Category: Litigation

Federal Court Strikes Down HIPAA Fee Limitations for Third-Party Medical Records Requests

On Jan. 29, 2020, OCR released a notice regarding a recent federal court ruling in the case of Ciox Health, LLC v. Azar, et al., where a federal judge in the District Court for the District of Columbia vacated the “third-party directive” within the individual right of access “insofar as it expands the HITECH Act’s third-party directive beyond requests for a copy of an electronic health record with respect to protected health information (“PHI”) of an individual … in an electronic format.”1 Additionally, the court held that the fee limitation set forth at 45 CFR § 164.524(c)(4) should only to an individual’s request for access to their own records, and does not apply to an individual’s request to transmit records to a third party.

The Ciox Health case centered on the restrictions the Department of Health and Human Services (“HHS”) and the Office for Civil Rights (“OCR”) put in place in the 2013 Omnibus Rule 2 and through informal guidance published in 2016 regarding fees that can be charged to patient in searching for, retrieving, and delivering their records and PHI as it pertains to third-party directives. Third-party directives are a mechanism promulgated by the HITECH Act that granted individuals the right to obtain a copy of their PHI maintained electronically, and “if the individual so chooses, to direct the covered entity to transmit such copy directly to an entity or person designed by the individual.”3 Additionally, the HIPAA Privacy Rule permits a reasonable cost-based fee to provide the individual (or the individual’s personal representative) with a copy of the individual’s PHI, or to direct a copy to a designated third party. The fee may include only the cost of certain labor, supplies, and postage (this fee is also referred to as the “Patient Rate”).4

The 2013 Omnibus Rule broadened the third-party directives to PHI maintained in any format, not just electronic records. Moreover, the 2013 Omnibus Rule amended the Patient Rate and required actual labor costs associated with the retrieval of electronic information to be excluded.5

In 2016, HHS issued a guidance document titled Individuals’ Right under HIPAA to Access their Health Information 45 C.F.R. § 164.524 (the “2016 Guidance”).6  The 2016 Guidance made two notable requirements that gave rise to the current litigation. Most significantly, HHS declared that the Patient Rate applies “when an individual directs a covered entity to send the PHI to a third party.”7

“This limitation,” HHS said, referring to the Patient Rate, “applies regardless of whether the individual has requested that the copy of PHI be sent to herself, or has directed that the covered entity send the copy directly to a third party designated by the individual (and it doesn’t matter who the third party is).”8

Additionally, in the 2016 Guidance, HHS provided a methodology to calculate the Patient Rate in requests for an electronic copy of PHI maintained electronically. The methodology would require the entity to determine a fee by calculating the actual allowable costs to fulfill each request or by using a schedule of costs based on the average allowable labor costs to fulfill standard requests. HHS also provided an option for entities to charge a flat rate for requests for electronic copies of PHI not to exceed $6.50 as an alternative to going through the process of calculating these costs.

In this case, HHS was sued by Ciox Health, a medical record retrieval company, over the changes to the Patient Rate set forth in both the 2013 Omnibus Rule and the 2016 Guidance. Ciox Health argued that the $6.50 flat fee is an arbitrary figure that bears no relation to the actual cost of honoring patient requests for copies of their health information, and such a low fee has negatively impacted its business. Ciox Health claims the 2013 Omnibus Rule and the 2016 Guidance, “unlawfully, unreasonably, arbitrarily and capriciously,” restrict the fees that can be charged by providers and their business associates for providing copies of the health information stored on patients.

The district court, in declaring the changes to the Patient Rate set forth in the 2013 Omnibus Rule unlawful, held that HHS cannot rely on its general rulemaking authority to supplement the limited-scope, third-party directive enacted by Congress in the HITECH Act. The court held that the 2013 Omnibus Rule’s expansion of the third-party directive is therefore arbitrary and capricious. Moreover, the district court held that the 2016 Guidance that worked a change into the Patient Rate was akin to a legislative rule that HHS had no authority to adopt without notice and comment. As a result, the court vacated the 2013 Omnibus Rule’s expansion of the HITECH Act’s third-party directive beyond requests for a copy of electronic records with respect to PHI of an individual in an electronic format. The court also declared unlawful and vacated the 2016 Guidance as it extended the Patient Rate to third-party directives without going through notice and comment.

Health care providers and medical records access companies are no longer required to limit the fees charged to their average costs, or charge a $6.50 flat fee, when a patient requests their medical records be transmitted to a third party. The fee limitations will still apply to individuals when they request their own records, however, as decided in the Ciox Health decision, on January 23, 2020.

