The Appellate Strategist

Insights on appellate issues, trial consultations, and evaluating appeals

Illinois Supreme Court Affirms Revenue Decoupling for Natural Gas Rates

By Kirk Jenkins on February 2, 2015 Posted in Illinois

In the closing days of its January term, the Illinois Supreme Court unanimously affirmed the Appellate Court’s decision in People ex rel. Madigan v. Illinois Commerce Commission, approving the use of the so-called volume-balancing-adjustment rider (or “Rider VBA”) on a natural gas utility’s bills. Our detailed summary of the facts and Commission and court opinions in Madigan is here. Our report on the oral argument is here.

In order to understand the debate over the Rider VBA, it’s necessary to briefly review how ratemaking at the Commerce Commission works. The Commission starts by determining the utility’s revenue requirement. The idea is to set that requirement at a level sufficient to recover costs plus a return on investment sufficient to enable the utilities to attract capital in financial markets at competitive rates. A major component of the utility’s costs is the cost of distribution. To a considerable degree, distribution costs are fixed, but traditionally, rates have been quite dependent on volume. Volume forecasts are dependent to a considerable degree on weather forecasts, and weather forecasts are not an exact science – particularly when they’re semi-long range. So utilities tend to over-recover their distribution costs when demand is high, and under-recover when demand is low.

The Rider VBA is intended to decouple fixed costs from their dependence on volume, and thereby prevent both under-recovery and over-recovery. If revenues dip below a level set by the Commission, the utility issues a surcharge. If revenues are above the preset level, the company issues credits. As the Court pointed out, one reason that Rider VBAs have gotten a lot of attention from both companies and regulators is that by reducing the utility’s dependence on volume, it lessens any financial incentive to discourage – or at least, not actively encourage – energy efficiency.

The Commission approved the Rider VBA as a pilot program in 2008. The Attorney General appealed. While that appeal was still pending, the Commission approved the Rider VBA on a permanent basis in 2012. The Attorney General appealed again. The Appellate Court affirmed the Commission’s permanent approval, rejecting the Attorney General’s claims that it violated prohibitions against retroactive and single-issue ratemaking.

In an opinion by Justice Theis, the Supreme Court affirmed. The Court began with the most fundamental issue of all – the standard of review. The Attorney General had argued that whether or not Rider VBA was permissible under the Act was ultimately a matter of statutory construction, but the Court disagreed. The Court disagreed, pointing out that review of Commission decisions is deferential pursuant to the Act. This was especially true in the area of fixing rates, an area heavily dependent on the Commission’s experience and expertise in the field.

The Attorney General had argued that the Rider VBA violated what it called “rate-of-return principles” built into the Act. According to the State, utility ratemaking has never been meant to guarantee the utility a certain level of profit. Rather, it’s intended to give the utility a reasonable chance at that level of revenue, if the business is properly managed. The Court disagreed. The utility is entitled to the revenue requirement set by the Commission, the Court held. So the Rider VBA, by ensuring that the utility will actually recover that requirement, no more guarantees a profit that the setting of a revenue requirement does. The State wasn’t challenging the revenue requirement which had been set by the Commission, the Court pointed out; it was merely challenging the vehicle – the Rider VBA – chosen to achieve that requirement. And the Commission’s decision on that vehicle was entitled to substantial deference.

The Attorney General also challenged the Rider VBA as violating the long-settled prohibition against single-issue ratemaking. The single-issue rule is based on the recognition that ratemaking depends on many variables of cost and demand. To change rates based on a change in one variable ignores the possibility that changes in another variable might offset the change, with no net effect on the company’s revenue. The Court rejected the State’s argument for two reasons. First, the rule against single-issue ratemaking only applies in full-blown rate proceedings. Second, the rule doesn’t bar the Commission from approving riders when a utility faces unexpected shortfalls in income, or increases in expenses.

Finally, the Attorney General challenged the Rider VBA as retroactive ratemaking. The Appellate Court had considered the Attorney General’s challenge even though the Attorney General failed to raise the issue in their application for rehearing, but the Court said that was error. The Appellate Court’s jurisdiction over the Commission’s decisions extended only as far as the Act provided, the Court pointed out. Parties seeking to invoke that jurisdiction were required to strictly comply with the Act. Since the Attorney General hadn’t raised the issue below, the Court held that the Appellate Court had no authority to consider it.

Image courtesy of Flickr by Damian Gadal (no changes).

Illinois Supreme Court Affirms Constitutionality of Nursing Home Bed Tax

By Kirk Jenkins on February 2, 2015 Posted in Illinois

In the closing days of its January term, a unanimous Illinois Supreme Court upheld the constitutionality of a “bed tax” on Illinois nursing homes, reversing the Circuit Court’s judgment that the tax violates the state constitution’s Uniformity Clause. The statute, 305 ILCS 5/5E-10, imposes a “fee” of “$1.50 for each licensed nursing bed day for the calendar quarter.” The proceeds of the tax are deposited “into the Long-Term Care Provider Fund.” The case is Grand Chapter, Order of the Eastern Star of the State of Illinois v. Topinka. Our report on the oral argument is here.

The plaintiff in Grand Chapter is a fraternal organization and not-for-profit corporation which owns a nursing home in Macon, Illinois, licensed by the Illinois Department of Public Health. Admission into the home is limited to members of the plaintiff organization. Residents either pay a monthly fee, or surrender all their present and future assets to the plaintiff in return for lifetime care. Residents are also required to decline any government aid, including Medicaid, prior to entering the home.

