held that: (1) the bank was entitled to immediate payment of a specific amount, plus interest actually earned, from funds held by the trustee in constructive trust on behalf of the bank; and (2) the bank was entitled to a postpetition administrative priority claim in an amount without accrual of interest.

NOTES ON MECHANICS OF TRACING

• Problems of proof: Ruffin says P must prove her right to constructive trust by clear and convincing evidence

o The tracing cases reflect two very different standards of proof

• When the dispute is between the victim and the wrongdoer, uncertainties are resolved against the wrongdoer, and plaintiff can sometimes fill gaps in the record w/ inference or circumstantial evidence (liberal tracing)

• But when the real dispute is between the victim and other innocent creditors of the wrongdoer, the restitution plaintiff is held to a higher standard of proof (strict tracing)

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Chapter 9: Ancillary Remedies: Enforcing the Judgment A. Enforcing Coercive Order: To Contempt Power

1. The three Kinds of Contempt

International Union, United Mine Workers v. Bagwell (1994)

• PROCEDURAL POSTURE: Petitioner unions sought review of the judgment of the Supreme Court of Virginia, which reversed a state appellate court and let stand the state trial court's order imposing $ 52 million in fines against the union for civil contempt.

o The unions argued that the fines, payable to the Commonwealth and two Virginia counties, were for criminal contempt rather than civil.

• OVERVIEW: The unions and their members repeatedly violated the trial court's orders regulating the conduct of a labor dispute.

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o The trial court announced a schedule of fines for various acts and, after hearings at which the trial court required that contumacious acts be proved beyond a reasonable doubt but did not afford a right to jury trial, imposed $ 64 million in fines against the unions.

o After the unions settled the labor dispute, the trial court refused to vacate the fines it had made payable to the Commonwealth and counties, and it appointed respondent receiver to collect the fines.

o The Supreme Court of Virginia held that the fines were civil and coercive in nature.

o On further appeal, the Court reviewed the differences between civil and criminal contempt and held that the fines were criminal in nature.

o The unions had no opportunity to purge once the fines were imposed, their conduct did not occur in the court's presence and did not implicate its ability to maintain order, and the fines effectively policed the unions' compliance with a code of conduct imposed by the court.

o Finally, the fines were serious in amount. The Court held that the unions were entitled to a criminal jury trial.

• OUTCOME: The Court reversed the judgment of the Supreme Court of Virginia, holding that a criminal trial for contempt was necessary.

NOTES ON THE THREE KINDS OF CONTEMPT

• Criminal Contempt: criminal contempt is criminal punishment for a past offense; the punishment is not conditional on future compliance.

ois prosecuted in the name of the sovereign;

othe civil plaintiff is in the position of a complaining witness

ohe can report the contempt, but he cannot require the court of prosecutor to proceed criminally, or stop them from continuing if he settles the case.

• Any fines are payable to the government

• Civil contempt: civil contempt is prosecuted in the name of the plaintiff and largely controlled by the plaintiff..

oHe initiates it with a motion, and up to a point he can abandon it or settle it

oThe collateral bar rule does not apply, because the civil plaintiff is not entitled to benefit from an erroneous injunction

oCivil contempt may be either coercive or compensatory. (look these up)

oViolations must be proved by clear and convincing evidence

oOnce a violation is proved, the amount of damages in compensatory civil contempt need be proved only by a preponderance of the evidence

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• Compensatory civil contempt: compensatory civil contempt is like an action for damages or restitution. Before it issues an injunction, the court decides that damages would be an inadequate remedy

oNow that the injunction iv violated, it awards compensation after all

oDamages are inadequate, but they are not uselessàrecall that adequacy is relative

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Chapter 10: More Ancillary Remedies: Attorneys’ Fees and the Costs of Litigation

A. FEE SHIFTING STATUTES

City of Riverside v. Riveria (1986)

• PROCEDURAL POSTURE: Petitioners sought a writ of certiorari of the decision from the United States Court of Appeals for the Ninth Circuit, which awarded respondents' counsel reasonable attorney fees under 42 U.S.C.S. § 1988.