OCR released a notice on Jan. 29, 2020 that the right of individuals to access their own records and any fee limitations that apply when exercising this right still apply. However, OCR appears to have at least accepted this ruling for now, as it pertains to third-party directives. OCR stated that it will continue to enforce the right of access provisions in 45 CFR § 164.524 that are not restricted by the court order. The court order can be viewed here.

[1] Ciox Health, LLC v. Azar, et al., No. 18-cv-0040 (D.D.C. January 23, 2020)

[2] See Modifications to the HIPAA Privacy, Security,

Enforcement, and Breach Notification Rules Under the [HITECH] Act and the Genetic

Information Nondiscrimination Act; Other Modifications to the HIPAA Rules, 78 Fed. Reg. 5,566

(Jan. 25, 2013).

[3] 42 U.S.C. § 17935(e);

[4] 45 CFR § 164.524(c)(4)

[5] 78 Fed. Reg. at 5,636.

[6] This guidance is available at this link: https://www.hhs.gov/hipaa/for-professionals/privacy/guidance/access/index.html.

[7] Id. at 16.

[8] Id.

© 2020 Dinsmore & Shohl LLP. All rights reserved.

For more on HIPAA medical-records regulation, see the National Law Review Health Law & Managed Care section.

California Law Creates New Risk Factor

Last year, California enacted AB 5 imposing the so-called A-B-C test for employee status under California’s Labor Code.  The legislation basically extended the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) which imposed the test in the more limited context of claims for wages and benefits arising under wage orders issued by the Industrial Welfare Commission.

Although aimed at the gig economy, AB 5 has impacted a wide range of traditional businesses.  For example, it was widely reported last year that Vox media had laid off hundreds of California free-lance writers in response to AB 5.  Not surprisingly, the American Society of Journalists and Authors, Inc., and National Press Photographers Association has filed a lawsuit in federal court challenging the new law (A hearing on California’s motion to dismiss is scheduled for March 23).  A ballot initiative measure is currently in circulation to change for “app-based” transportation and delivery drivers.  This month, the California Trucking Association succeeded in obtaining a federal court order enjoining enforcement of AB 5 as to any motor carrier operating in California.

I am music and I write the songs, but am I an employee?

Great uncertainty still abounds about the applicability, application and even constitutionality of AB 5.  Thus, it is not surprising to see issuers identifying AB 5 as a risk factor in their filings with the SEC.  For example, Warner Music Group Corp.  included this risk factor in its Form 10-K concerning independent songwriters and and recording artists:

“Although we believe that the recording artists and songwriters with which we partner are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. We are aware of a number of judicial decisions and legislative proposals that could bring about major reforms in worker classification, including the California legislature’s recent passage of California Assembly Bill 5 (“AB 5″). AB 5 purports to codify a new test for determining worker classification that is widely viewed as expanding the scope of employee relationships and narrowing the scope of independent contractor relationships. Given AB 5’s recent passage, there is no guidance from the regulatory authorities charged with its enforcement, and there is a significant degree of uncertainty regarding its application. In addition, AB 5 has been the subject of widespread national discussion and it is possible that other jurisdictions may enact similar laws. If such regulatory authorities or state, federal or foreign courts were to determine that our recording artists and songwriters are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay Social Security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our recording artists and songwriters are our employees could have a material adverse effect on our business, financial condition and results of operations.”

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

For more on California’s AB5 see the National Law Review Labor & Employment Law section.

I Have an Easement for Lake Access. Am I a Riparian?

The Michigan Court of Appeals recently said no. In Wenners v Chisholm, the plaintiffs owned property on Portage Lake in Washtenaw County. The defendant owned a back lot, but she and the previous owners of her property had accessed the lake using a strip of land located between the plaintiffs’ properties for more than 30 years.

The trial court found that the defendant had established a prescriptive easement for ingress and egress to the lake. However, the easement did not include riparian rights, and the defendant was barred from installing a dock or mooring any watercraft in the lake.

The defendant argued that the trial court could not grant her a prescriptive easement for lake access without also giving her riparian rights. The Court of Appeals rejected her arguments. It concluded that since the defendant could not show that she and the previous owners of her property had exercised riparian rights for a 15-year period, the prescriptive easement did not include riparian rights.

Had the defendant presented evidence showing that she and the previous owners of her property had installed a dock and moored a boat in the lake for at least 15 years, perhaps the outcome might have been different. But without that, the defendant’s easement to access the lake did not include riparian rights.

© 2020 Varnum LLP

ARTICLE BY Bradley S. Defoe of Varnum LLP.
For more easement access issues, see the National Law Review Real Estate law page.

