The ABC’s of Government Contract Claims – 10 Ways to Maximize Your Chance of Success

Sheppard Mullin 2012

1. Understand the Basic Contract Requirement – Every contract lawyer will begin an assessment with a very simple, fundamental question, i.e., “What does the contract say?” Your obligation is to perform to the contract; nothing more; nothing less.

2. Identify Variances Between What the Contract Says and What You Actually Are Doing – If you are doing something other than what the contract actually says, you may be entitled to relief.

3. Ask Yourself “Why Am I Doing This?” –You cannot blame Uncle Sam for your or (generally) your suppliers’ inefficiencies and delinquencies, but there are many Government acts or omissions that might entitle you to relief, e.g., Government direction, a defective specification, an acceleration order, late or defective GFP/GFE/GFI, and Government delinquencies relating to contractually prescribed review periods.

4. Do a Disciplined “Root Cause” Analysis – You perform these kinds of analyses in reporting on discrepancies to the Government. Require no less when analyzing a possible claim. Do not accept the easy answer, e.g., “We missed it.” If that is the response, probe – “What did you miss exactly?” “Show me where it was.” “Let me see the documentation you missed.”

5. Notify the Contracting Officer – Tell the PCO, in writing, of the circumstance that you believe gives rise to a change. Deprive the PCO of the ability to claim, later on, “If only I had known, I would have told you to stop doing that.”

6. Accept No Substitutes – No one but the Contracting Officer has the authority to change the contract. COTR’s, contracting specialists, Program Managers, general officers – they all love to issue orders and they will jawbone you to follow them. Don’t. Report the order to the PCO and ask the PCO to confirm the order to you in writing.

7. Trust But Verify – This one is simple. Never act on an oral direction. Send a letter to the PCO asking for confirmation. 8. Read Your “Changes” and “Notification of Changes” Clause(s) – They impose time limits for notification of a change. Failure to comply can be overcome in many cases, but why take that chance?

9. Use Change Order Accounting – A valid changes claim is only as good as your ability to prove quantum. Establish separate job numbers to collect the costs of the changed work.

10. Earn Interest – An REA can linger without closure for months, and years. If there is no progress, transform the REA into a certified claim and start the accrual of interest. And remember, the statute of limitations for submission of a certified claim is six years from the date of its accrual.

And for those of you who read this far, here is your bonus eleventh tip:

11. Read Those Unilaterally Issued Change Orders – They invariably say the work is not a change and ask you to sign. Don’t.

Copyright © 2013, Sheppard Mullin Richter & Hampton LLP

Beware the Boilerplate: Waiver Provisions

Linda R. Stahl of Andrews Kurth LLP recently had a series of articles regarding Boilerplate Contracts published in The National Law Review start reading the series here:
Andrews Kurth

What is a waiver?

Loan documents (generally the note, security instrument and guaranty) often contain waiver provisions. Some common waivers are indemnity provisions, waiver of the right to jury trial, waiver of defenses and waiver of notice. While parties seeking waivers might favor sneaking such provisions into the document, this can often backfire—and it is sure to for the waivers litigants care about most.

A “waiver” is the relinquishment of a right that is both (1) knowing and (2) voluntary. One way to help your lawyer show that a waiver in a contract is both knowing and voluntary is to make it conspicuous in the document.

How do I make a waiver conspicuous?

Simply put, a conspicuous waiver is one that jumps out at you. Use of ALL CAPS, contrasting type or color, for example, qualifies as conspicuous. Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 511 (Tex.1993). The most common, and probably best practice, is to make a provision conspicuous by setting it apart in bold, all-cap letters. E.g. In re Gen. Elec. Capital Corp., 203 S.W.3d 314, 316 (Tex. 2006) (orig. proceeding) (recognizing that contractual jury waiver provision that was “conspicuous”—because it was in bolded font and in all capital letters—met burden of party seeking to enforce provision to make prima facie showing that waiver was knowing and voluntary). Using a heading in addition that specifically states “waiver of jury trial” or “waiver of defenses” enhances conspicuousness and makes waiver provisions easier to defend.

