Category: Regulatory

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

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

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

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

The Sun Capital Case

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

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

Summary Judgment for the Private Equity Funds

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

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

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

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

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

Legal Context for the Court’s Ruling

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

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

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

Private Investment Funds as “Trades or Businesses”

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

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

The Palladium Capital Case

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

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

Significance of the Sun Capital Decision

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

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

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

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

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

[2]. Sun Capital, slip op. at 17.

[3]. Id. at 29-30.

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

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

Copyright © 2012 by Morgan, Lewis & Bockius LLP

Industry Groups File Suit to Block Conflict Minerals Rules and Resource Extraction Rules

The National Law Review recently featured an article by the Public Companies Group of Schiff Hardin LLP titled, Industry Groups File Suit to Block Conflict Minerals Rules and Resource Extraction Rules:

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Late last month, the U.S. Chamber of Commerce and the National Association of Manufacturers filed suit in federal court requesting that the court either modify or set aside the SEC rules governing so-called conflict minerals.  The petition, filed before the U.S. Court of Appeals for the District of Columbia Circuit, does not state a specific basis for the legal challenge, but in a joint statement, the groups stated that though well-intentioned, the rules are “not an effective approach to this complex issue” and characterized the rule as imposing “an unworkable, overly broad and burdensome system that will undermine jobs and growth and may not achieve Congress’s overall objectives.”  This petition comes on the heels of the suit filed against the SEC early last month by a collection of industry groups asking a federal district court to block implementation of the resource extraction disclosure rules promulgated in late August.  The plaintiff trade groups raised a number of claims, including a faulty cost-benefit analysis and deficiencies under the Administrative Procedures Act and Exchange Act.  It is not clear at this time if the SEC will stay either of the controversial rules on a voluntary basis after negotiation with plaintiffs’ counsel. Should the SEC refuse to do so, the plaintiffs could petition the court for injunctive relief.

© 2012 Schiff Hardin LLP

Domain Names and the First Amendment: The Latest Word

The National Law Review recently featured an article regarding Domain Names written by Tim Hyland of Ifrah Law:

 

The intersection of domain names and the First Amendment is not new. Indeed, in the early days of the domain name system, courts considered the issue of whether a domain name registrar could prohibit the registration of domain names on the basis of content – for instance, domain names containing profanities.  See Nat’l A-1 Advertising, Inc. v. Network Solutions, Inc., 121 F. Supp. 2d 156 (D.N.H. 2000); Seven Words LLC v. Network Solutions, Inc., 260 F.3d 1089 (9th Cir. 2001). However, the U.S. Court of Appeals for the Fifth Circuit recently was confronted, in Gibson v. Texas Dep’t of Insurance, with a new twist on the First Amendment as it applies to domain names: whether a particular domain name is pure “commercial speech” (entitled to only limited First Amendment protection) or “expressive speech” (entitled to more extensive protection).

The Texas Labor Code prohibits the use together of the words and phrases “Texas,” and “Workers Compensation,” or similar abbreviations. Nonetheless, Gibson, a workers compensation lawyer in Texas, registered the domain name texasworkerscomplaw.com. On the associated website, Gibson discusses matters relating to Texas workers compensation law and, of course, advertises his law practice. The Texas Department of Insurance took offense to Gibson’s domain name, and sent Gibson a cease and desist letter. Gibson, being a lawyer, sued in federal court, alleging that the Texas Labor Code restrictions violated his constitutional rights.

The Fifth Circuit, in an interesting opinion, addressed the commercial speech/pure speech dichotomy inherent in domain names used by commercial enterprises, but artfully dodged the question of whether the domain name was in fact commercial speech. Instead, the court first analyzed whether, if the domain name was in fact commercial speech (which can under some circumstances be restricted), it was the sort of commercial speech that the Texas Department of Insurance could restrict.

