The Corporate Transparency Act of 2020 (the “CTA”) was enacted as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021.[1] At the core of the CTA are reporting requirements imposed on substantially every small business organized or registered to conduct business in the United States through any type of limited liability entity. Reporting companies will be required to submit identifying information regarding their owners and individuals who participate in the formation and domestic registration of those businesses. Implementation of the CTA is largely deferred. Its reporting requirements take effect on the date regulations prescribed by the Secretary of the Treasury become effective.[2] No indication has been given as to when final regulations may be issued, although the proposed regulations discussed later in this article suggest the guidance necessary for implementation is being assembled.
Who is required to report?
Domestic or foreign companies may be required to report under the CTA. Domestic entities subject to reporting requirements include corporations, limited liability companies, and any other entity “that is created by filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.”[3] Thus, domestic reporting companies will also include limited partnerships, limited liability partnerships, limited liability limited partnerships, business trusts, and any other entity offering limited liability to its owners by virtue of a State or Tribal charter. Foreign entities that have registered to do business by filing with a secretary of state or similar office of any State or tribal jurisdiction are subject to the same reporting requirements as domestic entities.
What companies are not subject to reporting requirements?
The scope and purpose of the CTA is best understood by recognizing the types of companies that are exempt from its reporting requirements. The proposed regulations identify more than 22 different types of exempt entities. The vast majority of these exempt entities are subject to state or federal supervision, such as companies that report to securities, investment, insurance, and banking regulators.[4] Exemptions are also extended to public companies issuing securities under § 12 of the Securities Exchange Act of 1934,[5] governmental authorities, venture-capital fund advisors, public utilities, pooled investment vehicles, tax exempt entities, and entities assisting tax exempt entities. Also exempt are “large operating companies,” defined as any entity that:
employs more than 20 full-time employees in the United States,
has an operating presence at a physical office in the United States, and
filed a federal income tax return or information return for the prior year reporting more than $5 million in gross receipts or sales, excluding gross receipts or sales outside the United States.[6]
In the case of an entity that reports as part of an affiliated group under a consolidated return, the $5 million threshold applies to the amount reported on the consolidated return for the entire group.[7] Thus, any privately-held, for-profit business operating through a limited liability entity in the United States will be subject to the reporting requirements of the CTA unless it satisfies the definition of a “large operating company” and or qualifies for another exemption.
Generally, existing entities get no relief and, as explained below, are subject to the same reporting requirements as newly formed entities. However, certain inactive entities are exempt from the reporting requirements of the CTA. Entities are considered “inactive” if such entities were in existence on or before January 1, 2020, and such entities:
are not engaged in active business,
are not owned by a foreign person (directly or indirectly, wholly or partially),
have not experienced any change of ownership in the preceding 12-month period,
have not sent or received any funds in an amount greater than $1,000 either directly or through any financial account in which the entity or any affiliate of the entity has an interest in the preceding 12-month period, and
do not otherwise hold any kind or type of assets (including an equity interest in any limited liability entity).[8]
What information about the company must be reported?
The CTA requires reporting companies to disclose:
the full name of the reporting company,
any trade name or “doing business as” name of the reporting company,
the business street address,
State or Tribal jurisdiction of formation (or, in the case of a foreign entity subject to CTA reporting, the State or Tribal jurisdiction in which the foreign company first registered), and
the taxpayer identification number (TIN) under which the reporting company reports to the Internal Revenue Service.[9]If the reporting company has not yet been issued a TIN, it may instead use the Dunn and Bradstreet Data Universal Numbering System Number of the reporting company or Legal Entity Identifier.[10]
Which individuals are subject to disclosure by the reporting company?
In addition to the information regarding the reporting company that must be disclosed under the CTA, the reporting company must also provide information regarding every individual who is a beneficial owner and every individual who is a company applicant. The proposed regulations define a beneficial owner as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”[11]
How is “substantial control” of a reporting company determined?
For purposes of defining a “beneficial owner,” substantial control over a reporting company is defined to include:
service as a senior officer of the reporting company,
authority over the appointment or removal of any senior officer or a majority or dominant minority of the members of the board of directors (or similar body),
direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company as more specifically set forth in the proposed regulations, and
“[a]ny other form of substantial control over the reporting company.”[12]
The proposed regulations further clarify the circumstances in which an individual’s authority will be viewed as sufficiently substantial as to require reporting information regarding that individual. Regardless of office or title, substantial control over a reporting company includes the ability to direct, determine, decide, or exercise substantial influence over important matters affecting the reporting company. Such matters include
the nature, scope, or attributes of the business conducted by the reporting company, including mortgage, lease, sale, or other transfers of its principal assets, reorganization, dissolution, or merger of the reporting company,
major expenditures or incurring significant debt,
issuance of any equity interests by the reporting company,
approval of the operating budget of the reporting company,
selection or termination of business lines or geographic areas in which the reporting company does business,
approval of compensation schemes,
adoption of incentive programs for senior officers,
approval, performance, or termination of important contracts,
amendment of any substantial governance documents of the reporting company, including the articles of incorporation, other formation documents,
amendment of important polices or procedures of the reporting company, or
exercise of any other form of substantial control over the reporting company.
The person executing the foregoing authority with respect to a reporting company will be subject to the disclosure requirements of the CTA.[13] The means through which such control is exercised by an individual is irrelevant and such control may be direct or indirect, formal or informal, including simple business relationships. An individual may be deemed to have substantial control for purposes of the CTA if the ability to exercise substantial control (as set forth in the CTA) exists, even if such control is never actually exercised.[14]
Disclosure of information regarding non-controlling owners is required if their ownership of the reporting company equals or exceeds 25 percent. Ownership interest is broadly defined to include a variety of interests. Any type of equity interest — whether financial or simply voting — including “participation in a profit-sharing arrangement” is sufficient to be measured and considered to identify beneficial owners. In the case of non-corporate entities, any proprietary interest, any interest in capital or profits including limited and general partnership interests must be accounted for. Less direct interests are also considered ownership interests, including convertible debt, warrants, rights to purchase or subscribe to equity interests, and any “put, call, straddle, or other option or privilege of buying or selling” any ownership interest.[15]
Measuring whether an individual owns or controls 25 percent of the ownership interests of a reporting company requires accounting for “all ownership interests of any class or type, and the percentage of such ownership interests that an individual owns or controls shall be determined by aggregating all of the individual’s ownership interests in comparison to the undiluted ownership interests of the company.”[16] Consistent with the statute, the proposed regulations are clear that certain equity owners will be exempt and, therefore, not subject to reporting, including:
minor children (provided the reporting company discloses the required information regarding the parent or legal guardian of the minor child);
individuals acting as nominees, intermediaries, custodians, or agents;
employees of reporting companies “acting solely as an employee and not as a senior officer, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee”;
individuals whose only interest is an expectancy through a right of inheritance; and
With respect to creditors, the proposed regulations make it clear that creditors who are not required to be disclosed are individuals whose beneficial ownership is derived “solely through rights or interests in the company for the payment of a predetermined sum of money…and the payment of interest on such debt.”[18] If the right or interest in the value of the reporting company is a right or interest in its value or profits, such an obligation is not one “for payment of a predetermined sum” even if it takes the form of a debt instrument. This means participating debt must be accounted for as an ownership interest.
Must the ownership interest in the reporting company be owned by the beneficial owner?
An individual may be deemed a beneficial owner in a reporting company without holding an ownership interest in such reporting company. Not only are the equity and other interests described above sufficient to establish beneficial ownership, whether owned directly or indirectly, but beneficial ownership may also exist when the beneficial owner shares ownership or does not directly or indirectly hold the ownership interest. Specific examples set forth in the proposed regulations include:
joint ownership,
control of an ownership interest owned by another, and
holding an interest as a settlor, trustee, or beneficiary of a trust or similar arrangement that holds the ownership interest.[19]
In the case of an ownership interest owned or controlled by a trust, the identity of the trustee or other individuals (if any) with the authority to dispose of trust assets will always require disclosure. In addition, if the trust has a single beneficiary that is the sole permissible recipient of income and principal from the trust, the identity and other reporting information regarding such beneficiary must be disclosed. In the case of a trust with more than one beneficiary, disclosure of information is only required of those beneficiaries who have the right to withdraw or demand distributions of substantially all the trust assets.[20] If the settlor of the trust has the ability to revoke the trust or otherwise withdraw trust assets, the identity and other information regarding the settlor of the trust must be disclosed. Thus, in the right set of circumstances, an ownership interest in a reporting company held through a trust may require disclosure of the trustee, one or more beneficiaries, and the settlor of that trust. It is probably not coincidental that the revocation and withdrawal rights that make settlors or beneficiaries subject to disclosure also make those persons owners of trust income and corpus under the grantor trust rules of subpart E of the Internal Revenue Code.[21]
Who are “company applicants” requiring disclosure?
For professionals involved in entity formation, the most intrusive aspect of the CTA is the requirement for disclosure of information regarding company applicants. The proposed regulations define the term “company applicant” to mean any individual who files the document that creates the domestic reporting company or registers a foreign reporting company “including any individual who directs or controls the filing of such document by another person….”[22] Thus, a company applicant is not only the lawyer or paralegal who files the articles of incorporation, certificate of limited partnership, articles of organization, or similar document for establishing a domestic company (or the registration of a foreign entity) with a State or Tribal authority, but also a partner, senior lawyer, or any other person directing the activity of the paralegal or associate undertaking the organization or registration.
What information must be reported regarding beneficiaries and company applicants?
In the case of every individual who is a beneficial owner and every individual who is a company applicant with respect to a reporting company, the reporting company must disclose
the full legal name of the individual;
the individual’s date of birth;
the complete address of either:
such individual’s business, in the case of a company applicant who files the document organizing or registering the company in the course of such individual’s business, or
in the case of any other individual, the residential street address used by that individual for tax residency purposes; and
either the passport number, driver’s license number, or other unique identifying number from a non-expired identification document issued to the individual by a State, local, or Tribal government for identification purposes.[23]
In addition to providing the foregoing information, the reporting company must also provide a picture ID for the beneficial owner or company applicant which includes the disclosed identification number. In lieu of any beneficial owner or company applicant providing the information described above, the individual who is a beneficial owner or company applicant may, instead, provide a FinCEN identifier.[24] The proposed regulations do not provide guidance regarding how an individual may obtain a FinCEN identifier. Presumably that guidance will be forthcoming and will involve direct submission of the information described above to FinCEN. The proposed regulations require updating and correcting information submitted to FinCEN regarding beneficial owners and company applicants “at the same time and in the same manner” as updated or corrected reports are required to be submitted by reporting companies.[25]
When is reporting required?
The initial report for domestic or foreign reporting companies must be filed within 14 calendar days of the date of formation (in the case of a domestic reporting company) or within 14 calendar days of registration (in the case of a foreign reporting company).[26] For entities that pre-exist the effective date of final regulations, the initial report of the company is due not later than one year after the effective date of the final regulations.[27] In the case of an entity that no longer meets the criteria for exemption, the initial report is due within 30 calendar days after the date the exemption criteria are no longer satisfied.[28] Initial reports must be updated in a variety of circumstances, including:
within 30 days of the date on which there is “any change with respect to any information previously provided, including changes with respect to beneficial ownership, as well as any change with respect to the information reported for any particular beneficial owner or applicant”;[29]
when the reporting company becomes an exempt entity; and
within 30 days of settlement of the estate of a deceased beneficial owner.
In addition to updating the initial reports for changes in the status of the company, its beneficial owners, and company applicants, reporting companies are also obligated to correct inaccuracies and information reported within 14 calendar days after the date on which the reporting company becomes aware or has reason to know any required information previously submitted to FinCEN was inaccurate when filed and remains inaccurate.[30] How reporting companies will know or compel disclosure of corrections to the reporting information of beneficial owners and company applicants remains a mystery.
In what form is information required to be disclosed?
The proposed regulations do not provide any further elucidation as to the manner or form under which reporting will be undertaken other than to specify that it be done “in the form and manner that FinCEN shall prescribe in the forms and instructions for such report or application.…”[31]
What penalties apply to failures to report completely and accurately?
The proposed regulations do not elaborate on the penalty regime that will apply in the case of failures to report or for inaccuracies in reporting. Consistent with the statue, the proposed regulations simply assert that “it shall be unlawful for any person to willfully provide or attempt to provide, false or fraudulent beneficial ownership information…or to willfully fail to report, complete, or update beneficial ownership to FinCEN in accordance with this section.”[32] The proposed regulations do make it clear that a willful failure to report is subject to penalty. Persons who direct or control others with reporting obligations will also be held to have violated the CTA.[33]
Observations
The proposed regulations fill in some, but not all, of the gaps left by the CTA’s statutory language. For example, the proposed regulations provide no definitive guidance with respect to attribution of beneficial ownership other than as described above. Thus, there are no specific rules corresponding to §318 or §958 of the Internal Revenue Code by which constructive ownership would be attributed to a potential beneficial owner. While the proposed regulations require accounting for a broad array of ownership interests — including convertible debt, straddles, jointly owned interests, and beneficial interests in trusts — they provide no guidance as to measurement of these interests for purposes of the 25 percent threshold for disclosure of their owners, although aggregation of such interests with an individual’s other ownership interests is clearly required.
There appear to be multiple ways to avoid the reporting requirements:
Only entities deriving limited liability through State or Tribal charter (in the case of domestic entities) or registration with State or Tribal authorities (in the case of foreign entities) are subject to reporting.