Why is conspicuousness so important?

A conspicuous waiver is presumed to be knowing and voluntary, which shifts the burden to the other party to negate the presumption. Coupled with the general legal principle that persons are charged with knowledge of the contracts they sign and cannot use failure to read as a defense, In re Lyon Fin. Services, Inc., 257 S.W.3d 228, 232-33 (Tex. 2008), conspicuous waivers can be hard to beat.

More importantly, in the case of “extraordinary” risk-shifting waivers (you can read that as “waivers lenders should care about most”), conspicuousness is required. Examples of extraordinary waivers are indemnity agreements, agreements to release another in advance from liability for the other’s negligence, and waivers of jury trial.  See Littlefield v. Schaefer, 955 S.W.2d 272, 273 (Tex.1997); Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex.1993); In re Bank of Am., 278 S.W.342 (Tex. 2009).

Bottom line

Extraordinary or not, every waiver could benefit from being conspicuous.

Read the rest of the series:

Beware the Boilerplate:  Issue One

Beware the Boilerplate:  Issue Two

Beware the Boilerplate:  Issue Three

© 2013 Andrews Kurth LLP

Private Equity Fund Is Not a “Trade or Business” Under ERISA

An article, Private Equity Fund Is Not a “Trade or Business” Under ERISA, written by Stanley F. Lechner of Morgan, Lewis & Bockius LLP was recently featured in The National Law Review:

Morgan Lewis logo

 

District court decision refutes 2007 Pension Benefit Guaranty Corporation opinion letter and could provide potential clarity to private equity firms and private equity funds in determining how to structure their investments.

In a significant ruling that directly refutes a controversial 2007 opinion by the Pension Benefit Guaranty Corporation (PBGC) Appeals Board, the U.S. District Court for the District of Massachusetts held in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund that a private equity fund is not a “trade or business” under the Employee Retirement Income Security Act (ERISA) and therefore is not jointly and severally liable for millions of dollars in pension withdrawal liability incurred by a portfolio company in which the private equity fund had a substantial investment.[1] This ruling, if followed by other courts, will provide considerable clarity and relief to private equity funds that carefully structure their portfolios.

The Sun Capital Case

In Sun Capital, two private equity funds (Sun Fund III and Sun Fund IV) invested in a manufacturing company in 2006 through an affiliated subsidiary and obtained a 30% and 70% ownership interest, respectively, in the company. Two years after their investment, the company withdrew from a multiemployer pension plan in which it had participated and filed for protection under chapter 11 of the Bankruptcy Code. The pension fund assessed the company with withdrawal liability under section 4203 of ERISA in the amount of $4.5 million. In addition, the pension fund asserted that the two private equity funds were a joint venture or partnership under common control with the bankrupt company and thus were jointly and severally liable for the company’s withdrawal liability.

In response to the pension fund’s assessment, the private equity funds filed a lawsuit in federal district court in Massachusetts, seeking a declaratory judgment that, among other things, they were not an “employer” under section 4001(b)(1) of ERISA that could be liable for the bankrupt company’s pension withdrawal liability because they were neither (1) a “trade or business” nor (2) under “common control” with the bankrupt company.

Summary Judgment for the Private Equity Funds

After receiving cross-motions for summary judgment, the district court granted the private equity funds’ motion for summary judgment. In a lengthy and detailed written opinion, the court made three significant rulings.

First, the court held that the private equity funds were passive investors and not “trades or businesses” under common control with the bankrupt company and thus were not jointly and severally liable for the company’s withdrawal liability. In so holding, the court rejected a 2007 opinion letter of the PBGC Appeals Board, which had held that a private equity fund that owned a 96% interest in a company was a trade or business and was jointly and severally liable for unfunded employee benefit liabilities when the company’s single-employer pension plan terminated.

