European Parliament Adopts Resolution on Corporate Social Responsibility

Update from this week’s guest blogger at the National Law Review from Foley Hoag LLP.  Tafadzwa Pasipanodya discusses how a Corporate Responsibility Mandate would actually work.  

resolution adopted by the European Parliament on November 25, 2010 increases the likelihood that the days of CSR as a purely voluntary initiative are numbered. Approved by a margin of 480 votes to 48, the resolution on corporate social responsibility in international trade agreements calls on the European Commission to include a CSR clause in all of the European Union’s trade agreements.

Such a clause would require, inter alia, companies to publish “CSR balance sheets,” report on due diligence, and seek free, prior and informed consultation with local stakeholders.  The proposed CSR clause would also provide for monitoring and judicial cooperation in pursuing and punishing breaches of CSR commitments.  More generally, the resolution also calls on the Commission to reinforce its promotion of CSR in multilateral trade policies and to conduct sustainability impact assessments before and after trade agreements are signed.

According to its explanatory note, the resolution was drafted in recognition of the reality that for “ordinary people throughout the world, the expansion in international trade is justified only if it contributes to economic development, to job creation and to improved living standards.”

The note provides moral, socio-economic, and political justifications for Europe to address CSR in the context of its trade agreements:

  • First, European companies enjoying the benefits of trade must be asked to conduct themselves in a socially and environmentally responsible manner in developing countries and elsewhere.
  • Second, “non-compliance with CSR principles constitutes a form of social and environmental dumping” in developing countries to the detriment of companies and workers in Europe, who are required to meet more stringent social and environmental standards.
  • Third, the EU’s trade policy must be consistent with and complimentary of its other foreign policy priorities on matters such as environmental protection and development aid.

Many of the EU’s international trade agreements already address social and environmental concerns. The significance of the proposed CSR clause is that it would place an onus on companies – not just the State parties to the trade agreements – to act in a socially and environmentally responsible manner.  Also, while recent trade agreements concluded by the EU with South Korea, Colombia and Peru vaguely mention the State parties’ intent to promote CSR, the proposed CSR clause would require specific actions by companies.  Among the proposed requirements for the CSR clause are the following:

  • Companies would be required to publish CSR balance sheets in two or three year intervals in order to reinforce transparency and reporting and encourage visible and credible CSR practices;
  • Companies would be required to conduct due diligence in order to identify and prevent  “violations of human and environmental rights, corruption or tax evasion, including in their subsidiaries and supply chains”;
  • Companies would be required to commit to “free, open and informed prior consultation” with local and independent stakeholders prior to commencing a project that impacts a local community.

The resolution envisions that other provisions enforcing implementation of CSR would accompany the CSR clause.  It recommends, for example, that in addition to establishing appropriate investigatory mechanisms, State parties should be willing to “name and shame” companies in serious breach of their CSR commitments.  The resolution also foresees judicial cooperation and training as a means of facilitating judicial redress for victims of inappropriate corporate conduct.

The European Parliament’s resolution is a non-legislative act and thus not enforceable.  It is now up to the European Commission to decide whether to incorporate the Parliament’s proposals into binding legislation.  Although some companies will balk at any attempts to limit the voluntary nature of CSR, others, especially those that already seek to operate in a socially and environmentally responsible manner, may welcome the prospect of all companies being required to operate by the same rules in the context of particular trade agreements

Copyright © 2010 Foley Hoag LLP. All rights reserved.


Anti-Counterfeiting & Brand Protection West Coast – January 24-26 San Francisco, CA

The premiere anti-counterfeiting and brand protection event goes West!

Despite tremendous efforts, our economies continue to suffer from a sharp increase in trade in fake and pirated goods, aided by the Internet which has made it easier for buyers and sellers of counterfeit goods to come together and also to distribute pirated music, movies and software. In order to ensure these traffickers of illegal goods don’t win this war, governments, law enforcement and brands must continue to engage with one another and to work toward a common goal.

To facilitate this, IQPC and Legal IQ are proud to invite you to take part in our next meeting, Anti-Counterfeiting & Brand Protection West Coast taking place January 24 – 26, 2011, at the Hotel Nikko in San Francisco, CA. CLE Credits Are Available.  For More Information and to Register:



Law2020™- What Will It Take for Law Firms to Thrive?

The Business of Law guest blogger at the National Law Review this week is Meredith L. Williams of Baker Donelson. Meredith examines three areas:  Law firm Technology, Firm Characteristics and the Skill set Lawyers and makes educated predictions on how successful will look.  

Law2020™ is the brainchild of Bryan Cave’s Strategic Technology Partner John Alber and the International Legal Technology Association (ILTA).  I have had the privilege of working with John and the ILTA organization over the past 4 years as a part of the conferencing planning committee.  This year I am serving as a Conference Vice-President for the upcoming international conference being held in Nashville, TN from August 21st – 25th, 2011.

The concept of Law2020™ is based upon an anticipation of the legal industry encountering the same market dynamics that have challenged the newspaper industry since 2000-2010.  The online environment changed newspapers’ production, employment and consumption.  The ACC Value Challenge has placed law firms under a microscope like that the newspaper industry is under, thus requiring the legal industry to make strategic changes to meet the new needs of clients.  Will law firms see a similar shift due to the economy and the changing client landscape?  What can law firms learn from the newspaper industry and those papers that survived?   The real question for forward-thinking law firms is not what will it take for law firms to survive in the year 2020, but what will it take to thrive?

We will look at this concept from 3 perspectives:

1.       What technologies will successful law firms need in 2020?

2.       What will be the characteristics of successful law firms in 2020?

3.       What will be the skill set of successful lawyers and staff in 2020?

What technologies will law firms need in 2020?

Technology will continue to play a large role, as it does today, in the advancement of law firms in the year 2020.  The key trends of technology will center on legal project management, alternative fee arrangements, transparency, and mobility.

The majority of law firms are starting to look at legal project management and alternative fee arrangement  tools.  Although these are new concepts for law firms, the thought process behind both is not new.  Lawyers are already using use many tools to help manage their files.  However, the idea of pre-planning is new;  taking a step back and visualizing the entire case or deal and mapping out the various steps and risks to reach an end result, as well as the cost of each step.  Tasking, budgeting and knowledge management tools will continue to grow exponentially over the next 10 years as a result of client desire for more understanding and control.  Intranets, budget tools, tasking applications, and other project management tools will be in high demand.

A lesson learned through the WikiLeaks scandal is that transparency of information is now expected, not just desired. The same can be said of law firm clients.  Clients crave both an advocate and a partner.  They want to understand everything that a lawyer is doing for them, they want the lawyer to fix problems, and they want the lawyer to help manage risk. Tools such as extranets provide the client with a full view of all case and deal materials; these are now being  used by many law firms in the U.S.  Over the next 10 years, clients will have access to risk management tools via these legal service platforms.  Clients will be able to use online legal services provided by law firms to run their businesses and comply with new regulations and laws.

The number one trend law firms must deal with is mobility.  The IPad, IPhone, Blackberry and other mobile device growth over the past few years is an indication of what individuals will be expecting in the coming years.  All people, including clients, want to access their applications and information when, where, and how they want.  As mentioned earlier, extranets and information sharing will increase over the next decade.  In addition, video capabilities and cloud computing will be prominent technologies for all law firms.  Law firms are expanding; however, there is a desire to cut expenses but keep the personal interaction.  Video via conferencing, web cams, etc. can make this happen.  Law firms are also looking to the Cloud as an opportunity to cut slim expenses and create complete mobile enviroments.  Whether a firm chooses to place all critical application in the Cloud or only a few,  Cloud use will continue to grow in the legal industry.

What will be the characteristics of law firms in 2020?

As technology changes over the next 10 years, so will the characteristics of law firms.  Much of this will be a result of the changing landscape of clients. Additonally, management will shift to accommodate a new generation with different expectations.  Other new resources include the virtual law firm, outsourcing, partnership track changes, increased risk sharing with clients and possible investments by non-lawyers.

