Supreme Court Hears Oral Arguments Regarding Limits on Class Arbitration Waivers in Federal Cases

Womble Carlyle

Recently, the United States Supreme Court heard oral argument in American Express Co. v. Italian Colors Restaurant, a case that will have a substantial impact on the enforceability of arbitration agreements that contain class action waivers.  Italian Colors picks up where the Supreme Court left off in AT&T Mobility, LLC v. Concepción when a sharply divided Supreme Court held that a state law purporting to invalidate class action waivers in arbitration agreements was preempted by the Federal Arbitration Act.

Here, the Supreme Court is confronting the question of whether, as the Second Circuit Court of Appeals put it, the “federal substantive law of arbitrability” can invalidate class action waivers in arbitration agreements when the underlying claims are based on federal law.  The Second Circuit Court of Appeals determined that federal law requiredthe invalidation of the class action waiver because the cost of litigation compared to the relatively minimal amount of potential damages would effectively prohibit plaintiffs from pursuing their federal claims.  Concepción did not compel a different result, according to the Second Circuit, because in that case there was no showing that ”the practical effect of the enforcement would be to preclude [the plaintiff class’s] ability to vindicate their statutory rights.”

The Supreme Court’s decision in this case will have a substantial impact on the viability of class action waivers contained in arbitration clauses.  If the Second Circuit’s ruling is upheld, it will provide plaintiffs with a way around the limitations of Concepción if they are able to show that litigating a matter on an individual basis would be prohibitively expensive.  A decision reversing the Second Circuit would give business owners a greater ability to avoid complex and expensive class action litigation through carefully worded arbitration agreements.

The Supreme Court is expected to decide the case before the end of June 2013.

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Far From Perfection: Individual Alternative Minimum Tax Is Still Alive

Southern Methodist University, SMU Dedman School of Law

Spring 2013 Law Student Legal Writing Contest Winner

 

Introduction

On January 2, 2013, President Barack Obama signed the American Taxpayer Relief Act of 2012 (“ATRA”).[1] ATRA § 104 provides for annual inflation adjustments for purposes of the alternative minimum tax (“AMT”).[2] The law also makes Bush tax cuts permanent.[3] This paper focuses on the influences of the AMT on the individual tax liability with the proposals on a more rational AMT or a progressive replacement for the AMT. After a historical and academic overview of the AMT in Part I, the paper introduces the reasons of changing the AMT in Part II as failure of its intended purposes and the general tax policies. By elaborating in Part III the evaluation of ATRA and addressing the possible future reforms including a more rational AMT or a repeal of the AMT, the paper concludes that ATRA solution for the AMT is not the end but another start for the future tax reform.

I. Overview Of The AMT

The individual income tax has consisted of two parallel tax systems: a regular tax and an alternative tax.[4] The current version of the alternative tax is the AMT that operates parallel to the regular tax and sets a floor on total tax liability.[5] Taxpayers whose income exceeds the AMT exemption must calculate both regular tax and AMT liabilities and pay the larger amount of the two.[6]

1.          The History Of The AMT

The original minimum tax in 1969 was to guarantee that high-income individuals paid at least a minimal amount of tax.[7] Prior to ATRA, the AMT required annual congressional actions to prevent it from expansion on more taxpayers because of its design flaws.[8] 20 historical legislations on individual minimum taxes preceded ATRA.[9] Those changes before ATRA included the rates, the exemption amounts, and the credits allowed against the tax, but the basic structure had remained unchanged.[10] Over time, the AMT has become more influential on middle-class taxpayers.[11] Before 2000, the AMT was less than 2 percent of individual income tax revenue and 1 percent of total revenue, and affected less than 1 percent of taxpayers, so it played a minor role in the tax system.[12] Since 2000, the AMT is exploding.[13] The number of taxpayers owing the AMT grew from about 20,000 in 1970 to roughly 4 million in 2011.[14]

2.          The Definition And Operation Of The AMT

The Black Law Dictionary defines the AMT as “A tax, often a flat rate, potentially imposed on corporations and higher-income individuals to ensure that those taxpayers do not avoid too much (or all) income-tax liability by legitimately using exclusions, deductions, and credits.”[15] The AMT is the addition to regular income taxes,[16] and its amount equals to the excess of the AMT liability over the regular tax liability after appropriate credits.[17] Taxpayers calculate their taxes under the tentative AMT and the regular tax, and pay the higher of the two.[18] The following table shows the general formula of calculating the tentative AMT.

Taxable Income For Regular Tax Purposes[19]
− Certain Exclusions, Deductions, And Credits Allowed In The Regular Tax[20]
− The AMT Exemption Amount[21]
× The AMT Rate[22]
− The AMT Foreign Tax Credit[23]
= The Tentative AMT

The Tentative AMT Calculation

3.          The Intended Purposes And Policies Of The AMT

Underlying goals of the AMT are requiring high-income taxpayer to pay some tax, deterring the aggressive use of tax shelters, and ensuring progressivity.[24] Being originally motivated by a simplified version of vertical equity,[25] the AMT’s simple mission was making all Americans pay tax regardless of their tax shelters and avoidance efforts.[26] Additionally, the AMT is a second-best backstop for a porous regular income tax system by reducing distortions and avoiding tax sheltering because Legislature cannot address directly some unwarranted tax shelters in the regular income tax system.[27] Moreover, the AMT should increase the tax system progressivity, which means average tax burdens increase with income-size classes in all years and ensure the vertical equity of the tax system.[28]

II. Why To Change

The AMT failed its purposes and had explosive expand to the middle-class taxpayers because it was not indexed for inflation and Bush tax cuts reduced regular income tax without a permanent AMT fix. Moreover, the AMT thwarted generally accepted tax polices such as equity and efficiency bymodifying regular income tax incentives, altering marginal tax rates, increasing complexity, and reducing transparency.

1.          Failure of Intended Purposes Of The AMT

The AMT fails its intended purposes because of its expansion. Before ATRA, two main factors were responsible for the explosive growth in the AMT since 2000: it was not indexed for inflation and Bush tax cuts reduced regular income tax without a permanent AMT fix.[29] Inflation is an important factor of the long-term AMT receipts, but the exemption amounts and the tax rate brackets in AMT were not indexed to automatically adjust and keep pace with inflation as the regular tax before ATRA.[30] Because taxpayers pay the higher of the tentative AMT and the regular tax, the different treatments between the two tax systems would push more taxpayers to the AMT. Additionally, Bush tax cuts reduced regular tax rates without changing the AMT, which would have resulted a dramatic increase in the projected future number of AMT taxpayers.[31] If Legislature had not made the temporary adjustments (“patches”) to the AMT, more returns would be subject to the AMT after Bush tax cuts.[32] However, the patches have only served to mask the underlying problems rather than a permanent solution.[33] ATRA makes Bush tax cuts permanent.[34]

Because of its expansion, the AMT failed its purposes of requiring high-income taxpayer to pay some tax, deterring the aggressive use of tax shelters, and ensuring progressivity for the following ways.[35]

Although Congress originally enacted the AMT to prevent high-income individuals from sheltering all of their income and paying no tax, its expansion gradually moves the types of the AMT taxpayers from higher-income to lower-income by encroaching on the middle class.[36] Because taxpayers would pay higher of the tentative AMT and the regular tax, the top statutory rate for regular income tax higher than the top statutory rate for the AMT would move high-income individuals without substantial sheltering to the regular tax system.[37]

Additionally, the AMT fails to impede some tax shelters. For example, the current AMT cannot stop the tax shelters by reporting capital gains, which could be deferred for years and faced a low statutory rate after recognition.[38] Under the different tax rate treatments between ordinary income and capital gain in the regular tax, an investment that would be a loss before tax when the income including capital gains was less than the expense, but the same investment could be profitable after tax because expenses were overstated for tax purposes and capital gains had lower tax rates.[39] The post-1987 AMT does not have different rate treatment between long-term capital gains and ordinary income as the regular tax, which leads high-income taxpayers report large amounts of capital gains and generally receive the same tax break under the AMT as under the regular income tax.[40]

Furthermore, progressivity of the tax system means average tax burdens increase with income-size classes in all years.[41] The contribution to the AMT from middle-class families was increasing significantly while the contribution to the AMT from high-income families was decreasing, so the AMT becomes less progressive over time,[42] which causes less vertical equity in the tax system.

