DIGEST OF CASES FROM THE U.S. COURT OF APPEALS

 FOR THE SIXTH CIRCUIT  AUG. 20--OCT. 20, 2003

 

 

Franchisee Payment of Royalties.  The U.S. Court of Appeals for the Sixth Circuit affirmed an award of lost future royalty payments (profits) to a printing shop franchisor that had terminated a franchisee for nonpayment of royalties. American Speedy Printing Centers, Inc. v. AM Marketing, Inc. et al.  The franchisee admitted that it breached the franchise agreement by failing to pay royalties. Unfortunately for the franchisee, the Sixth Circuit held it bound to the royalty payments it would have made over the 20-year franchise contract.  The Sixth Circuit affirmed a trial court finding that the franchisor was entitled to all damages necessary to put it in the status quo ante position if the agreement had continued in operation.

To some, the Sixth Circuit's decision may seem like a case in which a plaintiff received  two bites at the apple: the franchisor was attempting to benefit from dissolving the franchise agreement and simultaneously receive damages for lost profits/royalties even after the dissolution.  But the Sixth Circuit rejected this viewpoint.  It held the franchisor just wanted monetary compensation for the franchisee's actual breach. 

Immunity of States in Bankruptcy Suits.  The U.S. Supreme Court has agreed to hear an appeal by the state of Tennessee of a Sixth Circuit decision that states are subject to jurisdiction of the federal bankruptcy courts.  The case has potential to be a major addition to the High Court's federalism jurisprudence, due to the widespread problem of unemployed graduates being unable to pay back their student loans owed to state agencies.

'states are often brought into federal bankruptcy proceedings as creditors for loans they guarantee.  In this case, Pamela L. Hood, a bankruptcy applicant, sought to discharge her student loan debt of $4,169.13 owed to the Tennessee Student Assistance Corporation, a state agency that guaranteed her loan.  The federal bankruptcy code does not treat student loans guaranteed by governmental agencies as ordinary debts.  Instead, government-guaranteed student loans can only be discharged in bankruptcy proceedings with proof that repaying the loan would produce "an undue hardship" on the applicant.

To litigate the undue handship issue,  Hood had to name the state agency as a defendant.  But Tennessee refused to take part in the proceeding, arguing that it was protected by 11^th Amendment, which deprives the federal courts of jurisdiction to hear certain suits against states.   Both the federal bankruptcy court and the Sixth Circuit rejected the state's position.  For the record, five other circuits had ruled that states indeed have sovereign immunity in bankruptcy proceedings, and those rulings reflect the current trend in federal appellate practice.

The current debate over limits on federal court jurisdiction originated in 1996, when the  Supreme Court held, by a sharply divided 5-4 decision, that Congress lacked constitutional  authority to permit suits by Indian tribes against the states.  The majority's theory in Seminole Tribe v. Florida was that the 11^th Amendment trumped Article I of the Constitution, which enumerates the specific powers of Congress.   

In a dissenting opinion in Seminole Tribe, Justice John Paul Stevens warned that the majority's theory would prohibit Congress from enforcing federal bankruptcy, copyright, and antitrust laws against the states.  Chief Justice Rehnquist, writing for the majority, scoffed at Justice Stevens suggestion as exaggerated both in its substance and in its significance."  But it turns out Justice Stevens was right, at least as far as bankruptcy jurisprudence is concerned. The limits on federal bankruptcy courts to discharge various kinds of debts owed to the states is now raging all across the country.  Assertion of state sovereign immunity is now commonplace in bankruptcy cases and has an enormous impact on the bankruptcy system, debtors, and creditors, according to a brief by bankruptcy law scholars now part of the case file before the Supreme Court.

  Traci Cotton, bankruptcy counsel for the University of Texas System, is quoted on University Wire news service as saying the loss of immunity of state agencies would hurt the Texas System.  If we lose immunity, any bankruptcy court across the U.S. could call us to argue undue hardship, Cotton said. "It will be extremely expensive and time consuming, and if they prevail, the debt goes away and we lose the money."   In Tennessee Student Assistance Corporation v. Hood,  48 states all but New  Jersey have filed a brief on behalf of Tennessee warning the Supreme Court that any adverse decision against the states would affect their ability to control their revenues.  According to the state brief, bankruptcy is no different from other laws under which the states enjoy immunity. 

