Category: Litigation

Supreme Court Decides Indian Child Welfare Act Case

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In Adoptive Couple v. Baby Girl, — S.Ct. —-, 2013 WL 3184627 (U.S. 2013), the baby girl in question (Baby Girl) was born in Oklahoma to unwed parents, including a Cherokee father (Father) and non-Indian mother (Mother). After the couple broke up during the pregnancy, Father, in response to an inquiry from Mother, text-messaged Mother that he would rather give up parental rights than pay child support. Mother decided to terminate her parental rights and give the baby up for adoption.

The adoptive parents (Adoptive Parents), residents of South Carolina, were present when Baby Girl was born September 15, 2009, and took her home with them shortly after receiving permission from Oklahoma pursuant to the Interstate Compact on Placement of Children. Adoptive Parents began adoption proceedings in South Carolina three days after Baby Girl was born but Father did not receive notice until nearly four months later, in January 2010. when a process server presented him with an “Acceptance of Service and Answer,” which purported to waive the 30-day waiting period, waive notice of hearing and waive any objection to the adoption. Father, a soldier about to depart for Iraq, signed but then immediately changed his mind and sought a stay of adoption under the Servicemember’s Civil Relief Act.

The Cherokee Nation, which had previously indicated that Father was not a citizen, later determined that he was. The South Carolina adoption petition was amended accordingly in March 2010. After establishing paternity through DNA testing, Father challenged the adoption. Adoptive parents argued that, under South Carolina law, there was no need for Father’s consent to the adoption because Father had neither lived with Mother or Baby Girl for the six months preceding the adoption nor paid child support. The South Carolina family court judge ruled that the Indian Child Welfare Act (ICWA) applied and mandated that Baby Girl be turned over to father. After various stay motions were denied, Father returned to Oklahoma with Baby Girl December 31, 2011. The South Carolina Supreme Court affirmed.

On June 25, the Supreme Court in a 5-4 decision reversed. The state court had relied in part on Section 1912(f) of the codified ICWA, which bars termination of parental rights to an Indian child unless the court finds that “the continued custody of the child by the parent or Indian custodian is likely to result in serious emotional or physical damage to the child.” Emphasizing the word “continued,” the Court held that “§ 1912(f) does not apply where the Indian parent never had custody of the Indian child” (Emphasis in original).

The Court also disagreed with the South Carolina court’s conclusion that termination of Father’s rights was barred by Section 1912(d), which requires a showing that efforts have been made “to prevent the breakup of the Indian family,” holding Section 1912(d) inapplicable in Father’s case: “But when an Indian parent abandons an Indian child prior to birth and that child has never been in the Indian parent’s legal or physical custody, there is no relationship that would be discontinued – and no effective entity that would be ended – by the termination of the Indian parent’s rights.” (Internal quotes and ellipses omitted).

Finally, the Court held that Section 1915(a), which mandates preference “in any adoptive placement” for a member of the child’s extended family, other members of the child’s tribe or other Indian families, in that order, did not apply in the case of Baby Girl: “This is because there simply is no ‘preference’ to apply if no alternative party that is eligible to be preferred under § 1915(a) has come forward.”

In an important concurrence, Justice Breyer explicitly left open whether ICWA sections 1915(a), (b) and (f) might apply under different circumstances, e.g., where the Indian father (1) has visitation rights, (2) has paid child support, (3) was deceived about the existence of a child, or (4) was prevented from supporting his child.

In a dissent joined by three other members of the Court, Justice Sotomayor accused the majority of distorting the meaning of the term “continued” to defeat the very purposes for which Congress had enacted the ICWA:

The majority’s hollow literalism distorts the statute and ignores Congress’ purpose in order to rectify a perceived wrong that, while heartbreaking at the time, was a correct application of federal law and that in any case cannot be undone. Baby Girl has now resided with her father for 18 months. However difficult it must have been for her to leave Adoptive Couple’s home when she was just over 2 years old, it will be equally devastating now if, at the age of 3 1/2, she is again removed from her home and sent to live halfway across the country. Such a fate is not foreordained, of course. But it can be said with certainty that the anguish this case has caused will only be compounded by today’s decision.

According to the dissent, “continued” custody, consistent with congressional intent, means prospective custody and does not preclude the application of ICWA’s protections to a non-custodial Indian parent, including (1) the requirement that a proceeding be transferred to tribal court upon the Indian parent’s request, in the absence of good cause to the contrary, as required by Section 1911(b), (2) the requirement that any consent to adoption be in writing and executed before a judge, per Section 1913(a), (3) the requirement of Section 1912(a) that an Indian parent and the child’s tribe receive notice, and (4) the requirement of Section 1912(b) that the Indian parent be provided with legal counsel.

