Chicago Business Litigation Lawyer Blog

7th Circuit Affirms Dismissal of Consumer Fraud Claims Against Wachovia

November 24, 2013 | Peter S. Lubin and James V. DiTommaso

While lawsuits have become increasingly common in today’s society, they have grown no less costly. Because of the cost and time consuming nature of lawsuits, plaintiffs should be advised to thoroughly consider every line of their contracts, as well as the law, before taking a person or company to court. In a recent case handled by the Seventh Circuit Court of Appeals, Martha Schilke either failed to thoroughly read her mortgage contract, or she failed to fully understand it. Either way, the result was much time spent in court that could have been avoided.

Schilke purchased a town house in 2006 using a mortgage from Wachovia Mortgage, FSB. One of the conditions of her mortgage was that Schilke buy and maintain insurance on her property. If, at any point, she failed to do so, the contract stipulated that Wachovia had the right to purchase insurance on her behalf and charge her for the premium. The contract even went so far as to warn Schilke that, due to fewer insurance options, insurance coverage bought by them would likely be at a much higher premium and less coverage than insurance Schilke could buy on her own.

The contract further stated that “[i]f at any time during the life of the loan, a policy is cancelled or replaced or an insurance agent is substituted, we must receive written evidence of the insurance and written evidence of the substitution of the insurance agent. Written evidence of insurance is defined as: a copy of the reinstatement notice for the cancelled policy or a copy of the replacement policy. … If we do not receive such evidence prior to the termination date of the previous coverage, we may at our sole option, obtain an insurance policy for our benefit only, which would not protect your interest in the property or the contents. We would charge the premium due in under such a policy to your loan and the loan payment would increase accordingly.”

In January of 2008, Schilke purchased insurance for her property. In May of that same year, Wachovia sent her a notice that her policy had ended on April 8. The letter requested that Schilke provide proof of insurance within 14 days. She never replied. Wachovia sent Schilke another letter in June, once again requesting proof of insurance and notifying her that it had acquired temporary insurance coverage through American Security Insurance (ASI). Enclosed with the letter was an “Illinois Notice of Placement Insurance” in which Wachovia described the terms of the temporary insurance coverage and informed Schilke that she was responsible for the cost. The letter further stated that, if Schilke could provide proof of insurance, Wachovia would cancel the temporary insurance coverage and refund any premiums paid by Schilke. It also stated that, in the event that Schilke failed to provide proof of insurance in the next 30 days, Wachovia would cancel the temporary insurance and replace it with a 12-month insurance policy, for which Schilke would be charged.

In July 2008, Wachovia wrote to Schilke to inform her that it had purchased a 12-month insurance policy on her mortgaged property and of the cost of that coverage. One year later, Schilke filed a class action lawsuit, on behalf of herself and others similarly situated, against Wachovia and ASI for allegedly engaging in deceptive practices by failing to disclose that Wachovia was receiving “kickbacks” from ASI.

Wachovia and ASI moved to dismiss the motion and the district court granted it.
Schilke then sought leave to file an amended complaint in which she added claims for breach of contract against both Wachovia and ASI and “clarified” that her claim under the Consumer Fraud Act was based on allegations that Wachovia’s conduct was both “deceptive” and “unfair” as defined by the Act. The district court rejected the proposed amendment, concluding that Schilke’s “clarification” of her amendment did not change the fact that she did not have a claim under the Act.

Schilke then submitted another amended complaint. In this version, she proposed to add Assurant, Inc., ASI’s parent company, as a defendant. She also proposed to add claims for conspiracy, aiding and abetting, acting “in concert”, and “intentional interference”. The judge denied leave to amend the complaint, stating that none of the changes significantly changed the allegations in the complaint. Schilke appealed and the case moved to the Seventh Circuit Court of Appeals.

