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Not Your Father's Insurance Coverage: Using Transactional Insurance to Drive Business Opportunities

Posted at the National Law Review last week by Daniel J. Struck and Neil B. Posner of Much Shelist – a review of different type of insurance products that can be helpful in facilitating certain types of financial transactions: 

Insurance coverage as a commercial risk management tool has been around for centuries, but there are a number of newer transactional insurance products that can actually help drive business opportunities and close deals. Developed in the last decade or so and becoming more widely available, these products—including representations and warranties (R&W), tax liability, litigation liability and environmental stop-loss insurance—are decidedly not your father’s insurance coverage. Rather, these less traditional types of coverage can help facilitate the purchase or sale of a business or a significant business asset by reducing the uncertainties associated with potential indemnification obligations and liability exposures.

Traditional Insurance Coverage: Still an Important Corporate Asset

For many businesses, standard commercial insurance is treated as a routine expense in which premiums are the deciding factor in evaluating largely interchangeable form policies. In previous articles, we have discussed why this approach is often short-sighted.

The types of insurance coverage purchased by most businesses are predictable. General liability insurance protecting against liabilities owed to third parties resulting from bodily injury, personal injury and property damage is a given. Some kind of first-party property coverage for loss to owned or rented premises, damage to inventory and equipment, and resulting business interruptions also is generally necessary. Because most businesses have employees, insurance related to workers’ compensation and employee benefits programs is essential. Depending on the particular business, additional lines of insurance—such as management liability, employee dishonesty/fidelity, fiduciary liability, cyber-liability and professional liability—may be necessary as well.

For all their differences, these types of coverage all serve as a means to manage risk and reduce the exposure to potential “fortuitous” first-party losses or third-party liabilities, ranging from slip-and-fall accidents at a retail location to a devastating explosion at a factory or an alleged breach of duty by a company’s directors. Although traditional insurance coverage may help protect the financial health and solvency of a business and its individual partners, officers or directors, it does not often operate as an actual driver of business opportunities.

Transactional Insurance: A Tool for Facilitating Corporate Transactions

Transactional insurance policies, on the other hand, generally insure against risks that fall outside the scope of more traditional coverage and have the potential to drive, or at least facilitate, certain corporate transactions. Examples include:

  • R&W insurance, which provides coverage for the contractual indemnification obligations resulting from breaches of the representations and warranties of a specific agreement (often a contract for the purchase/sale of a business or a significant corporate asset);
  • Tax liability insurance, which provides coverage for an identified potential tax liability or penalty, or for the liability resulting from an adverse determination in a specified ongoing tax dispute;
  • Litigation liability insurance, which may provide coverage if an award of damages in an identified piece of litigation exceeds a threshold specified in the insurance policy; and 
  • Environmental stop-loss insurance, which may provide coverage for the costs of an ongoing environmental remediation project that exceeds a specific cost threshold.

Although commercial insurance policies of every type should be tailored to the particular needs of the insured, the levels of detail and specific underwriting and negotiation involved in placing transactional insurance are generally even greater. For example, the process tends to be fact specific and often involves extensive manuscripting (i.e., the negotiation of customized coverage terms applicable to the specific risks insured against).

But how can transactional insurance facilitate the completion of corporate transactions? Even in the best of times, potential buyers and sellers may find it difficult to agree on price. In the current economic environment, however, distressed sellers may be reluctant to discount the value of their businesses in hopes of a return to better days, while value-conscious purchasers are determined to buy at a substantial discount. Assuming that agreement can be reached on price, the parties must still negotiate the representations and warranties provided by both the buyer and the seller, and then reach acceptable indemnity terms for breaches of those representations. But the challenges don’t end there. A buyer with concerns about the ability of the seller to satisfy its indemnification obligations naturally will want the indemnification provision to be backstopped by a substantial escrow. A seller, however, likely will not want a substantial portion of his or her personal wealth tied up in an escrow account to pay for liabilities related to a business with which he or she is no longer associated.

In this challenging context, R&W insurance might help bridge differences and facilitate the successful closing of the transaction. For example, a potential buyer can use R&W insurance as a means to avoid relying solely on the seller for indemnification. A potential buyer might be able to make an offer more appealing by incorporating R&W insurance into its bid to reduce the portion of the purchase price that will be held in escrow. Similarly, for a seller that is eager to divest a business and minimize the scope of its continuing obligations relating to that business, a carefully tailored R&W insurance policy may provide a greater level of comfort that the seller will not be forced to pay out of pocket to satisfy potential indemnification obligations.

The following scenarios illustrate some of the ways in which transactional insurance might be used effectively to facilitate a transaction or to make a particular proposal more financially appealing.

Scenario One: Show Me the Money

After spending 25 years building a successful manufacturing business, Jacob Marley has decided to retire and tour the world on a yacht purchased with the proceeds from the sale of his company. He retains an investment banker to put the business up for auction and receives interest from a number of private equity firms, including HavishamCo. Rather than grossly over-bidding its competitors, Havisham distinguishes its offer by including an escrow requirement that is dramatically lower than would normally be expected (subject only to Havisham’s ability to secure R&W coverage). While putting its bid together, Havisham negotiated terms of an R&W insurance policy to insure over the seller’s representations and warranties. The bid prices from the various private equity firms were roughly equivalent, but Havisham’s escrow holdback was several million dollars lower than in any of the competing bids. Thanks to this creative use of R&W insurance, Marley accepts Havisham’s bid and sails off into the sunset.