The dissent also sends a message to the state court, which will now consider the case on remand, laying out a scenario that could result in Father having no parental rights but having a relationship with his own daughter through relatives:

[T]he majority does not and cannot foreclose the possibility that on remand, Baby Girl’s paternal grandparents or other members of the Cherokee Nation may formally petition for adoption of Baby Girl. If these parties do so, and if on remand Birth Father’s parental rights are terminated so that an adoption becomes possible, they will then be entitled to consideration under the order of preference established in § 1915. The majority cannot rule prospectively that § 1915 would not apply to an adoption petition that has not yet been filed. Indeed, the statute applies “[i]n any adoptive placement of an Indian child under State law,” 25 U.S.C. § 1915(a) (emphasis added), and contains no temporal qualifications. It would indeed be an odd result for this Court, in the name of the child’s best interests, cf. ante, at —-, to purport to exclude from the proceedings possible custodians for Baby Girl, such as her paternal grand-parents, who may have well-established relationships with her.

In an odd concurring opinion, Justice Thomas blesses the majority for not reaching more fundamental constitutional questions but then embarks on an originalist reimagining of federal Indian law pursuant to which (1) Congress had no authority to enact the ICWA, (2) the doctrine of congressional plenary power is error, (3) congressional power is strictly limited to commercial trade with Indian tribes located beyond state borders, and (4) congressional power does not extend to citizens of tribes. The idea behind concurrences of this nature is to plant seeds that the author hopes will germinate into a majority of the court at some future date.

A Bad Smoke Break: Stringent Documentation of Work Rules Defends Against Unemployment Claims

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A recent Missouri case demonstrates the importance of documentation when defending against unwarranted unemployment claims. The case also underlines the need for the reforms passed by the Missouri General Assembly and pending signature by Gov. Jay Nixon.

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Facts

James Sullivan worked as a part-time cook for nearly a year and a half at Landry’s Seafood House. One day, he disappeared during dinner service and was found 20 minutes later smoking and talking on his cell phone in the parking lot. He was fired and filed a claim for unemployment benefits. In Missouri, when employees are terminated for work-related misconduct, they can be disqualified from receiving unemployment benefits. However, a deputy at the Missouri Division of Employment Security initially determined that Sullivan was eligible for benefits. The restaurant appealed that determination to the Division Appeals Tribunal.

Appeals Tribunal Finds Willful Misconduct

During the hearing, which Sullivan failed to attend, Landry’s Seafood House offered the testimony of a senior kitchen manager. The manager said the restaurant had policies prohibiting employees from smoking at work or leaving their work area without a supervisor’s permission. Landry’s posted signs on its doors to remind employees of the rule and had discussed the policy with employees at shift meetings. Further, Landry’s provided employees with a copy of its policies. Sullivan had signed an acknowledgment of receipt when hired. Sullivan had been counseled for violating the rules in the past and had complied with the policies on several occasions by asking for permission to leave his workstation and clocking out before going outside to smoke a cigarette.

After the hearing, the Appeals Tribunal reversed the determination and found in favor of Landry’s. Sullivan was to be disqualified from receiving unemployment benefits because he was discharged for work-related misconduct. Sullivan appealed.

Court of Appeals Sides with the Employer

The Missouri Court of Appeals upheld the decision in Landry’s favor, finding there was substantial evidence to support it. The court noted that Sullivan was aware of the rules, had signed a written statement acknowledging receipt of the policies, and had been counseled on the rules. The supervisor’s testimony at the hearing established these facts and constituted substantial evidence that Landry’s terminated Sullivan for work-related misconduct. The court explained that Landry’s rule on breaks was also reasonable because a restaurant’s business depends on employees preparing food for its customers in a timely manner. Landry’s rule against smoking on the clock was reasonable because an employer has a right to expect employees to be engaged in meaningful work while being paid.

Bottom Line

At the time of this case, Missouri law defined misconduct as a “wanton and willful” act in order to disqualify a terminated employee from receiving unemployment benefits in Missouri. But as the first decision made by the deputy at the Missouri Division of Employment Security shows, that definition can lead to inconsistent rulings. Although the Missouri Court of Appeals ruled in favor of the employer, it was a time-consuming and expensive undertaking to work through the appeals process to secure a decision that would seem obvious to most people.

During the 2013 Legislative Session, the Missouri Chamber championed legislation to change the definition of misconduct to provide more consistency in unemployment compensation cases. Sponsored by Rep. Will Kraus, a Republican from Lee’s Summit, SB 28 is currently pending signature by Gov. Jay Nixon. House Bill 611 contains similar language and also awaits signature. Proof that you properly communicated your work rules to employees and required them to acknowledge receipt of the rules is key when seeking to establish that an employee’s violation of the rules was intentional. Landry’s actions in this case protected the restaurant from having to pay unemployment benefits to a former employee who violated its well-publicized policies.

Published in the July 2013 issue of Missouri Business, the Magazine of the Missouri Chamber of Commerce and Industry

Federal Judge Finds that Apple Conspired to Raise E-book Prices

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On July 10, 2013, Judge Denise Cote of the Southern District of New York issued a 160-page opinion holding that Apple conspired with five book publishers to raise e-book prices and eliminate retail price competition in violation of Section 1 of the Sherman Act and several relevant state statutes.  United States v. Apple Inc., case number 12-civ-2826 (DLC).  The five publishers – Hatchett, HarperCollins, Macmillan, Penguin and Simon & Schuester – had all previously settled with the U.S. Department of Justice (DOJ).

