Interesting Delay: Prejudgment Interest Accrues Despite Unreasonable Delay
The US Court of Appeals for the Federal Circuit upheld a decision on enhanced damages and prejudgment interest, concluding that the district court correctly applied the appropriate standard for enhanced damages in accordance with established precedent. Halo Electronics, Inc. v. Pulse Electronics, Inc., Case Nos. 23-1772; -1966 (Fed. Cir. Feb. 28, 2025) (Prost, Bryson, Reyna, JJ.) (nonprecedential).
In 2013, following a jury verdict in favor of Halo, the district court entered a $1.5 million verdict against Pulse for willful infringement but denied Halo enhanced damages. Halo appealed and, in 2016, engendered a new enhanced damages standard from the Supreme Court. In 2015, while the case was pending before the Supreme Court, Halo filed for an award of supplemental damages for direct infringement between 2012 and 2013, and prejudgment and post-judgment interest on the initial $1.5 million judgment and on the supplemental damages. The district court awarded supplemental damages and prejudgment and post-judgment interest.
In 2017, the district court determined that Halo was not entitled to enhanced damages or attorneys’ fees under the Supreme Court’s new standard. Although the parties still disagreed on which method to use for prejudgment interest calculation – and briefed their positions accordingly – the district court mistakenly ordered the clerk to enter a final judgment and close the case. After the Supreme Court decided WesternGeco v. ION Geophysical in 2018, Halo (in 2020) filed a motion seeking prejudgment interest and a new damages trial, arguing that the district court had not made a final ruling on the issue of prejudgment interest and that WesternGeco was intervening case law that permitted it to seek additional damages for Pulse’s activities outside the United States.
Halo argued that because the final order closing the case ignored an outstanding issue (prejudgment interest), the case was merely administratively closed. Although Pulse argued that the resurrected case should remain closed under Federal Rule of Civil Procedure 41(b), the district court awarded limited prejudgment interest in March 2023. The district court rejected Halo’s request for a new trial regarding additional foreign damages under WesternGeco.
Halo appealed, and Pulse counter appealed. Halo raised two main arguments:
Enhanced damages were appropriate because of the jury’s finding of willfulness.
The district court should have allowed a limited trial on the issue of foreign infringement.
Pulse argued that FRCP 41(b) should have barred any prejudgment interest because Halo did not address the court’s oversight until 2020.
The Federal Circuit rejected both of Halo’s arguments. It explained that a jury’s finding of willfulness is “but one factor” in an enhanced damages determination under the Supreme Court’s highly discretionary Halo test. Willful infringement does not require the more egregious intent that gives rise to enhanced damages, nor does it merge with enhanced damages analyses procedurally – willfulness is a jury issue, while enhanced damages is an issue for the court.
Addressing Pulse’s argument, the Federal Circuit found no abuse of discretion in either the district court’s refusal of a new trial or its decision to allow prejudgment interest. It was unreasonable for Halo to bring forward an argument under WesternGeco for a new trial two years after WesternGeco was decided. Waiting three years between the case’s 2017 closing and renewing its arguments about prejudgment interest also constituted unreasonable delay, but other equitable factors nevertheless permitted the award of prejudgment interest.
Federal Judge Clarifies Scope of Preliminary Injunction Enjoining President Trump’s DEI-Related Executive Orders
On March 10, 2025, a federal judge in Maryland clarified the scope of the nationwide preliminary injunction that enjoins key portions of two of President Donald Trump’s diversity, equity, and inclusion (DEI)–related executive orders (EOs), stating that the injunction applies to all federal agencies.
Quick Hits
On February 21, 2025, a federal judge granted a nationwide preliminary injunction that enjoined key provisions of President Trump’s executive orders aimed at “illegal” DEI initiatives.
On March 3, 2025, the judge refused to halt the preliminary injunction, pending the government’s appeal to the Fourth Circuit Court of Appeals.
On March 10, 2025, the judge clarified that the preliminary injunction applies to all federal executive branch agencies, departments, and commissions, not just those that were specifically named in the complaint.
U.S. District Judge Adam B. Abelson clarified that the nationwide preliminary injunction enjoining the termination, certification, and enforcement provisions of EO 14151 and EO 14173 “applies to and binds Defendants other than the President, as well as all other federal executive branch agencies, departments, and commissions, and their heads, officers, agents, and subdivisions directed pursuant to” those executive orders.
The court’s February 21, 2025, preliminary injunction order defined the “Enjoined Parties” as “Defendants other than the President, and other persons who are in active concert or participation with Defendants.” The plaintiffs filed a motion to clarify the scope of the order. The government argued that the court lacked jurisdiction to rule on the motion, and that only the specific departments, agencies, and commissions named as additional defendants in the complaint were bound by the preliminary injunction. The complaint named the following defendants: the Office of Management and Budget, the U.S. Departments of Justice, Health and Human Services, Education, Labor, Interior, Commerce, Agriculture, Energy, and Transportation, along with the heads of those agencies (in their official capacities), the National Science Foundation, and President Trump in his official capacity. The government argued that including other departments, agencies, and commissions as enjoined parties would be inconsistent with Federal Rule of Civil Procedure 65(d), Article III of the U.S. Constitution’s standing requirement, and traditional principles of equity and preliminary injunctive relief.
The court disagreed. First, according to the court, the plaintiffs have shown a likelihood of success on the merits that the termination, certification, and enforcement provisions are unconstitutional, so any agencies acting pursuant to those provisions “would be acting pursuant to an order that Plaintiffs have shown a strong likelihood of success in establishing is unconstitutional on its face.”
Second, the termination and certification provisions were directed to all agencies, the enforcement provision was directed to the U.S. Department of Justice, and the president was named as a defendant in the complaint; thus, the preliminary injunction (in both its original and clarified forms) “is tailored to the executive branch agencies, departments and commissions that were directed, and have acted or may act, pursuant to the President’s directives in the Challenged Provisions of” EO 14151 and EO 14173.
Third, only enjoining those agencies that were specifically named in the complaint, despite the fact that the president was named as a defendant, would provide incomplete relief to the plaintiffs because their speech is at risk of being chilled by non-named agencies as well. In addition, the court held that “[a]rtificially limiting the preliminary injunction in the way Defendants propose also would make the termination status of a federal grant, or the requirement to certify compliance by a federal contractor, turn on which federal executive agency the grantee or contractor relies on for current or future federal funding—even though the agencies would be acting pursuant to the exact same Challenged Provisions,” resulting in “‘inequitable treatment.’” Thus, the court granted the plaintiffs’ motion to clarify that the preliminary injunction applies to every agency in the executive branch.
Second Circuit: Rule 37 Sanctions Require ‘Intent to Deprive’ for Lost ESI, Not Mere Negligence
Plaintiff–Appellant Richard Hoffer sued the city of Yonkers, the Yonkers Police Department, and various individual police officers under 42 U.S.C. § 1983, alleging the officers used excessive force when arresting him. After trial, the jury returned a verdict in the officers’ favor. Hoffer appealed the judgment, arguing the district court erred in denying his request for an adverse inference instruction pursuant to Federal Rule of Civil Procedure 37(e)(2), based on a missing video of him being tased. On appeal, the parties disputed the standard applicable to requests for adverse inference instructions under Rule 37(e)(2).
The Second Circuit held that to impose sanctions pursuant to Rule 37(e)(2), a district court or a jury must find, by a preponderance of the evidence, that a party acted with an “intent to deprive” another party of the lost information. Consistent with this holding, the court further held the lesser “culpable state of mind” standard, which includes negligence,[1] was no longer applicable for imposing Rule 37(e)(2) sanctions for lost electronically stored information (ESI).
Hoffer v. City of Yonkers, et al. Background
Plaintiff–appellant commenced a § 1983 suit against the city of Yonkers, the Yonkers Police Department, and various individual police officers alleging, among other things, that the officers used excessive force during his 2016 arrest. A trial was held in 2021 on the claims against the individual police officers (collectively, the officer defendants), where differing accounts of the arrest were offered into evidence. There was no dispute that plaintiff was tased two times. However, each taser generates a log, which reflects each use of the taser. And while the log for the date in issue reflected two deployments, they were hours apart: the first at 4:16 p.m., when the officer tested the taser at the beginning of his shift, and the second at 8:02 p.m., lasting eight seconds, which the officer testified corresponded to the secondtime he tased plaintiff. The log also reflected an event at 10:24 p.m. titled “USB Connected,” that apparently corresponded to the taser syncing to an external device.
There was also testimony that each taser deployment generates a video. However, the testimony established that only video of the second deployment was available because the video of the first deployment “had somehow been overwritten.” No further explanation was provided as to the first video’s absence. Plaintiff’s girlfriend testified that, when she was at the police station after plaintiff’s arrest, she saw one officer holding a USB and saying to another officer: “It shows everything that we did and nothing that he did.”
Plaintiff’s counsel orally requested the district court instruct the jury that it could draw an adverse inference against the officer defendants based on the purported spoliation of the first video. At the charge conference, the district court, after assessing the request under Rule 37(e)(2), declined finding the evidence before it insufficient to establish any defendant “acted with an intent to deprive [Plaintiff] of the use of the video.”