Scenario Two: Good Intentions and a Token Will Get You on the Subway

CogswellCorp is experiencing financial difficulty because its “visionary” CEO has begun expanding the company beyond its core cog-manufacturing business. In order to finance its ambitious growth strategy, Cogswell decides to sell its cog-manufacturing operations. SpacelyCo seizes the opportunity to purchase the operations of a longtime competitor, and the parties easily agree on price. In an effort to close the deal quickly, Spacely proposes a modest escrow of only $1 million. However, the cap on Cogswell’s indemnification obligations for breaches of its representations and warranties is significantly higher at $30 million. Although Spacely believes it is purchasing the fundamentally sound operations of one of its largest competitors at a bargain price, Spacely’s management team fears that Cogswell’s expansion efforts will fail, leaving the company unable to honor its indemnification obligations if called upon to do so. In order to address this concern, Spacely obtains an R&W policy that provides coverage above a retention amount equal to the escrow of $1 million, and the deal closes successfully.

Scenario Three: The Long Goodbye

Forty years ago, ApexCo was the world’s largest electronics manufacturer. The company also maintained one of the foremost R&D departments in the world and now holds patents for inventions that are widely used in data storage devices, computer chips and consumer electronics. Over time, Apex discovered that the licensing of its patents was far more lucrative than its manufacturing operations. After being acquired by a private equity firm, Apex shut down its manufacturing and marketing operations in order to focus on licensing its patents and vigorously protecting its intellectual property. Today, the company continues to own a number of shuttered manufacturing facilities and distribution centers in populous suburban locations. There is extensive environmental contamination at several of these sites, which makes them difficult to sell without providing broad, open-ended indemnifications to the buyers. In an effort to control the financial obligations associated with these facilities, Apex seeks the placement of stop-loss insurance that will apply to each of the properties. The underwriting process requires significant due diligence, testing and the preparation of estimates for the remediation cost at each property. Ultimately, Apex is able to secure a stop-loss policy that generally covers remediation costs above a threshold specified for each site. As a result, Apex is now able to market the properties knowing that its financial obligations will be fixed but that buyers will enjoy a level of assurance that additional remediation costs will be paid for under the stop-loss policy.

Scenario Four: Death and Taxes

Holding company Jarndyce & Sons consolidated a number of its subsidiaries into a new subsidiary, BleakCo. Based on the tax opinion of its law firm, Kenge & Carboy, Jarndyce believed that the roll-up had been accomplished through a series of tax-free transactions. Eventually, Jarndyce decided to sell Bleak and entered into negotiations with private equity firm PickwickPip. During due diligence, however, PickwickPip’s law firm, Dodson & Fogg, raised concerns about whether the roll-up transactions had indeed been tax free. Despite these concerns, PickwickPip felt strongly that Bleak would be a valuable addition to its portfolio. Because it disagreed with the tax position taken by PickwickPip’s counsel, Jarndyce was unwilling to place the full amount of the potential tax liability in escrow or to provide a full indemnity. Jarndyce, however, was willing to pay a portion of the premium for a tax insurance policy that would cover PickwickPip for any tax liability above an escrow amount agreed to by the parties in the purchase agreement.

A Strategic Solution

As these scenarios illustrate, transactional insurance can be used strategically by both buyers and sellers to overcome obstacles that might otherwise make it difficult to complete an acquisition or divesture. It is not, however, an off-the-shelf product. The underwriting often requires its own due diligence, and the terms under which coverage is provided frequently require intense negotiations. Accordingly, whether transactional insurance products might be useful in bridging obstacles to a transaction should be an early strategic consideration. Given the myriad issues and financial interests at stake, it is important that a potential purchaser of transactional insurance pay close attention to the risks for which coverage is sought, the extent to which the proposed coverage terms respond to those risks and the legal effects of the negotiated coverage terms.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

15th Annual North American Shared Services & Outsourcing Week – March 1-3 Orlando, FL

The National Law Review is a proud media partner of the 15th Annual North American Shared Services & Outsourcing Week – March 1-3 Orlando, FL    

The Shared Services & Outsourcing Network (SSON) is the largest and most established community of shared services and outsourcing professionals. SSON’s 15th Annual Shared Services Week is the largest annual gathering of Shared Services professionals in the world! This can’t-miss multi-tracked event is designed to provide executives from start-ups, intermediate and mature shared services with everything they need to know to bring shared services to the next level. Featuring outstanding keynotes, an impressive speaker faculty, workshops, master-classes, site-tours and the shared service excellence awards, there is little the Shared Services Executive could want outside of this conference.

The 15th Annual North American Shared Services & Outsourcing Week represents the next big wave of innovation in the shared services and outsourcing space. You will meet and network with the very best thought leaders, practitioners, providers and advisors in the shared services and outsourcing space, connecting with over 1,000 senior level attendees from various sectors all over the region.

If you want to seek fresh initiatives and reach new thresholds of productivity or revenue growth, are looking for game changing, innovative content and ideas to leverage technologies, and desperate to leave behind old legacies and shape the future of the sourcing world, then this event is for you.

Click Here -For More Information and to Register.

Patent Reform Is Again Before Congress – The Patent Reform Act of 2011

Recently posted at the National Law Review by Ashley Merlo of Sheppard Mullin – details on recent bill introduced by Senator Leahy.  