The opinion stated that as Apple prepared to launch its iPad to the public and sought to concurrently enter the e-book market with its iBookstore, it met with the publishers and agreed to provide them with an “agency model” for e-book pricing that allowed the publishers to set the prices of the e-books themselves, subject to certain price caps.  Apple’s agreements with the publishers also included Most Favored Nation provisions which ensured that Apple could match its competitors’ prices and also provided an incentive for the publishers to lobby Amazon and other retailers to change their wholesale business models to agency models.  According to the court’s opinion, these agency model agreements caused e-book prices to increase, sometimes 50% or more for a specific title.

A separate trial for potential damages will be scheduled later.  Apple said it will appeal the ruling.

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Securities and Exchange Commission (SEC) Sanctions Revlon Financial Makeover; Tips for Setting a Strong Foundation for Going Private Transaction Success

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On June 13, 2013, the SEC entered into a cease and desist order and imposed an $850,000 civil money penalty against Revlon, Inc. (Revlon) in connection with a 2009 “going private” transaction (the Revlon SEC Order).  This article identifies some of the significant challenges in executing a going private transaction and highlights particular aspects of the Revlon deal that can serve as a teaching lesson for planning and minimizing potential risks and delays in future going private transactions.

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Background of Revlon Going Private Transaction.

The controlling stockholder of Revlon, MacAndrews & Forbes Holdings Inc. (M&F), made a proposal to the independent directors of Revlon in April of 2009 to acquire, by way of merger (the Merger Proposal), all of the Class A common stock not currently owned by M&F (the Revlon Minority Stockholders).  The Merger Proposal was submitted as a partial solution to address Revlon’s liquidity needs arising under an impending maturity of a $107 million senior subordinated term loan that was payable to M&F by a Revlon subsidiary.  A portion of this debt (equal to the liquidation value of the preferred stock issued in the Merger Proposal) would be contributed by M&F to Revlon, as part of the transaction.  This was submitted as an alternative in lieu of potentially cost-prohibitive and dilutive financing alternatives (or potentially unavailable financing alternatives) during the volatile credit market following the 2008 sub-prime mortgage crisis.

In response to the Merger Proposal, Revlon formed a special committee of the Board (the Special Committee) to evaluate the Merger Proposal.  The Special Committee retained a financial advisor and separate counsel to assist in its evaluation of the Merger Proposal.  Four lawsuits were filed in Delaware between April 24 and May 12 of 2009 challenging various aspects of the Merger Proposal.

On May 28, 2009, the Special Committee was informed by its financial advisor that it would be unable to render a fairness opinion on the Merger Proposal, and thereafter the Special Committee advised M&F that it could not recommend the Merger Proposal.  In early June of 2009, the Special Committee disbanded, but the independent directors subsequently were advised that M&F would make a voluntary exchange offer proposal to the full Revlon Board of Directors (the Exchange Offer). Revlon’s independent directors thereafter chose to continue to utilize counsel that served to advise the Special Committee, but they elected not to retain a financial advisor for assistance with the forthcoming M&F Exchange Offer proposal, because they were advised that the securities to be offered in the Exchange Offer would be substantially similar to those issuable through Merger Proposal.  As a result, they did not believe they could obtain a fairness opinion for the Exchange Offer consideration.  The Board of Directors of Revlon (without the interested directors participating in the vote) ultimately approved the Exchange Offer without receiving any fairness opinion with respect to the Exchange Offer.

On September 24, 2009, the final terms of the Exchange Offer were set and the offer was launched.  The Exchange Offer, having been extended several times, finally closed on October 8, 2009, with less than half of the shares tendered for exchange out of all Class A shares held by the Revlon Minority Stockholders.  On October 29, 2009, Revlon announced third quarter financial results that exceeded market expectations, but these results were allegedly consistent with the financial projections disclosed in the Exchange Offer.  Following these announced results, Revlon’s Class A stock price increased.  These developments led to the filing of additional litigation in Delaware Chancery Court.

The Revlon SEC Order and Associated Rule 13e-3 Considerations.

A subset of the Revlon Minority Stockholders consisted of participants in a Revlon 401(k) retirement plan, which was subject to obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and a trust agreement (the Trust Agreement) between Revlon and the Plan’s trustee (the Trustee).  Provisions of ERISA and the Trust Agreement prohibited a 401(k) Plan participant’s sale of common stock to Revlon for less than “adequate consideration.”

During July of 2009, Revlon became actively involved with the Trustee to control the flow of information concerning any adequate consideration determination, to prevent such information from flowing back to Revlon and to prevent such information from flowing to 401(k) participants (and ultimately Revlon Minority Stockholders); certain amendments to the Trust Agreement were requested by Revlon and agreed to by the Trustee to effect these purposes.  This also had the additional effect of preventing the independent directors of Revlon from being aware that an adequate consideration opinion would be rendered for the benefit of Revlon’s 401(k) Plan participants.