There was no “clear evidence” that the first taser video existed in the first place, speculating that perhaps the first deployment did not trigger a video recording or that the first and second taser deployments happened within the same eight second period the log captured. The court further reasoned that it was not clear what the officer meant when he testified about “something being overwritten,” and nothing in his testimony suggested he had any direct knowledge or experience with the document management system for taser videos or this video specifically. The district court further observed that officer testimony establishing there were two taser deployments and no effort by defendants to “cover up that fact” undercut the theory the video was purposely destroyed. After three days of deliberations, the jury returned a unanimous verdict, finding in the officer defendants’ favor.
Appeal
On appeal, plaintiff-appellant argued that the district court erred by failing to instruct the jury that it could draw an adverse inference based on the purported spoliation of the first taser video. To decide that issue, the court was required to first resolve the parties’ dispute regarding the showing required for an adverse inference instruction under Rule 37(e)(2).[2]
In resolving this issue, the court discussed the history of Rule 37. Specifically, it noted that before 2015, a party seeking an adverse inference instruction based on lost evidence—electronic or otherwise—had to establish that the party obligated to preserve such evidence who failed to do so acted with “a culpable state of mind”[3] (internal quotation marks omitted). At that time, the circuit court held the requirement could be satisfied when a party acted knowingly or negligently. An intentional act was not required to establish a “culpable state of mind.” Then, in 2015, Rule 37(e) was amended to address the measures a court could employ if ESI was wrongfully lost, and the findings required to order such measures. At that time, Rule 37 was split into two subsections. The first allowed a court, upon a finding of prejudice to another party arising from the loss of ESI to order “measures no greater than necessary to cure the prejudice.” The second enumerated certain sanctions the court may impose “only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation.”
The court observed that the Advisory Committee notes to the 2015 Amendment explicitly stated that subdivision (e)(2) rejects cases such as Residential Funding that authorize adverse inference instructions upon a finding of negligence.[4] According to the court, the notes reason that only the intentional loss or destruction of evidence gives rise to an inference that the evidence was unfavorable to the party responsible for that loss or destruction. Negligent—or even grossly negligent—behavior does not logically support that inference.
While plaintiff-appellant correctly noted various circuit decisions after the 2015 Amendment that referenced or used the lesser “culpable state of mind” standard in the context of lost ESI (citing cases), the circuit noted that none of those decisions expressly held that the state of mind required for a sanction under Rule 37(e)(2) could be less than “intent to deprive.” Rather, no decision directly addressed the question before the court: whether the 2015 Amendment abrogated the lesser “culpable state of mind” standard in the context of lost ESI. According to the circuit, “[t]o the extent these decisions implied that a Rule 37(e)(2) sanction could issue upon a finding of a state of mind other than ‘intent to deprive,’ any such implication was mistaken after the 2015 Amendment.”
Conclusion
The Second Circuit has clearly articulated that imposing a sanction under Rule 37(e)(2) requires a finding of “intent to deprive another party of the information’s use in the litigation.” Thus, the 2015 Amendment to Rule 37(e)(2) abrogated the lesser “culpable state of mind” standard used in Residential Funding in the context of lost ESI. “A party’s acting negligently or knowingly will not suffice to justify the sanctions enumerated in Rule 37(e)(2).” Notably, in holding that the requisite state of mind to impose a sanction under Rule 37(e)(2) is “intent to deprive,” the Second Circuit joins the majority of its sister circuits.[5]
[1] see Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2d Cir. 2002).
[2] The parties also disagreed about whether the requirements of Rule 37(e)(2) must be proven by clear and convincing evidence or by a preponderance of the evidence, and whether the district court erred in resolving factual questions itself, rather than submitting them to the jury. Although the appellate court determined these issues (i.e., by a preponderance of the evidence and there was no error), these issues are not discussed in this blog.
[3] See Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir. 2002).
[4] Before the 2015 Amendment, Rule 37(e) provided in full: “Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.” Rule 37(e)(2) advisory committee’s note to 2015 amendment.
[5] See Jones v. Riot Hosp. Grp. LLC, 95 F.4th 730, 735 (9th Cir. 2024); Ford v. Anderson Cnty., Texas, 102 F.4th 292, 323–24 (5th Cir. 2024); Skanska USA Civ. Se. Inc. v. Bagelheads, Inc., 75 F.4th 1290, 1312 (11th Cir. 2023) (specifying that “intent to deprive” means “more than mere negligence”); Wall v. Rasnick, 42 F.4th 214, 222–23 (4th Cir. 2022); Auer v. City of Minot, 896 F.3d 854, 858 (8th Cir. 2018); Applebaum v. Target Corp., 831 F.3d 740, 745 (6th Cir. 2016) (“A showing of negligence or even gross negligence will not do the trick.”).
Federal Appeals Court Rules Against Doctor Seeking to Use Mushrooms to Aide Terminal Patients: How We Learned to Question the Rationale of the Controlled Substances Act
It’s funny how things work out – sometimes you find yourself living in a sort of butterfly effect where the tail seems to wag the dog. In 2023, when we first started writing about the traction psychedelics were gaining as medicine, our goal was not to end up spending years covering the winding legal battle of a Washington physician to legally obtain psilocybin for terminally ill cancer patients to manage their pain.
But here we are. To be clear, while we’re certainly interested in the fate of Dr. Sunil Aggarwal’s efforts, we’ve been following the case closely because it’s one of a few legal cases to shed light onto what courts and federal agencies may do when faced with a medicinal demand for psychedelics outside of the research context.
In his efforts to be able to administer psilocybin to his patients, Aggarwal employed a two-fold approach: (1) he attacked the status of psilocybin as a Schedule I drug, and (2) he tried to get around statutory requirements governing a physician’s right to distribute Schedule I drugs outside of the research context. Neither has been successful (yet).
DEA Says No to Rescheduling, but the Court Keeps the Door Cracked
As a reminder, here’s what happened when Aggarwal petitioned the DEA to reschedule psilocybin:
Since at least 2021, Dr. Sunil Aggarwal has been working to legally obtain psilocybin for terminally ill cancer patients undergoing end-of-life care. Because psilocybin is a Schedule I drug under the Controlled Substance Act (CSA), obtaining the drug to treat his patients was “practically and legally difficult” according to his lawyers. Aggarwal turned to the DEA, petitioning the agency to transfer psilocybin from Schedule I to Schedule II. The DEA denied the petition in a four-sentence letter. Aggarwal then looked to the Ninth Circuit.
The Ninth Circuit Court of Appeals in Aggarwal v. U.S. DEA directed the U.S. Drug Enforcement Agency (DEA) to reconsider its decision not to transfer psilocybin from Schedule I to Schedule II.
The Ninth Circuit sided with Aggarwal. The court held that the “DEA failed to provide sufficient analysis to allow its path to be reasonably discerned” and “failed to clearly indicate that it ha[d] considered the potential problem identified in the petition.” More specifically, the Ninth Circuit noted that the DEA failed to define “currently accepted medical use with severe restrictions,” which was the applicable standard for rescheduling on which Aggarwal relied. The court directed the DEA to clarify or reevaluate its position.
And, while the footsteps may not have been as swift as some would hope, we still stand by the predictions we made in 2023:
The Ninth Circuit’s refusal to accept the DEA’s out-of-hand dismissal of a petition to reschedule psilocybin is yet another step in what appears to be faster and faster footsteps towards the future. What that future holds is yet to be determined – though we will monitor closely – but whatever the future is it promises to be quite a ride.
Will the Right to Try Act Save Practitioners Who Don’t Conduct Research but Want to Administer Schedule I Drugs?
Perhaps realizing that convincing the DEA to reschedule psilocybin may be a tall task, Aggarwal tried his hand before the DEA and then the Ninth Circuit with another approach — trying to get around the Controlled Substance Act (CSA) by way of the Right to Try Act (RTT Act). Aggarwal challenged the DEA’s decision not to exempt him from registration under the CSA, but the FDA’s RTT Act didn’t turn out to be the rescuer he had hoped for.
Because it’s a Schedule I substance, the CSA dictates that psilocybin may only be produced, dispensed, or possessed in the context of a research protocol registered with the DEA and approved by the Secretary of Health and Human Services. In other words, psilocybin may only be dispensed by medical practitioners in the context of “bona fide research,” which requires the approval of the FDA (see21 U.S.C. § 823(g)(2)(A)). The DEA handles registration and “may, by regulation, waive the requirement for registration of certain…distributors, or dispensers if DEA finds it consistent with the public health and safety” (21 U.S.C. § 8222(d)).
The Food, Drug, and Cosmetic Act (FDCA) is even broader and “imposes restrictions on the…distribution of all drugs including but not limited to controlled substances” (21 U.S.C. § 331). Generally, before a new drug can be introduced to the market, it must go through the clinical trial process, but there are other ways. A patient, for instance, may attempt to access a new drug through the FDA’s expanded access program.
Where a prescription drug is a controlled substance, “the FDCA and CSA operate in tandem” and the person distributing the drug must comply with both statutes.