Ownership of a reporting company through a non-grantor multi-beneficiary trust with respect to which the beneficiaries do not possess withdrawal rights requires disclosure of information regarding the trustee, but not the settlors or beneficiaries of the trust. Consequently, trusts with Crummey powers will not avoid disclosure of beneficiaries holding powers of withdrawal, nor will section 2503(c) trusts. However, many settlors may be willing to forego annual exclusions for gifts to such trusts if the identity and information regarding beneficiaries can be protected.
Organization of the reporting company as one of the types of organizations exempted from reporting avoids disclosure of beneficial owners and company applicants, as well. Obviously, this opportunity is limited and may require a willingness to assume other reporting obligations and regulatory oversight. However, in certain cases, regulatory oversight may not exist or may not extend to disclosure of individuals exercising substantial control or satisfying the 25 percent beneficial ownership threshold of the CTA.
Although the information the CTA requires regarding the reporting companies may be seen as not significantly greater than that necessary to organize or register the company with State or Tribal authorities, do not be deceived. The reporting obligations the proposed regulations impose on reporting companies regarding the professionals who organize those companies are clearly intended to compel disclosure of the beneficial owners of those reporting companies. Without proper planning, the corporate curtain of secrecy will be lifted.
The CTA will significantly impact lawyers who organize business entities. The exposure it creates for counsel and their staff involved in preparing and filing organizational documents will require rethinking the information to be gathered and the content of client engagement letters. If a client is unwilling to provide the information the CTA requires, the terms of the law firm’s engagement should permit termination of its representation. It would be prudent to gather the necessary information regarding beneficial owners before the engagement commences and to set forth in engagement letters who will be responsible for updating and correcting information previously filed. New engagement letters will likely be compelled for existing clients when they form new entities and when entities formed prior to the effective date of the CTA are compelled to report to FinCEN.
There is no grandfathering of existing entities unless those entities are “inactive” as defined by the CTA. Making this determination requires the ability to contact the persons who currently operate the reporting company and solicit information regarding its operations, revenues, and expenditures. Every existing entity provided limited liability by a State or Tribal government and every foreign entity registered to do business with a State or Tribal government that is not otherwise exempt must not only provide information about itself, but also must provide information about its beneficial owners. Reluctance to provide required information should be anticipated, as should be possible reluctance to compensate counsel for the effort involved to collect and report that information to FinCEN. Like it or not, the CTA will change the way you practice law.
Robert E. Ward, J.D., LL.M. is a fellow of the American College of Tax Counsel who advises businesses and individuals on U.S. international and domestic tax matters from his firm’s offices in Vancouver, British Columbia and Bethesda, Maryland.
“The requirements of this subsection shall take effect on the effective date of the regulations prescribed by the Secretary of the Treasury under this subsection, which shall be promulgated not later than 1 year after the date of enactment of this section.” 31 USC §5336(b)(5). ↑
31 CFR §1010.380(c)(1)(i)(C). All citations are to the regulations as proposed and published at 86 Fed. Reg. 69920-69974 (Dec. 8, 2021). ↑
The types of exempt entities are identified in Prop. Reg. §31 CFR §1010.380(c)(2). ↑
In the case of an individual who does not have one of the foregoing identification documents, a non-expired passport issued by a foreign government to such individual will suffice. 31 CFR 1010.380(b)(1)(ii)(D)(4). ↑
“A person fails to report complete or updated beneficial ownership information to FinCEN if such person directs of controls another person with respect to any such failure to report, or is in substantial control of a reporting company when it fails to report compete or updated beneficial ownership information to FinCEN.” 31 CFR 1010.380(g)(5). ↑
Federal and state statutes prohibiting credit discrimination, such as the Equal Credit Opportunity Act and Fair Housing Act, generally date from the 1960s and 1970s. Given that most homes lacked a personal computer and with the widespread adoption of the Internet and smartphones still decades away, these laws understandably did not anticipate modern credit practices stemming from our digital world. This created unanticipated pitfalls and challenges for unwary financial institutions.
These risks have recently been brought into sharp relief due to a practice known as “digital targeted marketing.” At its core, digital targeted marketing is a form of marketing whereby advertisements are disseminated through a variety of online platforms such as web services, paid search, banners, and social media using sophisticated data analytics that effectively preselect a precise target audience. Preselection generally occurs either through “self-selecting” or “look alike” programs offered by online platforms such as Facebook. In self-selecting programs, the advertiser itself selects the criteria used to determine recipients based on an array of attributes and characteristics provided by the platform. In contrast, look alike programs are conducted by feeding the advertiser’s existing customer data through a black box of proprietary data analytics provided by the platform to identify recipients that “look like” the advertiser’s customer base. Because the troves of consumer data possessed by these platforms are so large that they are beyond the ability of individuals or even most software to analyze, companies increasingly use “machine learning”—a type of artificial intelligence that learns on its own as it analyzes huge amounts of data—to comb through this data to find predictive attributes and simultaneously improving its own analysis. Financial institutions increasingly use these tools because they allow advertisement placement not only with those most likely to be interested in a given financial product, but also with those most likely to qualify for it.
As with the use of any consumer attribute, fair lending concerns can arise when protected classes are excluded, whether intentionally or unintentionally, from digital targeted marketing offers due to the presence of one or more attributes that align with prohibited bases or their close proxies. A recent flurry of regulatory activity and private litigation aimed at Facebook highlights this risk and includes:
A 20-month investigation into Facebook’s digital targeted marketing practices by the Attorney General of Washington state. This resulted in a consent order in which Facebook agreed to cease providing advertisers with the option to (1) exclude ethnic groups from advertisements for insurance and public accommodations; or (2) otherwise utilize exclusionary advertising tools that allow advertisers with ties to employment, housing, credit, insurance and/or places of public accommodation to discriminate based on race, creed, color, national origin, veteran or military status, sexual orientation and disability status.[1]
A civil suit brought by the National Fair Housing Alliance, the Communications Workers of America and several other consumer groups alleging discriminatory practices in Facebook’s digital targeted marketing practices. This resulted in a settlement of $5 million and an agreement by Facebook to make changes to its look alike campaigns for housing, employment and credit-related advertisements (e.g., prohibiting attributes related to age, gender and zip codes).[2]
An ongoing Charge of Discrimination levied by the Department of Housing and Urban Development (“HUD”) alleging discriminatory housing practices in violation of the provisions of the Fair Housing Act that prohibit discrimination based on race, color, religion, sex, familial status, national origin or disability. Specifically, HUD alleges that Facebook (1) enabled advertisers of housing opportunities to target audiences using prohibited bases; and (2) used an ad-delivery algorithm that would independently discriminate based on prohibited bases even where advertisers did not use prohibited bases to target audiences. [3]
An ongoing civil suit in the Northern District of California alleging that Facebook’s direct targeted marketing practices violated the Fair Housing Act, Equal Credit Opportunity Act and California fair lending laws.[4]
While enforcement and litigation has primarily focused on Facebook and its practices to date,[5] the New York Department of Financial Services recently expressed interest in investigating financial institutions and “Facebook advertisers to examine…disturbing allegations [of discriminatory practices]…to take whatever measures necessary to make certain that all financial services providers are in compliance with New York’s stringent statutory and regulatory consumer protections.”[6] This sentiment was echoed in a recent article by the Associate Director and Counsel to the Federal Reserve Board’s Division of Consumer and Community Affairs which highlights the fair lending risk digital targeted marketing poses to financial institutions (i.e., steering and redlining) and notes that the “growing prevalence of AI-based technologies and vast amounts of available consumer data raises the risk that technology could effectively turbocharge or automate bias.”[7] The commentators further note that it is “important to understand whether a platform employs algorithms — such as the ones HUD alleges in its charge against Facebook — that could result in advertisements being targeted based on prohibited characteristics or proxies for these characteristics, even if that is not what the lender intends.”
With this in mind, financial institutions must evaluate and mitigate not only the risks associated with their own digital targeted marketing activities, but also the activities of the platforms with which they associate. In doing so, they should consider taking the following actions:
Evaluating the importance of digital targeted marketing to the financial institution and its risk tolerance with respect to same.
Attempting to obtain as much information as possible about the possible presence of prohibited bases or close proxies in digital-marketing algorithms.
Requiring indemnification in digital targeted marketing agreements, especially where platforms use proprietary black box analytics.
Where available, using “special ad audience” programs intended for industries subject to anti-discrimination laws (e.g., housing, credit, employment, etc.).
Considering using self-selected attribute criteria that avoid prohibited bases or close proxies in lieu of a platform’s look alike program.
Analyzing and testing responses to digital marketing campaigns for potentially disparate outcomes.
Given their potential benefits, financial institutions are unlikely to cease direct targeted marketing activities. But those that are prudent should engage in reasonable due diligence regarding the platforms they use—weighing the benefits against the risks of their use—while monitoring for future regulatory guidance or legal precedent.
In re Facebook, Inc., No. 18-2-18287-5SEA (Consent Order) (Wa. Super. Ct., July 24, 2018). ↑
Nat Ives, Facebook Axes Age, Gender and Other Targeting for Some Sensitive Ads, THE WALL STREET JOURNAL (March 19, 2019). ↑
HUD v. Facebook, Inc., HUD ALJ No. 01-18-0323-8 (Charge of Discrimination) (U.S. Dept. of Housing and Urban Development Office of Administrative Law Judges, March 28, 2019). ↑
Opiotennione v. Facebook, Inc., Case No. 3:19-cv-07185 (JSC) (Complaint) (N.D. Cal., October 31, 2019). ↑
HUD is reportedly investigating Google and Twitter for similar violations. See Tracy Jan and Elizabeth Dwoskin, HUD Is Reviewing Twitter’s and Google’s Ad Practices as Part of Housing Discrimination Probe, THE WASHINGTON POST (March 28, 2019). ↑
Carol A. Evans & Westra Miller, Fed. Reserve Sys., From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing, CONSUMER COMPLIANCE OUTLOOK, Third Issue 2019, at 7, available at https://consumercomplianceoutlook.org/2019/. ↑
Big News. On January 27, 2022, the Delaware Legislature passed legislation designed to make captive insurance a viable alternative to traditional D&O insurance. This new development should mean that, over time, the cost of D&O insurance should decline.
The following is a set of FAQs designed to help D&O insurance buyers and beneficiaries understand (1) why there was a problem, (2) what the Delaware legislature did to address the problem, (3) the impact of the change in Delaware law on traditional D&O insurance, and (4) for whom pursuing a captive strategy makes sense.
I. What Was the Problem?
A corporation with a small balance sheet will obviously want to purchase D&O insurance. But why are corporations with hefty balance sheets buying D&O insurance? Can’t they just self-fund any losses?
Some companies with large balance sheets choose to forgo the “balance sheet” protection part of D&O insurance (often referred to as Side B/C coverage) and self-fund any losses they can legally indemnify. In most cases, there is no need to go to the trouble of setting up an indemnification trust, a captive, or anything else. If something is indemnifiable, which is the case for solvent corporations when it comes to defense costs for all claims brought in the US as well as the settlement of securities class action lawsuits, the corporation can just pay these costs directly as incurred.
However, recall that under Delaware General Corporation Law (DGCL) Section 145(b), corporations are not permitted to provide indemnification for breach of fiduciary duty suits brought derivatively. This explains the popularity of “Side A” D&O insurance even for very large, well-funded companies. Side A D&O insurance provides first dollar coverage when something is insurable but not indemnifiable, such as the settlement of derivative suit claims.
Unfortunately, settling derivative suits is getting increasingly expensive. As a result, the cost of stand-alone Side A insurance has gone up dramatically in recent years.
What is a captive?
A captive is a licensed insurance company that provides insurance for designated risks to its corporate parent company. Companies like financing retained risk with captives because of potential benefits such as increased control over the cost of insurance, insulation from market volatility, access to reinsurance markets, and tax efficiency.
Given the high cost of D&O insurance, why weren’t we already using captives for D&O insurance?
The cost of using a captive for D&O insurance was prohibitive for two reasons: (1) onerous capital requirements, and (2) the concern that a captive would not be allowed to respond on behalf of directors and officers to claims that are not indemnifiable as a matter of Delaware corporate law.
Why are D&O captive capital requirements so onerous?
Put simply, captives work best for high-frequency, low-severity risks. When there is a plethora of data for a type of risk, for example workers’ compensation losses, actuaries can model future losses with a high degree of certainty. This is important because a captive must hold adequate capital to backstop the limit of insurance being provided to the parent company. The relative lack of predictability and the potential for outsized losses inherent in D&O claims means that the capital required for a D&O captive is likely to be substantial. Compared to the cost of D&O insurance, even during the current hard market, funding a captive is likely to be burdensome.
Why did everyone think that even if you used a captive, you still had to buy Side A insurance from a traditional commercial insurance carrier?
As noted above, DGCL Section 145(b) exposes directors and officers to the potential of personally paying to settle derivative suits. Thankfully, DGCL Section 145(g) explicitly contemplates using D&O insurance to cover directors and officers against liability “whether or not the corporation would have the power to indemnify such person against such liability under this section.”
What the original text of DGCL Section 145(g) did not do, however, was contemplate the use of captive insurance. While captive insurance is insurance, the concern is that using a parent company’s captive instead of buying commercial insurance arguably looks like the corporation is attempting to fund non-indemnifiable losses since it is the corporation itself that funds the captive. That led most experts to advise that corporations using a captive to protect their directors and officers should also continue to purchase Side A insurance to be certain directors and officers have coverage for non-indemnifiable claims.
II. What Did the Delaware Legislature Do?
What did the Delaware legislature do to make captives a more viable option to replace traditional D&O insurance?