On September 28, 2009, the financial advisor to the 401(k) Plan rendered an adverse opinion that the Exchange Offer did not provide adequate consideration to 401(k) Plan participants.  As a result, the Trustee informed 401(k) Plan participants, as previously directed by Revlon, that the 401(k) Plan Trustee could not honor tender instructions because it would result in a “non-exempt prohibited transaction under ERISA.”  Revlon Minority Stockholders, including 401(k) Plan participants, were generally unaware that an unfavorable adequate consideration opinion had been delivered to the Trustee.

In the Revlon SEC Order, the SEC concluded that Revlon engaged in a series of materially misleading disclosures in violation of Rule 13e-3.  Despite disclosure in the Exchange Offer that the Revlon Board had approved the Exchange Offer and related transactions based upon the “totality of information presented to and considered by its members” and that such approval was the product of a “full, fair and complete” process, the SEC found that the process, in fact, was not full, fair and complete.  The SEC particularly found that the Board’s process “was compromised because Revlon concealed from both minority shareholders and from its independent board members that it had engaged in a course of conduct to ‘ring-fence’ the adequate consideration determination.”  The SEC further found that “Revlon’s ‘ring-fencing’ deprived the Board (and in turn Revlon Minority Stockholders) of the opportunity to receive revised, qualified or supplemental disclosures including any that might have informed them of the third party financial advisor’s determination that the transaction consideration to be received by the 401(k) members . . . was inadequate.”

Significance of the Revlon SEC Order.

The Revlon Order underscores the significance of transparency and fairness being extended to all unaffiliated stockholders in a Rule 13e-3 transaction, including the 401(k) Plan participants whose shares represented only 0.6 percent of the Revlon Minority Stockholder holdings.  Importantly, the SEC took exception to the fact that Revlon actively prevented the flow of information regarding fairness and found that the information should have been provided for the benefit of these participants, as well as all Revlon Minority Stockholders.  This result ensued despite the fact that Revlon’s Exchange Offer disclosures noted in detail the Special Committee’s inability to obtain a fairness opinion for the Merger Proposal and the substantially similar financial terms of the preferred stock offered in both the Merger Proposal and the Exchange Offer transactions.

Going Private Transactions are Subject to Heightened Review by the SEC and Involve Significant Risk, Including Personal Risk.

Going private transactions are vulnerable to multiple challenges, including state law fiduciary duty claims and wide ranging securities law claims, including claims for private damages as well as SEC civil money penalties.  In the Revlon transaction, the SEC Staff conducted a full review of the going private transaction filings.  Despite the significant substantive changes in disclosure brought about through the SEC comment process, the SEC subsequently pursued an enforcement action and prevailed against Revlon for civil money penalties.

Although the SEC sanction was limited in scope to Revlon, it is worth noting that the SEC required each of Revlon, M&F and M&F’s controlling stockholder, Ronald Perelman, to acknowledge (i) personal responsibility for the adequacy and accuracy of disclosure in each filing; (ii) that Staff comments do not foreclose the SEC from taking action including enforcement action with regard to the filing; and (iii) that each may not assert staff comments as a defense in any proceeding initiated by the SEC or any other person under securities laws.  Thus, in planning a going private transaction, an issuer and each affiliate engaged in the transaction (each, a Filing Person) must make these acknowledgements, which expose each Filing Person (including certain affiliates who may be natural persons) to potential damages and sanctions.

The SEC also requires Filing Persons to demonstrate in excruciating detail the basis for their beliefs regarding the fairness of the transaction.  These inquiries typically focus on the process followed in pursuing and negotiating the transaction, the procedural fairness associated with such process, and the substantive fairness of the overall transaction, including financial fairness.  As a result of this, each Filing Person (including certain natural persons) in a going private transaction should be prepared to diligently satisfy cumbersome process and fairness requirements as part of the pre-filing period deliberative process, and later stand behind extensive and detailed disclosures that demonstrate and articulate the basis of the procedural and substantive fairness of the transaction, including financial fairness.

Damages and Penalties in Going Private Transactions Can Be Significant.

It is worth noting that civil money penalties and settlements that have been announced to date by Revlon for its Exchange Offer going private transaction is approximately $30 million.  After factoring in professional fees, it would not be surprising that the total post-closing costs, penalties and settlements approach 50 percent of the implied total transaction value of all securities offered in the Exchange Offer transaction.  From this experience, it is obvious that costs, damages and penalties can be a significant component of overall transaction consideration, and these risks must be factored in as part of overall transaction planning at the outset.

Given the risks of post-transaction damages and costs, it is essential that future going private transactions be structured and executed by Filing Persons with the foregoing considerations in mind in order to advance a transaction with full transparency, a demonstrably fair procedural process and deal consideration that is substantively fair and demonstrably supportable as fair from a financial point-of-view.

