Create Your Own Arbitration Provision: Two Recent Supreme Court Decisions Emphasize That Parties Have the Freedom to Define the Nature and Scope of Their Agreement to Arbitrate

Posted recently on the National Law Review by Damian V. Santomauro and Jennifer Marino Thibodaux of Gibbon PC – great analysis of the US Supreme Court’s recent interpretation of arbitration agreements: 

Arbitration provisions are a common component of a wide array of contracts, including many commercial and consumer agreements.  Recently, the Supreme Court of the United States issued two opinions addressing the enforceability of arbitration clauses that require businesses incorporating such clauses into their consumer agreements to re-evaluate how they are drafted and for those businesses that do not utilize such clauses in their agreements to reconsider whether to do so.  First, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.(“Stolt-Nielsen”), 130 S. Ct. 1758 (2010), the Court held that consent to class arbitration cannot be assumed based upon the parties’ general agreement to arbitrate and that a court cannot compel class arbitration where the arbitration clause is silent as to class arbitration.  Second, in Rent-A-Center, West, Inc. v. Jackson (“Rent-A-Center”), 130 S.Ct. 1758 (2010), the Court held that a party’s challenge to the validity of an arbitration agreement must be resolved by an arbitrator, not the District Court, where the agreement contains a provision delegating such issues to an arbitrator.  Taken together, these opinions (in both of which Justices Alito, Kennedy, Roberts, Scalia, and Thomas were in the majority) demonstrate that the direction of the current Court is to respect the language the parties used in their arbitration clauses, with a corollary emphasis on the underlying principle of parties’ freedom to contract.

The Stolt-Nielsen Decision

In Stolt-Nielsen, the Court considered a relatively straight-forward dispute among commercial parties regarding the propriety of ordering class arbitration where the parties’ arbitration provision was silent on the issue.  Specifically, the plaintiff, a supplier of raw ingredients utilized in animal fees, filed a demand for class arbitration seeking to represent a class of customers that had purchased transportation services from the defendant shipping companies.  130 S.Ct. at 1764-65.  The parties agreed that their dispute was subject to arbitration, but disagreed as to whether it could be arbitrated on a class-wide basis.  Ultimately, the parties agreed that an arbitration panel would decide whether class arbitration was appropriate in light of their arbitration agreement, which the parties stipulated was “silent” regarding class arbitration.  Id. at 1765.  When the arbitration panel determined that class arbitration could proceed under the arbitration clause because the parties’ evidence did not show an intent to preclude class arbitration, the shipping companies filed an application to vacate the arbitrators’ award.  Id. at 1766.  The District Court for the Southern District of New York vacated the award on the grounds that federal maritime law (and its emphasis on custom and usage) should have governed the issue, but the Court of Appeals for the Second Circuit reversed.  Id. at 1766-67.

On appeal, the Supreme Court, in a five to three decision (with Justice Sotomayor abstaining), reversed and held that the decision of the arbitration panel must be vacated pursuant to Section 10(a)(4) of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., because the panel exceeded its powers by imposing its own views with respect to the policy of class arbitration in lieu of what the parties actually agreed to.  Id. at 1767-68.  Specifically, the Court concluded that the panel had failed to identify any rule of decision from the FAA, maritime law, or New York law that addressed the question of class arbitration where the parties’ contract was silent on the issue and, instead, simply based its decision on its own policy choice.  Id. at 1770.

In ascertaining the appropriate law to apply to the dispute, the Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Id. at 1775 (emphasis in original).  The Court emphasized that, although interpretation of arbitration provisions is generally an issue of state law, the FAA imposes certain rules that must be considered, including that arbitration is principally an issue of consent.  Id. at 1773.  Noting that parties have the freedom to draft their arbitration provisions in accordance with their own preferences, including (1) the issues they want to arbitrate; (2) the rules under which an arbitration will occur; and (3) who will arbitrate the dispute, the Court said that in analyzing the nature and scope of an arbitration provision, courts and arbitrators must “give effect to the intent of the parties.”  Id. at 1774-75.

Although the Court could have remanded to the Court of Appeals for a rehearing in accordance with these principles, it elected to resolve the issue of class arbitration itself because, in light of the parties’ stipulation that the arbitration provision was silent, the Court determined that there was only one permissible outcome.  Id. Specifically, because the parties had stipulated that they had not reached an agreement on class arbitration, there was no basis to conclude that the parties had consented to arbitration on a class wide basis.  Id. at 1775.  Moreover, because of the significant differences between bilateral arbitration and class arbitration, the Court ruled that “[a]n implicit agreement to authorize class-action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.”  Thus, the parties’ silence on the issue could not be presumed to confer consent to class arbitration.  Id. As a result, the Court held that because the parties had not expressly agreed on class arbitration, the parties could not be compelled to submit their dispute to class arbitration.

The Rent-A-Center Decision

The Rent-A-Centerdecision involved a dispute as to whether the court or the arbitrator decides the issue of whether the arbitration agreement is unconscionable.  In this case, the plaintiff employee sued his employer, Rent-A-Center, in the United States District Court for the District of Nevada, alleging employment discrimination.  130 S.Ct. at 2775.  The plaintiff had signed an arbitration agreement that expressly provided for arbitration of claims of discrimination and contained a provision that expressly delegated to the “[a]rbitrator, and not any federal, state, or local court or agency, [] the exclusive authority to resolve any dispute relating to the interpretation, applicability enforceability, or formation of the” arbitration agreement.  Based on the arbitration agreement, Rent-A-Center moved to dismiss or stay the proceedings under the FAA and to compel arbitration.  In opposition, the plaintiff employee argued that the arbitration agreement was unenforceable on the grounds of unconscionability.  Id.

The District Court granted Rent-A-Center’s motion to dismiss and to compel arbitration, finding that the “delegation clause” in the arbitration agreement, which provided that the arbitrator had the exclusive authority to resolve all disputes regarding the agreement, governed because the plaintiff was challenging the arbitration as a whole.  Id. at 2775-76.  On appeal, the Court of Appeals for the Ninth Circuit reversed on the question of whether the court or the arbitrator had the authority to determine whether the agreement was enforceable, concluding that where a party asserts that an arbitration agreement is unconscionable that threshold inquiry is for the court to decide regardless of what the agreement provides.  Id. at 2776.

On appeal, the Supreme Court, in a five to three decision (with the same five Justices in the majority as were in the majority in Stolt-Nielsen) reversed, holding that the question of the validity of the subject arbitration agreement was reserved for the arbitrator by the delegation clause.  Id. at 2779.  The Court’s opinion focused on the FAA’s recognition of “the fundamental principle that arbitration is a matter of contract” and noted that “the FAA [] places arbitration agreements on an equal footing with other contracts.”  Id. at 2776.  As a result, the Court stated that the delegation provision governed the dispute unless it was otherwise unenforceable pursuant to Section 2 of the FAA, which provides that arbitration provisions “shall be valid irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.

In analyzing the enforceability of the delegation provision, the Court noted that there are two ways to challenge the validity of an arbitration provision under Section 2 of the FAA: (1) to challenge the validity of the specific arbitration provision at issue, or (2) to challenge the entire contract as a whole.  130 S.Ct. at 2778.  As the Court explained, only the former challenge implicates a court’s involvement because Section 2 of the FAA provides that a “written provision” to arbitrate is valid — without regard to the validity of the entire contract in which the provision is contained.  Thus, a party’s challenge to the entire contract does not preclude a court from enforcing a specific agreement to arbitrate, which is severable from the contract.  Id. In other words, only if a party challenges the validity of the specific arbitration provision, rather than the validity of the entire contract, is the inquiry one for the court.  Id.

Although the subject contract in this case was an arbitration agreement, the Court concluded, in the face of a strongly worded dissent, that was not a distinction with any significance, stating “[a]pplication of the severability rule does not depend on the substance of the remainder of the contract.”  Id. In this case, the plaintiffs unconscionability challenges (i.e. that the arbitration agreement was one-sided in that it only applied to claims of an employee and that the arbitration procedures called for by the arbitration agreement, including fee-splitting and limitations on discovery, were unconscionable) were all directed at the arbitration agreement as a whole.  Thus, because the plaintiff only challenged the validity of the contract as a whole (i.e. the arbitration agreement) and the not the specific arbitration provision at issue (i.e. the delegation provision in the arbitration agreement), the majority held that the delegation provision was enforceable under the FAA and the issue of the enforceability of the arbitration agreement was one that was within the exclusive authority of the arbitrator.  Id.

Analysis

Arbitration can, under certain circumstances, be a less expensive and more efficient forum in which to resolve disputes than traditional litigation.  The Stolt-Nielsen and Rent-A-Center decisions provide parties with the ability to craft arbitration provisions with clearly defined parameters, and potentially allow parties to more readily ensure that their disputes are addressed in arbitration.

As an initial matter, the Rent-A-Center decision enables parties to exert greater control over the forum in which issues relating to their arbitration agreement are resolved.  Specifically, parties can draft arbitration agreements limiting a court’s involvement in any subsequent dispute regarding the arbitration agreement by including a delegation clause in the agreement that expressly requires that all disputes regarding the arbitration agreement, including those that challenge the enforceability of the arbitration agreement, will be decided by the arbitrator rather than a court (conversely, parties may draft a delegation provision that requires the court to resolve such disputes, although the use of such provisions is unlikely given that the parties have agreed to arbitrate the underlying dispute).  In such an agreement, only challenges specifically directed to the validity of the delegation clause could be heard by a court, while challenges to the arbitration agreement as a whole would be addressed by the arbitrator.  Thus, the practical effect of theRent-A-Center decision is that disputes between parties with arbitration agreements containing such delegation clauses are more likely to be arbitrated than in the past.  That is, because a delegation clause referring disputes regarding the arbitration agreement to arbitration is generally more difficult to invalidate in court than an arbitration agreement as a whole, 130 S.Ct. at 2778 andRent-A-Center provides that the court can only consider the former, arbitration should now be easier to successfully invoke in that (1) opposing parties will be less likely to resist referral to arbitration and/or (2) courts will be more likely to refer the dispute to arbitration because of the limitations imposed by Rent-A-Center on their authority to invalidate arbitration agreements.

While the Rent-A-Center decision related to a delegation provision in a stand-alone arbitration agreement, the Court’s holding should be equally applicable where the delegation clause is contained in an arbitration provision that is part of a larger contract.  Indeed, as the dissent noted in Rent-A-Center, “the written arbitration agreement [was] but one part of a broader employment agreement between the parties.”  Id. at 2782.  Until further clarification is provided by District Courts or Circuit Courts of Appeal, however, it may be prudent for businesses to utilize arbitration agreements (containing the appropriate delegation clause) that are separate from, but still applicable to, the underlying contract.

The Stolt-Nielsen decision enables parties to more readily control the forum in which class claims will be resolved.  That is, unless the parties specifically agree to arbitrate class claims, an agreement to arbitrate does not compel arbitration of class claims.  This decision, thus, provides significant protection for parties that want to arbitrate individual claims, but ensure that any class claims are litigated in the courts.  Although the decision in Stolt-Nielsen provides that silence on the issue of class arbitration does not equal consent, the preferred practice is for business to expressly include provisions in their arbitration agreements that the parties do not consent to class arbitration.

In addition, Stolt-Nielsen calls into question those decisions in which courts have held that class arbitration waivers are unconscionable and unenforceable, severed such waivers from the arbitration provision, and compelled arbitration of all claims, including class claims.  If silence cannot be construed as consent to class arbitration, then arbitration provision containing a class arbitration waiver, even if that waiver is determined to be unenforceable, should not be construed as consent to class arbitration.  Nevertheless, business can avoid any ambiguity on the issue by expressly stating that (1) the class arbitration waiver is not severable from the arbitration agreement and (2) if a court or other authority determines that the class action waiver is unenforceable, then the parties do not consent to arbitration of any class claims.

Finally, it is important to note that the Supreme Court’s grant of certiori in AT&T Mobility LLC v. Concepcion, 130 S.Ct. 3322 (May 24, 2010) has the potential to drastically alter the nature and scope of enforceable arbitration provisions and significantly increase the use of such provisions, particularly in consumer contracts.  In this case, the Court of Appeals for the Ninth Circuit held that the FAA did not expressly or impliedly preempt California state law regarding the unconscionability of class arbitration waivers in the arbitration agreements.  Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).  That the Supreme Court granted certiori suggests, particularly in light of the Stolt-Nielsen and Rent-A-Center cases, the potential that the Court may conclude that the FAA — and not state law — governs the issue of the enforceability of class action waivers and that such waivers are enforceable.  If that were to occur, then such a decision could, depending upon the nature and scope of the Court’s decision, enable businesses to potentially insulate themselves from class actions in either the courts or arbitration proceedings through the utilization of arbitration agreements contain class arbitration waivers (i.e. an enforceable agreement that refers the parties to arbitration to resolve any dispute relating to the agreement, but expressly provides that such disputes may not be arbitrated on a class-wide basis).

Conclusion

The Supreme Court’s decisions in Stolt-Nielsen and Rent-A-Center evidence the significance of the FAA and signal that the Court, as currently constituted, is likely to enforce the terms of arbitration provisions in parties’ agreements as written.  Thus, even in circumstances that may be susceptible to concern as to whether the parties really had a “freedom to contract,” parties will more likely be bound by the terms of their written arbitration agreements, and there is a significant likelihood that these decisions will result in the federal courts referring more litigation to arbitration where the parties’ agreements so provide.  The Court’s pending decision in Concepcion promises to provide further direction from the Court regarding the scope of the FAA and, when the Court issues this decision, businesses and parties to contracts should further assess their use of arbitration provisions and the validity and enforceability of the language they include in such provisions.

© 2010 Gibbons P.C., All Rights Reserved.

Should Jurors Use the Internet?

The National Law Review would like to congratulate Gareth Lacy of the University of Washington School of Law as one of our Fall 2010 Law Student Legal Writing Contest Winners! 

During trials jurors are increasingly using cell phones and other devices capable of accessing the Internet. Courts are responding by amending court rules to explicitly ban these devices. This Article points out problems with these new court rules. This Article also reviews scientific literature on the effect of pre-trial publicity on jury decision-making to conclude some concerns about outside Internet research may be unwarranted. This Article exposes weaknesses in the arguments against allowing jurors to conduct outside Internet research.