Pharmaceutical Company Agrees To $54 Million To Settle False Claims Kickback Allegations

Teva Pharmaceuticals has agreed to pay $54 Million to settle false claims kickback allegations brought by two whistleblowers, Charles Arnstein and Hossam Senousy. In their 2013 complaint, the whistleblowers asserted that Teva Pharmaceuticals (“Teva”) violated the False Claims Act when the company knowingly induced physicians to prescribe two of the company’s drugs in exchange for “speaker fees.”

Physicians hosted Teva’s speaker events, which were attended by the speakers, their families, Teva employees, and various repeat attendees. In her memorandum decision and order denying Teva’s motion for summary judgment, Chief Judge Colleen McMahon pointed to the suspect audience in attendance as well as the event locations, and the amount of alcohol served as further evidence of the questionable nature of the events.

Physician speakers earned speaker fees for their event appearances. These same physicians subsequently prescribed the drugs Copaxone and Azilect, both manufactured by Teva. The physicians in question also encouraged other doctors to prescribe the medications that treated multiple sclerosis and Parkinson’s disease, respectively. Pharmacies across the United States filled the prescriptions and submitted reimbursement claims to government-funded healthcare programs. Reimbursement funds to the pharmacies are taxpayers’ dollars.

The whistleblowers allege that the reimbursement payments from the various Federal health care programs were a result of fraud, namely the questionable “speaker fees” paid to the physicians in exchange for their prescribing Copaxone and Azilect. Furthermore, the Anti-Kickback Statute of the False Claims Act makes it illegal to knowingly pay or offer to pay kickbacks, bribes, or rebates to encourage someone to recommend the purchase of a pharmaceutical covered by a Federal health care program.

The False Claims Act has been a vital tool in the fight against government programs fraud since its inception; however, the success of the act depends on private citizens like Charles Arnstein and Hossam Senousy who are willing and able to speak out against the wrong that they encounter and work closely with the help of an experienced False Claims Act attorney to get results for everyone. The settlement of this case is not only beneficial to the government from a monetary perspective, but it is also a win for the taxpayers – those who ultimately pay when companies like Teva Pharmaceuticals choose to defraud the government.

© 2020 by Tycko & Zavareei LLP

For more false claims act settlements, see the National Law Review Litigation & Trial Practice section.

Million-Dollar Settlement of Billion-Dollar Claim Found Reasonable in Light of Due Process Problems Posed By Disproportionate Damages

Another court has observed that a billion-dollar aggregate liability under the TCPA likely would violate due process, adopting the Eighth Circuit’s reasoning that such a “shockingly large amount” of statutory damages would be “so severe and oppressive as to be wholly disproportionate[] to the offense and obviously unreasonable.”

In Larson v. Harman-Mgmt. Corp., No. 1:16-cv-00219-DAD-SKO, 2019 WL 7038399 (E.D. Cal. Dec. 20, 2019),  the Eastern District of California preliminarily approved a settlement proposal that represents less than 0.1% of potential statutory damages. Like the Eighth Circuit decision that we discussed previously, both courts observed that several uncertainties exist as to whether the plaintiffs can succeed in proving certain legal issues, such as whether consent was provided and whether an ATDS was used.

The Larson case exposed the defendants to TCPA liability for allegedly sending 13.5 million text messages without prior express consent as part of a marketing program called the “A&W Text Club.” After extensive discovery and motion practice, the parties proposed a settlement that would have the defendants deposit $4 million into a settlement fund that in turn distributes $2.4 million to class members who submit a timely, valid claim.

The court preliminarily approved the proposed settlement, observing that its terms demonstrated “substantive fairness and adequacy.” As a preliminary matter, it found, “[i]t is well-settled law that a cash settlement amounting to only a fraction of the potential recovery does not per se render the settlement inadequate or unfair.” Concerned that calculating damages based on $500 per message under 47 U.S.C. § 227(b)(3)(B) would violate the Due Process Clause, it agreed that the conduct of the defendant (sending over 13.5 million messages) was not persistent or severely harmful to the 232,602 recipients to warrant the billion-dollar judgment.

While $4 million represents less than 0.1% of the theoretical aggregate damages, “the value of the settlement is intertwined with the risks of litigation.” Here, in addition to the uncertainty about whether the “A&T Text Club” program uses an ATDS, “several risks are present, including . . . whether the plaintiff can maintain the action as a class action, . . . and whether the plaintiff’s theories of individual and vicarious liability can succeed.” The proposed settlement amount was found to strike the appropriate balance as it would likely result in each class member receiving $52 to $210 for each message if 5% to 20% of the class submit timely claims.

Although the case was only at the preliminary approval stage, this decision again illustrates that at least some courts recognize the due process problem posed by disproportionate aggregate damages and do not reject settlements simply because they provide some fraction of the theoretical aggregate damages available under a given statute.