As to Schilke’s claims under the Consumer Fraud Act, the Act prohibits any “unfair” or “deceptive” business practices to be used by a person or entity in order to gain an unfair advantage. The Act defines these terms as including “the use or employment of any deception, fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression, or omission”. The court found that, due to the contract provided by Wachovia, as well as its notices and correspondence to Schilke, the company had provided sufficient evidence that it had not violated the Consumer Fraud Act.

Schilke tried to claim that, even if Wachovia’s business practices were not deceptive, they were unfair because they “coerced” her into buying insurance through them. She backed this statement by saying that, had she refused to pay for the insurance through Wachovia, or failed to make a payment on her mortgage, Wachovia would have cancelled her mortgage, therefore she was “coerced” into buying the more expensive insurance. The court, however, pointed out that Wachovia had provided plenty of chances for Schilke to purchase cheaper insurance and, since having insurance was always a part of the legal contract, the court denied these allegations.

Because Wachovia received a commission from ASI for purchasing insurance on one of its properties, Schilke called it a “kickback” and claimed that it was unlawful. However, a “kickback” is defined as a bribe or payment which might be used to divide loyalties. This was never the case because Wachovia was not acting on Schilke’s behalf. Instead, the bank was merely acting to protect its own interests in the property it had purchased, for which Schilke was paying them back. Such a commission is fully within the limits of the law.

The Seventh Circuit Court of Appeals therefore upheld the ruling of the district court and dismissed the case.

NCAA Loses Injunction Ruling in Class Action Regarding Use of Player Images in Video Games

November 20, 2013 | Peter S. Lubin and James V. DiTommaso

Generally, when filing a lawsuit, the plaintiff has one of two aims: to reap payment for damages incurred; or for the court to order an injunction against the defendant. Many plaintiffs seek both. In the current case against the NCAA regarding the rights of student athletes, the plaintiffs have managed to gain court approval to move forward as a class to seek one of these goals, but not the other.

U.S. District Judge Claudia Wilken ruled that the plaintiffs can move forward as a class in their lawsuit against the NCAA regarding what student athletes receive in exchange for playing sports for their colleges. However, Wilken denied the motion to certify a class which sought billions of dollars in damages from the NCAA in exchange for improper use of the athletes’ names and likenesses in several forms, including live television broadcasts. According to Wilken, the plaintiffs had failed to identify a legitimate method to calculate damages for former players and that was her reason for refusing to certify a class to seek damages.

Sonny Vaccaro had mixed feelings about the ruling. Vaccaro is the form sneaker marketing executive who convinced O’Bannon, a former UCLA basketball star, to file the lawsuit against the NCAA. Vaccaro was disappointed that the class won’t be able to pursue damages, but he was optimistic about moving the case forward to elicit changes from the NCAA. According to Vaccaro, O’Bannon said of the ruling, “This is what I wanted … They’ll have rights. I never had rights. I didn’t think I would ever have rights.” The goal in this lawsuit now is to prevent the NCAA from taking advantage of student athletes in the future and using their names and likenesses, not only on television, but also in things like video games for EA.

Vaccaro also said that the plaintiffs “won in the sense we’re going forward, … Those damages, whatever they would have been, if we win, going forward, there’s no limit to what the numbers are in the future.

Vaccaro and O’Bannon aren’t the only ones who are pleased with the court’s ruling. Michael Hausfeld, one of the attorneys for the plaintiffs, released a statement saying that, “The court’s decision is a victory for all current and former student-athletes who are seeking compensation on a going forward basis. While we are disappointed that the court did not permit the athletes to seek past damages as a group, we are nevertheless hopeful that the court’s decision will cause the NCAA to reconsider its business practices.”

Another attorney for the plaintiffs, Hilary Sherrer, said, “There is a growing public recognition that the NCAA’s business practices are unfair and must be changed. The court’s ruling is a giant leap in the effort to end these unfair practices.”

The NCAA also claimed that the ruling was a victory for their side. They released a statement which says, “We have long maintained that the plaintiffs in this matter are wrong on the facts and wrong on the law. This ruling is one step closer to validating that position”.