Virtual law firms and lawyer mobility will increase.  Brick and mortar buildings will not go away, but we will see an increase of lawyers choosing to work for a firm while at home or in a different location.  In addition, legal process outsourcing will appear in law firms over the coming years.  Many firms are venturing into this field with document review and other e-discovery tasks.  Clients are pushing to keep expenses low and no longer want to pay large costs for firms to do document review tasks, when these can be outsourced for half the cost.

As noted in the alternative fee arrangements and transparency discussion, clients are looking for a partner to help bear some of the risk with their representation.  Many clients will not pay the typical billable hour.  They want to hire firms that are willing to share this risk and allow for different methods of payment.  Some want flat fees with exceptions or bonuses based upon the efforts of the law firms.  With these new methods of revenue for a law firm, the traditional path to partnership, currently based primarily on billable hour requirements, will change.  How law firms react to this will determine whether they retain their lawyer resources.

One law firm characteristic available in other countries is the ability to have law firm investment by non-lawyers.  Allowing non-lawyers to invest in the firm creates more loyalty to the law firm and the work the non-lawyer is doing for the firm and clients.  It is something US firms will consider as the economic shift continues to reshape law firms as we know it.

What will be the skill set of lawyers and staff in 2020?

We have now taken a look at what technologies will be used by law firms in 2020 and what a law firm will look like.  The bigger question is what skills will be required by lawyers and staff in 2020?  Efficiency of the law practice, a streamline business model, relationship building and marketing via social media and the capability to work via a new legal service platform will dominate the skills of lawyers in 10 years.

As discussed above, the economy and client expectations will drive many changes in the legal industry, including the skill sets needed to practice and support the practice. To be specific, lawyers will begin to hone their practices to increase efficiency.  This will be mainly a result of the increase in LPM and AFAs.  By breaking down different areas of law into steps and risks, lawyers will better understand each step and will find ways to deliver a better quality work product at a lower cost.

In addition, law firms will begin to consider streamlining certain tasks through administrative staffs to create better business processes.  For example, layering secretaries with 5-6 attorneys and then creating an additional level of executive assistants to provide project management and client communication is something new that law firms will consider.  This will allow new alternative paths for legal staff.

Lawyers also need to learn to market and build relationships via social media. This is the biggest change we have seen over the past few years, and the usage is drastically increasing.  This new form of communication and collaboration needs to be harnessed for a lawyers to reach certain clients with younger and innovative leadership.


In conclusion, the legal profession will see changes over the next decade.  How a firm adapts to the changes in the practice of law and client needs will determine whether that firm will survive.  For additional information regarding Law2020™, please visit the International Legal Technology Association Peer to Peer Magazine on the concept.

©2010 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. All Rights Reserved.



The 15th Annual ABA National Institute on the Gaming Law Minefield Feb 24-25 LasVegas

The 2011 Gaming Law Minefield program is specifically designed to provide in-depth coverage and discussion of the cutting-edge legal, regulatory, and ethical issues confronting both commercial and Native American gaming. Attorneys, compliance officers, Native American leaders, regulators, and legislators will all provide invaluable insights into current trends, opportunities and obstacles in the gaming industry. The program’s subject matter includes new gaming technology, increased IRS CTR and SAR compliance audit activity, Internet gaming, Native American gaming, breaking hot topics in the gaming industry, latest developments in dealing with problem gamblers, and a two-hour CLE-certified ethics program.

The Gaming Law Minefield program constitutes one of the most comprehensive, state-of-the-law gaming programs available. Program attendees have consistently rated the program as a valuable educational experience that provides participants with the opportunity to meet and talk with a wide variety of gaming law experts and leading state and Native American regulators.

Early Bird Registration ends January 24th. For More Information:  Click Here:

How to Gain and Retain Clients—Establishing LTR Differentiators

From this week’s Business of Law Guest Blogger at the National Law Review, Hilary Fordwich of Strelmark, LLC – provides some very practical tips for attorneys on how to think about your interactions with potential clients.  

Every attorney is plagued by the ever-present mandate to “grow the practice.” This imperative is crucial to the success of every law firm, but most attorneys find it bothersome (at a minimum) when they are also under ever-increasing pressure to maintain chargeable hours. It is analogous to the conflicting objectives faced by other service professionals, be they accountants, engineers, architects or IT professionals. However, the key to this growth is not, as some may believe, to simply throw out a net and watch the clients rush your boat. The critical factor in any service professional’s business growth is desire; in short, the prospect must want to retain the attorney.

Thus, the real problem for any attorney is not simply the cliché of growing the practice; rather, the key is attaining the critical components of want. These components are not nebulous—they are based on three critical factors: your contacts will want to conduct business with you if they like you, trust you and respect you (Likability = L; Trust = T; Respect = R: LTR). And this all must be achieved both with new prospects—so you garner them—as well as with existing clients—so you do not lose them. Business development, then, is inseparable from daily activities; indeed, it must become a part of daily interactions.

Most professionals have an inherent habit of forgetting that the essential truths of human psychology apply not only to life outside of the office, but also to relationships within each business sphere. Indeed, some professionals fail to recognize that the most obvious of these essential truths—that we choose to not associate with people whom we dislike—is a critical factor in business.

Likability Alone is Not Enough

However, likability is insufficient; two additional essential psychological truths operate in tandem with it. We choose not to do business with those we dislike; we also choose not to associate with those we neither trust nor respect. While you may like someone immensely, if you distrust them, you will likely not be giving them your business.

I do not mean to detract from the critical importance of an individual’s level of competence. Clearly, clients select attorneys because of their legal competence, not just because they are personally appealing. However, the market is currently flooded with more-than-competent lawyers. Each potential client selects an expert with whom they would like to work. It is this element of the decision that is driven by the LTR differentiators.

In other words, an attorney must catalyze in each prospective client—in essence, every person with whom he or she comes in contact—a feeling of likability, trust and respect. These three qualities are inseparable. And though they are not always innate, they can be taught; in today’s ever-more-competitive legal market, attorneys must master the tactical techniques for attaining them.

A Viable Referral Network

Timothy J. Waters, former managing partner of McDermott, Will & Emery, recently published a highly perceptive article, reporting that “Last year, 2009, a remarkable number of law firms across the country spent more time reducing the number of their lawyers than recruiting law school graduates.”[1] Who were these lawyers who were the victims of that “reducing”? Certainly not those viewed as stellar performers. Yet, these now unemployed attorneys were likely incredible lawyers in regards to the practice of law. They were likely just not those incredible at gaining and retaining clients.

Client retention is not taught in most law schools; the general trend in professional education lacks a psychological aspect: teaching law students only about the law, thus increasing their capability to be legal experts, but neglecting to impart the very tools necessary to grow their future practice.

Building a viable legal practice depends to a great degree upon building a phenomenal referral network. The foundation of this network is legal competence. However, the motivation behind the synapses within this network is still LTR. This referral base can fuel the lawyer’s clientele—but that base is only valuable if a lawyer is liked by those within it. Those in a position to refer clients have to want to send them to a particular attorney versus all others, who are likely just as professionally qualified.

The way to ensure that value is to maintain the LTR you have gained in your original clients. In every e-mail, every voice mail, focus on them: What are their needs? What are their concerns? How is their family? Learn their names and the names of those important to them. Ask how they are doing; choose not to dwell on yourself. To ensure their trust, behave with integrity in every endeavor. If a potential client sees you cheat on the golf course, they will not trust you as their attorney. Likewise, they will respect you if you conduct yourself with compassion, competency and concern for others.

Retaining Partners

Several critical factors determine the cost of both gaining and retaining clients. According to Alan E. Webber of Forrester Research, acquiring a new client costs five times more than retaining a current client.[2] Clearly, this retaining requires the same personal qualities as the initial gaining. If we subscribe to the viable network principle discussed above, the two are inseparable. You will only gain new lasting clients if you have satisfied and retained your long-time clients.

With all the growth of legal marketing, very few people are examining what truly drives business development and the growth of legal practices. Executives don’t retain law firms; they retain partners—a person, not an entity, whom they admire. Executives and general counsels no doubt want to respect their legal counsel for his/her knowledge of the law; however, they also want to know their external representation is entirely committed to their cause.