Introduction

“Jurors are rarely brilliant and rarely stupid, but they are treated as both at once.” – Judge Warren K. Urbom[i]

“When lawyers speak about courtroom technology, they are typically debating the merits of making their presentations in Powerpoint.”[ii]

2010 is the year of mobile Internet. One quarter of all Americans get news via their cell phones.[iii] Amazon’s Kindle e-reader allows readers to carry thousands of novels and access the Internet with a single notepad-sized device. As jurors bring these devices into the courtroom, they are causing quite a commotion. Last year several courts ordered mistrials after discovering jurors had accessed Wikipedia or became Facebook friends with their fellow jurors during trial.[iv] Following a case in Florida that ended in mistrial, counsel told the New York Times that courts have been unprepared for this new technology in the courthouse: “It’s the first time modern tech­nology struck us in that fashion, and it hit us right over the head.”[v]Now that 22 million U.S. cell phone users access the mobile Internet on a daily basis, courts must respond quickly and effect-tively.[vi]

This article will first explain why the recent response to increasing use of outside information—“just say no”—will be inadequate. Second, it will ques­tion the underlying assumption that access to outside information is always harmful. Third, it will argue that denying useful tools and information is unwise in the face of increasingly complex trials.

I. Judicial Response: “Just Say No”

Courts and commentators fear that access to the Internet could introduce bias into trial proceedings.[vii] The court rules and jury instructions are apparently designed to ensure jurors only consider evidence admitted at the appropriate time.[viii] But the underlying rationale for these rules is not made clear to jurors. Jurors are therefore likely to feel—rightly so—information is being hidden from them.

Courts have recently responded by drafting new jury instructions and admonitions. New York’s criminal jury instruction, for example, explains that basing opinions on news reports, rather than trial testimony, would be unfair to both parties:

Finally, our law requires that you not read or listen to any news accounts of the case, and that you not attempt to research any fact, issue, or law related to the case. Your decision must be based solely on the testimony and other evidence presented in this courtroom. It would not be fair to the parties for you to base your decision on some reporter’s view or opinion, or upon information you acquire outside the courtroom.[ix]

This is a slightly persuasive effort to explain the reasoning behind the court’s rule. An instruction in Oregon goes a bit further by explaining the rule in the context of everyday experience:

In our daily lives we may be used to looking for information on-line and to “Google” something as a matter of routine. Also, in a trial it can be very tempting for jurors to do their own research to make sure they are making the correct decision. You must resist that temptation for our system of justice to work as it should. I specifically instruct that you must decide the case only on the evidence received here in court.[x]

Again this instruction is better than nothing, but it still fails to explain why the “system of justice” requires restricting access to outside information. Any-thing short of transparent explanations will likely continue to feed jury—and public—mistrust for the legal system.

In February 2010, the U.S. Judicial Conference suggested jury instruc­tions on the use of “electronic communication technologies.[xi] The instruc­tions ban a laundry list of devices and resources—“blogs, websites such as Facebook, MySpace, LinkedIn, YouTube or Twitter, to communicate to anyone any information about this case or to conduct any research”—but fail to explain why jurors should not, for example, look up the definition of “lividity.”[xii] Again, if courts want to convince jurors not to “google” on their cell phones, they must give concrete explanations for the court rules.

Failure to explain the reason for a ban can create mistrust for the judicial system. A recent New York Times article on jurors’ use of the Internet gathered 300 comments in one hour,[xiii] some of which expressed belief in a “systemic effort to keep jurors from learning the truth . . . [in which] jurors, therefore, needed to dig deeper to uncover the truth.”[xiv] What can ease this mistrust? Clear and convincing explanations of judicial policies will help. Furthermore, giving jurors the tools and information in court that they need to make informed decisions in court will make them less likely to look out of court for answers.

II. Does Outside Research Really Bias Jurors?

After commentators raise concerns about jurors turning to extrinsic information, their most common recommendation is for courts to issue stronger admonitions to juries.[xv] Other suggestions include more vigorous voir dire or banning cell phones in the courthouse.[xvi] The problem with these recommen-dations is that courts are already doing most of these things. Juries are already told not to conduct outside research. Voir dire is about as vigorous as it can get.[xvii] Cell phone bans might help for one-day trials, but they will have no effect—and maybe even adverse effects—on multiday litiga­tion. In short, commentators have offered few new suggestions for how to respond to juries using the Internet.

The reason these suggestions have been minimal is because they contain an underlying assumption that external information biases jurors. This assumption therefore restricts the judiciary’s options; if external information is always harmful, cell phone and Internet policies should not be liberalized. One California legislator who adopts this view introduced a bill imposing criminal penalties on jurors who access the Internet.[xviii] This assumption behind the restrictive policies—that external information is always harmful—should be questioned.

Courts and commentators have generally not given balanced appraisals of the scientific research on the effect of outside information on jury decision-making.[xix]For example, a recent article on jury Internet usage states confi­dently: “[j]urors may feel their searching is harmless and will not bias them, something that research has demonstrated is untrue.”[xx] But has scientific research really demonstrated outside research is always harmful? Indeed some research suggests jurors are influenced by pretrial publicity or negative information.[xxi] But the majority of these studies were laboratory simulations, not field studies of actual jury behavior.[xxii]Moreover, a close examination of the scientific evidence reveals more nuanced data than most courts and commentators have acknowledged.[xxiii]

Researchers have found, for example, that in federal criminal cases “it does not appear that highly publicized defendants are treated much differently in terms of ultimate conviction rates than defendants who receive no publicity at all.”[xxiv]Moreover, it was low levels of publicity that resulted in greater probability of conviction.[xxv] Other research found evidence that pretrial publicity did not influence trials outcomes.[xxvi] These results suggest that courts ought to focus on the content and quantity of the information jurors receive, rather than on outright bans.

Researchers have also found that when juries learn substantial and contrary information from evidence and judicial instructions during trial, they are capable of displacing information received before trial.[xxvii] In other words, prior beliefs are diluted by new, relevant information.[xxviii] When trial evidence is strong, this can reduce the effect of bias and external information: “the effect of irrelevant, inadmissible, or biasing information is reduced in its effect to the degree that relevant, probative evidence is available for the jurors’ considera-tion.”[xxix] Again, this suggests that courts should manage the flow of information rather than make unrealistic efforts to weed out all juror expo­sure to the Internet.

III. Giving The Internet A Second Chance

“A major question is whether the protective cocoon we want to preserve of the courtroom trial, where jurors calmly and dispassionately receive only relevant and reliable information based on evidentiary rules . . . can viably be maintained in the face of the informational tsunami pressing against it.”[xxx]

For decades, various groups of judges and scholars have called for better tools in the courtroom. They have argued for engaging jurors in the legal process by providing trial notebooks summarizing key information, allowing jurors to take notes, granting access to dictionaries, and allowing jurors to ask questions.[xxxi]These calls for juror engagement have met with vocal approval but have led to few concrete changes.[xxxii]

Jurors are not going to stop looking at outside information. The best way to keep jurors away from Wikipedia would be to sequester them. But seques­tration is rarely practical on a large scale because it is prohibitively expensive and tends to promote mistrust for the jury system.[xxxiii] A more realistic response would be for attorneys and courts to conduct advance Internet research to identify what information about their case is available online, analyze that information, and then deal with it during trial. Another realistic response would be to give jurors the tools they need to make informed decisions in court so they do not need to conduct outside research.

Jurors want to know everything they can about a case so they can make informed decisions. But rather than promote the jury’s interest in Truth and Justice, courts tend to discourage curiosity and obscure information. For example, some courts still debate the “fairly recent innovation” of “allowing jurors to take notes during trial.”[xxxiv] Note-taking! And while some evidence shows judicial resistance to note-taking may be waning, individual judges still have the final say.

Juries were not always this sheltered. For four-hundred years after William the Conqueror’s reign, jurors were expected to investigate facts and “declare the truth” on the basis of personal knowledge.[xxxv] Even after sworn testimony became common in the sixteenth century, jurors were still permitted to ask questions. It was only when lawyers began to assert the func­tion of law-making and law-finding that “[t]struggle for control over the jury came to a head.”[xxxvi] Rules of evidence then emerged to limit the information available to juries and to control how the information was received.[xxxvii] Jury power was ultimately curbed by strong demands from bankers, merchants, and industrialists for a more predictable—and sympathetic—legal system.[xxxviii] As for the prohibition against note-taking? That arose at a time when most jurors were illiterate.[xxxix]

Today the legal profession may be justified in exercising caution in some circumstances, but it is absurd to continue many of these traditional prac­tices. Trials can involve hundreds of witnesses and thousands of exhibits. No juror can store all that information in his or her head. Even in shorter trials, jurors would be well-served by note-taking. Psychologists (and law students) have known for some time that the dual process of hearing and writing enhances retention.[xl] And lest there be any concern about the law: Trial judges are well within their authority to allow note-taking during trials.[xli]

In the early 1990s, one-hundred law professors, attorneys, judges, researchers, and representatives of business, insurance, and various interest groups met in North Carolina to consider the workings of the jury system and to recommend improvements. The participants did not agree about everything, but the overwhelming proportion strongly supported making jurors more active during trials:

Jurors need not and should not be merely passive listeners in trials, but instead should be given the tools to become more active participants in the search for just results. To that end, trial procedures and evidentiary rules should take greater advantage of modern methods of communica­tion and recognize modern understanding of how people learn and make decisions.[xlii]

Jurors want answers to their questions. Some judges have begun to allow jurors to submit questions to the court and to allow attorneys to provide answers. This is a good start. But courts are competing with pocket-sized encyclopedias inside every cell phone, so they will need to explain to juries exactly why the court rules exist. And of course lawyers must be permitted to deliver useful information to reduce the desire to turn to outside sources.

Conclusion

“Once a new technology rolls over you, if you’re not a part of the steam­roller, you’re part of the road.” – Stewart Brand

It is still quite fashionable to attack the jury system as moribund. Indeed jury participation is at an all-time low. Jurors report feeling unengaged. But it is not correct to blame the jury for the judicial system’s failures. Alexis de Tocqueville found a key purpose of the American jury was to be a “gratuitous public school” that empowers citizens with information about how to take charge of social affairs.[xliii] It is simply time to add some technology to this civics classroom. It is time to give jurors the tools they need to do their job.

 

[i]Warren K. Urbom, Toward Better Treatment of Jurors by Judges, 61 Neb. L. Rev. 409, 425 (1982).

[ii]Nancy S. Marder, Juries and Technology: Equipping Jurors for the Twenty-First Century, 66 Brook. L. Rev. 1257, 1273. (2001).

[iii] Kristen Purcell, et al., Understanding the Participatory News Consumer, Pew Research  Center 5 (Mar. 1, 2010), available at http://www.pewinternet.org/~/media//Files/Reports/ 2010/PIP_Understanding_the_Participatory_News_Consumer.pdf.

[iv]John Schwartz, As Jurors Turn to Web, Mistrials Are Popping Up, N.Y. Times, Mar. 18, 2009, available at http://www.floridasupremecourt.org/decisions/probin/sc10-51_AppendixD.pdf.

[v] Id.

[vi]Enid Burns, Mobile Internet Usage Becomes the Norm for Many in U.S., Search Engine Watch, Mar 17, 2009, http://searchenginewatch.com/3633213.

[vii]Hillary Hylton, Tweeting in the Jury Box: A Danger to Fair Trials?, Time, Dec. 29, 2009, http://www.time.com/time/nation/article/0,8599,1948971,00.html.

[viii]Evan Brown, Some thoughts on jurors doing internet research – keep the process clamped down,  Internet Cases, Jan. 2, 2010, http://blog.internetcases.com/2010/01/02/some-thoughts-on-jurors-doing-internet-research-keep-the-process-clamped-down/.

[ix] Jury Admonitions In Preliminary Instructions, May 5, 2009, www.nycourts.gov/cji/1-General/CJI2d.Jury_Admonitions.pdf.

[x]Gregory S. Hurley, Cell Phone Policies/Instructions for Jurors, Jur-E Bulletin, May 1, 2009, http://view.exacttarget.com/?j=fe4f1579726d04747313&m=ff3417737561&ls=fe03 13707667047d74147970&l=feee117976630d&s=fdf015757d6006757d127377&jb=ffcf14& ju=fe2116727c6d0778771377.

[xi]Proposed Model Jury Instructions The Use of Electronic Technology to Conduct Research on or Communicate about a Case (Jan. 28, 2010), http://www.wired.com/images_ blogs/threatlevel/2010/02/juryinstructions.pdf.

[xii]A Maryland appeals court threw out a first degree murder conviction after a juror, confused by the word “lividity” during a murder trial, looked up the term on Wikipedia. Del Quentin Wilber, Social networking among jurors is trying judges’ patience, Wash. Post, Jan. 9, 2010 at C01.

[xiii]John Schwartz, As Jurors Turn to Web, Mistrials Are Popping Up, N.Y. Times, Mar. 18, 2009, available at www.nytimes.com/2009/03/18/us/18juries.html.

[xiv]Douglas L. Keene & Rita R. Handrich, Online and Wired for Justice: Why Jurors Turn to the Internet, The Jury Expert 14 (Nov. 2009) http://www.astcweb.org/public/publication /article.cfm/1/21/6/Why-Jurors-Turn-to-the-Internet.

[xv]See,e.g., Ellen Brickman, et al., How Juror Internet Use Has Changed the American Jury Trial, 1 J. Ct. Innovation 297 (2008).

[xvi] See e.g., Anita Ramasastry, Why Courts Need to Ban Jurors’ Electronic Communications  Devices, Findlaw, Aug. 11, 2009, http://writ.news.findlaw.com/ramasastry/20090811.html.

[xvii]Ironically some commentators have recommended doing background checks on jurors by using the very resources, for example Facebook, they seek to ban.

[xviii]Paul Elias, Courts finally catching up to texting jurors, Associated Press, Mar. 6, 2010, http://abcnews.go.com/US/wireStory?id=10028507.

[xix]Ellen Brickman, et al., How Juror Internet Use Has Changed the American Jury Trial, 1 J. Ct. Innovation 287 (2008).

[xx]Id. (emphasis added).