2.          The AMT Thwarting Generally Accepted Tax Policies

The AMT thwarted generally accepted tax polices such as equity and efficiency bymodifying regular income tax incentives, altering marginal tax rates, increasing complexity, and reducing transparency

A.         Modifying Or Limiting Regular Income Tax Incentives[43]

For the horizontal equity, the AMT should reduce the variance of average effective tax rates among taxpayers with similar incomes.[44] However, the AMT differently affects taxpayers with similar incomes but different family circumstances or different state of residence.[45] The AMT disallows the deduction for state and local taxes, so it affects more taxpayers who live in the places with high state and local taxes.[46] Moreover, the AMT replaces the personal exemptions based on filing status and number of dependents in the regular tax with one single exemption solely based on filing status, so the AMT will not benefit larger families and marriage.[47] Additionally, the AMT has the exemption for married couples less than twice of that for singles[48] and has the same brackets regardless of filing status, so the AMT has more impact on married than unmarried.[49] Furthermore, the AMT requires higher percent of AGI as the threshold (10 percent) to deduct medical expenses than the regular tax (7.5 percent), and disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt,[50] which discourage the incentives to get medical treatments and purchase real property.

B.         Altering Marginal Tax Rates

Because Legislature cannot address directly some unwarranted tax shelters in the regular income tax system, the most plausible economic rationale for the AMT is that it is a second-best backstop for a porous regular income tax system by reducing distortions and avoiding tax sheltering.[51] However, because the AMT exempts a large share of income for many middle-class taxpayers and has the phase-out of the AMT exemption,[52] the AMT fails on the efficiency policy by taxing narrower base of income and imposing higher marginal rates than the regular income tax for the most AMT taxpayers.[53] Narrower base and higher marginal tax rates in AMT can decrease after-tax income, discourage work, and reduce economic efficiency.[54]

C.         Increasing Complexity And Reducing Transparency

The AMT can increase the complexity of the tax calculations and reduce the transparency of the tax system because it can affect people’s behavior, alter the distribution of taxes, and complicate the tax planning decisions.[55] Taxpayers need to complete AMT forms in addition to their regular income tax returns,[56] and keep two separate sets of books because of the different deferral preferences between the AMT and the regular income tax.[57] Most people filling out the AMT forms end up owing no additional taxes.[58] Using computer software[59] may lower the complexity of filings, but it will increase the out-of-pocket costs and decrease taxpayer’s intended incentives in the tax code.[60]

III. ATRA Solution: Not The End But Another Start

The increasing number of taxpayers in the AMT placed pressure to permanently restructure of the AMT.[61] In 2013, President Obama signed ATRA, § 104 of which provides for annual inflation adjustments for purposes of the AMT and makes Bush tax cuts permanent.[62] This part lays out the evaluation of ATRA and addresses the possible future reforms including a more rational AMT or the AMT abolishment.

1.          Evaluation Of ATRA Solution

This section assesses ATRA solution in the context of possible legislative options before its enactment, the insufficiency of the current solution, and the potential barriers for the future AMT reform.

A.         Legislative Options Before ATRA

The problems in the AMT placed pressure to permanently restructure of the AMT. Before the enactment of ATRA, the alternative options to repeal the AMT included repealing regular tax, indexing the AMT’s parameters for inflation, and allowing additional exemptions and deductions under the AMT.

(1)  The AMT Or The Regular Income Tax[63]

A debate exists on the elimination of the AMT or the regular income tax. Because ATRA indexes the AMT for inflation and makes Bush tax cuts permanent,[64] the AMT will affect 8 million households by 2020.[65] After the permanent extension of Bush tax cuts by the ATRA, repealing the AMT would reduce revenues by over $2.7 trillion between 2011 and 2022.[66] On the contrary, the advocates of regular tax state that the single AMT system would lead undesirable policy changes from current law.[67] By eliminating the regular tax, the differences between the AMT and the regular tax would alter the current distribution of the income tax, which would be especially detrimental against middle class.[68]

This paper would respectfully join the pro-regular-tax alignment. The statistical indicators of immense scope of the AMT are mostly based on the legislations before ATRA, so it must be subject to change after ATRA. Even assuring that the statistical changes after ATRA are small, it would be against the legislative logic to remove the regular tax and preserve the AMT because the regular tax is the foundation of the AMT calculation.[69] The approach of eliminating the regular tax is analogous to remove the tree trunk (the AMT) from the root (the regular tax) and expect the tree trunk to grow bigger and stronger. Additionally, simply eliminating the regular tax would sacrifice substantial revenues, impose marriage penalties, produce higher marginal tax rates, etc.[70] Admittedly, neither the AMT nor the regular tax is a perfect tax system. However, the regular tax has fewer defects than the AMT.[71] As the discussion in Part II, Section 2A, the AMT rejects the deduction of the state and local taxes; disallows exemptions for dependents; requires higher percent of AGI as the threshold to deduct medical expenses than the regular tax; and disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt. These defects do not exist in the regular tax. Moreover, Legislature would consider the cost-benefit to eliminate the regular tax. The cost of eliminating the regular tax would be the lost revenue from the regular tax and the cost of correcting the defects of the AMT. Assuming that the lost revenue from eliminating either the regular tax or the AMT would be close in number, the cost of improving the AMT will probably be higher than improving the regular tax because the regular tax has fewer defects than the AMT.[72]

(2) Rationale Of Congress On Choosing Inflation Index

Before the enactment of ATRA, Legislature could permanently limit the expansion of the AMT’s impact in a number of ways, such as indexing the AMT’s parameters for inflation; allowing additional exemptions and deductions under the AMT; and eliminating the AMT.[73] This part will not discuss the elimination of the regular tax as a legislative option for the reasons in the preceding section (1).

Permanently indexing the AMT’s parameters for inflation was a compelling candidate for AMT reform before ATRA. Even though the patches to the AMT exemptions can have similar effects as the inflation indexing, they create uncertainty for taxpayers and their financial decisions.[74] Additionally, allowing additional exemptions and deductions under the AMT would offset the erosion of the un-indexed AMT exemptions caused by inflation and would provide similar relief as indexing the AMT for inflation.[75] To provide some reliefs for AMT taxpayers, Legislature could allow state and local taxes deductions and dependent exemptions, lower the threshold of medical expense deduction, and loose the rules on interest deductions.Moreover, because the AMT did not fulfill its purposes or policies but became a de facto ATM machine for generating additional tax revenue from middle-class taxpayers,[76] the most comprehensive approach would simply eliminate the individual AMT, which will relief all taxpayers from the complexity and opacity of two parallel tax systems.[77] The following table gives the brief comparisons and contrasts for the three options.

                Consequences

 

 

Legislative Options

 Decreased Number Of AMT Taxpayer In 2010 After Adopting The Optional Reform 2010-2019 Lost Tax Revenue By Adopting The Optional Reform
Option 1: Indexing The AMT’s Parameters For Inflation 22 million[78] $450 billion[79]
Option 2: Allowing Additional Preferences Under The AMT 25 million[80] $530 billion[81]
Option 3: Eliminating The AMT 27 million[82] $620 billion[83]

Legislative Options And Their Consequences Before ATRA

The table above can show that indexing the AMT’s parameters for inflation was the cheapest option before ATRA among the three options. Moreover, either allowing additional preferences under the AMT or eliminating the AMT is more difficult and complex legislation procedures than indexing the AMT for inflation. Allowing additional preferences will have a lot of detailed changes for the current regular tax system. Additionally, the following Section 3 of the paper can show that eliminating the AMT will be a progressive procedure with the AMT indexing as the initial step. Furthermore, indexing the AMT for inflation will be the prerequisite of allowing additional preferences under the AMT because the preferences should be indexed for inflation.[84] So Congress made a right choice to have the AMT indexing for inflation in ATRA.