In rejecting Tennessee's immunity claim, the Sixth Circuit explained why bankruptcy laws are different from other federal laws for a couple of reasons.  First, the framers of the Constitution felt it was essential to have a uniform bankruptcy code apply on a national level so that states would not set up their own systems to favor in-state creditors.  Second, the states knowingly ceded part of their sovereignty when they ratified a Constitution that gave Congress the power to establish uniform laws on the subject of bankruptcies throughout the United States.

Given the fact that the members of the Supreme Court are the same in 2003 as in 1996, we would expect the same 5-4 majority will decide to limit the jurisdiction of federal bankruptcy courts over the states and their agencies.  Although the Sixth Circuit decision is well reasoned in both constitutional law theory and history, the Supreme Court will probably decide this issue as a matter of federalism and the need for states to control their own finances.  In effect, the Supreme Court's decision will likely gut the federal bankruptcy law as it pertains to undue hardships, because these debts will never be discharged if the states cannot be forced to appear in federal bankruptcy courts.  But given the conservative mood of the country, there will be little public outcry or concern for the plight of (indigent) bankruptcy applicants.

Many educational institutions prey on the ability of students to get government-backed loans; without a continuing pool of student loan-backed applicants, these educational institutions many operating as for-profit corporations would go bankrupt.  They sell applicants on the idea that their earning potential will increase dramatically if they have a college degree, any degree.  It is not until the students graduate and find they are still unemployed that they realize they were duped.

With no jobs, the students do not have income to repay their student loans, and the taxpayers foot the bill.  What is the solution   State and federal government agencies could do a better job of requiring educational institutions to link educational studies with post-graduation employment, e.g., by requiring students to participate in a one-semester or one-year apprenticeship with an employer prior to receiving a degree. 

Marketing With Celebrity Names and Likeness.  Court watchers say the U.S. Court of Appeals for the Sixth Circuit has issued two conflicting decisions this summer in Parks v. LaFace Records and ETW Co. v. Jireh Publishing Inc.  These two cases address the First Amendment defense to claims of false endorsement under the Lanham Act as well as violations of the common law right of publicity.  These cases forced the Sixth Circuit to weigh the rights of celebrities civil rights pioneer Rosa Parks and golfer Tiger Woods, respectively and those of artists to express themselves using a celebrity's name or likeness.

In the first case, a rap duo, Outkast, wrote a song entitled Rosa Parks for their album Aquemini.   The song became a hit for the duo.  Rosa Parks objected to the use of her name and sued Outkast for violating her right of publicity under Michigan common law and under Section 43(a) of the Lanham Act due to the commercial nature of Outkast's work.  Outkast claimed they used Rosa Parks name as a metaphor.  At trial, a member of the Outkast duo explained the metaphor this way:  "We never intended for the song to be about Rosa Parks or the civil rights movement. It was just symbolic, meaning that we comin back out, so all you other MCs move to the back of the bus."  The phrase move to the back of the bus is used ten times in the chorus of the Outkast song.

According to the federal district court, The Rosa Parks song has received widespread acclaim and was nominated for a Grammy award. This result is not altered by defendants' promotion of their album and hit single because the fundamental right to free expression would be illusory if defendants' were permitted to entitle their song 'Rosa Parks,' but not advertise it to the public. The law imposes no such artificial limitation."

The Sixth Circuit reversed the district court's summary judgment in Outkast's favor and held there was a genuine issue of material fact as to whether the title "Rosa Parks" was artistically related to the song lyrics.  Court watchers expected the Sixth Circuit to apply a more objective standard: the First Amendment's freedom of expression trumps a celebrity's publicity rights when those rights are adapted to artistic expression rather than commercial exploitation.  Instead the Sixth Circuit questioned whether the defendants were using Rosa Parks name as a symbolic metaphor or merely a slick marketing tool.