The Uniformity Clause of the Illinois Constitution provides that:

In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly.

The plaintiff alleged that the tax was used principally to fund Medicaid-related expenditures. But the plaintiff argued that it didn’t contribute to the problem addressed by Medicaid; indeed, it helped mitigate the problem by providing life-care to members of the plaintiff order who would otherwise be receiving government aid. Nor did the plaintiff receive any money in connection with Medicaid. So the question for the Court was – did any of that matter for the tax’s constitutionality?

The Circuit Court said yes, but in an opinion by Justice Thomas, the Illinois Supreme Court said no. The Circuit Court’s reasoning involved two fatal mistakes, according to the Court.

First, it was based on the proposition that the tax was intended to reimburse Medicaid expenses. In fact, the statute set forth seven distinct purposes for the Fund into which tax receipts were deposited, including paying the Department’s administrative expenses, enforcing the State’s nursing home standards and supporting a Department nursing home ombudsman program.

Second, it just wasn’t true that a taxpayer couldn’t be required to pay a tax it receives no benefit from. The Circuit Court and the plaintiff had relied mostly on the Court’s opinion in Primeco Personal Communications, LP v. Illinois Commerce Commission. Primeco was limited to its facts, the Court held, standing only for the proposition that a tax functioning essentially as a rent payment could be imposed only on those actually enjoying the leasehold. It didn’t help the plaintiff with the broader proposition that only quid pro quo taxes were permissible.

The Supreme Court concluded with an invitation to the legislature: “the mere fact that a tax is permissible does not necessarily mean it is wise.” The plaintiff painted a “compelling picture” of the “noble charitable work” it was performing, according to the Court – work which was significantly burdened by the tax. The Court suggested that the legislature might want to reevaluate whether including operations like the plaintiff’s within the scope of the tax was really necessary.

Image courtesy of Flickr by Elliott Brown (no changes).

State’s Defense of Pension Reform: Constitutional Convention Couldn’t Make Pension Protection Absolute (Even If It Wanted To)

By Kirk Jenkins on February 1, 2015 Posted in Illinois, Pension Reform Litigation

Today we continue our discussion of the centerpiece of the Illinois Supreme Court’s civil docket – the public pension reform case – with a look at the State’s Opening Brief, which was filed January 12, 2015. As we’ll see below, the State’s defense of the Pension Reform bill almost certainly sets up an all-out fight on the most fundamental battleground of all in constitutional adjudication – the debates at the 1970 constitutional convention (a subject we’ll explore in detail soon).

The State’s brief begins with the effect of the “Great Recession” of 2008-2009 on the State’s pension liabilities. The State paints a direful picture of the effect of the recession on state finances: “State revenues had plummeted, state services had been slashed, and the state retirement systems’ unfunded pension liabilities had ballooned to approximately $100 billion.” The State concedes that it had made insufficient annual contributions to the system in the years before 1994 – “a practice repeatedly upheld as constitutional” – but the brief insists that the State was mending its ways. According to the brief, as of 2006, the State was on track to get the pension funds 90% funded by 2045. But then the recession hit, cratering state receipts while at the same time causing the systems’ assets to lose more than 30% of their value. The State also claims that “[d]ramatically increased longevity over the past two decades” has contributed to the systems’ unfunded liabilities.

Based on the filings below – and the extensive exchange of publicly available memos leading up to the 2013 pension reform package – we can expect the plaintiffs to directly attack the State’s historical theme. Although the State admits in passing to the legislature’s decades-long underfunding of the system – a habit which led directly to the adoption of the Pension Protection Clause in the first place – at least one study has concluded that 47% of the growth in the State’s pension liabilities between 1983 and 2012 was due to legislative underfunding. Sixteen percent was due to stock market losses, and only 10% due to people living longer than expected. Employee salary increases? They were actually less than expected, and helped reduce unfunded liabilities.

The Pension Protection Clause provides:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

The State begins its argument by emphasizing the first half of the clause, providing that pension relationships are contractual in nature. The Circuit Court entirely failed to come to grips with this fact, the State argues – in particular, that the State can modify any contract in the bona fide exercise of its police power. Disregarding this inherent limitation, the State claims, could have dire consequences, making the State unable to reduce pension benefits in the midst of an epidemic to pay for “costly medication,” or by requiring the State to close its prisons and schools in preference to reducing pensions if the State’s bond rating collapsed, making borrowing impossible.

The State points out that the state Constitution has included a Contracts Clause since 1818, but that the Clause – despite its apparently absolute terms – had never been understood as absolutely protecting contracts from impairment any more than the federal constitution does. This is not even a matter of legislative intent, the State argues; the State cannot make a contract which is immune from modification pursuant to the reserved police power, suggesting that any contract exempt from the right of modification would separately violate the constitution’s ban on laws constituting an “irrevocable grant of special privileges or immunities.” “This rule does not mean” that the State’s agreements “are illusory or may be modified at the State’s whim,” the State argues, pointing to cases in which the courts had purportedly held that reserved police powers were not applicable. But there were nevertheless “important reasons” for the reserved limitation on all contracts involving the State.

The Pension Protection Clause is no exception to this body of law, the State argues. The Clause’s express language “reflects a decision to incorporate the same degree of protection afforded to all contracts,” the State claims.

