Friday, December 3, 2010

Excerpts 25-30 - Opinion of US 7th Circuit Court of Appeals, Case No. 08-2306 Options

November 23, 2010 - 7th Circuit Court of Appeals rules against Haifan Baha'is of Wilmette, Illinois
Seventh Circuit Court of Appeals. Opinion, Judge Sykes.
Excerpts - Opinion of US 7th Circuit Court of Appeals, Case No. 08-2306

No. 08-2306
Webster Dictionary Company in 1975; John was its presi-
dent and sole shareholder, and George was his general
sales manager. At its peak the company had six employees;
it was not in business very long. The big dictionary firm G.
& C. Merriam Co. owned the rights to the well-known
“Webster’s” line of dictionaries, and in late 1975 it sued
Webster Dictionary for trademark infringement, seeking
damages and injunctive relief. In March 1977 Webster
Dictionary advised the court that it was insolvent, was
discharging its attorneys, and would consent to entry of an
“appropriate judgment” against it. In October of that year,
the district court held that Webster Dictionary had de-
faulted and entered a permanent injunction against it and
John Hoskins barring them from using various Merriam
tradenames and marks. Webster Dictionary went out of
business and John Hoskins exited the reference-book
George Hoskins did not. In 1976, still employed by
Webster Dictionary, George incorporated Webster Publish-
ing Company and two related corporations, the business of
which bore “a striking resemblance to that of Webster
Dictionary Company.” Id. at 34. After Webster Dictionary
ceased operations, George Hoskins, through Webster
Publishing, continued to use Merriam’s tradenames and
marks in much the same way as Webster Dictionary had.
The district court held that George Hoskins and Webster
Publishing were bound by the injunction against Webster
Dictionary and found them in contempt.
The First Circuit reversed based on a lack of clarity in the
district court’s order and remanded with a detailed
No. 08-2306
explanation of the possible legal grounds for holding
George Hoskins and Webster Publishing bound by the
injunction though they were not parties to the underlying
litigation. The court began with a discussion of Alemite,
summarizing the holding in this way: “To hold a non-
party bound by an injunction it is thus essential to prove
either that the nonparty participated in the contumacious
act of a party or that the nonparty was subject to the
injunction because [he is] legally identified with a party.”
Id. at 35. Because George Hoskins had not participated in
an act of contempt by John, the court recognized that he
could not be held in contempt as an aider and abettor. Id.
The court noted that an enjoined party’s “successors and
assigns” might be “legally identified” with the bound party
and thus obligated to obey the injunction; this justification
for nonparty contempt was also unavailable because
George Hoskins and Webster Publishing were not the
successors or assigns of John or Webster Dictionary. In this
regard, the court observed that “[i]t is not enough to prove
that the first entity went out of existence and . . . the second
entity entered into the enjoined type of business activity,
knowing about the injunction but without having acquired
the business, or a relevant part of it, from the first entity.”
Id. at 36.
But the court went on to conclude that a person could be
“legally identified” with an enjoined corporation and thus
personally bound by the injunction if he was a “key
employee” of the corporation, had a significant role in the
underlying litigation, and was closely identified with the
bound party in other relevant respects. Id. at 37. Impor-
No. 08-2306
tantly, the court explained that the nonparty’s status as a
“key employee” of the enjoined corporation is not suffi-
cient by itself to personally bind him to the injunction:
[T]hat George Hoskins was a “key employee” of
Webster Dictionary Company as well as “the princi-
pal” of [Webster Publishing] . . . is insufficient to
support the district court’s conclusion that George
Hoskins was bound by the injunction. The central
reason that one who is not a party to the action
in which the injunction was issued cannot be bound
by it is that he has not had his day in court with
respect to the validity of the injunction. Cf. Alemite,
supra. Absent an opportunity to contest liability, his
knowledge of the injunction is not sufficient to bind
him as an individual, id., as distinguished from prohib-
iting him from acting in the forbidden way on behalf
of the enjoined party. Thus, the relevant inquiry is not
merely whether (in addition to having knowledge of
the injunction) George Hoskins was a “key employee”
of Webster Dictionary Company but whether he had
such a key role in the corporation’s participation in
the injunction proceedings that it can be fairly said
that he has had his day in court in relation to the
validity of the injunction.
Id. The court issued these remand instructions to the
district court:
The evidence raises a fact issue as to whether this is
a case of the same person continuing to do