B.         Insufficiency Of ATRA Solution

The AMT actually affects taxpayers with similar incomes but different family circumstances or different state of residence differently, raising the variance of after-tax income.[85] After ATRA, the AMT still rejects the deduction of the state and local taxes; disallows exemptions for dependents; requires higher percent of AGI as the threshold to deduct medical expenses than the regular tax; and disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt. Moreover, ATRA does not eliminate the phase-out of the AMT exemption that leads additional marginal tax rates,[86] so most taxpayers still have higher marginal tax rates under the AMT than under the regular income tax.[87] Additionally, ATRA does not reduce complexity and increase transparency of the AMT. Taxpayers still need to complete AMT forms in addition to their regular income tax returns,[88] and keep two separate sets of books.[89] Furthermore, the AMT after ATRA still fails to impede some shelters, such as the ones involved with capital gains.[90] The future legislations after ATRA should change these defects or abolish the whole AMT.

C.         Barrier To AMT Reform After ATRA

A significant barrier to AMT reform has been the challenge of what to do about the lost revenues.[91] If the AMT reform would have no offsets, federal budget deficits would rise and the cost would be shifted to the future taxpayers.[92] Methods of offsetting the revenue loss from the AMT reform include broadening the base for the regular income tax or raising its rates, increasing revenues from other tax sources, and reducing spending.[93] Regular tax system would have to rise by a similar magnitude to offset the revenue loss, may eliminate various tax preferences, and could raise all or some of rates on capital gains, dividend income, etc.[94] However, if other tax increases or spending reductions would offset the resulting revenue losses, the AMT reform would benefit some taxpayers and disadvantage others.[95]

2.          Possibility Of Creating A More Rational AMT

The more rational AMT should “keep the baby but throw out the bathwater.”[96] If the AMT will remain, a more rational system should allow additional exemptions and deductions as the regular tax[97], and neutralize the potential federal deficit by increasing the AMT tax bracket[98] and eliminating the preferential rates for capital gains in regular tax.[99]

3.          Feasibility Of Repealing The AMT

If Legislature will repeal the AMT, it can be a progressive elimination.[100] The following flowchart illustrates the progressive procedure of the AMT elimination.

à

Indexing The AMT For Inflation

Step 1

(Completed)

à

Allowing Dependent Personal Exemptions

Step 2

à

Repealing The Phase-out And Allowing Same Deductions As Regular Tax

Step 3

à

Deleting Deferral Preferences

Step 4

à

 NO AMT

AMT

The Flowchart On The AMT Progressive Elimination

ATRA has already finished Step 1.[101]  Step 2 can remove almost the entire middle class from the AMT.[102] Step 3 will eliminate the major different tax preferences between the AMT and the regular tax and end the AMT except for high-income taxpayers.[103] Step 4 will significantly increase the number of high-income taxpayers who pay no income tax because deferral preferences have a greater tendency to affect high-income taxpayers.[104]

Two reasonable methods can offset the revenue loss after the AMT progressive elimination. First, after the AMT deletion, Legislature can impose an add-on tax.[105] However, this option is actually back to the origin of the AMT,[106] and will have the possibility to repeat some AMT mistakes in future. Second, changing the regular income tax can reduce some federal deficits.[107] Some AMT provisions, which are preventing investment activities to avoid the regular income tax,[108] should be incorporated into the regular income tax after repealing the AMT.[109] But the legislation of such incorporations may not be easy because the AMT was created to backstop the unwarranted tax shelters that Legislature could not address directly for some reasons in the first place.[110] Additionally, Legislature can raise some or all of the regular income tax rates, including tax rates on capital gains and dividend income,to compensate the lost revenue after the termination of the AMT.[111] Moreover, the AMT elimination can pair with the abolishment of various regular tax preference, such as state and local tax deduction to reduce the federal deficits.[112]

Conclusion

The individual AMT operates parallel to the regular income tax by defining income differently, imposing different tax rates, and allowing different tax preferences. Ideally, the most comprehensive approach should be reforming the income tax to eliminate the AMT. But considering the reality under the huge pressure of potential federal revenue loss, Legislature chose the AMT indexing for inflation in ATRA. As Republican Senator Orrin Hatch of Utah told ABC News, “Far from perfect, this legislation does include a permanent fix to the ever-growing the AMT, giving millions of hard-working, middle-class families certainty that the nightmare of this tax has finally come to an end.”[113] As long as the individual AMT exists, the future tax reform is still foreseeable.

[1]126 Stat 2313 (2013).

[2]Id.

[3]Luke Landes, Fiscal Cliff Bill Passes: American Taxpayer Relief Act of 2012 (H.R. 8), http://www.consumerismcommentary.com/fiscal-cliff-bill-american-taxpayer… (last visited April 1, 2013).

[4]Congressional Budget Office, Economic and Budget Issue Brief: The Individual Alternative Minimum Tax, 1 (2010); Katherine Lim & Jeff Rohaly, The Individual Alternative Minimum Tax: Historical Data and Projections, Urban-Brookings Tax Policy Center, 1, 3 (2009).

[5]Id.

[6]Congressional Budget Office, supra note 4, at 2; I.R.S., supra note 7 (“Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax.”);Burman et al., supra note 7, at 1.

[7]I.R.S. Topic 556 – Alternative Minimum Tax, http://www.irs.gov/taxtopics/tc556.html (last visited April 1, 2013); Lim & Rohaly, supra note 4, at3; Leonard E. Burman et al., The Individual Alternative Minimum Tax (AMT): 12 Facts and Projections, Urban-Brookings Tax Policy Center, 1 (2008).

[8]Lim & Rohaly, supra note 4, at3.

[9]Leonard E. Burman et al., Historical Features of Individual Minimum Taxes, Urban-Brookings Tax Policy Center, 1, 2 (2011).

[10]Greg Leiserson & Jeff Rohaly, What Is Responsible for the Growth of the AMT?, Urban-Brookings Tax Policy Center, 1 (2007).

[11]Burman et al., supra note 9, at 1.

[12]The Joint Committee on Taxation, Present Law and Background Relating to the Individual Alternative Minimum Tax, JCX-10-07 (2007); Lim & Rohaly, supra note 4, at5-7.

[13]Burman et al., supra note 7, at 1.

[14]Aggregate AMT Projections 2011-2022, Urban-Brookings Tax Policy Center (2011).

[15]Black’s Law Dictionary, 1, 1594 (9th ed. 2009) (under the definition of “Tax”).

[16]1 MertensLaw of Fed.Income Tax’n§ 4:39 (“The alternative minimum tax is a tax upon income.”).

[17]Congressional Budget Office, supra note 4, at 2.

[18]Id. at 2; I.R.S., supra note 7;Burman et al., supra note 7, at 1.

[19]Lim & Rohaly, supra note 4, at3.

[20]I.R.S., supra note 7.

[21]I.R.S., supra note 7 (stating that the AMT exemption amount is set by law).

[22]Id. (stating that AMT rate is set by law and the rates in effect for the regular tax are used for capital gains and certain dividends).

[23]I.R.C. § 59; Leonard E. Burman & David Weiner, Suppose They Took the AM Out of the AMT?,Urban-Brookings Tax Policy Center, 1, 6 (2007) (“After determining pre-credit tentative AMT liability above, taxpayers subtract foreign tax credits (FTC) to calculate tentative AMT liability.”).

[24]Lim & Rohaly, supra note 4, at6.

[25]Leonard E. Burman et al., The Expanding Reach of the Individual Alternative Minimum Tax, Urban-Brookings Tax Policy Center, 1, 7 (2005).

[26]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 86.

[27]Burman et al., supra note 25, at 8 (“For example, by taxing interest income from bonds that state and local governments issue to support private activities like shopping centers or stadiums, income that is exempt from the regular income tax, the AMT reduces the subsidy afforded such investments.”).