©2020 Drinker Biddle & Reath LLP. All Rights Reserved

Federal Court Issues Eleventh-Hour TRO to Enjoin Enforcement of California’s Controversial New Independent Contractor Law for 70,000 Independent Truckers

On January 1, 2020, California’s new independent contractor statute, known as AB 5, went into effect.  The law codifies the use of an “ABC” test to determine if an individual may be classified as an independent contractor.

The hastily passed and controversial statute has been challenged by a number of groups as being unconstitutional and/or preempted by federal law, including ride-share and delivery companies and freelance writers.

Just hours before AB 5 went into effect, a California federal court in San Diego enjoined enforcement of the statute as to some individuals – approximately 70,000 independent truckers, many of whom have invested substantial sums of money to purchase their own trucks and to work as “owner-operators.”

In the lawsuit, the California Trucking Association (“CTA”) has alleged that the “ABC” test set forth in AB 5 is preempted by the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”).

The CTA asserts that the FAAA preempts the “B” prong because it will effectively operate as a de facto prohibition on motor carriers contracting with independent owner-operators, and will therefore directly impact motor carriers’ services, routes, and prices, in contravention of the FAAA’s preemption provision.

The CTA further contends that the test imposes an impermissible burden on interstate commerce, in violation of the Commerce Clause of the U.S. Constitution.  The CTA asserts that the test would deprive motor carriers of the right to engage in the interstate transportation of property free of unreasonable burdens, as motor carriers would be precluded from contracting with a single owner-operator to transport an interstate load that originates or terminates in California.  Instead, motor carriers would be forced to hire an employee driver to perform the leg of the trip that takes place in California.

©2020 Epstein Becker & Green, P.C. All rights reserved.

Three Ways Litigation Finance Can Help Corporate Legal Departments

Corporate legal departments are generally measured by their ability to control legal costs, manage risk, and deputize external litigation resources, especially when their company is involved in litigation. Although a common feature of modern business, litigation is an increasingly costly proposition that is fraught with risk. In recent years, commercial litigation finance has emerged as an effective means of shouldering case costs and redistributing risk. While the number of law firms that have seized the advantages of this type of financing has grown exponentially, general counsels (“GCs”) and corporate legal departments have been slower to recognize the many benefits that it can offer, which has handicapped their companies by keeping a potent tool needlessly out of reach. Here are three things every GC should know about litigation finance.

Litigation Finance Offsets Risk

Litigation costs and other financial risks inherent to the legal process pose a daunting challenge to GCs. As a result, companies often forgo bringing lawsuits due to their impact on financial performance. Yet even when legal departments decide to forge ahead with legal claims, their outcome is often far from certain. The decision to bring a lawsuit, therefore, has the power to make or break entire companies. This risk is even more acute for smaller companies and those facing financial headwinds. A victory could revive a company’s fortunes, while a poorly conceived effort might precipitate the firm’s demise. Litigation finance mitigates that risk through funding “without recourse,” which allows a company to shift costs to a third party and only share an agreed-upon portion of proceeds with the funder at the successful conclusion of the claim. If a case is lost and no proceeds are recovered, the company is under no obligation to repay the funding amount.

Consider the following example: Suppose a small tech startup sues an industry giant for theft of its trade secrets relating to a revolutionary new product. The startup’s case against its unscrupulous competitor is seemingly strong as the brazen theft greatly damaged the fledgling company. Unfortunately, the lawsuit comes with a steep price tag, forcing the startup to spend more than $100,000 each month on attorneys’ fees and associated costs. Small and vulnerable, the startup is quickly exhausting its cash reserves as its better-capitalized opponent employs a panoply of defensive tactics designed to delay and frustrate plaintiff’s efforts at all stages of litigation. As legal bills continue to mount, the startup may need to abandon its lawsuit or accept a paltry settlement far below the actual value of its claim.

Faced with an existential threat, what the startup really needs is a cash injection from a litigation finance provider to pay for the escalating litigation costs while also providing a much-needed insurance policy against unforeseen financial difficulties that can result from litigation. The startup’s GC is surprised to learn that this type of funding is an increasingly common financing option that is available to companies large and small. In a typical transaction, a third-party funder can finance most, or all of the legal expenses associated with the lawsuit in return for a portion of any recovery. The funds may be used to hire top legal talent or procure additional expert resources. Essentially a corporate finance transaction, this type of funding can even be used to supplement the company’s working capital or clean up arrears to legal service providers.