The court found, correctly, that commercial speech can be restricted only if it is “inherently likely to deceive.” The state argued that Gibson’s domain name implied a connection with or approval of the state. The Fifth Circuit dispensed with the state’s argument, noting that since there was nothing to suggest that texasworkerscomplaw.com could not be viewed in a non-deceptive fashion (a truism), the state could not restrict the use of the domain name as commercial speech.

There is a second exception allowing a restriction on commercial speech: A state may regulate non-deceptive commercial speech if the restriction “advances a substantial state interest” and is narrowly tailored to serve that interest. On this issue, the Fifth Circuit sent the case back to the federal district court to develop a factual record. It seems unlikely that the Texas Department of Insurance will prevail in the end, as the statute on which its objection is based is vastly overreaching, and would prohibit anyone providing services relating to workers compensation in Texas from registering domain names that accurately describe what they do. For instance, a physician who performs workers compensation examinations could not register texasworkerscompdoc.com (as of this writing, this domain name is available for the taking).

Obviously, such a domain name is not misleading, and there is no legitimate basis upon which the state can restrict it. Domain names are often a form of speech. Just because they are a relatively new format of expression does not change this fact and give the government a basis to attempt to restrict their use.

© 2012 Ifrah PLLC

Sixth Circuit Strikes Down Michigan Affirmative Ban As Unconstitutional

The National Law Review recently published an article by Bryan R. Walters of Varnum LLP regarding Michigan’s Affirmative Action Ban:

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In Coalition to Defend Affirmative Action, Integration and Immigrant Rights and Fight for Equality By Any Means Necessary (BAMN) v Regents of the University of Michigan (6th. Cir. Nov. 16, 2012), the United States Court of Appeals for the Sixth Circuit, in an en banc decision decided on an 8-7 basis, held that the provision in Michigan’s Constitution prohibiting public colleges and universities from discriminating against, or granting preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin (commonly known as “Proposal 2”) was unconstitutional.

The majority was careful to note that the Court was “neither required nor inclined to weigh in on the constitutional status or relative merits of a race-conscious admissions policy as such.  This case does not present us with a second bite at Gratz and Grutter – despite the best efforts of the dissenters to take one anyway.”  Id. at 9.  Rather, the Court framed the issue as follows:  “The sole issue before us is whether Proposal 2 runs afoul of the constitutional guarantee of equal protection by removing the power of university officials to even consider using race as a factor in admissions decisions – something they are specifically allowed to do under Grutter.” Id.

The Court concluded that when an enactment (1) has a racial focus and “inures primarily to the benefit of the minority” and (2) reallocates political power in a way that places special burdens on a minority group’s ability to achieve its goals, that enactment violates the Equal Protection Clause of the constitution absent a compelling state interest to the contrary.  Id. at 15.  The Court held that Proposal 2 inured primarily to the benefit of racial minorities and that its enactment placed special burdens on racial minorities’ access to public education.  Id. at 18, 27.

Several of the dissenting judges wrote separate opinions voicing the reasons for their dissent.  In general, the dissents echo a similar theme – that Proposal 2’s mandate of non-discrimination in public education cannot be a violation of the Equal Protection Clause.  One dissent noted that the majority’s opinion was out of step with the decision by the United States Court of Appeals for the Ninth Circuit in Wilson (which is generally regarded as the most “liberal” circuit court of appeals) that “impediments to preferential treatment do not deny equal protection.”  Id. at 47.  Another dissent described thwae majority opinion as “the antithesis of the Equal Protection Clause of the Fourteenth Amendment.”  Id. at 70.  Given the obvious circuit split created between this decision and the Ninth Circuit’s decision in Wilson, it seems very likely that the issue will ultimately be decided by the United States Supreme Court.  Stay tuned.