Consider the way you select a financial planner or an accountant to complete your tax documentation. No doubt most professionals can complete the task, but you probably selected the one with whom you felt the most comfortable speaking, the one whom you respected the most technically, and the one whom you trusted to complete the task on time and effectively.

You likely decided about LTR within a few seconds of your interaction with that individual, though probably subconsciously. This intrinsic assessment was perhaps based upon very subjective criteria: professional tone of voice, ability to maintain eye contact, genuine concern about you and your problems, depth of professional knowledge, understanding your needs (or seeming like they did), and so on.

Just as you evaluate your accountant, your future clients will examine you. When a company selects a lawyer, the issues of LTR take precedence over that attorney’s competence. Each of us has heard the ubiquitous Dale Carnegie quote asserting, “15% of one’s financial success is due to one’s technical knowledge.” The other 85% is “due to skill in human engineering,” which involves the “soft” skills of human engineering, such as likability and empathy; these become the differentiators.

To combat these psychological decision-making factors, all attorneys can improve their LTR techniques to gain and retain clients. It is a teachable process and one honed with practice. Indeed, everyone has the capacity to exhibit qualities of genuine likability, to gain trust and to garner respect, but either use this capacity or choose to ignore it subconsciously. Most may understand that LTR factors need to be established quickly in social settings, but many fail to recognize that business development is inseparable from day-to-day activities. These three factors also need to be utilized in every conversation with every potential client—in every e-mail, every voicemail, in every communication. If you are clearly trustworthy, incite respect and are simply likeable again and again, not only will your initial meetings, presentations and conference calls win you a new client, but your constant concern for that client’s well-being will ensure their retention for years to come.

The author wishes to acknowledge the contributions of J.M. Larsen to this article.


[1] See Waters, Timothy J., The Law Firm Paradigm: Relevant or Relic (July 13, 2010), available at (last reviewed November 4, 2010).

[2] See Webber, Alan E., B2B Customer Experience Priorities in an Economic Downturn: Key Customer Usability Initiatives in a Soft Economy (February 19, 2008), Forrester Research.

Copyright © 2010 by Strelmark, Corporation. All rights reserved.


Food Safety Bill Leaves Senate with Unanimous Consent, House Vote Tuesday

Update yesterday from National Law Review guest blogger William Marler of the Marler Blog:  

Perhaps the President will bring the Bill with him to Hawaii for Christmas – It’s a short flight from Seattle.  Thanks to Republican and Democratic Staff for this great Summary of the House and Senate version of the Bill:


· S. 510 is intended to respond to several food safety outbreaks in recent years by strengthening the authority of the Food and Drug Administration (FDA) and redoubling its efforts to prevent and respond to food safety concerns.

· The legislation expands current registration and inspection authority for FDA, and re-focuses FDA’s inspection regime based on risk assessments, such that high-risk facilities will be inspected more frequently. The bill also requires food processors to conduct a hazard analysis of their facilities and implement a plan to minimize those hazards.

· The bill requires FDA to recognize bodies that accredit food safety laboratories domestically and third-party auditors overseas. The bill enhances partnerships with state and local officials regarding food safety outbreaks, and establishes a framework to allow FDA to inspect foreign facilities.

· The bill does NOT change the existing jurisdictional boundaries between FDA and the Department of Agriculture, and includes protections for farms and small businesses.

· The bill gives the FDA the power to order mandatory food recalls, in the event that a food company cannot or does not comply with a request to recall its products voluntarily.

Title I – Prevention

Records Inspection: Expands and clarifies FDA’s records inspection authority, such that FDA can inspect records regarding an article of food “and any other article of food that [FDA] reasonably believes is likely to be affected in a similar manner, will cause serious adverse health consequences or death to humans or animals.”

Registration: Requires facilities to renew registration with the FDA every two years, and to agree to potential FDA inspections as a condition of such registration. Gives the FDA Commissioner the power to suspend facilities’ registration in the event FDA determines the facility “has a reasonable probability of causing serious adverse health consequences or death.” A suspended facility shall not be able to “introduce food into interstate or intrastate commerce in the United States. A hearing would occur within two business days on any suspension. If the suspension is found warranted, the facility must submit a corrective action plan before its suspension could be lifted. The bill also states that the commissioner cannot delegate to other officials within FDA the authority to impose or revoke a suspension.

Small Entity Compliance Guides: Requires FDA to develop plain language small entity compliance guides within 180 days of the issuance of regulations with respect to registration, hazard analysis, safe production, and recordkeeping requirements.

Hazard Analysis: Requires facilities to analyze at least every three years their potential hazards and implement preventive controls at critical points. Further requires facilities to monitor the effectiveness of their preventive controls, take appropriate corrective action, and maintain records for at least two years regarding verification of compliance. The bill gives FDA the authority to waive compliance requirements in certain instances, and allows FDA to exempt facilities “engaged only in specific types of on-farm manufacturing, processing, or holding activities that the Secretary determines to be low risk.” The language also delays implementation for smaller establishments for up to three years.

Performance Standards: Requires FDA to review evidence on food-borne contaminants and issue guidance documents or regulations as warranted every two years.

Produce Safety: Establishes a process to set standards for the safe production and harvesting of raw agricultural commodities (i.e. fruits and vegetables). Requires FDA to promulgate regulations regarding the intentional adulteration of food—applying to food “for which there is a high risk of intentional contamination”—within two years, and issue compliance guidance as appropriate. Includes delayed implementation of up to two years for smaller establishments.

Fees for Non-Compliance: Imposes fees on facilities only in cases where a facility undergoes re-inspection to correct material non-compliance, or does not comply with a recall order and thereby forces FDA to use its own resources to perform recall activities. Importers would be subject to fees for annual re-inspections or for participation in the voluntary qualified importer program established under title III of the bill. Requires FDA appropriations funding to keep pace with inflation in order for fees to be collected. The bill gives FDA the authority to lower fee levels on small businesses through a notice-and-comment process.

Safety Strategies: Requires FDA, the Department of Agriculture, and the Department of Homeland Security to coordinate to create an agriculture and food defense strategy, focused on preparedness, detection, emergency response, and recovery. Requires reports from FDA on building domestic preventive capacity—including analysis, surveillance, communication, and outreach—and requires FDA to issue regulations on the sanitary transportation of food within 18 months of enactment.

Food Allergies in Children: Requires FDA to work with the Department of Education to develop voluntary guidelines to manage the risk of food allergy and anaphylaxis in schools and early childhood education programs. Authorizes new grants of up to $50,000 over two years for local education agencies to implement the voluntary guidelines.

Dietary Ingredients and Supplements: Requires FDA to notify the Drug Enforcement Administration if FDA believes a dietary supplement may not be safe due to the presence of anabolic steroids.

Refused Entry: Requires FDA to notify the Department of Homeland Security, and by extension the Customs and Border Protection Agency, in all cases where FDA refuses to admit foods into the United States on the grounds that the food is unsafe.

Title II – Detection and Response

Targeted Inspections: Requires FDA to prioritize inspection of high-risk facilities, based on a risk profile that includes the type of food being manufactured and processed, facilities’ compliance history, and other criteria. Requires FDA to inspect high-risk facilities once in the five years after enactment, and every three years thereafter; low-risk facilities would be inspected once in the seven years after enactment, and every five years thereafter. Foreign facility inspections would be required to double every year for five years.

Laboratory Testing: Requires FDA to establish within two years a process to recognize organizations that accredit laboratories testing food products, and to develop and maintain model standards for accrediting bodies to use during the accreditation process. Requires food testing for certain regulatory purposes to be conducted in federal laboratories or those accredited by an approved accrediting body, with results sent directly to FDA. Includes reporting and other provisions designed to support early detection among laboratory facilities.

