Friday, December 3, 2010

Excerpts 20-24 - Opinion of US 7th Circuit Court of Appeals, Case No. 08-2306 Options

nion of US 7th Circuit Court of Appeals, Case No. 08-2306 - November 23, 2010

20 No. 08-2306
derived from the commonlaw doctrine that a decree of
injunction not only binds the parties defendant but also
those identified with them in interest, in “privity” with
them, represented by them or subject to their control.
In essence it is that defendants may not nullify a decree
by carrying out prohibited acts through aiders and
abettors, although they were not parties to the original
Regal Knitwear Co. v. N.L.R.B., 324 U.S. 9, 14 (1945). Broadly
speaking, both the rule and the common-law doctrine
contemplate two categories of nonparties potentially
bound by an injunction. One includes nonparties acting in
concert with a bound party; many cases hold that a
nonparty may be held in contempt if he aids or abets an
enjoined party in violating an injunction. Id.; Chase Nat’l
Bank v. City of Norwalk, Ohio, 291 U.S. 431, 436 (1934);
S.E.C. v. Homa, 514 F.3d 661, 673-77 (7th Cir. 2008); Rockwell
Graphic Sys., Inc. v. DEV Indus., Inc., 91 F.3d 914, 919
(7th Cir. 1996). This principle is codified in subsection
(2)(C) of the rule, which provides that nonparties “who are
in active concert or participation with” a bound party are
themselves bound and may be liable for aiding and
abetting the party’s contempt. See FED. R. CIV.
P. 65(d)(2)(C). This category of nonparty contempt liability
is also not at issue here.
The other category is captured under the general rubric
of “privity.” It is generally accepted that an injunction may
be enforced against a nonparty in “privity” with an
enjoined party. E.g., Golden State Bottling Co. v. N.L.R.B., 414
U.S. 168, 179-80 (1973); Regal Knitwear, 324 U.S. at 14;
No. 08-2306 21
Rockwell Graphic Sys., 91 F.3d at 919. This concept can be
hard to pin down; the use of the term “privity” has expanded
over time. See Taylor, 553 U.S. at 894 n.8 (“The term
‘privity’ . . . has also come to be used more broadly, as a
way to express the conclusion that nonparty preclusion is
appropriate on any ground.”); Richards, 517 U.S. at 798
(“[T]he term ‘privity’ is now used to describe various
relationships between litigants that would not have come
within the traditional definition of that term.”). In this
context, “privity” has come to be “seen as a descriptive
term for designating those with a sufficiently close identity
of interests” to justify application of nonparty claim
preclusion, Tice v. Am. Airlines, Inc., 162 F.3d 966, 971
(7th Cir. 1998) (internal quotation marks omitted), or the
enforcement of an injunction against a nonparty, see Regal
Knitwear, 324 U.S. at 14.
The concept of privity, however—both in preclusion
doctrine and in the law of injunctions—is ultimately
bounded by due process, which starts from a “presumption
that each person has a right to her day in court.” Martin H.
Redish & William J. Katt, Taylor v. Sturgell, Procedural Due
Process, and the Day-in-Court Ideal: Resolving the Virtual
Representation Dilemma, 84 NOTRE DAME L. REV. 1877,
1881 (2009); see also Richards, 517 U.S. at 798 (“[T]here
are clearly constitutional limits on the ‘privity’ exception
. . . .”); Regal Knitwear, 324 U.S. at 13 (“The courts, nevertheless,
may not grant an enforcement order or injunction
so broad as to make punishable the conduct of persons
who acted independently and whose rights have not been
adjudged according to law.”); Tice, 162 F.3d at 971 (cautioning
against too relaxed an approach to privity because
22 No. 08-2306
“serious due process problems would arise if the earlier
nonparty were barred from her own day in court”).
Both preclusion doctrine and Rule 65(d)(2) are concerned
with the scope and effect of a judgment, and “[i]n no area
of procedure has this [own-day-in-court] ideal traditionally
played a more important role than the field of judgments.”
Redish & Katt, supra, at 1877. When privity is invoked as a
basis for binding a nonparty to an injunction, it is “restricted
to persons so identified in interest with those
named in the decree that it would be reasonable to conclude
that their rights and interests have been represented
and adjudicated in the original injunction proceeding.”