The FDA has also adopted the RTT Act, which is intended to expand access for eligible investigational drugs outside the clinical trail process. “The RTT Act exempts the drugs provided to eligible patients from specified statutory and regulatory requirements concerning drug labeling, marketing, clinical, testing and approval.” “To access an eligible investigational drug under the RTT Act,” an eligible patient’s physician applies directly to the drug’s sponsor, and the FDA is not involved in approving access.
Seeking psilocybin for his terminally ill patients, Aggarwal’s attorneys submitted a letter to the DEA asking the DEA “for authorization to access psilocybin for therapeutic use under state and federal RTT Acts and immunity from prosecution under the CSA.” His lawyers also asked that if it deemed registration was required under the CSA, that the registration requirement be waived.
The DEA said no dice and clung tight to the CSA. In so doing, the DEA made a few things clear:
“Practitioners who seek to dispense or possess [S]chedule I controlled substances must be properly registered as an approved researcher in accordance with the CSA and its implementing regulations.”
The RTT Act does “not provide any exemptions from the CSA or its implementing regulations.”
The RTT Act does “not give the DEA authority to waive CSA requirements.”
Doubling down, the DEA also declined Aggarwal’s request to initiate rulemaking to exempt him from the CSA’s registration requirement. The DEA provided the following as its reasoning:
The DEA could not fully assess Aggarwal’s proposal because it was lacking in detail.
Aggarwal’s desire to administer psilocybin to patients was not consistent with public health and safety. In making this particular finding, the DEA relied heavily on Congress’ determinations in designating psilocybin as a Schedule I drug that it has a high potential for abuse, no currently accepted medicinal use in treatment in the United States, and a lack of accepted safety for use under medical supervision.
Aggarwal’s cited historical scenarios involving Schedule I controlled substances — including marijuana — were not persuasive.
The Ninth Circuit found in favor of the DEA, ruling that the DEA’s reasoning in blocking Aggarwal’s access to the DEA was not arbitrary and capricious. While the Ninth Circuit didn’t declare the following reasoning the rule of land even within the Ninth Circuit, it did make clear that the DEA’s reliance on this reasoning is not arbitrary and capricious:
“The CSA and FDCA together govern access to controlled substances for medicinal purpose.”
“Although the RTT Act itself does not require FDA approval for eligible patients to access eligible investigational drugs, it does not exempt such drugs from the FDA’s Attorney-General-delegated oversight pursuant to the CSA.” “So DEA’s continued enforcement of the CSA’s registration requirement does not affect, modify, repeal, or supersede the FDCA as amended by the RTT Act.”
The Ninth Circuit did not reject the DEA’s reliance on Congress’ determination, as codified in the CSA, that psilocybin has a high potential for abuse, no currently accepted medicinal use in treatment in the United States, and a lack of accepted safety for use under medical supervision.
So, What Does an Opinion Brushing Back One Physician on the West Coast Mean to the Psychedelics Industry More Broadly?
Proponents and physicians who are looking for easier access to psilocybin outside of the research context will see this as a significant step back. The DEA dealt a significant setback to the ability to rely on the RTT Act or to seek a waiver of registration. The Ninth Circuit didn’t really pull back the reigns. The DEA’s position that, even if a physician is able to obtain approval under the RTT, he or she still must obtain registration or a waiver under the CSA has now been approved (or at least not disapproved). And that position was pretty clear: The DEA is still in charge.
So, what does the opinion not mean? This opinion does not foreclose the efforts of physicians interested in conducting research blessed by the CSA and FDA. As we’ve previously reported, interest in researching psychedelics remains high and it appears capital does, too. Indeed, there are strong pushes for research in the federal, state, and private sectors with corresponding funding. There is no indication — and we have no expectation — that it will slow down any time soon, and the Ninth Circuit’s decision does nothing to change our thoughts on that point. Indeed, it appears to be, at least according to the DEA as approved by the Ninth Circuit, the clearest path forward.
EU Advocate General Recommends Overturning Decision Annulling Harmonized Classification and Labeling of Titanium Dioxide
On February 6, 2025, the European Union (EU) Advocate General (EU AG) recommended that the European Court of Justice (ECJ) overturn the 2022 decision of the General Court annulling the 2019 harmonized classification and labeling of titanium dioxide as a carcinogenic substance by inhalation in certain powder forms. As reported in our December 6, 2022, memorandum, the court annulled the European Commission’s (EC) decision to classify titanium dioxide as a suspected human carcinogen. The French government and the EC appealed the decision, arguing that the court exceeded the limits of permissible judicial review of an EC decision and that the court incorrectly interpreted the concept of “intrinsic properties” as it appears in the Classification, Labeling, and Packaging (CLP) Regulation.
According to the EU AG, “[i]n cases of scientific uncertainty relevant for the identification and classification of hazardous substances, the CLP Regulation bestows the role of final interpreter on the Commission, which in turn renders its decision on the basis of an assessment by the [Risk Assessment Committee (RAC)]. In other words, the Commission chooses the ‘correct’ interpretation of scientific data.” In the judgment under appeal, the court did not agree with the conclusion of the European Chemicals Agency’s (ECHA) RAC. The court “explained that taking into consideration the standard particle density value of titanium dioxide for the purposes of the Morrow overload calculation would be wrong; a lower density value should have been used in the circumstances at issue.” The EU AG concludes that “by going further than simply judging whether the administration was aware of and had assessed all of the aspects that current scientific knowledge required it to take into consideration,” the court exceeded the limit of its power of judicial review and annulled the EC’s decision “not because that institution did not take into account all of the relevant (scientific) factors, but because it disagreed with how the administration had assessed those factors.”
The lower court excluded the possibility that the carcinogenicity arising from the inhalation of titanium dioxide in powder form may be connected to its intrinsic properties because (1) carcinogenicity appears only if a certain quantity of that substance is inhaled and (2) carcinogenicity results only from inflammation in the lung due to the accumulation of titanium dioxide particles therein. The court concluded that these are properties that are extrinsic to the substance itself. The EU AG disagrees, stating that “in the light of the context and purpose of the CLP Regulation, the concept of ‘intrinsic properties’ must be interpreted broadly” and that the court “erred when attributing a narrow interpretation to the concept of ‘intrinsic properties.’”
The EU AG proposes that the ECJ:
Set aside the November 2022 judgment in CWS Powder Coatings and Others v Commission (T‑279/20, T‑283/20 and T‑288/20, EU:T:2022:725);
Refer the case back to the General Court for the resolution of the remaining pleas in law; and
Order that the costs be reserved.
EU AGs assist the ECJ. They are responsible for presenting, with complete impartiality and independence, opinions in assigned cases. Their opinions are non-binding. The ECJ is expected to issue its decision later this year.
Time Was Not on Her Side: 5th Circuit Rules Unpaid Mentor’s Claim of Discrimination Is Untimely
In Title VII actions, plaintiffs have a limited amount of time to file a charge of discrimination (or a court can dismiss the case as untimely). In the case of Wells v. Texas Tech University, the timeliness dynamic was further complicated by a question of whether unpaid participation in a program can make you an employee. The Fifth Circuit took a hard look at both and determined that the plaintiff’s claim was too late.
(Paid) Life in the Lab and Unpaid Mentoring
Cara Wells was a research assistant back in 2009 in the Animal and Food Sciences Lab at Texas Tech University. In that position, Wells claimed that two professors bullied and harassed her, including forcing her to share a hotel room with a male professor during certain conferences. After she graduated and started her PhD program, she continued to work in that lab. She graduated from her doctoral program in 2017 but stayed at the lab as an assistant. She then went on to participate in Texas Tech’s Accelerator Hub program and founded two companies, using one of her former professors as a mentor. There were some professional issues between Wells and the professor, and in 2020, Wells ultimately reported to the Texas Tech the harassment she claimed she suffered during her student days.
In May 2022 (about two years after her harassment report), Wells joined Texas Tech’s Hub program as an unpaid mentor. Texas Tech removed her from that program about a month later, removed her from the website, and took her off any publications. In November 2022, Wells filed an EEOC charge alleging sex discrimination, sex harassment, and retaliation. She claimed the harassment started in 2012 when she was an undergrad research assistant and continued through 2022 when she was removed as a Hub mentor. She later filed suit against Texas Tech for the same claims.
Employee Status and Timeliness
Texas Tech moved to dismiss Wells’ claims as untimely. Title VII requires that a charging party file an EEOC charge within 180 days of the unlawful employment action. The lower court determined that Wells’ last employment with Texas Tech was in 2017 (while she was a doctoral student), so her November 2022 charge was far outside the required time period. Wells argued that her participation in the unpaid Hub mentor program in 2022 gave her employee status.
The Fifth Circuit used the “direct-renumeration” test to determine whether Wells was an employee for the purpose of Title VII. The test requires that an individual receive either wages or job-related benefits to be considered in an employment relationship. As an unpaid mentor, the court decided that Wells received neither and therefore was not an employee after 2017. The court found that her claims were untimely.