[xxi]See Brickman, et al., supra, note 19, at 290 nn. 2-8 (citing Amy L. Otto et al., The Biasing Impact of Pretrial Publicity on Juror Judgments, 18 Law & Hum. Behav. 453 (1994)); Christina A. Studebaker & Steven D. Penrod, Pretrial Publicity: The Media, the Law, and Common Sense,
3 Pscyhol. Pub. Pol’y & L. 428 (1997); Studebaker, et al., Assessing pretrial publicity effects: Integrating content analytic results, 24 Law & Hum. Behav. 317 (2000); Neil Vidmar, Case Studies of Pre- and Midtrial Prejudice in Criminal and Civil Litigation,26 Law & Hum. Behav. 73 (2002). None of these studies offer full support for Brickman et al.’s assertion that research on pretrial publicity is definitive. Otto et al., found negative information about a defendant’s character can influence initial judgments about the defendant’s guilt, but this bias is weakened by trial evidence. Otto et al., supra, at 453. Studebaker and Penrod assessed pretrial publicity effects reported in previous studies, but did not offer new evidence; they merely “propose[] a multimethod research approach by which meditational mechanisms can be assessed.” Studebaker & Penrod, supra, at 428. Studebaker et al., did not study juries per se, but instead conducted a content analysis of media coverage of the Oklahoma City bombing. Studebaker et al.,supra, at 317. Vidmar points out deficiencies in research on prejudicial publicity and explains how courts have rejected research based on laboratory simulations rather than actual case studies. Vidmar, supra, at 73.

[xxii]See Studebaker, et al., supra note 21, at 317.

[xxiii]SeeJon Bruschke & William E. Loges, Free Press vs. Fair Trials: Examining Publicity’s Roles in Trial Outcomes(2004).

[xxiv] Jon Bruschke & William E. Loges, Relationship Between Pretrial Publicity and Trial Outcomes, 49 J. of Comm. 104, 115 (1999).

[xxv]Id. at 114.

[xxvi]See e.g., J. L. Freedman & T. M. Burke, The Effect of Pretrial Publicity: The Bernardo Case, 38 Can. J. Criminology 253 (1996); John S. Carroll, et al., Free Press and Fair Trial: The Role of Behavioral Research, 10 Law & Hum. Behav. 187 (1986); D. R. Pember, Does Pretrial Publicity Really Hurt? 23(3) Colum. Journalism Rev. 16 (1984); H. E. Rollings & J. Blascovich, The Case of Patricia Hearst: Pretrial Publicity and Opinion, 27 J. of Comm. 58 (1977).

[xxvii]Rita J. Simon, Does the Court’s decision in Nebraska Press Association fit the research evidence on the impact on jurors of news coverage?, 29 Stan. L. Rev. 515 (1977); accord Martin F. Kaplan, Cognitive Processes in the Individual Juror, in The Psychology of the Courtroom 197 (1982); but see Geoffrey P. Kramer et al., Pretrial Publicity, Judicial Remedies, and Jury Bias, 14 Law & Hum. Behav. 409 (1990) (finding judicial admonition had no effect and deliberations exacerbated negative effects of factual or emotional information).

[xxviii]Martin F. Kaplan & Lynn E. Miller, Reducing the Effects of Juror Bias, 36 J. Personality & Soc. Pscyhol. 1443 (1978).

[xxix]Michael J. Saks, What Do Jury Experiments Tell Us About How Juries (Should) Make Decisions?, 6 S. Cal. Interdisc. L.J. 1, 28 (1997).

[xxx]Michael Hoenig, Juror misconduct on the Internet, N.Y. L.J., Oct. 8, 2009.

[xxxi]Interview by Donald C. Dilworth with Judge B. Michael Dann, Arizona Superior Court, Waking up Jurors, Shaking Up Courts, Trial, July 1, 1997, at 20, available athttp://www. thefreelibrary.com/_/print/PrintArticle.aspx?id=19634468; The Honorable B. Michael Dann, “Learning Lessons” and “Speaking Rights”: Creating Educated and Democratic Juries, 68 Ind. L.J. 1229, 1241 (1993); William W. Schwarzer, Reforming Jury Trials, 1990 U. Chi. Legal F. 199, 137 (1990); Warren K. Urbom, Toward Better Treatment of Jurors by Judges, 61 Neb. L. Rev. 409, 425 (1982).

[xxxii]ABA/Brookings Symposium, Charting a Future for the Civil Jury System 16 (1992).

[xxxiii]James P. Levine, The impact of sequestration on juries, 79 Judicature 266 (1995).

[xxxiv]Nancy S. Marder, Juries and Technology: Equipping Jurors for the Twenty-First Century, 66 Brook. L. Rev. 1257, 1276. (2001). Believe it or not, the merits of note-taking is still subject to some scholarly debate. See e.g., Victor E. Flango,Would Jurors Do a Better Job if They Could Take Notes?, 63 Judicature 436 (1979-1980); Steven D. Penrod & Larry Heuer, Tweaking Commonsense: Assessing Aids to Jury Decision Making, 3 Psychol., Pub. Pol’y & L. 259, 271 (1997); Irwin A. Horowitz & Lynee ForsterLee, The Effects of Note-Taking and Trial Transcript Access on Mock Jury Decisions in Complex Civil Trial, 25 Law & Hum. Behav. 373 (Aug. 2001).

[xxxv]Blackstone’s Commentaries on the Law 673-77 (Bernard C. Gavit ed., 1941).

[xxxvi]Morris S. Arnold, Law and Fact in the Medieval Jury Trial: Out of Sight, Out of Mind, 18 Am. J. Legal Hist. 267, 279 (1974).

[xxxvii]Lawrence M. Friedman, A History of American Law 101 (3rd ed. 2005).

[xxxviii]Morton J. Horwitz, The Transformation of American Law 1780-1860 140-41 (1977).

[xxxix]Nancy S. Marder, Juries and Technology: Equipping Jurors for the Twenty-First Century, 66 Brook. L. Rev. 1257 (2001).

[xl]Elizabeth F. Loftus, Memory 19-20 (1980).

[xli]See e.g., Johnson v. State 887 S.W. 2d 957 (Tex Crim. 1994); Sonja Larsen,Taking and use of trial notes by jury, 36 A.L.R. 5th 255 (1996).

[xlii]ABA/Brookings Symposium, supra note32, at16.

[xliii]Alexis De Tocqueville, 1 Democracy in America 266 (Henry Reeve trans., George Adlard 2d ed. 1838) (1830).

Copyright © 2010 Gareth Lacy

 

Final Genetic Information Non Discrimination Act "GINA" Regulations Impact All Employers

From National Law Review’s featured blogger Patricia Anderson Pryor of Taft Stettinius & Hollister LLP, important information for both employers and employees about the Genetic Information Non Discrimination Act (“GINA”).

On November 9, 2010, the EEOC published its final regulations concerning the employment aspects of the Genetic Information Non Discrimination Act (“GINA”).

Although very few employers consciously utilize genetic information or discriminate against individuals because of genetic information, the prohibitions in GINA impact all employers.  Prohibited genetic information includes medical information about an employee’s family members.  The new regulations provide that an employer may violate GINA even if the employer does not specifically intend to acquire genetic (or family medical) information.

Many employers inadvertently come into contact with what the law defines as “genetic information” when they send employees for medical exams, when they request medical information in connection with requests for accommodation or requests for leave, when they provide employee wellness programs, when their supervisors engage in, or overhear, general, water cooler type conversations or even when supervisors look through Facebook posts.

In order to protect themselves, employers may need to update postings, policies and leave of absence or other medical request forms.

Employers should take precautions to avoid receiving genetic information in connection with requests for medical information and medical exams.

An employer who requests medical information from an employee or provider to support a request for an accommodation, FMLA leave or other leave, may inadvertently receive genetic information, including family medical information, that is already contained in the provider’s file.  The regulations provide that such receipt will not run afoul of GINA if either the employer informed the provider not to provide genetic information, with language similar to that suggested by the EEOC, or the request was so narrowly tailored that the request for medical information was not likely to result in the production of genetic information.

However, according to the final regulations, if an employer is requiring an employee to submit to a medical exam in connection with employment (either a pre-employment/post-offer exam or a fitness for duty exam), the employer “must” tell the health care provider not to collect genetic information, including family medical history, as part of the exam.  If the provider nonetheless requests genetic information, the regulations provide that the employer may need to take additional reasonable measures, including potentially no longer using that health care professional’s services.

Wellness programs cannot include a financial incentive for the disclosure of genetic information.

Many wellness programs include a health risk assessment that often requests family medical history.  Requesting genetic information in connection with a wellness program is permissible only if the employee’s participation is knowing and voluntary (among other things).  The final regulations clarify that “voluntary” means that an employer cannot offer a financial incentive to induce individuals to provide genetic information.  If a health risk assessment includes questions concerning genetic information, the employer must inform the employees that any incentive will be provided regardless of whether the employee answers the particular questions identified as requesting genetic or family medical information.

Information obtained through casual conversations or social network sites may still be inadvertent, as long as there is no intentional probing.

The final regulations keep intact the exceptions for certain inadvertent acquisitions of genetic information, including a supervisor overhearing a conversation about an employee’s genetic information or a family member’s medical condition or a supervisor viewing similar information on a social media site that he or she had permission to access.

However, the new regulations clarify that although an employer may obtain genetic information inadvertently or through information that is publicly or commercially available, these exceptions do not apply if the employer has deliberately sought the information by asking probing questions or searching for genetic information on line.

GINA’s requirements go far beyond simply prohibiting genetic testing.

Copyright © 2010 Taft Stettinius & Hollister LLP. All rights reserved.

Law Firm Business Development Must Mature in an Increasingly Competitive Market

Featured Business of Law Blogger this week at the National Law Review is Angela Spall of Williams Mullen.  Angela provides some great specific points about business development for law firms during these trying economic times. 

The legal profession continues to find itself in increasingly competitive markets.  The focus on business development has by necessity sharpened.  The key to a successful business development program in a law firm is to provide lawyers with the best possible competitive advantage in a highly competitive marketplace.

Vital components in building a successful business development program encompass the following:

Business development professionals, in a fully supported marketing department, must be as focused as the lawyers they serve and experts on the practice areas and industries they are assigned.  Credibility will be a key factor in working successfully with lawyers. The following are the recommended requirements for an effective business development professional:

  • Assigned to practice areas and industries where they must become experts.
  • Conduct comprehensive research to identify challenges and opportunities within a client entity, an industry or a target prospect.
  • Support and coach their lawyers in business development techniques.
  • Understand the sales process and most likely have had a background in sales or sales support.
  • Regularly engage in client feedback or end-of-matter interviews.
  • Regularly present proactive ideas to practice and industry groups.
  • They must be in an integral strategic role in all business development activities working alongside the lawyers they support.

Teamwork is vital in successful business development in law firms.  Business development professionals and lawyers must work together in client and industry teams for successful results. Teamwork must be rewarded and compensation systems must take into account the whole team that brought the business in or expanded a client relationship.  Encouraging teamwork ensures all levels of expertise and skills are used effectively and rewarded accordingly.

Keep your targets organized. Targets, whether they are prospects or clients, must be worked across the board. Use technology to access and store information on targets and clients and their industries so that it is readily available 24/7.  Opportunities can happen at any time.  In business development, making your own luck by being prepared and ready to act quickly without too many prior meetings or discussions, is imperative.  A window of opportunity can be jumped through by a competitor and can close quickly.

Clients will always be THE top priority.  Clients want all the things that clients or customers in any industry want: value for their dollar.  Providing value is more about results than it is about cost; it is more about knowledge, expertise, and trusting relationships.  Clients are the number one business development source and law firms must be competitive in how services are offered and delivered to their clients.  Expanding client relationships is still an under-utilized business development action.  Client feedback and end-of-matter interviews are a necessity.

It has been said that many law firms succeed despite themselves.  But, after a deep recession and the economy experiencing a slow recovery, it is time for law firms to invest in key areas to be competitive.  You will need technology to help streamline the business development process.  You will need to invest in qualified and experienced individuals, attorneys and non-attorneys alike to be successful. These areas of investment include:

  • Installing technologies such as Contact Relationship Management (CRM) and Email Relationship Management (ERM) and the newer add on tools that assist lawyers and business development professionals in providing ways to organize and utilize client and target contact information.
  • Research software that can quickly access business information of all kinds to pull together business and industry information.
  • Motivate lawyers and practice and industry teams by investing in appropriate reward systems through innovative approaches to compensation programs.
  • Ongoing training for lawyers and staff in business development, client service, technologies, the business of law, etc. Effective business development techniques can be learned.  While innate skills are highly valued, training lawyers in business development at an early point in their careers will benefit the firm in the long term.
  • Invest in people by hiring the best qualified and providing them the tools to be effective in their responsibilities.

And finally, and this has been said and written time after time by so many other marketing professionals, business development professionals must encourage their lawyers to accept and embrace business development as an essential part of their professional lives. No other time in the last 20 years has it been so critical to take care of your clients, participate in activities that get you in front of clients and prospects, take care of reputation management, and becoming known in your communities through building practice expertise and volunteering time in community organizations.  These activities will pay off.

Originally published in the Fall 2010 issue of LMA Practice Marketing Newsletter Copyright 2010 Legal Marketing Association –The Virginias Chapter

©2010 LMA Virginias. All rights reserved.

Employment-Based Preference EB-5 Program Assistance

For the National Law Review’s featured guest bloggers from Taft Stettinius & Hollister LLP.  Hugh E. Wall III discusses an immigrant visa program which gives preference to qualified foreign investors. 

The fifth employment-based preference (“EB-5”) immigrant visa program encourages qualified foreign investors to invest within the United States in exchange for permanent residency. The program is currently underutilized; of the 10,000 EB-5 visas available last year, the United States Customs and Immigration Service (“USCIS”) only issued 4,218 visas. The following list is a summary of the program features.