[28]Tom Petska & Mike Strudler, Income, Taxes, And Tax Progressivity: An Examination Of Recent Trends In The Distribution Of Individual Income And Taxes, Statistics of Income Division, I.R.S., http://www.irs.gov/pub/irs-soi/indincdi.pdf (last visited April 1, 2013).

[29]Lim & Rohaly, supra note 4, at3; Burman et al., supra note 7, at 2; Leiserson & Rohaly, supra note 10, at 1.

[30]Congressional Budget Office, supra note 4, at 1.

[31]Leiserson & Rohaly, supra note 10, at 3; Gabriel Aitsebaomo, The Individual Alternative Minimum Tax and the Intersection of the Bush Tax Cuts: A Proposal for Permanent Reform, 23 Akron Tax J. 109, 134 (2008).

[32]Congressional Budget Office, supra note 4, at 1.

[33]Leiserson & Rohaly, supra note 10, at 3.

[34]Landes, supranote 3.

[35]Burman et al., supra note 25, at 11.

[36]Congressional Budget Office, supra note 4, at 5-7; Lim & Rohaly, supra note 4, at6; Burman et al., supra note 7, at 2.

[37]Lim & Rohaly, supra note 4, at6.

[38]Burman et al., supra note 25, at 9.

[39]Burman et al., supra note 25, at 9 (2005).

[40]Lim & Rohaly, supra note 4, at6, n.10.

[41]Petska & Strudler, supra note 28.

[42]Burman et al., supra note 25, at 7.

[43]Congressional Budget Office, supra note 4, at 7.

[44]Burman et al., supra note 25, at 7.

[45]Id. at 7-8.

[46]Burman et al., supra note 7, at 2.

[47]I.R.C. §§ 55, 56, 151; Burman et al., supra note 7, at 2.

[48]I.R.C. §§ 55(d)(1), 56; Rev. Proc. 2013-15, 2013-5 I.R.B. 444.

[49]Lim & Rohaly, supra note 4, at7.

[50]I.R.C. §§ 55, 56, 163, 213; Congressional Budget Office, supra note 4, at 8.

[51]Burman et al., supra note 25, at 8.

[52]Lim & Rohaly, supra note 4, at8-9.

[53]Lim & Rohaly, supra note 4, at10.

[54]Burman et al., supra note 7, at 2 (“Marginal tax rates affect the incentive to work, save, and comply with the tax system.”); Congressional Budget Office, supra note 4, at 7-8 (“The AMT can subject taxpayers to higher marginal tax rates—which, in turn, influence decisions about how much to work and save, potentially reducing economic efficiency.”).

[55]Congressional Budget Office, supra note 4, at 7.

[56]Id. at 8.

[57]Burman et al., supra note 25, at 11.

[58]Burman et al., supra note 7, at 2; Burman et al., supra note 25, at 11.

[59]See, e.g.,I.R.S., supra note 7 (“If you are filing the Form 1040, you may use the AMT Assistant for Individuals, which is an electronic version of the AMT worksheet available on the IRS website.”).

[60]Congressional Budget Office, supra note 4, at 9.

[61]Congressional Budget Office, supra note 4, at 3.

[62]126 Stat 2313 (2013); Landes, supranote 3.

[63]Burman & Weiner, supra note 23, at Table 2 (listing the regular tax and the AMT provisions for comparison and contrast).

[64]126 Stat 2313 (2013); Landes, supranote 3.

[65]Lim & Rohaly, supra note 4, at6.

[66]Urban-Brookings Tax Policy Center, supra note 14.

[67]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87.

[68]Burman et al., supra note 7, at 2 (“The AMT is encroaching on the middle class.”);2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87 (“Relative to the current system, many middle-income taxpayers would face higher marginal tax rates, while lower- and very high-income taxpayers would face lower marginal tax rates.”).

[69]I.R.S., supra note 7 (“The AMT is the excess of the tentative minimum tax over the regular tax.”); Congressional Budget Office, supra note 4, at 2 (stating that the AMT is the addition to regular income taxes, and its amount equals to the excess of the AMT liability over the regular tax liability after appropriate credits).

[70]Burman & Weiner, supra note 23, at 17.

[71]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87.

[72]Id.

[73]Congressional Budget Office, supra note 4, at 9.

[74]Id. at 10.

[75]Congressional Budget Office, supra note 4, at 10.

[76]Aitsebaomo, supra note 31, at 141.

[77]2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 85-87.

[78]Congressional Budget Office, supra note 4, at 10 (“If the exemption amounts in effect for 2009 were made permanent and indexed for inflation after 2009, along with the AMT’s brackets and the threshold at which the exemption phased out, 5 million taxpayers would pay the AMT in 2010—rather than the 27 million projected to pay under current law—and revenues would be about $450 billion lower from 2010 to 2019 than they would be otherwise.”).

[79]Id.

[80]Id. (In January of 2010, The CBO estimates that this option would decrease the number of people affected by the AMT from 27 million to 2 million in 2010).

[81]Id.

[82]Lim & Rohaly, supra note 4, at3 (“Absent another temporary fix or other change in law, the tax cuts and lack of indexation will combine to push more than 27 million taxpayers onto the AMT in 2010.”).

[83]Congressional Budget Office, supra note 4, at 10 (The CBO estimating a revenue cost of more than $620 billion from 2010 to 2019 for the AMT elimination). See also Urban-Brookings Tax Policy Center, supra note 14(showing that the cost of repealing the AMT would be over $2.7 trillion between 2011 and 2022 after the permanent extension of Bush tax cuts by the ATRA).

[84]Id. (“To provide some relief to taxpayers, lawmakers could allow them to use the standard deduction, personal exemptions, and deductions for state and local taxes (as they are used under the regular tax) when computing their tax liability under the AMT. The standard deduction and personal exemptions are both indexed for inflation, and state and local taxes also generally rise with prices.”).

[85]Burman et al., supra note 25, at 7-8.

[86]I.R.C. §§ 55(d)(1), 56; Rev. Proc. 2013-15, 2013-5 I.R.B. 444; 2005 Report of the President’s Advisory Panel on Federal Tax Reform, Chapter Five-Seven, supra note 26, at 87 (“The phase-out of the AMT exemption at higher income levels actually creates two additional marginal tax rates – and a resulting tax rate schedule of 26, 32.5, 35, and 28 percent.”).

[87]Congressional Budget Office, supra note 4, at 8.

[88]Id.

[89]Burman et al., supra note 25, at 11.

[90]Lim & Rohaly, supra note 4, at6, n.10.

[91]Burman et al., supra note 7, at 3 (“Paying for reform or repeal is a key issue”).

[92]Congressional Budget Office, supra note 4, at 1.

[93]Id. at 9.

[94]Id.

[95]Id. at 1.

[96]Burman et al., supra note 25, at 11.

[97]Aitsebaomo, supra note 31, at 139 (“Given that the major pitfall of the AMT is its increasing proliferation into the unintended returns of middle and upper middle class taxpayers, a permanent remedy to this unintended spread should be to exempt taxpayers with AGI of $250,000 or less from the AMT altogether. The implementation of such exemption would help align the AMT closer to its original purpose and policy objective of ensuring that wealthy individuals (not middle and upper middle class taxpayers) would be subject to the AMT.”); Burman et al., supra note 25, at 13.

[98]Burman et al., supra note 25, at 13 (proposing increasing the 28 percent AMT bracket to 33.5 percent to offset the revenue loss because it would only increase taxes for those with incomes above the AMT exemption phase-out).

[99]Burman et al., supra note 25, at 13; Burman & Weiner, supra note 23, at 15 (“If capital gains are taxed at the same 37 percent rate as other income, the option could raise $67 billion that could be applied to deficit reduction.”).

[100]Burman et al., supra note 25, at 11-13.

[101]Id.at 11.

[102]Id. at 12.

[103]Id.

[104]Id. at 12-13.

[105]Leonard E. Burman & Greg Leiserson, A Simple, Progressive Replacement for the AMT, Tax Analysts Viewpoints, 945 (2007) (proposing the 4 percent add-on tax of AGI above certain amount that will be indexed for inflation.).