A fundamental difference between the legal reasoning of the court in the Sun Capital case compared to the reasoning of the PBGC in the 2007 opinion is the extent to which the actions of the private equity funds’ general partners were attributed to the private equity fund. In the PBGC opinion, the Appeals Board concluded that the private equity fund was not a “passive investor” because its agent, the fund’s general partner, was actively involved in the business activity of the company in which it invested and exercised control over the management of the company. In contrast, the court in Sun Capital stated that the PBGC Appeals Board “misunderstood the law of agency” and “incorrectly attributed the activity of the general partner to the investment fund.”[2]

Second, in responding to what the court described as a “creative” but unpersuasive argument by the pension fund, the court concluded that the private equity funds did not incur partnership liability due to the fact that they were both members in the affiliated Delaware limited liability company (LLC) that the funds created to serve as the fund’s investment vehicle in purchasing the manufacturing company. Applying Delaware state law, the court stated that the private equity funds, as members of an LLC, were not personally liable for the liabilities of the LLC. Therefore, the court concluded that, even if the LLC bore any responsibility for the bankrupt company’s withdrawal liability, the private equity funds were not jointly and severally liable for such liability.

Third, the court held that, even though each of the private equity funds limited its investment in the manufacturing company to less than 80% (i.e., 30% for Fund III and 70% for Fund IV) in part to “minimize their exposure to potential future withdrawal liability,” this did not subject the private equity funds to withdrawal liability under the “evade or avoid” provisions of section 4212(c) of ERISA.[3] Under section 4212(c) of ERISA, withdrawal liability could be incurred by an entity that engages in a transaction if “a principal purpose of [the] transaction is to evade or avoid liability” from a multiemployer pension plan. In so ruling, the court stated that the private equity funds had legitimate business reasons for limiting their investments to under 80% each and that it was not clear to the court that Congress intended the “evade or avoid” provisions of ERISA to apply to outside investors such as private equity funds.

Legal Context for the Court’s Ruling

Due to the distressed condition of many single-employer and multiemployer pension plans, the PBGC and many multiemployer pension plans are pursuing claims against solvent entities to satisfy unfunded benefit liabilities. For example, if a company files for bankruptcy and terminates its defined benefit pension plan, the PBGC generally will take over the plan and may file claims against the company’s corporate parents, affiliates, or investment funds that had a controlling interest in the company, or the PBGC will pursue claims against alleged alter egos, successor employers, or others for the unfunded benefit liabilities of the plan that the bankrupt company cannot satisfy.

Similarly, if a company contributes to a multiemployer pension plan and, for whatever reason, withdraws from the plan, the withdrawing company will be assessed “withdrawal liability” if the plan has unfunded vested benefits. In general, withdrawal liability consists of the employer’s pro rata share of any unfunded vested benefit liability of the multiemployer pension plan. If the withdrawing company is financially unable to pay the assessed withdrawal liability, the multiemployer plan may file claims against solvent entities pursuant to various legal theories, such as controlled group liability or successor liability, or may challenge transactions that have a principal purpose of “evading or avoiding” withdrawal liability.

Under ERISA, liability for unfunded or underfunded employee benefit plans is not limited to the employer that sponsors a single-employer plan and is not limited to the employer that contributes to a multiemployer pension plan. Instead, ERISA liability extends to all members of the employer’s “controlled group.” Members of an employer’s controlled group generally include those “trades or businesses” that are under “common control” with the employer. In parent-subsidiary controlled groups, for example, the parent company must own at least 80% of the subsidiary to be part of the controlled group. Under ERISA, being part of an employer’s controlled group is significant because all members of the controlled group are jointly and severally liable for the employee benefit liabilities that the company owes to an ERISA-covered plan.