The State then turns to the plaintiffs’ argument that the State ignores the second half of the Clause. After all, the Clause doesn’t merely provide that pension rights are contractual in nature; it then provides that the benefits of that contract cannot be “diminished or impaired.” This doesn’t refute its argument, the State argues, for three reasons. First, the “benefits” which cannot be “diminished or impaired” are the benefits of the contractual relationship – which can inherently be modified by the State. Second, the State claims, the plaintiffs’ argument that benefits cannot be reduced pursuant to the second part of the Clause makes the first part designating pension relationships as contractual into surplusage. Third, the State argues, the word “impaired,” when used in reference to contract claims, inherently allows for the possibility of unilateral amendments by the State pursuant to the police power.

We can expect the plaintiffs to argue that the State’s construction of the pension protection clause reads the second half of the clause – the “diminished or impaired” language – out of the clause. But note the dilemma the plaintiffs face here. The State’s argument can arguably be caricatured as “the State can’t cut pension benefits – unless it needs to.” The State briefly acknowledges that the police power isn’t limitless, but never suggests what limits there might be, or why it might be able to satisfy them. But merely arguing that the State’s police power showing isn’t good enough won’t get the plaintiffs an affirmance. The Circuit Court flatly held that there is no police power exception to the Pension Protection Clause.

The State then turns to the history of the Clause, arguing that the constitutional debates, “when read in the context of the state of the law at the time” don’t permit the conclusion that the convention intended to place pensions beyond the reach of the State’s police powers. The State argues that the Clause was adopted in order to overrule a then-current body of law which would have construed many state pensions as mere gratuities, subject to withdrawal at any time. But “there was no expression of a desire by anyone,” the State argues, to give pensions even greater protection than ordinary contracts. The State points to the statement of the sponsor of a provision conditioning the state right to keep and bear arms on “the police power.” The sponsor was asked whether all provisions of the constitution were outside the police power unless the power was expressly mentioned, and he responded that “[i]t applies to every section.” According to the State, the only case “in American legal history” which had ever suggested that pension rights were outside the scope of the police power was the 2014 opinion of the Arizona Supreme Court, Fields v. Elected Officials’ Retirement Plan, which we discussed here.

We can expect the plaintiffs to take on the State’s reading of the constitutional history in some detail. The plaintiffs are likely to argue that the State ignores the statements of many delegates prominent in the debates who stated that, in view of the State’s chronic underfunding of the pension funds, the Clause was intended to guarantee that a state employee would receive what he or she was promised at the outset of his or her employment in pension benefits.

The State then turns to the cases interpreting the Pension Protection Clause. The State argues that the only decision directly addressing a possible police powers limitation on the Clause, Felt v. Board of Trustees of Judges Retirement System – the decision cited by the Circuit Court for the proposition that there is no such defense – actually stands for the reverse, that such a limitation exists, but the State simply hadn’t made a sufficient showing in that case. Nor is Kanerva v. Weems to the contrary, the State claims. The only question presented in Kanerva was whether the health care benefit subsidies at issue there fell within the scope of the Clause at all.

Next, the State argues that the federal constitution bars the states from surrendering their police powers. This “reserved powers doctrine” has been frequently reaffirmed by the United States Supreme Court, the State argues, and the Court has never strayed from the principle. Once again, the State denies that this argument makes all agreements between the government and private parties meaningless on the grounds that they’re subject to amendment at any time. “[E]xtraordinary circumstances must exist,” the State concedes. But if the Pension Protection Clause does not contain an implicit exception for such police powers, then the Clause violates the federal constitution, according to the State.

The State concludes with a brief argument that the Circuit Court improperly disregarded Section 97 of the Pension Reform Act, which provides that certain provisions are severable, when it chose to strike down the statute in its entirety.

Plaintiffs’ Brief is due February 16, and we’ll take a close look at it then. But before that, we’ll take a detailed tour through the constitutional debates regarding the Pension Protection Clause.

Image courtesy of Flickr by Chuck Coker (no changes).

Illinois Supreme Court Affirms Circuit Court Jurisdiction Over Workers Comp Referral Fee Disputes

By Kirk Jenkins on February 1, 2015 Posted in Illinois

The Workers Compensation has broad jurisdiction to award or apportion attorneys’ fees in connection with counsel’s work before the Commission. But what if one of the attorneys didn’t appear before the Commission, and the contract is largely for referral fees? Unanimously affirming the Appellate Court in Ferris, Thompson & Zweig, Ltd. v. Esposito, the Illinois Supreme Court held that the Circuit Court has subject matter jurisdiction to consider such disputes. Our detailed summary of the underlying facts and lower court decisions in Ferris is here. Our report on the oral argument is here.

Plaintiff and defendant entered into an attorneys’ fees agreement with respect to representation of two women in connection with their workers’ compensation claim. It wasn’t a pure referral fee agreement; plaintiff agreed to assist with initial interviews and document preparation, provide translation services as needed, keep a duplicate file and facilitate client communication. But the defendant was to represent the clients before the Commission. After the cases settled, the defendants declined to pay plaintiff its share of the fees, and the plaintiff sued in Circuit Court.