The example above is just one of the ways that litigation finance can be used to hedge litigation risk. More creative GCs have been able to offset their institution’s litigation costs entirely by using a portfolio-based approach to finance all of their legal claims.  This type of structure typically provides a much larger financing commitment but requires cross-collateralization of several litigation matters. Where portfolio financing is utilized, it may provide a greater degree of certainty about long-term future litigation spend.  If the funding amount is substantial enough, GCs may no longer need to allocate for litigation budgets on an annual basis and take a longer-term approach instead.

Litigation Finance Can Transform Legal Departments into Profit Centers Through Balance Sheet Management

Under GAAP, litigation costs are reflected as expenses, which can negatively impact a company’s financials and quarterly performance. This is especially troublesome for public companies that are valued on earnings or cash flow or require certain financial criteria to be met to comply with credit covenants. For such companies, litigation costs paid from company funds must be recorded as expenses immediately when incurred, thereby diminishing reportable earnings. Worse yet, recoveries from successful legal matters may not offset the adverse impact of lawsuit-related costs because such recoveries are generally treated as below-the-line items that do not increase earnings. Moreover, some actions may result in favorable judgments which then take months or years to enforce, leaving a temporary hole in a company’s cash flows despite a successful ruling.

It is no surprise then that corporate legal departments are frequently perceived by management as cost centers, necessary to put out fires or navigate the laws applicable to a particular industry, but not as potential revenue generators. Traditionally, GCs who have identified a roster of affirmative litigation likely to yield significant recoveries will still need to convince their c-suite to take on the risk and immediate financial burden of funding lawsuits from the company’s own balance sheet. Enter litigation finance. When both the risk and burden are shifted to litigation finance providers in exchange for a portion of any recoveries, a company’s legal department can focus on unlocking the hidden value of its legal matters without the risk of negatively impacting its financials, becoming a potential profit generator for the company.

An Experienced Litigation Funder Can Help Optimize Litigation Outcomes

The quality and breadth of resources that litigants are able to deploy can greatly impact outcomes in legal disputes.  For example, the skill of the legal team, the quality of expert witnesses and other litigation consultants are important drivers of how courts and juries perceive the merits of legal claims. With litigation financing mitigating the burden of paying for legal costs, GCs have greater flexibility in assembling a first-rate litigation team. A legal department buttressed by litigation finance can focus on the skill and effectiveness of its team without worrying about negotiating for the lowest possible fees. Access to the support of top-quality counsel and litigation consultants can improve a company’s overall likelihood of success and the magnitude of any recovery.

Experienced litigation funders can provide access to these top litigation support channels by leveraging their network.  In addition, they can provide an invaluable outside perspective on the merits of a case during the due diligence process and throughout the pendency of the claim. When choosing a litigation funder, consider the expertise of the funder’s team and if there are any practice areas which they target in their investment strategy.

A trusted litigation finance firm should demonstrate the highest professionalism, abide by the explicit understanding that a third-party funder should have no involvement in the litigation or strategy, and should protect attorney-client privilege and confidentiality at all times.  When these essential confidences are met, engaging with a third-party funder can be enormously helpful in assessing the merits and risk of a case, budgeting litigation spend, and providing access to first-rate litigation support.

Conclusion

As litigation finance continues to gain popularity among law firms, GCs should also take notice. As businesses continuously seek to gain a competitive advantage over their peers, the ability to mitigate the risks associated with litigation should be an important consideration, especially since poorly conceived strategies can often carry existential consequences.  GCs, therefore, should recognize litigation finance as an indispensable asset that has the potential to offset the risk of litigation, provide effective balance sheet management while unlocking the hidden value of prospective legal claims, and improve outcomes for meritorious cases.

 

© 2019 LexShares, Inc. All rights reserved.

ARTICLE BY Matthew Oxman of LexShares.

Ruling in First CWA Case to Rely on EPA’s Interpretive Statement on Groundwater Releases

On November 26, a federal district court judge in Massachusetts held that releases of pollutants reaching surface waters through groundwater do not require permits under the Clean Water Act (CWA), “irrespective of any hydrological connection to navigable waters.” Conservation Law Foundation Inc. v. Longwood Venues and Destinations Inc. et al., 1:18-cv-11821. The decision comes less than three weeks after the U.S. Supreme Court heard oral argument in County of Maui v. Hawaii Wildlife Fund, No. 18-260, in which the justices have been asked to decide whether the CWA’s National Pollutant Discharge Elimination System (NPDES) permitting requirement applies to releases that traverse nonpoint sources—like groundwater—before entering navigable waters.