[106]Burman et al., supra note 9, at 1(illustrating 4 add-on tax related legislations in the early stage of the AMT as 1969 TRA, 1976 TRA, 1978 Revenue Act, and 1982 TEFRA).

[107]Burman et al., supra note 25, at 14.

[108]Id. at 8 (“For example, by taxing interest income from bonds that state and local governments issue to support private activities like shopping centers or stadiums, income that is exempt from the regular income tax, the AMT reduces the subsidy afforded such investments.”).

[109]Congressional Budget Office, supra note 4, at 10.

[110]Burman et al., supra note 25, at 8.

[111]Congressional Budget Office, supra note 4, at 10.

[112]Id.; Burman et al., supra note 25, at 14, n.13 (stating that eliminating the regular income tax deduction for state and local taxes would more than pay for repealing the AMT).

[113]Dan Kadlec, At Long Last, a Permanent Patch for a Dreaded Tax Read, Time Business & Money (Jan. 03, 2013), http://www.consumerismcommentary.com/fiscal-cliff-bill-american-taxpayer-relief/.

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Do You Need Employment Practices Liability Insurance?

McBrayer

According to the 2012-2013 Edition of Jury Award Trends and Statistics, the national median award for employment practice claims in 2011 was $325,000, up from $172,500 in 2010. This figure confirms what many in the employment law community already know to be true, that the number of employment practices claims has increased, and with that increase there has been an increase in the size of awards over the years as well.  There is no reason to believe that this trend will not continue, and no business should believe itself to be immune from employment practice claims.

Every business of size should seriously consider carrying Employment Practices Liability Insurance (“EPLI”) to protect itself from employment-related claims, which can encompass everything from sexual harassment, to wrongful termination, to defamation.  Although a business’s first line of defense should always be thorough up-to-date and well written HR procedures and policies, EPLI coverage can be a valuable lifeline when an expensive and lengthy lawsuit is looming and it just may save your business from financial ruin.

Costs of EPLI policies vary greatly; the price is generally based on your business type, size and associated risk of employment practices.  Insurance companies will normally want to review copies of the HR forms, policies, and manuals to assess risk probability.  If you seeking EPLI, there are some things you should be looking for in a policy. These include, but are not limited to,

  • A broad definition of “insured,” so that all directors, officers, and employees are covered;
  • A broad definition of “claim,” so that criminal, civil, and administrative proceedings are covered, as well as arbitrations and investigations;
  • A practical deductible that can be met if the insurance is needed;
  • A carve-out for claims under federal statutes; if an employee brings a whistleblower claim for exercising rights pursuant to certain statutes such as COBRA, ERISA, or OSHA, you will likely want these claims to be covered by the policy; and
  • A choice of counsel provision so that the business can utilize an employment attorney that is familiar with the business, locality, governing law, and particular claim.

As an added bonus, some EPLI insurers even offer additional services free to their customers, such as a call-in line for general employment questions or sample employee handbooks. EPLI can offer peace of mind and valuable protection in the increasingly litigious employment law arena.

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A Reminder About Pollution Legal Liability Coverage

GT Law

A recent decision from the federal district court in Pittsburgh highlights the importance of carrying environmental insurance, especially in connection with properties or facilities with an increased potential for environmental legacy liabilities. Many property owners believe that comprehensive general liability (CGL) policies adequately protect against environmental liabilities. However, standard CGL policies will typically only cover certain, very limited environmental liabilities and are by no means an effective tool for comprehensive environmental protection. Pollution legal liability (PLL) policies, designed to respond to contamination found on properties, are a far more useful and comprehensive mechanism to mitigate potential liability stemming from current or past ownership of environmentally sensitive properties.

Wiseman Oil v. TIG Insurance, 2013 U.S. Dist. LEXIS 14747 (W.D. Pa. Jan. 22, 2013), report and recommendation adopted, 2013 U.S. Dist. LEXIS 37501 (W.D. Pa. Mar. 19, 2013), involved a claim by Wiseman for coverage and for defense under Wiseman’s CGL policy for underlying claims against Wiseman under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

The CERCLA claims against Wiseman arose out of environmental contamination at property formerly owned by Wiseman. TIG asserted that it owed no such defense or coverage-related duties to Wiseman. Among other arguments, TIG asserted that the CGL policy contained an exclusion for bodily injury orproperty damage claims arising out of the release of hazardous materials “into or upon land.” However, the exclusion contained an exception to releases that were considered “sudden and accidental.” “Sudden and accidental” was not defined under the policy. TIG asserted that the CERCLA claims brought against Wiseman did not allege any sudden or accidental event and thus it had no duty to defend or otherwise provide coverage.

The case was assigned to Chief Magistrate Judge Lisa Pupo Lenihan for a report and recommendation. She clarified that TIG’s duty to defend did not hinge on whether the underlying complaint “expressly alleges specific factual predicates clearly within the applicable policy terms.” Rather, the duty to defend arose when a fair reading of the underlying complaint did not “expressly rule out the possibility of insurance coverage under the applicable policy terms.” Pupo Lenihan stated further that TIG could not reasonably conclude from the face of the underlying complaint that the allegations “precluded or negated any potential applicability” of the “sudden and accidental” qualifiers.

Based on the foregoing, Pupo Lenihan held that the language of the underlying complaint was a sufficient basis to deny TIG’s asserted grounds for summary judgment and to grant Wiseman’s motion for partial summary judgment on the question of TIG’s duty to defend.

Last month, U.S. District Judge Joy Flowers Conti of the Western District of Pennsylvania adopted Pupo Lenihan’s report and recommendation. (See 2013 U.S. Dist. LEXIS 37501 (W.D. Pa. Mar. 19, 2013).)

Although in this case Wiseman succeeded in thwarting its insurer’s summary judgment motion on the dutyto defend, in order for Wiseman ultimately to obtain coverage for its claim it will face a significant burden in demonstrating that the “sudden and accidental” exception to the policy exclusion applies. Given that the property was likely contaminated over a long period of time rather than in a single abrupt, catastrophic event, actually obtaining coverage under the policy will require a factually intensive showing that the gradual contamination was sufficiently like the abrupt event to qualify as “sudden and accidental.” In short, the case highlights the difficulty of obtaining coverage for environmental liabilities under a CGL policy.

That controversy could have been avoided if the plaintiffs had considered other insurance products that are better suited to cover this type of pollution-related risk. This is especially true of properties on which manufacturing or other environmentally sensitive operations may have occurred.

Generally speaking, PLL insurance policies can help landowners mitigate known and unknown risks associated with the acquisition and divesture of real property, and offer more robust protections for environmental risks than the CGL policy that the plaintiffs sought to rely on in the Wiseman case. In situations comparable to the facts at issue in Wiseman, a PLL policy would have been a more appropriate coverage and likely would have negated the need to bring a lawsuit to enforce the policy.

PLL coverage is the most common type of insurance to address potential environmental liabilities associated with real property.

It is generally used to address cleanup costs for environmental contamination, third-party claims for bodily injury or property damage arising from environmental contamination (both pre-existing or first occurring during the policy term), and business interruption losses resulting from a covered environmental condition or claim.

Among other things, PLL policies can also provide for protection against natural resource damages, risk stemming from non-owned disposal sites, and legal defense costs associated with all of the foregoing. PLL policies cover unknown pre-existing contamination discovered after the policy inception, as well as new conditions that occur after the inception date.

Known conditions are included under most PLL policies unless they are specifically scheduled and excluded from coverage under the policy. Capital improvement exclusions are quite common and would exclude costs of remediating known conditions, such as urban fill material, in connection with redevelopment of a property.

However, costs arising in connection with government claims stemming from known conditions can still be covered under a typical PLL policy. CGL policies will typically exclude coverage for underground storage tanks, fuel or chemical storage, waste storage and business interruption, which can be included under a PLL policy. It is also important to note that off-site disposal sites or landfills (often called “non-owned disposal sites” in PLL policies) can be scheduled onto policies. If liability arises at the disposal facility and liability attaches to your client as a generator, the PLL policy would kick in.