© 2012 Varnum LLP

Congress Continues to Examine Data Brokers’ Practices

The National Law Review recently published an article, Congress Continues to Examine Data Brokers’ Practices, written by Michelle Cohen of Ifrah Law:

 

The chairmen of the Congressional Bipartisan Privacy Caucus just released the responses they received from nine major data brokers whom they queried in July about how each broker collects, assembles and sells consumer information to third parties. In their responses, the nine companies — Acxiom, Epsilon, Equifax, Experian, Harte-Hanks, Intelius, Fair Isaac, Merkle and Meredith Corp. – generally asserted that they were not data brokers. Some companies claimed they analyze data rather than broker it. Copies of the brokers’ responses and the original letters can be found here.

Interestingly, several of the brokers acknowledged obtaining their data from social networks such as LinkedIn and Facebook, in addition to telephone directories, government agencies, and financial institutions.

The legislators issued a joint statement in which they noted shortcomings in the brokers’ answers, stating that “many questions about how these data brokers operate have been left unanswered, particularly how they analyze personal information to categorize and rate consumers.”

Members of Congress have indicated that they will continue to scrutinize the data brokerage industry. Issues of particular concern for the legislators include: the sale of personal information to third parties for targeted advertising, the gathering and selling of information relating to children and teenagers, and the lack of transparency in data brokers’ practices and available information. The Privacy Caucus has expressed concern that many Americans do not know how the industry operates and that controls may be lacking for individuals over their own information.

The FTC has already called on Congress to address data brokers’ practices through legislation. In March, the FTC advocated for legislation to “address the invisibility of, and consumers’ lack of control over, data brokers’ collection and use of consumer information.” We anticipate continued review of data brokers by Congress and federal agencies including the FTC. Companies in the data compilation business should continue to monitor ongoing proceedings.

It should be noted, however, that not all companies that gather personal information actually “broker” it in a manner that raises concern. Some companies compile information and remove identifying data before providing it to third parties; other companies gather information under contract for a business with whom a consumer has an existing business relationship – as a means to promote better customer service by tailoring offerings that will be of interest to consumers generally or to a particular consumer. Many consumers have indicated a willingness to receive these types of tailored offerings.

© 2012 Ifrah PLLC

Recent Case Suggests How Private Equity Funds Can Protect Against Unfunded Pension Liabilities of Portfolio Companies

The National Law Review recently published an article, Recent Case Suggests How Private Equity Funds Can Protect Against Unfunded Pension Liabilities of Portfolio Companies, written by Joseph S. Adams, Laurence R. Bronska, Nancy S. Gerrie, Andrew C. Liazos, and Maureen O’Brien of McDermott Will & Emery:

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A significant objective for a private equity (PE) fund when making an investment is to avoid exposing itself to portfolio company liabilities.  Generally, corporate law would protect the purchaser of a controlling interest in an acquired corporation against portfolio company liabilities as long as the acquired company is operated independently of the purchaser.  However, special considerations apply under theEmployee Retirement Income Security Act (ERISA), the federal law that governs employee benefit plans.  ERISA makes all members of a controlled group liable on a joint and several basis for any pension-related liabilities of single employer and multi-employer pension plans.  The Pension Benefit Guaranty Corporation (PBGC), the federal agency responsible for overseeing these pension plans, has been aggressive in broadly interpreting what is a “controlled group” for this purpose and in pursuing PE funds for pension liabilities incurred by portfolio companies.  But a recent case out of the U.S. District Court for the District of Massachusetts signals that courts may not agree with the PBGC’s broad assessment of pension liability for PE funds.

In a recently decided case, Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund, D. Mass., No. 1:10-cv-10921-DPW, 10/18/12, the U.S. District Court for the District of Massachusetts became the first court to reject a multi-employer pension plan’s attempt to rely on PBGC precedent to assess a PE fund with a portfolio company’s unfunded pension liabilities.  While this likely is not the last word on this subject, the Sun Capital Partners case offers a roadmap for how a PE fund may take a position to avoid controlled group liability for single employer and multi-employer pension liability.