New York State Court of Appeals Backs Starbucks Policy on Tip-Pooling

Sheppard Mullin 2012

Starbucks shift supervisors can legally participate in tip-sharing with other store employees, but the coffee chain’s assistant managers have enough managerial responsibility to disqualify them from sharing in customer tips, according to the New York State Court of Appeals.

Starbucks’ policy provides for weekly distribution of gratuities to the company’s two lower ranking categories of employees, baristas and shift supervisors, but not to its two higher ranking categories of employees, assistant managers and store managers. In addressing questions certified by the Second Circuit regarding the validity this policy, the Court of Appeals concluded that since shift supervisors, like baristas, directly serve patrons, they remain tip-pool eligible even if their role also involves some supervisory responsibility. But assistant managers, because they are granted “meaningful authority” over subordinates, are not eligible to participate in the tip pool.

The decision provides guidance to the Second Circuit as it hears appeals of two suits, Barenboim et al. v. Starbucks Corporation, No. 10–4912–cv, and Winans et al. v. Starbucks Corporation, No. 11–3199–cv, each brought by a different putative class of Starbucks workers. The plaintiffs in Barenboimare Starbucks baristas who argue that only baristas, and not shift supervisors, are entitled to participate in tip-sharing. The Winans plaintiffs are assistant managers who claim that they should be allowed a share of the tips. In both cases, the Southern District of New York awarded summary judgment to Starbucks, and the plaintiffs appealed. The Second Circuit certified questions to the New York Court of Appeals regarding the interpretation of New York Labor Law §196-d, which governs tip-pooling.

Shift Supervisors Are Not Company “Agents”

New York Labor Law §196-d prohibits an “employer or his agent or an officer or agent of any corporation, or any other person” from accepting or retaining any part of the gratuities received by an employee. It also states, “Nothing in this subdivision shall be construed as affecting the… sharing of tips by a waiter with a busboy or similar employee.”

According to the plaintiff baristas in Barenboim, Starbucks’ policy of including shift supervisors in the stores’ tip pools violates §196-d because the shift supervisors are company “agents” and therefore not permitted to “demand or accept, directly or indirectly, any part of the gratuities, received by an employee.” Starbucks argues that shift supervisors are sufficiently analogous to waiters, busboys and similar employees, and should therefore be permitted to share in the gratuities pursuant to §196-d.

The Court of Appeals, in deciding that shift supervisors are entitled to share in the tip pool, deferred to the New York State Department of Labor’s (“DOL”) long-standing view that “employees who regularly provide direct service to patrons remain tip-pool eligible even if they exercise a limited degree of supervisory responsibility.” The Court compared the shift supervisors to restaurant captains who have some authority over wait staff, but are nonetheless eligible to participate in tip pools pursuant to the DOL’s Hospitality Industry Wage Order and DOL guidelines dating back to 1972.

“Meaningful Authority” Standard

In Winans, the Starbucks assistant store managers argue that they should be deemed similar to waiters and busboys under §196-d (and therefore eligible for tip-sharing) because they do not have full or final authority to terminate subordinates. The Court of Appeals disagreed: “[W]e believe that there comes a point at which the degree of managerial responsibility becomes so substantial that the individual can no longer fairly be characterized as an employee similar to general wait staff within the meaning of Labor Law §196-d.” That line is drawn, according to the decision, at “meaningful or significant authority or control over subordinates.”

Examples of meaningful authority, according to the decision, are the ability to discipline subordinates, the authority to hire and terminate employees, and input into the creation of employee work schedules. Contrary to the plaintiffs’ claim, authority to hire and fire is not the exclusive test for determining whether an employee is similar to wait staff for the purposes of §196-d.

Tip-Sharing Required?

In addition to the question of which employees are eligible for tip-sharing, the Second Circuit asked the Court of Appeals to consider whether an employer may deny tip pool distributions to an employee who is eligible to split tips under §196-d. The Court held that §196-d excludes certain employees from tip pools, but does not require employers to include all employees who are not legally barred from participating.

Conclusion

The Court of Appeals decision provides specific guidance to the Second Circuit Court of Appeals in connection with the two Starbucks cases pending on appeal, but it also provides helpful clarity to any employers with tip-sharing policies. In particular, the decision confirms that employees who regularly provide direct service to patrons may still participate in tip-sharing, but are not required to do so, even if they exercise a limited degree of supervisory responsibility. On the other hand, employees with meaningful authority over subordinates are not eligible to participate in tip-sharing. Employers should carefully review their tip-sharing policies in light of this guidance from the Court of Appeals.

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On Heels of European Raids, Energy Companies Face U.S. Class Actions

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White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.

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Michigan Supreme Court Won’t Give Advisory Opinion on Right-to-Work

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Saying simply that “we are not persuaded that granting the request would be an appropriate exercise of the court’s discretion,” the Michigan Supreme Court on Friday denied Gov. Rick Snyder’s request that the high court render an advisory opinion about the constitutionality of Michigan’s new right-to-work law.