Private Investment Funds as “Trades or Businesses”

Historically, private investment funds were not considered to be part of an employer’s controlled group because they were not considered to be a “trade or business.” Past rulings generally have supported the conclusion that a passive investment, such as through a private equity fund, is not a trade or business and therefore cannot be considered part of a controlled group.[4]

In 2007, however, the Appeals Board of the PBGC issued a contrary opinion, concluding a private equity fund that invested in a company that eventually failed was a “trade or business” and therefore was jointly and severally liable for the unfunded employee benefit liabilities of the company’s defined benefit pension plan, which was terminated by the PBGC. Although the 2007 PBGC opinion letter was disputed by many practitioners, it was endorsed by at least one court.[5]

The Palladium Capital Case

In Palladium Capital, a related group of companies participated in two multiemployer pension plans. The companies became insolvent, filed for bankruptcy, withdrew from the multiemployer pension plans, and were assessed more than $13 million in withdrawal liability. Unable to collect the withdrawal liability from the defunct companies, the pension plans initiated litigation against three private equity limited partnerships and a private equity firm that acted as an advisor to the limited partnerships. The three limited partnerships collectively owned more than 80% of the unrestricted shares of the defunct companies, although no single limited partnership owned more than 57%.

Based on the specific facts of the case, and relying in part on the PBGC’s 2007 opinion, the U.S. District Court for the Eastern District of Michigan denied the parties’ cross-motions for summary judgment. Among other things, the court stated that there were material facts in dispute over whether the three limited partnerships acted as a joint venture or partnership regarding their portfolio investments, whether the limited partnerships were passive investors or “investment plus” investors that actively and regularly exerted power and control over the financial and managerial activities of the portfolio companies, and whether the limited partnerships and their financial advisor were alter egos of the companies and jointly liable for the assessed withdrawal liability. Because there were genuine issues of material fact regarding each of these issues, the court denied each party’s motion for summary judgment.

Significance of the Sun Capital Decision

In concluding that a private equity fund is not a “trade or business,” the Sun Capital decision directly refutes the 2007 PBGC opinion letter and its reasoning. If the Sun Capital decision is followed by other courts, it will provide welcome clarity to private equity firms and private equity funds in determining how to structure their investments. Among other things, both private equity funds and defined benefit pension plans would benefit from knowing whether or under what circumstances a fund’s passive investment in a portfolio company can constitute a “trade or business” thus subjecting the private equity fund to potential controlled group liability. Similarly, both private equity firms and private equity funds need to know whether a court will attribute to the private equity fund the actions of a general partner or financial or management advisors in determining whether the investment fund is sufficiently and actively involved in the operations and management of a portfolio company to be considered a “trade or business.”

The Sun Capital decision was rendered, as noted above, against a backdrop in which the PBGC and underfunded pension plans are becoming more aggressive in pursuing new theories of liability against various solvent entities to collect substantial sums that are owed to the employee benefit plans by insolvent and bankrupt companies. Until the law becomes more developed and clear regarding the various theories of liability that are now being asserted against private equity funds investing in portfolio companies that are exposed to substantial employee benefits liability, it would be prudent for private equity firms and investment funds to do the following:

  • Structure carefully their operations and investment vehicles.
  • Be cautious in determining whether any particular fund should acquire a controlling interest in a portfolio company that faces substantial unfunded pension liability.
  • Ensure that the private equity fund is a passive investor and does not exercise “investment plus” power and influence over the operations and management of its portfolio companies.
  • Conduct thorough due diligence into the potential employee benefits liability of a portfolio company, including “hidden” liabilities, such as withdrawal liability, that generally do not appear on corporate balance sheets and financial statements.
  • Be aware of the risks in structuring a transaction in which an important objective is to elude withdrawal liability.

Similarly, until the law becomes more developed and clear, multiemployer pension plans may wish to devote particular attention to the nature and structure of both strategic and financial owners of the businesses that contribute to their plans and should weigh and balance the risks to which they are exposed by different ownership approaches.


[1]Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 10-10921-DPW, 2012 WL 5197117 (D. Mass. Oct. 18, 2012), available here.

[2]Sun Capital, slip op. at 17.

[3]Id. at 29-30.

[4]. See e.g., Whipple v. Comm’r., 373 U.S. 193, 202 (1963).

[5]See, e.g., Bd. of Trs., Sheet Metal Workers’ Nat’l Pension Fund v. Palladium Equity Partners, LLC (Palladium Capital), 722 F. Supp. 2d 854 (E.D. Mich. 2010).