essentially the same thing with the same high degree
of practical control, discretion and responsibility,
No. 08-2306
before and after the injunction, with knowledge of the
injunction, and after participating in the enjoined
firm’s corporate decisionmaking regarding its position
in the injunction proceedings. If it is found that George
Hoskins was legally identified with Webster Dictionary
Company in this way, then he is bound by the injunc-
tion and the appellant corporations founded by him
are also subject to it.
Id. at 38.
The upshot of Merriam is that a key employee, officer,
director, shareholder, or other central figure in an
enjoined corporation can be personally bound by the
injunction even after the company has dissolved, provided
he had a controlling role in the injunction proceedings
and is otherwise so “closely identified” with the
enjoined corporation that it may reasonably be said that
he had his day in court when the injunction was issued.4
These important qualifiers keep Merriam within the limits
of due process.
Understood in this way, Merriam corresponds to one of the
categories of nonparty preclusion listed in Taylor, which might
be described in shorthand as “control person” preclusion. Taylor
v. Sturgell, 553 U.S. 880, 895 (2008) (“[A] nonparty is bound by a
judgment if she assumed control over the litigation in which that
judgment was rendered.” (internal quotation marks omitted));
see also Montana v. United States, 440 U.S. 147, 153-54 (1979);
Schnell v. Peter Eckrich & Sons, Inc., 365 U.S. 260, 262 n.4 (1961);
Souffront v. La Compagnie des Sucreries de Porto Rico, 217 U.S. 475,
486-87 (1910).
No. 08-2306
In this case, the district court rejected Merriam’s holding
for essentially two reasons. First, the judge thought
Merriam was in “silent tension” with Judge Hand’s opinion
in Alemite. Second, she concluded that Merriam conflicted
with the Supreme Court’s decision in Zenith Radio Corp. v.
Hazeltine Research, Inc., 395 U.S. 100 (1969). We disagree on
both counts.
Though Alemite and Merriam reached very different
results, the two opinions can be reconciled. For starters,
Alemite specifically noted that a nonparty to an injunction
proceeding may be held in contempt for violating the
injunction when the nonparty “either abet[s] the defendant,
or [is] legally identified with him.” 42 F.2d at 833 (emphasis
added). Moreover, Alemite’s result—that a salesman is not
bound along with his corporation—is consistent with
Merriam’s holding that a “key employee,” without more, is
not legally identified with the enjoined company. Merriam,
639 F.2d at 37. To be sure, there are factual differences
between the two cases, but we find no tension between the
two as a legal matter. See id. at 39 (distinguishing Alemite
on these grounds). Both cases recognize the following
categories of nonparty contempt liability: (1) aiders and
abettors; and (2) those who are legally identified with the
enjoined party. “Legal identity” usually means successors
and assigns, but it can include a limited class of other
nonparties as well—provided the evidence establishes a
very close identity of interest and such significant control
over the organization and the underlying litigation that it
is fair to say that the nonparty had his day in court when
the injunction was issued.
No. 08-2306
As for the perceived inconsistency between Merriam and
Zenith Radio, here too we disagree. In Zenith Radio the
Supreme Court reiterated the general rule that a court
may not issue an injunction against a person over which
the court had not acquired jurisdiction by service of
process. 395 U.S. at 110-12; accord United States v.
Kirschenbaum, 156 F.3d 784, 794-96 (7th Cir. 1998). But
the Court clearly anticipated that a nonparty may
properly be held in contempt for violating an injunction
if the court acquires jurisdiction over the nonparty and
gives the nonparty an opportunity to contest whether he
is bound by the injunction and is in fact in contempt.
Zenith Radio, 395 U.S. at 112 (“[A] nonparty with notice
cannot be held in contempt until shown to be in concert
or participation. It was error to enter the injunction against
Hazeltine, without having made this determination in
a proceeding to which Hazeltine was a party.” (emphasis
added)). Once a court establishes jurisdiction over a
nonparty and offers the nonparty this opportunity to be
heard on whether concerted action or privity exists,
Zenith Radio requires nothing further insofar as Rule
65(d)(2) is concerned. See Lake Shore Asset Mgmt., 511 F.3d
at 767 (offering similar understanding of Zenith Radio
and stating “whether a particular person or firm is among
[those listed in Rule 65(d)(2)(B)-(C)] is a decision that
may be made only after the person in question is given
notice and an opportunity to be heard”); see also id.
(Nonparties still “act at their peril if they disregard
the commands of the injunction, for, if the district court
ultimately determines that they are in concert with [the
enjoined party], then they will be in contempt of court.”);

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