Relying upon the provision in the state’s constitution’s that allows the governor to request the “opinion of the supreme court on important questions of law upon solemn occasions as to the constitutionality of legislation after it has been enacted into law but before its effective date,” the Governor had asked the Court for a ruling largely because the state’s public workers’ collective agreements are set to expire at the end of 2013. In a brief filed in support of the request for an advisory opinion, Michigan Solicitor General John Bursch said that an advisory opinion would prevent an “impasse at the negotiating table.”

Notwithstanding the Court’s decision, six lawsuits continue challenging the Act. Two of them are brought by unions or labor coalitions. Michigan State AFL-CIO v. Callaghan has been brought in federal court and challenges the constitutionality of the Act as to private sector workers. UAW v. Green, currently pending in the Michigan Court of Appeals, challenges the constitutionality as it applies to public sector workers. Here’s a helpful link to a chart describing the pending litigation.

SG Bursch also said in his filing with the Supreme Court that barring Supreme Court action, the state would consider filing a motion seeking an expedited ruling in the Green case.

The Detroit Free Press coverage on the court’s decision can be found here.

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Impact of Trademark Trial and Appeal Board (TTAB) Rulings in Court Decisions

Katten Muchin

The US Patent and Trademark Office’s Trademark Trial and Appeal Board (TTAB) provides, among other things, a forum for trademark owners to oppose the issuance of a certificate of registration for a mark filed by a third party which it believes is confusingly similar to its registered mark. Although the TTAB can issue a decision as to whether two marks are confusingly similar such that one of them should not be entitled to registration, the issue of whether one mark infringes another is beyond the scope of a TTAB proceeding and is instead left to the courts.

Therefore, when a trade mark owner is formulating its enforcement strategy, a common question that arises is whether a TTAB decision holding that two marks are confusingly similar would be dispositive when the same two marks are the subject of a trademark infringement claim before the courts. This issue was recently addressed by the Eighth Circuit in the case of B&B Hardware, Inc v Hargis Industries, Inc and the conclusion reached in this case can be helpful to brand owners contemplating their approach to brand enforcement.

B&B Hardware, the owner of a trade mark registration for the mark Sealtight covering a fastener product that is used predominantly in the aerospace industry, had successfully opposed a trade mark application filed by Hargis for the mark Sealtite covering a line of self-drilling and self-taping screws that are commonly used in the construction of metal buildings. Subsequently, B&B Hardware sued Hargis, making claims of trade mark infringement and unfair competition. The District Court rejected B&B Hardware’s claims and in doing so decided not give preclusive effect to the TTAB decision (that is, the Court did not allow the decision to preclude the issue from being re-litigated) which held that there was a likelihood of confusion between the two marks.

B&B Hardware appealed the decision to the Eighth Circuit arguing that the TTAB’s determination that there is a likelihood of confusion between the two marks should have been given preclusive effect by the District Court on the claim of trade mark infringement which, in turn, would have necessitated a finding by the District Court in B&B Hardware’s favour. The Eighth Circuit, however, affirmed the District Court’s decision, holding that regardless of whether the TTAB is an agency whose decisions are entitled to preclusive effect, the decision rendered in the opposition proceedings was not so entitled. Specifically, the Eighth Circuit ruled that preclusive effect should not be given to the TTAB decision at issue because the likelihood of confusion test applied by the TTAB when considering B&B Hardware’s opposition to Hargis’ attempt to register the Sealtite mark did not equate to a determination of likelihood of confusion for purposes of analysing a claim for trade mark infringement.

The decision issued by the Eighth Circuit was not without dissent, however. The dissent took the position that when an administrative agency is acting in a judicial capacity and resolves disputed issues of fact which the parties had the opportunity to litigate, the courts should give the decision issued preclusive effect. In short, the dissent believed that Hargis should not have had the opportunity to re-litigate the dispute at the District Court level after already having done so before the TTAB.

This case, therefore, stands for the proposition that a ruling by the TTAB may not be serve as the final decision on the existence of a likelihood of confusion between two marks. However, as indicated by the dissent, the holding in this case may not be universally applied so careful consideration should be given by a trade mark owner when pursuing a claim of trade mark infringement when the marks at issue were already the subject of a TTAB decision.

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A Short-Lived Victory for Generic Drug Manufacturers?

Sheppard Mullin 2012

On June 24, 2012, the U.S. Supreme Court handed down its decision in Mutual Pharmaceutical Co. Inc. v. Bartlett, 570 U.S. ____ (2013), finding that design-defect claims against generic drug companies are pre-empted where federal law prohibits an action required by state law. The Supreme Court had previously held in Pliva v. Mensing, 564 U.S. ____ (2011) that failure to warn claims against generic drug manufacturers are pre-empted by the Federal Food Drug and Cosmetic Act since generic drug makers must copy innovator drug labeling precisely in order to obtain approval of their products by the U.S. Food and Drug Administration (“FDA”). The Court in Mutual rejected the argument of lower courts that the generic manufacturer could comply with both federal and state law by choosing not to make and distribute the product at all.