In 2018, a citizen suit was filed against the owners of the Wychmere Beach Club claiming that the Beach Club’s wastewater treatment facility (in particular, the facility’s 22 leach pits located near the shoreline) discharged nitrogen into the groundwater and subsequently into Wychmere Harbor, a navigable water located off Cape Cod. The complaint accused the Beach Club of violating the CWA by discharging pollutants into the harbor and failing to obtain a federal permit for these releases. The Beach Club argued that it was not liable under the CWA because it released nitrogen into groundwater, rather than directly into the harbor, and that such a release is not covered by the CWA.

Unlike the decisions from the Fourth, Sixth, and Ninth Circuits that have addressed this issue, Longwood is the first case to rely on the April 2019 Interpretive Statement in which EPA concluded that releases traversing groundwater are categorically excluded from the requirement to obtain an NPDES permit. The court concluded that the CWA is ambiguous on the question of whether the statute requires permits for releases that reach surface waters via groundwater. The court then deferred to EPA’s Interpretive Statement under Chevron Step Two after concluding that EPA reasonably decided to exclude releases through groundwater from the NPDES program.

Citing the resultant ambiguity from dueling CWA directives; namely, that the federal government has jurisdiction over the waters of the United States while the states are primarily tasked with groundwater regulation, the court turned to EPA’s April 2019 interpretation of the statute to answer the question of whether – and to what extent – the CWA applies to releases into groundwater that carries pollutants into navigable waters. Finding the agency’s analysis reasonable, the court deferred to EPA’s conclusion that releases of pollutants into groundwater do not constitute point source discharges subject to the NPDES program or permitting requirements.

Until the Supreme Court issues a decision in Maui (expected before the end of June 2020), courts and regulated entities will continue to search for guidance on how the CWA applies to mediated releases of pollutants to surface waters. The Longwood decision’s approach—relying on EPA’s recent guidance—applies only to groundwater and offers no comfort to litigants in the Fourth and Ninth Circuits.

© 2019 Beveridge & Diamond PC

More on the Clean Water Act can be found in the National Law Review Environmental, Energy & Resources Law area.

The Future of the CFPB: the Executive Branch and Separation of Powers

On October 18, 2019 the Supreme Court granted certiorari in Seila Law v. Consumer Financial Protection Bureau (CFPB). SCOTUS  will answer the question of “whether the substantial executive authority yielded by the CFPB, an independent agency led by a single director, violates the separation of powers,” and the Justices requested that the parties brief and argue an additional issue: “If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [the for-cause removal provision] be severed from the Dodd-Frank Act?”

Origins of the Consumer Financial Bureau and Previous Constitutional Challenges

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) established the CFPB as an independent bureau within the Federal Reserve System designed to protect consumers from abusive financial services practices.  The structure and constitutionality of the CFPB has been addressed before. In 2018, the D.C. Circuit held in PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir. 2018) (PHH) that the current structure of the CFPB, which features a single director that cannot be removed by the president except for cause, “is consistent with Article II” of the Constitution.

The PHH opinion stated that Congress’ response to the consumer finance abuse that led up to the 2008 financial crisis purposely created the CFPB to be “a regulator attentive to individuals and families”  because the existing regulatory agencies were too concerned about the financial industry they were supposed to supervise. It was determined that the CFPB needed independence to do its job, and the CPFB structure was designed to confer that independence.   Neither PHH Corporation nor the CFPB filed a petition for certiorari to ask the Supreme Court to review the D.C. Circuit’s decision.

Background of the Seila Law Case

In Seila Law v. Consumer Financial Protection Bureau (CFPB) the Petitioner is a law firm that provides a variety of legal services to consumers, and as part of a CFPB investigation into whether Seila Law violated certain federal laws, the CFPB issued a civil investigative demand seeking information and documents. Seila Law objected to the demand on the ground that the CFPB was unconstitutionally structured and filed a petition to a federal district court for enforcement. The district court held that the structure of the CFPB did not violate the separation of powers and was constitutional, after which that district court decision was appealed. The Ninth Circuit affirmed, noting that the issues had been “thoroughly canvassed” in the DC Circuit it in PHH, and adopting the position of the PHH majority that the CFPB’s structure is constitutional. Seila Law filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling, and here we are.

An Experienced Federal Agency Litigator’s Perspective

Mr. Anthony E. DiResta, is co-chair of Holland & Knight’s Consumer Protection Defense and Compliance Team, and a former Director of the Federal Trade Commission’s (FTC) Southeast Regional office.  Mr. DiResta was kind enough to take some time with the National Law Review to discuss the upcoming Seila Law decision and its impact on the future of the CFPB.

_______________

NLR: Can you sum up the CFPB and separation of powers story to this point from your own viewpoint?