The Sixth Circuit even went so far as to suggest an alternative title, Back of the Bus,   for the group's now hit song.  So much for artistic expression when U.S. Court of Appeals judges try to come up with imaginative titles for hip-hop or rap songs.  Obviously, the defendants cannot turn back the clock and rename their song once it has become known as Rosa Parks.   According to the Sixth Circuit, the alternative title "would be obviously relevant to the content of the song, but it also would not have the marketing power of an icon of the civil rights movement."  The court admitted that "Rosa Parks (the person) is universally known for and commonly associated with her refusal . . . to . . . move to the back of the bus.    Therefore, even if Outkast could retroactively change the title of their song to "Back of the Bus," it would still conjure up images of Rosa Parks.  Whether the three-judge panel realized it or not, they had just proved the close nexus between the title and the lyrics of the song.

The Sixth Circuit seemed to get it right in ETW Co. v. Jireh Publishing, where the question focused on whether Tiger Woods rights were violated when an artist put his name and likeness on prints of a painting titled "The Masters of Augusta."  The limited reproduction commemorates Woods' victory in the Masters Championship. A sports artist, Rick Rush, depicted Woods in three golf poses with his caddy; the Augusta National Clubhouse was in the foreground, and the likeness of past Masters champions, including Arnold Palmer, Sam Snead, Ben Hogan, Walter Hagen, Bobby Jones, and Jack Nicklaus, looked down on him.

The Sixth Circuit concluded that Mr. Rush's work contained significant transformative elements that makes it worthy of First Amendment protection and less likely to interfere with the economic interests protected by Mr. Woods' publicity right. The court stated that Rush's work consisted of a collage of images that combine to describe an historic sports event and to convey the significance of Tiger Woods' achievement in that event. Accordingly, Tiger Woods' right of publicity must yield to the First Amendment.

Opting Out of Class Action.  The Sixth Circuit will hear an appeal by Nevada residents who received silicone breast implants manufactured by Dow Corning.  The Nevada claimants are the only remaining litigants in Dow Corning's $4.5 billion bankruptcy reorganization plan.  The Nevada claimants contend if they choose to opt out of the creditor settlement, then they should be allowed to bring future claims against Dow Corning's two parent companies, Dow Chemical Co. and Corning Inc.  The federal district court for the Eastern District of Michigan held that the release and injunction provisions set forth in the bankruptcy reorganization plan applied to all claimants, whether they accepted or rejected the plan.

Despite the pending appeal to the Sixth Circuit, Dow Corning has mailed claim forms to approximately 300,000 recipients of Dow Corning silicone gel breast implants. These women will share $3.2 billion, and thousands of other creditors will receive $1.3 billion. The Dow Corning trust settlement facility is beginning to process those claims.

Coal Contract with TVA.   The Tennessee Valley Authority has petitioned the U.S. Court of Appeals for the 6th Circuit to rehear en banc a case involving Diversified Energy's claim that the electric utility breached its coal purchase contracts.  A three-judge panel of the Six Circuit ruled that TVA must reimburse Diversified Energy $1.14 million plus interest for profits the company lost when the agency canceled its coal supply contract in 1993.

All was going well under a 1990 series of contracts under which Diversified supplied coal produced by Sigmon Coal to TVA's John Sevier coal-burning power plant.  However, when TVA learned in 1993 that Diversified President Randy Edgemon made a personal loan to TVA transportation specialist Daniel Bradshaw, the agency abruptly canceled the contracts.  The coal supply contracts contained a clause prohibiting contractors from giving gratuities to TVA officials. The clause also stated that a breach of its mandates would be considered material.

While the TVA was investigating the alleged loan, it contacted Diversified to discuss the reopening of negotiations on one of the contracts. However, the parties did not reach an agreement on extension of the contract prior to its expiration date of March 19, 1993.  On that same day, the TVA notified Diversified by letter that the clause prohibiting gratuities had been violated and that the four existing coal supply contracts would not be extended. The letter stated the contracts were terminated to the extent they had not already expired.

In its first pass at this litigation, the Sixth Circuit held that TVA could not use Diversified's alleged breach of the gratuities clause as a defense to TVA's own repudiation of the contracts, because the TVA contracting officer never brought a valid claim against Diversified as required under the Contract Disputes Act, 41 U.S.C.  §  606 et seq.  The trial court, which had refused to award monetary relief to Diversified, then went back on the remanded case and awarded $1.14 million in damages representing commissions the company would have received from its coal supplier if TVA had accepted further deliveries.