The change just passed by the Delaware legislature amends DGCL Section 145(g) to clarify, that as the term is used by the DGCL, the definition of insurance includes captives. This makes captives a viable alternative to traditional D&O insurance, even Side A D&O insurance, for claims that are not directly indemnifiable by the corporation due to DGCL Section 145(b).
Can a captive provide identical coverage that commercial insurance carriers provide?
As always with D&O insurance, the devil is in the details, and it will take time to understand the details of the change in the DGCL. One observation is that, particularly with respect to independent directors, some of the most advanced D&O insurance policies available have no conduct exclusions of any kind for independent directors.
By contrast, DGCL 145(g) mandates some exclusions from coverage. Some may not consider these exclusions to be problematic, such as the exclusions for “any claim made against any person arising out of, based upon or attributable . . . to or a knowing violation of law by such person, if . . . established by a final, non-appealable adjudication in the underlying proceeding in respect of such claim.”
This will be a business decision for boards to consider. Boards will want to take into consideration how to best attract talented independent directors to their board given the high frequency and severity of claims brought against directors and officers, including very expensive but largely frivolous claims.
III. What Will Be the Impact of the Change in the DGCL on Traditional D&O Insurance?
Are insurance carriers going to be upset about this change?
No. The reason the cost of D&O insurance has gone up so dramatically is that losses have been outpacing premiums for years. The volatile, high-severity nature of outcomes for D&O claims makes underwriting a particularly difficult challenge—especially for the biggest companies. Carriers have long felt that providing D&O insurance for some companies is much like providing fire insurance for mansion-size cabins in the middle of a forest experiencing drought. Smart carriers will welcome the opportunity the change in Delaware law provides to partner with their insureds in more creative ways.
Will the cost of D&O insurance decline?
Yes, the cost of D&O insurance should decline over time. Insurance market conditions are impacted by both the trading market and the technical underwriting results. On the technical side, one factor leading to the increased price of D&O insurance has been huge losses experienced by carriers, leading to poor underwriting results and the need for increased premiums. The trading market has experienced unprecedented demand for the D&O insurance product. There is always a large cohort of mature public companies that seek D&O insurance each year. Adding to that demand more recently has been an unusually large numbers of new seekers of public company D&O insurance resulting from traditional operating company IPOs, direct listings, SPAC IPOs, and companies going public through de-SPAC transactions. Economics 101 tells us that when demand goes up and supply—insurance capital—is relatively inelastic, the cost of the product will go up. The emergence of captives should ease the demand somewhat, so all things being equal DGCL 145(g) should bring down the cost of D&O insurance over time.
IV. Who Should Pursue a Captive Strategy as an Alternative to Traditional D&O Insurance?
What type of companies are the best candidates to use a captive as an alternative to D&O insurance?
The primary qualifications for financing D&O in a captive are (1) a strong corporate balance sheet, and (2) the desire to retain significant, unpredictable D&O risk. Corporations using their captive to cover D&O risk will need to pay the captive an annual premium to cover actuarial expectations for D&O claims. These corporations will also be required to deposit sufficient risk capital into the captive to satisfy regulatory capital requirements and cover claims beyond the actuaries’ estimates up to the full policy limit.
When factoring in the captive premium, the opportunity cost of the risk capital invested in the captive and the captive’s operating costs (captive management, actuaries, accountants), the captive option is likely to be more expensive and operationally onerous compared to simply buying traditional D&O insurance. A careful cost-benefit analysis may show that commercial D&O insurance is still a good deal.
Given that cost of setting up a captive and the work involved, companies that already have a captive in place are the best candidates to consider using a captive as an alternative to D&O insurance.
What type of companies are especially unlikely to use a captive for D&O insurance?
Companies that are not financially stable are unlikely to be good candidates to use a captive.
First, a company with a weak balance sheet is unlikely to have the cash or credit facilities available to fund a captive. In addition, it is not clear that a bankruptcy court would refrain from seizing the captive’s assets, which would adversely affect the ability of the captive to pay a claim brought against a director or officer. If this happened, the company’s directors and officers would have no protection against claims brought against them. By contrast, classic Side A D&O insurance is specifically designed to be able to respond on behalf of directors and officers when a company is in bankruptcy and can no longer indemnify its directors and officers.
Companies for whom investing millions of dollars of risk capital is painful—either because of less than robust balance sheets or because capital is better utilized for other initiatives like acquisitions or capital investment—should also avoid D&O captive strategies.
Organizations looking to use a captive as a short-term antidote to expensive D&O insurance will likely be frustrated. Standing up a D&O-focused captive or adding D&O to an existing captive will require companies to maintain significant regulatory capital for years, not to mention material time and attention from executives. Captives make the most sense for companies that are committed to this strategy. (For this reason, SPACs—which only exist in their original form for two years or less—are not good candidates to use a captive instead of traditional D&O insurance.)
Over time, the change in DGCL Section 145(g) might lead to captive solution innovations beyond a traditional single parent structure for D&O risks, potentially including group captives. Group captives tend to be most appropriate for smaller middle market companies. However, group captives still require considerable capital. Most importantly, group captive solutions typically involve levels of risk sharing among members—something many independent directors might find deeply uncomfortable. Any consideration of D&O offerings from existing captives should be carefully reviewed to understand the fine print and appropriateness of fit to solve the underlying problem.
I have an existing captive. Can I just put my D&O risk into that?
Likely yes, but it is not clear that this will be the best way to go. Directors and officers may be wary of being asked to pivot from having dedicated protection through traditional D&O insurance to facing the risk of their coverage being diluted by workers’ compensation or other claims covered by a company’s captive. If a big D&O claim has to be paid the same year the captive has to pay other claims, it will be too late to back-fill with traditional D&O insurance.
How long does it take to set up a captive?
From soup to nuts, you are typically looking at 45 to 90 days. It is likely that the first few captives for D&O insurance that include coverage for non-indemnifiable loss will take longer as captive domiciles and regulators need to come up to speed on putting D&O risk in a captive. You will also want to build additional time into your planning process for things like getting management and board alignment on whether to pivot to using a captive to replace some or all of your traditional D&O insurance.
What would be a sensible strategy to explore using a captive for my D&O risk?
Rather than, in one year, completely pivoting from a traditional D&O insurance program to a captive, consider setting up a dedicated captive to address part of your risk. This allows everyone to get used to the idea and work out the inevitable kinks in the system before fully committing all the directors’ and officers’ protection to a captive structure.
What are some non-obvious risks my board should consider as it considers replacing traditional D&O insurance with a captive?
See above for comments on attracting and retaining top talent in a competitive market for directors and officers.
When a captive pays a D&O insurance claim, there could be questions of timing, optics, and potentially mischief. Amended DGCL Section 145(g) requires that if notice is required to be given to shareholders of the settlement of a derivative suit, a condition precedent to any payment by a captive is that shareholders be given notice that the payment is being made “under such [captive] insurance in connection with such dismissal or compromise.”
Maybe this will be fine. On the other hand, large settlements rarely leave shareholders feeling charitable towards the directors and officers on whose behalf the settlements are being made. DGCL Section 145(g)’s notification requirement may imply to shareholders that they have the ability to object to the payments—even though there is nothing in the section about objections. The timing of the notification may lead some shareholders to feel that since the claims are being paid by the corporate parent’s captive—which was funded by corporate proceeds—the shareholders are being harmed. One expects that there will be many articles written that will fail to mention that Delaware law explicitly authorized this funding mechanism and will instead attempt to shame directors and officers for “taking advantage” of shareholders.
When D&O insurance pays a claim, there is no shareholder notification process, and certainly no one is writing articles sympathizing with the D&O insurance carriers who paid the claim.
What are good next steps?
Before running too far down the captive path, consider having an informed conversation with your board of directors to test their appetite. D&O insurance prices are already starting to soften, creating a dynamic where your board may not think the squeeze is worth the juice.
You will also want to conduct a feasibility study, the normal first step taken when considering a captive. A feasibility study is a somewhat involved process that typically includes things like a review of the organization’s ability to retain risk, actuarial modeling of the D&O exposure, several years of pro-forma captive financials and a comprehensive financial comparison to traditional insurance accounting for the opportunity cost of capital trapped in the captive.
Principal, Litigation Chair of North America Trade Secrets Practice Baker McKenzie 600 Hansen Way Palo Alto, CA 94304 (650) 856-5509 [email protected]
Adam Aft
Partner, IPTech Co-Chair Global Technology Transactions Baker McKenzie 300 E. Randolph St., Suite 5000 Chicago, IL 60001 (312) 861-2904 [email protected]
Contributors
Alex Crowley
Associate, IPTech Baker McKenzie 300 E. Randolph St. Suite 5000 Chicago, IL 60001 (312) 861-6598 [email protected]
§ 1.1. Introduction
We are pleased to present the second edition of the rapidly growing Chapter on Artificial Intelligence.
A few years ago, when in my capacity as the Founder and Chair of the AI Subcommittee, I made the original suggestion that the Annual Review should include a new Chapter devoted entirely to AI, I understood from clients that this is an area where they were hungry for guidance. Over the last decade, AI and Machine Learning have become my passion. I continue to be fascinated by the various AI/ML issues I am asked by my clients to advise them on, and have watched with interest as US regulators and the plaintiff’s bar have begun to focus their sights on commercial and embedded AI. The pace of corporate deals involving companies who count AI as their innovation have also increased substantially. I have tried hard to keep up with the rapid pace of change and have published on many aspects, formulated proposed federal AI legislation that in 2018 became a House of Representatives Draft Discussion Bill, and have been invited to speak and teach on AI at many institutions including MIT/SLOAN, NYU, and Berkeley Law School.
In the absence of substantive federal legislation, case law plays an outsized role in helping shape the contours of the emerging legal issues associated with widespread adoption of AI and Machine Learning. Tracking relevant case developments from around the country is essential. Last year, we confidently predicted that the developments we report this year would increase exponentially year over year. Our prognostication has proven correct. This year’s Chapter marks a notable increase in reported cases in the field.
The goal of this Chapter is to have it become a useful tool for those business attorneys who seek to be kept up to date on a national basis concerning how the courts are deciding cases involving AI. We again made the same editorial decisions and included relevant legislation and pending legislation. We also made the same judgments as to what should be included. A notable example is facial recognition. Due to the nature of the underlying technology and the complexity of FR, FR necessarily involves issues of algorithmic/artificial intelligence. However, we did not include every case that references facial recognition when the issue at bar pertained to procedural aspects such as class certification (e.g., class action lawsuits filed under the Illinois Biometric Information Privacy Act (BIPA) (740 ILCS 14)).
Finally, I want to thank my colleagues, Adam Aft and Alex Crowley, for their assistance in preparing this year’s Chapter. Adam is a knowledgeable and accomplished AI attorney with whom I frequently collaborate, and Alex is a new joiner to our team with a noted exuberance for AI.
We hope this Chapter provides useful guidance to practitioners of varying experience and expertise and look forward to tracking the trends in these cases and presenting the cases arising in the next several years.
Van Buren v. United States, 141 S. Ct. 1648 (Jun. 3, 2021). The dispute underlying this case arose when a police officer violated department policy by using the computer in his patrol car to access information in a law enforcement database for a non-law-enforcement purpose. The Court held that a computer user “exceeds authorized access” under the Computer Fraud and Abuse Act of 1986 (CFAA) “when he accesses a computer with authorization but then obtains information located in particular areas of the computer—such as files, folders, or databases—that are off-limits to him.” Here, the police officer was authorized to access his patrol-car computer and the law enforcement database. But due to the Court’s holding, the officer’s purpose, albeit improper, in accessing the computer and database was not relevant to determining liability under CFAA. This holding resolved a circuit split about how broadly to interpret CFAA. It avoided making “millions of otherwise law-abiding citizens” into criminals simply on the basis that they used their computers in a technically unauthorized way, such as to send personal email from a work laptop.
There were no other qualifying decisions by the United Sates Supreme Court. We note the Court has heard a number of cases foreshadowing the types of issues that will soon arise with respecting to artificial intelligence such as United States v. Am. Library Ass’n (539 U.S. 194 (2003)) in which a plurality of the Court upheld the constitutionality of filtering software that libraries had to implement pursuant to the Children’s Internet Protection Act and Gill v. Whitford (138 S. Ct. 1916) in 2017 in which, if the plaintiffs had standing, the Justices may have had to evaluate the use of sophisticated software in redistricting (a point noted again in Justice Kagan’s express reference to machine learning in her dissent in Rucho v. Common Cause (139 S. Ct. 2484 (2019))). The Court had previously concluded that a “people search engine” site presenting incorrect information that prejudiced a plaintiff’s job search was a cognizable injury under the Fair Credit Reporting Act in Spokeo, Inc. v. Robins (136 S. Ct. 1540 (2016)). These cases are representative of the type of any number of cases that are likely to make their way to the Court in the near future that will require the Justices to contemplate artificial intelligence, machine learning, and the impact of the use of these technologies.
§ 1.2.2. First Circuit
There were no qualifying decisions within the First Circuit.
§ 1.2.3. Second Circuit
Flores v. Stanford, 2021 U.S. Dist. LEXIS 185700 (S.D.N.Y 2021) (compelling disclosure of information related to the COMPAS software (used to assess the likelihood of recidivism and used by courts to inform bail amounts and sentencing) as relevant to inform the plaintiffs class certification given that having transparency and explainability regarding such information and the operation of the applicable algorithm would be potentially central to the plaintiffs’ assertions that the defendants had unconstitutional practices deployed against them in the manner in which the COMPAS software informed their sentencing).