Patent reform has been a topic of congressional debate since the introduction of the Patent Reform Act of 2005. Having failed to enact the 2005 legislation or any subsequently proposed reform, patent reform has again been introduced into the Senate, this time entitled The Patent Reform Act of 2011. (S. 23, 112th Cong. (2011).)

In introducing the new bill, Senator Leahy noted the following: “China has been modernizing its patent laws and promoting innovation while the United States has failed to keep pace. It has now been nearly 60 years since Congress last acted to reform American patent law. We can no longer wait.” (157 Cong. Rec. S131 (2011).)

As Leahy further explained, the proposed reforms aim to accomplish three goals: (1) “improve the application process by transitioning to a first-inventor-to-file system”; (2) “improve the quality of patents issued by the USPTO by introducing several quality-enhancement measures”; and (3) “provide more certainty in litigation.” The most significant changes to implement these goals are described below.

The Application Process: Shift To First-To-File System

In an effort to harmonize the U.S. patent system with the systems of other countries, The Patent Reform Act of 2011 proposes to change the U.S. Patent System from a first-to-invent to a first-to-file system. This change means that patents will be awarded to the earliest-filed application for a claimed invention, regardless of the date of actual invention. In other words, under the proposed reform, if A invents a new, novel and non-obvious widget in April but fails to file its patent application (or disclose it) until August, and B invents the same widget in June and files its patent application at that time, B gets the patent under the new system, not A.

The change to the first-to-file system also impacts the prior art analysis. Under current law, for prior art that is publicly — available less than one year before an application for a patent is filed, an inventor can still obtain a patent if she can prove that she invented the claimed invention prior to the date of the prior art. The new bill, however, appears to limit a patent applicant’s ability to negate prior art. Namely, only disclosures by the inventor or someone who obtained the disclosure from the inventor are excluded as prior art.

However, inventors that get beat to the patent office are not entirely out of luck; the reforms provide for “derivation” proceedings to determine if the inventor of an earlier-filed patent “derived” the invention from the inventor of a later-filed application. In other words, returning to the example above, if A could show that B’s widget invention was derived from his widget invention, A may nonetheless obtain a patent despite B’s earlier filing date.

Patent Quality: Submission of Prior Art / Post-Grant Review Procedures

In an effort to improve patent quality, the proposed act establishes the opportunity for third parties to submit information (i.e., prior art) related to a pending application. This, in turn, should assist the examiner in determining whether an applied-for patent is indeed patentable.

In addition, the proposed act incorporates a post-grant 9-month window in which a person who is not the patent owner can institute a post-grant review proceeding to cancel as unpatentable one or more claims of the patent. However, post-grant review can only commence if, following petition, it is determined that it is more likely than not that at least one of the claims challenged is unpatentable.

To protect against abuse of the post-grant review procedure, the act also specifies that an accused infringer may not seek review (1) after it has already filed a lawsuit in district court challenging the patent, or (2) more than three months after the date the accused infringer must answer, or otherwise respond to, a complaint for patent infringement filed by the patentee. The post-grant review proceeding also has estoppel effect, i.e., the petitioner in a post-grant review proceeding cannot raise in a subsequent action any ground of invalidity that was raised or reasonably could have been raised in the post-grant proceeding.

Improve Certainty Surrounding Litigation: Damages

The proposed legislation aims to provide more certainty to litigants as to damage calculations and enhanced damages.

Specifically, the act empowers judges to serve as a gatekeeper on damages. The proposed legislation specifies that the court “shall identify the methodologies and factors that are relevant to the determination of damages, and the court or jury shall consider only those methodologies and factors relevant to making such determination.” As Senator Leahy explained: “the gatekeeper compromise on damages . . . is what is needed to ensure an award of a reasonable royalty is not artificially inflated or based on irrelevant factors.”

In addition, on a showing of good cause, litigants are entitled to have the trial sequenced such that the trier of fact decides the questions of validity and infringement prior to damages.

Finally, the proposed legislation would codify case law regarding willfulness, requiring a plaintiff to demonstrate by “clear and convincing evidence that the accused infringer’s conduct with respect to the patent was objectively reckless.” Objectively reckless conduct will be found where the infringer acted “despite an objectively high likelihood that his actions constituted infringement of a valid patent, and this objectively-defined risk was either known or so obvious that it should have been known.” Mere knowledge of a patent is insufficient to show willfulness for an enhanced damage award.

Conclusion

As Senator Leahy explained in his remarks presenting the bill to the Senate, reform of the American patent law system is long overdue. Overall, the proposed legislation is similar to previously proposed legislation; indeed it was structured around the legislative proposal from 2005. The 2011 Patent Reform Act proposes significant changes to American patent law, surely to receive comment from those in favor and those against. Whether patent reform will actually make its way onto the books is a question yet to be determined.
 

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

New Alternatives to Condominium Structure for Florida Real Estate Developers

From featured bloggers at the National Law Review  Jeffrey R. Margolis and Barry D. Lapides of Duane Morris LLP – helpful information about what to look for in alternative non-condominium structure for certain real estate  projects in Florida.

Florida’s real estate market is showing signs of a turnaround. However, residential developers have appeared hesitant to construct new condominium projects. As an alternative to projects using a condominium form of ownership, new low-rise or “garden style” projects that would typically need to be structured as a residential condominium have recently been approved by several Florida local authorities, potentially paving the way for an alternative non-condominium structure for projects that otherwise would need to be structured as a condominium.