The Sixth Circuit affirmed the trial court's computation and award of damages.  The Sixth Circuit noted that Diversified was not entitled to an award based on the difference between the contract price for coal and the market price. 

Bankruptcy Practice.    The Sixth Circuit in In re Hurtado held that the recipient of a fraudulent conveyance possessed requisite dominion and control over the disputed funds to be  strictly liable for the return of such funds regardless of any good faith intent on the part of the recipient.  The federal Bankruptcy Code authorizes the trustee [or Chapter 11 debtor in possession who is accorded essentially the same powers as a trustee in bankruptcy] to avoid certain liens and transfers that were made prior to the debtor's bankruptcy filing.  Bankruptcy Code § 550(a)(2) allows recovery of avoided transfers from "immediate transferees and 'mediate transferees.' " However, if the party is either an "immediate" or "mediate" transferee, then he or she may raise the good faith defense to recovery by the trustee: the party received the transfer from the debtor in good faith, not as a fraudulent conveyance to avoid inclusion in the bankruptcy estate. 

An initial transferee does not have the benefit of a good faith exception under the Bankruptcy Code.  In the case under discussion, the Sixth Circuit determined that the party was neither an immediate nor a mediate transferee, but instead was an initial transferee: the transferee can be held liable for the proceeds where they were forwarded to a third party.

In Hurtado, the son and daughter-in-law of Barbara Hurtado filed for Chapter 7 bankruptcy.  Three years prior to their bankruptcy filing, the son and daughter-in-law sold their home and received proceeds in the amount of $83,000 and settled a lawsuit in which they received approximately $130,000.  The two transferred these funds to Mrs. Hurtado, who deposited them in her savings account and dispersed the funds to pay for son and daughter-in-law's living expenses and to specific creditors as directed by her son and daughter-in-law.   Ms. Hurtado did not commingle any of her own money with the bankruptcy debtors' money held in the savings account.

Mrs. Hurtado admitted at a deposition that she knew the money was being used to pay certain creditors to whom she was writing individual checks. Within the first year, the $213,000 in debtor funds had been depleted: two years prior to the bankruptcy filing.   The bankruptcy trustee sought to recover from Mrs. Hurtado the $213,000 that had been dispersed by her to creditors and for paying her son's living expenses.  The Sixth Circuit held that Mrs. Hurtado had dominion and control over the funds in her savings account, that she was an initial transferee, and that she was personally liable to the trustee for the $213,000 she had disbursed.   The Sixth Circuit found that Mrs. Hurtado had no legal obligation to follow the commands or direction of her son and daughter-in-law.  Therefore, no principal/agent relationship was created, which would have provided her with a good faith defense to the trustee's claims.

This case deals with a mother who was trying to help her son and daughter-in-law pay off their debts and retain enough money to pay their living expenses and survive.  But the family went about it in a manner that the Sixth Circuit and district court determined to be a fraudulent conveyance, even though it happened three years prior to the bankruptcy filing.  Now the mother, Barbara Hurtado has been hit with a bill for $213,000.

Interstate and Internet Shipments of Wine.  The Sixth Circuit struck down Michigan's statute banning on out-of-state shipments of wine to Michigan residents as an unconstitutional violation of the Commerce Clause.  Plaintiff John Arundel of Lansing commented, I was motivated by the fact that I just can't get access to the wines I like. . . .I've tried to get these wines through the beer and wine wholesalers in Michigan, and I've never gotten any response."

The Michigan law required out-of-state wine shipments to pass through Michigan licensed wholesalers; the court rejected arguments that the statute was needed to protect tax revenues and prevent access to liquor by minors.  Michael Lashbrook, president of the Michigan Beer and Wine Wholesalers Association, is quoted in the Flint Journal as saying, "There certainly are those who would use the Internet to sell whatever to whomever to make a buck."  One can only wonder if Michigan's wine and beer wholesalers ever made a buck off the former  statutory limits on outside competitors to supply Michigan consumers.

Ambulance Chasing.  In Amelkin vs. McClure, a three-judge panel of the Sixth Circuit unanimously upheld a Kentucky law designed to prevent ambulance-chasing. The Kentucky law restricts access to police accident reports to news organizations, those involved in the accident, and their insurers.  Lawyers and chiropractors, who wanted to use the police report information to generate business, challenged the constitutionality of the statute. 