Wells also argued that even if her employment with Texas Tech ended in 2017, she reported the harassment in 2020 and was retaliated against in May 2022 — so her November 2022 charge of discrimination was timely. The court did not agree and stated that while former employees had the ability to file retaliation claims, the system was not set up “to permit a perpetual cause of action for any unfavorable action taken in the future.” Courts should look to see if the time passing between the protected activity and the adverse employment action is too “attenuated” to support a claim for retaliation. In this case, the court held that the two years between her reporting the harassment and her subsequent removal from the mentor program was too long to establish a causal connection.
What Can We Learn from This?
As with most employment issues, documentation is key. When trying to establish a timeline of when things occurred, having memos in the file and completed forms with dates makes a big difference. An employer who can definitely show when a complaint was filed may be able to use it to further a timeliness defense.
The court’s discussion of the plaintiff’s unpaid mentoring status also shows why written job descriptions and payment/benefits statements are helpful. Employers should consistently update the duties and pay (or non-pay) of positions within the company. It is also important to evaluate what sort of benefits are provided to unpaid interns and fellows so you don’t put yourself into an employment relationship without knowing it.
FTC Calls for Public Feedback on Tech Censorship
The Federal Trade Commission (FTC or Commission) is asking members of the public to weigh in on whether tech platforms restricted or blocked their access because of content they posted on those platforms. The FTC issued a Request for Information (RFI) on February 20, 2025, to “better understand how technology platforms deny or degrade (such as by “demonetizing” and “shadow banning”) users’ access to services based on the content of the users’ speech or their affiliations, including activities that take place outside the platform” and how such actions may violate federal law. FTC Chairman Andrew Ferguson commented in the press release accompanying the RFI that “tech firms should not be bullying their users …This inquiry will help the FTC better understand how these firms may have violated the law by silencing and intimidating Americans for speaking their minds.”
In issuing the RFI, the Commission is following a long-held FTC tradition of carrying out investigative groundwork on an issue before it issues a potential regulatory rule, and the RFI is simply an initial investigation. But the inquiry raises questions about the scope of First Amendment rights of platforms and the reach of the FTC Act.
The RFI has thus far received over 1,000 comments. Stakeholders interested in submitting feedback have until May 21, 2025.
New York Commercial Division Clarifies How Claims Will Be Valued
The New York Commercial Division, the specialized arm of the New York State Supreme Court composed of justices experienced in handling complex civil matters, recently amended its rules to clarify how actions seeking equitable or declaratory relief will be valued for purposes of meeting the Commercial Division’s monetary thresholds. See AO/038/25 (Jan. 28, 2025).
In order to qualify for assignment to the Commercial Division, the relief sought in an action must exceed a certain monetary value, which varies from county to county. In New York County, for example, actions must meet the monetary threshold of $500,000. NYCRR 202.70(a).
The rule change clarifies how actions seeking equitable or declaratory relief are valued. Going forward, whether such actions meet the Commercial Division’s monetary threshold will be measured by the “value of the object of the action,” defined as “the value of the suit’s intended benefit, the value of the right being protected, or the value of the injury being averted, whichever is greatest.” NYCRR 202.70(b). The court will assess the value based on the Commercial Division addendum filed with the Request for Judicial Intervention, as well as the allegations in the operative pleadings when the case is sought to be assigned to the Commercial Division.
The rule change provides litigants and Commercial Division justices with much-needed guidance for evaluating the monetary value of actions seeking equitable or declaratory relief and whether such actions qualify for assignment to the Commercial Division.
TRANSFERRED: Shelton Suit Against Freedom Forever Pulled from PA and Sent to California
Famous TCPA litigator James Shelton had home court advantaged yanked away from him yesterday when a court ordered his TCPA suit against Freedom Forever, LLC transferred to California.
In Shelton v. Freedom Forever, 2025 WL 693249 (E.D. Pa March 4, 2025) the Court ordered the case transferred where the bulk of the activity leading up to the calls at issue took place in California.
While Shelton claims to have received calls in PA, the calling parties and all applicable principles and policies were California based. Since the case was a class action–and not an individual suit–the court determined Shelton’s presence in one state was not important as an entire nation worth of individuals must be taken into account.
On balance it made more sense to have the case tried in California where the key defense witnesses were rather than in PA where only Shelton resided.
Pretty straightforward and good ruling. TCPA defendants should consider transfer motions where a superior jurisdiction may exist that aligns with the interests of justice.
Generally California is not where one wants to litigate a case but let’s assume Freedom Forever thought that through before filing their motion.
Supreme Court Update: Waetzig v. Halliburton Energy Services, Inc. (No. 23-971)
In Waetzig v. Halliburton Energy Services, Inc., (No. 23-971), the Supreme Court finally settled a question lawyers have been debating from time immemorial: Is a plaintiff’s voluntary dismissal of a complaint without prejudice under Federal Rule of Civil Procedure 41(a) a “final proceeding” for purposes of a Rule 60(b) motion to reopen the suit? A unanimous Court concluded that it was, eliminating a circuit split created by a Tenth Circuit decision that had ruled it was not.
The case began when Gary Waetzig was fired by Halliburton. He sued his former employer in federal court alleging age discrimination. Halliburton responded by asserting that Waetzig was required to arbitrate his claim. Waetzig acquiesced, submitting his claim for arbitration. But instead of asking the District Court to stay his suit pending the outcome of that arbitration, he voluntarily dismissed his complaint pursuant to Rule 41(a), which permits a plaintiff to dismiss a case “without a court order” if the plaintiff serves “a notice of dismissal before the opposing party serves either an answer or a motion for summary judgment.” Because Halliburton had not answered or moved for summary judgment, Waetzig’s dismissal was effective without any court action. And because this was Waetzig’s first such dismissal, it was (according to the Rule’s terms) presumptively without prejudice.
Unfortunately for Waetzig, he lost the arbitration. He then filed a motion in the docket for the dismissed case, asking the District Court to reopen the case and vacate the arbitration award. He argued the District Court had the authority to reopen the case under Rule 60(b), which allows a court “[o]n motion and just terms,” to “relieve a party . . . from a final judgment, order, or proceeding.” The District Court agreed with Waetzig and awarded Rule 60(b) relief, holding that a voluntary dismissal without prejudice counts as a “final proceeding” within the meaning of Rule 60(b), and that Waetzig’s voluntary dismissal was a “careless mistake” of the sort Rule 60(b)(1) allows relief from. Then, in a second order, the District Court found that the arbitration award was improper and set it aside. Halliburton appealed, arguing the District Court lacked authority to reopen the case in the first place because a voluntary dismissal without prejudice does not count as a “final judgment, order, or proceeding,” and therefore falls outside the reach of Rule 60(b). The Tenth Circuit agreed with Halliburton: It held that a voluntary dismissal without prejudice could not be a “final proceeding” because “a final proceeding must involve, at a minimum, a judicial determination with finality.” In reaching that result, the Tenth Circuit disagreed with the Fifth and Seventh Circuits, which both had held that a voluntary dismissal without prejudice was a “final proceeding” within the meaning of Rule 60(b).
A unanimous Supreme Court sided with the Fifth and Seventh Circuits over the Tenth. Writing for the Court, Justice Alito first concluded that a voluntary dismissal under Rule 41(a) was “final.” According to sources like the Advisory Committee’s Notes on the rule, the word “final” means only that interlocutory judgments are not subject to Rule 60. Whether it’s with or without prejudice, a voluntary dismissal “terminates the case,“ making it “final.” Alito then addressed whether such a dismissal was also a “proceeding.” Turning to dictionaries, he concluded that “proceeding” included “all formal steps taken in an action.” He thus rejected Halliburton’s argument that a “proceeding” required judicial intervention, noting that such a restrictive definition would deprive “proceeding” of independent meaning since the Rule also covers “orders,” which by definition require judicial action. Having concluded that a voluntary dismissal was both “final” and a “proceeding,” Alito put one and one together and held that it was a “final proceeding” within the meaning of Rule 60(b). The District Court thus had the authority to reopen Waetzig’s case.
Waetzig’s legal claim lives to fight another day, but maybe not that many more. For while Halliburton put up a valiant defense of the Tenth Circuit’s Rule 60(b) decision at the Supreme Court, its heart wasn’t really in it. Instead, Halliburton devoted many of the pages of its Supreme Court brief (and a good chunk of its oral argument) to the point that it doesn’t matter whether the District Court had the authority to reopen Waetzig’s dismissed case under Rule 60(b) because it didn’t have jurisdiction to set aside the arbitration award issued in Halliburton’s favor. But the Court gave that argument short shrift: It granted cert only on the question of whether the District Court had the authority under Rule 60(b) to reopen the case. And whether it did or didn’t wasn’t affected by whether it had the authority to then go on and grant Waetzig the relief he sought (namely vacating the arbitration award). The Court thus left “any subsequent jurisdictional questions” to the lower courts on remand. And if we had to guess, we suspect the Tenth Circuit will once again rule for Halliburton, only this time on the perhaps sounder basis that even if the District Court could reopen the case, it couldn’t free Waetzig from the arbitration award.
Supreme Court Expands Rule 60(b) Relief: Implications for Voluntary Dismissals and Arbitration Challenges
In Waetzig v. Halliburton Energy Services, Inc., the U.S. Supreme Court expanded the scope of Federal Rule of Civil Procedure 60(b), holding that a voluntary dismissal without prejudice under Rule 41(a) constitutes a “final proceeding” eligible for post-dismissal relief. This decision may open the door for plaintiffs to attempt to reinstate voluntarily dismissed claims, raising concerns about litigation finality and increasing risks for corporate defendants.