Defendant moved to dismiss, arguing that under Section 16a(J) of the Workers’ Compensation Act, (820 ILCS 305/16a(J)), the Commission had exclusive jurisdiction over all attorneys’ disputes in connection with the Act. The Circuit Court concluded that the agreement at issue was a referral agreement, and fell outside the scope of the Act. Following trial, the court awarded judgment to the plaintiff. The Appellate Court affirmed.

In an opinion by Justice Kilbride, the Supreme Court affirmed the Circuit and Appellate Courts. Relying both on the language of the Act and the legislature’s expressed intent that matters before the Commission be handled promptly so as to facilitate quick compensation to claimants, the Court concluded that the Commission’s jurisdiction over attorneys’ fees disputes covered only fees incurred for representation before the Commission.

The Court held that the plaintiff’s role in the clients’ representation was minimal, and the agreements clearly provided that the defendant was solely responsible for representing the clients before the Commission. Accordingly, the Court found, the claim was for breach of referral agreements. The defendant argued that the matter was nevertheless within the Commission’s jurisdiction, pointing to the ban in Section 16b of the Act (820 ILCS 305/16b(a)) on providing “compensation or any gift in exchange for referral of a client involving a matter to be heard before the Commission” except as provided for by Rule 1.5 of the Code of Professional Responsibility, but the Court held that Section 16b doesn’t purport to give the Commission jurisdiction over such claims.

Since the sole challenge to the judgment for plaintiff was based upon the Circuit Court’s jurisdiction, the Supreme Court affirmed the judgment for plaintiff.

Image courtesy of Flickr by darkday (no changes).

Illinois Supreme Court Denies All Ten Amici Requests in Support of State in Pension Appeal

By Kirk Jenkins on February 1, 2015 Posted in Illinois, Pension Reform Litigation

Over four days in mid-January, no fewer than ten entities – public entities, charitable institutions and individuals – filed motions for leave to file amicus briefs in support of the State’s defense of the public pension reform statute. All told, the amici amounted to 265 pages of briefing, on top of the State’s own fifty page brief – in a case in which the State had successfully moved for an accelerated schedule leading to a March oral argument:

Illinois Law Professors

Will-Grundy Center for Independent Living, Transitions Mental Health Services, Mental Health Centers of Illinois, Youth Network Council, Marcfirst and Omni Youth Services

The Civic Federation

Constitutional Law Professors

The Chicago Public Schools, Chicago Transit Authority and Chicago Park District

The City of Chicago

The Civic Committee of the Commercial Club of Chicago

The Illinois Municipal League

The Illinois Policy Institute

The International Municipal Lawyers Association

On January 22, 2015, the Illinois Supreme Court denied all ten motions for leave to file.

In the wake of the Supreme Court’s order, reporters and other commentators have wondered whether anything can be read into the Court’s action. For reporting on the order, see here, here and here.

But in fact, the Court’s order was not a surprise. We’ll address the matter from a historical perspective in more detail over at the Illinois Supreme Court Review in a few weeks, but there is no established tradition of amicus briefs on the Court’s civil docket. As a general matter, the Court averages around one amicus brief per civil case over the course of a year. Five days after the last of the amici filed, the plaintiffs filed a motion for a twenty-eight day extension of time, pointing out that they were now potentially saddled with the task of responding to 315 pages of merits and amici briefing. Had the extension been granted, the plaintiffs’ brief would have been due March 16, and oral argument would certainly have been postponed till May at the earliest. The plaintiffs’ motion was opposed by the State.

The day after the State filed its opposition, the Court solved the program by denying all of the motions for leave to file the amicus briefs. Since the plaintiffs’ request for extension was based on the volume of amicus briefing, the Court denied the plaintiffs’ motion as moot.

We’ll consider the State’s opening brief here tomorrow. The plaintiffs’ opening brief is due February 16.

Image courtesy of Flickr by Joel Bez (no changes).

Illinois Supreme Court Clarifies Impact of Oral Rulings on Time to Appeal Clock

By Kirk Jenkins on February 1, 2015 Posted in Illinois

What’s the impact on your time to appeal when the trial court says in open court that all substantive attacks on the judgment are denied – does the clock start? That’s the question presented in Williams v. BNSF Railway Company, which was decided last week by a unanimous Illinois Supreme Court. The Court’s answer: it depends. Our detailed summary of the underlying facts and lower court rulings in Williams is here. Our report on the oral argument is here.

Williams is an action against the plaintiff’s employer under the Federal Employers’ Liability Act. The jury rendered a verdict for plaintiff, as well as a verdict for the third-party defendant – which provided certain intermodal services to the defendant – on the defendant’s claim for contractual indemnity.

The defendant filed a timely post-trial motion raising 46 different challenges to the verdict and seeking a new trial. On April 18, 2012, the trial court stated on the record that “the post-trial motions that have been filed are respectfully denied,” and that a written order would follow within “ten days or so.” No written order was entered.

About six weeks later, the defendant filed a motion for leave to file supplemental authority on its claim for a remittitur. During a subsequent hearing, the court said “I’m going to give you a record that you can take up.” Five days later, during another hearing, the court directed the plaintiffs to prepare a written order stating, among other things, that “[f]or all the reasons stated in the record the post-trial motion is denied.” When a written order was finally issued a few days later, the order recited that it was final and appealable.