HSBC Hit With $2.5 Billion Class Action Judgment

November 18, 2013 | Peter S. Lubin and James V. DiTommaso

Some companies might want to make sure to be very careful before making large acquisitions. Otherwise they might find themselves fighting a legal battle for something the company being acquired did years ago. Such is the case for HSBC Holdings Plc, a British bank, which has recently been hit with the largest judgment yet made in U.S. courts. The judgment, a record breaking $2.46 billion, was made against HSBC by U.S. Judge Ronald Guzman following a jury trial in a class action against Household International, which is now a division of HSBC.

According to the class action lawsuit, Household International’s chief executive, chief financial officers, and head of consumer lending all made false and misleading statements about the company in order to artificially inflate the company’s share price. The lawsuit further alleges that Household International engaged in predatory lending and intentionally concealed the quality of its loan portfolio.

Reports of Household International’s lending practices began to reach the public in 2001, which resulted in the company’s share prices sinking to the lowest it had been in seven years. The class action lawsuit was filed against Household International in 2002, the same year that HSBC bought out the U.S. lender. Now HSBC is stuck dealing with the lawsuit. A spokesman for the company sounded confident however, saying that HSBC plans to appeal and believes that it has a strong case. Despite its embroilment in the current legal battle, HSBC seems not to regret the purchase of the U.S. lending company. On the contrary, it appears to be eager to continue the battle against the class action lawsuit. The spokesman did add, however, that the matter has been noted in HSBC’s regulatory filings. It might affect future acquisitions made by the British bank after all.

The case is notable because securities fraud class actions almost always settle before reaching a jury. Defendants frequently prefer to settle outside of court to avoid the negative media attention as well as to avoid the extremely high judgments. When a class is certified by a judge, it frequently puts pressure on the defendant to settle the case outside of court, given that class action status gives the plaintiffs greater leverage.

Plaintiffs in securities fraud class action lawsuits generally rely on the “fraud on the market” theory as a key tool in their litigation. This is the theory that the price of a security trading in an efficient market reflects all publicly available information about that security. Working on that premise, the theory assumes that investors rely on material misrepresentations which are reflected in market prices at the time that the security is traded. Like most securities fraud class action lawsuits, the one against Household International also relied on evidence that investors and the market relied on unreliable statements provided by high-level executives at Household International. Because of the misrepresentations of the company and its lending practices, investors were led to buy shares which they would not have otherwise purchased, or were led to buy them at a higher price than that at which they would normally have bought them.

Court Rejects Volvo’s Motion to Decertify Class Action Involving Sun Roofs That Leaked Due to a Defective Design

November 15, 2013 | Peter S. Lubin and James V. DiTommaso

With the Supreme Court make the criteria for class certification more stringent, cases are still getting certified in the consumer protection and fraud area for products with common design defects. In a recent case against Volvo, a class action of consumers has been certified for a lawsuit against the car company alleging that defective sunroofs leaked, leading to flooding and damage inside the car. The lawsuit was filed in New Jersey U.S. District Court by Joanne Neale and seven other Volvo owners. Each plaintiff experienced an issue with the sunroof drainage system which resulted in damage to the inside of the vehicle. Each of these consumers were told that the sunroof drain was not covered under their warranty and so the cost of fixing or repairing the drain fell on the consumers. For some, this included the cost of whatever damage was cause by the faulty drain, such as replacing the carpeting in the vehicle. The cost of implementing these repairs ranged from $250 to over $1,000. The plaintiffs filed the lawsuit and asked for certification of either a nationwide class or statewide class.

The defective sunroofs allegedly affect Volvo models S40, S60, S80, V50 (model years 2004 to present), and XC90 (model years 2003 to present). The class action includes Volvo owners and lessees in Massachusetts, Florida, Hawaii, New Jersey, California, and Maryland. According to the lawsuit, the defective sunroofs allegedly resulted in damage to the vehicles’ interior components, including carpeting and safety-regulated electrical sensors and wiring. The lawsuit further alleges that Volvo knew about the design defect, based on the existence of numerous consumer complaints as well as internal Volvo communications and Technical Service Bulletins which were issued by Volvo in an attempt to deal with the problem.