  • Pursuant to the basic program, an alien investor must make a capital investment of either $500,000 or $1,000,000, depending on whether the investor invests in a “Targeted Employment Area” (“TEA”), in a new commercial enterprise located within the United States. The enterprise must directly create or preserve at least ten full-time jobs for qualified U.S. workers.
  • Under the Regional Center Pilot Program, foreign investors must complete the basic program requirements by investing either $500,000 or $1,000,000 in a new commercial enterprise. However, unlike the basic program, under the Regional Center Pilot Program, the new commercial venture need not directly create the ten jobs required by the basic program. Instead, the commercial venture need only show that the investment indirectly created or preserved ten jobs.
  • To create a Regional Center, an individual or entity must file a Regional Center Proposal with USCIS to request approval of the investment proposal and the designation of the applying entity as a Regional Center. The entity applying for Regional Center status must maintain at least $100,000 in capital before the USCIS will award Regional Center status. There are currently 90 Regional Centers operating in 34 states. USCIS awards the vast majority of utilized EB-5 visas to alien investors who have invested in a Regional Center.
  • A TEA is an area with an unemployment rate that is at least 150% of the national average. If the foreign investor invests in a non-TEA, the investor must contribute the standard threshold minimum of $1,000,000. If the investor invests in a TEA, the investor need only invest $500,000 to be eligible for the EB-5 visa.

Copyright © 2010 Taft Stettinius & Hollister LLP. All rights reserved.

Time to Retire the ESOP from the 401k: Assessing the Liabilities of KSOP Structures in Light of ERISA Fiduciary Duties and Modern Alternatives

The National Law Review would like to congratulate Adam Dominic Kielich of  Texas Wesleyan University School of Law as one of our 2010 Fall Student Legal Writing Contest Winners !!! 

I. Introduction

401k plans represent the most common employer-sponsored retirement plans for employees of private employers. They have replaced defined benefit pension plans, as well as less flexible vehicles (such as ESOPs) as the primary retirement plan.1 However; some of these plan models have continued their legacy through 401ks through structures that tie the two together or place one inside the other. A very common and notable example is the Employee Stock Ownership Plan (ESOP). ESOPs are frequently offered by companies as an investment vehicle within 401ks that allow participants to invest in the employer’s stock as an alternative to the standard fund offerings that are pooled investments (e.g. mutual funds or institutional funds). Participants may be unaware that the company stock option in their 401k is a plan within a plan. These combination plans are sometimes referred to as KSOPs.2

Although this investment vehicle seems innocuous, KSOPs generate considerable risk to both participants and sponsors that warrants serious consideration in favor of abandoning the ESOP option. Participants face additional exposure in their retirement savings when they invest in a single company, rather than diversified investment vehicles that spread risk across many underlying investments. They may lack the necessary resources to determine the quality of this investment and invest beyond an appropriate risk level. Moreover, sponsors face substantial financial (and legal) risk by converting their plan participants into stockholders within the strict protections of ERISA.3 The risk is magnified by participant litigation driven by the two market downturns of the last decade. Given the growing risk, sponsors may best find themselves avoiding the risks of KSOPs by adopting a brokerage window feature (sometimes labeled self-directed brokerage accounts) following the decision in Hecker.4

II.  Overview and History of ESOPs

A.  ESOP Overview

ESOPs are employer-sponsored retirement plans that allow the employee to invest in company stock, often unitized, on a tax-deferred basis. They are qualified defined contribution plans under ERISA. As a standalone plan, ESOPs take tax deferred payroll contributions from employees to purchase shares in the ESOP, which in turn owns shares of the employer’s stock. That indirect ownership through the ESOP coverts participants into shareholders, which gives them shareholder rights and creates liabilities to the participants both as shareholders and as participants in an ERISA-protected plan. They may receive dividends, may have the option to reinvest dividends into the plan, and may be able to receive distributions of vested assets in cash or in-kind, dependent upon plan rules.5

ESOPs offer employers financial benefits: they create a way to add to employee benefit packages in a manner that is tax-advantaged while providing a vehicle to keep company stock in friendly hands – employees – and away from the hands of parties that may seek to take over the company or influence it through voting. Additionally, ESOPs create a consistent flow of stock periodically drawn out of the market, reducing supply and cushioning prices. Moreover, with those shares in the hands of employees, who tend to support their employer, there are fewer shares likely to vote against the company’s decision-makers or engage in shareholder activism.6

B.  Brief Relevant History of ESOPs

ESOPs are generally less flexible and less advantageous to employees than 401ks. ESOPs lack loan options, offer a single investment option, typically lack a hardship or in-service distribution scheme and most importantly, lack diversification opportunities. Individual plans may adopt more restrictive rules to maintain funds within the plan as long as possible, as long as it is ERISA-compliant. Perhaps the most important consequence of that lack of diversity is that it necessarily ties retirement savings to the value of the company. If the company becomes insolvent or the share price declines without recovery, employees lose their retirement savings in the plan, and likely at least some of the pension benefits funded by the employer. The uneven distribution of benefits to employees helped pave the way for ERISA in 1974.7

C.  Current State of Law on ESOPs

1.  ESOPs Within 401k Plans

After the ERISA regulatory regime paved the way for 401k plans, employers began folding their ESOPs and other company stock offerings into the 401ks. For decades employers could mandate at least some plan assets had to be held in company stock. When corporate scandals and the dot com bubble burst in 2001, it evaporated significant retirement savings of participants heavily invested in their employer’s stock, often without their choice. Congress responded by including in the Pension Protection Act of 2006 (PPA) by eliminating or severely restricting several permissible plan rules that require 401k assets in any company stock investment within 401k plans.8

2. ERISA Litigation of the 2000s

Participants who saw their 401k assets in company stock vehicles disappear with the stock price had difficulty recovering under ERISA until recent litigation changed how ERISA is construed for 401k plans. ERISA was largely written with defined benefit plans in mind. Defined benefit plans hold assets collectively in trust for the entire plan. Participants may have hypothetical individual accounts in some plan models, but they do not have actual individual accounts. ERISA required that suits brought by participants against the plan (or the sponsor, trust, or other agent of the plan) for negligence or malfeasance would represent claims for losses to the plan collectively for all participants, so any monetary damages would be awarded to the plan to benefit the participants collectively, similar to the shareholder derivative suit model. Damages were not paid to participants or used to increase the benefits payable under the plan.

Defined contribution plans with individual participant accounts, such as 401k plans and ESOPs, were grafted onto those rules. Therefore, any suit arising from an issue with the company stock in one of these plans meant participants could not be credited in their individual accounts relative to injuries sustained. It rendered participant suits meaningless in most cases because the likelihood of recovery was suspect at best.9

The Supreme Court affirmed this view in 1985 in Russell, and courts have consistently held that individual participants could not individually benefit from participant suits. Participants owning company stock through the plan could take part separately in suits as shareholders against the company, but these are distinguished from suits under ERISA. In 2008, the Supreme Court revisedRussell in LaRue and held that Russell only applied to defined benefit plans. Defined contribution plan participants could now bring claims individually or as a class and receive individual awards as participants. This shift represented new risks to sponsors that immediately arose with the market crash in 2007.10

III.  Risks to Employees

The primary risk to employees is financial; a significant component of employee financial risk is the investment risk. 401k sponsors are required to select investments that are prudent for participant retirement accounts. This is why 401k plans typically include pooled investments; diversified investment options spread risk. ESOPs are accepted investments within 401k plans, although they are not diversified.11 This increases the risk, and profit potential, participants can expose themselves to within their accounts. While added risk can be exponentially profitable to participants when the employer has rising stock prices or a bull market is present, the downside can also be significantly disastrous when the company fails to meet analyst expectations or the bears take over the markets.

Moreover, employees may be more inclined to invest in the employer’s stock than an independent investor would. Employees tend to be bullish about their employer for two reasons.12 First, employees are inundated with positive comments from management while typically negative information is not disclosed or is given a positive spin. This commentary arises in an area not covered by ERISA, SEC, or FINRA regulations. This commentary is not treated as statements to shareholders; they arise strictly from the employment relationship. This removes much of the accountability and standards that otherwise are related to comments from the company to participants and shareholders. Management can, and should, seek to motivate its employees to perform as well as possible. While the merit of misleading employees about the quality of operations may be debatable, the ability to be positive to such an end is not.

Second, employees tend to believe in the quality of their employer, even if they espouse otherwise. They tend to believe the company is run by experienced professionals who are leading the company to long term success. Going to work each day, seeing the company operating and producing for its customers encourages belief that the company must be doing well. It can even develop into a belief that the employee has the inside edge on knowing how great the company is, although this belief is likely formed with little or no knowledge of the financial health of the company. The product of the internal and external pressures is a strong likelihood employees will invest in an ESOP over other investment options for ephemeral, rather than financial, reasons.13

Additionally, participants may have greater exposure to the volatility of company stock over other shareholders due to 401k plan restrictions. While some plans are liberally constructed to give participants more freedom and choice, some plans conversely allow participants few options. This is particularly relevant to the investment activity within participant accounts. Participants may be limited to a certain number of investment transfers per period (e.g. quarterly or annually), may be subject to excessive trade restrictions, or may even find themselves exposed to company stock through repayment of a loan that originated in whole or in part from assets in the ESOP. Additionally, the ESOP may have periodic windows that restrict when purchases or redemptions can occur. While a regular shareholder can trade in and out of a stock in seconds in an after-tax brokerage account, ESOP shareholders may find themselves hung out to dry by either the ESOP or 401k plan rules. These restrictions are not penal; they represent administrative decisions on behalf of the sponsor to avoid the added expense generally associated with more liberal rules.

Although employees take notable risk to their retirement savings portfolio by investing in ESOPs within their 401k plans, it can add up to a tremendous financial risk when viewed in the bigger picture of an employee’s overall financial picture. Employees absorb the biggest source of financial risk by nature of employment through the company because it is the major, if not sole, income stream during an employee’s working years. This risk increases if the employer is also the primary source of retirement assets or provides health insurance. The employee’s present and future financial well being is inherently tied directly to the employer’s financial well being. This risk is compounded if the employee also has stock grants, stock options, or other stock plans that keep assets solely tied to the value of the company stock. If the employee is fortunate enough to have a defined benefit plan (not withstanding PBGC coverage) or retirement health benefits through the company, then that will further tie the long term success of the company to the financial well being of the employee. Adding diversification in the retirement portfolio may be a worthwhile venture when those other factors are considered in a holistic fashion.

IV.  Risks to the Sponsor

ERISA litigation is a serious risk and concern to sponsors. Although there is exposure in other areas related to participants as stockholders, ERISA establishes higher standards towards participants than companies otherwise have towards shareholders. Sponsors once were able to protect themselves under ERISA but since LaRue participants have an open door to reach the sponsor to recover losses related to the administration of the plan.14 ERISA requires sponsors to make available investment options that are prudent for 401k plans. The dormant side of that rule requires sponsors to remove investment options that have fallen below the prudent standard. Company stock is not excluded from this requirement.15

Any time the market value of the stock declines, the sponsor is at risk for participant losses for failure to remove the ESOP (or other company stock investment option) as an imprudent investment within the plan. Participants are enticed to indemnify losses through the sponsor. Such a suit is unlikely to succeed when the loss is short term and negligible, or the value declined in a market-wide downturn. However, as prior market downturns indicate, investors look to all possible avenues to indemnify their losses by bringing suits against brokers, advisors, fund companies, and issuers of their devalued assets. There is no reason to believe that participants would not be enticed to try this route; LaRuewas born out of the downturn in the early 2000s.16

The exposure for sponsors runs from additional costs to mount a defense to massive monetary awards to indemnify participants for losses. In cases where participants are unlikely to recover, sponsors still must finance the defense against what often turns into expensive, class action litigation or a long serious of suits. However, there is a serious risk of sponsors having to pay damages, or settle, cases where events have led to a unique loss in share value. Participants have filed suit under the theory that the sponsor failed to remove imprudent investment options in a timely fashion. BP 401k participants filed suit following the gulf oil leak under a similar theory that the sponsor failed to remove the company stock investment option from the plan, knowing that it would have to pay clean up costs and settlements. While it remains to be seen if these participants will be successful, they surely will not the last to try.17

Sponsors should take a good, long look at the ESOP to determine whether the sponsor receives more reward than risk – particularly future risk – from its inclusion. The risk to a company does not have as severe as the situation BP faced this year. Even bankruptcy or mismanagement that results in serious stock decline can merit suit when the sponsor fails to immediately withdraw the ESOP, since it has prior knowledge of the bankruptcy or mismanagement prior to any public release.

To hedge these risks, sponsors can adopt several options. First, sponsors may limit the percentage of any account that may be held in company stock. This is easily justified as the sponsor taking a position in favor of diversification and responsible execution of fiduciary duties. While this may not completely absolve the sponsor of the duty to remove imprudent investment options, it does act as a limit on liability. Although it does provide some protection against risk, it is an imperfect solution.

Second, ESOP plans can adopt pricing structures to discourage holding large positions of company stock for the purpose of day trading. Some 401k plans allow participants to trade between company stock and cash equivalents without restraint. When the ESOP determines share pricing based on the closing price of the underlying stock, it creates a window where participants can play the company stock very differently than the constraints of most 401k investment options.

It is a very alluring reason to take advantage of the plan structure by taking an oversized position in company stock. Add the possibility to indemnify losses in court and it becomes even more desirable. The process is simple: participants can check the trading price minutes before the market closes. If the stock price is higher than the basis, they sell and net profit. If it is below, they hold the stock and try against each day until the sale is profitable. They will then buy back into the ESOP on a dip and repeat the process. This is distinguishable from the standard diversified fund options in 401k plans, where ignorance of the underlying investments preempts the ability to game closing prices. Funds generally discourage day trading – and may even carry redemption fees to penalize it – and encourage long term investing strategies more consistent with the objective of retirement accounts.

Available solutions are directly tied to the cause of the problem; changing the ESOP pricing scheme can eliminate gaming closing prices. ESOPs can adopt other pricing schemes such as average weighted pricing and next day order fulfillment. Average weighted pricing gives participants the average weighted prices of all transactions in the stock, executed that day, by a given entity. For example, if the ESOP is held with Broker X as the trustee, it may rely upon Broker X to provide the prices and volumes of all of its executed orders that day in the stock, which is used to determine the average weighted price participants will receive that day. Alternately, participants could be required to place orders on one day and have the order fulfilled on the following day’s closing with that day’s closing price. Both of these pricing schemes introduce some mystery into the price that diminishes gaming the closing price. This is also an imperfect solution, even if combined with the first option, because it maintains the risks of the ESOP.