The defendant filed its notice of appeal less than thirty days after the trial court’s June 6 order, but 72 days after the court’s April 18 oral ruling that all post-trial motions were “respectfully denied.” The Appellate Court dismissed the appeal, holding that the fact that the trial court hadn’t issued a written order following its April hearing didn’t make the oral ruling any less final. The defendant filed a petition for rehearing together with a motion for leave to supplement the record with a certified copy of the law record, arguing that the oral hearing had never been entered as of record. The Appellate Court denied both the petition and the motion for leave to supplement.

In an opinion by Justice Robert R. Thomas, a unanimous Supreme Court reversed.

The Court began by addressing the state of the record – a subject which was discussed during the oral argument. The Court noted that just as it had at the Appellate Court, the defendant had moved for leave to supplement the record with the certified law record. Both the plaintiff and the third-party defendant had opposed the motion, arguing that the defendant had missed its chance by not offering a complete record to the Appellate Court. The Court disagreed, pointing out that there was nothing in the defendant’s appeal that required the certified law record; only when the plaintiff and third-party defendant reasserted their motion to dismiss did the issue become relevant. The Court concluded that the record before the Appellate Court was insufficient to fully and fairly present the questions at issue, so it granted the motion to supplement.

The Court then turned to the issues. The central problem with the Appellate Court’s opinion, the Court found, was that it apparently assumed that the trial court’s oral ruling constituted entry of record. But it didn’t, the Court noted; although law and equity had been treated differently before Rule 272, the Rule had abolished the distinction. Ever since, merely pronouncing an oral ruling wasn’t enough to start the appeal clock – it had to be entered by the clerk in the record.

And the trial court’s April oral ruling hadn’t been entered in the record until June 6. The plaintiff argued that Rule 272 didn’t apply at all to post-trial orders, since it merely referred to judgments; but the Court made short shrift of that argument, finding that the Rule encompassed both a judgment and a post-trial order. Since the oral ruling hadn’t been entered as of record until June 6, the defendant’s appeal was timely.

The Court concluded by declining the defendant’s invitation to decide its entitlement to a directed verdict on the third-party defendant’s contractual indemnity claim in the first instance.

Image courtesy of Flickr by Joe Haupt (no changes).

Illinois Supreme Court Dismisses Appeal on Interlocutory “Rules of Road” Custody Orders

By Kirk Jenkins on January 31, 2015 Posted in Illinois

What procedural and substantive rights are potentially impacted by “rules of the road” orders in child custody cases – interlocutory orders which regulate what the contending parents can and can’t do in interacting with their children while the divorce case is pending? That’s the issue presented by In re Marriage of Eckersall. Last week, the Supreme Court declined to decide the issues, holding that the issues in Eckersall were moot and that leave to appeal was improvidently granted. Our report on the oral argument is here.

Eckersall began when the husband filed a petition for divorce. By agreement of the parties, the Circuit Court appointed an attorney to represent the couple’s three children. The parties subsequently agreed on a visitation schedule, but not on the terms and conditions of visitation, so the attorney for the children proposed what he referred to as a “prophylactic” order.

The order enjoined the parties from various actions, mostly relating to the divorce litigation: no discussing any aspect of the litigation, no coaching the children for court testimony or interviews, no discussing with the children their preferences as to visitation, no criticizing the other parent in the children’s presence, and no questioning the children about the other parent’s conduct, habits or spending. The wife objected to the order on the grounds that it interfered with her right to parent and communicate with her children, but the trial court entered the order over her objections.

The wife filed a notice of appeal from the order, contending that it was appealable under Rule 307(a)(1) as an injunction. A divided Appellate Court disagreed and dismissed the appeal. Not long after, the Circuit Court entered an order finalizing the parties’ divorce, which automatically vacated the “rules of the road” order.

In an opinion by Justice Charles E. Freeman, a unanimous Supreme Court affirmed the Appellate Court. The order under appeal was clearly moot, the Court held; the only question was whether an exception applied allowing the Court to proceed with the appeal anyway.

The public interest exception to the mootness doctrine involves weighing three factors: (1) the question presented is of a substantial public nature; (2) there is a need for an authoritative determination of the issue for the guidance of public officers; (3) there is a likelihood of future recurrence of the question.

The Court held that the first factor was not satisfied. The order was used in Cook County custody cases, the Court pointed out, and then only when the parties couldn’t agree on terms and conditions of visitation. Therefore, the order only affected a “small group of people,” and had no real impact on the public as a whole. The second factor wasn’t satisfied either, given that there was no conflict in authority on the issues presented. The third factor – likelihood of recurrence – wasn’t satisfied either, given the lack of litigation on the issue. Accordingly, there was no basis for applying the public interest exception.

The Supreme Court therefore unanimously dismissed the appeal, concluding that the petition for leave to appeal was improvidently granted.

Image courtesy of Flickr by umjanedoan (no changes).

Florida Appellate Court Blocks Discovery of Communications Between Insured and Insurer-Retained Defense Counsel in Third-Party Bad Faith Action

By Erin E. Dardis on January 30, 2015 Posted in Florida

On September 5, 2014, the Fifth District Court of Appeal issued its en banc decision in Boozer v. Stalley, 146 So. 3d 139 (Fla. 5th DCA 2014), holding that in a third-party bad faith action, the attorney-client privilege precludes discovery of confidential communications between the insured and counsel retained by the insurer to represent the insured, receding from its holding in Dunn v. National Security Fire & Casualty Co., 631 So. 2d 1103 (Fla. 5th DCA 1993). The court also certified the following question to the Florida Supreme Court:

DO THE DECISIONS IN ALLSTATE INDEMNITY CO. V. RUIZ, 899 So. 2d 1121 (Fla. 2005), AND GENOVESE V. PROVIDENT LIFE & ACCIDENT INSURANCE CO., 74 So. 3d 1064 (Fla. 2011), SHIELD ATTORNEY-CLIENT PRIVILEGED COMMUNICATIONS FROM DISCOVERY IN THIRD-PARTY BAD FAITH LITIGATION?