Force v. Facebook, Inc., 934 F.3d 53 (2d Cir. 2019). Victims, estates, and family members of victims of terrorist attacks in Israel alleged that Facebook was a provider of terrorist postings where they developed and used algorithms designed to match users’ information with other users and content. The court held that Facebook was a publisher protected by Section 230 of the Communications Decency Act and that the term publisher under the Act was not so limited that Facebook’s use of algorithms to match information with users’ interests changed Facebook’s role as a publisher.
§ 1.2.3.1. Additional Cases of Note
Clark v. City of New York, 2021 U.S. Dist. LEXIS 177534 (S.D.N.Y. 2021) (denying motion to dismiss first amendment and state law religious discrimination claims against New York City for requiring Muslim women to remove their hijabs for booking photographs after arrest. A primary motivation for the women’s complaint was that forcing them to remove their hijabs for a picture would cause the women to violate their religious belief that men outside of their immediate family were prohibited from seeing the women without their hijabs, even if only via pictures stored in facial recognition databases. The court found that “requiring the removal of a hijab does not rationally advance the City’s valid interest in readily identifying arrestees,” including via facial recognition databases.)
Nat’l Coalition on Black Civic Participation v. Wohl, 2021 U.S. Dist. LEXIS 177589, 2021 WL 4254802(S.D.N.Y. 2021) (holding that a robocall service provider that allowed users to upload messages to a website for distribution via the service provider’s automated phone calling (i.e., robocall) system was not entitled to neutral publisher immunity under Section 230 because it was not a provider or user of an interactive computer service and the service provider allegedly knew of the discriminatory and false content of the messages and actively helped the users determine where to distribute the messages).
Nuance Communs., Inc. v. IBM, 2021 U.S. Dist. LEXIS 115228 (S.D.N.Y. 2021) (noting that “This is a breach of contract case arising under New York law. But more than that, this case is a contemporary window into the brave new world of artificial intelligence (“AI”) commercial applications” and finding after a bench trial that IBM had breached its implied covenant of good faith by updating a product outside of the scope of the parties’ agreement in order to avoid making the updates available to Nuance in relation to the product within the scope of the agreement).
Calderon v. Clearwater AI, Inc., 2020 U.S. Dist. LEXIS 94926 (S.D. N.Y. 2020) (stating the court’s intent to consolidate cases against Clearview based on a January 2020 New York Times article alleging defendants scraped over 3 billion facial images from the internet and scanned biometric identifiers and then used those scans to create a searchable database, which defendants then allegedly sold access to the database to law enforcement, government agencies, and private entities without complying with BIPA); see also Mutnick v. Clearview Ai, Inc., 2020 U.S. Dist. LEXIS 109864 (N.D. Ill. 2020).
People v. Wakefield, 175 A.D.3d 158 (N.Y. App. Div. 2019) (concluding no violation of the confrontation clause where the creator of artificial intelligence software was the declarant, not the “sophisticated and highly automated tool powered by electronics and source code.”); see also People v. H.K., 2020 NY Slip Op 20232, 130 N.Y.S.3d 890 (Crim. Ct. 2020) (following Wakefield in concluding that where software was “acting as a highly sophisticated calculator” the analyst using the software was still a declarant and the right to confrontation was preserved).
Vigil v. Take-Two Interactive Software, Inc., 235 F. Supp. 3d 499 (S.D.N.Y. 2017) (affirmed in relevant part by Santana v. Take-Two Interactive Software, Inc., 717 Fed.Appx. 12 (2d Cir. 2017)) (concluding that the BIPA doesn’t create a concrete interest in the form of right-to-information, but instead operates to support the statute’s data protection goal; therefor, defendant’s bare violations of the notice and consent provisions of BIPA were dismissed for lack of standing).
LivePerson, Inc. v. 24/7 Customer, Inc., 83 F. Supp. 3d 501 (S.D.N.Y. 2015) (determining plaintiff adequately plead possession and misappropriation of a trade secret where plaintiff alleged its “predictive algorithms” and “proprietary behavioral analysis methods” were based on many years of expensive research and were secured by patents, copyrights, trademarks, and contractual provisions).
§ 1.2.4. Third Circuit
Zaletel v. Prisma Labs, Inc., No. 16-1307-SLR, 2017 U.S. Dist. LEXIS 30868 (D. Del. Mar. 6, 2017). The plaintiff had a “Prizmia” photo editing app. The plaintiff alleged trademark infringement based on the defendant’s “Prisma” photo transformation app. In reviewing the Third Circuit’s likelihood of confusion factors, the court considered the competition and overlap factor. The court concluded that “while plaintiff broadly describes both apps as distributing photo filtering apps, the record demonstrates that defendant’s app analyzes photos using artificial intelligence technology and then redraws the photos in a chosen artistic style, resulting in machine generated art. Given these very real differences in functionality, it stands to reason that the two products are directed to different consumers.”
§ 1.2.4.1. Additional Cases of Note
McGoveran v. Amazon Web Servs., 2021 U.S. Dist. LEXIS 189633 (D. Del. 2021) (granting motion to dismiss a claim under Illinois’ Biometric Information Privacy Act (BIPA) brought by residents of Illinois against non-Illinois-based companies Amazon Web Services (AWS) and Pindrop Security for collecting callers’ “voiceprints,” which can be used to identify the speaker, when the residents made calls from Illinois using Illinois phone numbers to a company that used AWS and Pindrop services. The court found no “allegations involving conduct that occurred ‘primarily and substantially’ in Illinois” and that “BIPA does not apply extraterritorially.”)
Thomson Reuters Enter. Ctr. GmbH v. ROSS Intelligence Inc., 2021 U.S. Dist. LEXIS 59945 (D. Del. 2021) (denying a motion to dismiss claim of copyright infringement and tortious interference with contract against ROSS Intelligence, a legal research services company, related to ROSS’s alleged obtaining, via a third party contracted with Thomson Reuters, and use of certain Westlaw materials, notably Westlaw’s Headnotes and Key Number System, when developing ROSS’s own artificial intelligence-based legal research software. While ROSS argued “that Westlaw Content is not copyrightable under the government edicts doctrine,” the court nonetheless held that Thomson Reuters at least had a plausible claim for copyright infringement based on Thomson Reuters’ efforts to register its content with the US Copyright Office and a plausible claim of tortious interference with contract due to the manner in which ROSS allegedly obtained the Westlaw content.)
In re Valsartan, Losartan, & Irbesartan Prods. Liab. Litig., 337 F.R.D. 610 (D.N.J. 2020) (requiring the defendants to use an eDiscovery document review protocol that the parties had mostly agreed on rather than letting Teva unilaterally implement its own machine-learning-based document review protocol, suggesting that eDiscovery implementation is a collaborative effort requiring transparency in how document analysis is performed regardless of which technologies are used to conduct the analysis.)
§ 1.2.5. Fourth Circuit
Thaler v. Hirshfeld, 2021 U.S. Dist. LEXIS 167393 (E.D. Va. 2021) (holding that an artificial intelligence machine cannot be considered an “inventor” under the US Patent Act because plain reading of relevant provisions and statutes indicates that inventors must be natural persons.)
TruGreen Ltd. P’ship v. Allegis Global Sols., Inc., 2021 U.S. Dist. LEXIS 33587 (4th Cir. 2021) (granting motions to dismiss counts of negligent misrepresentation and promissory estoppel made based on claims that Defendant failed to perform under the contract. The failure of the defendant’s AI chatbot recruiting tool to perform as defendant promised was one way in which the defendant failed to meet its contractual obligations.)
Sevatec, Inc. v. Ayyar, 102 Va. Cir. 148 (Va. Cir. Ct. 2019). The court noted that matters such as data analytics, artificial intelligence, and machine learning are complex enough that expert testimony is proper and helpful and such testimony does not invade the province of the jury.
§ 1.2.6. Fifth Circuit
Aerotek, Inc. v. Boyd, 598 S.W.3d 373 (Tex. App. 2020). The court expressly acknowledged that one day courts may have to determine whether machine learning and artificial intelligence resulted in software altering itself and inserting an arbitration clause after the fact.
§ 1.2.6.1. Additional Cases of Note
Bertuccelli v. Universal City Studios LLC, No. 19-1304, 2020 U.S. Dist. LEXIS 195295 (E.D. La. 2020) (denying a motion to disqualify an expert who the court concluded was qualified to testify in a copyright infringement case after having performed a “artificial intelligence assisted facial recognition analysis” of the plaintiff’s mask and the alleged infringing mask). But seeBertuccelli v. Universal City Studios LLC, 2021 U.S. Dist. LEXIS 77784 (E.D. La. 2021) (later excluding a portion of the expert witness’s testimony on the basis that plaintiff Bertuccelli failed to timely respond to defendants’ request for additional information about the expert witness’s initial report.)
§ 1.2.7. Sixth Circuit
Cahoo v. Fast Enters. LLC, 508 F. Supp. 3d 162 (E.D. Mich. 2020) (finding that the plaintiff class had sufficiently demonstrated injury-in-fact due to “fraud determinations based on rigid application of UIA’s logic trees coupled with inadequate notice procedures.” The application of the logic trees was too rigid in that such application resulted in significant outcomes—determination of fraud—solely on the basis of plaintiff’s failure to respond to a questionnaire. Whether or not the software using the logic trees constituted artificial intelligence was of little consequence.)
Delphi Auto, PLC v. Absmeier, 167 F. Supp. 3d 868 (E.D. Mich. 2016). Plaintiff employer alleged defendant former employee breached his contractual obligations by terminating his employment with the plaintiff and accepting a job with Samsung in the same line of business. Defendant worked for the plaintiff as director of their labs in Silicon Valley, managing engineers and programmers on work related to autonomous driving. Defendant had signed a confidentiality and Noninterference agreement. The court concluded that the plaintiff had a strong likelihood of success on the merits of its breach of contract claim. Therefore, the court granted the plaintiff’s motion for preliminary injunction with certain modifications (namely, limiting the applicability of the non-compete provision to the field of autonomous vehicle technology for one year because the Court determined that autonomous vehicle technology is a “small and specialized field that is international in scope” and therefore a global restriction was reasonable).
§ 1.2.7.1. Additional Cases of Note
In re C.W., 2019-Ohio-5262 (Oh. Ct. App. 2019) (noting that “[p]roving that an actual person is behind something like a social-networking account becomes increasingly important in an era when Twitter bots and other artificial intelligence troll the internet pretending to be people.”).
§ 1.2.8. Seventh Circuit
King v. PeopleNet Corp., 2021 U.S. Dist. LEXIS 207694 (N.D. Ill. 2021) (remanding plaintiff’s BIPA § 15(a) and (c) claims to state court, and denying defendant’s motion to dismiss plaintiff’s BIPA § 15(b) claim. Re the BIPA § 15(a) and (c) claims, the court found that plaintiff lacked Article III standing because she failed to allege a concrete and particularized injury rather than a general injury not particular to her. Re the BIPA § 15(b) claim, the court found that plaintiff suffered a concrete and particularized injury when defendant, a third-party technology provider, actively collected plaintiff’s biometric facial scans without obtain plaintiff’s informed consent, thereby violating § 15(b).)
Kislov v. Am. Airlines, Inc., 2021 U.S. Dist. LEXIS 194911 (N.D. Ill. 2021) (applying Bryant and Fox, among other cases to hold that plaintiffs lacked Article III standing for their BIPA § 15(a) claim because, like Bryant but unlike Fox, the plaintiffs only alleged that defendant American Airlines “failed to make publicly available any policy addressing its biometric retention and destruction policies” without further alleging a failure to comply with those policies (which the plaintiff in Fox did).[2] The court remanded the case to state court.)
Jacobs v. Hanwha Techwin Am., Inc., 2021 U.S. Dist. LEXIS 139668 (N.D. Ill. 2021) (dismissing claims brought under BIPA § 15(a), (b), and (d) against a third-party technology manufacturer. Re the BIPA § 15(b) claim, the court found that defendant was not engaged in illegal collection of facial recognition data because it merely manufactured the camera and did not take any active steps to use the camera to collect or retain the data. Re the BIPA § 15(a) and (d) claims, the court found that no evidence to plausibly suggest that defendant, as a mere third-party technology provider, actually possessed or disclosed plaintiff’s biometric data.)
United States v. Bebris, 4 F.4th 551 (7th Cir. 2021) (affirming a district court holding that quashed Bebris’s subpoena made on the basis of an alleged claim that plaintiff’s Fourth Amendment rights were violated and Facebook acted as a government agent when providing results of image recognition analysis to the National Center for Missing and Exploited Children (NCMEC) in compliance with 18 U.S.C. § 2258A(a). The court found that the district court’s holding that Facebook did not act as a government agent was not clearly erroneous because Facebook voluntarily provided the images to the NCMEC (a quasi-governmental organization), no government entity contacted Facebook about Bebris or directed Facebook to take any actions with respect to Bebris, and Facebook had an “independent business purpose in keeping its platform free of child pornography.”)
Hazlitt v. Apple Inc., 2021 U.S. Dist. LEXIS 110556 (S.D. Ill. 2021) (applying Bryant and Fox to hold that plaintiffs had Article III standing for their BIPA § 15(a) and (b) claims, and applying Thornley to hold that plaintiffs lacked Article III standing for their BIPA § 15(c) because they had merely alleged a regulatory violation). CompareHazlitt v. Apple Inc., 500 F. Supp. 3d 738 (S.D. Ill. 2020) (vacated for reconsideration after the Fox and Thornley decisions published).