Sponsors may also take advantage of brokerage windows to expand employee investment options, including company stock, without the risks afforded to ESOPs. Brokerage windows create brokerage accounts within 401k plans. The brokerage window is not an investment in itself; it is a shell that allows employees to reach through the window to access other investments. Sponsors found good reason to be suspicious of brokerage windows, seeing it as liability for all the available investments that could be deemed imprudent for retirement accounts. A minute minority of participants saw it as a way to have their cake and eat it too during the last rise and fall of the markets; they could invest more aggressively within their 401ks and then demand sponsors indemnify their losses when the markets gave up years of gains on the basis of sponsor failure to review the available contents of the window under the prudence standard.

However, in Deere the court handed down a critcal decision: sponsors could not be responsible for the choices made by participants within brokerage windows. InDeere, several Deere & Co. (John Deere) employees sued the company for making available investments that were imprudent for 401k accounts that caused substantial losses in the 2007 market downturn. John Deere had not reviewed the thousands of available options under the ERISA prudence standard. Although the plaintiffs’ theory was a compelling interpretation of ERISA duties, the court rejected the theory on two grounds. First, it would be impossible for any sponsor to review every investment available through the window. Second, participants had taken ownership of the responsibility to review their investment decisions by choosing to invest through the window.18

Following the court’s decision in Deere, brokerage windows gained new life as a means for sponsors to expand investment availability at less risk. Rather than having to review a menu of funds and company stock for prudence under ERISA, sponsors can justifiably limit the fund selection directly offered through the plan and leave the rest of the options to the brokerage window. Importantly, this includes offering company stock in the window. By utilizing the brokerage window, sponsors allow access to the company stock without the liabilities of offering an ESOP through the plan. The sponsor will likely lose out on any benefits received from the ESOP, although for most established employers ESOPs are likely more of a convenience factor and a legacy offering rooted in the history of employer-sponsored plans.

Although Deere foreclosed participant abuse of brokerage windows, this option is not without its own negative aspects. Future litigation may reestablish some liability upon the sponsor for the brokerage link. Sponsors may face alternate liability under ERISA for selecting a brokerage window with excessive commissions or fees, similar to requirements for funds under ERISA.19 Given the flurry of awareness brought to 401k management fees and revenue sharing agreements between sponsors and fund providers following the market crash in 2007, it is likely that brokerage windows will be the hot ticket for participants in the next market crash. Therefore, sponsors should preemptively guard against future litigation by reviewing available brokerage window options to make sure any fees or commissions are reasonable and the categories of investment options are reasonable (even if specific investments in those categories are not).

Perhaps a lesser concern, sponsors need to consider overall plan operation and any negative impacts that may arise from shifting to a brokerage window-based investment offering. These concerns may be less of a legal risk issue than a risk of participant discontent and dealing with those effects. There are primarily two areas that brokerage windows can create discontent. First, when participants want to move from a fund to the brokerage window, they must wait for the sale to settle from the fund and transfer to the window, which generally makes the money available in the window the day after the fund processes the order. Conversely, selling investments in the window may delay transferring money into plan funds because of settlement periods and the added delay of settlement with the fund once the funds are available to move out of the window. Additionally, the settlement periods within the window may frustrate participants, although the plan has no control over those timeframes. Those natural delays in processing the movement of money may create discontent, especially for those participants trying to invest based upon short term market conditions.

Second, those same processes and delays can negatively affect plan distributions. Many plans offer loans and withdrawal schemes, and while sponsors may have their own reasons for making those options available, participants often use those offerings to finance emergency financial needs. Brokerage windows can complicate and delay releasing money to participants. Settlement periods will create delays; if money has to be transferred out of the window to another investment to make those funds available for a distribution that will add at least one more day before money can be released. If participants find themselves in illiquid investments, the money may not be able to move for a distribution at all. Although these issues may not be of legal significance but they will be significant to the people responsible for absorbing participant complaints and there may be additional expenses created in handling those issues.

An additional concern is that the Department of Labor (DOL) is still fleshing out several requirements surrounding brokerage windows and how they relate to ERISA requirements. For example, the DOL October 2010 modification of 401k disclosure rules affects plans as a whole, but it leaves open several areas of ambiguity around the specific effects on brokerage windows. Sponsors may face continuing financial costs complying and determining how to comply with DOL requirements. Future changes in the regulations may negatively affect plans that rely heavily on brokerage windows to provide access to a greater range of investment options.20

These considerations are not exhaustive to the benefits or risks of either ESOPs or brokerage windows, they merely highlight some of the more salient points as they relate generally to the legal and significant financial benefits and risks to sponsors. There may be additional concerns equally salient to sponsors given their particular situation, such as participant suspicion of the removal of the ESOP or unwillingness at the executive level to retire the ESOP.

V.  Conclusion

Although brokerage windows may open the door to some new liabilities, it closes the door to the risks of ESOPs, for both participants and sponsors. Sponsor diligence in administering retirement plans will always be the most successful method of checking liability; however, as discussed ESOPs risk putting sponsors in an unwinnable position. Removing the company stock option may not be the most beneficial option in all cases but it may be time for sponsors to consider retiring the ESOP from the 401k in light of the current regulatory regime. A brokerage window option is well suited to take advantage of participant ownership of the employer’s stock, as well as other investment opportunities, while limiting the risk that normally accompanies that ownership. Ultimately, sponsors must consider what is best for the plan and its participants over both the short term and the long term.

Endnotes.

1. Chris Farrell, The 401(k) Turns Thirty Years Old, Bloomberg Businessweek Special Report, Mar. 15, 2010,http://www.businessweek.com/investor/content/mar2010/pi20100312_874138.htm.

2. National Center for Employee Ownership401(k) Plans as Employee Ownership Vehicles, Alone and in Combination with ESOPs, (no date provided),http://www.nceo.org/main/article.php/id/15/.

3. Id.; 29 U.S.C. § 1104 (2010); the term “sponsor” can be used interchangeably with “employer” for purposes of this discussion, however there are some situations where the employer is not the sponsor, such as union plans, or the employer is not the sole sponsor in the case of multi-employer plans. This discussion relates to KSOPs where the sponsor is the employer. Different rules and different liability may apply to other plan structures.

4. Hecker v. Deere & Co., 556 F.3d 575, 590 (7th Cir. 2009), cert. denied, 130 S. Ct. 1141 (2010).

5. Todd S. Snyder, Employee Stock Ownership Plans (ESOPs): Legislative History, Congressional Research Service, May 20, 2003.

6. William N. Pugh et al. The Effect of ESOP Adoptions on Corporate Performance: Are There Really Performance Changes?, 21Managerial & Decision Econ., 167, 167-180 (2000).

7. Supra note 5.

8. Pension Protection Act of 2006 § 901, 29 U.S.C. 401 (2010).

9. LaRue v. DeWitt, Boberg & Assocs., Inc., 552 U.S. 248, 254-55 (2008).

10. Id. at 255-56.

11. Shlomo Benartzi et al., The Law and Economic of Company Stock in 401(k) Plans, 50 J.L. & Econ. 45, 45-79 (2007).

12. Id.

13. Id.

14. LaRue, 552 U.S. at 254-55.

15.  § 1104.

16. LaRue, 552 U.S. at 250-51.

17. E.g., In Re: BP P.L.C. Securities Litigation, MDL No. 2185, 2010 WL 3238321 (J.P.M.L. Aug. 10, 2010).

18. Hecker, 556 F.3dat 590.

19. §1104.

20. 29 C.F.R. § 2550 (2010).

© Copyright 2010 Adam Dominic Kielich

 

Alternatives to International Criminal Justice – Restorative Justice and Peace Through Peaceful Means

The National Law Review would like to congratulate Heejung Park of Washington University in St. Louis as one of our Fall 2010 Law Student Legal Writing Contest Winners! 

“Out of timber so crooked as that from which man is made nothing entirely straight can be carved.” -Immanuel Kant-

Individuals live their own lives, and have their own goals.  An entity may be an individual, a group, or a nation.  The purposes of two parties may be in harmony with each other and without conflict, or may not.  Such purposes may be good, or evil.  Essentially, problems occur when the purposes of two or more parties do not coincide.  The basic position of the traditional criminal justice system is to address problems simply by punishing the perpetrators.  However, over the last several decades, there have been new studies in the area of peace and human rights, and in this environment, new institutions may be welcome.  This is inspiring changes from the perspective of human integrity and the right to peace, which pursues harmonious coexistence.

If the criminal justice system, which aims to punish perpetrators, takes an interest in the perpetrators as well as the victims by enabling the perpetrators to truly repent for their offenses and voluntarily make restitution to their victims, while allowing the victims to accept the restitution based on a principle of forgiveness and tolerance, a foundation for peace and respect of others in the community will be formed. As such, it is very significant to prepare for a system wherein the pepetrator and the victim can remediatetheir hurt,and recover.  If we are working from a principle that values life above all, and values human rights to the extent that they carry more weight than the earth itself, such an approach must be inspiring.  It is not that easy to buildasociety that is better and more peaceful, in which everyone can live together harmoniously.  When criminals are punished, this does not mean that everything has been resolved.  Often,the root causesof a crime can be foundin the community, or even in the victim himself or herself.  On this basis, victims and communities also have a responsibility to take an interest in the perpetrators of crimes.  The intent must be to identify the fundamental causes of crimes, and by addressing these causes, to create a better society and a better country, byseeking an alternative to the international criminal justice system based on peaceful means.

To achieve this, one or more of the following three approaches may be effective.  The first is to constitute a truth commission to pursue truth and reconciliation. This approach has been successful in South Africa, as well as in some Latin American and Asian countries.  Truth will be identified, and reconciliation will be made based on investigations into violations of human rights and provisions concerning ethical and legal responsibilities and duties.  The Report of the Truth and Reconciliation Commission that was prepared by the government of South Africa in 2003 also addressed this issue.  Through the Truth and Reconciliation Commission, violations of human rights relating to apartheid have been addressed.[i] The second is to hold public inquiries.  This is closely related to post-conflict management.  “Bloody Sunday[ii]” in the UK is a representative sample.  In this event, 13 people were shot to death and several were injured on January 30, 1972, a Sunday. A high-profile public inquiry, it was led by English Supreme Court Justice Mark Saville together with a judge from New Zealand and a judge from Canada, and was established on April 3, 1998.  The last is “Community-based Restorative Justice”, which is the most important and is addressed intensively herein.  This is a mechanism that focuses on the post-conflict environment, and is deeply related to the peaceful coexistence of a community.  In this area, new justice systems have emerged, called “gacaca” and restorative justice.[iii]  Gacaca is a new court system that was launched by the Rwandese government on June 18, 2002.  This new court system follows the customary system for community hearings, which have been used whenever a conflict occurs in the community.  Begun at a Canadian church in the 1970s, restorative justice is a crime-fighting approach for victim-sensitive victim-offender mediation.

Criminal prosecution is not always the right solution.  It is a good method only when it can benefit society and nation.  If we acknowledge that unexpected pitfalls exist for everyone, then people should be given one more chance, even if they have committed a crime. The proposition of the “restoration of offenders” is not suitable for all conflicts.  Nonetheless, it is a new approach to consensus, and aims at facilitating mutual understanding.  The Bible features an approach similar to this restorative justice.[iv]  It also refers to accountability for healing that goes through discipline to move toward a peaceful environment, which is different from the existing criminal justice system.[v]   The Bible considers every individual a sinner.  It says that an individual can receive forgiveness when he/she sincerely repents, surrenders to God, and produces the fruit of repentance.[vi]  It further says that reconciliation will take place when one makes restitution and reparation for the harm, and this action bears fruit.[vii]  When this is done, the offender is able to commit himself/herself to the community and the nation by producing the fruit of the Spirit[viii], through his/her indebtedness and freedom from being forgiven. Curing offenders, allowing them to repent for their wrongdoings and to voluntarily make restitution and reparation, a win-win situation for perpetrator and victim, is possible in the love of God through the remediation of hurt, restoration, forgiveness, and tolerance.  Through this, the community can seek peace through social justice and tolerance.  Both perpetrators and victims have fundamental rights as human beings.  In this area, the roles of national reconciliation/mediation agencies, protection agencies, and NGOs are important.

These approaches may equally be applied to international criminal justice.  As demonstrated above, post-conflict management should be approached peacefully.   Disputes occur when the purposes of parties do not coincide with each other. This discord emerges in the form of conflict.  A conflict is a polarization of opinions or powers.  Ultimately, such polarization may reach the level of violence, which leaves residual trauma.  This process repeats itself, continuously.  The ring of this vicious circle should be peacefully severed.  Such an approach to peaceful means advocates solving problems through mediation (this is directed toward the future, and it is better than “victory”) at the stage of conflict; through the positive involvement of peace-building at the stage of polarization; and through nonviolence rather than violence, and reconciliation and conciliation (which is against the past, and requires healing) instead of trauma.

[i]Mark Freeman, Truth Commissions and Procedural Fairness, Part 1:‘Introduction’ 3 (Cambridge University Press, 2007).

[ii]Angela Hegarty, “Truth, Law and Official Denial: The Case of Bloody Sunday”15Criminal Law Forum 199 (2004).

[iii]Phil Clark, “Hybridity, Holism and ‘Traditional’ Justice: The Case of the Gacaca Community Courts in Post- Genocide Rwanda”, 39 Geroge Washinton International Law Review 4 20 (2007).

[iv]Tony F. Marshall, Restorative Justice An Overview 6 (Research Development and Statistics, 1998).

[v]Edward Bouverie Pusey, The Confessions Of Saint Augustine 5-6 (Kessinger Publishing, 2004).

[vi]Matthew, New International Version Bible,The New Testament: Matthew 2 (Word Of Life Press, 2009).

[vii]Jeremiah, New International Version Bible, The Old Testament: Jeremiah 706 (Word Of Life Press, 2009).

[viii]Paul, New International Version Bible, The New Testament: Galatians 185 (Word Of Life Press, 2009).