PLL policies also can cover re-opener type situations. In many states, parties that have received no-furtheraction determinations after cleaning up a contaminated property may be audited, and the cleanup decision re-opened to require further investigation or remediation. This is likely to occur in situations where the remediation standards governing a particular contaminant are revised, or where new data become available at a later date suggesting that remediation was not properly completed. With a PLL policy in place, costs associated with a re-opener become less of an uncertainty. PLL policies also entitle the policyholder to legal defense of any of the above situations.

PLL policies are claims-made-and-reported policies, meaning that claims must be made during the term of the policy. So, for example, Wiseman would have had to have an existing PLL policy covering the property to avail itself of that policy’s protections when the underlying CERCLA claim arose. It would not have been enough to have had the policy during ownership of the property.

Underwriting on PLL policies is typically conducted using readily available environmental documents, including Phase I and Phase II environmental site assessments, as well as other environmental reports, and agreement documents.

Wiseman offers an important lesson, especially to those that own or operate properties that have current or former facilities with environmentally sensitive operations: CGL policies are not an effective tool to manage environmental liability risks. Although not perfect, PLL policies are a more appropriate type of coverage to mitigate unknown risks associated with present and legacy property ownership. PLL policies can offer particular value to address the residual risk after a cleanup.

Kyle R. Johnson also contributed to this article.

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2011 SuperConference Change, Grow, Innovate – From Legal Advisor to Strategic Partner May 23- 24 Chicago, IL

The National Law Review is a proud sponsor of Inside Counsel’s 11th Annual SuperConference Monday May 23- Tuesday, May 24, 2011 at the Fairmont Hotel in Chicago, IL. 

Change, Grow, Innovate – From Legal Advisor to Strategic Partner

InsideCounsel’s 11th Annual SuperConference is designed to provide senior legal professionals insights, ideas and solutions to help them meet their growing responsibilities and evolving needs. Developed by in-house counsel, for in-house counsel, SuperConference will provide you innovative resolutions essential to addressing your department’s business and legal needs.

Conference Overview

• Research-based, market-driven content addressing the evolving role and needs of in-house counsel

• 19 interactive educational sessions with real-world case studies

• Unparalleled networking opportunities with senior level corporate counsel from Fortune-500 companies

• The industry’s best-valued corporate legal conference — Earn up to 12 CLE Credits for less than $38 per credit*

*Based on in-house early bird rate of $449

Keynote Speakers

Opening Keynote – Former White House Deputy Counsel Daniel J. Meltzer.

Keynote Panel: Managing Up: Ways on Managing the Board, CEO & CFO – Featuring Kraft Foods’ GC Marc Firestone and MillerCoors’ CLO Karen Ripley.

Keynote Panel: Corporate Governance – Featuring Scripps Network’s CLO A.B. Cruz, III, Corn Products’ GC Mary Ann Hynes, and DLA Piper’s Anastasia Kelly.

$100 Discount off registration before April 1st with Promo Code WBNLR1 To Register and for More Info.  Please Click Here:

“The Power of Professionalism:” An Attorney’s Take on the Nexus Between Professionalism and Personal Success

The National Law Review a top volume legal news website

Professionalism serves as a constant in the legal profession but its potential benefits remain untapped. Among practicing attorneys, professionalism vacillates in between a theoretical concept and the more mundane aspect of working in a law firm environment. We study the topic in law school, abide by the Model Rules of Professional Conduct in our careers, are warned by our bosses of the consequences of acting in a manner not deemed professional. But can embracing professionalism elevate us in our own careers? Can professionalism uplift the legal community as a whole? Can professionalism serve as an omnipotent guidepost to attorneys across the spectrum?

Gregory Gallopoulos, Senior Vice President, General Counsel and Corporate Secretary for General Dynamics and selected keynote speaker for the upcoming 13th Annual SuperConference, seems to thinks so. In his speech entitled “The Power of Professionalism” that addresses in-house attorneys across the country at the SuperConference, Mr. Gallopoulos plans to explore the nexus between professionalism and personal success. In doing so, he simultaneously reframes professionalism from an abstract notion to a philosophy encompassing the hallmarks of law, as well as brings a sense of vigor back to the legal field.

In an interview with me regarding his speech, Mr. Gallopoulos explicated on professionalism, its upsides and consequences and how he envisions the legal industry. He identified key attributes of a professional in the legal industry as one who renders objective and independent counsel, free of barriers. The professional in her legal capacity is one with a mastery of legal knowledge and an adherence to ethical standards that are more rigorous than the norms.

In his analysis of how an attorney can embrace professionalism. Mr. Gallopoulos stressed the commerce-dominated world the attorney inhabits. He theorized that the legal professional must act intentionally in the interest of the law over monetary and ancillary factors. Moreover, the legal professional must constantly ensure her own independence– while attorneys owe a duty of loyalty to their clients, they cannot be dominated by their clients’ interests. Rather, they must strive to be objective and render advice based on the situational circumstances.

If the attorney is successful in doing so, she will enact the role of a professional as opposed to just an employee. Mr. Gallopoulos distinguished the two based on the professional’s obligations to the ethical standards of the profession that transcend employee duties. For instance, the professional’s advice cannot be tied to the employer-employee relationship if it is truly objective and independent. Instead, the lawyer’s obligation to the legal system supersedes that to his workplace.

Mr. Gallopoulos argued that the benefits are twofold in that attorneys who conduct themselves professionally empower themselves in the workplace. By providing objective and independent counsel and assisting others, an attorney can gain stature that leaves her qualified, in turn safeguarding her job security. Secondly, the attorney can also earn personal success when acting in a professional manner. Mr. Gallopoulos stressed the personal satisfaction that comes from contributing to the profession and earning the approval of one’s peers.  He also established the common sense argument that the sought-after attorney is one who has impeccable judgment– that which is independent and objective.

But there are difficulties associated with acting in a professional capacity and Mr. Gallopoulos acknowledged this. The reality is that the world may not be prepared to hear independent and objective advice, regardless of whether these attributes may be the essence of the profession. However, Mr. Gallopoulos suggested that the competent lawyer can provide counsel to her clients with a sense of empathy that displays a commitment to assisting the client.

The question of whether professionalism serves a purpose in the contemporary legal setting still remains.  Mr. Gallopoulos readily pointed out that though it is far too easy to focus on pension plans and billable hours, the law is more than a means of earning livelihood. In his interactions with young attorneys, many of whom appear unhappy practicing law, he has noticed a failure to make professionalism a priority which would have provided them with a sense of contentment. In today’s evolving legal profession which has been affected by the failing economy, he urges attorneys to take the road less travelled and maintain professionalism, thereby contributing to the legal profession as a whole. In his portrait of professionalism, he depicted a structured legal profession that will flourish when its own thinking and methodology is shared and promoted by attorneys alike.

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“Innovation Meets Insight:” An Intellectual Property Expert’s Take on the Revised America Invents Act (AIA)

The National Law Review a top volume legal news website

Speaking of the latest developments in the legal field, legislation for the Leahy-Smith American America Invents Act (“AIA” or “Act”) was signed by President Obama and passed in September of 2011 and has gone into full implementation this past March. The Act massively overhauls U.S. patent laws and sets forth the most comprehensive, sweeping changes to the U.S. patent system since 1836.

In an exciting era for intellectual property, David Kappos, one of the world’s leading experts on intellectual property law and a partner at Cravath, Swaine & Moore LLP, recently sat down with me to discuss the revisions to the AIA and their implications. Mr. Kappos ended his term as director of the U.S. Patent and Trademark Office (“USPTO”) this past January, where he acted as advisor to the president on intellectual property policy matters. He will serve as keynote speaker for the upcoming 13th Annual SuperConference, where he will present the new-and-improved AIA to an audience of senior-level legal professionals. In doing so, Mr. Kappos will introduce a revolutionary patent system in which “innovation meets insight.”