Copyright © 2012 by Morgan, Lewis & Bockius LLP

Court Grants Summary Judgment Against Coca-Cola in Breach of Collective Bargaining Agreement Claim by United Steel Workers

The National Law Review recently published an article by Bryan R. Walters of Varnum LLP regarding Coca-Cola’s Breach of Collective Bargaining Agreement:

Varnum LLP

 

In Local Union 2-2000 United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial, Chemical and Service Workers International Union v. Coca-Cola Refreshments U.S.A. Inc(W.D. Mich. Nov. 21, 2012), the Honorable Janet T. Neff granted summary judgment in favor of the United Steel Workers against Coca-Cola on a breach of contract claim concerning wage increases under the parties’ collective bargaining agreement. The opinion addressed two interesting legal issues.

First, the court rejected Coca-Cola’s statute of limitations argument under 29 U.S.C. § 160(b), which provides that “no complaint shall issue based upon any unfair labor practice occurring more than six months prior to the filing of the charge with the Board and the service of a copy thereof upon a person against whom such charge is made.”  Coca-Cola argued that, because the United Steel Workers had filed an unfair labor practice charge concerning their unpaid wages claim approximately nine months after becoming aware of the issue, Section 160(b) barred the union’s claim.  The court rejected this argument, concluding that it would be “inappropriate” to apply the six-month limitations period to what was a pure breach of contract claim.  Instead, the court held that the applicable statute of limitations was the six-year statute of limitations under Michigan law for breach of contract actions.  Op. at 13–15.

The second significant issue related to interpretation of the collective bargaining agreement.  The collective bargaining agreement included schedules for wage increases in “Year 1, Year 2, and Year 3” without further defining those terms within the primary contract document.  The court held that this contract language was ambiguous, requiring introduction of parol evidence of the parties’ negotiation history. The court found clear and convincing evidence in the negotiating history that the union’s interpretation of the “Years” was correct, in that “Year 1” referred to the first 365 days after the effective date of the contract, etc.  Id. at 19.

The court also concluded that there was clear and convincing evidence of a mutual mistake in the drafting of the final collective bargaining agreement. Coca-Cola listed specific dates for the wage adjustments in an appendix to the collective bargaining agreement. The court found that the dates listed in the appendix were not bargained for and never agreed to by the parties, rejecting as self-serving subsequent statements from Coca-Cola’s negotiators that Coca-Cola did not consider the dates unilaterally added to the appendix by Coca-Cola a “mistake.”  Id. at 20–21.

© 2012 Varnum LLP

After Nearly 25 Years, New Jersey Appellate Court Provides ‘Sobering’ Guidance to Employers Respecting Workplace Alcoholism

GT Law

It has been almost 25 years since a New Jersey appellate court published a decision providing any meaningful analysis of the treatment of alcoholism in the workplace under the State’s Law Against Discrimination (LAD), the last time being the Supreme Court’s 1988 decision in Clowes v. Terminix International, Inc.

That has now changed.

On October 26, 2012, the Appellate Division held in A.D.P. v. ExxonMobil Research & Engineering Co. that a private-sector, non-union employer’s blanket policy requiring any employee returning from an alcohol rehabilitation program to submit to random alcohol testing, applicable only to those identified as being “alcoholic” and divorced from any individualized assessment of the employee’s performance, was facially discriminatory under the LAD — a conclusion that would likely be the same under the federal Americans with Disabilities Act (ADA) as well. Although the Court reversed summary judgment initially entered in favor of the employer, A.D.P. provides valuable guidance to employers as they develop their policies concerning how best to deal with alcohol (and substance) abuse in the workplace. Equally important,  A.D.P. illustrates the utility of so-called “last chance agreements” to address these issues when they arise.