Background

Title IV of ERISA imposes joint and several liability with respect to a broad array of pension liabilities, including an employer’s minimum funding contributions to a single employer pension plan, unfunded pension liabilities upon plan termination, PBGC premium payments and withdrawal liability under a multi-employer pension plan.  Under ERISA, joint and several liability applies to any entity under common control with the employer sponsoring the pension plan.

  • The definition of “common control” is interpreted under federal tax rules that are applicable to tax-qualified plans under Section 414 of the Internal Revenue Code (the Code).
  • These Internal Revenue Service (IRS) regulations have long provided that entities are under common control if they are “trades or businesses” that share common ownership of 80 percent or more (by vote or value).
  • In the 1987 case of Commissioner v. Groetzinger, the Supreme Court of the United States established a test for when an activity constitutes a “trade or business” for these purposes.  Under Groetzinger, for a person to be engaged in a trade or business, the primary purpose of the activity must be income or profit, and the activity must be performed with continuity and regularity.

In 2007, the PBGC issued an opinion (PBGC Appeals Board opinion dated September 26, 2007) finding that a PE fund was engaged in a trade or business.  According to the PBGC, the PE fund subject to the opinion was engaged in a “trade or business” because it had a stated purpose of creating a profit; provided investment services; and had a general partner that received management fees, a carried interest and consulting fees (i.e., the PE funds did not receive just investment income as a passive investor similar to an individual investor).  The PBGC stated that this activity was regular and continuous because of the size of the PE fund and its profits.

The Sun Capital Decision

In the Sun Capital Partners case, the court determined that the one-time investment of capital by a PE fund into a portfolio company was a passive investment and did not result in the PE funds engaging in a trade or business.  The investment was structured such that the portfolio company was owned by two PE funds in a 70/30 split.  Each PE fund had a general partner, and each general partner had a management company that performed consulting and advisory services.  The PE funds, as shareholders, could appoint members of the board of directors of the portfolio company.

In its decision, the court determined that receipt of non-investment compensation in the form of consulting, management or advisory fees and carried interest by the management companies and the general partners could not be attributable to the PE funds.  The non-investment income was a result of a contractual relationship between the management companies, the general partners and the portfolio company.  The court found that the receipt of this non-investment income did not mean that the PE funds themselves were engaged in the full range of the general partners’ activities.  The PE funds themselves did not perform any consulting, advising or management services, and did not have employees, own any office space, or make or sell any goods.  In fact, on tax returns, the PE funds reported only capital gains and dividends, both sources of investment income.  Further, the court held that the ability of the PE funds to appoint the board of directors of the portfolio company did not mean that the funds were engaged in a trade or business, because such appointments were made in the PE funds’ capacity as shareholders of the portfolio company.  The court also noted that the fact that the same persons signed the management agreements representing both sides of the contract was not persuasive evidence of engaging in a trade or business, since officers of different entities can sign in different capacities.

The court in the Sun Capital Partners case expressly considered and declined to rely on the 2007 PBGC opinion.  Importantly, the court held that the 2007 PBGC opinion had misapplied the theory of agency and incorrectly imputed the management companies’ or general partners’ actions to the PE funds.  In addition, the court held that, as a matter of law, the PBGC had misapplied the Groetzinger test and other relevant tax law precedent.

Finally, the court determined that the structuring of the PE funds’ investment in the portfolio company (using multiple funds each owning less than 80 percent of the portfolio company) did not violate ERISA provisions allowing certain transactions to be undone if they were undertaken to evade or avoid ERISA liabilities.  Although the PE funds admitted that one of the reasons that the investment was structured to be two funds with a 70/30 split was in order to minimize pension liability risk, the court found that ERISA’s evade-or-avoid provisions did not apply in this context, because such provisions were meant to apply to sellers rather than first-time investors.  Indeed, as the court noted, if the investment was undone and the controlled group determined without regard to the investment as contemplated under ERISA, the PE funds would still not be liable.  Thus, application of the evade-or-avoid provisions did not make sense in this context.