© Copyright 2010 Heejung Park

Congressional Approach to Misclassification of Employees as Independent Contractors Would Confuse Rather than Clarify the Law

From featured guest blogger at the National Law Review   Richard J. Reibstein of Pepper Hamilton LLP – good commentary on why what Congress is proposing concerning Independent Contractors won’t work and what should be done instead: 

Congress has introduced two bills intended to discourage businesses from misclassifying employees as independent contractors and end the issuance of Form 1099s to workers who are not legitimate independent contractors.  Both bills – one a labor bill and the other a tax bill – have the laudable objective of curtailing misclassification of employees as independent contractors.  But the two bills, although related, contain different tests for determining who is an independent contractor or employee. 

The Obama Administration has firmly endorsed both bills.  While some Administration-supported legislative initiatives have little chance of passage in the lame-duck session of Congress or in 2011, these bills have a far better chance of passage because they are both revenue raisers.  Between the two bills, the labor bill may be passed earlier, inasmuch as hearings on the bill have already been held.

It can hardly be disputed that businesses that intentionally issue Form 1099s to workers contribute to the tax gap, deprive workers of federal, state, and local workplace protections, and places businesses that properly classify workers at a competitive disadvantage.  But, what about unintentional misclassification by businesses confused by varying definitions and legal standards used to determine who is an independent contractor and who an “employee” under an array of labor, tax, and benefits laws?

A 2006 report to Congress by the Government Accountability Office addressing misclassification observed that “the tests used to determine whether a worker is an independent contractor or an employee . . . differ from law to law,” even among various federal labor, employment, and employee benefits laws.  The GAO report notes, “For example, the NLRA, the Civil Rights Act, FLSA, and ERISA each use a different definition of an employee and various tests, or criteria, to distinguish independent contractors from employees.”  A 2009 report by theGAO concluded that while “the independent contractor relationship can offer advantages to both businesses and workers” and “[m]any independent contractors are classified properly,” Congress should take steps to help businesses that “may be confused about how to properly classify workers.” 

The tax bill expressly seeks to clarify confusion over who is an employee or independent contractor under the federal employment tax laws; however, the labor bill not only contains a test at odds with the tax bill but is also inconsistent with the test used in most other federal laws dealing with labor and employment.

The passage of the labor bill as drafted, with or without passage of the tax bill, will contribute to an even more confusing legal landscape for the hundreds of thousands of businesses that treat certain workers as independent contractors.

The Tax Bill:  The Fair Playing Field Act of 2010 

In mid-September 2010, both the Senate (S. 3786) and House (H.R. 6128) introduced the more recent of the two bills addressing misclassification – the Fair Playing Field Act of 2010.  The bill would close what the sponsors of the legislation, Senator John Kerry (D-MA) and Representative Jim McDermott (D-WA), refer to as a “tax loophole allowing businesses to misclassify workers as independent contractors.”  As set forth in the preamble of the bill, “Such misclassification for tax purposes contributes to inequities in the competitive positions of businesses and to the Federal and State tax gap, and may also result in misclassification for other purposes, such as denial of unemployment benefits, workplace health and safety protections, and retirement or other benefits or protections available to employees.”

The “loophole” that the Fair Playing Field Act seeks to close is Section 530 of the Revenue Act of 1978.  For the past 30 years, that law has afforded businesses a “safe harbor” to treat workers as independent contractors for employment tax purposes as long as the company has had a reasonable basis for such treatment and has consistently treated such employees as independent contractors by reporting their compensation on a Form 1099.

The tax bill’s “findings” recognize that while “many workers are properly classified as independent contractors, in other instances workers who are employees are being treated as independent contractors.”  The bill continues: “Workers, businesses, and other taxpayers will benefit from clear guidance regarding employment tax status.”  The bill therefore directs the Secretary of the Treasury to issue guidance in the form of regulations “allowing workers and businesses to clearly understand the proper federal tax classification of workers.” 

The Fair Playing Field Act bill provides that, in issuing such guidance, the term “employment status” for any individual shall be determined “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).”  

The IRS and the courts have historically used the “common law” test for determining independent contractor status under the Tax Code.  But, as noted below, the other federal bill seeking to curtail misclassification not only refers to a different test for determining who is an employee and who is an independent contractor, but also is out of sync with prevailing judicial precedent.

The Labor Bill:  The Employee Misclassification Prevention Act (EMPA)

EMPA was introduced in late April 2010 by the Senate (S. 3254) and House (H.R. 5107).  EMPA would amend an existing law, the Fair Labor Standards Act (FLSA), by creating a new labor law offense: misclassification of an employee as an independent contractor. 

If passed, EMPA would also impose strict record-keeping and notice requirements upon businesses with respect to workers treated as independent contractors, expose such businesses to fines of $1,100 to $5,000 per employee for each misclassification, and award triple damages for violations of the minimum wage or overtime provisions of the FLSA.

EMPA also makes specific reference to the definition of “employee” found in the FLSA, a 1938 law that regulates child labor and mandates the payment of minimum wage and overtime for employees who work more than 40 hours in a workweek. For decades, courts have interpreted the word “employee” in FLSA cases under an expansive legal standard that is commonly referred to as the “economic realities” test.  As the Supreme Court has noted, this expansive interpretation under the FLSA derives from laws that were intended to prevent child labor violations, and “stretches the meaning of ‘employee’ to cover some parties who might not qualify as [an employee] under a strict application of traditional [common] law principles.”

As drafted, however, the EMPA bill would arguably incorporate the FLSA’s broad “economic realities” test into its definition of “employee.”  That test gives undue weight to the economic dependence by workers on the business that has retained them.  Such a test is inconsistent with the Supreme Court’s most recent judicial precedents applying the “common law” test and is at odds with what the that Court referred to as  the “common understanding…of the difference between an employee and an independent contractor.”

At least one house of Congress is presumably well aware of this disconnect.  As the Assistant Secretary of Labor testified in writing before the Senate at a hearing held on EMPA on June 17, 2010, “Whether a worker is an employee [or independent contractor] depends on which law is applicable.”  He continued, “We recognize that it is conceivable for a worker to be correctly classified differently under the different standards that apply for different statutory purposes.”  Thus, absent a legislative “fix,” a business that properly classified a particular worker under the “common law” test used to determine independent contractor status under the Tax Code, ERISA, and the nation’s discrimination laws, may be found to have misclassified the same worker under the new EMPA law if the “economic realities” test of the 1938 FLSA law is used. 

Congress Should Provide a Common Federal Definition of “Employee” for Misclassification Purposes

The “common law” test for determining if an individual is an independent contractor or employee focuses on whether the business controls the manner and means that the work is accomplished.  The Supreme Court has set forth twelve factors relevant to the issue of “control,” but noted that there are many additional factors that can be useful in determining employee status, including the additional factors set forth in the IRS’s so-called “20 factor” test.

According to the Supreme Court, the “common law“ test “comports…with our recent precedents and with the common understanding, reflected in those precedents, of the difference between an employee and an independent contractor.”  Those recent precedents include the Court’s determination of whether a worker was an employee or independent contractor under the nation’s pension law and under one of the most important post-Civil Rights discrimination laws – the Americans with Disabilities Act (ADA).

The sponsors of EMPA as well as witnesses who testified in favor of the bill’s passage at a Senate committee hearing in June have noted that EMPA is intended to serve a number of important objectives: closing the tax gap that has deprived the federal and state governments of tax revenues; affording protections to misclassified workers under an array of federal laws that govern employers and employees (including ERISA, FLSA, OSHA, and the federal discrimination laws); and promoting fair business competition by outlawing the practice of misclassification, which creates an unfair advantage for businesses that improperly avoid the payment of payroll taxes.  Notably, these are the very same purposes set forth in the preamble of the Fair Playing Field Act.  Thus, both misclassification bills are intended to serve the same broad tax, labor, and business purposes.  There is no reason, therefore, for Congress to have two different and potentially conflicting tests for determining if a worker is an employee or independent contractor. 

The FLSA is one of over a dozen major federal labor and employment laws; it is not a misclassification statute.  Congress appears to have attached EMPA to the FLSA merely as a matter of legislative convenience. The value of piggy-backing new legislative initiatives on existing laws can have many benefits, such as eliminating the need for Congress to draft definitional, administrative, procedural, and other similar provisions for a new piece of legislation. 

This valuable use of legislative piggy-backing, however, should not automatically incorporate special definitional sections within the existing law where the definitions were enacted to serve purposes wholly unrelated to the purpose of the new legislation.  Indeed, the Congressional Declaration of Policy underlying the FLSA, which was enacted as part of the New Deal legislation, was to address “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”  The broad purposes of EMPA have little if nothing to do with the narrow remedial purposes of the FLSA or the child labor law statutes that were used to craft the expansive definition of “employee” in the FLSA. 

The Congressional goal expressed in the Fair Playing Field Act of “allowing workers and businesses to clearly understand the proper federal tax classification of workers” is beneficial, but if Congress allows EMPA to be passed with a different definition of “employee” than what prevails under the Tax Code and most other federal laws, all Congress will have done is created more confusion among workers and businesses.  In addition, in order to comply with all federal laws covering “employees,” a prudent business would have to disregard the “common law” test applicable under most federal statutes including the Fair Playing Field Act and only treat workers as independent contractors if they satisfied the narrower test under the New Deal child labor and wage and hour law.  This would have the effect of limiting the use of legitimate independent contractors, a result that Congress has never articulated as a purpose of either of the two bills.  Indeed, as stated in the preamble to the Fair Playing Field Act, Congress has found that “many workers are properly classified as independent contractors….”

What Congress Should Do

Congress should use the legislative process to take one of the following two steps to remedy this important discrepancy between the two bills or, if only the labor bill is passed, to ensure that it does not create even greater confusion about who is and who is not an independent contractor: 

  • Modify the definition of “employee” within EMPA so that it uses the same wording found in the Fair Playing Field Act for determining employee or independent contractor status.  Such determinations under that law should be made, as stated in the Fair Playing Field Act, “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).” 
     
  • Make it crystal clear in the legislative history of the bill, including the Senate and House committee reports, that the definition of “employee” for purposes of EMPA should be construed in a manner consistent with both the “common law” test – which is the prevailing judicial standard under most federal laws including ERISA, the ADA, and the Tax Code – and the “common understanding” of contemporary independent contractor relationships. 

Another approach would be to amend the definition of “employee” or “employ” under the FLSA to language that updates the New Deal definitional terms and, like the Fair Playing Field Act bill,  incorporates the “common law” test that prevails under virtually every other federal law.   

The urgent need for thoughtful federal legislation in the area of misclassification is hard to argue against.  The one witness that testified in a critical manner about EMPA at the Senate hearing this past June did not suggest that federal legislation is not needed.  Rather, he criticized the size of the proposed penalties for misclassification, the nature of the record-keeping requirements, the language of the proposed notice to be given to all workers, and the potential that the anti-retaliation provision could reward unethical conduct. 

The determination of whether an individual worker is an independent contractor or employee is, more often than not,  in the “gray area” and it oftentimes presents a close question of law.  Regardless of whether Congress conducts further hearings on EMPA, it is imperative that legislators avoid placing businesses and workers in the untenable position where they may be found by the very same court to have properly classified an individual under one of the two new proposed laws but improperly classified him or her under the other.

Copyright © 2010 Pepper Hamilton LLP

Congress has introduced two bills intended to discourage businesses from misclassifying employees as independent contractors and end the issuance of Form 1099s to workers who are not legitimate independent contractors.  Both bills – one a labor bill and the other a tax bill – have the laudable objective of curtailing misclassification of employees as independent contractors.  But the two bills, although related, contain different tests for determining who is an independent contractor or employee. 

The Obama Administration has firmly endorsed both bills.  While some Administration-supported legislative initiatives have little chance of passage in the lame-duck session of Congress or in 2011, these bills have a far better chance of passage because they are both revenue raisers.  Between the two bills, the labor bill may be passed earlier, inasmuch as hearings on the bill have already been held.

It can hardly be disputed that businesses that intentionally issue Form 1099s to workers contribute to the tax gap, deprive workers of federal, state, and local workplace protections, and places businesses that properly classify workers at a competitive disadvantage.  But, what about unintentional misclassification by businesses confused by varying definitions and legal standards used to determine who is an independent contractor and who an “employee” under an array of labor, tax, and benefits laws?

A 2006 report to Congress by the Government Accountability Office addressing misclassification observed that “the tests used to determine whether a worker is an independent contractor or an employee . . . differ from law to law,” even among various federal labor, employment, and employee benefits laws.  The GAO report notes, “For example, the NLRA, the Civil Rights Act, FLSA, and ERISA each use a different definition of an employee and various tests, or criteria, to distinguish independent contractors from employees.”  A 2009 report by theGAO concluded that while “the independent contractor relationship can offer advantages to both businesses and workers” and “[m]any independent contractors are classified properly,” Congress should take steps to help businesses that “may be confused about how to properly classify workers.” 

The tax bill expressly seeks to clarify confusion over who is an employee or independent contractor under the federal employment tax laws; however, the labor bill not only contains a test at odds with the tax bill but is also inconsistent with the test used in most other federal laws dealing with labor and employment.

The passage of the labor bill as drafted, with or without passage of the tax bill, will contribute to an even more confusing legal landscape for the hundreds of thousands of businesses that treat certain workers as independent contractors.

The Tax Bill:  The Fair Playing Field Act of 2010 

In mid-September 2010, both the Senate (S. 3786) and House (H.R. 6128) introduced the more recent of the two bills addressing misclassification – the Fair Playing Field Act of 2010.  The bill would close what the sponsors of the legislation, Senator John Kerry (D-MA) and Representative Jim McDermott (D-WA), refer to as a “tax loophole allowing businesses to misclassify workers as independent contractors.”  As set forth in the preamble of the bill, “Such misclassification for tax purposes contributes to inequities in the competitive positions of businesses and to the Federal and State tax gap, and may also result in misclassification for other purposes, such as denial of unemployment benefits, workplace health and safety protections, and retirement or other benefits or protections available to employees.”

The “loophole” that the Fair Playing Field Act seeks to close is Section 530 of the Revenue Act of 1978.  For the past 30 years, that law has afforded businesses a “safe harbor” to treat workers as independent contractors for employment tax purposes as long as the company has had a reasonable basis for such treatment and has consistently treated such employees as independent contractors by reporting their compensation on a Form 1099.