Underlying Proceedings

Benjamin Hintz was injured in a motor vehicle accident involving Emily Boozer, who was covered under two Allstate insurance policies. Hintz’s guardian, Stalley, sued Boozer and Allstate and recovered a judgment against Boozer in excess of the Allstate policy limits. Allstate paid its policy limits, leaving the remainder of the judgment unsatisfied. The guardian then filed a bad faith action against Allstate and sought to depose Boozer’s attorney and subpoena his files. Boozer moved for a protective order, asserting the attorney-client privilege. The trial court denied the motion.

Boozer’s attorney appeared for his scheduled deposition and answered general questions, but refused to answer any questions or produce any documents related to his representation of Boozer. The deposition was adjourned and Boozer filed a petition for writ of certiorari, arguing that the trial court improperly denied her motion for protective order. Stalley argued that in the context of third-party bad faith litigation, he stood in Boozer’s shoes and could obtain discovery of any materials that would be available to her, including those that would otherwise be protected by the attorney-client privilege.

The Fifth District’s Analysis

The court began its analysis by explaining that the issue before it was first considered in Boston Old Colony Insurance Co. v. Gutierrez, 325 So. 2d 416 (Fla. 3d DCA 1976), where the Third District held that a defense attorney retained by an insurer could be deposed in a subsequent bad faith case and had to produce his files: “As a third-party beneficiary of the insurance policy, Gutierrez stands in the same posture as that of Brown, the insured. Just as Brown would be entitled to discovery, including deposition and production of files by the attorneys, since both he (Brown) and Boston Old Colony were their clients, Gutierrez has the same right of discovery in furtherance of the preparation of his case.”

In Dunn, the Fifth District considered a similar issue, when the plaintiff in a third-party bad faith claim sought the insurer’s claim and litigation file. The court rejected the insurer’s claim of work product and attorney-client privilege, stating, “In bad faith suits against insurance companies for failure to settle within the policy limits, all materials in the insurance company’s claim file up to the date the judgment in the underlying suit are obtainable, and should be produced when sought by discovery.”

The court noted that these decisions and others supported Stalley’s argument below. However, the court noted that several more recent decisions required it to re-think Dunn.

For example, in Allstate Indemnity Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005), the Florida Supreme Court held that in first-party bad faith actions pursuant to Section 624.155, Florida Statutes, work product materials were discoverable. In Westbend Mutual Insurance Co. v. Higgins, 9 So. 3d 655 (Fla. 5th DCA 2009), the Fifth District held that in the context of a first-party bad faith proceeding, Ruiz did not extend to materials protected by the attorney-client privilege stating, “Nothing in Ruiz suggests that the attorney-client privilege available to any contracting party, including insurers, somehow evaporates uniquely for insureds upon the filing of a bad faith claim.” In Genovese v. Provident Life & Accident Insurance Co., 74 So. 3d 1064 (Fla. 2011), the Florida Supreme Court determined that the attorney-client communications were not discoverable a first-party bad faith case. In Progressive v. Scoma, 975 So. 2d 461 (Fla. 2d DCA 2007), the Second District held that communications between the insurer and its counsel were protected by the attorney-client privilege in a third-party bad faith action. Lastly, in Maharaj v. Geico Casualty Co., 289 F.R.D. 666 (S.D. Fla. 2013), the court stated, “The court is cognizant of the fact that the express language of Genovese limits its holding to the first-party bad faith context, but the court sees no reason why the legal analysis utilized in Genovese regarding the application of the attorney-client privilege to the insurer’s claims file would not be equally relevant in a third-party bad faith case.”

Conclusion

The court found that Maharaj is a logical extension of the Florida Supreme Court’s holdings in Ruiz and Genovese and the Second DCA‘s holding in Scoma. Thus, it stated that it should adopt the holdings of Scoma and Maharaj and recede from Dunn to the extent it allows the unqualified discovery of attorney-client protected material. “The fact that Stalley may stand in Boozer’s shoes, or have an independent right to bring a bad faith action under Section 627.155, does not mean that Boozer gave up her statutory attorney-client privilege . . . .”

The court quashed the trial court order denying the motion for protective order and certified the above-referenced questions to the Florida Supreme Court.

Image courtesy of Flickr by Ivory Elephant Photography (no changes).

Florida High Court Declares That Contract Legality Is Not Reviewable On A Motion to Vacate An Arbitral Award

By on January 30, 2015 Posted in Florida

On November 6, 2014, the Florida Supreme Court resolved a conflict among the Fourth and Fifth District Courts of Appeal by holding that a court is not required to determine whether a contract is legal before enforcing an arbitral award based on the contract. See Visiting Nurse Ass’n of Fla., Inc. v. Jupiter Med. Ctr., Inc., No. SC11-2468. To view the supreme court’s opinion click here.