Implications

Most importantly, this decision provides support for the widely held position that a PE fund is not engaged in trade or business and cannot be determined to be under common control with its portfolio companies under Code Section 414.  Under this interpretation, no PE fund could be held liable for withdrawal liability under a multi-employer pension plan, or unfunded benefits liabilities upon termination of a single employer plan (or minimum funding or contractually required ongoing contributions to such plans), because PE funds are not engaged in a trade or business.  Further, if the PE fund cannot be held liable, then the chain of ownership between portfolio companies held by the same private equity fund is also broken.  This decision also provides significant leverage to negotiate with the PBGC or a multi-employer pension fund should a PE fund be defending itself against the PBGC or multi-employer pension fund for pension liability claims.

In order to avail themselves of the benefits of this decision, PE funds should evaluate their operations and contractual relationships to determine if such operations and relationships are comparable to those outlined by the court in the Sun Capital Partners case.  In addition, PE funds may wish, when possible, to structure future investments across multiple funds with each fund owning less than 80 percent of the portfolio company in order to minimize risk of pension liability.

On November 2, 2012, the multi-employer pension fund appealed the decision in the Sun Capital Partners case to the U.S. Court of Appeals for the First Circuit.

© 2012 McDermott Will & Emery

EEOC Releases Q&A Fact Sheet On Application of Title VII and ADA to Victims of Domestic Violence, Sexual Assault, and Stalking

Recently, The National Law Review published an article by R. Holtzman Hedrick of Barnes & Thornburg LLP regarding Domestic Violence Victims:

 

The Equal Employment Opportunity Commission’s (EEOC) most recent official guidance involves the application of federal anti-discrimination laws to employees and applicants who have experienced domestic or dating violence, sexual assault, or stalking. The Q&A Sheet can be found here. 

Because victims of these offenses are not explicitly protected under federal law, employers may not realize certain employment decisions can run afoul of Title VII (prohibits discrimination on the basis of sex and sex stereotyping, among other categories) or the Americans with Disabilities Act (ADA).  Examples that might lead to charges of discrimination under Title VII include:

  • Terminating an employee after learning she has been the subject of domestic violence because the employer fears the possible “drama battered women bring to the workplace.”
  • Failing to select a male applicant after learning applicant obtained a restraining order against his male domestic partner because hiring manager believes men can’t be victims of domestic violence and should be able to protect themselves.
  • Allowing males a leave of absence to appear in court for the prosecution of an assault, but denying females leave to testify in domestic violence case.  Employer believes the former to be a “real crime” while the latter is “just a marital problem.”

The ADA prohibits discrimination based on actual or perceived impairments, and one can easily foresee situations when domestic/dating violence or sexual assault can result in such impairments.  Examples where employers may be found liable for unlawful disability discrimination under such circumstances include:

  • Deciding not to hire applicant employer discovers is the complaining witness in a rape prosecution and has seen a therapist for depression because employer believes applicant may need time off in the future to deal with symptoms or for counseling sessions.
  • Failing to address and stop harassment by co-workers regarding employee with facial scars/skin grafts resulting from attack by former domestic partner.
  • Failing to accommodate an employee not eligible for FMLA leave by refusing to give her time off to seek treatment for depression and anxiety following a sexual assault.  The employer tries to justify the refusal by stating that leave and attendance are uniformly applied to all employees.
  • Failing to honor an employee’s request for reassignment to available vacant position at different location for which she is qualified when ex-boyfriend who currently works in the same building is stalking her, causing her major depression.  Employer cites “no transfer” policy as reason for refusal.
  • (Supervisor) disclosing to other co-workers an employee’s post-traumatic stress disorder resulting from incest.