DiResta: The Supreme Court has decided to review this case because of the constitutionality of the CFPB’s structure, based on separation of powers. Any single leader in government who doesn’t serve at the pleasure of the President may simply have too much power, and people with certain jurisprudential philosophies about how government should be run find that an offensive situation. That’s the theory behind the certiorari decision and why SCOTUS is addressing the case – it’s really a question of constitutionality and the power of administrative agencies. Additionally, the Court will look at the severability of the CFPB in Dodd-Frank, whether it’s possible to just restructure the single leader structure, and then leave the Bureau intact to continue business as usual.

NLR: It seems many of these issues could’ve been avoided had the CFPB been structured more as a multi-member commission initially or if Congress had simply expanded FTC powers.  Why do you think it was structured differently?

DiResta: That’s a matter of speculation – but I think it might have gone something like this: After the Recession in the early 2000s, many people felt that government was asleep at the wheel, letting  devastating things in banking and finance and servicing to consumers run out of control, which led to serious blunders and mishaps. So it was decided that a new office was needed – and this was led by representatives in Congress like Elizabeth Warren.

Why they didn’t simply expand the power and resources of the FTC is also pure speculation – they could have merely expanded FTC’s jurisdiction and reach to achieve similar outcomes and intentions.

The Constitutionality of the CFPB

NLR: Do you think SCOTUS will rule in favor of the petitioner in Seila Law, and find the structure of the CFPB unconstitutional?

DiResta: I do. I suspect that SCOTUS will, in fact, find the structure unconstitutional on the basis of the separation of powers. But I also believe that an even more interesting part of that will be the discussion of the severability of the organization’s leadership, leaving the CFPB itself intact. If the structure is unconstitutional, how the Court recommends a remedy to correct that unconstitutionality could have far-reaching effects. This is so important – and we should all be excited that we get to watch this corrective process in action.

NLR: Is there a chance this would result in a complete restructure of CFPB, or even its possible dissolution?

DiResta: I really don’t think so – and the Court couldn’t do that anyway. The Court could recommend to Congress that a certain path for correction be followed, but it will be up to Congress to rearrange the CFPB (if that’s the result) in the best way. The legislative branch will just have to make sure it’s done, in a way that the Court recommends.

Some More Background on CFPB Constitutionality Litigation

Then-Judge, now Justice Kavanaugh was on the U.S Court of Appeals Court for the D.C. Circuit for the 2018 en banc ruling in the PHH Corp. v. CFPB case and on the 2016 three-judge decision. Judge Kavanaugh authored two opinions regarding PHH:  declaring a certain aspect of the CFPB to be unconstitutional and in 2018, the dissenting opinion from the en banc U.S. Court of Appeals for the D.C Circuit’s decision overruling the 2016 panel opinion.

The 2016 panel opinion determined that the structure of the CFPB is unconstitutional stating:  “The concentration of massive, unchecked power in a single Director marks a dramatic departure from settled historical practice and makes the CFPB unique among independent agencies.” And the 2016 panel also presented a view of the Constitution that vests with the president an extensive degree of unilateral authority over the executive branch’s enforcement of federal laws.

NLR:  Since Justice Kavanaugh was a judge involved in a similar case – PHH Corp. v. CFPB – why is he allowed to rule on this matter again?

DiResta: I’m not an expert on judicial ethics but there does not appear to be improper bias in Kavanaugh reviewing this decision. Rather, his views in PHH reflect a philosophical perspective on separation of powers and the role of administrative agencies.  In fact, I expect they’ll use his past ruling on PHH as part of their internal discussion.

Seila Law v CFPB and Election Politics

NLR: It’s difficult to ignore the political undertones of this case:  a watchdog organization created, in part, with input from some high-profile democrats (most notably Elizabeth Warren, who is currently running as a candidate for president) is being challenged and that challenge is being echoed in support by largely conservative elements.  In your view, is this case a litmus test for the Supreme Court delving into political issues, something it has largely tried not to do?

DiResta: No – I really don’t see this as political. Again, this is a purely constitutional question, a legal question, and it’s exactly the kind of case the SCOTUS should be deciding. If we’re honest, this is a perfect example of why we have SCOTUS in the first place: To examine how effective our public servants are behaving and performing their responsibilities under the constitutional structure revealed in the separation of powers doctrine.

Besides that, politically speaking, this could boomerang. Consider: if the Democrats win the White House in 2020, and the Court were to change the structure, that would offer any Democratic President the opportunity to appoint a new Director in 2021, and Kathleen Kraninger’s term isn’t up until 2023.

Informed Democracy at Work

While the situation with CFPB and its constitutionality is demonstrably important, DiResta touched on a few more salient – though no less important – points.

DiResta: Democracy isn’t supposed to be easy. Democracy is hard – it’s messy and complicated. It’s in its nature, and in the nature of different ideas.