Visiting Nurse Association (VNA) and Jupiter Medical Center (“hospital”) arbitrated a contractual dispute stemming from VNA’s purchase of the hospital’s own home health care agency. The dispute centered around the hospital’s obligation upon a patient’s discharge to notify the patient of available home health agencies, including the hospital’s relationship with VNA if the patient expressed no preference, and the hospital’s agreement to provide VNA with office space in the hospital. The arbitration panel found that the hospital breached the contract and awarded VNA damages. The hospital moved to vacate the award, alleging that the panel’s construction of the contract violated state and federal law. Specifically, the hospital argued that the panel construed the purchase agreement as an unlawful agreement to make, influence and steer future patient referrals to VNA in exchange for compensation in violation of state and federal laws. The panel denied the motion and enforced the award.

On appeal, the Fourth District reversed the denial of the motion to vacate and remanded for the trial court to consider the legality of the contract because “a Florida court cannot enforce an illegal contract” and must make that determination before enforcing an award based on it. VNA then sought review in the Florida Supreme Court.

The supreme court framed the conflict issue as “whether the illegality of a contract is subject to review on a motion to vacate.” The Court examined this issue under both the Federal Arbitration Act (FAA) and the Florida Arbitration Code (FAC). The Court found that under FAA case law “the issue of the contract’s validity is considered by the arbitrator . . . unless the challenge is to the arbitration clause itself.”

The Court’s analysis of the FAC was guided by section 682.13(1), Florida Statutes which enumerates when a court “shall” vacate an arbitral award. Because that statute does not include the term “illegality” or require a court to vacate an arbitrator’s “illegal construction of the underlying contract,” the Court found that a court may not vacate an arbitral award based on illegality.

As a consequence of its resolution of the conflict issue, the Court also found that the arbitrators did not exceed their powers under both the FAA and the FAC by interpreting the purchase agreement in a manner that would violate state and federal laws.

The Court therefore quashed the Fourth District’s decision and held that a court is not required to determine whether a contract is legal before enforcing an arbitral award based on the contract. Stated another way, the illegality of a contract is not subject to court review on a motion to vacate an arbitration award.

Image courtesy of Flickr by Juhan Sonin (no changes).

Illinois Supreme Court Debates Self-Critical Analysis Privilege

By Kirk Jenkins on January 24, 2015 Posted in Illinois

Last week, the Illinois Supreme Court heard argument in a case being closely watched by the civil defense bar: Harris v. One Hope United, Inc. Harris poses a simple question: does Illinois recognize the self-critical analysis privilege? Our detailed summary of the facts and lower court rulings in Harris is here.

As a general rule, courts require three elements for proof of the self-critical analysis privilege: (1) the information sought comes from a critical self-analysis undertaken by the party seeking protection; (2) the public has a strong interest in preserving the free flow of the type of information sought; and (3) the information is of a type whose flow would be curtailed if discovery were allowed.

The defendant in Harris is a private contractor which provides services to troubled families working with the state Department of Child and Family Services. DCFS received a complaint in late 2009 alleging neglect and abuse of a small child. DCFS assigned the matter to the defendant, which commenced an investigation. Two months later, the child was hospitalized, and upon release, was sent to live with her aunt. The child was soon returned to her mother, and not long after, was accidentally drowned.

The plaintiff – the Public Guardian of Cook County – sued the defendant and others for wrongful death. The plaintiff alleged that the defendant was negligent in permitting the child to be returned to her mother. During a deposition, the executive director of the defendant disclosed the existence of a “continuous quality review department” which investigates cases and prepares reports about past cases. The defendant refused to produce the report, the plaintiff moved to compel production, the defendant opposed, and the trial court compelled production. On appeal following entry of a “friendly contempt,” the Appellate Court affirmed.

Counsel for the defendant began. Counsel argued that she was not asking the Court to rule on all aspects of self-critical analysis. Rather, the appellant was limiting her argument to a single type of report – the peer review analysis. The trial judge was supportive of the privilege claim, counsel argued, but felt constrained by the lack of law on the subject. Similarly, the First District was sympathetic, but said it had no power to find a privilege with no law available on the subject. Counsel argued that the analysis begins with Rule 501, which allows the Court to determine privileges based on the common law. Justice Thomas noted that the legislature has already enacted a type of self-critical analysis privilege in the Medical Studies Act, and counsel responded that the privilege applied only to hospitals, physicians and certain qualifying parties. Justice Thomas asked whether the Court would simply be legislating if it were to add to the privilege the legislature created. Counsel answered that the statute was limited in scope. The DCFS has sovereign immunity. The appellant was doing exactly what the DCFS did, with none of the protections. Counsel argued that the Court should look at the four-part test for finding a privilege. This is not about the search for truth, counsel argued; the plaintiff already has all the witnesses available. Counsel argued that the appellee wanted a smoking gun – something in which a witness said “we made a mistake.” The appellant’s quality control reports are made with an expectation of confidentiality. Counsel argued that denial of the privilege involves a slippery slope. Justice Theis asked counsel to address the Child Death Review Team Act – given the existence of the Act, wasn’t an investigation inevitable? Counsel answered that only the DCFS was subject to the privilege in the Act. Justice Theis pointed out that the statute seemed to cover everyone involved in the mandated investigations. Counsel agreed that the DCFS’s report was privileged by statute. Justice Theis asked whether there would be an investigation under the Act regardless of whether the privilege was extended. Counsel answered that the police and the DCFS all investigated the incident. The appellant was seeking to privilege the internal investigation. The appellant’s participation in the DCFS’s investigation was not privileged. Justice Theis suggested that counsel was argued that without the privilege, nobody would investigate the incident. Counsel responded that the appellant investigates incidents quickly in order to promote safety and learn from incidents. But there were no facts in the reports that plaintiff doesn’t already have, and no witnesses the plaintiff doesn’t already have available. Justice Thomas asked whether creating new privileges was a matter for the legislature. Counsel responded that although there might be a need for a complete legislative look at these types of privileges, the appellant was not in a position to lobby for the legislative fix. Nevertheless, the Court had the power to grant a common law privilege. Chief Justice Garman asked whether the privilege would be limited to discussions after the accident, and counsel said yes. Justice Freeman suggested that it was unclear whether the appellant had returned the child to its mother. Counsel responded that the DCFS was responsible for either withdrawing the child or returning it to the home; the appellant merely oversaw the mother’s activities and tried to help her keep the family intact. Justice Freeman asked whether the court had ordered the return of the child. Counsel said no, the DCFS had placed the child with its mother, and the case worker had visited each week to look for signs of problems. Justice Thomas asked why the plaintiff shouldn’t have the right to impeach witnesses who went on the stand and claimed that there was nothing more the defendant could have done. Counsel answered that plaintiffs could depose witnesses, they just couldn’t examine them based on the investigative report, because its value outweighed the loss of any evidence.