Case Overview
Gary Waetzig, a former Halliburton employee, sued the company for age discrimination in federal court before voluntarily dismissing his case without prejudice to pursue arbitration. After losing in arbitration, Waetzig sought to reopen his dismissed federal lawsuit and vacate the arbitration award under Rule 60(b), arguing his dismissal was filed in error. The district court granted Waetzig Rule 60(b) relief and vacated the arbitration award, but the Tenth Circuit reversed, holding that a voluntary dismissal without prejudice does not satisfy Rule 60(b)’s definition of a “final judgment, order, or proceeding.” On appeal, the Supreme Court reversed the Tenth Circuit, finding that Waetzig’s voluntary dismissal indeed qualified as a “final proceeding” eligible for Rule 60(b) relief. However, the Supreme Court declined to address whether the district court had jurisdiction over Waetzig’s motion to vacate the arbitration award or whether the district court’s decision vacating the arbitration award was otherwise proper.
Key Takeaways from the Supreme Court’s Decision
1. Voluntary Dismissals as “Final Proceedings” – The court determined that a voluntary dismissal without prejudice pursuant to Rule 41(a) is a “final proceeding” under Rule 60(b) because it removes the case from the docket and terminates active litigation. 2. General Rule for Voluntary Dismissals and Statute – When a plaintiff voluntarily dismisses a case without prejudice under Rule 41(a), the general rule is that the statute of limitations continues to run as if the case had never been filed. If the plaintiff refiles after the limitations period has expired, the claim is typically barred unless a state or federal savings statute applies. Waetzig does not alter this rule; it does not grant an automatic tolling effect to voluntary dismissals. 3. Implications for Statute of Limitations – If a court grants Rule 60(b) relief from a voluntary dismissal, the original case is reinstated rather than refiled as a new lawsuit. This could allow plaintiffs to bypass the statute of limitations issue because the original filing date remains intact. The court in Waetzig does not explicitly address this issue, but the risk arises because Rule 60(b) relief is often granted without regard to whether the statute of limitations has since expired. Defendants may now face arguments from plaintiffs that reopening a dismissed case under Rule 60(b) is permissible even if the statute of limitations would otherwise have barred refiling as a new lawsuit. 4. State “Savings Statutes” – Many states have “savings statutes” that allow a plaintiff to refile a voluntarily dismissed lawsuit within a specified period (e.g., six months or one year), even if the statute of limitations otherwise has expired. Under Waetzig, the availability of Rule 60(b) relief after a voluntary dismissal could allow plaintiffs to argue that they should not be constrained by savings statutes because they are reopening the original case rather than refiling it. Courts may need to address whether Rule 60(b) relief can extend beyond the time limits imposed by savings statutes, further complicating the statute of limitations analysis. 5. Arbitration Finality at Risk – Plaintiffs who dismiss cases without prejudice pre-arbitration may now attempt to vacate arbitration awards by moving to reopen those originally dismissed lawsuits, creating an additional avenue for challenging arbitration results. 6. Broader Interpretation of “Finality” – The Supreme Court rejected Halliburton’s argument that “final” under Rule 60(b) should align with appellate jurisdiction principles requiring a decision on the merits, broadening the interpretation of Rule 60(b).
Strategic Implications and Risk-Mitigation Considerations for Corporate Defendants
1.
Strengthen Language in Arbitration Agreements – Waetzig introduces a potential mechanism to challenge arbitration outcomes, requiring companies to reassess arbitration agreements and ensure dismissals are carefully structured. Defense counsel should consider insisting on stronger arbitration clauses, such as explicit waiver provisions in voluntary dismissals, to potentially limit post-dismissal challenges and reinforce that arbitration is binding and cannot be undone via procedural maneuvers. Consider updating arbitration agreements to include language such as, “Any dismissal of litigation arising from this Agreement, whether voluntary or involuntary, shall be deemed final and irrevocable, and Plaintiff waives any right to seek relief under Federal Rule of Civil Procedure 60(b) or any similar rule.”
2.
Monitor Previously Dismissed Claims – While Rule 60(b) motions generally must be filed within a “reasonable time,” motions under Rule 60(b)(1), (b)(2), and (b)(3)—based on mistake, newly discovered evidence, or fraud—must be filed within one year. Additionally, counsel may wish to argue that any attempt to reopen a dismissed case after the statute of limitations has expired is inherently unreasonable, as it causes prejudice and undue delay.
3.
Document Plaintiff Representations Regarding Dismissal – Consider documenting evidence that a plaintiff dismissed their case knowingly and voluntarily to reduce the chance of a successful Rule 60(b) motion. If a plaintiff voluntarily dismisses a case, defense counsel may request plaintiff confirm in writing that they understand the dismissal is final and that they are choosing to forgo litigation, rather than seeking a stay or alternative resolution. Additionally, in jurisdictions with savings statutes that permit refiling within a limited period (e.g., six months or one year), defendants may wish to ensure that any written acknowledgment from plaintiff explicitly states that they are aware of and voluntarily assuming the risk of any applicable statute of limitations consequences.
4.
Include Protections in Stipulation of Dismissal – To reduce the risk of plaintiffs attempting to reopen a case under Rule 60(b), counsel should consider including language in the Stipulation of Dismissal that plaintiff waives the right to reopen the case or otherwise seek relief under Federal Rule of Civil Procedure 60(b).
The Supreme Court’s decision in Waetzig expands the scope of Rule 60(b) relief, creating new risks for defendants by enabling plaintiffs to revive voluntarily dismissed claims, even in scenarios where statute-of-limitations concerns might otherwise arise. While the decision creates uncertainty, defendants can address potential exposure through updated litigation strategies, stronger arbitration agreements, and carefully structured dismissals designed to protect against future challenges.
The Privity Defense in Illinois Today
“There is no privity of contract between these parties, and if the plaintiff can sue, every passenger, or even any person passing along the road, who was injured by the upsetting coach, might bring a similar action. Unless we confine the operation of such contracts as this to the parties who entered into them, the most absurd and outrageous consequences, to which I can see no limit, would ensue. Lord Abinger, Winterbottom v. Wright, 152 ER 402, Meeson & Welsby 109; pages 109 – 116 (1842); see also, Tweddle v. Atkinson, EWCH J57 (QB) (1861).
“Privity is an elusive concept.” Manley v. Hain Celestial Grp., Inc., 417 F. Supp. 3d 1114, 1122 (N.D. Ill. 2019).
Those of us “of a certain age” might remember studying the above-mentioned old English case, probably in your contracts class. It may also be the first time that you were exposed to the term “privity,” not a word used in everyday parlance. Privity is, basically, a central aspect of the commercial relationship between buyer and seller. Simply stated, it is “that connection. . . which exists between two or more contracting parties.”1 Both under the Uniform Commercial Code, and at common law, privity has been, and remains, an essential element in many of an aggrieved buyer’s claims against a seller for non-performance of the goods bought and sold.2
Practitioners of tort law might also recall that in 1965 the Illinois Supreme Court abolished the defense of privity of contract in tort actions involving personal injury, as part of the still-developing body of product liability law in Illinois. Suvada v. White Motor Co.,3 making “explicit that which was implicit” in such earlier cases as Lindroth v. Walgreen Co.4 and Gray v. American Radiator and Standard Sanitary Corp.5
The next major milestone in the evolution of Illinois product liability law may be said to have come in the case of Moorman Mfg. Co. v. National Tank Co.6, in which the Illinois Supreme Court held that economic loss – defined as “damages for inadequate value, cost of repair and replacement of the defective product, or consequent loss of profits . . . without any claim of personal injury or damage to other property . . .”7 – was not recoverable under tort theories. The court thereby resolved the Santor/Seeley debate for Illinois8, and answered a question left unresolved by Suvada, i.e. “whether a consumer could recover under a strict liability in tort theory for solely economic loss.”9
Having been relegated to a contract theory for disappointed commercial expectations, the aggrieved consumer faces another hurdle on the road to recovery – privity – a concept whose very existence was challenged before the Illinois Supreme Court in the case of Szajna v. General Motors Corp.10
The Szajna and Rothe Cases.
Mr. Szajna purchased a 1976 Pontiac Ventura but subsequently discovered that the car contained a Chevette transmission, which was allegedly inferior to the Pontiac transmission Szajna thought he had purchased. He brought a class action lawsuit against General Motors on his own behalf and on behalf of all others who had purchased a 1976 Pontiac Ventura. The class action alleged breach of both express and implied warranties along with other counts. Damages were based solely on economic loss, with plaintiff claiming that the Chevette transmissions required more repairs, had shorter service lives and lessened the value of the cars in question. Also, additional damages were claimed for the cost of replacing the transmission.
Among its other rulings, the trial court dismissed the plaintiff’s implied warranty of merchantability claim, and the Appellate Court affirmed,11 finding no privity between Szajna and General Motors which, the court held, was fatal to the plaintiff’s UCC-based implied warranty claim.