In a free marketplace of ideas, people will clash when citizens are free to express themselves, and there will always be conflict – but it’s out of resolving those conflicts that democracy claims – and grows – its power and attraction. It’s so important that we – the people – see this and get to comment on it – to watch this happening.

NLR: Absolutely. In a world where the news cycle has compressed from days, to hours, to minutes – while attention spans have diminished in similar fashion – it’s increasingly important that these monumental workings in government are transparent, and that people see them.

DiResta: I couldn’t agree more. And – as a young lawyer, I  had the privilege to work with some very dedicated and highly professional journalists who understood journalism as a public service, not as entertainment.  These journalists saw themselves as educators, bringing light to the processes and prospects of government to citizens. And that’s how the media serves effectively as the Fourth Branch of government. A branch that presents a constant check to the power of government and its branches, and that gives the people the knowledge to make better decisions, and to vote for the best people and the best situations.

We sincerely appreciate Mr. DiResta for his thoughtful insights and for taking time out of his busy schedule to share them with the National Law Review.

Copyright ©2019 National Law Forum, LLC

Indiana Federal Court Gives Frostbitten ADA Plaintiff The Cold Shoulder

The U.S. District Court for the Southern District of Indiana recently granted summary judgment on behalf of a logistics employer in a case alleging discrimination under the Americans with Disabilities Act (ADA). The court found that because the plaintiff employee could not work in the freezer area of his employer’s warehouse, as was required for his job, he failed to establish that he was a “qualified individual” with a disability.

In Pryor v. Americold Logistics, LLC, the defendant employer operates a cold-storage warehouse that “provides temperature-controlled food warehousing and distribution services,” with “five cooler rooms, two freezer rooms, a loading dock, a designated battery-changing room, and a small office.” The plaintiff was a Lift Truck Operator (LTO) who filled orders by picking items from the various rooms of the warehouse and wrapping them on a skid for pickup by another employee. He had previously “suffered severe frostbite on his left hand after he spent three-quarters of a shift in the freezer with defective gloves,” and due to his prior frostbite “exposure to the freezer’s extreme cold caused pain and risked further injury.”

After treatment (and intervening stints of alternate duty), the plaintiff employee “reached maximum medical improvement” and was put on “a permanent restriction of exposure to the freezer for no more than thirty minutes per workday.” The plaintiff’s LTO role, however, required nearly constant exposure to subzero temperatures. When the plaintiff did not return from leave, he was terminated.

The plaintiff alleged that his employer “discriminated against him by failing to provide a reasonable accommodation for his disability and by terminating his employment.” The employer argued that the plaintiff was not a “qualified individual” under the ADA because “he could not perform the essential duties of an LTO with or without a reasonable accommodation.” The district court held that the plaintiff had not “presented sufficient evidence that he was able to perform the essential functions of his job with a reasonable accommodation,” and thus granted summary judgement in favor of the employer.

The court explained the employer’s judgment as to which job functions are essential is entitled to consideration. And with regard to the essential functions of the LTO role, the court found that the LTO role required “substantial exposure to freezer temperatures” each workday. The court explained that, because the plaintiff admittedly could not work in the freezer for more than thirty minutes per day, “he could not perform the essential functions of his LTO order selector position without reasonable accommodation.” He was thus a “‘qualified individual’ under the ADA only if he could perform the essential functions with reasonable accommodation.”

As for the question of what a reasonable accommodation might entail, the plaintiff argued that he could have been reassigned to a non-freezer position, a temporary “cooler-only” position, or a position in the loading dock or office. However, the court stated, “it is the plaintiff’s burden to show that a vacant position exists for which he was qualified.” The court explained that the ADA does not require an employer to “create a new position or transfer another employee to create a vacancy,” or to “transfer a disabled employee to a temporary position on a permanent basis.”

Ultimately, with regard “cooler-only” positions, the court held that the plaintiff failed to identify any vacancies, and noted that pursuant to a union contract, those positions had to be filled according to seniority. With regard to the vacant loading dock or office positions, the plaintiff failed to demonstrate that he was qualified. Thus, the court held that the plaintiff failed “to create a genuine issue of material fact whether reassignment was a reasonable accommodation,” and summary judgement in favor of the employer was appropriate.

The key takeaways from the Pryor decision for employers facing ADA claims are that employees must still be able to perform the essential functions of their job, and that courts should consider the employer’s determination of which job functions are essential. Moreover, the Pryor decision reaffirms that the ADA does not require employers to create positions or vacancies as part of the interactive process.

© 2019 BARNES & THORNBURG LLP
For more ADA cases, see the National Law Review Labor & Employment law page.