Kalb v. Gardaworld Cashlink LLC, 2021 U.S. Dist. LEXIS 81325 (C.D. Ill. 2021) (finding that plaintiff had Article III standing for his BIPA § 15(a) claim because, like Fox and unlike Bryant, plaintiff alleged that not only had defendant failed to publish a data retention and destruction policy, defendant had no such policy at all. Thus, under Fox, plaintiff had alleged a concrete and particularized injury sufficient for Article III standing.)
Stein v. Clarifai, Inc., 2021 U.S. Dist. LEXIS 49516 (N.D. Ill. 2021) (finding no personal jurisdiction for a set of claims alleging that Clarifai violated BIPA § 15 by obtaining images of Illinois users from OKCupid user profiles to use in training facial recognition software. The court found that plaintiff had not alleged sufficient contacts with Illinois to bring a BIPA claim given that the only evidence of Clarifai’s contact with Illinois was obtaining a data set from an investor based in Chicago.)
Wilcosky v. Amazon.com, Inc., 517 F. Supp. 3d 751 (N.D. Ill. 2021) (holding that plaintiffs Wilcosky, Gunderson, and E.G. (a minor) had Article III standing for their BIPA § 15(a) and (b) claims against Amazon’s collection, use, and storage of plaintiffs’ voice biometric data, i.e., “voiceprint,” via the speech and voice recognition capabilities of Amazon’s Alexa virtual assistant. Under Bryant, Amazon’s failure to obtain plaintiffs’ informed consent about Amazon’s collection and storage of their voiceprints was sufficient concrete and particularized injury-in-fact under BIPA § 15(b). Under Fox, Amazon failed to publish and comply with a voiceprint data retention policy, which is a sufficiently concrete and particularized injury under BIPA § 15(a). The court also held that plaintiff Wilcosky’s and Gundersons’ claims were subject to arbitration related to Amazon Alexa given that they had agreed to arbitration when purchasing products from Amazon’s website.)
Thornley v. Clearview AI, Inc., 984 F.3d 1241 (7th Cir. 2021) (affirming that plaintiffs did not have Article III standing to pursue their BIPA § 15(c) claim in federal court against Clearview AI, a facial recognition company that plaintiffs alleged included the plaintiffs’ biometric identifiers or information in Clearview AI’s database. Significantly, the plaintiffs’ only alleged injury was general, statutory aggrievement under BIPA § 15(c). Because the plaintiffs had not alleged a concrete and particularized injury, the court remanded the case back to state court. This case was the court’s first opportunity to consider BIPA § 15(c).)
Fox v. Dakkota Integrated Sys., LLC, 980 F.3d 1146 (7th Cir. 2020) (finding that plaintiff had standing under BIPA § 15(a) because defendant violated plaintiff’s legal right by failing to “comply with data retention and destruction policies—resulting in the wrongful retention of her biometric data after her employment ended, beyond the time authorized by law.” The court distinguished Bryant from this case on the basis that Bryant was focused only on public disclosure of data retention and destruction protocols while this case also relied on an evaluation of compliance with those protocols. Further, the court held that unlawful retention of biometric data was a concrete and particularized injury just like unlawful collection of biometric data.)
Marquez v. Google LLC, 2020 U.S. Dist. LEXIS 199098 (N.D. Ill. 2020) (finding that plaintiff Marquez lacked Article III standing in federal court because he did not plead any particularized harm arising under defendant’s alleged violation of BIPA; rather, he had merely alleged that Google committed a public harm under BIPA § 15(a) by not publishing data retention policies. Thus, under Bryant, the court remanded the § 15(a) claim back to Illinois state court.)
Bryant v. Compass Group USA, Inc., 958 F.3d 617 (7th Cir. 2020). Plaintiff vending machine customer filed class action against vending machine owner/operator, alleging violation of BIPA when it required her to provide a fingerprint scan before allowing her to purchase items. The district court found defendant’s alleged violations were mere procedural violations that cause no concrete harm to plaintiff and therefore remanded the action to state court. The Court of Appeals held that a violation of § 15(a) (requiring development of a written and public policy establishing a retention schedule and guidelines for destroying biometric identifiers and information) of BIPA did not create a concrete and particularized injury and plaintiff therefore lacked standing under Article III to pursue the claim in federal court. In contrast, the Court of Appeals held that a violation of § 15(b) (requiring private entities make certain disclosures and receive informed consent from consumers before obtaining biometric identifiers and information) of BIPA did result in a concrete injury (plaintiff’s loss of the power and ability to make informed decisions about the collection, storage, and use of her biometric information) and therefore she had standing and her claim could proceed in federal court.[3]
Rosenbach v. Six Flags Entertainment Corporation, 129 N.E.3d 1197 (Ill. 2019). Rosenbach is a key Supreme Court of Illinois case answering whether one qualifies as an “aggrieved” person for purposes of BIPA and may seek damages and injunctive relief if she hasn’t alleged some actual injury or adverse effect beyond a violation of her rights under the statute. Plaintiff purchased a season pass for her son to defendant’s amusement park. Plaintiff’s son was asked to scan his thumb into defendant’s biometric data capture system and neither plaintiff nor her son were informed of the specific purpose and length of term for which the son’s fingerprint had been collected. Plaintiff brought suit alleging violation of BIPA. The Supreme Court of Illinois held that an individual need not allege some actual injury or adverse effect, beyond violation of his or her rights under BIPA, to qualify as an “aggrieved” person under the statute and be entitled to seek damages and injunctive relief. The court reasoned that requiring individuals to wait until they’ve sustained some compensable injury beyond violation of their statutory rights before they can seek recourse would be antithetical to BIPA’s purposes. The court found that BIPA codified individuals’ right to privacy in and control over their biometric identifiers and information. Therefore, the court found also that a violation of BIPA is not merely “technical,” but rather the “injury is real and significant.”
§ 1.2.8.1. Additional Cases of Note
Kloss v. Acuant, Inc., 2020 U.S. Dist. LEXIS 89411 (N.D. Ill. 2020) (applying Bryant v. Compass Group (summarized in this chapter) and concluded that the court lacked subject-matter jurisdiction over plaintiff’s BIPA § 15(a) claims because a violation of § 15(a) is procedural and thus doesn’t create a concrete and particularized Article III injury).
Acaley v. Vimeo, 2020 U.S. Dist. LEXIS 95208 (N.D. Ill. June 1, 2020) (concluding that parties made an agreement to arbitrate because defendant provided reasonable notice of its terms of service to users by requiring users to give consent to its terms when they first opened the app and when they signed up for a free subscription plan, but the BIPA violation claim alleged by the plaintiff was not within the scope of the parties’ agreement to arbitrate because the “Exceptions to Arbitration” clause excluded claims for invasion of privacy).
Heard v. Becton, Dickinson & Co., 2020 U.S. Dist. LEXIS 31249 (N.D. Ill. 2020) (concluding that for § 15(b) to apply, an entity must at least take an active step to “collect, capture, purchase, receive through trade, or otherwise obtain” biometric data and the plaintiff did not adequately plead that defendant took any such active step where the complaint omitted specific factual detail and merely parroted BIPA’s statutory language and the plaintiff failed to adequately plead possession because he failed to sufficiently allege that defendant “exercised any dominion or control” over his fingerprint data).
Rogers v. CSX Intermodal Terminals, Inc., 409 F. Supp. 3d 612 (N.D. Ill. 2019) (denying defendant’s motion to dismiss and relied on the Illinois Supreme Court’s holding in Rosenbach (summarized in this chapter) to conclude that plaintiff’s right to privacy in his fingerprint data included “the right to give up his biometric identifiers or information only after receiving written notice of the purpose and duration of collection and providing informed written consent.”).
Neals v. PAR Technology Corp., 419 F. Supp. 3d 1088 (N.D. Ill. 2019) (concluding that the BIPA does not exempt a third-party non-employer collector of biometric information when an action arises in the employment context, rejected defendant’s argument that a third-party vendor couldn’t be required to comply with the BIPA because only the employer has a preexisting relationship with the employees).
Ocean Tomo, LLC v. Patentratings, LLC, 375 F. Supp. 3d 915, 957 (N.D. Ill. 2019) (determining that Ocean Tomo training its machine learning algorithm on PatentRatings’ patent database violated a requirement in a license agreement between the parties that prohibited Ocean Tomo from using the database (which was designated as PatentRatings confidential information) from developing a product for anyone except PatentRatings).
Liu v. Four Seasons Hotel, Ltd., 2019 IL App(1st) 182645, 138 N.E.3d 201 (Ill. 2019) (noting that “simply because an employer opts to use biometric data, like fingerprints, for timekeeping purposes does not transform a complaint into a wages or hours claim.”).
§ 1.2.9. Eighth Circuit
There were no qualifying decisions within the Eighth Circuit.
§ 1.2.10. Ninth Circuit
Klein v. Facebook, Inc., 2021 U.S. Dist. LEXIS 175738 (N.D. Cal. 2021) (resolving disputes between the parties related to the electronically stored information (ESI) protocol to use as part of e-discovery. Notably, the court required the parties to disclose intent to their use technology assisted review (TAR), predictive coding, or machine learning for e-discovery, discuss how those tools would be used, and, if needed, defend the decisions made in using the tools to produce a sufficient set of documents for review. As part of its opinion, the court cited In re Valsartan, Losartan, & Irbesartan Prods. Liab. Litig., 337 F.R.D. 610 (D.N.J. 2020), which was discussed previously in this chapter.)
Gonzalez v. Google LLC, 2 F.4th 871 (9th Cir. 2021) (evaluating multiple complaints alleging that Google and other social media companies such as Facebook and Twitter were directly and secondarily liable for acts of terrorism committed by ISIS because the companies’ platforms facilitated ISIS recruiting and messaging. The court held that the defendants retained publisher immunity under 47 U.S.C.S. § 230. Notably, the court stated that it did “not hold that ‘machine-learning algorithms can never produce content within the meaning of Section 230.’ We only reiterate that a website’s use of content-neutral algorithms, without more, does not expose it to liability for content posted by a third-party. Under our existing case law, § 230 requires this result.” The court also held that the plaintiffs for two of the three complaints failed to state an adequate claim that the companies were liable for aiding and abetting ISIS.)
United States v. Nelson, 2021 U.S. Dist. LEXIS 71421 (N.D. Cal. 2021) (denying a motion to exclude an expert witness’s testimony about the function of an AI-based software program due to Federal Rule 702 and Daubert concerns because expert witnesses do not have to be experts in the algorithms used in certain software to reliably testify about the software’s outputs.)
In re Facebook Biometric Info. Privacy Litig., 522 F. Supp. 3d 617 (N.D. Cal. 2021) (approving a $650 million settlement for the Facebook biometric information privacy litigation, which involved BIPA § 15(a) and (b) claim against Facebook’s collection and retention of Illinois residents’ facial scans (biometric data) for facial recognition purposes.)
Lopez v. Apple, Inc., 519 F. Supp. 3d 672 (N.D. Cal. 2021) (dismissing claims that Apple violated multiple federal and state privacy laws when its artificial intelligence-based virtual assistant “Siri” was accidentally triggered to “listen” to conversations intended to be private. The court held that the plaintiffs lacked Article III standing because their claims were based entirely on a news article that claimed to reveal details about accidental triggering of Siri and resulting subsequent recordings of private conversations. The court also dismissed the each of the plaintiff’s claims for a variety of reasons, including that the plaintiffs’ allegations were conclusory or out of scope of the bounds of a given law.)
Williams-Sonoma, Inc. v. Amazon.com, Inc., 2020 U.S. Dist. LEXIS 163066 (N.D. Cal. 2020) (holding that Williams Sonoma had adequately alleged copyright infringement by Amazon because Amazon’s algorithm selects the “most attractive photos irrespective of rights” and then publishes those photos on its website without input from any other party.)
Patel v. Facebook, Inc., 932 F.3d 1264 (9th Cir. 2019). Facebook moved to dismiss plaintiff users’ complaint for lack of standing on the ground that the plaintiffs hadn’t alleged any concrete injury as a result of Facebook’s facial recognition technology. The court concluded that BIPA protects concrete privacy interests and violations of BIPA’s procedures actually harm or pose a material risk of harm to those privacy interests.
WeRide Corp. v. Kun Huang, 379 F. Supp. 3d 834 (N.D. Cal. 2019). Autonomous vehicle companies brought, inter alia, trade secret misappropriation claims against former director and officer and his competing company. The court determined the plaintiff showed it was likely to succeed on the merits of its trade secret misappropriation claims where it developed source code and algorithms for autonomous vehicles over 18 months with investments of over $45M and restricted access to its code base to on-site employees or employees who use a password-protected VPN. Plaintiff identified its trade secrets with particularity where it described the functionality of each trade secret and named numerous files in its code base because plaintiff was “not required to identify the specific source code to meet the reasonable particularity standard.”
§ 1.2.10.1. Status of the Vanceet al line of cases
(i) Complaints filed in 2020
Vance et al v. Amazon.com, Inc. (W.D. Wa. 2:20-cv-01084); Vance et al v. Facefirst, Inc. (C.D. Cal. 2:20-cv-06244); Vance et al v. Google LLC (N.D. Cal. 5:20-cv-04696); and Vance et al v. Microsoft Corporation (W.D. Wa. 2:20-cv-01082). Chicago residents Steven Vance and Tim Janecyk filed four nearly identical proposed class actions against Amazon.com Inc., Google LLC, Microsoft Corp. and a fourth company called Facefirst Inc., alleging the companies violated Illinois’ Biometric Information Privacy Act by “unlawfully collecting, obtaining, storing, using, possessing and profiting from the biometric identifiers and information” of plaintiffs without their permission. Plaintiffs allege that the tech companies used the dataset containing their geometric face scans to train computer programs how to better recognize faces. These companies, in an attempt to win an “arms race,” are working to develop the ability to claim a low identification error rate. Allegedly, the four tech giants obtained plaintiffs’ face scans by purchasing a dataset created by IBM Corp. (the subject of another suit brought by Janecyk).