With the current perceived stigma of falling values for condominiums as well as the increased costs associated with forming condominiums and operating condominium associations, developers of proposed low-rise or “garden style” projects in Florida may want to consider a hybrid structure that allows the development of these projects as non-condominiums that permits the individual units to be conveyed as non-condominium homes operated through homeowners’ associations under Chapter 720 of the Florida Statutes.

With the proper documentation, including a declaration of covenants and restrictions, appropriate disclosures in homeowners’ association and sales documents, and necessary approvals from the applicable governmental authorities and lenders, homebuilders can now construct low-rise or “garden style” residential townhomes, with each unit having exclusive use of a garage, that can be structured to allow ownership as non-condominium units as opposed to condominiums.

With this structure—a sample floor plan is depicted below—all units have exclusive use and access to a garage, though certain units actually have no garages (“Non-Garage Homes”), and other units contain two garages (“Garage Homes”). To accommodate the Non-Garage Homes with use and access to a garage, an easement is provided in favor of a Non-Garage Home for the exclusive use of one of the garages. This structure may also be available for living areas other than a garage through the use of easements or other rights.

Floorplan

With this structure, the following may warrant consideration:

  1. Easement. A recorded declaration of covenants and restrictions should include the necessary easements in favor of the Non-Garage Home, including a perpetual, exclusive easement for the use and enjoyment of the garage and the driveway appurtenant to the garage.
     
  2. Taxes. Fairness would dictate only that the owner of the Non-Garage Home pay the real estate taxes associated with the garage space over which it has exclusive use and enjoyment, although the garage is not part of the Non-Garage Home. Unless the local property appraiser agrees to assess each unit as if it has one garage, regardless of the legal description of the unit, a recorded declaration would have to provide a mechanism for the apportionment of real estate taxes.
     
  3. Homeowners’ Assessments. Depending on whether assessments are allocated to each unit based upon square footage or on an equal basis, a recorded declaration of covenants and restrictions should be drafted to account for any assessments allocated to the garage component.
     
  4. Utilities. Depending on how the utilities will be metered and billed, a recorded declaration would have to provide a mechanism so that utility costs related to the garage used by the Non-Garage Home are paid by the owner of the Non-Garage Home. In addition, issues relating to utility lines serving the garage component would have to be addressed.
     
  5. Insurance. Depending on whether the homeowners’ association obtains and maintains insurance coverage over all of the units in the community, the developer may want to consult with local insurance companies to determine whether coverage can be obtained so that the owner of the Non-Garage Home can obtain insurance, both casualty and general liability, covering the garage component.
     
  6. Casualty. Provisions should be set forth in a recorded declaration of restrictions and covenants to ensure that the garage used by the Non-Garage Home is reconstructed or repaired in the event of its damage or destruction.
     
  7. Maintenance. A recorded declaration should contain provisions to ensure that the owner of a Non-Garage Home maintains and safely uses the garage component used by the owner of the Non-Garage Home.
     
  8. Parking. The applicable governmental entity should confirm that applicable parking requirements are satisfied, notwithstanding the structure of this type of development.
     
  9. Disclosures. Appropriate and sufficient disclosures should be included in a recorded declaration of covenants and restrictions as well as sales documents advising purchasers and owners of the details of the structure, including the easements and issues relating to maintenance, taxes, insurance and property taxes.
     
  10. Other. A recorded declaration of covenants and restrictions should account for other issues, including provisions relating to liability and indemnification issues.

Duane Morris LLP & Affiliates. © 1998-2011 Duane Morris LLP.

Federal Scrutiny of Social Media Policies – Facebook posting subject of NLRB settlement with employer

The much publicized case in front of the National Labor Relations Board (NLRB)  concerning the employer  charged by the NLRB with terminating an employee for posting disparaging comments about her supervisor on Facebook has been settled.   Bracewell & Giuliani posted the following on the National Law Review yesterday: 

 

On Monday, February 7, 2011, the National Labor Relations Board (NLRB) reached a settlement with American Medical Response of Connecticut, Inc., the employer recently charged by the NLRB with terminating an employee in violation of federal labor law for posting disparaging comments about her supervisor on Facebook. The NLRB complaint alleged that the employer’s policy regarding “Blogging and Internet Posting” was overly-broad and unlawfully interfered with employees’ rights under Section 7 of the National Labor Relations Act (NLRA) to engage in “concerted, protected activity.” As written, the challenged policy stated that “Employees are prohibited from making disparaging, discriminatory or defamatory comments when discussing the Company or the employee’s superiors, co-workers and/or competitors.”

Under the terms of the settlement agreement, the employer agreed to revise this policy to allow employees to discuss wages, hours, and working conditions with co-workers outside of the workplace, and agreed to refrain from disciplining or firing employees for engaging in such discussions. The matter of the employee’s discharge was resolved through a separate, private agreement between the employee and the employer.

Why is this important?

The NLRB’s involvement in this case indicates an increased focus on the enforcement of employee rights under Section 7 of the NLRA and on employers’ social media policies. Section 7 protects employees regardless of whether their workplace is unionized; therefore all employers must be cognizant of policies and practices that might be interpreted to limit employees’ right to engage in concerted action.

Actions needed?

The NLRB’s stated position on this issue is that employees are allowed to discuss the conditions of their employment with co-workers on Facebook, or other social media websites, to the same extent they are permitted to do so at the water cooler or a restaurant. To this end, policies or practices which could be interpreted as limiting such right should be modified to include a statement that the policy will not be construed or applied in any manner that interferes with employees’ rights under the NLRA.