However, the AIA almost did not materialize due to its largely stagnated history. Initial calls for changes to the patent system began in the 1980s, but negotiations for the actual legislation did not start until 2001. Mr. Kappos was in private practice at that time and helped with the negotiations. It took nearly five session of Congress for the legislation to finally gain approval.

The ensuing legislation affects many tenants of the patent system. Among the most prominent amendments to the Act is the U.S.’s conversion from a first-to-invent system to a first-to-file system, resulting in the first inventor to file an application with the USPTO for the claimed invention to be granted the patent. In addition, improvements have been made to the post-grant challenge system, resulting in the ability of an inventor to appeal to the USPTO to reconsider any issues related to granting approval of a patent.

According to Mr. Kappos, the AIA espouses a modern, pro-innovation outlook that has “leapfrogged” legislation. The patent system tends to treat innovation as highly valuable and offers incentives. For example, the U.S. now retains an interest-based system for enabling third parties to participate in the patent process.

The Act’s pervasiveness has led to progress and evolution in numerous industries. Mr. Kappos identified the life sciences and pharmaceutical sectors of the business community, which among other fields, have been granted supplemental examination, thus enabling patent owners to request timely additional examination of their inventions by the USPTO for further consideration. The finance and banking industry is expected to progress, due to the covered business method which permits parties to request a post-grant review hearing, providing patent owners an alternative to litigation for challenging a decision related to a patent. For small inventors, a new category has been carved into the Act for 75% off of fees owed to the USPTO associated with obtaining a patent.

Mr. Kappos believes that the legislation will overall bring more clarity to the U.S. innovation system. He characterized the AIA as a “more streamlined and effective way to perfect your innovations.” Any person or business seeking a patent will find a more clear, efficient and cost-effective arrangement in the AIA.

As far as the legal community catching up to the legislation, Mr. Kappos points out that there are numerous changes in the law and recommends attorneys read about the Act and focus on the modifications. The revisions are also great fodder for exchanging ideas and asking questions to other members of the IP field because there are multiple angles to look at.

Overall, Mr. Kappos has said that progress in terms of innovation is amazing and things that were unimaginable five to ten years ago are now possible due to invention and technology. He is optimistic about the future and the ability of technology to change the equation. In his own words,  “Through innovation we — humanity — has the ability to meet and overcome our most critical challenges. And when you talk about innovation, you are talking about invention and insight.  And following that thread, there is only one system of laws that protects invention, incenting it and encouraging creative people to spend their resources on it.  That one system of laws: the patent system.”

 

The “Reasonable” Perils of Data Security Law

Your House Counsel Logo

The following is drawn from the materials to be presented at the 17th Annual America’s Claims Event 2013 conference in the “Cyber-Liability and Data Loss Claims: A Case Study from Notice of Occurrence Through Conclusion” session on June 20, 2013 in Austin, Texas.

NEGLIGENCE. “The omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do.”1

“When we think about data breaches, we often worry about malicious minded computer hackers exploiting software flaws, or perhaps Internet criminals seeking to enrich themselves at our expense. But the truth is that errors and negligence within the workplace are a significant cause of data breaches that compromise sensitive personal information.”2

According to a recent privacy institute study by the Ponemon Institute, only 8% of the surveyed data breach incidents were due to external cyber attack, while 22% could be attributed in part to malicious employees or other insiders. Loss of laptops or other mobile devices containing sensitive data topped the survey, while mishandling of data “at rest” or “in motion” were also major contributors.3 A later study showed that 39% of surveyed organizations identified negligence as the root cause of their data breaches, while 37% were attributed to malicious or criminal attack.4

Negligent document disposal is a clear source of preventable negligence. On December 7, 2012, at least eight garbage bags were left unattended on a dirt road in Hudson, Florida, containing credit applications to Rock Bottom Auto Sales with names, driver’s license information, and Social Security numbers. Three days later, in Pittsburgh, Pennsylvania, job placement documents were found in a dumpster from the West Pittsburgh Partnership, all containing names and SSN’s.5 For that matter, the Internal Revenue Service in 2008 was found to have disposed of taxpayer documents in regular waste containers and dumpsters, and that a follow-up investigation revealed that IRS officials failed to consistently verify whether contract employees who have access to taxpayer documents had passed background checks.6

Convincing users to back up their laptops has been difficult enough in practice; getting them to encrypt them voluntarily is much more daunting a task. A 2010 Ponemon Institute study, admittedly biased towards large corporations, concluded that of those surveyed typically 46% of the laptops held confidential data, while only 30% had their contents encrypted. A startlingly low 29% of the laptops had backup/imaging software installed, which implies that more than two thirds of all laptops if lost or stolen would leave no backup of work in progress.7

Even though more devices are coming to market with built-in encryption capabilities, these features may simply be left switched off by their users despite the fact that lost laptops, tablets, smartphones, USB “thumb” drives and other portable devices with unencrypted contents continue to provide a wealth of information to identity thieves.

On March 22, 2013, a laptop used by clinicians at the University of Mississippi Medical Center was discovered to be missing. It contained patient names, social security numbers, addresses, diagnoses, birthdates and other personal information, protected only by a password.8

On January 8, 2013, an unencrypted flash drive was stolen from a Hephzibah Georgia middle school teacher’s car, containing student SSN’s and other information.9 TD Bank had two unencrypted backup tapes with customer and their dependent names, SSN’s, addresses, account, credit and debit card numbers go missing while being transported between two TD Bank offices in March 2012, but public notice was not made until March 4, 2013.10

An examination of reported data security incidents with potential or actual data privacy breaches reveals that the scope of what is deemed “reasonable” ranges from ordinary care in the disposal of documents containing personally identifiable information (“PII”) and personal health information (“PHI”), to sophisticated data encryption, access authentication and other highly technical data security practices that the “reasonably prudent” persons, companies and governmental agencies are now expected to employ to protect the personal data that they have collected.

On October 10, 2012, the South Carolina Department of Revenue was informed of a potential cyber attack involving the personal information of taxpayers.11 The origin of the attack was traced to a state Department of Revenue employee who clicked on an embedded link in a “salacious” email and compromised his computer.12 The subsequent investigation revealed that “outdated computers and security flaws at the state’s Department of Revenue allowed international hackers to steal 3.8 million tax records”, according to Governor Nikki R. Haley. Apparently South Carolina did not encrypt Social Security Numbers, and once the outer perimeter security was compromised the hackers were able to log in as tax officials and read the data.13

Users of online services will routinely provide personal information as a matter of course to shop or obtain other services, all of which gets recorded and tracked. Data privacy laws are intended to promote and enforce a number of fair information practices to give individuals the ability to find out what personal information is being kept and by whom, opportunities to correct or remove such information, assurances that reasonable measures will be undertaken to protect such information from disclosure and to properly dispose of such information when appropriate, and may include remedial measures to be undertaken in the event of a data breach.

In the United States, there is no single comprehensive statute for data privacy laws.14 Instead, a number of sector-specific federal laws have been enacted to address the particular sensitivity of information generally recorded by companies in that market sector, and forty six states have enacted data breach notification statutes. If there is a data breach, you may be liable under state law to provide notice to those affected.15 In some jurisdictions, you may be required to provide notice to all consumer credit reporting agencies as well.16

The financial exposure to a data breach by a company may be insurable to some degree using various forms of “cyber liability” insurance, which expand and supplement many forms of more standard insurance coverages underwritten today. Policy premiums for such policies, however, are dependent upon the extent of data security practices implemented.

Conducting a data security risk assessment before encountering a data breach should identify measures that can be taken at the corporate level to provide additional protection not only to sensitive data, but also mitigate the consequences of a security incident where company data is disclosed, lost or stolen. Encrypted data in many cases may not be considered “exposed” for purposes of mandated notice to affected individuals.

In the event of a data security incident, please consider obtaining a data forensic team to not only identify the source and extent of the breach, but to preserve evidence in the event that a potential prosecution may be possible.

We will discuss a data breach case study from inception through enforcement, resolution and potential mitigation through cyber liability insurance at our presentation at ACE 2013. We hope to see you then.