The tax bill’s “findings” recognize that while “many workers are properly classified as independent contractors, in other instances workers who are employees are being treated as independent contractors.”  The bill continues: “Workers, businesses, and other taxpayers will benefit from clear guidance regarding employment tax status.”  The bill therefore directs the Secretary of the Treasury to issue guidance in the form of regulations “allowing workers and businesses to clearly understand the proper federal tax classification of workers.” 

The Fair Playing Field Act bill provides that, in issuing such guidance, the term “employment status” for any individual shall be determined “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).”  

The IRS and the courts have historically used the “common law” test for determining independent contractor status under the Tax Code.  But, as noted below, the other federal bill seeking to curtail misclassification not only refers to a different test for determining who is an employee and who is an independent contractor, but also is out of sync with prevailing judicial precedent.

The Labor Bill:  The Employee Misclassification Prevention Act (EMPA)

EMPA was introduced in late April 2010 by the Senate (S. 3254) and House (H.R. 5107).  EMPA would amend an existing law, the Fair Labor Standards Act (FLSA), by creating a new labor law offense: misclassification of an employee as an independent contractor. 

If passed, EMPA would also impose strict record-keeping and notice requirements upon businesses with respect to workers treated as independent contractors, expose such businesses to fines of $1,100 to $5,000 per employee for each misclassification, and award triple damages for violations of the minimum wage or overtime provisions of the FLSA.

EMPA also makes specific reference to the definition of “employee” found in the FLSA, a 1938 law that regulates child labor and mandates the payment of minimum wage and overtime for employees who work more than 40 hours in a workweek. For decades, courts have interpreted the word “employee” in FLSA cases under an expansive legal standard that is commonly referred to as the “economic realities” test.  As the Supreme Court has noted, this expansive interpretation under the FLSA derives from laws that were intended to prevent child labor violations, and “stretches the meaning of ‘employee’ to cover some parties who might not qualify as [an employee] under a strict application of traditional [common] law principles.”

As drafted, however, the EMPA bill would arguably incorporate the FLSA’s broad “economic realities” test into its definition of “employee.”  That test gives undue weight to the economic dependence by workers on the business that has retained them.  Such a test is inconsistent with the Supreme Court’s most recent judicial precedents applying the “common law” test and is at odds with what the that Court referred to as  the “common understanding…of the difference between an employee and an independent contractor.”

At least one house of Congress is presumably well aware of this disconnect.  As the Assistant Secretary of Labor testified in writing before the Senate at a hearing held on EMPA on June 17, 2010, “Whether a worker is an employee [or independent contractor] depends on which law is applicable.”  He continued, “We recognize that it is conceivable for a worker to be correctly classified differently under the different standards that apply for different statutory purposes.”  Thus, absent a legislative “fix,” a business that properly classified a particular worker under the “common law” test used to determine independent contractor status under the Tax Code, ERISA, and the nation’s discrimination laws, may be found to have misclassified the same worker under the new EMPA law if the “economic realities” test of the 1938 FLSA law is used. 

Congress Should Provide a Common Federal Definition of “Employee” for Misclassification Purposes

The “common law” test for determining if an individual is an independent contractor or employee focuses on whether the business controls the manner and means that the work is accomplished.  The Supreme Court has set forth twelve factors relevant to the issue of “control,” but noted that there are many additional factors that can be useful in determining employee status, including the additional factors set forth in the IRS’s so-called “20 factor” test.

According to the Supreme Court, the “common law“ test “comports…with our recent precedents and with the common understanding, reflected in those precedents, of the difference between an employee and an independent contractor.”  Those recent precedents include the Court’s determination of whether a worker was an employee or independent contractor under the nation’s pension law and under one of the most important post-Civil Rights discrimination laws – the Americans with Disabilities Act (ADA).

The sponsors of EMPA as well as witnesses who testified in favor of the bill’s passage at a Senate committee hearing in June have noted that EMPA is intended to serve a number of important objectives: closing the tax gap that has deprived the federal and state governments of tax revenues; affording protections to misclassified workers under an array of federal laws that govern employers and employees (including ERISA, FLSA, OSHA, and the federal discrimination laws); and promoting fair business competition by outlawing the practice of misclassification, which creates an unfair advantage for businesses that improperly avoid the payment of payroll taxes.  Notably, these are the very same purposes set forth in the preamble of the Fair Playing Field Act.  Thus, both misclassification bills are intended to serve the same broad tax, labor, and business purposes.  There is no reason, therefore, for Congress to have two different and potentially conflicting tests for determining if a worker is an employee or independent contractor. 

The FLSA is one of over a dozen major federal labor and employment laws; it is not a misclassification statute.  Congress appears to have attached EMPA to the FLSA merely as a matter of legislative convenience. The value of piggy-backing new legislative initiatives on existing laws can have many benefits, such as eliminating the need for Congress to draft definitional, administrative, procedural, and other similar provisions for a new piece of legislation. 

This valuable use of legislative piggy-backing, however, should not automatically incorporate special definitional sections within the existing law where the definitions were enacted to serve purposes wholly unrelated to the purpose of the new legislation.  Indeed, the Congressional Declaration of Policy underlying the FLSA, which was enacted as part of the New Deal legislation, was to address “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”  The broad purposes of EMPA have little if nothing to do with the narrow remedial purposes of the FLSA or the child labor law statutes that were used to craft the expansive definition of “employee” in the FLSA. 

The Congressional goal expressed in the Fair Playing Field Act of “allowing workers and businesses to clearly understand the proper federal tax classification of workers” is beneficial, but if Congress allows EMPA to be passed with a different definition of “employee” than what prevails under the Tax Code and most other federal laws, all Congress will have done is created more confusion among workers and businesses.  In addition, in order to comply with all federal laws covering “employees,” a prudent business would have to disregard the “common law” test applicable under most federal statutes including the Fair Playing Field Act and only treat workers as independent contractors if they satisfied the narrower test under the New Deal child labor and wage and hour law.  This would have the effect of limiting the use of legitimate independent contractors, a result that Congress has never articulated as a purpose of either of the two bills.  Indeed, as stated in the preamble to the Fair Playing Field Act, Congress has found that “many workers are properly classified as independent contractors….”

What Congress Should Do

Congress should use the legislative process to take one of the following two steps to remedy this important discrepancy between the two bills or, if only the labor bill is passed, to ensure that it does not create even greater confusion about who is and who is not an independent contractor: 

  • Modify the definition of “employee” within EMPA so that it uses the same wording found in the Fair Playing Field Act for determining employee or independent contractor status.  Such determinations under that law should be made, as stated in the Fair Playing Field Act, “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).” 
     
  • Make it crystal clear in the legislative history of the bill, including the Senate and House committee reports, that the definition of “employee” for purposes of EMPA should be construed in a manner consistent with both the “common law” test – which is the prevailing judicial standard under most federal laws including ERISA, the ADA, and the Tax Code – and the “common understanding” of contemporary independent contractor relationships. 

Another approach would be to amend the definition of “employee” or “employ” under the FLSA to language that updates the New Deal definitional terms and, like the Fair Playing Field Act bill,  incorporates the “common law” test that prevails under virtually every other federal law.   

The urgent need for thoughtful federal legislation in the area of misclassification is hard to argue against.  The one witness that testified in a critical manner about EMPA at the Senate hearing this past June did not suggest that federal legislation is not needed.  Rather, he criticized the size of the proposed penalties for misclassification, the nature of the record-keeping requirements, the language of the proposed notice to be given to all workers, and the potential that the anti-retaliation provision could reward unethical conduct. 

The determination of whether an individual worker is an independent contractor or employee is, more often than not,  in the “gray area” and it oftentimes presents a close question of law.  Regardless of whether Congress conducts further hearings on EMPA, it is imperative that legislators avoid placing businesses and workers in the untenable position where they may be found by the very same court to have properly classified an individual under one of the two new proposed laws but improperly classified him or her under the other.

Copyright © 2010 Pepper Hamilton LLP

How the Supreme Court Skirted ADEA Issues During Reductions in Force and What Must be Done to Fix It

Congratulations to the Fall 2010 National Law Review Student Legal Writing Contest Winners Charles “Chip” William Hinnant III and John Erwin Barton of  the  Charlotte School of Law. 

Jack Gross was born in 1948, and grew up in Mt. Ayr, Iowa.[i] His father was an Iowa Highway Patrolman and his mother was a 3rd grade teacher.[ii] Throughout his childhood and into his adult life, health issues defined Mr. Gross.[iii] He developed chronic ulcerated colitis, and as a result underwent multiple operations involving the removal of his colon, and a part of his large intestine.[iv]When he graduated from Drake University with a B.S. in Personnel Management, he weighed 87 pounds.[v]

Upon graduating Mr. Gross went to work for Farm Bureau as a claims adjuster, eventually becoming the highest volume adjuster in the company.[vi]He stood out for his outstanding contributions, earned many professional designations, and began teaching classes to other employees.[vii]Mr. Gross’ exceptional work performance and contributions to his company were reflected in his annual reviews, which were in the top 3-5% of his company for 13 consecutive years.[viii]Yet, notwithstanding Mr. Gross’ improbable story, in 2003, all claims department employees over the age of 50 with a title of supervisor and above were demoted on the same day.[ix]Mr. Gross was replaced by a person he had hired who was in her early forties, did not have the required skills for the position as stated on the company job description, nor his breadth of experience.[x]Mr. Gross would later file an age discrimination lawsuit pursuant to the Age Discrimination in Employment Act (ADEA)[xi]in federal court, and the rest as they say, is history.

On June 18, 2009, the Supreme Court of the United States decided Gross v. FBL Financial Services, Inc.,[xii] which simultaneously held that mixed-motive theories are never proper in ADEA cases and that a plaintiff bringing a disparate-treatment claim pursuant to the ADEA must prove that age was the “but-for” cause of the challenged adverse employment action.[xiii] In effect, the Gross holding abrogated the mixed-motive theory presumably applicable to ADEA cases established inPrice Waterhouse v. Hopkins,[xiv]and led to a celebrated victory for employers to the detriment of older, ADEA protected employees just like Jack Gross, the prototypical individual that the ADEA was created to protect.

While Gross has considerably heightened the burden placed upon ADEA plaintiffs, particularly given the near universal absence of direct evidence of age discrimination in ADEA cases,[xv] its holding imposes a logically impossible burden upon ADEA plaintiffs in Reduction in Force (RIF) cases that the Supreme Court seems to have not contemplated given that Gross did not involve a RIF.[xvi] In short, during a RIF, an ADEA plaintiff always loses.  In order to correct this logical inconsistency, either the Supreme Court must grant certiorari to an ADEA RIF case to affirmatively correct its mistake, or Congress must pass legislation limiting the holding of Gross to non-RIF scenarios, if not all ADEA cases.

How Gross Prevents an ADEA RIF Plaintiff from Ever Prevailing at Trial

Gross prevents an ADEA RIF plaintiff from ever prevailing at trial because an employer will always be able to claim that a legitimate, non-discriminatory reason for the adverse action taken against the employee exists. Inherent in any RIF are financial troubles that force an employer to terminate some of its employees in an effort to remain in business; as a result, the courts have recognized that a RIF is a legitimate business justification for an adverse employment action.[xvii]

Consequently, prior to Gross, when an employer utilized a RIF as a legitimate business justification for an adverse employment action, the plaintiff was required to make an “additional showing” that age was a motivating factor in their termination in order to prevail using a mixed-motive theory of discrimination.[xviii]

However, because Gross simultaneously eliminated the mixed-motive theory as a viable option for ADEA plaintiffs and heightened the requisite showing necessary for a plaintiff to prevail from age as a “motivating-factor” of the adverse employment action to age as the “but-for” cause of the adverse employment action, such an “additional showing” can neverbe made under the law as it is currently interpreted.

Because an employer will always be able to claim that a RIF constitutes a legitimate business reason for termination, under Gross, a plaintiff cannot ever offer evidence that “illegal … motives … were the ‘true’ motives”[xix]for the adverse employment action taken against them.

As a result, an ADEA RIF plaintiff can never prove that “but-for” their age, the employer would not have initiated the adverse action against them given the ever-present excuse of a RIF. Thus, while Gross is detrimental to all ADEA plaintiffs, it is particularly prejudicial to ADEA plaintiffs whose adverse action is a result of a RIF, as it creates a logical impossibility for these plaintiffs to everhave a chance of prevailing against their employer.

What the Supreme Court Can Do to Fix the Gross Problem

The Supreme Court can and needs to fix the Gross problem and the confusion it has created for lower courts by granting certiorari to an ADEA RIF case and explicitly stating that mixed-motive theories are and must be applicable to ADEA RIF cases, and that evidence of age discrimination can be considered a “motivating factor,” rather than the “but for” cause, of illegal age discrimination within the burden shifting framework articulated within McDonnell Douglas Corp. v. Green.[xx]

As of this moment, the lower district and circuit courts are confused as to the application of Gross and its relationship with the McDonnell Douglas prima facie case and burden-shifting framework. Furthermore, this confusion is certain to increase as more RIF and non-RIF ADEA cases are filed in the near future as a result of the current economic recession, and as the unworkable nature of theGross holding in ADEA RIF cases is further exposed. Notably, post-Gross ADEA cases are relatively few and far between at the time this article is being written; however, early signs support the contention that the lower courts are not in conformity with how to interpret Gross.

The Tenth Circuit explicitly states that Gross has created some uncertainty regarding burden shifting in the ADEA context.[xxi] The Jones decision discusses in detail the application of Gross to McDonnell Douglas and clearly states that the court will not overturn their prior decisions applying the burden-shifting framework to ADEA claims.[xxii]

Furthermore, the Sixth Circuit attempts to reconcile Gross’ “but for” language with the burden shifting test in McDonnell Douglas.  By applying similar language from the application of Title VII in McDonnell Douglas, that “where there is a reduction in force, a plaintiff must … show that age was a factor [emphasis added] in eliminating his position”[xxiii]the court attempts to pigeonhole the two decisions together.  The use of the language “a factor” instead of “the factor” in the Johnsondecision enunciates the line that the court has drawn between “but for” causation of age discrimination and age being a “motivating factor” in determining whether illegal age discrimination is afoot.