At the Illinois Supreme Court, Szajna urged the court “to abolish the privity requirement in suits for breach of implied warranty when a plaintiff seeks to recover for economic loss.”12
The court reviewed the various commentators and case law regarding recovery for purely economic loss, which the court recognized “most certainly is not uniform in all jurisdictions.”13
Citing its decision in Moorman four years earlier, the court said, “we held that recovery for economic loss must be had within the framework of contract law.”14
Noting that the distinction between the two standards of recovery (tort and contract) is not arbitrary but rests upon an understanding of the nature of the responsibility a manufacturer must undertake in distributing his product, the court said the consumer should not be charged with bearing the risk of physical injury when he buys a product on the market, but he can, however, fairly be charged with the risk of disappointed commercial expectations in the quality or performance of a product.15
The court expressed its belief that “it is preferable to relegate the consumer to the comprehensive scheme of remedies fashioned by the UCC, rather than requiring the consuming public to pay more for their products so that the manufacturer can insure against the possibility that some of his products will not meet the business need of some of his customers.”16
The same rationale, the court concluded, supports the prohibition of recovery for economic loss by non-privity plaintiffs. The court therefore declined to abolish the privity requirement in implied warranty economic loss cases, and affirmed the judgment in favor of the defendant on the plaintiff’s UCC warranty claim.17
As to plaintiff’s implied warranty claim based upon the Magnuson – Moss Act,18 however, the Supreme Court resurrected this claim, reversing the dismissal of this count and remanding it to the trial court.19
The privity rules in Szajna were endorsed two years later in Rothe v. Maloney Cadillac, Inc.,20 when the Illinois Supreme Court again ruled that “with respect to purely economic loss, the UCC article ll implied warranties give a buyer of goods a potential cause of action only against his immediate seller”, and not against a remote manufacturer.21
As in Szajna, however, the plaintiff’s implied warranty claim based upon the Magnuson – Moss Act was allowed to stand, despite the absence of privity between the plaintiff and the remote manufacturer, ruling that the effect of the Act imposes against the remote manufacturer the same warranty obligations as would be imposed against the immediate seller.22
Post-Szajna/Rothe Rulings.
The last time the Illinois Supreme Court weighed in on the issue of implied warranties arising under the UCC and the Magnuson-Moss Act was in the case of Mydlach v. DaimlerChrysler Corp.,23 a 2007 decision that dealt primarily with questions of which statute of limitations applied to plaintiffs’ claims, when was it triggered, and whether the remedy of revocation was available against the remote manufacturer of the motor home plaintiffs had purchased from an independent RV dealer.
Refusing to extend the remedy recognized by the court in the Szajna decision to the facts of the case, the court said that the limited implied warranty created by the Magnuson-Moss Act does not provide a basis for relief against a remote manufacturer by a purchaser of a used motor vehicle.
The most recent appellate-level case to discuss the issue of privity in the context of an implied warranty of merchantability under the UCC is Zaffiri v. Pontiac RV, Inc.,24 a 2012 decision from the Fourth District Appellate Court of Illinois.
In Zaffiri, the plaintiffs purchased a motor home from the defendant that experienced problems with the exterior and interior walls. After multiple attempts to obtain repairs the plaintiffs sued multiple defendants under a number of theories, one of which was a UCC-based claim for breach of the implied warranty of merchantability. As to one of the defendants with whom the plaintiffs had not directly dealt, the court recognized their privity defense, stating that under the UCC, “a plaintiff must be in vertical privity of contract with the seller in order to file a claim for economic damages for breach of implied warranty of merchantability . . . Thus, pursuant to the UCC, a buyer of good seeking purely economic damages for a breach of implied warranty has ‘a potential cause of action only against his immediate seller.’”25
Plaintiffs invited the court to abandon the concept of privity, arguing that “most states hold that the existence of privity in order to enforce an implied warranty is not necessary”,26 but the court declined, holding that “[a]lthough the vertical privity requirement has been challenged on a number of occasions, our supreme court has consistently declined to abolish the doctrine in cases where, as here, purely economic damages are sought.”27
As will be seen in the following section, the vast majority of federal courts, including the Seventh Circuit, have disagreed with the Illinois Supreme Court and have rejected its rulings in Szajna and Rothe concerning the viability of implied warranty claims brought under the Magnuson- Moss Act.
The Privity Rule in the Illinois Federal Courts.
As can be seen from the number of cases cited below, the federal courts sitting in Illinois, particularly the Northern District, have been very active on the topic of privity, perhaps because of the federal nature of Magnuson-Moss claims. Ironically, however, those claims have fared much better in the Illinois state courts than in their federal counterparts.
The United States District Court for the Northern District of Illinois has taken a very different approach from the Illinois Supreme Court regarding the viability of a claim for breach of an implied warranty arising under the Magnuson – Moss Act while agreeing with the state court as to the dismissal of UCC – based implied warranty claims.
In Larry J. Soldinger Assocs. V. Aston Martin Lagonda of N. Am., Inc. (“Soldinger”)28 the plaintiff purchased a very expensive automobile which was beset with a myriad of mechanical problems. Plaintiff sued the American distributor of the British manufacturer, with whom he was not in privity. Plaintiff’s suit included implied warranty claims under both the UCC and the Magnuson-Moss Act. The court readily disposed of the UCC-based implied warranty claim, citing Szajna and Rothe, supra.29
In support of his Magnuson-Moss implied warranty action, the plaintiff cited the same two above-referenced cases, which he claimed constituted controlling law, and which he argued eliminated the need for privity in a Magnuson-Moss implied warranty claim.
The defendant relied upon a Second Circuit case30 as well as an earlier Northern District of Illinois ruling,31 both of which held that implied warranty claims asserted under the Magnuson-Moss Act are subject to state-law privity rules and that only purchasers from states not requiring privity could maintain an implied warranty action, because the Act did not create a federal cause of action for breach of implied warranty without privity.32
Noting that “[t]he Seventh Circuit had not yet addressed the question of whether privity of contract is a prerequisite to a Magnuson-Moss breach of implied warranty claim brought in Illinois”,33 the court declined to follow Szajna and Rothe and instead found “the Abraham line of authority [from the Second Circuit, requiring privity in Magnuson-Moss implied warranty claims] more persuasive.”34
While recognizing that it was “not bound by a Second Circuit decision, Abraham holds greater sway than Szajna, since the Seventh Circuit asks that district court[s] give ‘substantial weight’ to the ‘direct authority of a sister circuit.’”35
The court examined the legislative history of the Magnuson-Moss Act and, like the observations in Walsh36 and Skelton,37 concluded that “Magnuson-Moss does not create a federal cause of action for breach of implied warranty sans privity.”38
The Voelker decision.
The Seventh Circuit itself weighed in on the matter of privity in the context of implied warranty claims under the Magnuson-Moss Act four years later in the case of Voelker v. Porsche Cars N. Am., Inc.39 In Voelker, the plaintiff leased a car from a Porsche dealer. As part of plaintiff’s lease, he was provided with a “New Car Limited Warranty” which obligated Porsche to “repair or replace any factory-installed part that was defective in material or workmanship under normal use.”40
The plaintiff was involved in an accident with an SUV shortly thereafter which did extensive damage to the car, necessitating major repairs and replacement of parts. The car was in the shop for several months while awaiting parts from Porsche which were in short supply. The plaintiff stopped making lease payments on the car, and the Porsche-affiliated finance company demanded the surrender of the car for overdue payments, in response to which the plaintiff filed suit against Porsche under a number of theories, including breach of implied warranty under the Magnuson-Moss Act.
The court noted that the Act allows for breach of “‘an implied warranty arising under State law (as modified by sections 2308 and 2304(a) of this title)’”41
“Because secs. 2308 and 2304(a) do not modify or discuss in any way [the court continued], a state’s ability to establish a privity requirement, whether privity is a prerequisite to a claim for breach of implied warranty under the Magnuson-Moss Act therefore hinges entirely on the applicable state law. “42
Since, under the law of Illinois, privity of contract is a prerequisite to recover economic damages for breach of implied warranty,43 the plaintiff’s claim against Porsche was properly dismissed.44
The Federal/State Court Split, Examined.
Perhaps the most comprehensive description of the complexities of the conflict between the Illinois state courts and their federal counterparts, both in Illinois and nationally, can be found in a 2004 decision from the First District Appellate Court of Illinois in the case of Mekertichian v. Mercedes-Benz U.S.A., L.L.C.45
In Mekertichian, the plaintiff purchased a new Mercedes-Benz automobile from a dealership in Illinois. The car came with a 48-month or 50,000-mile limited written warranty issued by the defendant-manufacturer. Shortly after the purchase, the plaintiff began experiencing problems with the car and returned it to the dealership on several occasions for repairs. Ultimately the dealership said it was unable to repair the vehicle, and the plaintiff thereafter filed suit against the defendant-manufacturer claiming breach of written and implied warranties under the Magnuson-Moss Act.