Traceback and Recordkeeping: Establishes a series of pilot projects within nine months of enactment on “methods to rapidly and effectively identify recipients of food to prevent or mitigate a foodborne illness outbreak.” Requires FDA to issue within two years a notice of proposed rulemaking regarding recordkeeping requirements for high-risk foods. Permits FDA to request that farm owners “identify immediate potential recipients, other than consumers,” in the event of a foodborne illness outbreak. Delays implementation of regulations for up to two years for smaller establishments.

Surveillance: Directs FDA to enhance foodborne illness surveillance systems to improve collection, analysis, reporting, and usefulness of data on foodborne illnesses, and establishes a multi-stakeholder working group to provide recommendations. Reauthorizes an existing program of food safety grants through fiscal year 2015.

Mandatory Recall Authority: Provides FDA the authority to order recall of products if the products are adulterated or misbranded “and the use of or exposure to such article will cause serious adverse health consequences or death.” Requires FDA to provide an opportunity for voluntary recall by the manufacturer or distributor prior to ordering a recall and provides the responsible party the opportunity to obtain a hearing within two days regarding any FDA order for a mandatory recall. Requires federal agencies to establish and maintain a single point of contact regarding recalls, and requires FDA to take appropriate actions to publicize mandatory recalls through press releases, an internet Web site, and other similar means. Also gives FDA authority to order the administrative detention of food products when the agency has “reason to believe” they are adulterated or misbranded. Directs that only the commissioner has the authority to order a mandatory recall, a power that may not be delegated to other FDA employees.

State and Local Governments: Directs FDA, working with other federal departments, to provide support to state and local governments in response to food safety outbreaks. Requires the Department of Health and Human Services to set standards and administer training programs for state and local food safety officials. Creates a new program of food safety centers of excellence, and amends an existing program of food safety grants to fund food safety inspections and training, with an extended authorization through fiscal year 2015.

Food Registry: Permits FDA to require the submission of reportable food subject to recall procedures (excepting fruits and vegetables that are raw agricultural commodities). Requires grocery stores with more than 15 locations to post information about reportable foods prominently for 14 days.

Title III – Food Imports

Foreign Supplier Verification Program: Requires importers to undertake a risk-based foreign supplier verification program to ensure that imported food meets appropriate federal requirements and is not adulterated or misbranded. Requires FDA to establish regulations for the foreign supplier verification program within one year of enactment. Importers’ records relating to foreign supplier verification would be maintained for at least two years.

Voluntary Qualified Importer Program: Directs FDA to establish within 18 months a voluntary program of “expedited review and importation” for importers. Eligibility would be determined by FDA using a risk assessment based on such factors as the type of food being imported, the compliance history of the foreign supplier, and the compliance capacity of the country of export.

Import Certification: Permits FDA to require as a condition of importation a certification “that the article of food complies with some or all applicable requirements” under the Food, Drug, and Cosmetic Act. Requires FDA’s determination of certification requirements to be made based on risk assessments. Requires notices for imported food to list any country that previously refused entry for that food. Permits FDA to review foreign countries’ controls and standards to verify their implementation.

Foreign Government Capacity: Requires FDA to “develop a comprehensive plan to expand the technical, scientific, and regulatory capacity” of foreign entities exporting food to the United States. Permits FDA to inspect foreign food facilities, and requires the refusal of imported food if a registered exporter refuses entry of FDA inspectors into an overseas facility. Directs FDA to establish a system to recognize bodies that accredit third-party auditors to certify eligible foreign food facilities meet federal compliance requirements. Requires FDA to establish overseas offices in countries selected by FDA to “provide assistance to the appropriate governmental entities of such countries with respect to measures to provide for the safety of articles of food.”

Smuggled Food: Requires FDA to work with the Department of Homeland Security and Customs officials to develop a strategy to identify smuggled food and prevent its entry.

Title IV – Other Provisions

Funding and Staffing: Authorizes such sums in funding for fiscal years 2011 through 2015. The bill also sets staffing goals of 4,000 new field staff in fiscal year 2011, and a total of 17,800 through fiscal year 2014.

Employee Protections: Creates a new process intended to prevent employment discrimination against individuals reporting food safety violations. The Department of Labor is directed to review and investigate complaints of such discrimination through an administrative process, subject to appeal in federal court.

Jurisdiction: The bill notes that nothing within its contents shall be construed to alter the division of jurisdiction between the Department of Health and Human Services and the Department of Agriculture. Likewise, the bill notes that it shall not be construed in a manner inconsistent with American obligations under the World Trade Organization and other relevant international treaties.

Summary of Tester Amendment as Modified (Included in Harkin Substitute Amendment as passed the Senate):

· Clarifies that a “retail food establishment” shall not include the sale of food products at a roadside stand or farmer’s market, the sale of food “through a community supported agriculture program,” or the sale of food through any other “direct sales platform” designated by the Secretary.

· Exempts from recordkeeping and hazard analysis requirements a “very small business” as defined by the Secretary, as well as those facilities whose direct sales (to consumers and local restaurants) exceed their sales to distributors AND whose annual sales total fewer than $500,000 (adjusted for inflation). Requires such facilities receiving exemptions to submit documentation to FDA that the owners have identified potential food hazards OR are in compliance with state and other applicable food safety laws. Permits FDA to revoke exemptions in the event of a food outbreak directly linked to the facility or to protect the public health.

· Requires a study by FDA and the Department of Agriculture to help define the terms “small business” and “very small business” for purposes of the statute’s regulatory requirements.

· Requires facilities receiving exemptions under the amendment to “include prominently and conspicuously…the name and business address of the facility where the food was manufactured or processed,” either on food labels or at the point of purchase.

· Amends the timeline for the new hazard analysis requirements to specify that small businesses will have an additional six months to comply with the hazard control regulatory requirements (down from two years in the base bill) and very small businesses will have an additional 18 months to comply (down from three years in the base bill).

· Exempts from new produce safety guidelines those farms whose direct sales (to consumers and local restaurants) exceed their sales to distributors AND whose annual sales total fewer than $500,000 (adjusted for inflation). Requires farms receiving exemptions under the amendment to “include prominently and conspicuously…the name and business address of the facility where the food was manufactured or processed,” either on food labels or at the point of purchase. Permits FDA to revoke exemptions in the event of a food outbreak directly linked to the facility or to protect the public health.

Copyright © Marler Clark


E-Verify Tentative Nonconfirmations: Don’t Panic Just Yet

Recent Business of Law Guest Blogger at the National Law Review, John Fay of LawLogix Group, Inc. provides a nice walk-through of what employers can expect when they receive a mismatch or tentative nonconfirmation (TNC) through the e-verify system. 

As an employer, there’s a certain amount of trepidation that comes with using the E-Verify system. While roughly 97% of all employees are instantly (or shortly thereafter) confirmed as work authorized, it’s the potential 3% which receive a mismatch or tentantive nonconfirmation (TNC)  that keep us up at night. Was there a mistake in the information that we submitted or perhaps a mistake with the SSA or DHS database? Or what if the employee is unauthorized to work? When do I have to terminate him? Processing a TNC requires employer guidance, employee action, and often, lots of patience. The most important thing to remember is that a TNC does not mean that your employee is unauthorized to work. It’s just the first step in an E-Verify dance with government systems. Sounds like fun, right?

Process Overview

First, there are many perfectly legitimate reasons for a TNC, and your role as the employer is to communicate that fact with your employee. For example, your employee could receive a Social Security mismatch because of the following:

  • Name, SSN or date of birth is incorrect in SSA database
  • Employee failed to report a name change to SSA (married name, perhaps?)
  • USCIS immigration status was not updated with SSA

You might also receive a DHS TNC because of the following:

  • Photo ID of green card, EAD , or US passport (starting September 26th) does not match DHS records (this is a comparison you would perform manually when prompted)
  • Information was not updated in DHS records
  • Citizenship or immigration status has recently changed
  • Name, alien number, and/or I-94 admission number were incorrect in DHS database

Regardless of the reason, you must first notify the employee in private of the TNC case result by printing the TNC Notice (to be signed) which is automatically generated by the E-Verify system. This letter explains all of the possible reasons why the TNC may have occurred and instructs the employee to review their information to make sure it was correct. Assuming it was, the employee then has 2 choices: CONTEST or NOT CONTEST. If the employee chooses to contest, then you must initiate a referral (in the E-Verify system) and provide them with a TNC Referral Letter (to be signed) that is automatically generated. This letter instructs the employee to contact the appropriate government agency (SSA or DHS) within 8 federal government work days to resolve the case. If there was a photo mismatch, you will also be instructed to send a copy to E-Verify. Alternatively, if the employee chooses not to contest, you may terminate employment and close the case.