© 2011 Bracewell & Giuliani LLP

Can a 401(k) Plan Member Recover Damages to His Individual Account Caused By a Plan Administrator’s Breach of Fiduciary Duty?

Recently posted at the National Law Review by guest blogger David B. Cosgrove – a question many unhappy 401(k) plans members may have pondered: 

An ERISA Plaintiff cannot seek individual monetary damages for a Plan Administrator’s breach of fiduciary duty to the plan. Importantly, however, seeking damages on behalf of the 401(k) Plan as a result of a Plaintiff’s losses in his individual account is explicitly permitted under LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008), which held that ERISA Section 502(a)(2) authorizes recovery by a plan participant for fiduciary breaches “that impair the value of plan assets in a participant’s individual account.” 522 U.S. at 256. The Supreme Court in LaRue made clear its reasoning for this holding:

Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of § 409.  Id. at 256.

For instance, a Plaintiff may rely upon ERISA Section 502(a)(1)(B) for a Defendant’s failure to provide the Plaintiff with the full 401(k) benefits owed to him under the 401(k) Plan at issue. And the Plaintiff may also rely upon ERISA Section 502(a)(2) for a Defendant’s breaches of fiduciary duties. A plain reading of Sections 502(a)(1)(B) and 502(a)(2) establishes that the two sections provide for different relief. Indeed, as the 9th Circuit explicitly noted in Harris v. Amgen, Inc.:

Section 502(a)(1)(B) allows a plan participant “to recover benefits due to him under the terms of his plan.” By contrast, Section 502(a)(2) encompasses claims based on breach of fiduciary duty and allows for the more expansive recovery of “appropriate relief,” including disgorgement of profits and equitable remedies.  573 F.3d 728, 734, n. 4 (9th Cir. 2009) (citations omitted).

Regardless, some defendants incorrectly assert that “the Eighth Circuit and other courts alike have repeatedly held that participants cannot state claims for breach of fiduciary duty under ERISA Section 502(a) when they are also seeking to recover the same benefits under ERISA Section 502(a)(1)(B).” The falsity of this assertion is clear upon a review of the federal caselaw. Indeed, the cases usually cited are inapplicable in that each is either irrelevant or is limited in scope to claims brought under ERISA Sections 502(a)(1)(B) and 502(a)(3), not Sections 502(a)(1)(B) and 502(a)(2). See Geissal ex rel. Estate of Geissal v. Moore Medical Corp., 338 F.3d 926, 933 (8th Cir. 2003) (narrowly holding that a beneficiary cannot bring a claim for benefits under Section 502(a)(1)(B) and Section 502(a)(3)(B));Conley v. Pitney Bowes, 176 F.3d 1044, 1047 (8th Cir. 1999) (citing Wald v. Southwestern Bell Corporation Customcare Medical Plan, 83 F.3d 1002, 1006 (8th Cir. 1996) in holding that “where a plaintiff is ‘provided adequate relief by [the] right to bring a claim for benefits under [Section 502(a)(1)(B)],’ the plaintiff does not have a cause of action to seek the same remedy under [Section 502(a)(3)(B)]”). Some defendants also cite Coyne & Delaney Co. v. BCBS of Va., Inc., 102 F.3d 712 (4th Cir. 1996). However, Coyne is not relevant in that it analyses whether aplan fiduciary can bring a claim for benefits under ERISA Section 502(a)(3). 102 F.3d at 713.

Some plan defendants also rely upon the U.S. Supreme Court’s holding in LaRue v. DeWolff, Boberg & Assoc., Inc., 552 U.S. 248 (2008) for the proposition that duplicative claims under ERISA Section 502(a)(1)(B) and 502(a)(2) are inappropriate. Specifically, defendants may rely upon commentary by Chief Justice Roberts in that case, without revealing that Justice Roberts wrote the concurring opinion rather than the opinion of the Court. Accordingly, his analysis is not binding. Id. at 249. In fact, at the conclusion of his concurring opinion, Justice Roberts acknowledged that his analysis is not binding on the issue: “In any event, other courts in other cases remain free to consider what we have not—what effect the availability of relief under § 502(a)(1)(B) may have on a plan participant’s ability to proceed under § 502(a)(2).” Id. at 260.

Indeed, in Crider v. Life Ins. Co. of N. Am., 2008 WL 2782871 (W.D. Ky. 2008), the Western District of Kentucky acknowledged that Justice Roberts’ analysis inLaRue is not binding, and therefore noted that in deciding whether to allow a claim under both ERISA Section 502(a)(1)(B) and Section 502(a)(2), the question for the court is whether the facts the plaintiff alleges “state a claim for breach of fiduciary duty under Section 502(a)(2) which is separate from her claim for benefits under Section 502(a)(1)(B).” Id. at *2. The court further noted that in deciding this question, the Sixth Circuit has on at least three occasions “allowed plaintiffs to pursue both a claim for benefits under Section 502(a)(1) and also to attempt to hold a plan responsible for breaches of fiduciary duty under a separate Section 502(a) action.” Id. Finally, In Hill v. Blue Cross & Blue Shield of Mich., the Sixth Circuit observed that plan-wide claims are distinct from claims seeking to correct the denial of individual benefits. 409 F.3d 710, 718 (6th Cir. 2005).