The case in question involved the drug sulindac, a non-steroidal anti-inflammatory drug product marketed by the innovator as Clinoril®. The plaintiff in the case had been prescribed sulindac for treatment of shoulder pain. She subsequently developed a case of toxic epidermal necrolysis following taking an FDA approved generic product equivalent to Clinoril®, which resulted in significant and permanent disability (including blindness) and disfigurement. Subsequent to the event, the FDA required a more specific warning as to this possible side effect on sulindac products. A jury found the generic manufacturer liable under a theory that there was a design defect with the product, and the First Circuit affirmed, holding that the generic manufacturer could have complied with both federal and state law by not manufacturing and distributing the product. This was the method by which the lower courts overcame prior precedent that a state law may be impliedly pre-empted when it is not possible to comply with both federal and state law.

The Supreme Court in Mutual noted that the generic manufacturer could not comply with the state law, since federal law requires that the active ingredient, the amount of the active ingredient, the dosage form, and the labeling had to be identical to the innovator product. In this case, it was not possible to redesign the product, and the only way, under New Hampshire law, to remedy the design defect would have been to strengthen the product’s warnings. That too could not be done, as FDA rules require the labeling of the generic to be identical to that of the innovator. The Court ruled that in such a case the state law is without effect, and relevant New Hampshire warning-based design defect cause of action was pre-empted with respect to FDA-approved generic drugs sold in interstate commerce.

The scope of the Mutual decision may be limited to those states where design-defect claims allow for a risk-utility approach such as that the New Hampshire requires. The New Hampshire standard requires, among other things in determining whether there is a valid cause of action for a design defect, a determination as to whether there is a possible warning to avoid unreasonable risk of harm from the design defect and the efficacy of such warning. So not every design-defect claim may be pre-empted, depending on each state’s laws are interpreted. But given the Court’s reasoning, even state laws that do not take into effect the presence of and efficacy of a warning, may be pre-empted, as the generic must copy the formula of the innovator in all respects, except for the inactive ingredients in the product. (It should be noted that generics of some dosage forms – ophthalmic products and injectable products – must, in most cases, contain the same inactive ingredients as in the innovator product in the same amounts).

Furthermore, the FDA may amend its rules to permit ANDA holders to make changes in labeling. See “FDA Rule Could Open Generic Drug Makers to Suits,” The New York Times, Business, July 4, 2013, at B2. As stated in the posting on the OMB website (RIN 0910-A694):

Abstract: This proposed rule would amend the regulations regarding new drug applications (NDAs), abbreviated new drug applications (NDAs), abbreviated new drug applications (ANDAs), and biologics license applications (BLAs) to revise and clarify procedures for changes to the labeling of an approved drug to reflect certain types of newly acquired information in advance of FDA’s review of such change. The proposed rule would describe the process by which information regarding a “changes being effected” (CBE) labeling supplement submitted by an NDA or ANDA holder would be made publicly available during FDA’s review of the labeling change. The proposed rule also would clarify requirements for the NDA holder for the reference listed drug and all ANDA holders to submit conforming labeling revisions after FDA has taken an action on the NDA and/or ANDA holder’s CBE labeling supplement. These proposed revisions to FDA’s regulations would create parity between NDA holders and ANDA holders with respect to submission of CBE labeling supplements.

The expected date for a Notice of Proposed Rulemaking is September 2013. It could, of course, take FDA quite some time to propose a rule, and put it into effect, given the requirements of the Administrative Procedure Act. And Congressional action is also a possibility.

For the present, however, generic drug manufacturers appear to be shielded from liability under the doctrine of pre-emption from most, if not all, failure to warn and design defect claims under state law. Whether that victory is short-lived or not remains to be seen.

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Defense of Marriage Act’s Demise (DOMA) – What it Means for Canadian Residents with U.S. Ties

Altro Levy LogoLast week, the US Supreme Court issued an historic and landmark ruling in the case of US v. Windsor. It has been hailed in the media as the demise of the Defense Of Marriage Act (“DOMA”), and celebrated as an extension of more than 1,000 federal benefits to same-sex couples.

In US v. Windsor, Edith Windsor brought suit against the US government after she was ordered to pay $363,000 in US estate tax upon the death of her wife Thea Spyer. Edith and Thea were legally married in Canada in 2007, but the US federal government did not recognize their marriage when Thea passed away in 2009. Under DOMA gay marriage was not recognized, even if it was legal in the jurisdiction where it was performed. This lack of recognition meant that Edith could not take advantage of the marital deduction that would have allowed her to inherit from her wife without paying US estate tax.

In its ruling on June 26th, the US Supreme Court ruled that the US federal government could not discriminate against same-sex married couples in the administration of its federal laws and benefits as previously dictated by DOMA. Same-sex couples, who are legally married in one of the 13 states that recognize gay marriage, or a country like Canada, now have access to the same federal protections and benefits as a heterosexual married couple.