Plaintiff in  A.D.P. had been employed as a research technician, and later Senior Research Associate, for approximately 30 years.  Unlike the plaintiff in the Supreme Court’s 1992 decision in Hennessey v. Coastal Eagle Point Oil Co., hers was not a “safety-sensitive” position. In 2007, plaintiff voluntarily disclosed to her employer that she suffered from alcoholism, and entered a rehabilitation program. At the time, she was not subject to any pending or threatened disciplinary action, and she had built a good performance record over the years. The company’s policy nonetheless required that, upon her return from rehabilitation, plaintiff sign a contract agreeing to participate in a company-approved “aftercare program” obligating her to “maintain total abstinence from alcohol” and submit to “clinical substance testing for a minimum of two (2) years.” A positive test result or refusal to submit to a test would be deemed grounds for discipline, “which is most likely to be termination of employment.” Although plaintiff passed nine breathalyzer tests over a period of just 10 months, she subsequently failed a pair of tests on August 22, 2008, and accordingly was terminated under the company’s policy.

Reversing summary judgment, the Appellate Division held that the employer’s blanket policy was facially discriminatory because it was unrelated to any performance concerns and was based solely on the  fact that an employee was identified (in plaintiff’s case, self-identified) as an alcoholic (i.e., the employer, according to the court, exhibited “hostility toward members of the employee’s class”). Unlike the Supreme Court in  Hennessey, which considered  whether an employer’s termination of an employee who failed a mandatory random drug test violated a clear mandate of “public policy” thereby creating a common law cause of action for wrongful discharge, the A.D.P. Court grounded its analysis of the defendant’s alcohol policy on LAD.

Notably, the A.D.P. Court looked to the EEOC’s 2000 policy guidance under the ADA, even though the EEOC had not yet considered the potential impact of the 2008 ADA Amendments Act upon that guidance. The EEOC explains that, absent a “last chance” agreement, an employer can subject employees returning from alcohol rehabilitation to random alcohol testing, a breathalyzer for example, only if the employer has a reasonable belief, based on objective evidence, that the employee will pose a “direct threat” (for example, to safety or job performance) absent such testing. Any such “reasonable belief” must be based on an individualized assessment of the employee and his/her position, including “safety risks associated with the position,” and not on generalized assumptions. The A.D.P. Court looked to this guidance statement for “assistance in interpreting the LAD” because the ADA’s prohibition against disability discrimination is “similar” to its LAD counterpart, and alcoholism may qualify as a disability under either statute.

In A.D.P., plaintiff did not have a last chance agreement, a fact the court “emphasize[d]” at the outset. The court also stressed that the employer had made no individualized assessment, but rather “defend[ed] its actions as requirements it uniformly imposed as a matter of policy upon any identified alcoholic.” Interestingly, the A.D.P. Court did not mention the Third Circuit’s unpublished 2009 decision inByrd v. Federal Express Corp. Byrd upheld an employer’s termination of a self-reported alcoholic employee for failing a random alcohol test mandated under a “Statement of Understanding” (SOU) — a contract the Third Circuit described as “in effect, a ‘last chance’ agreement” — that the employer required all employees identified as alcoholics to sign.  Byrd did not, however, consider plaintiff’s claim that requiring the SOU was itself a violation of LAD “because it treats employees with alcohol or substance abuse problems differently,” as plaintiff had failed to challenge the SOU within LAD’s statutory limitations period.

Although  A.D.P. invalidated the particular policy before it, in its opinion, the Court nonetheless provides employers with valuable guidance in developing their own policies concerning alcohol and substance abuse in the workplace. It seems clear under A.D.P. that private, non-union employers can require employees returning from rehabilitation programs for alcoholism to submit to random alcohol or drug testing (subject to the limits imposed by the Supreme Court in Hennessey) provided that either (i) they articulate a reasonable belief, based on careful assessment of objective evidence concerning both the employee and the position, that the employee will pose a direct threat absent such testing, or (ii) the employee has entered into a last chance agreement providing for random testing.