Finally, it is well-established that “[i]n ruling on a motion to dismiss, a court must view the allegations of the complaint in the light most favorable to the plaintiff.”Guarantee Co. of North America, USA v. Middleton Bros., Inc., 2010 WL 2553693, at *2 (E.D. Mo. June 23, 2010). To survive a motion to dismiss, a claim need only be facially plausible, “meaning that the factual content…allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”Id. (quoting Cole v. Homier Dist. Co., Inc., 599 F.3d 856, 861 (8th Cir. 2010)).

Copyright © 2011 Cosgrove Law, LLC.

Conduct Outside Business Hours: Guidelines for Minimizing Risk

Posted yesterday at the National Law Review by Wendy C. Hyland of Dinsmore & Shohl LLP – one of my personal favorite topics – after hour business social activities – who knew that one Harvey Wallbanger could make a person so wacky: 

Disciplining employees for conduct outside of work can be tricky territory and highly dependent on the specific nature of the incident. Consider both of the following scenarios. At an after hours dinner following a company annual meeting, several off color jokes are told about the shape of food on employees’ entrees after a few rounds of margaritas. Everyone is laughing at the jokes and no one reports being uncomfortable with the conversation. Since attendance is required, almost all employees are there, including human resources employees.

What should they do?

In the second scenario, employees playing on the company softball team go for happy hour after the game. An employee starts coming on to a co-worker and, after she rebuffs his advances, the co-worker follows her home and repeatedly knocks on her door asking to come in. At work the following Monday, she tells another co-worker about the incident but says it didn’t happen on work time and she doesn’t want to report it. The co-worker reports it to human resources, but doesn’t want anything to be done because she promised her co-worker she wouldn’t tell anyone. One event is a company-sponsored dinner following a company event, and the other is not. Is there a difference? What are the best practices to limit liability and, if necessary, discipline employees as the result of conduct outside of work hours?

Employers are in a tough position since, on one hand, parties and sports teams can be a great way to encourage employee morale and relationship building. On the other hand, they are fraught with potential legal issues, risks, and concerns. The first issue to consider is whether the event if company sponsored, because there is a difference between company-sponsored events and voluntary social opportunities. If an employee gets hurt while traveling to, or during the course of an event, the injury is likely to be considered work-related for workers’ compensation purposes. A company could be held responsible for any accidents or injuries resulting from employer-sponsored events. Ways to minimize this risk include:

 

  1. eliminating alcohol at company-sponsored events and informing employees that attendance is completely voluntary;
  2. require employees to pay for drinks, or provide drink tickets for a limited number of drinks;
  3. stop serving alcohol one hour before the event ends; and
  4. provide a taxi or other designated driver service or encourage employees to car pool and choose a designated driver.

What about employee behavior, whether at a company sponsored event or otherwise, and its impact on the workplace? In both of the above scenarios, there are potential issues implicating harassment/hostile work environment policies. What else can companies do to minimize risk in these situations? In the first scenario, potential measures prior to the event could include sending a company-wide e-mail explaining the parameters on alcohol, along with specific language about dress code and a reminder of the harassment/hostile work environment policy as a guide for appropriate behavior. After the event, the human resources employees could recirculate the company policy on harassment and have everyone sign an acknowledgement of receipt. In the second scenario, similar precautions regarding the parameters and rules of voluntary participation, alcohol use, and appropriate behavior could be circulated among employees before the softball season begins—handed out along with the team t-shirts. The company should immediately investigate the report on the potential harassment issue with the co-worker, even though neither party was at work when the event took place and there were requests not to do anything. Company response to issues is critical to defenses in the event of a harassment lawsuit. The co-worker’s report places the company on notice that potential issues exist, whether an employee wants its addressed or not. If warranted under company policy, disciplinary action could be appropriate, even for off duty conduct.

While legal issues and concerns are a reality, there are creative ways to minimize risk while pursuing the goal of workplace cohesion and relationship building.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

Leasing Employees – Not a Risk Free Arrangement

Posted today at the National Law Review by  Melvin J. Muskovitz of Dykema Gossett PLLC – some of the key points to consider when considering entering into an employee leasing situation:  

While leasing employees from a staffing agency, either on a temporary or long term basis, is not a new phenomenon, the number of such workers is again increasing after reaching a low in July 2009, according to the Bureau of Labor Statistics. While there are a number of benefits to leasing employees, the arrangement is not risk free. This article discusses issues associated with the use of a contingent workforce.

Businesses may use temporary employment agencies to provide more flexibility with their workforce, maintaining a core workforce and utilizing temporary employees as the need exists. However, even though a staffing contract may state that the business is not the employer of thetemporary workers, it may be liable under various employment laws as a “joint employer” with the agency, despite the fact that the worker is paid by the agency and is not on the contracting business’ payroll.

Who is the legal employer?

Since the agency normally hires and pays the employee, provides workers’ compensation coverage, and if necessary, terminates the employee, it has an employer/employee relationship with the worker.However, during the job assignment, the entity to whom the worker is assigned may also be considered a joint employer depending upon the amount of control it exercises over the worker. A determination of joint employment is made by looking at the entire relationship

Factors to consider in determining if there is a joint employment relationship include:

  • the nature and degree of control over the worker;
  • the degree of supervision, direct or indirect, exercised over the work, including the scheduling of hours worked;
  • the furnishing of work space and/or equipment for the job;
  • the power each has to determine the pay rates or the methods of payment of the employee; and
  • the right each has to hire, fire or modify the worker’s employment conditions.