The Waiting Game

Assuming that your employee has contested and you have properly referred them, the waiting game begins. E-Verify instructs employers that they will provide a case update (in the system) within 10 federal government working days. Employers using the web interface will need to check the system periodically, whereas employers using electronic I-9 systems can see updates automatically on their dashboard. Regardless of how you check, remember that you may not ask the employee for additional evidence of confirmation that SSA or DHS resolved the case. Doing so might be viewed as discriminatory. On the other hand, you should be diligent in checking on the case to see if there are updates. I did say this was a dance didn’t I?

Occasionally, the SSA or DHS may need more time to resolve a TNC – this could happen for a variety of reasons. Local SSA offices may be over-burdened with their core tasks (application for SSA benefits) or the employee may not have the documentation needed by SSA to support a change in their records. These record requests can add weeks to the process, and needless gray hairs to the worried HR representative. Regardless, the rules make it clear that you may not terminate, suspend, delay training, withhold or lower pay, or take any other adverse action against an employee based on the employee’s decision to contest a TNC or while the case is still pending with SSA.

The End Game

If all goes well, SSA or DHS will update its records and the employee’s case in E-Verify to indicate “Employment Authorized.” Occasionally, SSA may require the employer, employee or the U.S. Department of Homeland Security (DHS) to take additional action before a final case result can be issued. In these cases, SSA will update the employee’s case with a different message. Once the employee has received a final case status, such as “Employment Authorized” or “SSA FNC,” the employer must close the case in E-Verify. If the employee received an “SSA FNC,” the employer must also indicate whether the employee was terminated.

Paper Trail

If you review the last 4 paragraphs, you’ll notice I mentioned a variety of letters and notices. As with most areas of I-9 compliance, documentation is key. Therefore, as an employer, you’ll want to make sure to keep these signed letters on file with the I-9 (as instructed in your E-Verify User Manual). In the event of a government audit (relating to I-9s or E-Verify), you may be required to present these.  If you are usinga good electronic I-9 and E-Verify compliance system, the employee and employer should be able to electronically sign these letters, and the system should automatically attach them to the employee’s record along with a detailed audit trail.  Documentation is good, but paperless documentation with detailed audit trails is even better yet in building your “Good Faith” defense in case of an EEOC/OFCCP investigation and/or ICE audit!

More Information

Resolving TNCs can be a complicated process, and I’ve just given you a very brief overview. For more information, check out the USCIS web site here and review the latest E-Verify user manual. And if you’re stuck with a tricky E-Verify situation, make sure you consult experienced immigration counsel to avoid any missteps in this government dance

LawLogix Group, Inc. © 2001-2010 All Rights Reserved

Rise in Foreclosures + An Increase in Mortgage Fraud = More Homeowner Fires

A recent posting at the National Law Review by Rick Hammond of Johnson & Bell Ltd. highlights some of many problems related to mortgage fraud.  

According to recent reports, many insurers have experienced an increase in the number of fire claims since the onset of the subprime mortgage crisis.  Allegedly, many of these fires were intentionally set by homeowners facing foreclosure.  Not surprisingly, when homeowners’ monthly mortgage payments increase after their low introductory rates expire or when falling home values and stricter lending practices reduce the possibility of restructuring or refinancing loans, the natural result is an increase in the number of foreclosures and an increase in homeowner fires.

That’s not the only problem facing the insurance industry.  Insurers are also experiencing an increase in fires associated with the rise in mortgage fraud, which is also running rampant across the United States.  Mortgage fraud is generally defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested party relied on by a lender or underwriter to provide funding for a mortgage loan.

Victims of mortgage fraud include borrowers, mortgage industry entities, and those living in the neighborhoods affected by mortgage fraud. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When property values are inflated, property taxes increase as well. Legitimate homeowners also find it difficult to sell their homes. When properties foreclose as a result of mortgage fraud, neighborhoods deteriorate and surrounding properties depreciate.

Legal Issues and Developing Law

  • Insurable Interest by the Insured

The threshold question in many cases involving mortgage fraud and its effect on insurance coverage is whether the insured has an insurable interest in the property at the time of a loss.  An insurable interest at the time of loss is essential to the validity of an insurance policy.  Hawkeye Security Ins. Co. v. Reeg, 128 Ill. App. 3d 352, 470 N.E.2d 1103 (Ill. App. Ct. 1984).  Generally speaking, a person has an insurable interest in property whenever he or she would profit or gain some advantage by a property’s continued existence, and suffer loss or disadvantage by its destruction. Lieberman v. Hartford Fire Ins. Co., 6 Ill.App.3d 948, 287 N.E.2d 38 (Ill. App. Ct. 1972).

To determine whether an individual has an insurable interest in property, a court will usually examine whether an economic benefit or detriment inures to the named insured under any set of circumstances.  In cases involving a straw person, a close examination of the facts might reveal that in every conceivable manner an insured did not contribute a single cent towards the purchase of the insured property or its maintenance.  That is, an investigation might reveal that every payment towards the purchase or maintenance of the insured premises was made by a straw person, that is, the property’s unidentified buyer-in-fact.

Therefore, a proper investigation would seek to determine whether a buyer-in-fact paid for the insurance, paid the initial down payment, the mortgage payments, and for all upkeep and necessary expenses, and whether he or she paid for every attendant cost for the property.  In these cases, the actual insured will likely not incur economic loss due to the damage suffered by the insured premises, nor gain economically from any recoverable insurance proceeds.  Simply put, the primary question is whether there was an actual relationship between the insured and the insured premises, or whether the insured’s relationship to the insured premises is illusory.

  • Mortgagee’s Duty to Notify Insurer of Foreclosure Proceedings

An insurer is often unaware of a pending foreclosure on property that it insures until after a fire has occurred.  Must a mortgagee, as a condition to receiving coverage, give notice to the insurer when that mortgagee initiates foreclosure?  A recent case in Tennessee is instructive in analyzing this question (See: U.S. Bank, N.A. v. Tennessee Farmers Mut. Ins. Co., 2007 WL 4463959).

In this case, a homeowner and insured fell behind on her monthly mortgage payments and the mortgagee, U. S. Bank, N.A., initiated foreclosure.  The bank sent a letter to the homeowner stating that it started foreclosure, but the bank neglected to give notice of the foreclosure to the property insurer, Tennessee Farmers Mutual Insurance Company.  Before the foreclosure process was completed, the homeowner and her husband filed for bankruptcy, which stayed the foreclosure proceedings.  Shortly thereafter, the house was destroyed by fire.

U.S. Bank filed a claim with the insurers, Tennessee Farmers, for the fire loss, but the insurer denied the claim because the bank had failed to notify Tennessee Farmers that a foreclosure had been initiated.  Tennessee Farmers stated that the foreclosure filing constituted an increase in hazard and, as such, the bank was required to notify the insurance company, and the bank’s failure to provide this notice was a breach of the policy’s mortgage clause, which stated:

We will:

(a)        protect the mortgagee’s interest in the insured building.  This protection will not be invalidated by any act or neglect of any insured person, breach of warranty, increase in hazard, change of ownership, or foreclosure if the mortgagee has no knowledge of these conditions

The trial court denied Tennessee Farmers’ motion for summary judgment and granted summary judgment to the bank.  The insurance company then filed an appeal.  On appeal, Tennessee Farmers argued that the foreclosure proceedings was an “increase in hazard” under the terms of the policy of insurance, and contended that the bank’s bad faith claim was unfounded.  On the other hand, U.S. Bank argued that commencing foreclosure proceedings did not constitute an increase in hazard, and asked the court to adopt the Kentucky’s court’s opinion in Anderson v. Kentucky Growers Ins. Co., Inc., 105 S.W.3d 462 (Ky. Ct. App. 2003).