Although these are the examples given by the EEOC, indirect discrimination allegations under Title VII and the ADA can arise in numerous situations that would not necessarily be readily apparent to even well-trained and sophisticated employers. Of course, it is always a good idea to seek guidance from experienced employment counsel when employers are given pause about an employment decision, even when the employer is not entirely sure why they might be hesitating.

© 2012 BARNES & THORNBURG LLP

Big Brother Gets Better Glasses: FERC Enhances Its Market Surveillance Tools

In a concerted effort to enhance its ability to monitor energy markets for possible anti-competitive or manipulative conduct, FERC has undertaken a number of separate initiatives to strengthen its market surveillance capabilities over electric power and natural gas markets.  Among the areas of focus, FERC has been especially keen on obtaining data and market information on a real-time, or near real-time, basis, which is in contrast to FERC’s traditional collection of data through quarterly or annual reports submitted well after-the-fact.  FERC has also been intent on gathering data outside of organized wholesale electric markets.

These initiatives include:

  • On February 16, 2012, FERC Chairman Jon Wellinghoff announced the creation of a new Division of Analytics and Surveillance to the Office of Enforcement.  Described by the Chairman as staffed with “geeks and wonks”, the Division is intended to provide continuous, real-time market surveillance and data analysis of physical gas and electric power markets and of related financial products.  The Division also is intended to develop and implement surveillance tools to detect potential market manipulation, anticompetitive behavior, and other anomalous activity.
  • Beginning in August 2012, FERC enacted a rule to require Regional Transmission Organizations (RTO) and Independent System Operators (ISO) to electronically deliver to FERC non-public data on a rolling basis, seven days after creation.  Specifically, FERC requires RTOs and ISOs to provide: market participant names and pricing points; virtual offers and bids; capacity market offers, awards, and prices; marginal cost estimates; financial transmission rights, or FTR, data; pricing data for interchange transactions; supply offers and demand bids; energy and ancillary services awards; resource output; day-ahead generation and load shift factors associated with constraints; internal bilateral contracts; and uplift charges and credits.  FERC allowed a phased implementation, with only certain data required August 2012, leading up to full implementation by February 2013.  This data collection is intended to supplement ongoing market monitoring efforts by the RTOs’ and ISOs’ market monitors.
  • FERC has also taken efforts to enhance its more traditional forms of reporting, including extending FERC’s Electric Quarterly Report (EQR) requirements to non-public utility entities that make sales above a 4,000,000 MWh threshold under Section 220 of the Federal Power Act (FPA).  These non-public utility entities—which generally consist of governmentally-owned entities, such as federal power marketing administrations, municipal utilities, public utility districts, and coops—have traditionally been exempt from FERC’s EQR filing requirements.  In the Energy Policy Act of 2005, Congress granted FERC increased authority over these entities in order to improve market transparency, as non-public utility entities represent large portions of the market, particularly in areas of the country outside of organized markets.  In the same order, FERC also increased the amount of data required of all EQR filers to include individual trade dates, whether a transaction was reported to an index publisher, the broker or exchange used for a transaction, and e-Tag IDs associated with individual transactions.  In a separate order issued in February 2012, FERC also indicated it will consider requiring EQR filers to report electric “buy-sell” transactions, termed by FERC as “simultaneous exchanges”.
  • FERC is also in the process of considering a rule that proposes to require theNorth American Electric Reliability Corporation (NERC) to provide FERC staff with access to the complete set of non-public e-Tag data.  (Notably, NERCresponded to the Commission’s proposal by noting that other entities, and not NERC, maintained the desired e-Tag information.)  When viewed in conjunction with the new requirement to report e-Tag IDs in the EQRs, it is clear that FERC intends to associate the broader set of e-Tag data with parties’ transaction reports in an effort to understand how power is transacted and scheduled.
  • Finally, on October 15, 2012, FERC Staff issued a set of proposed metrics that would compare the performance of market performance in areas outside of organized wholesale electric markets with performance in organized markets.  As part of this effort, FERC Staff issued a new report, FERC-922, that would collect information from utilities outside of organized markets.  Requested information includes price data and information relating to reliability, transmission planning, requests for service, and system capacity.  Staff stated it will use this information to help develop a common set of metrics for both RTO/ISO markets and non-RTO/ISO markets, and for evaluating market performance thereafter.  FERC Staff noted that it could not require many non-public utility entities to provide such information but requested such entities to comply as part of “a voluntary and collaborative process”.