Counsel for the plaintiff followed. Counsel argued that the privilege doesn’t exist at common law or in the statutes. The decisions of the Court, counsel argued, are clear that creating new privileges is the business of the legislature. Rule 501 merely gives the Court the right to administer privileges which exist, not to create new ones. Justice Karmeier asked whether it was true that absent the defendant’s self-critical analysis, there would be no possibly damaging opinions for the plaintiff to discovery. Counsel agreed that was true. Justice Karmeier asked if the Court should be concerned about that as a matter of public policy. Counsel answered that it was not an issue since the privilege doesn’t exist. Justice Karmeier asked, if the plaintiff has all the facts, which he would need these opinions. Counsel responded that the public policy of the state is that full investigation is imperative with respect to the deaths of children. Justice Karmeier asked, if the Court agrees with him that there is no privilege, whether there can be any limitations placed on the use of the report. Counsel answered that that would be up to the trial court. What the case is really about, according to counsel, is full disclosure with respect to the death of an eight-month old girl. Counsel argued that any contradictions in the report would be critical evidence regarding finding out what really happened. Justice Karmeier suggested that production was appropriate for finding out what really happened, but said that his concern is about post-remedial measures – why would that kind of information be admissible? Counsel responded that the lower court could have blocked disclosure of parts of the report, had it chosen to do so, by relying on the privilege for remedial measures. Justice Karmeier asked if counsel’s suggestion that the report couldn’t be used with respect to remedial measures was the same as saying there was a privilege. Counsel said no, a privilege is far more encompassing, and with much more of a chilling effect. Justice Karmeier asked if the only thing in the report aside from facts plaintiff has already is remedial measures, is that admissible? Counsel answered that’s up to the trial court. Chief Justice Garman asked whether a finding of no privilege would discourage these kinds of self-critical analyses. Counsel answered that given the public policy favoring full disclosure, there is no legitimate expectation of non-disclosure in these investigations. The Chief Justice pointed out that the DCFS’s investigation would be shielded from disclosure, and counsel agreed. The Chief Justice agreed that the DCFS had not, in fact, undertaken this investigation, but for many years, they had. It was a new circumstance that a subcontractor would pursue these investigations. Did counsel nevertheless believe no privilege existed? Counsel said yes, the trend around the country is moving away from any recognition of the self-critical analysis privilege based on the proposition that truth-seeking is paramount. Justice Karmeier asked whether the Court should take into consideration how its decision would affect services to children, and counsel said yes. Justice Karmeier asked whether the Court had the power to create a privilege which the legislature to date had not, and counsel answered that earlier precedent for that proposition was quite limited. Justice Karmeier suggested that counsel’s argument suggests that there might be cases where it is important. Counsel answered that there are cases in which there might arguably be a basis for finding a privilege, but not on the facts at bar.

In rebuttal, counsel for the defendant argued that more cases were being published recognizing the privilege than rejecting it, but the Court should focus solely on Illinois. The defendant’s case workers don’t know anything about admissibility, counsel argued – they’re just asked to be critical and honest, and that’s all that’s necessary for the privilege to attach. Counsel argued that the persons involved in the investigation couldn’t give opinions on the stand anyway, and they aren’t fact witnesses either, but there would nevertheless be a very real chilling effect if everything in the report became admissible in court. The case wasn’t about whether the truth would come out, counsel argued; the plaintiff has the DCFS records and all the fact witnesses. Justice Thomas asked whether, if the Court finds for the defendant, the decision would stand for the proposition that groups without the wherewithal to get relief from the legislature can come to the Court. Counsel responded that the Court has always had its door open with regard to fashioning common-law privileges, but if the Court concluded that there was insufficient basis in the record to find a privilege as a matter of law, it should remand the case with guidance for the trial court.

We expect Harris to be decided in three to six months.

Image courtesy of Flickr by Stephen Dann (no changes).