What is the liability for the joint employer?

If the agency and the client are held to be joint employers, both may be liable under federal or state employment laws.

Anti-Discrimination

If the entity to whom a worker is assigned treats that worker in a discriminatory manner, or subjects the employee to a hostile environment, it may be liable. Further, generally, the entity to which a worker is assigned is required to provide an accommodation if it has notice of the need for it and can do so without an undue hardship.

Family and Medical Leave Act (FMLA)

The FMLA generally covers private employers with 50 or more employees and all schools and public agencies. Employees jointly employed by two employers must be counted by both for FMLA purposes. If a temporary employee fills in for an absent one who is expected to return, both employees count toward the employer’s 50-employee minimum for FMLA coverage purposes. Part-time employees who work for a full workweek, including those hired through a temporary agency, count toward the 50 minimum for FMLA coverage.

When organizations are considered joint employers under the FMLA, only the primary employer is responsible for giving notices concerning FMLA leave, providing the leave, and maintaining health benefits.In a joint employment situation, the primary employer is the one that has the authority to hire or fire, assign or place the employee, and provide pay and benefits. The secondary employer is responsible for accepting an employee returning from leave if the secondary employer continues its relationship with the agency and the agency elects to return the employee to that job.

Fair Labor Standards Act (FLSA)

The FLSA makes both employers liable for minimum wage and overtime requirements.

National Labor Relations Act (NLRA)

Joint employers may both be liable under the NLRA if they share matters governing essential terms and conditions of employment such as hiring, supervision, disciplining and discharging. Therefore both employers may be found liable in an unfair labor practice. In addition,the National Labor Relations Board has taken the position that temporary employees from an agency may be included in a bargaining unit or voting unit if the temporary employees share a “community of interests” with the regular employees.

Occupational Safety and Health Act (OSHA)

Generally with joint employers under OSHA, the employer at whose business location the temporary employee is assigned will be the liable employer for work-related injuries. The staffing agency will normally be cited only if it knew or should have known of the unsafe conditions or if the citation is necessary to correct a violation.

Benefits Statutes

Depending on the terms of a business entity’s benefit plans, in addition to other factors, leased employees may be entitled to benefits provided to an entity’s regular employees.

Best Practices

1. Employers should seek indemnity agreements in the contracts they sign with temporary staffing agencies so that the agency retains liability for employment related claims and agrees to indemnify the client for any losses they may incur attributable to the actions of the staffing agency.

2. Contracts with staffing agencies should include a provision that makes the staffing agency responsible for payment of all federal, state and local employment taxes, including income taxes, FICA and unemployment taxes.

3. Employers should verify that the employees are covered under the staffing agency’s workers’ compensation policy.

4. Employers should accommodate the needs of a worker with a disability, or be able to justify why it would be an undue hardship to do so.

5. Employers should ensure that temporary or leased employees are not subjected to discriminatory treatment or harassment.

6. Employers should review all policies and benefit plans, to ensure that leased employees are not eligible to receive company benefits.

© 2011 Dykema Gossett PLLC.

 

Why We Decided to Become Certified Legal Project Managers

From this week’s Business of Law Guest Bloggers at the National Law Review – Stacy D. Ballin and Mitchell S. Thompson of Squire, Sanders & Demsey LLP insight on the need and the process of becoming a Certified Legal Project Manager: 

On January 7, 2011, in a simple conference call, the two of us struck out upon a new venture that we believe will help us serve our clients better, and might just mark the start of a new and significant trend for law firm partners.

In a kick-off telephone conversation with consultant Jim Hassett of LegalBizDev, we plunged into an innovative program of study in the rapidly growing field of legal project management.

That conversation was the beginning of a six-month distance learning course put together by LegalBizDev that we can complete at our own pace and that leads to the title of Certified Legal Project Manager. We are among the pioneers in this, the first formal program to certify lawyers as legal project managers.

Squire, Sanders & Dempsey LLP is one of the first major legal practices to take project management to a new level. As the co-chairs of Squire Sanders’ Project Management Committee, we are taking the lead in obtaining the certification ourselves and in helping to plan how to spread best practices within the firm.

What does project management have to do with lawyers? Well, pretty much everything.  The world has changed, and clients need more than ever from their law firms. They want their lawyers to partner with them to achieve their business goals and deliver value, not to merely send them a monthly bill showing how many hours have been spent.

Like every other kind of business worldwide, law firms are becoming more cost-effective and efficient in providing their services. It’s no secret that many users of legal services – including the corporations, governments, and nonprofits, big and small, that big law firms serve — have perceived some disconnect between their costs for legal services and the value of those services. This trend has been building since the DuPont Legal Model was launched in the 1990s, and it was accelerated by the recent economic downturn.  Even as the economy improves, however, we expect clients to continue to require greater value than ever from their law firms.

The Association of Corporate Counsel’s Value Challenge is perhaps the best known of several concerted efforts by corporate counsel to improve the methods and tools that law firms use in delivering legal services. Squire Sanders has formally endorsed the Value Challenge, and adopted our own principles in the form of the Squire Sanders Partnering for Worldwide Value Covenant. Our combination with Hammonds LLP, which took effect on January 1, 2011, makes us one of a very small number of global firms that clearly articulates the importance of providing cost-effective services to our clients.