As to the plaintiff’s claim for breach of the implied warranty of merchantability, the defendant argued that since the plaintiff did not purchase the vehicle directly from the manufacturer, no vertical privity existed and therefore the breach of implied warranty claim could not be sustained. The defendant-manufacturer moved for partial summary judgment on this basis on the implied warranty claim but because of the rulings in the Szajna and Rothe cases (holding that Magnuson-Moss expanded Illinois state law to excuse the absence of vertical privity to allow a direct action by a consumer against a remote manufacturer), the trial court denied the motion, but certified for immediate appeal the question of whether privity was required to maintain such a suit. The appellate court denied the defendant’s application for leave to appeal, but the Illinois Supreme Court issued a supervisory order directing the interlocutory appeal to proceed.46
The appellate court began its analysis of the certified question by reviewing the language and effect of the Magnuson-Moss Act which provides that actions predicated upon a breach of an implied warranty brought under the Act are governed by state law. Under common law, as well as under the Uniform Commercial Code, actions for breach of the implied warranty of merchantability seeking economic damages require privity between buyer and seller.47 The Illinois Supreme Court had ruled, however, in 1986, and again in 1988, that the Magnuson-Moss Act served to modify state law with regard to the privity requirement, eliminating it in order to “furnish broad protection to a consumer”48. . . “where a manufacturer has expressly warranted a product to a consumer.”49
In such instances “vertical privity will be deemed to exist with respect to the consumer,”50 allowing direct actions by the consumer against a remote manufacturer in Illinois state courts.
This finding, eliminating the requirement of vertical privity in implied warranty cases brought under the Magnuson-Moss Act, has been rejected by every federal appellate circuit to have ruled on the issue, as well as by the overwhelming majority of federal district courts,51 which have taken the position that the Magnuson-Moss Act, by itself, has not relaxed the privity requirement, and that the need for privity must be determined by state law. Since “Illinois requires contractual privity as a prerequisite for breach of implied warranty claims under internal law”, the federal courts hold, “there must also be vertical privity in breach of implied warranty claims brought pursuant to Magnuson-Moss in Illinois.”52
In taking the position, it staked out in the Szajna and Rothe decisions, the Illinois Supreme Court, according to Mekertician, was “not purporting to construe state law, which still requires privity, but purports to construe federal law,”53 and while the Illinois supreme court has said in the past that “federal decisions are considered controlling on Illinois state courts interpreting a federal statute,”54 six months later the Illinois supreme court held that it need not follow Seventh Circuit precedent interpreting a federal statute where there is a split in the federal circuits on the issue, where the Supreme Court of the United States has not yet ruled, and where it believed that the Seventh Circuit had wrongfully decided on the issue.55
Hence, federal court decisions, including those of the Seventh Circuit, are considered persuasive, but not binding, on Illinois state courts in the absence of a decision by the Supreme Court of the United States.56
Until then, Illinois courts remain bound by the Szajna and Rothe cases in deeming privity to be present between a consumer and a remote manufacturer in implied warranty cases brought under the Magnuson-Moss Act.57
District Court Cases After Voelker.
Post-Voelker decisions from the Northern District of Illinois remain consistent with the ruling of that Seventh Circuit holding, rejecting the Magnuson-Moss exception to the privity rule that the Supreme Court of Illinois announced in the Szajna and Rothe cases.
A very instructive case that discussed in detail the history and rationale of the Illinois/federal distinction is Watson v. Coachman Rec. Vehicle Co.58 Plaintiff purchased a motor home from an RV dealership, which was not a party to the case. The defendant-manufacturer provided a written warranty covering all “parts, components and features” of the motor home while limiting its liability under the warranty to repair or replacement of defects in materials or workmanship.59
Shortly after taking possession of the motor home, the plaintiff began to experience various problems with the motor home and after giving the dealer sufficient opportunity to repair the defects, sued the manufacturer for, inter alia, breach of the implied warranties of merchantability and fitness for a particular purpose. The manufacturer asserted the defense of lack of privity, in response to which plaintiff attempted to use the manufacturer’s written warranty as an exception to the no-privity defense, citing Szajna and Rothe, to which the district court responded: “[a]s The Court has already determined not to follow the Illinois Supreme Court’s holding[s] in Szajna and Rothe, it finds the Plaintiff’s instant argument unavailing. . .”60
Before announcing its decision, as mentioned, the district court provided a comprehensive contrast between “The Illinois View” and “The Federal View” regarding the privity defense, and whether the existence of a written warranty from a manufacturer provides an exception to the privity rule,61 finding it did not, and ruling in favor of the defendant-manufacturer.
Another significant post-Voelker case is Rodriguez v. Ford Motor Co.62 This case involved an alleged defect in the trunk lid wiring harness of the plaintiff’s car which caused intermittent failure of the backup camera, which was said to be a common problem among Ford Mustang vehicles manufactured between 2015 and 2017. Plaintiff sued the defendant-manufacturer with whom he had no direct dealings, having purchased the car from an authorized Ford dealership. In response to the manufacturer’s defense of lack of privity, plaintiff attempted to invoke one of the court-created exceptions to the privity requirement known as the “direct dealing exception”, which is the subject of the following section. As more fully discussed, infra, this exception only applies when there are direct dealings between the customer and the remote manufacturer and has been applied quite restrictively by the courts.
The Direct Dealing Exception to the Privity Requirement.
In discussing the history and evolution of the direct dealing exception to the privity requirement, one court said: “Much as all roads led to Rome, the cases that mention a ‘direct-dealing’ exception to the privity requirement under Illinois law seem to trace back to one case, Rhodes Pharmacal Co. v. Continental Can Co.” (citation omitted).63
In Rhodes, the plaintiff was a marketer of various cosmetic and hair beauty products. It purchased from a distributor a certain type of “rustproof” aerosol cans manufactured by the defendant. When the plaintiff began receiving complaints from its customers that the aerosol cans were leaking, causing not only loss of the product but damage to the inventory of its customers, the plaintiff complained to the manufacturer of the cans who responded that the contents of the cans was incompatible with the “rustproof” linings of the cans, resulting in corrosion.64
When plaintiff sued the manufacturer for breach of implied warranty, the defendant asserted a lack-of-privity defense. Plaintiff argued that the absence of privity should not foreclose its implied warranty action since it alleged that its employees had direct dealings with the manufacturer of the cans, in that they had met with the manufacturer to discuss various design issues.65 The Appellate Court agreed, concluding that the plaintiff could sue the manufacturer on a third-party beneficiary theory, given that the plaintiff had worked directly with the defendant-manufacturer on product specifications for the cans.66
The holding in Rhodes eventually evolved into two distinct exceptions to the privity rule in implied warranty cases; the “direct dealing exception” which “applies when there are direct dealings between the manufacturer and the remote customer,”67 and the “third-party beneficiary exception” which allows warranty claims “to bypass the privity requirement if ‘the manufacturer knew the identity, purpose and requirements of the dealer’s customer and manufactured or delivered the goods specifically to meet those requirements.’”68
Having observed the number of cases “which evidence the increasing disregard for the privity requirement through the continued expansion of the class of permissible plaintiffs under [the] third-party beneficiary doctrine”, the Illinois Supreme Court, beginning with Rozny v. Marnul,69declined any further erosion of the privity requirement. Written advertisements cannot serve as the basis for a direct dealing relationship.70
Also, “Illinois courts have made clear that their direct-dealing exception does not extend to goods mass-produced and sold at retail to a third party who is not a beneficiary of the manufacturer-seller contract.”71
Given the fact that “the Illinois Supreme Court has hammered home the necessity of privity in claims for breach of implied warranty”72 at least one court has been led to believe that if the Illinois Supreme Court is squarely faced with the issue of the continued viability of the exceptions to vertical privity in implied warranty cases, “[t]his Court is not alone in doubting the Illinois Supreme Court would recognize any exceptions to the requirement of privity for implied warranty cases.”73
Conclusion.
“Since the mid-nineteenth century, courts have used privity of contract as a way of limiting relief based on warranties.”74
“Thus, remote sellers were relieved of liability for injuries to persons other than those for whom the goods were constructed or to whom they were sold.”75
The adoption of sec. 402A of the Restatement of Torts rendered the privity rule irrelevant in cases involving personal injury,76 but instances of purely economic loss remained the province of warranty law.77
At present, the federal/state court split appears to remain, with state court cases excusing the absence of privity in implied warranty cases brought pursuant to the Magnuson-Moss Act, with cases holding that (while absent), vertical privity will be “deemed” to be present, thus allowing direct actions by consumers against remote manufacturers. Federal courts, on the other hand, have strictly interpreted Illinois common law to require actual privity in all such cases.
Vertical privity has withstood its challenges in the Illinois state and federal courts and, in certain cases, remains a viable defense to remote sellers from whom purely economic losses are sought to be recovered. Therefore, at least for now, there remains a legitimate place for the notion of vertical privity in Illinois contract jurisprudence.
BLACK’S LAW DICTIONERY 1079 (5th ed. 1979).
Szajna v. General Motors Corp., 115 Ill. 2d 294, 311, 503 N.E. 2d 760, 767 (1986), see also, J. White & R. Summers, Uniform Commercial Code (2d ed. 1980).