Volvo filed a motion for summary judgment and to decertify against the plaintiffs saying that the definition of the nationwide class and the definition of the statewide classes were too broad. In their motion to reconsider, Volvo noted a recent Supreme Court decision in which the Court ruled in favor of the defendant, Comcast. In that case, the plaintiffs, a class of current and former Comcast cable consumers, provided an expert witness who testified with hypothetical examples of what cable prices would have been without Comcast’s allegedly illegal business practices. The Supreme Court ruled that the methodology used by the expert was unsound and, on that basis, the Court denied the plaintiffs class action status.

The Volvo case, according to the New Jersey U.S. District Court judge, had verty little in common with the Comcast case. In his opinion, Judge Dennis Cavanaugh wrote that “Defendants argue that this court should reconsider its opinion that granted plaintiffs’ motion for certification for statewide classes due to the U.S. Supreme Court’s decision in Comcast. … However, this case is entirely distinguishable from Comcast. … Here, the damages issue is much more straightforward – all class members who purchased defendants’ product were allegedly damaged by a design defect.” The U.S. District Court therefore saw no reason to decertify the statewide class action in the Volvo case and denied the defendant’s motion for to reconsider as well as the motion for summary judgment against the plaintiffs.

Arizona Court Finds Arbitration Clause Unconscionable

November 8, 2013 | Peter S. Lubin and James V. DiTommaso

An arbitration clause is a part of a contract which requires that any dispute between the parties be handled in arbitration, rather than trial courts. An increasing number of companies are implementing these clauses and requiring everyone from their employees to their customers to sign them. The goal is to prevent class actions from forming and taking the company to court for large sums of money. However, these clauses are not always enforceable and many plaintiffs have found ways around them.

An unconscionable contract is a contract that is unenforceable in a court of law. Arbitration agreements may be found unconscionable on “such grounds as exist at law or in equity” to revoke a contract. There are two types of contractual unconscionability: procedural and substantive. Procedural unconscionability addresses the fairness of the bargaining process, which “is concerned with ‘unfair surprise’, fine print clauses, mistakes or ignorance of important facts”. Substantive unconscionability, on the other hand, determines the fairness of the terms of the contract itself. For example, a contract may be considered substantively unconscionable if its terms favor one party too heavily over another.

An arbitration agreement may be substantively unconscionable if the fees and costs to arbitrate are so excessive as to “deny a potential litigant the opportunity to vindicate his or her rights.” In such cases, it is up to the plaintiff to prove to the court that the arbitration would be prohibitively expensive.

First, the plaintiff has to present evidence concerning the cost to arbitrate. The evidence provided “must be based on specific facts showing with reasonable certainty the likely costs of arbitration.” Second, the plaintiff “must show that based on their specific income/assets, they are unable to pay the likely costs of arbitration.” The third and final consideration for the court is whether the arbitration agreement allows for a party to avoid or reduce the costs of arbitration based on financial hardship.

One case that exemplifies this is Clark v. Renaissance West in Arizona. The plaintiff sued the nursing home for medical malpractice, alleging that it was due to their negligence that he formed a pressure ulcer which required surgery and long term care to remedy. Clark had signed a contract with the nursing home that included an arbitration clause but he argued that the clause was unenforceable and took the case to trial. The trial court ruled that the arbitration clause was, indeed unconscionable, and the appellate court agreed after Renaissance West appealed the lower court’s decision.