Taken as a whole, these efforts show an agency intent on gaining a deeper and more granular perspective on energy markets and a better understanding of how those markets function day-to-day.

© 2012 Bracewell & Giuliani LLP

The NLRB at it Again: Blanket Rules Prohibiting Employees from Discussing Ongoing Investigations Violates NLRA Absent “Legitimate and Substantial Justification”

An article by Eric E. Hobbs of Michael Best & Friedrich LLP regarding The NLRB recently appeared in The National Law Review:

 

The National Labor Relations Board (NLRB or Board) on July 30, 2012, held that a blanket rule prohibiting employees from discussing ongoing internal investigations – for example, of employee misconduct, harassment, or criminal conduct – violates the employees’ rights under the National Labor Relations Act (NLRA) absent “legitimate and substantial justification”.

In Banner Health System, the employer’s human resources consultant, as a matter of course, had asked employees involved in internal investigations not to discuss the investigation’s details, the employees’ roles or what had been said during the consultant’s interviews while the investigation continued. In particular, she had asked employee James Navarro, whom she had interviewed as a part of an insubordination investigation, to maintain his silence. Navarro then filed an unfair labor practice charge against the employer, alleging that the consultant’s request had violated his rights under Section 7 of the NLRA, which protects, among other things, communications between employees regarding terms and conditions of employment.

The NLRB found merit to the charge and issued a complaint, which went to hearing before one of the NLRB’s administrative law judges. The judge found the employer’s conduct not to have violated Navarro’s Section 7 rights because the consultant’s request had been justified by the employer’s concern with protecting the integrity of its insubordination investigation.

The NLRB reversed its judge’s decision on that point. It held that, in order for an employer to justify a prohibition against employee communications regarding ongoing investigation, the employer must demonstrate the existence of a “substantial business justification” that outweighs the employees’ Section 7 rights. And a general concern with protecting the integrity of an investigation, according to the Board, was not substantial enough to meet the bar.

The Board gave examples of justifications that might qualify as sufficiently substantial to outweigh employees’ Section 7 rights: If a witness needed protection; if the employer reasonably believed that evidence might be destroyed or fabricated; or if maintenance of silence was necessary to prevent a “cover-up.” Notably, the Board did not say that those three circumstances were examples only, rather than an exclusive list of potentially adequate justifications. Our best educated guess is that they are examples only.

We do not have to guess, however, that the NLRB would find a blanket prohibition against communication by employees among themselves during the course of an ongoing employer investigation to be unlawful. In fact, a requirement of such silence in any case the employer cannot show substantial business justification for it will be found by the Board to violate the employer’s workers’ Section 7 rights.

The Board’s decision is not without support by its own precedent. In the late 1980s, the NLRB had held that it was unlawful under Section 7 of the Act for an employer to direct an employee who complained of sexual harassment not to talk to anyone other than her supervisors about the matter. The Board found that “anyone” could include the employee’s union representatives and that such a prohibition ran afoul of the NLRA.

The Banner Health System decision, however, greatly expands that principle. Employers now must be careful whenever directing employees not to communicate among themselves about, or to maintain as “confidential” all matters related to, an internal investigation. Protection of the integrity of the investigation is not going to be a sufficiently substantial reason for imposing such a prohibition, and the burden will be on the employer to establish that it had a “substantial business justification” for the prohibition that outweighed its employees’ rights under Section 7 of the NLRA.