• OVERVIEW: Respondent Chicano individuals filed suit against petitioners, a city and individual police officers, for violating respondents' civil rights by breaking up a party, without a warrant, and using unnecessary physical force.

oFollowing a jury verdict in which respondents were awarded compensatory and punitive damages, respondents' counsel were also awarded attorney fees under 42 U.S.C.S. § 1988, for all hours expended during litigation.

oAffirming the lower court, the U.S. Supreme Court held that the amount of time expended by counsel was reasonable and reflected sound legal judgment and that the counselors' excellent performance entitled them to be compensated at the prevailing market rate.

oWhile finding that the amount of damages awarded to respondents was relevant to the amount of attorney fees that should be awarded, the Court held that a rule of proportionality did not apply to § 1988awards.

oBecause the civil rights litigation advanced the public benefit, the Court ruled that successful plaintiffs' attorneys in civil rights litigation would be compensated for all time reasonably expended.

• OUTCOME: The award of attorney fees was affirmed.

NOTES ON THE AMERICAN RULE

• Attorneys’ fees and the rightful position. One might suppose that the successful plaintiff should always recover attorneys’ fees under the rightful position principleàwhatever the ratio of fees to judgment, P is undercompensated is has to pay his own attorneys’ fees

oAmerican law has never viewed the matter this way

oRecovery of attorneys’ fees is viewed as an ancillary remedy, separate from the merits, unavailable unless specifically authorized by a particular statute or rule.

• Reasons for the American Rule: Why do we tolerate such a substantial deviation from the usual rule that P is to be restored to his rightful position?

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oThe court has said that ‘one should not be penalized for merely defending or prosecuting a lawsuit,’ that the poor would be especially discouraged by the risk of liability for the other side’s fees, and t hat fee litigation is burdensome to the courts (Fleishman v. Maier Brewing)

• The fear of dettering litigation is the more important of these reasons

NOTES ON EXCEPTIONS TO THE AMERICAN RULE

There are many substantial exceptions to the American rule. Common law tort cases, including personal injury litigation, are the largest remaining domain of the pure American rule.

• Statutory exceptions

• The Bad-Faith Litigation Exception. Courts assert inherent power to award fees to punish bad-faith litigation

oBecause these fees are awarded for litigation misconduct, the power to award them is not limited by the American Rule, and a federal court can award them in a diversity case even if the state court would not award fees for the same misconduct

• The court can also award fees against the lawyer instead of his client (attorney misconduct)

• The Contempt of Court Exception: a court may asses fees for willful disobedience of a court order

• The Contract Exception: courts will enforce K provisions for reasonable attorneys’ fees

oAdhesion Ks routinely provide that the party without bargaining power will pay the stronger party’s attorneys’ fees if the stonger party sues to enforce the contract

• Family law exception: common to award fees in divorce

• The collateral-litigation exeption: when D’s wrong involves P in collateral litigation, P can recover the expenses of that litigation, including attorneys’ fees as consequential damages

• The private attorney general exception: Alyeska squarely rejects a judicially created exception for private litigants who enforce public policy, but that decision is not binding w/ respect to state claims

• The Common Law Fund Exception: When a case creates a common fund in which others will share, P and her attorney are entitled to fees from the fund

• Procedure: the view that attorneys’ fees are generally a collateral matter has procedural consequences that are a trap for unwary litigators

oA federal judgment is final and appealable when it is final on all issues except attorneys’ fees

• The merits and the fee award thus become separate final judgments, requiring separate notices of appeal, and becoming separate cases in the court of appeals

NOTES ON ONE-WAY FEE SHIFTING

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• Express provisions for one way fee shifting: it is easy enough to make plaintiffs whole without discouraging them from suing

oThe solution is to award attorneys’ fees to prevailing plaintiffs but not to prevailing defendants

• Some statutes explicitly authorize fees only to prevailing plaintiffs

• Anti-trust laws; truth in lending act

• Some statutes authorize fees to all prevailing plaintiffs and authorize fees to prevailing defendants only on a showing akin to malicious prosecution

• Texas Deceptive Trade Practices Act: awards fees to defendants when the action ‘was groundless in fact or law or brought in bad faith, or for the purpose of harrasmsent.”

• Statutes interpreted to provide one way fee shifting: Some statutes that are facially natural have been construed to favor ps

oFederal Civil Rights laws: (Employment discrimination has the same language)

• The statute at issue in Riveria, which applies to a wide range of civil rights and civil liberties litigation against local governments and state and local officials, provides that ‘the court, in its discretions, may allow the prevailing party …a reasonable attorney’s fees.”