Janecyk v. IBM Corp. (Cook County Cir. Ct. Ill. 2020CH00833). IBM Corp. was accused in an Illinois state court lawsuit of violating the state’s biometrics law when it allegedly collected photographs to develop its facial recognition technology without obtaining consent from the subjects to use biometric information. Plaintiff Janecyk, a photographer, said that at least seven of his photos appeared in IBM’s “diversity in faces” dataset. The photos were used to generate unique face templates that recognized the subjects’ gender, age, and race, and were given to third parties without consent. IBM allegedly created, collected and stored millions of face templates – highly detailed geometric maps of the face – from about a million photos that make up the “diversity in faces” database. Janecyk claimed that IBM obtained the photos from Flickr, a website where users upload their photos. IBM obtained photos depicting people Janecyk has photographed in the Chicago area whom he had assured he was only taking their photos as a hobbyist and that their images wouldn’t be used by other parties or for a commercial purpose. See also Vance v. IBM Corp. (N.D. Ill. 1:20-cv-00577; January 24, 2020) (initial class action complaint); Vance v. IBM (N.D. Ill. 1:20-cv-00577; March 12, 2020) (second amended class action complaint, included both Steven Vance and Tim Janecyk).
(ii) Judicial decisions in 2021
Vance v. Amazon.com Inc., 2021 U.S. Dist. LEXIS 72294 (W.D. Wash. 2021) (denying Amazon’s motion to dismiss the plaintiffs’ BIPA § 15(c) claim and unjust enrichment claim. Re the BIPA § 15(c) claim, the court found that the plaintiffs’ allegations that Amazon’s Recognition software was used by customers such as law enforcement agencies to monitor certain individuals support inferences “that the biometric data is itself so incorporated into Amazon’s product that by marketing the product, it is commercially disseminating the biometric data” and “Amazon received some benefit from the biometric data through increased sales of its improved products.” Nonetheless, the court recognized that additional factual development may reveal that plaintiffs’ allegations are false. Re the unjust enrichment claim, the court applied Illinois law and held that the plaintiffs had sufficiently stated an unjust enrichment claim by alleging increased risk of privacy harm and loss of control over their biometric data, aligning with the Northern District of Illinois District Court’s holding in Vance v. IBM, 2020 U.S. Dist. LEXIS 168610 2020 WL 5530134.)
Vance v. Microsoft Corp., 2021 U.S. Dist. LEXIS 72286 (W.D. Wash. 2021) (applying similar reasoning to Vance v. Amazon.com Inc., 2021 U.S. Dist. LEXIS 72294 to the facts of this case, the court dismissed the plaintiffs’ BIPA § 15(c) claim and denied Microsoft’s motion to dismiss the plaintiff’s unjust enrichment claim. Re the BIPA § 15(c) claim, the court found that the plaintiffs did not allege enough facts to infer that Microsoft “disseminated or shared access to biometric data through its products” or sold the data. Re the unjust enrichment claim, the court applied Illinois law and held that the plaintiffs had sufficiently stated an unjust enrichment claim by alleging increased risk of privacy harm and loss of control over their biometric data, aligning with the Northern District of Illinois District Court’s holding in Vance v. IBM, 2020 U.S. Dist. LEXIS 168610 2020 WL 5530134.)
Vance v. Amazon.com, Inc., 525 F. Supp. 3d 1301 (W.D. Wash. 2021) (holding that there was not enough factual information at that time to (1) dismiss BIPA claims on the basis of extraterritorial effect and (2) determine whether applying BIPA would violate the Dormant Commerce Clause; that BIPA applies to facial scans captured from photographs; and that BIPA § 15(b) applied to downloading biometric data from IBM and using it to improve the downloader’s products. The court requested additional briefing on whether Amazon had profited from the biometric data it possessed and which state law should govern the plaintiffs’ unjust enrichment claim.) See also Vance v. Microsoft Corp., 525 F. Supp. 3d 1287 (W.D. Wash. 2021) (same).
Vance v. Google LLC, 2021 U.S. Dist. LEXIS 27546, *1, 2021 WL 534363 (N.D. Cal. 2021) (granting Google’s motion to stay pending the resolution of Vance v. International Business Machines, Corporation. The court held that the balance of hardships for granting a stay weighed in favor of granting it. The case is stayed until the earlier of February 12, 2022 and the resolution of the IBM action.) Vance v. Facefirst, Inc., 2021 U.S. Dist. LEXIS 212756, *1, 2021 WL 5044010 (C.D. Cal. 2021) (similar reasoning, except the case is stayed until the earlier of February 11, 2022 and the resolution of the IBM action).
Vance v. IBM, 2020 U.S. Dist. LEXIS 168610 2020 WL 5530134 (N.D. Ill. 2020) (among other holdings, the court denied IBM’s motion to dismiss plaintiff’s BIPA claim. The court rejected IBM’s argument that “BIPA expressly excludes photographs and biometric information derived from photographs.”)
§ 1.2.10.2. Additional Cases of Note
Hatteberg v. Capital One Bank, N.A., No. SA CV 19-1425-DOC-KES, 2019 U.S. Dist. LEXIS 231235 (C.D. Cal. Nov. 20, 2019) (relying on advances in technology, including use of artificial intelligence to “deepfake” audio as a basis for denying defendant’s argument that a plaintiff must plead to a higher standard alleging specific indicia of automatic dialing to survive a motion to dismiss in a Telephone Consumer Protection Act case).
Williams-Sonoma, Inc. v. Amazon.com, Inc., No. 18-cv-07548-EDL, 2019 U.S. Dist. LEXIS 226300, at *36 (N.D. Cal. May 2, 2019) (denying Amazon’s motion to dismiss Williams-Sonoma’s service mark infringement case noting “it would not be plausible to presume that Amazon conducted its marketing of Williams-Sonoma’s products without some careful aforethought (whether consciously in the traditional sense or via algorithm and artificial intelligence).”
Nevarez v. Forty Niners Football Co., LLC, No. 16-cv-07013-LHK (SVK), 2018 U.S. Dist. LEXIS 182255 (N.D. Cal. Oct. 16, 2018) (determining that protections exist such as protective orders and the Federal Rules of Evidence that prohibit a party from using artificial intelligence to identify non-responsive documents without identifying a “cut-off” point for some manner of reviewing the alleged non-responsive documents).
§ 1.2.11. Tenth Circuit
There were no qualifying decisions within the Tenth Circuit.
§ 1.2.12. Eleventh Circuit
There were no qualifying decisions within the Eleventh Circuit.
§ 1.2.13. DC Circuit
Elec. Privacy Info. Ctr. v. Nat’l Sec. Comm’n on Artificial Intelligence, No. 1:19-cv-02906 (TNM), 2020 U.S. Dist. LEXIS 95508 (D.D.C. June 1, 2020). The court concluded that the National Security Commission on Artificial Intelligence is subject to both the Freedom of Information Act and the Federal Advisory Committee Act.
§ 1.2.14. Court of Appeals for the Federal Circuit[4]
McRO, Inc. v. Bandai Namco Games America, Inc., 837 F.3d 1299 (Fed. Cir. 2016). Patent litigation over a patent which claimed a method of using a computer to automate the realistic syncing of lip and facial expressions in animated characters. The plaintiff owners of the patents brought infringement actions and defendants argued the claims were unpatentable algorithms that merely took a preexisting process and make it faster by automating it on a computer. The court held that the patent claim was not directed to ineligible subject matter where the claim involved the use of automation algorithms and was specific enough such that the claimed rules would not prevent broad preemption of all rules-based means of automating facial animation.
§ 1.3. Legislation
We organize the enacted and proposed legislation into (i) policy (e.g., executive orders); (ii) algorithmic accountability (e.g., legislation aimed at responding to public concerns regarding algorithmic bias and discrimination); (iii) facial recognition; (iv) transparency (e.g., legislation primarily directed at promoting transparency in use of AI); and (v) other (e.g., other pending bills such as federal bills on governance issues for AI).
§ 1.4. Policy
§ 1.4.1. 2021
[Fed] National Artificial Intelligence Initiative Office (Jan. 2021) Established pursuant to the National Artificial Intelligence Initiative Act of 2020 to lead AI education, research, and development efforts on behalf of the Executive Branch.
[Fed] Request for Information and Comment on Financial Institutions’ Use of Artificial Intelligence, Including Machine Learning (Mar. 2021). Initiative by federal agencies to research use of AI and machine learning by financial institutions.
[Fed] Aiming for truth, fairness, and equity in your company’s use of AI (Apr. 2021). Guidance from the FTC about ensuring truth, fairness, and equity when using AI.
[Fed] Launch of the National Artificial Intelligence Research Resource Task Force (Jun. 2021). Established pursuant to the National Artificial Intelligence Initiative Act of 2020 to develop a roadmap for US AI research.
[Fed] Call for Nominations to Serve on the National Artificial Intelligence Advisory Committee and Call for Nominations To Serve on the Subcommittee on Artificial Intelligence and Law Enforcement (Sep. 2021). Establishing the National Artificial Intelligence Advisory Committee (NAIAC) pursuant to the National Artificial Intelligence Initiative Act of 2020, to be comprised of members from academic institutions, private companies, nonprofit organizations, and Federal laboratories to help guide US AI education, research, and development efforts.
[Fed] Notice of Request for Information (RFI) on Public and Private Sector Uses of Biometric Technologies (Oct. 2021). Inviting public comment on use of biometric technologies for purposes related to identification and inference of individual attributes.
[Fed] U.S. Equal Employment Opportunity Commission Initiative on Artificial Intelligence and Algorithmic Fairness (Oct. 2021). Researching use and impact of AI in hiring and other employment decisions.
§ 1.4.2. 2020
[Fed] Maintaining Am Leadership in Al (Feb 2019). Executive order 13859 (Feb. 2019) launching “American AI Initiative” intended to help coordinate federal resources to support development of AI in the US
[Fed] H R Res 153 (Feb 2019). Legislation to support the development of guidelines for ethical development of artificial intelligence.
[Fed / NIST] US Leadership in Al (Aug 2019). NIST to establish standards to support reliable, robust, and trustworthy AI.
[Cal] Res on 23 Asilomar Al Principles (Sep 2018). Adopted state resolution ACR 215 (Sept. 2018) expressing legislative support for the Asilomar AI Principles as “guiding values” for AI development.
§ 1.5. Algorithmic Accountability
§ 1.5.1. 2021
[Fed] Algorithmic Justice and Online Platform Transparency Act. Bills H.R.3611, S.1896 (In committee May 2021). Seeks to prevent discrimination by algorithmic processes and increase algorithmic transparency.
[CA] Automated Decision Systems Accountability Act. Bill A.B. 13 (In committee Aug. 2021). Restricts state agencies’ use of automated decision-making systems to avoid algorithmic discrimination.
[CO] Restrict Insurers’ Use Of External Consumer Data. Bill S.B. 169 (Enacted Jul. 2021). Prohibits algorithmic discrimination in insurance practices.
[IL] Video Interview Demographic. Bill H.B. 53 (Effective Jan. 2022). Seeks to avoid algorithmic discrimination in first-pass hiring interviews conducted using AI.
[MA] An Act Establishing a Commission on Automated Decision-Making By Government in the Commonwealth. Bill H.119 (similar to S.60) (In committee Mar. 2021). Establishes a committee to help prevent algorithmic discrimination and improve algorithmic transparency in state agencies’ use of automated decision systems.
[MA] An Act Related to Data Privacy. Bill H.136 (In committee Mar. 2021). Proposes a state data privacy law that includes creating a Massachusetts Data Accountability and Transparency Agency and ensuring algorithmic accountability.
[MA] An Act Establishing the Massachusetts Information Privacy Act. Bill H.142 (In committee Mar. 2021). Proposes a state data privacy law that includes restrictions on covered entities’ and data processors’ processing of personal information and use of automated decision systems; and provides data rights for subjects.
[MI] Michigan employment security act. Bill H.B. 4439 (In committee Mar. 2021). Requires auditing the source code, algorithms, and logic formulas of the unemployment agency computer systems.
[NJ] Prohibits certain discrimination by automated decision systems. Bill S.B. 1943 (Introduced Feb. 2020). Prohibits algorithmic discrimination with respect to the provision of financial services, insurance, and healthcare services.
[VT] An act relating to State development, use, and procurement of automated decision systems. Bill H.263 (In committee Feb. 2021). Requires Secretary of Digital Services to ensure automated decision systems used by the State do not lead to algorithmic discrimination.
[VT] An act relating to the creation of the Artificial Intelligence Commission. Bill H.410 (In committee Mar. 2021). Establishes commission to promote ethical AI use and development.
[VT] An act relating to establishing an advisory group to address bias in State-used software. Bill H.429 (In committee Mar. 2021). Seeks to prevent bias in software.
§ 1.5.2. 2020
[Fed] Algorithmic Accountability Act (Apr 2019). Bills S 1108, HR 2231 (Apr. 2019) intended to require “companies to regularly evaluate their tools for accuracy, fairness, bias, and discrimination.”
[NJ] New Jersey Algorithmic Accountability Act (May 2019). Require that certain businesses conduct automated decision system and data protection impact assessments of their automated decision system and information systems.