In Anderson, the policy’s mortgage clause stated that the insurance company’s denial of the insured’s claim would not apply to a mortgagee’s claim if the mortgagee had notified the insurer of a “substantial change in risk of which the mortgagee becomes aware.”  In that case, the house was destroyed by fire, and the insurance company argued that the filing of foreclosure proceedings constituted a “substantial change in risk of which the mortgagee became aware.”

The court in Anderson ruled against the insurer, noting that insurance contracts are liberally construed in favor of the insured: “While we agree that the filing of foreclosure proceedings constitutes a ‘change of risk,’ we do not agree that such a change is necessarily ‘substantial.”  The court then concluded that the policy did not “clearly and unambiguously” require the mortgagee to give the insurer notice when foreclosure was initiated.  The court in Anderson further held that commencing foreclosure proceedings, while certainly a “change of risk,” did not constitute a “substantial change of risk” within the meaning of the mortgage clause.

The Tennessee Farmers’ court rejected the Anderson court’s analysis, noting that the mortgage clause in the Tennessee Farmer’s policy required notification of “any” increases in hazard, not just a “substantial” increase in hazard.  However, this issue remains a moving target.  Thus, after the Tennessee Court of Appeals agreed with the insurance company and reversed the trial court’s decision, U.S. Bank then appealed to the Tennessee Supreme Court.  The state’s high court held that the bank’s commencement of foreclosure proceedings was not an increase of hazard requiring notification to insurance company under the standard mortgage clause in a fire insurance policy, and the bank’s commencement of foreclosure proceedings was not an increase of hazard requiring statutory notification to insurance company.

  • Mortgage Fraud and the Insurer’s Right of Rescission

By its very nature, mortgage fraud involves the intentional misstatement and misrepresentation of material information to a mortgagee.  Often, the same misrepresentations made to the mortgagee are also made to an insurer on an insurance application and give rise to a rescission action.  For an insurer to rescind a policy due to misrepresentation, the insured’s statement must be false, and the false statement must have been made with the intent to deceive ormaterially affect the acceptance of the risk or hazard by the insurer.  Illinois State Bar Assn. Mut. Ins. Co. v. Coregis Ins. Co., 335 Ill. App. 156, 821 N.E.2d 706 (Ill. App. Ct. 2004).  In such circumstances, an insurance policy becomes voidable, not void ab initio, and an insurer can waive its right to void if it does not invoke it promptly.

However, in some states an insurer has no general duty to investigate the truthfulness of answers to questions asked on an insurance application.  Those states have recognized that “an insurance company has the right to rely on the truthfulness of the answers given by an insurance applicant, and the insured has the corresponding duty to supply complete and accurate information to the insurer.”  Commercial Life Insurance v. Lone Star Life Insurance, 727 F. Supp. 467, 471 (N.D. Ill. 1989).

However, an insurer is generally estopped from voiding a policy for untrue representations in the application if the insured discloses facts to the agent and the agent, in filling out the application, does not state the facts as disclosed to him, but instead inserts conclusions of his own or answers inconsistent with the facts. See Boyles v. Freeman, 21 Ill. App. 3d 535, 539, 315 N.E.2d 899 (Ill. App. Ct. 1974). Typically, an insurer cannot rely on incorrectly recorded answers, even when the insured knows that the agent has entered answers different from the ones he or she provided, if the incorrect answers are entered under the agent’s advice, suggestion, or interpretation.  Loganv. Allstate Life Insurance Co., 19 Ill. App. 3d 656, 660, 312 N.E.2d 416 (Ill. App. Ct. 1974).

Thus, the agent’s knowledge of the truthfulness of the statements is imputed to the insurer.  Generally, only when an applicant has acted in bad faith, either on his or her own or in collusion with the insurer’s agent, will a court refuse to impute the agent’s knowledge to the insurance company.

Most laws that are enacted to regulate rescission actions are designed to prevent insurance companies from rescinding policies based on cursory or unintended misstatements by an insured.  However, in cases involving straw persons, an argument can be made that the buyers-in-fact act as puppet masters and typically arrange to have the insureds’ names placed on the mortgage and the insurance policies to shield him or herself from exposure, while still enjoying potential profits from sales or insurance proceeds.  In these cases, a court will likely recognize this deceptive arrangement, and that the buyer-in-fact elicited an insurance policy using the purported insured as a front.  Arguably, a court should order rescission of the insurance policy in these types of cases.

  • Rescission of the Mortgagee’s Right of Recovery

Most policies’ mortgage clause does not address rescission of the contract, nor does it describe the mortgagee’s rights in the context of rescission, because these rights are, in fact, extinguished by rescission.  Therefore, a novel approach in cases involving fraud in the application for insurance is to file a declaratory judgment action seeking rescission and voiding of the policy, which will possibly render the mortgage clause inapplicable, and asking a court to bar the mortgagee from receiving any benefits of that clause.  Thus, rescission could potentially wipe the entire policy away, and the insurer would owe no contractual duties to either the insured or the mortgagee.  Assuming rescission is granted, in effect, the policy will have never legally existed, and all parties that had any putative rights under that policy would have none.

Importantly, some courts have held that an insurer’s right to rescind or deny coverage on the basis of fraud only applies to the claims of the insured, not to claims of innocent third-parties that are injured by the insured’s tortuous acts.  However, this argument is inapplicable here, since a mortgagee is not a third party but is tantamount to a first-party insured.  Moreover, contract law governs the alleged wrongful acts of the insured rather than tort law.

  • Increasing the Effectiveness of an Insurance Claims Investigation

To conduct a more effective investigation when faced with mortgage fraud and foreclosure issues, the author encourages insurers, as part of their investigations, to check the sales history of the insured premises because several sales within a short period of time could indicate false, inflated values.  Also, it is advisable to conduct a title search, checking with the local tax assessment office or recorder of deeds, to analyze the property’s ownership history and to ensure that the insured owns the property.  Interviewing and completing background checks on the appraisers and real-estate brokers that were involved in a transaction are also advisable.

Finally, review information regarding recent comparable sales in the area, and other documents, such as tax assessments, to verify the property’s value.  Reviewing a title history can help determine if a property has been sold multiple times within a short period, which could indicate that the property has been “flipped” and that the value is falsely inflated.

©2010 Johnson & Bell, Ltd. All Rights Reserved.

Adult Dancers at Penthouse, Claiming they are Employees not Independent Contractors, Granted Right to Proceed with Wage Claims as a Class Action

Who says Labor & Employment Law isn’t sexy? Richard J. Reibstein of Pepper Hamilton doesn”t think so.  In a recent post at the National Law Review, Richard provides some good insight on how businesses can effectively navigate the possible pitfalls of using Independent Contractors.

Within the past month, a federal court in Manhattan granted a motion for class action certification to a group of  adult dancers who have worked at the Penthouse Executive Club in New York City.  They alleged, among other things, that the Club violated the federal Fair Labor Standards Act (FLSA) by failing to pay them overtime for hours worked in excess of 40 per week, requiring them to pay a “house fee” that sometimes exceeded $100 per night, deducting service charges for tips paid in scrip issued by the Club, and requiring that the dancers share their tips with other Club personnel. Penthouse asserted as a defense that the adult dancers were independent contractors.

Judge Naomi Reice Buchwald found unpersuasive all five of Penthouse’s arguments, including that class certification would be improper because the issue of whether the dancers were independent contractors was unsuitable for class action treatment.  Penthouse argued that this type of inquiry regarding their status as employees or independent contractors required an individualized, fact intensive inquiry into the nature of the dancer’s relationships with the Club.