Tax Benefits

The demise of DOMA will bring with it a multitude of changes under US tax law. We will not attempt to enumerate all of them here, though we will provide a brief overview of key changes for our Canadian and American clients.

i. US Estate Tax

The case of US v. Windsor was based on the US estate tax, which is imposed by the US federal government on both US citizens and residents, as well as non-residents who own US assets worth more than $60,000 USD. Currently US citizens and residents with less than $5.25 Million USD in worldwide assets do not owe US estate tax on death. Canadians with worldwide assets of $5.25 Million USD or less receive a unified credit under the Canada-US Tax Treaty that works to eliminate any US estate tax owed on their US property.

Under federal law a US citizen may pass his entire estate to his US citizen spouse tax-free upon death. Up until last week this rollover was unavailable to same-sex couples.

Canadian same-sex couples should now benefit from the Canada-US Tax Treaty provisions that provide a marital credit to the surviving spouse. This allows for a doubling up of credit against any potential US estate tax due on US property. Now a Canadian same-sex spouse can inherit a worldwide estate worth up to $10.5 Million USD and should see little to no tax on US assets due upon the death of the first spouse.

ii. Gift Tax

The US imposes a tax on gifts if they exceed $14,000 USD per recipient per year. There is an exemption for gifts between spouses, which are generally not taxable.

Gifts made in the US between non-US citizen non-resident spouses are taxable, but the annual exemption is $139,000 USD instead of $14,000 USD. Canadian spouses who gift each other US property, US corporate stocks, etc. may gift up to $139,000 USD per year without incurring US gift tax.

These exemptions have now been extended to same-sex couples, expanding their ability to use gifting for tax and estate planning.

iii. US Income Tax

Many Canadians move to the US each year, in part because of the lower personal tax rates. In the US spouses are allowed to engage in a form of income splitting by filing a joint income tax return. By filing jointly, married couples are also generally able to take advantage of further credits and deductions not afforded to individual or single filers. Being able to file jointly can be highly tax advantageous.

Previously, same-sex couples had to file either separately or as head of household. Now they have the option of filing jointly as spouses, and gaining access to the aforementioned income splitting, credits and deductions.

Couples may file up to three years of amended US Income Tax returns if they believe that they would have been entitled to a larger tax return by filing jointly in those years.

iv. Other Tax Benefits

In the US most individuals receive health insurance through their employer at least up until they qualify for US Medicare at age 65. Previously, if the employer sponsored health insurance plan covered the same-sex spouse as well, then it was considered a taxable benefit. Such coverage will now also be tax-free for same-sex couples.

Retirement Benefits

Among the many benefits now extended to same-sex couples are a variety of “Retirement Benefits.”

i. Social Security and Medicare Benefits

With the end of DOMA, same-sex couples may now qualify for retirement, death, and disability Social Security benefits based on their spouse’s qualifying US employment history. For example, same-sex couples that do not have the required US employment history to qualify for US Social Security benefits on their own may now qualify for spousal Social Security benefits based on their spouse’s qualifying employment history. These spousal Social Security benefits are typically equal to 50% of the Social Security benefits received by the spouse with the qualifying employment history.

Additionally, spouses can qualify for US Medicare based on only one spouse’s qualifying US employment. This allows access to premium-free, or reduced-premium, health coverage in retirement.

Previously these important retirement benefits were not available to same-sex spouses.

ii. Individual Retirement Accounts

Important changes to the rights and recognition of spouses under US retirement savings plans result from the end of DOMA. Same-sex couples will now be recognized under 401(k), 403(b), IRA, Roth IRA, and similar plans. Spouses will be required to give their consent for any non-spouse beneficiary designations for these accounts. They will be treated as spouses for purposes of determining required distributions. For example, an inheriting same-sex spouse will not have to begin IRA distributions until age 70 ½, whereas previously he would have had to begin required distributions immediately as would any non-spouse beneficiary.

Immigration

One of the biggest questions after the US Supreme Court’s ruling on DOMA was whether there would be immediate changes to US immigration policy. Previously the US government did not recognize same-sex couples for immigration purposes. This meant that a US citizen spouse could not sponsor his husband for immigration to the US as a permanent resident (a.k.a. green card holder).

Last week, shortly after the ruling on DOMA, Alejandro Mayorkas, the director of US Citizenship and Immigration Services (“USCIS”) announced at the American Immigration Lawyers Association annual conference that the USCIS would begin issuing green cards to qualifying same-sex couples.

As of Friday, June 29, 2013, USCIS began issuing green cards to same-sex spouses. USCIS has stated that it has been keeping a record of spousal green card petitions denied only due to a same-sex marriage for the past two years. It is expected to reopen and reconsider these spousal sponsorship petitions that were previously denied due to same-sex marriage.

Conclusion

The demise of DOMA is exciting news for Americans, and Canadians with US ties. It provides same sex couples a wealth of new tax and estate planning opportunities, not to mention new opportunities for retirement and immigration planning. It is not too early to review your current planning, and take advantage of these changes.

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