[CA] AI Reporting (Feb 2019). Require California business entities with over 50 employees and associated contractors and venders to each maintain a written record of the data used relating to any use of artificial intelligence for the delivery of the product or service to the public entity.
[WA] Guidelines for Gov’t Procurement and Use of Auto Decision Systems (Jan 2019). Establish guidelines for government procurement and use of automated decision systems in order to protect consumers, improve transparency, and create more market predictability.
[NY] NYC (Jan 2018). —“A Local Law in relation to automated decision systems used by agencies” (Int. No. 1696-2017) required the creation of a task force for providing recommendations on how information on agency automated decision systems may be shared with the public and how agencies may address situations where people are harmed by such agency automated decision systems.
§ 1.6. Facial Recognition Technology
§ 1.6.1. 2021
[Fed] Facial Recognition and Biometric Technology Moratorium Act of 2021. Bill S.2052 (In committee Jun. 2021). Requires Federal agencies or officials to receive Congressional approval (i.e., legislation) to use biometric surveillance systems or information derived therefrom.
§ 1.6.2. 2020
[Fed] Commercial Facial Recognition Privacy Act (Mar 2019). Bill S 847 (Mar. 2019) intended to provide people info and control over how their data is shared with companies using facial recognition tech.
[Fed] FACE Protection Act (July 2019). Restrict Federal government from using a facial recognition technology without a court order.
[Fed] No Biometric Barriers to Housing Act (July 2019). Prohibiting owners of certain federally assisted rental units from using facial recognition, physical biometric recognition, or remote biometric recognition technology in any units, buildings, or grounds of such project.
[CA] Body Camera Account Act (Feb 2019). Bill A.B. 1215 was introduced to prohibit law enforcement agencies and officials from using any “biometric surveillance system,” including facial recognition technology, in connection with an officer camera or data collected by the camera.
[MA] An Act Establishing a Moratorium on Face Recognition (Jan 2019). Senate Bill 1385 was introduced to establish a moratorium on the use of face recognition systems by state and local law enforcement.
[NY] Prohibits Use of Facial Recog. Sys. (May 2019). Senate Bill 5687 was introduced to propose a temporary stop to the use of facial recognition technology in public schools.
[SF and Oakland, CA]City ordinances were passed to ban the use of facial recognition software by the police and other government agencies.(June, July 2019).
[Somerville, MA] City ordinance was passed to ban the use of facial recognition technology by government agencies (July 2019).
§ 1.7. Transparency
§ 1.7.1. 2021
[Fed] Mind Your Own Business Act of 2021. Bill S.1444 (In committee Apr. 2021). Seeks to prevent algorithmic bias in high-risk information systems and automated-decision systems, and enables consumers to opt out of tracking by covered entities.
[Fed] Filter Bubble Transparency Act. Bill S.2024 (In committee Jun. 2021). Requires online platform operators that use algorithms to customize what users see to allow users to opt out of the use of those algorithms.
[Fed] GOOD AI Act of 2021. Bill S.3035 (In committee Oct. 2021). Establishes AI Hygiene Working Group to ensure that Federal acquisition contracts for AI ensure protection of privacy, civil rights, civil liberties, and data security.
[WA] Establishing guidelines for government procurement and use of automated decision systems in order to protect consumers, improve transparency, and create more market predictability. Bill S.B. 5116 (In committee Feb. 2021).
§ 1.7.2. 2020
[CA] BOT Act – SB 1001 (effective July 2019). Enacted bill SB 1001 (eff. July 2019) intended to “shed light on bots by requiring them to identify themselves as automated accounts.”
[CA] Anti-Eavesdropping Act (Assemb. May 2019). Prohibiting a person or entity from providing the operation of a voice recognition feature within the state without prominently informing the user during the initial setup or installation of a smart speaker device.
[IL] Al Video Interview Act (effective Jan 2020). Provide notice and explainability requirements for recorded video interviews.
§ 1.8. Other
§ 1.8.1. 2021
[Fed] Democracy Technology Partnership Act. Bill S.604 (In committee Mar. 2021). Seeks to develop international partnerships to develop regimes for technology governance, including for AI and machine learning.
[Fed] Information Transparency & Personal Data Control Act. Bill H.R. 1816 (In committee Mar. 2021). Requires Federal Trade Commission to regulate the protection of sensitive personal information.
[Fed] AI Scholarship-for-Service Act. Bill S.1257 (In committee Apr. 2021). Creates Federal scholarship to develop AI professionals in government.
[Fed] Consumer Data Privacy and Security Act of 2021. S. 1494 (In committee Apr. 2021). Federal data protection law.
[Fed] Artificial Intelligence Capabilities and Transparency (AICT) Act of 2021. Bill S.1705 (Introduced May 2021). Seeks to promote research and development of AI in the US for economic and national security purposes.
[Fed] Artificial Intelligence for the Military Act of 2021. Bill S.1776 (Introduced May 2021). Requires AI training for certain military personnel.
[Fed] Next Generation Computing Research and Development Act of 2021. Bill H.R.3284 (In committee May 2021). Promotes Department of Energy research in advanced scientific computing.
[Fed] SELF DRIVE Act. Bill H.R.3711 (In committee Jun. 2021). Regulates highly automated vehicles to ensure their safe operation.
[Fed] Consumer Safety Technology Act. Bill H.R.3723 (Passed House Jun. 2021). Requires various Federal agencies to research impact of technologies such as AI and blockchain on consumer product safety and protection.
[Fed] United States Innovation and Competition Act of 2021. Bill S.1260, H.R.2731 (Passed Senate Jun. 2021). Creates a Directorate for Technology and Innovation in the National Science Foundation tasked with promoting research, innovation, and commercialization of technologies such as AI.
[Fed] Fellowships and Traineeships for Early-Career AI Researchers Act. Bill H.R.3844 (In committee Jun. 2021). Provides financial support, via university traineeships, to graduate students studying AI.
[Fed] Data Protection Act of 2021. Bill S.2134 (In committee Jun. 2021). Creates a Federal Data Protection Agency that, among other things, will research and analyze the use of automated decision systems in collecting and processing personal data.
[Fed] AI for Agency Impact Act. Bill H.R.4468 (In committee Jul. 2021). Requires Executive agencies to implement trustworthy-AI strategies and implementation plans.
[Fed] AI in Counterterrorism Oversight Enhancement Act. Bill H.R.4469 (In committee Jul. 2021). Enables the Privacy and Civil Liberties Oversight Board to oversee use of AI for counterterrorism.
[Fed] SAFE DATA Act. Bill S.2499 (In committee Jul. 2021). Federal data protection law.
[Fed] Intelligence Authorization Act for Fiscal Year 2022. Bill S.2160. (introduced Aug. 2021). Director of National Intelligence to develop modern digital ecosystem plan that includes use of AI for intelligence purposes.
[Fed] Digital Defense Leadership Act. Bill H.R.4985 (In committee Aug. 2021). Implements National Security Commission on Artificial Intelligence recommendations, including for AI research, development, and use.
[Fed] Deepfake Task Force Act. Bill S.2559 (In committee Aug. 2021). Creates task force to research and propose methods to reduce digital content forgeries.
[Fed] Department of Defense Artificial Intelligence Metrics Act of 2021. Bill S.2904 (In committee Sep. 2021). Creates performance objectives and metrics for AI implementation by the Department of Defense.
[Fed] Healthy Technology Act of 2021. Bill H.R.5467 (In committee Sep. 2021). Allows AI and machine learning technologies to prescribe drugs if approved by the relevant State and the Food and Drug Administration.
[Fed] United States–Israel Artificial Intelligence Center Act. Bill H.R.5148, S.2120 (In committee Oct. 2021). Promotes AI research and development partnership between US and Israel.
[Fed] AI Training Act. Bill S.2551 (Introduced Oct. 2021). Requires AI training for certain Executive Branch employees.
[Fed] Financial Transparency Act of 2021. Bill H.R.2989 (In committee Oct. 2021). Seeks to improve and standardize regulation-imposed financial data collection to, among other things, enable more effective use of AI.
[Fed] Protecting Sensitive Personal Data Act of 2021. Bill (Introduced Oct. 2021). Empower Committee on Foreign Investment in the United States to regulate the security of sensitive personal information.
[Fed] Infrastructure Investment and Jobs Act. Bill H.R.3684 (Enacted Nov. 2021). Provides funding for assessing the use of AI and machine learning in mining research and development activities, digital climate solutions, and in manufacturing.
[AL] Technology, Alabama Council on Advanced Technology, estab., to advise Governor and Legislature, members, duties. Bill S.B. 78 (Passed Apr. 2021). Creates council that advises Alabama’s Governor and Legislature about advanced technology and AI.
[HI] Relating To Taxation. Bill H.B. 454 (Introduced Jan. 2021). Provide income tax credit for investment in cybersecurity and AI development businesses.
[IL] Future of Work Task Force. Bill H.B. 645 (Effective Aug. 2021). Creates a task force to study how to help Illinois workers adapt to new technologies such as AI.
[MS] Computer science curriculum; require State Department of Education to implement in K-12 public schools.. Bill HB 633 (Effective Jul. 2021). Mandates K-12 computer science education in Mississippi, including about AI.
[NC] An Act to Establish the Study Committee on Automation and the Workforce. Bill S.B. 600 (Introduced Apr. 2021). Creates committee that researches how to help workers adapt to new technologies such as AI.
[NJ] Requires Commissioner of Labor and Workforce Development to conduct study and issue report on impact of artificial intelligence on growth of State’s economy. Bill A.B. 195 (Received in Senate after passing Assembly Mar 2021).
[NJ] Establishes Edison Innovation Science and Technology Fund in EDA to provide grants for certain science and technology-based university research; appropriates $5 million. Bill A.B. 2172 (In committee Jan. 2020). Includes grants for AI research.
[NJ] 21st Century Integrated Digital Experience Act. Bill A.B. 2614, S.B. 2723 (In committee(?) Feb. 2021). Requires State Executive Branch to leverage new technologies such as AI and machine learning to modernize government service delivery.
[NY] Establishes the commission on the future of work. Bill A.B. 2414 (In committee Jan. 2021). Creates commission that researches how to help workers adapt to new technologies such as AI
[VA] Consumer Data Protection Act. Bills S.B. 1392, H.B. 2307 (Enacted Mar. 2021). Virginia data protection law.
§ 1.8.2. 2020
[Fed] FUTURE of Al Act (Dec 2017). Requiring the Secretary of Commerce to establish the Federal Advisory Committee on the Development and Implementation of Artificial Intelligence.
[Fed] Al JOBS Act (Jan 2019). Promoting a 21st century artificial intelligence workforce.
[Fed] GrAITR Act (Apr 2019). Legislation directed to research on cybersecurity and algorithm accountability, explainability, and trustworthiness.
[Fed] Al in Government Act (May 2019). Instructing the General Services Administration’s AI Center of Excellence to advise and promote the efforts of the federal government in developing innovative uses of AI to benefit the public, and improve cohesion and competency in the use of AI.
[Fed] Al Initiative Act (May 2019). Requiring federal government activities related to AI, including implementing a National Artificial Intelligence Research and Development Initiative.
[1] In addition to the Federal cases we note, a number of states are dealing with similar evidentiary and explanability issues. See, e.g.,Green v. Geico Gen. Ins. Co., No. : N17C-03-242 EMD CCLD, 2021 Del. Super. LEXIS 308 (Super. Ct. Mar. 24, 2021) (granting declaratory relief to plaintiff due to GEICO’s use of automated, rules-based insurance claims analysis tools that were based on “antiquated” rules; the court stated, “until…a system [with rules updated based on relevant case law] is in place, human judgment should not be eliminated from the process.” Note that the court was careful not to “eliminat[e] the ability for insurers to use automated systems to make the claims process more efficient” but wanted those systems to be based on up-to-date rules.); R.L.G. v. State, 322 So. 3d 721 (Fla. Dist. Ct. App. 2021) (holding that a statement made by a machine without any facts provided about how that statement was made (automatically, with human input or interpretation, etc.) was inadmissible hearsay on appeal because the facts on the record did not support a determination otherwise.);People v. Reyes, 2020 NY Slip Op 20258, 69 Misc. 3d 963, 133 N.Y.S.3d 433 (Sup. Ct.) (denying defendant’s motion to preclude testimony that was based on the use of facial recognition software to identify defendant. The court observed that the use of and reliability of facial recognition to date suggested that facial recognition is among “a growing number of scientific and near-scientific techniques that may be used as tools for identifying or eliminating suspects, but that do not produce results admissible at a trial.”); Matter of Phila. Ins. Indem. Co. v. Kendall, 197 A.D.3d 75, 2021 N.Y. App. Div. LEXIS 4393, 2021 NY Slip Op 04284, 151 N.Y.S.3d 392 (observing, “Just as a party may attack a hardcopy settlement offer or acceptance as a forgery, a party that claims an email was the product of a hacker (or of artificial intelligence, or of some other source) may rebut its authenticity.”)).