PROCEDURE § 2956, at 340-41 (2d ed. 1995).
The caselaw suggests that when it comes to injunctions,
the concept of nonparty privity has at least two subcategories.
One line of cases holds that an injunction will bind
nonparty successors in interest to an enjoined party. E.g.,
Golden State Bottling Co., 414 U.S. 168; Regal Knitwear, 324
U.S. at 14-15; Walling v. James V. Reuter, Inc., 321 U.S.
671 (1944); Reich, 50 F.3d 413; Panther Pumps & Equip. Co.
v. Hydrocraft, Inc., 566 F.2d 8 (7th Cir. 1977); see also Operation
Rescue Nat’l, 80 F.3d at 70 (“[A party may not] circumvent
a valid court order merely by making superficial
changes in the organization’s name or form . . . .”). Another
line of cases holds that a nonparty may be bound by an
injunction if the nonparty is otherwise “legally identified”
with the enjoined party. See, e.g., Merriam, 639 F.2d at 37-40;
see also Flowdata, 154 F.3d at 1352 (using “legal identification”
test and favorably citing Merriam).
No. 08-2306 23
The main dispute in this case centers on the First Circuit’s
decision in Merriam, and specifically whether its
articulation of the “legal identity” basis for privity is
doctrinally sound. The question arises here because the
district court thought Merriam was inconsistent with the
Second Circuit’s famous articulation in Alemite of the
principles on which nonparties may be held in contempt
and the related limits on the court’s adjudicative power.
In Alemite the underlying suit involved four brothers
alleged to be partners in a business that was infringing the
plaintiff’s patent. Two of the brothers were never served,
and the case proceeded to trial against the remaining two,
John and Joseph Staff. Joseph was dismissed as a defendant
after John testified that the business belonged solely to
him and he merely employed Joseph as a salesman. The
court then enjoined John Staff and “his agents, employees,
associates and confederates” from infringing the plaintiff’s
patent. Sometime later Joseph left his brother’s employ,
“set up in business for himself, and was proved to have
infringed the patent.” Alemite, 42 F.2d at 832. The plaintiff
initiated contempt proceedings against Joseph. Though he
was no longer John’s employee, and John himself was not
involved in Joseph’s infringement of the patent, the district
court found Joseph—a nonparty to the injunction action—
in contempt. Id.
The Second Circuit reversed. In a decision by Judge
Hand, the court explained the background legal principles
as follows:
[N]o court can make a decree which will bind any one
but a party; a court of equity is as much so limited as a
24 No. 08-2306
court of law; it cannot lawfully enjoin the world at
large, no matter how broadly it words its decree. If it
assumes to do so, the decree is pro tanto brutum
fulmen, and the persons enjoined are free to ignore it.
It is not vested with sovereign powers to declare
conduct unlawful; its jurisdiction is limited to those
over whom it gets personal service, and who therefore
can have their day in court. Thus, the only occasion
when a person not a party may be punished, is when
he has helped to bring about, not merely what the
decree has forbidden, because it may have gone too far,
but what it has power to forbid, an act of a party. This
means that the respondent must either abet the defendant,
or must be legally identified with him.
Id. at 832-33. Joseph Staff was not himself a party to the
injunction and was no longer employed by John, the
enjoined party; he had not aided or abetted a violation of
the injunction by John, the bound party. Accordingly, the
court held that Joseph could not be found in contempt.
Id. at 833. “The District Court,” the Second Circuit explained,
“had no more power in the case at bar to punish
the respondent than a third party who had never heard of
the suit.” Id.
In Merriam the First Circuit invoked Alemite in another
case involving two brothers, but with a different result:
Merriam held that a “key employee” of a corporation could
be personally bound by an injunction against the corporation
even after he ceased being an agent of the company.
639 F.2d at 39. Brothers John and George Hoskins opened
a small reference-book marketing company known as the

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