Most arbitration clauses state that the company will choose and pay for arbitration. In this case however, the contract called for three arbitrators in the event that the parties could not agree on one, and for both parties to split the arbitration fees, regardless of who won the case. Clark brought in an expert who testified that, based on the complexity of Clark’s case, they could be in arbitration for at least five days (assuming an 8-hour day). Taking that into consideration, arbitration alone would have cost Clark about $22,800. Since Clark is retired and living on a fixed income, such an exorbitant amount is clearly beyond his means.

The appellate court’s decision is a mixed blessing for plaintiffs trying to avoid unfair arbitration provisions. On the one hand, the plaintiff won and the arbitration clause has been rejected. On the other hand, this case has proven the lengths to which plaintiffs must go in order to prove that the arbitration clause is unconscionable.

New Jersey Supreme Court Requires Mediated Settlement to be in Writing

November 7, 2013 | Peter S. Lubin and James V. DiTommaso

While courts usually use the law to determine who has the right in a case, supreme courts can sometimes use a case as motivation to create new laws or to modify existing laws. In a recent case, the New Jersey Supreme Court did both of these things. The case, Willingboro Mall v. Franklin Avenue, involved a pre-existing law which the court used to rule in the case. However, the court determined that, in future cases, a slightly different set of standards would be used.

The case involved the sale of a mall which was handled in mediation. However, the settlement was never put in writing before the mediation closed. A few weeks after the settlement, Willingboro rejected the settlement and Franklin filed a motion to enforce the settlement. In his filing, Franklin included certifications from its attorney and the mediator. Rather than filing a motion to dismiss the case based on breach of mediation confidentiality, Willingboro filed an opposing motion in which it included certification from its manager regarding the substance of the parties’ discussion during mediation. During discovery, both Franklin and Willingboro agreed to waive any issues of confidentiality concerning the mediation process.

A four-day hearing followed, during which testimony was given from the mediator as well as Willingboro’s manager and attorney. However, halfway through the hearing, Willingboro changed its mind and moved for an order to expunge “all confidential communications” which had been disclosed and to bar any further disclosures regarding the mediation. The court ruled, however, that Willingboro had already waived its right to confidentiality and the hearing proceeded. At the end of the hearing, the trial court determined that the settlement was binding and ruled to enforce it, “[even] though the [settlement] terms were not reduced to formal writing at the mediation session.”

Willingboro appealed the decision until it reached the New Jersey Supreme Court. The Supreme Court upheld the rulings of the lower courts, enforcing the settlement. In determining a breach of confidentiality, the Court considered the rule governing mediation which states that “an agreement evidenced by a record signed by all parties to the agreement is an exception to the mediation-communication privilege.” Although this rule does not specify that the agreement must be made in writing, it does require some sort of documentation of the agreement, whether written or on tape, to be signed by all parties involved in the mediation. Given that there was no such signed record, the court ruled that this exception did not apply in the current case.

Willingboro’s attempt to dismiss the case based on this rule was therefore rejected.
Although the court agreed that the testimony of the mediator was a breach of confidentiality, it found that Willingboro had waited too long before objecting to the breach. The court further rejected Willingboro’s assertions that its own disclosures were permitted, but that Franklin’s disclosures consisted a breach of confidentiality.

However, in order to avoid such confusion from resulting in similar lawsuits in the future, the New Jersey Supreme Court added that, from now on “if the parties to mediation reach an agreement to resolve their dispute, the terms of that settlement must be reduced to writing and signed by the parties before the mediation comes to a close” in order to be enforced.”

Johnson & Johnson Pays to $2.2 Billion to Settle Whistle Blower/Qui Tam Fraud Lawsuit

November 4, 2013 | Peter S. Lubin and James V. DiTommaso

Johnson & Johnson and its subsidiaries have agreed on Monday to pay over $2.2 billion to resolve criminal and civil allegations of promoting prescription drugs for uses not approved as safe and effective by the Food and Drug Administration – which was first brought to light by a Chicago-area whistle-blower.

Class Action Lawsuit Over Johns Hopkins Gynecologist Moves Forward

November 2, 2013 | Peter S. Lubin and James V. DiTommaso

CBS News reports:

In a stunning new development, WJZ learns there may be as many as 9,000 victims of a Johns Hopkins gynecologist.