The court said the statute does not violate the equal protection rights of the Plaintiffs, nor does it abridge their First Amendment right to freedom of speech.  The unanimous decision stated the Kentucky law insofar as it applies to the plaintiffs, does not restrict or even regulate expression. Rather, it simply restricts access to confidential information possessed by the government. Counsel for the plaintiffs contended at oral argument that § 189.635 restricts the uses to which the plaintiffs may put accident reports if and when they obtain the reports. But the statute imposes no such restriction. It prohibits news-gathering organizations that have obtained accident reports from using them for commercial purposes.   The court went on to say that the statute in question placed no restrictions on how lawyers and chiropractors could use information on accident reports if they somehow received it.  However, these plaintiffs did not have a right to force the police or government to give them this information.

The Sixth Circuit found that the limitations on access to accident reports were rationally related to the state's legitimate  interest in protecting the privacy of accident victims.  The U.S. Supreme Court denied certiorari for an appeal on Oct. 2, 2003.

Labor Union Access.  In Wolgast Corp. v. NLRB, the Sixth Circuit addressed the issue of union representative access to employees at a construction site outside the control of a subcontractor that was working there.  More generally, this case concerns employees who work at multiple locations or customer sites, where the unionized employer has less control over a union's access to the employees and even less control over the property on which the employees are working.  In this case, a non-employee union representative wanted access to the unionized employees of a subcontractor, who were working on a general contractor's site. Without site access, the union representative could not perform his standard oversight duties, such as checking the safety of scaffolding for the unionized workers.  The general contractor ordered the union representative off its property,  and after a shouting match in which a supervisory employee of the general contractor lifted a makeshift table, flipped it over, tools went flying off the table and struck a union employee but caused no injury the union charged the contractor with unfair labor practices.

'section 8(a)(1) of the National Labor Relations Act pertains to employer interference with union access to its members at a job site.  The National Labor Relations Board (NLRB) ruled that the general contractor violated Section 8(a)(1) and was obligated to allow onto its property the union representative of its subcontractor's employees.   The Sixth Circuit deferred to the NLRB on issues of union access to employee sites and affirmed the NLRB's decision.

In First Healthcare Corporation v. NLRB, the Sixth Circuit granted the NLRB's application of an enforcement order against a nursing home operator in California.  The NLRB found that First Healthcare violated section 8(a)(1) of the Act by enforcing against off-site employees its solicitation and distribution policy prohibiting non-employees from any solicitation and distribution at its nursing home properties, including the parking lots and other non-wrok areas.  The Board also held First Healthcare violated section 8(a)(1) by maintaining a company policy that prohibited an off-duty employees from returning to the non-work areas of the facilities unless the off-duty employees were there to pick up their paychecks or had company authorization to return to the facilities.   The rule effectively prevented off-duty employees from organizing for the union on the company's premises during their off-duty hours.

The Sixth Circuit ordered First Healthcare to cease and desist from engaging in these unfair labor practices, particularly with respect to enforcing its no-solicitation policy in a manner that denied its off-duty employees access to parking lots and other non-work areas for the purpose of union solicitation and/or distribution. The Sixth Circuit also ordered the company to notify employees of the recission of this policy by posting a remedial notice at all of its nonunion facilities in California.

In NLRB v. Sliman's Sales and Services, Inc., the Sixth Circuit held that a union's representative's offer to give employees t-shirts, hats, and stickers if they voted in the union did not constitute financial rewards sufficient to invalidate an election to have the union represent workers as a sole bargaining agent.  The NLRB found no evidence that Castro distributed any items during the Union's campaign. Assuming arguendo that hats, T-shirts, and stickers were distributed, the Board concluded that the distribution of inexpensive pieces of campaign propaganda such as buttons, stickers, or T-shirts is not per se objectionable and a distribution will not be considered objectionable unless it occurs at the election site immediately after the voters left the polling area, as an obvious reward for voting in favor of union representation.

The Sixth Circuit ordered Sliman to cease and desist from refusing to bargain with the union elected to represent the workers.

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