In a 16-page opinion, the New York federal district court judge rejected that argument.  As Judge Buchwald stated, a plaintiff’s burden in seeking a preliminary class action certification is “simply to make a ‘modest factual showing sufficient to demonstrate that [plaintiffs] and potential plaintiffs together were victims of a common policy or plan that violated the law.’ ”  In dismissing this argument, the judge noted that members of the proposed class “all hold the same job title, have the same job responsibilities, work at the same location, and, by extension, are subject to the same ownership and management.”  She concluded that “[i]f such a group does not merit at least preliminary class treatment, one would expect that class treatment would rarely be granted in FLSA actions, a proposition that is plainly incorrect as an empirical matter.”

This is by no means the first adult club class action misclassification case.  Other class action cases involving claims by adult dancers that they were improperly classified as independent contractors include an exotic dancer case in Massachusetts, an adult entertainment dancer case in Georgia, and another New York City adult dancer case.

A Couple of Takeaways:

1. Where a business uses a relatively large number of independent contractors or is built on an independent contractor model, it faces misclassification liability not only for unpaid overtime but also for unpaid:

  • unemployment taxes,
  • workers compensation premiums,
  • payroll taxes, and
  • employee benefits,

just to name some of the many types of claims made by workers who claim they were misclassified as independent contractors.

2. Businesses that use many independent contractors or pay workers on a 1099 basis are well advised to address the issue of their independent contractor compliance before receiving a notice from a state unemployment or workers compensation office, before receiving notice from the IRS or state revenue department that it will be conducting a tax audit, or before being served with a summons and complaint (which can lead to class action certification if the case involves a substantial number of similarly situated workers).

Regardless of any business’s current state of compliance with such laws, there are a number of ways by which organizations can enhance their future compliance and minimize their exposure to future misclassification liabilities, including the costs of defending class actions by workers who receive 1099s instead of W-2s.  See “Independent Contractor Misclassification: How Companies Can Minimize the Risks,” Pepper Hamilton LLP, Apr. 26, 2010.  Indeed, some of these class actions seek damages for unpaid employee benefits – an area of exposurethat can often be avoided simply by properly amending the language of a company’s benefit plans, as explained in the above article.

While efforts today to enhance independent contractor compliance cannot eliminate past exposure to misclassification liability, any changes that enhance compliance with the independent contractor laws will not only minimize or avoidfuture liability but also lessen the likelihood that the business will become a target for class action lawyers and government agencies.

Copyright © 2010 Pepper Hamilton LLP

Create Your Own Arbitration Provision: Two Recent Supreme Court Decisions Emphasize That Parties Have the Freedom to Define the Nature and Scope of Their Agreement to Arbitrate

Posted recently on the National Law Review by Damian V. Santomauro and Jennifer Marino Thibodaux of Gibbon PC – great analysis of the US Supreme Court’s recent interpretation of arbitration agreements: 

Arbitration provisions are a common component of a wide array of contracts, including many commercial and consumer agreements.  Recently, the Supreme Court of the United States issued two opinions addressing the enforceability of arbitration clauses that require businesses incorporating such clauses into their consumer agreements to re-evaluate how they are drafted and for those businesses that do not utilize such clauses in their agreements to reconsider whether to do so.  First, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.(“Stolt-Nielsen”), 130 S. Ct. 1758 (2010), the Court held that consent to class arbitration cannot be assumed based upon the parties’ general agreement to arbitrate and that a court cannot compel class arbitration where the arbitration clause is silent as to class arbitration.  Second, in Rent-A-Center, West, Inc. v. Jackson (“Rent-A-Center”), 130 S.Ct. 1758 (2010), the Court held that a party’s challenge to the validity of an arbitration agreement must be resolved by an arbitrator, not the District Court, where the agreement contains a provision delegating such issues to an arbitrator.  Taken together, these opinions (in both of which Justices Alito, Kennedy, Roberts, Scalia, and Thomas were in the majority) demonstrate that the direction of the current Court is to respect the language the parties used in their arbitration clauses, with a corollary emphasis on the underlying principle of parties’ freedom to contract.

The Stolt-Nielsen Decision

In Stolt-Nielsen, the Court considered a relatively straight-forward dispute among commercial parties regarding the propriety of ordering class arbitration where the parties’ arbitration provision was silent on the issue.  Specifically, the plaintiff, a supplier of raw ingredients utilized in animal fees, filed a demand for class arbitration seeking to represent a class of customers that had purchased transportation services from the defendant shipping companies.  130 S.Ct. at 1764-65.  The parties agreed that their dispute was subject to arbitration, but disagreed as to whether it could be arbitrated on a class-wide basis.  Ultimately, the parties agreed that an arbitration panel would decide whether class arbitration was appropriate in light of their arbitration agreement, which the parties stipulated was “silent” regarding class arbitration.  Id. at 1765.  When the arbitration panel determined that class arbitration could proceed under the arbitration clause because the parties’ evidence did not show an intent to preclude class arbitration, the shipping companies filed an application to vacate the arbitrators’ award.  Id. at 1766.  The District Court for the Southern District of New York vacated the award on the grounds that federal maritime law (and its emphasis on custom and usage) should have governed the issue, but the Court of Appeals for the Second Circuit reversed.  Id. at 1766-67.

On appeal, the Supreme Court, in a five to three decision (with Justice Sotomayor abstaining), reversed and held that the decision of the arbitration panel must be vacated pursuant to Section 10(a)(4) of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., because the panel exceeded its powers by imposing its own views with respect to the policy of class arbitration in lieu of what the parties actually agreed to.  Id. at 1767-68.  Specifically, the Court concluded that the panel had failed to identify any rule of decision from the FAA, maritime law, or New York law that addressed the question of class arbitration where the parties’ contract was silent on the issue and, instead, simply based its decision on its own policy choice.  Id. at 1770.

In ascertaining the appropriate law to apply to the dispute, the Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Id. at 1775 (emphasis in original).  The Court emphasized that, although interpretation of arbitration provisions is generally an issue of state law, the FAA imposes certain rules that must be considered, including that arbitration is principally an issue of consent.  Id. at 1773.  Noting that parties have the freedom to draft their arbitration provisions in accordance with their own preferences, including (1) the issues they want to arbitrate; (2) the rules under which an arbitration will occur; and (3) who will arbitrate the dispute, the Court said that in analyzing the nature and scope of an arbitration provision, courts and arbitrators must “give effect to the intent of the parties.”  Id. at 1774-75.

Although the Court could have remanded to the Court of Appeals for a rehearing in accordance with these principles, it elected to resolve the issue of class arbitration itself because, in light of the parties’ stipulation that the arbitration provision was silent, the Court determined that there was only one permissible outcome.  Id. Specifically, because the parties had stipulated that they had not reached an agreement on class arbitration, there was no basis to conclude that the parties had consented to arbitration on a class wide basis.  Id. at 1775.  Moreover, because of the significant differences between bilateral arbitration and class arbitration, the Court ruled that “[a]n implicit agreement to authorize class-action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.”  Thus, the parties’ silence on the issue could not be presumed to confer consent to class arbitration.  Id. As a result, the Court held that because the parties had not expressly agreed on class arbitration, the parties could not be compelled to submit their dispute to class arbitration.

The Rent-A-Center Decision

The Rent-A-Centerdecision involved a dispute as to whether the court or the arbitrator decides the issue of whether the arbitration agreement is unconscionable.  In this case, the plaintiff employee sued his employer, Rent-A-Center, in the United States District Court for the District of Nevada, alleging employment discrimination.  130 S.Ct. at 2775.  The plaintiff had signed an arbitration agreement that expressly provided for arbitration of claims of discrimination and contained a provision that expressly delegated to the “[a]rbitrator, and not any federal, state, or local court or agency, [] the exclusive authority to resolve any dispute relating to the interpretation, applicability enforceability, or formation of the” arbitration agreement.  Based on the arbitration agreement, Rent-A-Center moved to dismiss or stay the proceedings under the FAA and to compel arbitration.  In opposition, the plaintiff employee argued that the arbitration agreement was unenforceable on the grounds of unconscionability.  Id.