1 BLACK’S LAW DICTIONARY 1184 (4th ed. 1968).

2 Privacy Rights Clearinghouse, Are the Businesses You Frequent or Work For Exposing You to an Identity Thief?, (Mar. 6, 2012), https://www.privacyrights.org/workplace-identity-theft-quiz-alert-2012

3 The Human Factor in Data Protection, 3 PONEMON INSTITUTE LLC (January 2012), available athttp://www.ponemon.org/local/upload/file/The_Human_Factor_in_data_Protection_WP_FINAL.pdf.

4 2011 Cost of Data Breach Study: United States, 7 PONEMON INSTITUTE LLC (March 2012),available at http://   www.ponemon.org/local/upload/file/2011_US_CODB_FINAL_5.pdf.

5 http://www.privacyrights.org/data-breach/new (check Breach Type “PHYS”, Organization Type “BSR” and Year “2012”).

6 Increased Management Oversight of the Sensitive but Unclassified Waste Disposal Process Is Needed to Prevent Inadvertent Disclosure of Personally Identifiable Information, TREASUR INSPECTOR GENERAL FOR TAX ADMINISTRATION (May 8, 2009), http://www.treas.gov/tigta/auditreports/2009reports/200930059fr.pdf.

7 The Billion Dollar Lost Laptop Problem 6 PONEMON INSTITUTE LLC (Sept. 30, 2010), availableat http://newsroom.intel.com/servlet/JiveServlet/download/1544-8-3132/The_Billion_Dollar_Lost_Laptop_Study.pdf.

8 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “EDU” and Year “2013”).

9 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “EDU” and Year “2013”).

10 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “BSF” and Year “2013”).

11 Kara Durrette, SC Department of Revenue hacked; millions of SC residents affected, http://www.midlandsconnect.com/sports/story.aspx?id=817902#.UVyOdheYu7w (posted Oct. 26, 2012, updated Oct. 27, 2012).

12 Matthew J. Schwartz, How South Carolina Failed To Spot Hack Attack, INFORMATION WEEK, Nov. 26, 2012, http://www.informationweek.com/security/attacks/how-south-carolina-failed-to-spot-hack-a/240142543.

13 Robbie Brown, South Carolina Offers Details of Data Theft and Warns It Could Happen Elsewhere, N.Y. TIMES, Nov. 20, 2012, available at http://www.nytimes.com/2012/11/21/us/more-details-of-southcarolina-hacking-episode.html?_r=0.

14 PETER P. SWIRE & KENESA AHMAD, FOUNDATIONS OF INFORMATION PRIVACY AND DATA PROTECTION 41 (International Association of Privacy Professionals) (2012).

15 NYC Administrative Code § 20-117(c) (2013); NY CLS State Technology Law § 208(2) (NY state residents only); 73 Pa. Stat. § 2303 (PA residents).

16 73 Pa. Stat. § 2305; NY CLS State Technology Law §208(7)(b).

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Price Transparency and the Legal Marketplace

consumer_colorlogo (1)

My teenage children don’t know a world without the internet; a place where the sum of all human wisdom is a few clicks away.
Or where it’s really easy to research and buy the latest videogame.

 

Aside from the democratization of information and sharing enabled by the internet, the biggest impact of the web in most people’s lives is how it has transformed the consumer experience.  It has done so in two important ways:  by creating unprecedented levels of transparency and removing friction from the purchase process.   In nearly every industry, a wealth of information is available to consumers prior to making a purchase:  what the options are, differences between products, user feedback, and price transparency.  With full information about products, including price, the internet makes comparison shopping easy.

 

And with all of that information, purchasing is smoothed out as well.  Web services continue to refine the art of removing friction from the purchase process.  Amazon aggressively knocked down reasons to purchasing goods in brick-and-mortar stores.  Uber removed the transactional choke points from cab rides.  iTunes made it easy to buy music on an a la carte basis.  Much of the consumer internet continues to iterate and expand on the winning concept of blending ever-higher levels of information with ever-smoother transaction processing.

 

This online purchasing revolution has also reached beyond everyday consumer goods and services.  Buying insurance, trading stocks, even government licensing – all have been streamlined online.

 

But there’s one notable area that has remained largely impervious: legal services.  Despite some increases in transparency on lawyer backgrounds (Avvo) and do-it-yourself online legal forms (LegalZoom), the legal marketplace has seen nothing approaching the change in consumer empowerment and ease of transacting experienced in virtually all other industries.
It’s not as if legal services is a tiny economic niche.  The market for legal services in the U.S. is worth over $250 billion per year, and nearly 40% of that is made up of consumer legal spending.  Rather, a mixture of byzantine regulation, barriers to market entry, and restrictions on common forms of marketing have kept consumers from experiencing the same form of experimentation and innovation that has transformed the delivery of so many other goods and services:

  • Until the late 1970’s, lawyers in the U.S. could not advertise in any meaningful way, and many states still have laws on the books prohibiting lawyers from using common advertising techniques.
  • Non-lawyers cannot own even a minority interest law firms, preventing outside investment in the industry and removing the ability to offer equity compensation to talented non-lawyer leaders.
  • Except in limited circumstances, attorneys are prevented from participating in services that attempt to match clients with lawyers based on specific legal circumstances.
  • Rules based on the geographic location of an attorney prevent many forms of remote counseling, even when the matter in question is not dependent on a given state’s law.
  • Legal obligations in most states make it difficult for attorneys to offer limited-scope services that attempt to counsel or coach consumers through specific legal issues rather than engage in full-blown client advocacy.

Some of these restrictions are rooted in a learned profession’s reliance on tradition and resistance to rapid change, and much of it stems from a desire to protect clients and ensure the quality of legal work.  But a consequence of the locked-down nature of the industry is that many consumers who would otherwise use legal services do not avail themselves of them.

 

It’s not hard to see why.  There’s no way to shop for a lawyer-reviewed estate plan the way you would for a pair of shoes or a flight to Mexico.  And beyond price transparency, attorneys and law firm have shown little interest in marketing fixed-price, entry-level offerings that work fine for a large percentage of consumers.  Instead of leading with such offers and then upselling to those needing more involved help, the vast majority of lawyers treat every client as being in need of a custom solution.

 

It’s a shame for both consumers and lawyers. Many consumers who choose to do without a lawyer’s help are no doubt getting suboptimal outcomes in their legal matters.  And lawyers, by failing to deliver the transparency and ease of transacting that consumers have become used to, are missing out on a massive, underserved market.

–          Josh King is vice president and general counsel of Avvo.com, the web’s largest legal Q&A platform, directory and marketplace.

New I-9 Form Required by May 8, 2013

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Effective May 8, 2013, employers are required to use an updated version of the I-9 form when verifying employee work authorization. The new I-9s will not be required for previously verified employees, only new hires and employees requiring reverification. Failure to use the updated I-9 form following the implementation date may result in fines ranging from $110 to $1,100 for each incorrect form.

As many employers are aware, I-9 forms must be completed to document the identity and employment authorization of all new hires. Section 1 of the I-9 must be completed by the employee on the first day of employment, and Section 2 completed by the employer within three business days thereof. Section 3 (Reverification and Rehires) need only be completed by the employer when reverifying that an employee is authorized to work or when an employee is rehired within 3 years of the date the I-9 was originally completed.

Revisions to the new I-9 form are threefold: (1) new format, (2) clearer instructions, and (3) additional data fields.

  1. Format: The updated I-9 has a new two-page format, which should be easier for employers to use. The first page of the form relates to employee information and certification, while the second page consists of the employer verification and reverification.
  2. Instructions: Additionally, the updated I-9’s instructions provide a more detailed explanation of the information required of employees and employers to properly complete the form.
  3. Data Fields: Finally, the new I-9 asks for several new pieces of information from employees, including email address, telephone number, and foreign passport information. U.S. Citizenship and Immigration Services’ request for additional employee contact information suggests that the agency may be more inclined to directly contact employees for information moving forward. Employees are not required to provide such information, however. The employee email address and telephone number fields are optional.

The updated I-9 form is available for download here.

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