Among the principles that are integral to our covenant are that we will proactively offer our clients alternative fee structures; that we will provide budgets and estimates for each engagement and advise the client immediately if there may be material changes in cost; and that we will continuously work to become more cost-effective in the delivery of our services.

Our enrollment in legal project management certification was directly related to our value covenant. If Squire Sanders is going to live by these ambitious principles, our lawyers must understand project management and put it into practice. Unless law firms understand project management principles and put them into action, there is no way that they can thrive and deliver excellence while pursuing alternative fee structures and providing firmer budgets and estimates on hourly matters.

Project management is a well accepted technique in business and industry. It can be defined as the discipline of planning, organizing, securing, and managing resources to achieve a project’s goals within the constraints of scope, time, and budget. We are convinced that the time has come for its careful application to major legal matters, including large transactions and significant pieces of litigation.

Lawyers will benefit from project management tools because they can improve communication with their clients and focus on clients’ true needs, thereby reducing client risk and delivering greater value. Client will benefit because they can work with lawyers who put client business goals first, use creative ways to provide solutions to client challenges and ensure clients receive the best value for their investment in legal services.

There are many challenges involved in bringing the well-tested tools of project management into the legal world. For example, legal project managers must take into account client-imposed deal deadlines, due diligence requirements, opposing litigation counsel and their tactics, and deadlines and court calendars that are out of a lawyer’s or law firm’s control — but we believe that these obstacles can be overcome.

In our certification program, we will do assigned readings from six leading textbooks in the field of project management and answer a series of probing essay questions. We will focus on eight key issues that lawyers must understand in order to be effective project managers: setting objectives and defining the scope of a project; identifying and scheduling activities; assigning tasks and managing a team; planning and managing a budget; assessing risks; managing quality; managing client communication and expectations; and negotiating changes of scope. All along the way we’ll interact with Jim Hassett and his staff.

At a later stage of the course, we will apply project management concepts to an actual matter on our plates at Squire Sanders. For example, we might be asked to assume that the same situation would arise again but that this time the client insists on a fixed price at a lower total cost with better communication throughout. We will have to solve the problem with our new project management tools.

In that first conversation with Jim Hassett in January, we discussed Squire Sanders’ position in the vanguard of this emerging area and how to maximize the benefits to our clients. In future conversations, we will discuss the most efficient ways to make project management information accessible to other members of our firm so that each lawyer can determine the best way to apply these principles in his or her own practice.  We hope that the program and the certification will help our firm and our clients succeed in this rapidly changing world.

©Squire, Sanders & Dempsey All Rights Reserved 2011

 

 

Planning Opportunities Under the New Estate and Gift Tax Law

Recent post summarizing Gift and Estate Tax changes at the National Law Review by Lowndes, Drosdick, Doster, Kantor & Reed, P.A. – read on: 

On December 17, 2010 Congress enacted a new tax law which changes the federal gift, estate and generation-skipping transfer (“GST”) taxes currently in effect. However, the new law is only effective for the next two years, through December 31, 2012. The new law reinstates the lifetime exemptions for the estate, GST and gift taxes and increases the amount of the exemptions to $5,000,000 per person with a top tax rate of 35%.

The law provides new opportunities for clients. The increased gift tax exemption allows for clients to make tax-free gifts of their estate which might otherwise be taxable. The new gift tax provisions allow someone who has already made taxable gifts totaling $1,000,000 during his or her life to have an additional $4,000,000 of gift tax exemption available for use during his or her life. This is an immediate planning opportunity for clients who may wish to take advantage of the tax law changes.

The new law may also alter many clients’ estate plans. For example, assume a client’s estate plan is drafted to provide that the estate is to be divided into a family trust and a marital trust with the family trust being funded with the maximum estate tax exemption and the marital trust being funded with the amount, if any, of the estate that exceeds the exemption amount. Thus, under current law, the family trust would be funded with the first $5,000,000 of the estate (or the entire estate depending on the value of the estate) with the possibility that no portion of the estate would pass into the marital trust. Given the increased exemption, this may or may not be what a client would want to happen.

Many clients’ current estate plans include a family trust to ensure the use of the first spouse’s estate tax exemption because the prior law provided if the estate exemption was not used at the first spouse’s death it was lost. The new law provides for “portability” of the estate tax exemption. Thus, a surviving spouse may elect to add the deceased spouse’s unused estate and gift tax exemption to the surviving spouse’s exemption, thereby increasing the surviving spouse’s estate and gift tax exemption for transfers during life or upon death. For instance, if the first spouse dies and only used $2,000,000 of his $5,000,000 estate tax exemption, upon election, the surviving spouse would now be able to shelter $8,000,000 from estate and gift tax (the surviving spouse’s exemption of $5,000,000 plus the deceased spouse’s unused $3,000,000 of exemption).

The new law also applies to the estates of individuals who died in 2010 and who may wish to take advantage of some of the planning opportunities. If a family member passed away in 2010, you may want to discuss what planning opportunities are available related to the estate with your estate attorney.

While the new tax law is a step in the right direction, it only applies through December 31, 2012. Therefore, it is important to confirm your estate planning documents are drafted to address the changing tax law as well as to take advantage of the new opportunities that are currently available and may expire in two years. Even if your estate is below the new exemption amount, it is still important to make sure your estate plan is up to date to ensure your intent is carried out and to maximize all of the options available to you. 

© Lowndes, Drosdick, Doster, Kantor & Reed, PA, 2011. All rights reserved.