The Ninth Circuit on the other hand, has essentially followed Gross to the letter.[xxiv] In the McFadden decision, the Ninth Circuit holds alongside the Supreme Court and agrees that the McDonnell Douglas burden-shifting framework does not apply to ADEA claims, and that a plaintiff must carry the burden of persuasion throughout the case.  Therefore, no burden shifting occurs, and causation must be “but-for.”

These cases, et al., are the first evidence of post-Gross confusion, and illustrate the growing problem facing the lower courts as well as plaintiffs soon to bring mixed-motive age discrimination cases involving RIFs. Some circuits and district courts continue to apply theMcDonnell Douglas burden-shifting framework and will consider whether age was a “motivating factor” of an adverse employment action, while others require a heightened burden of proof that age was the “but for” cause of an adverse employment action. Such varying interpretations of Gross will inevitably lead to circuit splits, the absence of uniformity in the application of federal law, and a future Supreme Court decision to clean up the mess.

Thus, the Supreme Court should grant certiorari to an ADEA RIF case and seek to dispel the impossible burden it has placed upon RIF plaintiffs.

What Congress Can Do to Fix the Gross Problem

Congress can fix the Gross problem by enacting legislation that limits the scope of the Gross decision to non-RIF ADEA cases, or, in the alternative, to all ADEA cases by explicitly stating that the mixed-motive theory articulated in Price Waterhouse v. Hopkins,[xxv] as well as the burden shifting framework articulated in McDonnell Douglas Corp. v. Green,[xxvi] are fully applicable to ADEA cases.

As this article is being written, both houses of Congress have responded to theGross problem by proposing bills entitled the “Protecting Older Workers Against Discrimination Act,”[xxvii] the stated purpose of which are “to amend the Age Discrimination in Employment Act of 1967 to clarify the appropriate standard of proof.”[xxviii] While these bills clearly reflect Congressional understanding of the harm that Gross causes ADEA plaintiffs, their current language as well as their present place in the legislative process creates foreseeable problems that should be swiftly resolved.

First and foremost, both bills are presently tied up in Committees.[xxix]As a result, amidst a nationwide economic recession resulting in numerous corporate RIFs as discussed infra, plaintiffs filing age discrimination lawsuits while in post-Gross, pre-Congressional action “purgatory” will be left without a remedy.

Second, because such “purgatory plaintiffs” will likely exist given the current economic recession, Congress should seek to include retroactive language in the proposed bills in an effort to afford these plaintiffs a remedy. Currently, no such retroactive language exists in either bill proposal.[xxx]

Third, the proposed bills as presently written include no language recognizing theGross problem’s disproportionate and logically impossible burden it places on ADEA RIF plaintiffs, as opposed to the more classic, non-RIF ADEA plaintiff.[xxxi]While it may be reasonably presumed that general language that disavows the Gross decision’s applicability to ADEA cases would prevent its application to ADEA RIF plaintiffs as well, there is no sense in leaving any provisions of these bills subject to judicial interpretation.

The role of Congress cannot be understated in fixing the Gross problem, and while it has taken the proper initial steps to remedy the subversion of federal law thatGross represents, timeliness, retroactivity, and precision in language choice to guarantee the protection of ADEA RIF plaintiffs soon to be effected is essential in ensuring that the rule of law is upheld.  As Justice Ginsburg famously stated in another recent travesty of judicial interpretation in the employment context,[xxxii]“the ball is in Congress’ court.”[xxxiii]

Why Fixing the Gross Problem Matters Now More than Ever

A survey of ADEA charges filed with the EEOC from 1997 to 2009 indicates that in 2008 and 2009, more ADEA charges were filed with the EEOC than in any other fiscal year in the 12-year sample size.[xxxiv]Furthermore, a tremendous increase in ADEA charges is glaringly apparent from 2007 to 2008.[xxxv]While no known data exists to support the contention, it can be reasonably inferred that such a substantial rise in ADEA charges filed with the EEOC is a byproduct of the ongoing economic recession in the United States.

As this article is being written and during the time period reflected in the EEOC charge data, numerous corporate employers, all of which are subject to the protections of the ADEA, are reducing their workforces in droves in an effort to reduce operating costs and maintain profit margins. To name a few that can be quickly found with a simple Google search, the health insurer Humana,[xxxvi] the discount retailer Target,[xxxvii] the drug manufacturers Sanofi-Aventis,[xxxviii]Eli Lilly,[xxxix]and Bristol-Meyers Squib,[xl] the oil giant Shell,[xli] the healthcare giant Cardinal Health,[xlii]and the telecommunications provider AT&T,[xliii]are all reducing their workforces during the current economic recession.

With every RIF that takes place between now and the moment that either the Supreme Court or Congress act to eliminate the applicability of the Gross decision to ADEA RIF cases if not ADEA cases as a whole, multitudes of ADEA protected plaintiffs adversely effected by a RIF that may or may not have a compelling case for illegal age-motivated discrimination against their employer, will ultimately be denied the legal protections afforded to them under federal law.[xliv]

Above all else, the Supreme Court, Congress, and the readers of this article must remember that people like Jack Gross are exactly those that the ADEA was meant to protect.  Now, the Supreme Court has to fix its mistake, or Congress must do it for them.

 

[i]Testimony of Jack Gross:  Hearings Before the Senate Judiciary Comm., 111thCong. (2010).

[ii]Id.

[iii]Id.

[iv]Id.

[v]Id.

[vi]Id.

[vii]Id.

[viii]Id.

[ix]Id.

[x]Id.

[xi]29 U.S.C.A 621 (1967)

[xii]129 S. Ct. 2343 (2009).

[xiii]Id.

[xiv]109 S. Ct. 1775 (1989).

[xv]See Generally, Desert Palace, Inc. v. Costa, 123 S.Ct. 2148 (2003).

[xvi]See 129 S.Ct. 2343 (2009).

[xvii]See Hardin v. Hussmann Corp., 45 F.3d 262 (8th Cir. 1995); Coleman v. Quaker Oats Co., 232 F.3d 1271 (9th Cir. 2000).

[xviii]See Hardin v. Hussmann Corp., 45 F.3d 262 (8th Cir. 1995).

[xix]NLRB v. Transp. Mgmt. Corp., 103 S. Ct. 2469, 2473 (1983).

[xx]93 S. Ct. 1817 (1973).

[xxi]Jones v. Okla. City Pub. Schs., 617 F.3d 1273, 1278 (10th Cir. 2010).

[xxii]Id.

[xxiii]Johnson v. Franklin Farmers Cooperative, 378 F. Appx. 505, 509 (6th Cir. 2010).

[xxiv]McFadden v. Krause, 357 F. Appx. 17 (9th Cir. 2009).

[xxv]109 S. Ct. 1775 (1989).

[xxvi]93 S. Ct. 1817 (1973).

[xxvii]H.R. 3721, 111th Cong. (2009), 2009 FD H.B. 3721 (NS) (Westlaw), See also S. 1756, 111th Cong. (2009), 2009 FD S.B. 1756(NS) (Westlaw).

[xxviii]Id.

[xxix]Id. (H.R. 3721 presently rests in the Subcommittee on Health, Labor, Employment, and Pensions, while S. 1756 presently rests in the Committee on Health, Education, Labor, and Pensions.)

[xxx]See http://www.govtrack.us/congress/billtext.xpd?bill=h111-3721 andhttp://www.govtrack.us/congress/billtext.xpd?bill=s111-1756

[xxxi]See Id.

[xxxii]Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618, 127 S. Ct. 2162 (2007)

[xxxiii]Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618, 661, 127 S. Ct. 2162, 2188 (2007) (Ginsburg, J., Dissenting).

[xxxiv]http://www.eeoc.gov/eeoc/statistics/enforcement/adea.cfm (24,582 charges were filed in 2008 and 22,778 charges were filed in 2009.)

[xxxv]Id. (Only 19,103 charges were filed in 2007.)

[xxxvi]Catherine Larkin and Alex Nussbaum, Humana Plans to Reduce Workforce by 1,400 This Year, Bloomberg Businessweek, Feb. 17, 2010,http://www.businessweek.com/news/2010-02-17/humana-plans-to-reduce-workf…

[xxxvii]Scott Mayerowitz and Alice Gomstyn, Target Among the Latest Chain of Grim Layoffs: Major Companies From Communications to Retail Layoff 40,000; More Americans Lose Jobs, ABC News, Jan. 27, 2009,http://abcnews.go.com/Business/CEOProfiles/story?id=6731375&page=1

[xxxviii]Linda A. Johnson, Sanofi-Aventis to Reduce US Workforce by 1,700, The Boston Globe, Oct. 8, 2010,http://www.boston.com/news/health/articles/2010/10/08/sanofi_aventis_to_…

[xxxix]Eli Lilly to Reduce Workforce, United Press International, Sept. 14, 2009,http://www.upi.com/Business_News/2009/09/14/Eli-Lilly-to-reduce-workforc…

[xl]Ellen Gibson, Bristol-Myers to Cut 3% of Workforce to Reduce Costs, Bloomberg Businessweek, Sept. 23, 2010,

http://www.businessweek.com/news/2010-09-23/bristol-myers-to-cut-3-of-workforce-to-reduce-costs.html

[xli]Shell To Layoff Workforce To Reduce Cost, Energy Business Review, April 30, 2009, http://utilitiesnetwork.energy-business-review.com/news/shell_to_layoff_…

[xlii]Press release, Cardinal Health, Cardinal Health to Reduce Workforce to Respond to Economic Conditions, (March 31, 2009.)

http://cardinalhealth.mediaroom.com/index.php?s=43&item=295 (

[xliii]AT&T to reduce workforce by 12,000, San Antonio Business Journal, Dec. 4, 2008,

http://www.bizjournals.com/sanantonio/stories/2008/12/01/daily29.html

[xliv]See the Age Discrimination in Employment Act at 29 U.S.C.A 621 (1967)

Charles “Chip” William Hinnant III and John Erwin Barton © Copyright 2010

Marketing and PR Social Networking Best Practices

The Business of Law Blog Spot at the National Law Review recently featured Amy Juers of Edge Legal Marketing who shared a great top ten list of Social Networking Best Practices and a great video on businesses implementing social media strategies: 

When should your team get involved in social networking marketing tactics, and which sites offer the most appropriate venue to shorten the sales cycle? Many marketing departments are still holding back on this initiative for good reason, it is practically impossible to manage what you do not understand.

Determining the right time to jump in is not as important as investigating the sites to determine if your involvement would complement your legal technology marketing or legal services marketing, sales, client communication, or any host of business initiatives. Simply jumping in for the sake of getting your feet wet is not a strategic social networking tactic.  You should do research to gain an understanding of your options, match options with organizational goals, and then consider launching initiatives through multiple outlets. If you do not have time to research this or determine if or how to weave social networking into your organization, call experts in legal marketing and PR services and ask them for social networking strategy advice.

Whether or not sites that are popular today will evolve and remain popular next year cannot be predicted, however, given every teenager knows of this technology and actively uses it, your customers and prospects of the future are developing social networking finesse and will expect to connect with you in a few years in these ways.  If the popular “must have” social networking sites of today fade into the abyss, rest assured, new “must have” networking outlets will emerge to satisfy social networking needs in business. Think of today’s big buzz social networking websites like a wave that has water in it that you can choose to ride or let pass. If you miss this one, certainly there will be another. Because no one knows how long this wave will be upon us, rather than simply waiting for this to pass, there are plenty of good reasons to investigate and consider getting involved today.

Why use Social Networking for Legal Marketing and PR

Connections through social networking sites allow groups to quickly catch up on each other’s business, while also allowing for the free-flow of information.  People are increasingly becoming more excited about checking their social networking page rather than checking email for good reason, spam has a difficult time finding its way into your “friend” list and the platform for interaction is growing increasingly dynamic.

How extensively you get involved with social networking initiatives depends upon how these initiatives align with your firm’s goals. Your firm may want to leverage a site like Facebook to create a client group, post news, share client success stories or post YouTube videos of client testimonials and demos. LinkedIn has recently added greater flexibility into their site as well. For any firm sending out electronic newsletters, or client communications, creating a chat group or client networking group on these sites provides another outlet for sharing important content that may otherwise get buried if it were delivered as an email message.

Top 10 Social Networking Best Practices

  1. Conduct your own investigation. Before you determine whether or not to invest resources or any energy into creating a business profile and joining a site, investigate the leading sites and kick the tires! Social networking sites require zero “real cash” outlay, costing only the investment of research time.
  2. Select social networking opportunities that support business goals. Test the waters before you dive in, ask your prospects, clients and employees which social networking site they prefer. Not every site is going to be a fit and align with your firm goals.
  3. Get the word out – and if needed – educate your clients! Connect to your prospects, clients and who’s who in your channel. Introducing a “chat” group on Facebook for clients makes little sense if your clients have no understanding of how to create a profile or get connected.
  4. Structure or limit the time invested in managing a social networking site.Whether responding to posts, making connections with people, or adding content to your profile, make regular updates once or twice weekly. Calendar for 15-minutes one time per week to maintain each site.
  5. Avoid getting personal. Publish content relevant to your expertise to establish thought-leadership status. No one really wants to know if you just finished a cup of coffee or if your dog has fleas.
  6. Don’t over-stimulate with too much content. Keep postings brief and informational.
  7. Resist begging. Create a consistently informational space and followers will line up to “friend” you.
  8. Avoid posting on what may be sensitive topics. Events will unfold in the industry or within a competitors business that may be highly tempting to post about. The safest approach is to stay neutral, be informative and remain professional.
  9. Measure your activity. You cannot analyze what you cannot measure. Track your tweets, followers, time spent, and conversions.
  10. Keep current on social networking trends.Subscribe to a social networking blog or legal industry RSS feed  to receive legal industry social networking, marketing and PR updates daily or weekly.

Recommended Social Media Resource Webcast

Watch this YouTube webcast video, The Business Value Behind Social Media featuring social media experts Charlene Li, David Meerman Scott and Chris Brogan as they weigh in on social media and discuss the latest strategies and opportunities that executives face when considering the implementation of social media initiatives. This webcast was recorded at the Premier Business Leadership Series in Las Vegas in November 2010. Please note, although informative this video is approximately an hour long.

© 2010 Edge Legal Marketing