• The Court has held that prevailing Ps under these statutes should recover fees as a matter of course, unless special circumstances make an award unjust.

• But, prevailing Ds recover fees only when P’s claim was ‘frivolous, unreasonable, or ground, …or P continued to litigate after it clearly became so.”

o BAD faith is NOT required

• Other interpretations for other statutes: The civil rights laws are probably the best-known model for fee shifting, but they are not always the model for interpreting other fee shifting statutes with similar language.

oThe copyright Act: provides that the court ‘may…award a reasonable attorney’s fee to the prevailing party.”

• BUT, the Court has rejected one-way fee shifting under the Copyright Act

• Also rejected two way (presumptive) fee shifting

• Rather, said that trial courts should exercise their discretion ‘in light of the consideration we have identified’ and that this discretion should be exercise evenhandledly between plaintiffs and defendants

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oRemoval Statute: provides that courts ‘may’ award fees against defendants who remove state cases to federal court, if the fed. Judge sends the case back to state court for lack of federal jurisdiction

NOTES ON THE AMOUNT OF THE JUDGMENT AS A CONSTRAINT ON ATTORNEY’S FEES

• Nominal damages: Harrar (1992): held that when P recovers only nominal damages, ‘the only reasonable fee is usually no fee at all’àbut, courts have continued to award fees in some cases with only nominal damages

• The cases since Riveria: since Riv., courts have continued to approve fees in excess of damages, although some of these cases say that the amount of damages is a reason for awarding less than the full lodestar.

• The policy argument: the ultimate argument in these cases is whether violations of rights are worth remedying if their dollar value is small in proportion to the cost of litigation

NOTES ON THE PREVAILING PARTY REQUIREMENT:

• Partially prevailing parties: Section 1988 and many other fee provisions authorize fees to a ‘prevailing party’

oWhat about a partially prevailing party?

• Hensley (1983) said that unrelated claims should be treated as separate lawsuits, with fees only for hours spent on successful claims’

B attorney’s fees from a common fund

In RE Cabletron Systems, Inc. Securities Litigation (2006)

• Here the lawyers are modeling their class action fees on a contingency fee basis

oMethodology for Determining Attorneys’ Fees

• Percentage of Fund v. Lodestar

• POF: establishes a percentage of the settlement, to be deducted from the common settlement fund, to compensate the attorneys for their efforts

o Has emerged in the last decade-plus as the preferred method

• Lodestar: the number of hours reasonably expended…multiplied by a reasonable hourly rate

oDetermining the Reasonableness of the Fee

• Multi-Factor Approach

• All of these tests include a comparison to the lodestar, some consideration of complexity and difficulty of the case, the quality of representation, and the benefit

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obtained for the class as reflected by the size of the fun, as well as an accounting for the risk associated with the contingency nature of the case

• 25% Benchmark:

• The 9th Circuit applies a benchmarked of 25% from which a deviation is permitted upon consideration of various case specific factors

o Simple and consistent approach

o Just a reasonable figure…

• Market Mimicking Approach:

• This method is designed to award a fee that is the ‘market price for legal services’ in light of the risk of nonpayment and the normal rate of compensation in the market’ at the outset of the case

Notes on EXAM 3/26/2012

• Not exam by ambush - wants us to know about nature of exam.

• ExamSoft computer exam.

• Exam will be open book - but no outlines. Can mark up book as much as you want but cannot paste sheets into it and cannot bring outline.

• No cellphones in exam.

• 3 hour exam. Three kinds of questions:

• memorization questions - ask you the rule (not many on this exam since open book)

• doctrinal questions - why do we have _______ rule of remedy?

• most of the exam is spot the issue: there will be half a page of facts and the facts will pose one or more issues, then series of short essays spun off of those facts. Answers will never be longer than a typed page sometimes just a few sentences.

• Grading: McFly answers all questions, and breaks each answer down into bullet points, and looks to see if you address the same issues or not. Each bullet point is worth one point, and it will be listed with the question. So if there is a 5 point question, make sure you have five points to support answer.

• IRAC format. Damn contracts professors.

• Also word limits on each question. Double that of the model answer.

• Won't cover anything that we didn't directly cover in class.