32 Ill. 2d 612, 210 N.E. 2d 182 (1965).
407 Ill.121, 94 N.E. 2d 847 (1950).
22 Ill. 2d 432, 176 N.E. 2d 761 (1961).
91 Ill.2d 69, 435 N.E. 2d 443 (1982).
Note, Economic Loss in Product Liability Jurisprudence, 66 Colum. L. Rev. 917, 918 (1966).
Compare, Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965) (allowing a direct action in warranty by a purchaser against a manufacturer despite an absence of privity between the parties, and inferring, in dicta, that recovery in tort for a product’s diminished value was also possible) and Seely v. White Motor Co., 63 Cal. 2d 9, 45 Cal. Rptr. 17, 403 P.2d 145 (1965) (denying recovery in tort for economic losses).
Moorman, 91 Ill. 2d at 74.
115 Ill. 2d 294, 503 N.E. 2d 760 (1986).
Szajna v. General Motors, Corp., 130 Ill. App. 3d 173, 474 N.E.2d 397 (1st Dist. 1985).
Szajna, 115 Ill. 2d at 301, 503 N.E. 2d at 762.
Id., 115 Ill. 2d at 302, 503 N.E. 2d at 763.
Id., 115 Ill. 2d at 304, 503 N.E. 2d at 764.
Id., referencing Seeley v. White Motor Co., 63 Cal. 2d 9 at 18, 45 Cal. Rptr. 17 at 23, 403 P.2d 145 at 151 (1965), and Moorman, supra, 91 Ill. 2d at 81, 435 N.E. 2d at 448.
Szajna, 115 Ill. 2d at 310, 503 N.E.2d at 767, quoting Moorman, 91 Ill. 2d at 79-80, 435 N.E. 2d at 448.
Id., 115 Ill. 2d at 311, 503 N.E. 2d at 767.
Specifically, 15 U.S.C. Sec. 2310(d)(1).
Id., 115 Ill.2d at 317, 503 N.E. 2d at 769.
119 Ill. 2d 288, 518 N.E. 2d 1028 (1988).
119 Ill. 2d at 292, 518 N.E.2d at 1029.
119 Ill. 2d at 294, 518 N.E.2d at 1030.
226 Ill. 2d 307, 865 N.E. 2d 1047 (2007).
2021 IL App (4th) 120042-U, 2021 Ill. App. Unpub. LEXIS 2211, 2021 WL 7050429 (4th Dist. 2012).
Zaffiri, 2012 IL App (4th) 120042-U at P88, quoting Mekertichian, supra, 347 Ill. App. 3d at 1168.
Id., at P89.
Id., at P90.
1999 U.S. Dist. LEXIS 14765, 1999 WL 756174 (N.D. Ill. Sept. 13, 1999).
Soldinger, 1999 U.S. Dist. LEXIS 14765 at *18.
Abraham v. Volkswagen of Am., 795 F.2d 238 (2d Cir. 1986).
Skelton v. General Motors Corp, No. 79 C 1243,1985 U.S. Dist. LEXIS 18649, 1985 WL 1860 (N.D. Ill. June 21, 1985).
Abraham, 795 F.2d at 249; Skelton, 1985 U.S. Dist. LEXIS 18649 at *7,8.
Soldinger,1999 U.S. Dist. LEXIS at *21.
Id., at 22.
Id., at *29, quoting Richards v. Local134, Int’l Bhd. Of Electrical Workers, 790 F.2d 633, 636 (7th Cir. 1986).
Walsh v. Ford Motor Co., 807 F.2d 1000 at 1012 (D.C. Cir. 1986).
Skelton, supra, 1985 U.S. Dist. LEXIS 18649 at*7, 1985 WL 1860 at *3.
Id.
353 F.3d 516 (7th Cir. 2003).
353 F.3d at 520.
353 F.3d at 525, quoting 15 U.S.C. sec. 2301(7).
Walsh, supra, 807 F.2d at 1014; Abraham, supra, 795 F.2d at 249.
Rothe, supra, 119 Ill. 2d at 292, 518 N.E.2d at 1029-30.
See also, Soldinger, supra, 1999 U.S. Dist. LEXIS 14765 at **27-31, 1999 WL 756174 at **6-10.
347 Ill. App. 3d 828, 807 N.E. 2d 1165 (1st Dist. 2004).
Mekertician, 347 Ill. App. 3d at 830, 807 N.E. 2d at 1167.
See, Szajna, 115 Ill. App. 2d at 311, 503 N.E. 2d at 767; Rothe, 119 Ill. 2d at 292, 518 N.E. 2d at 1029-30.
Szajna, 115 Ill. 2d at 315-16, 503 N.E. 2d at 769: Rothe, 119 Ill. 2d at 294, 518 N.E. 2d at 1030
Mekertichian, 347 Ill. App. 3d at 832, 807 Ill. App. 2d at 1168.
Id.
Id., 347 Ill. App. 3d at 833, 807 N.E. 2d at 1168 (citing cases).
Id.
Id.
Wilson v. Norfolk & Western Ry. Co., 187 Ill. 2d 369 at 383, 718 N.E. 2d 172 at 179 (1999) (following a Seventh Circuit interpretation of the Federal Employers’ Liability Act, 45 U.S.C. sec. 51 et seq. (1994)).
Wieland v. Telectronics Pacing Systems, Inc., 188 Ill. 2d 415 at 423, 721 N.E. 2d 1149 at 1154 (1999).
See, Sprietsma v. Mercury Marine, 197 Ill. 2d !!2, 757 N.E. 2d 75 (2001), rev’d on other grounds, 537 U.S. 51, 123 S. Ct. 518, 154 L. Ed. 2d 466 (2002); see also, Bishop v. Burgard, 198 Ill. 2d 495 at 507, 764 N.E. 2d 24 at 33 (2002).
See, People v. Spahr, 56 Ill .App. 3d 434 at 438, 371 N.E.2d 1261 at 1264 (1st Dist. 1978) ( holding that Illinois supreme court decisions are biding on all Illinois courts, but decisions of federal courts, other than the Supreme Court of the United States, are not binding on Illinois courts).
No. 05-CV-524, 2006 U.S. Dist. LEXIS 15087, 2006 WL 8455882 (N.D. Ill. March 31, 2006).
Watson, 2006 U.S. Dist. LEXIS 15087 at *4.
Id., at *27.
Id., at *15 -26; see also, Mekertichian v. Mercedes-Benz U.S.A., L.L.C., supra.
596 F. Supp. 3d 1059 (N.D.) Ill. 2022.
Manley v. Hain Celestial Grp., Inc., 417 F. Supp. 3d 1114, 1123 (N.D. Ill. 2019).
Rhodes Pharmacal Co. v. Continental Can Co., 72 Ill. App. 2d 362, 366, 219 N.E.2d 726, 729 (1st Dist. 1966).
Rhodes, 72 Ill. App. 2d at 372, 219 N.E. 2d at 732.
Id.
See, e,g., Edward v. Electrolux Home Prods., Inc., 214 F. Supp. 3d 701, 705 (N.D. Ill. 2016).
F.E. Moran, Inc. v. Johnson Controls, Inc., 697 F. Supp. 3d 786, 797 (N.D. Ill. 2023), quoting Frank’s Maintenance & Eng’g , Inc., v. C.A. Roberts Co., 86 Ill. App. 3d 980, 408 N.E. 2d 403 (1st Dist. 1980); see also, Redmon v. Whirlpool Corp., No. 20 C 6626, 2021 U.S. Dist. LEXIS 81628, 2020 WL 9396529 (N.D. Ill. April 28, 2021) (collecting cases).
43 Ill. 2d 54, 250 N.E. 2d 656 (1969).
In re VTech Data Breach Litig., No.15 C 10889, 2018 U.S. Dist. LEXIS 65060 at *18, 2018 WL 1863953 at *5 (N.D. Ill. Apr. 18, 2018) ( “I am not persuaded that the Illinois Supreme Court would conclude that advertising alone creates a direct relationship between a manufacturer and a customer. . .” )
Harris v. Kashi Sales, LLC, 609 F. Supp.3d 633, 643 (N.D. Ill. 2022); see also, Harmon v. Lenovo (U.S.) Inc., No. 3:23-CV-1643, 2024 U.S. Dist. Lexis 74091, 2024 WL 1741264 (S.D. Ill. Apr. 23, 2024).
Manley, supra, 417 F. Supp. 3d at 1124.
Id., (citing Caterpillar, Inc. v. Usinor Industeel, 393 F. Supp. 2d 659, 678 (N.D. Ill. 2005) (emphasis added).
Arlie R. Nogay, Comment: Enforcing the Rights of Remote Sellers Under the UCC: Warranty Disclaimers, the Implied Warranty of Fitness for a Particular Purpose and the Notice Requirement in the Nonprivity Context, 47 U. Pitt. L. Rev. 873 (Spring, 1986), at p. 882, citing Winterbottom v. Wright, 152 Eng. Rep. 402 (Exch. 1842) (sustaining a demurrer to suit by injured coachman for breach of warranty against a third party who had contracted to maintain the coach), (see also, the reference to same at the beginning of this article).
Id.
See, Suvada, supra, n. 1.
See, Moorman, supra, n. 4.