Key Takeaways

  • Employers should strongly consider entering into last chance agreements with any employee who points to alcohol or substance dependency as a cause for workplace problems (for example, poor performance or persistent tardiness), and include in the agreement requirements that, as a condition of continued employment, the employee will enter a rehabilitation program and submit to periodic testing.
  • Absent a last chance agreement, employers should not compel an employee to submit to periodic alcohol testing unless the employer can articulate a reasonable belief, based on a careful assessment of objective evidence concerning both the employee and the nature of his/her position, that the subject employee will pose a direct threat without testing.
  • Employers are cautioned against instituting blanket workplace alcohol (or substance) policies that specifically target employees returning from rehabilitation without regard to safety or performance issues.

©2012 Greenberg Traurig, LLP

Negotiating Business Acquisitions Conference – November 1-2, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:

When

November 01 – 02, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

No Material Change – No Forbidden CON Application Amendment

The National Law Review recently published an article regarding CON Applications written by Pamela A. Scott of Poyner Spruill LLP:

 

The North Carolina Court of Appeals recently made crystal clear that a certificate-of-need (CON) applicant’s submission of additional information after its application has been filed does not constitute a forbidden amendment, unless it materially changes the proposal set forth in the application. The CON regulation prohibiting amendments of applications has been around for more than 30 years, but it has rarely been interpreted by our appellate courts. The no-amendment rule is often a basis for attack against CON applicants that submit any supplemental information after their applications have been filed and deemed complete by the CON Section. In a recent opinion in WakeMed v. N.C. DHHS (COA11-1558), the Court of Appeals rejected the notion that the CON Section’s consideration of any additional information submitted by an applicant after an application is deemed complete constitutes a prohibited amendment requiring disapproval of the application. Instead, the court held that the proper test is whether the additional information materially changed representations made in the application.

At issue in the WakeMed appeal were competitive applications for operating rooms in Wake County and the Division of Health Service Regulation’s decision to award a CON for three ambulatory ORs to Holly Springs Surgery Center (HSSC), a subsidiary of Novant Health, Inc. Rex Hospital, Inc. d/b/a Rex Healthcare (Rex), whose competing application was denied, argued that HSSC’s application should not have been approved because it was impermissibly amended after being filed and deemed complete. Rex’s argument hinged on HSSC’s submission of several subsections of the application and a letter of support from an orthopedic physician practice as attachments to its responsive comments during the CON review approximately two months after the application was deemed complete by the CON Section. Both the subsections and support letter were inadvertently omitted from the application when it was originally filed.

The Court of Appeals disagreed with Rex’s theory that the test for whether a CON application has been amended should be whether the agency “considered” information provided after the application was filed. Instead, the court harkened to the single case in which the court previously held that an application had been impermissibly amended. In that 1996 Presbyterian-Orthopedic Hospital v. N.C. DHHS case, the Court of Appeals had concluded that the CON applicant made a material amendment to its application when it changed the management company that would oversee the operations of its proposed facility, because all the applicant’s logistical and financial data was based upon using the original management company. Consistent with this prior decision, in WakeMed the court ruled that because the answers to the questions in the missing application subsections were found elsewhere in the HSSC application as originally submitted, and because the physician letter of support was specifically referenced in the original application — including identification of the surgeons who signed the letter – the additional information submitted by HSSC did not materially amend the application. The court also noted the testimony of the CON Section chief and project analyst that the approval of the HSSC application was not based upon the additional materials filed.

It is always the best practice to ensure a CON application is complete and contains all necessary information before it is filed with the CON Section. However, inadvertent omissions and other mistakes in the content of applications do happen. The Court of Appeals’ recent analysis of this issue sheds light for long term care providers on the type of additional information that can be submitted regarding a CON application under review, without crossing the amendment line. It should also help CON applicants ward off specious and hyper technical challenges by opponents that are grounded in nothing other than the mere submission of supplemental or clarifying information after an application is filed.

© 2012 Poyner Spruill LLP

Negotiating Business Acquisitions Conference – November 1-2, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:

When

November 01 – 02, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

Negotiating Business Acquisitions Conference – November 1-2, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:

When

November 01 – 02, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

Negotiating Business Acquisitions Conference – November 1-2, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:

When

November 01 – 02, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America