The District Court granted Rent-A-Center’s motion to dismiss and to compel arbitration, finding that the “delegation clause” in the arbitration agreement, which provided that the arbitrator had the exclusive authority to resolve all disputes regarding the agreement, governed because the plaintiff was challenging the arbitration as a whole.  Id. at 2775-76.  On appeal, the Court of Appeals for the Ninth Circuit reversed on the question of whether the court or the arbitrator had the authority to determine whether the agreement was enforceable, concluding that where a party asserts that an arbitration agreement is unconscionable that threshold inquiry is for the court to decide regardless of what the agreement provides.  Id. at 2776.

On appeal, the Supreme Court, in a five to three decision (with the same five Justices in the majority as were in the majority in Stolt-Nielsen) reversed, holding that the question of the validity of the subject arbitration agreement was reserved for the arbitrator by the delegation clause.  Id. at 2779.  The Court’s opinion focused on the FAA’s recognition of “the fundamental principle that arbitration is a matter of contract” and noted that “the FAA [] places arbitration agreements on an equal footing with other contracts.”  Id. at 2776.  As a result, the Court stated that the delegation provision governed the dispute unless it was otherwise unenforceable pursuant to Section 2 of the FAA, which provides that arbitration provisions “shall be valid irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.

In analyzing the enforceability of the delegation provision, the Court noted that there are two ways to challenge the validity of an arbitration provision under Section 2 of the FAA: (1) to challenge the validity of the specific arbitration provision at issue, or (2) to challenge the entire contract as a whole.  130 S.Ct. at 2778.  As the Court explained, only the former challenge implicates a court’s involvement because Section 2 of the FAA provides that a “written provision” to arbitrate is valid — without regard to the validity of the entire contract in which the provision is contained.  Thus, a party’s challenge to the entire contract does not preclude a court from enforcing a specific agreement to arbitrate, which is severable from the contract.  Id. In other words, only if a party challenges the validity of the specific arbitration provision, rather than the validity of the entire contract, is the inquiry one for the court.  Id.

Although the subject contract in this case was an arbitration agreement, the Court concluded, in the face of a strongly worded dissent, that was not a distinction with any significance, stating “[a]pplication of the severability rule does not depend on the substance of the remainder of the contract.”  Id. In this case, the plaintiffs unconscionability challenges (i.e. that the arbitration agreement was one-sided in that it only applied to claims of an employee and that the arbitration procedures called for by the arbitration agreement, including fee-splitting and limitations on discovery, were unconscionable) were all directed at the arbitration agreement as a whole.  Thus, because the plaintiff only challenged the validity of the contract as a whole (i.e. the arbitration agreement) and the not the specific arbitration provision at issue (i.e. the delegation provision in the arbitration agreement), the majority held that the delegation provision was enforceable under the FAA and the issue of the enforceability of the arbitration agreement was one that was within the exclusive authority of the arbitrator.  Id.


Arbitration can, under certain circumstances, be a less expensive and more efficient forum in which to resolve disputes than traditional litigation.  The Stolt-Nielsen and Rent-A-Center decisions provide parties with the ability to craft arbitration provisions with clearly defined parameters, and potentially allow parties to more readily ensure that their disputes are addressed in arbitration.

As an initial matter, the Rent-A-Center decision enables parties to exert greater control over the forum in which issues relating to their arbitration agreement are resolved.  Specifically, parties can draft arbitration agreements limiting a court’s involvement in any subsequent dispute regarding the arbitration agreement by including a delegation clause in the agreement that expressly requires that all disputes regarding the arbitration agreement, including those that challenge the enforceability of the arbitration agreement, will be decided by the arbitrator rather than a court (conversely, parties may draft a delegation provision that requires the court to resolve such disputes, although the use of such provisions is unlikely given that the parties have agreed to arbitrate the underlying dispute).  In such an agreement, only challenges specifically directed to the validity of the delegation clause could be heard by a court, while challenges to the arbitration agreement as a whole would be addressed by the arbitrator.  Thus, the practical effect of theRent-A-Center decision is that disputes between parties with arbitration agreements containing such delegation clauses are more likely to be arbitrated than in the past.  That is, because a delegation clause referring disputes regarding the arbitration agreement to arbitration is generally more difficult to invalidate in court than an arbitration agreement as a whole, 130 S.Ct. at 2778 andRent-A-Center provides that the court can only consider the former, arbitration should now be easier to successfully invoke in that (1) opposing parties will be less likely to resist referral to arbitration and/or (2) courts will be more likely to refer the dispute to arbitration because of the limitations imposed by Rent-A-Center on their authority to invalidate arbitration agreements.

While the Rent-A-Center decision related to a delegation provision in a stand-alone arbitration agreement, the Court’s holding should be equally applicable where the delegation clause is contained in an arbitration provision that is part of a larger contract.  Indeed, as the dissent noted in Rent-A-Center, “the written arbitration agreement [was] but one part of a broader employment agreement between the parties.”  Id. at 2782.  Until further clarification is provided by District Courts or Circuit Courts of Appeal, however, it may be prudent for businesses to utilize arbitration agreements (containing the appropriate delegation clause) that are separate from, but still applicable to, the underlying contract.

The Stolt-Nielsen decision enables parties to more readily control the forum in which class claims will be resolved.  That is, unless the parties specifically agree to arbitrate class claims, an agreement to arbitrate does not compel arbitration of class claims.  This decision, thus, provides significant protection for parties that want to arbitrate individual claims, but ensure that any class claims are litigated in the courts.  Although the decision in Stolt-Nielsen provides that silence on the issue of class arbitration does not equal consent, the preferred practice is for business to expressly include provisions in their arbitration agreements that the parties do not consent to class arbitration.

In addition, Stolt-Nielsen calls into question those decisions in which courts have held that class arbitration waivers are unconscionable and unenforceable, severed such waivers from the arbitration provision, and compelled arbitration of all claims, including class claims.  If silence cannot be construed as consent to class arbitration, then arbitration provision containing a class arbitration waiver, even if that waiver is determined to be unenforceable, should not be construed as consent to class arbitration.  Nevertheless, business can avoid any ambiguity on the issue by expressly stating that (1) the class arbitration waiver is not severable from the arbitration agreement and (2) if a court or other authority determines that the class action waiver is unenforceable, then the parties do not consent to arbitration of any class claims.

Finally, it is important to note that the Supreme Court’s grant of certiori in AT&T Mobility LLC v. Concepcion, 130 S.Ct. 3322 (May 24, 2010) has the potential to drastically alter the nature and scope of enforceable arbitration provisions and significantly increase the use of such provisions, particularly in consumer contracts.  In this case, the Court of Appeals for the Ninth Circuit held that the FAA did not expressly or impliedly preempt California state law regarding the unconscionability of class arbitration waivers in the arbitration agreements.  Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).  That the Supreme Court granted certiori suggests, particularly in light of the Stolt-Nielsen and Rent-A-Center cases, the potential that the Court may conclude that the FAA — and not state law — governs the issue of the enforceability of class action waivers and that such waivers are enforceable.  If that were to occur, then such a decision could, depending upon the nature and scope of the Court’s decision, enable businesses to potentially insulate themselves from class actions in either the courts or arbitration proceedings through the utilization of arbitration agreements contain class arbitration waivers (i.e. an enforceable agreement that refers the parties to arbitration to resolve any dispute relating to the agreement, but expressly provides that such disputes may not be arbitrated on a class-wide basis).


The Supreme Court’s decisions in Stolt-Nielsen and Rent-A-Center evidence the significance of the FAA and signal that the Court, as currently constituted, is likely to enforce the terms of arbitration provisions in parties’ agreements as written.  Thus, even in circumstances that may be susceptible to concern as to whether the parties really had a “freedom to contract,” parties will more likely be bound by the terms of their written arbitration agreements, and there is a significant likelihood that these decisions will result in the federal courts referring more litigation to arbitration where the parties’ agreements so provide.  The Court’s pending decision in Concepcion promises to provide further direction from the Court regarding the scope of the FAA and, when the Court issues this decision, businesses and parties to contracts should further assess their use of arbitration provisions and the validity and enforceability of the language they include in such provisions.

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