Dr. Nikita Levy killed himself after allegations surfaced that he secretly videotaped his patients during exams.

Mike Hellgren tells us what else his victims claim he did to them.

They say he performed extra exams and touched them inappropriately. Now — a class action settlement process is moving forward in the case, with the lawyers representing the victims praising Johns Hopkins.

Investigators say gynecologist Nikita Levy used a pen camera to record exams at Johns Hopkins’ East Baltimore Medical Center. The FBI is still sifting through thousands of images on Levy’s computer.

There may be 9,000 victims, and their lawyers are now working to settle the class action case through a mediator.

Class actions sometime provide an excellent device to help victims receive treatment for mass traumas such as occurred here. More often individualized injuries from mass torts can be organized into groups of cases for discovery and then bell weather cases can be tried to set a settlement value for the remaining cases. Treating this type of case as a class action is somewhat unusual.

Internet Auto-Fraud and Other Internet Fraud Scams

October 28, 2013 | Peter S. Lubin and James V. DiTommaso

Watch the latest video at video.foxnews.com

How to avoid internet auto fraud, intimidation and extortion.

Ford Settles F Series Truck Class Action

October 27, 2013 | Peter S. Lubin and James V. DiTommaso

As with all relationships, business partnerships can sometimes turn out to be more trouble than they are worth. Such was apparently the case in the relationship between Ford Motor Co. and Navistar. Beginning in 1994, Ford had Navistar build every Power Stroke engine used in Ford’s F-Series. However, the diesel engines produced by Navistar resulted in dozens of class action consumer lawsuits against Ford for cars it sold with allegedly defective engines.

Ford has now agreed to settle the lawsuits outside of court, which include all of the 2003-2007 Super Duty pickups and E-series vans sold by the car company. At the center of the lawsuit is the diesel 6-liter V-8 engine which allegedly had multiple problems with the fuel system, turbochargers, and other major components. The settlement covers any consumer in the United States who purchased or leased any 2003-2007 Ford vehicle which was equipped with a 6-liter Power Stroke diesel engine and had to replace, repair, or adjust the vehicle’s exhaust gas recirculation (EGR) cooler and EGR valve, oil cooler, fuel injectors, or turbocharger before the vehicle reached 135,000 miles or six years of age.

The settlement will reportedly cover half of the full value of all of the claims made by class members in addition to $150,000, which the car company will pay to the 16 named plaintiffs of the case. The total amount of the settlement will depend upon the number of potential class members who decide to file a claim. Each component of the diesel engine has a reimbursement limit. If a class member paid at least a $100 deductible multiple times for repairs under the five-year/100,000 mile engine warranty, Ford will reimburse the consumer $50 for each deductible paid, beginning with the second deductible and going through the fifth. They will pay up to $200 covering no more than four deductible payments. All told, each consumer will be able to claim between $50 and $825 in reimbursements for repairs to their engine and engine components as a result of this settlement.

Despite the long relationship between Ford and Navistar, poor engine quality, high repair costs, and lower customer satisfaction led to the demise of that relationship. Beginning in 2010, Ford replaced the Navistar diesel engine with a new 6.7 liter diesel V-8 which the company designs itself.

Some of the failures of the Navistar 6-liter diesel engines were so severe that Ford was forced to replace entire engines. Ford also had to issue recalls which resulted in the company buying back hundreds of trucks with engines that required extensive and costly repairs. Due to all of these problems, the relationship between Ford and Navistar grew to be more costly to Ford than beneficial. They dramatically increased the warranty costs on Ford vehicles and resulted in litigation with Navistar. However, Navistar was eventually removed from the class action lawsuit which Ford has recently agreed to settle. This leaves Ford with the full burden of costs of the class action lawsuit. Because consumers grouped together in a class action they were finally able to achieve some damages for their defective trucks.