In the event you believe it necessary to maintain the confidentiality of an internal investigation, we suggest that you take several steps:

  • First, make sure you are able to articulate a significant concern particular to the investigation that a failure by any witness to maintain confidentiality will result in serious, negative consequences. For instance, where employer, employee or third-party safety might be jeopardized, where a target of or participant in the investigation might become violent, where the target of or participant in the investigation might threaten or manipulate other witnesses, or where evidence might be destroyed or lost.
  • Second, be clear to limit your request for confidentiality. Limit it explicitly to confidentiality of the interview conducted, the facts known to the individual, his or her impressions and opinions, the existence of the investigation, and other of its elements. Make clear that the confidentiality is to be maintained only during the pendency of the investigation, but not afterwards. And, if possible, articulate that the confidentiality is to be maintained not just among employees but also among friends and family members.
  • Finally, do not threaten to discipline employees for breaches of confidentiality regarding the investigation at the time you communicate your confidentiality request, unless the investigation is one that clearly and “substantially” justifies such a threat.

© MICHAEL BEST & FRIEDRICH LLP

Seventh Circuit Reverses Course on Reassignment Accommodation, Leaving United Airlines Grounded

An article by R. Holtzman Hedrick of Barnes & Thornburg LLP regarding Reassignment Accommodations, recently appeared in The National Law Review:

 

In arguably its most significant decision under the Americans with Disabilities Act (ADA) in years, the Seventh Circuit, in EEOC v. United Airlines, Inc., reversed its own previous holdings regarding the viability of competitive transfer policies for disabled employees. The case can be found here.

For over a decade, employers in the Seventh Circuit have been able to rely onEEOC v. Humiston-Keeling, 227 F.3d 1024 (7th Cir. 2000), to adopt perfectly valid policies allowing for disabled employees who can no longer perform the essential functions of their current jobs to be considered for reassignment on a competitive basis.  In other words, if a more qualified candidate sought the same position as the disabled candidate, the employer could select the best-qualified candidate without running afoul of the ADA.  No longer, says the Seventh Circuit.

The circuit court held that under the Supreme Court precedent of U.S. Airways, Inc. v. Barnett, 535 U.S. 391 (2002) (requiring an employee to show that an accommodation is reasonable on its face, which then shifts the burden to the employers to demonstrate case-specific undue hardship), reassignment of a disabled but qualified employee to a vacant position is mandatory in the absence of an undue hardship.  Despite reaffirming its best-qualified candidate rule even after Barnett was decided (reasoning that that ADA does not require preferential treatment and that violating facially-neutral employment policies creates an undue hardship), the Seventh Circuit decided last week that it had been wrong all along:  the “ADA does indeed mandate that an employer appoint employees with disabilities to vacant positions for which they are qualified, provided that such accommodations would be ordinarily reasonable and would not present an undue hardship to that employer.”

The importance of this new automatic reassignment interpretation cannot be overstated.  Indeed, questions about an employer’s reassignment obligations are among the most frequently received inquiries by attorneys under the ADA.  United Airlines, whose policy in question provided for preferential treatment of disabled employees, although not for automatic reassignment for those who were qualified – meaning the company actually went beyond what the Seventh Circuit required it to do before last week – must feel blindsided by the court.  Indeed, this Seventh Circuit panel issued an earlier version of an opinion in this case dismissing the lawsuit under Humiston-Keeling before vacating that decision and issuing a new opinion.

Obviously, employers in the Seventh Circuit (and likely beyond, as the D.C. and Tenth Circuits provide for automatic reassignment, and the Eighth Circuit relied onHumiston-Keeling in deciding that competitive transfer policies were legal) will need to adjust their reassignment policies for disabled employees.  In light of this new ruling, it is critical to consult with experienced counsel to navigate what is likely uncharted territory.

© 2012 BARNES & THORNBURG LLP