[2] Demonstrating the wealth of caselaw that has developed related to Bryant and Fox, the court cited as supporting cases “Roberson v. Maestro Consulting Servs. LLC, 507 F. Supp. 3d 998, 1008 (S.D. Ill. 2020) (denying motion to remand Section 15(a) claim where plaintiff alleged that defendant failed to comply with its retention schedule and destruction guidelines); Marsh v. CSL Plasma Inc., 503 F. Supp. 3d 677, 682-83 (N.D. Ill. 2020) (same); Neals v. ParTech, Inc., No. 19-cv-05660, 2021 U.S. Dist. LEXIS 24542, 2021 WL 463100, at *5 (N.D. Ill. Feb. 9, 2021) (same); Heard v. Becton, Dickinson & Co., 2021 U.S. Dist. LEXIS 44160, 2021 WL 872963, at *3-4 (N.D. Ill. Mar. 9, 2021) (same); Wilcosky v. Amazon.com, Inc., 517 F. Supp. 3d 751, 761-62 (N.D. Ill. 2021) (same); Hazlitt v. Apple Inc., 2021 U.S. Dist. LEXIS 110556, 2021 WL 2414669, at *4-5 (S.D. Ill. June 14, 2021) (same); Fernandez v. Kerry, Inc., No. 17-cv-08971, 2020 U.S. Dist. LEXIS 223075, 2020 WL 7027587, at *7-8 (N.D. Ill. Nov. 30, 2020) (concluding that plaintiffs had standing to bring Section 15(a) claims against their employer not only because they alleged unlawful retention of their biometric data, but also because union members have a concrete interest in collective bargaining over biometric data usage) (citing Miller v. Southwest Airlines Co., 926 F.3d 898, 902 (7th Cir. 2019).”).
[3] As noted in our introduction, we made certain judgment calls with respect to which cases to include. For example, we omitted certain BIPA cases that did not add any additional information to those we have presented in this Chapter. See, e.g., Darty v. Columbia Rehabilitation and Nursing Center, LLC, 2020 U.S. Dist. LEXIS 110574 (N.D. Ill. 2020); Figueroa v. Kronos Incorporated, 2020 U.S. Dist. LEXIS 64131 (N.D. Ill. 2020); Namuwonge v. Kronos, Inc., 418 F. Supp. 3d 279 (N.D. Ill. 2019); Treadwell v. Power Solutions International Inc., 427 F. Supp. 3d 984 (N.D. Ill. 2019); Kiefer v. Bob Evans Farm, LLC, 313 F. Supp. 3d 966 (C.D. Ill. 2018); Rivera v. Google Inc., 238 F. Supp. 3d 1088 (N.D. Ill. 2017); In re Facebook Biometric Information Privacy Litigation, 185 F. Supp. 3d 1155 (N.D. Cal. 2016); Norberg v. Shutterfly, Inc., 152 F. Supp. 3d 1103 (N.D. Ill. 2015).
[4] As noted in our introduction, we made certain judgment calls with respect to which cases to include. For example, we omitted several patent cases directed to subject-matter eligibility that we felt did not substantive additional insight to those we have presented in this Chapter. See, e.g., Kaavo Inc. v. Amazon.com Inc., 323 F. Supp. 3d 630 (D. Del. 2018); Hyper Search, LLC v. Facebook, Inc., No. 17-1387, 2018 U.S. Dist. LEXIS 212336 (D. Del. Dec. 18, 2018); Purepredictive, Inc. v. H20.AI, Inc., No. 17-cv-03049, 2017 U.S. Dist. LEXIS 139056 (N.D. Cal. Aug. 29, 2017); Power Analytics Corp. v. Operation Tech., Inc., No. SA CV16-01955 JAK, 2017 U.S. Dist. LEXIS 216875 (C.D. Cal. July 13, 2017); Nice Sys. v. Clickfox, Inc., 207 F. Supp. 3d 393 (D. Del. 2016); eResearch Tech., Inc. v. CRF, Inc., 186 F. Supp. 3d 463 (W.D. Pa. 2016); Neochloris, Inc. v. Emerson Process Mgmt. LLP, 140 F. Supp. 3d 763 (N.D. Ill. 2015).
Associate Stone, Pigman, Walther, Wittmann, L.L.C. 909 Poydras Street, Suite 3150 New Orleans, LA 70112 (504) 593-0922 [email protected]
Introduction
In many ways, 2021 marked a return to a semblance of normalcy in the sporting world. The proliferation of vaccines enabled crowds to return to sporting events, and tent-pole events postponed from 2020 (most notably the Summer Olympics) were able to proceed. In terms of sports-related commercial litigation and disputes, however, the year was anything but “normal.” From a landmark Supreme Court decision regarding amateurism to a stunning (and quickly foiled) European soccer conspiracy to lingering litigation resulting from the COVID-19 pandemic and resultant shutdowns, the year featured a bevy of sports-related suits and incidents that could shape the business of sports for years and decades to come. Below is a brief summary of a few of the cases that occurred or were resolved in 2021.
Part I – NCAA
§ 1.1. NCAA v. Alston, 141 S. Ct. 2141 (June 21, 2021)
Directly addressing the antitrust legality of the NCAA’s student-athlete compensation limits for the first time, the Supreme Court unanimously affirmed the lower courts’ holding that the NCAA’s restrictions on “education-related” compensation to Division I athletes were unlawful.[1]
The plaintiffs in Alston were current and former student-athletes in men’s Division I FBS football and men’s and women’s Division I basketball players. Their initial suit challenged, on antitrust grounds, the NCAA rules capping the amount of “grant-in-aid” scholarship a Division I college or university can offer to a scholarship athlete at roughly the “cost of attendance” of the institution. The players argued that, by conspiring to arbitrarily “fix” the compensation student-athletes could otherwise earn in a free market for their services, NCAA member schools violate Section 1 of the Sherman Act under a “Rule of Reason” analysis.[2] In response, the NCAA argued that its interest in preserving “amateurism” justified its grant-in-aid rules and that the Supreme Court recognized that its compensation rules were presumptively legal in its 1984 decision in NCAA v. Board of Regents.[3]
Applying the full “Rule of Reason” analysis, the district court found that the NCAA’s restrictions on grant-in-aid were anticompetitive and not justified by the NCAA’s ever-shifting concept of “amateurism.”[4] However, the court did find that the NCAA had a procompetitive interest in restricting payments to athletes that were “unrelated to education,” so as to distinguish student-athletes from their professional counterparts.[5] The district court thus enjoined the NCAA from enforcing rules that limited athletes’ “educational” compensation, such as laptops and lab equipment for studies, payments for tutoring, and post-eligibility internships.[6] In addition, the court increased the limit of cash award for athletic achievement to $5,980, the maximum a high-achieving football player could earn in additional cash benefits.[7] The Ninth Circuit affirmed the district court in full, prompting the NCAA to petition for certiorari.[8] The plaintiffs opted against appealing the portion of the judgment preserving the NCAA’s ability to limit compensation “unrelated to education.”[9]
Writing for a unanimous court, Justice Gorsuch first addressed whether the NCAA’s rules were subject to a full Rule of Reason antitrust analysis or were afforded a deferential “quick look” standard. Justice Gorsuch explained that while a “quick look” will often be enough to approve the restraints “necessary to produce a game”—such as rules about the length of a game, the frequency of games, and the number of players on the field or court—a fuller review may be appropriate for other restraints. The Court found that the NCAA’s compensation rules fell on the “far side of this line,” emphasizing that “Division I basketball and FBS football can proceed (and have proceeded) without the education-related compensation restrictions the district court enjoined; the games go on.”[10] The court also clarified that language in dicta from the Board of Regents decision indicating that student-athletes “must not be paid” did not make the NCAA’s compensation restrictions presumptively legal, particularly given the explosion of NCAA athletic revenues in the past 37 years.[11] Finally, the court rejected the notion that the NCAA deserves more deference because it is not a “commercial enterprise,” highlighting the many commercial aspects of top-level NCAA competition.[12]
Justice Gorsuch then turned to the district court’s application of the facts under the Rule of Reason. Spurning the “parade of horribles” that the NCAA warned would arise from allowing “in-kind” academic compensation and limited cash awards, the Supreme Court held that the lower courts’ remedy of enjoining certain limits on “education-related” compensation was both judicious and reasonable under the facts.[13]
A concurrence from Justice Kavanaugh also garnered considerable media interest. After lambasting the NCAA during oral arguments, Justice Kavanaugh used his concurrence to take the NCAA to task for its “business model of using unpaid student athletes to generate billions of dollars in revenue for the colleges raises serious questions under the antitrust laws.”[14] Justice Kavanaugh indicated that he would be open to striking all of the NCAA’s compensation rules as illegal under the Sherman Act.[15]
The Alston decision headlined a watershed year in the law pertaining to collegiate athlete compensation. In addition to the passage of laws in several states authorizing student-athletes to earn “Name, Image and Likeness” (NIL) compensation (and the NCAA’s temporary suspension of its rules prohibiting such compensation), a federal court in Pennsylvania cited Alston in denying a motion to dismiss labor-related claims against NCAA members.[16] The National Labor Relations Board’s general counsel, Jennifer Abruzzo, later released a memorandum opining that student-athletes qualified as employees under the Fair Labor Standards Act.[17]
§ 1.2. Oklahoma, Texas Bolt for SEC, Spark Wave of Conference Realignment
On July 30, 2021, the Universities of Oklahoma and Texas announced that their respective boards of regents had unanimously voted to accept invitations to join the Southeastern Conference.[18] The move followed weeks of speculation that the two longtime Big 12 stalwarts would join the SEC and came a day after the SEC’s 14 current members unanimously voted to extend invitations to the universities.[19]
The Big 12 has neither initiated nor threatened any legal action against Oklahoma or Texas. However, Big 12 Commissioner Bob Bowlsby did send a cease and desist letter to ESPN, in which it accused the sports network of inducing Big 12 members to leave the conference.[20] Bowlsby alleged that, in addition to aiding Oklahoma and Texas’s efforts to leave for the SEC, ESPN was “actively engaged in discussions with at least one other conference” to which to funnel other Big 12 members.[21] ESPN characterized the allegations as “unsubstantiated speculation,”[22] and neither the ESPN nor the Big 12 have taken further action.
Both Oklahoma and Texas pledged to remain in the Big 12 through June 30, 2025, when the Big 12’s current media rights contract ends.[23] Should either or both attempt to leave the conference sooner, the universities would be potentially subject to a penalty of at least $75 million apiece.
The defection of Oklahoma and Texas from the Big 12 triggered an onslaught of conference realignment. On September 10, 2021, the Big 12 formally announced that Brigham Young University, the University of Central Florida, the University of Cincinnati, and the University of Houston would become members no later than the 2024-25 season.[24] The American Athletic Conference responded by swiping six member schools from Conference USA, with the Mid-American Conference and Sun Belt Conference also adding new members.[25] The fluctuating state of Division I conference membership is likely to stoke additional legal conflict between institutions and conferences. The Colonial Athletic Association, for instance, has already banned James Madison University from postseason participation until its departure for the Sun Belt Conference.[26]
§ 1.3. Case No. D2021-2418, WIPO Arbitration and Mediation Center, National Collegiate Athletic Association v. Jules Richard IV, Bachi Graphics LLC
An arbitrator with the World Intellectual Property Organization (WIPO) ordered the owner of domain name “finalfourneworleans.com” to the NCAA, months before the organization was slated to host its 2022 Men’s Basketball Tournament Final Four in New Orleans.[27]
Between 1981 and 2005, the NCAA registered several trademarks related to the Final Four, including “FINAL FOUR,” “THE FINAL FOUR,” “FINAL 4” and others. In 2008, Jules Richard IV registered the domain name “finalfourneworleans.com” Go Daddy, but did not use the domain name to host an active website.
Under the Uniform Domain Name Dispute Resolution Policy, a party seeking to obtain a disputed domain name from another must establish three elements: (i) the disputed domain name is identical or confusingly similar to a trademark or service mark in which Complainant has rights; (ii) Respondent has no rights or legitimate interests in respect of the disputed domain name; and (iii) the disputed domain name was registered and is being used in bad faith.
The NCAA filed its complaint with WIPO’s Arbitration and Mediation Center on July 23, 2021, asserting that it enjoys “strong rights in the FINAL FOUR” mark given its longtime use of the phrase and the various registered trademarks. The NCAA further maintained that the domain name finalfourneworleans.com was “identical and confusingly similar” to its mark, since it incorporated the non-distinctive geographic location (New Orleans) where the NCAA happens to be hosting the 2022 national semifinals and finals of its men’s tournament. According to the NCAA’s complaint, Richard had no legitimate interest in holding the domain, as he had no affiliation with the NCAA and had never made use of the domain name. The NCAA further accused Richard of acting in bad faith by “squatting” on the domain name while knowing of the NCAA’s interest in the Final Four mark. Richard did not respond to the NCAA’s complaint.
Arbitrator Georges Nahitchevansky accepted the NCAA’s arguments. First, Nahitchevansky held, the domain was “confusingly similar” to the NCAA’s final four mark, even with the addition of the geographic name “New Orleans.” Second, Nahitchevansky found that the evidence indicated that Richard, who appeared to be based in New Orleans, “registered the disputed domain name on the basis that the FINAL FOUR tournament might again be played in New Orleans and did so for [his own] benefit.” As a result, the arbitrator concluded that Richard lacked a right or legitimate interest in the domain name. Finally, relying on similar reasoning, Nahitchevansky found that Richard “opportunistically registered the disputed domain name to somehow profit from its association with Complainant” and thus was acting in bad faith.
§ 1.4. Westwood One Radio Networks, LLC v. National Collegiate Athletic Association, 172 N.E.3d 293 (Ct. App. Ind. May 26, 2021)
The Court of Appeals of Indiana affirmed the dismissal of an action brought by Westwood One Radio Networks against the NCAA that, if successful, would have prevented the NCAA from voiding its agreement with Westwood One.[28]
In 2011, Westwood One entered an agreement to serve as the exclusive radio broadcaster of NCAA championship events.[29] The contract obligated Westwood One to pay the NCAA an “annual rights fee” in two installments to preserve Westwood One’s exclusive broadcast rights.[30] When the COVID-19 pandemic forced the NCAA to cancel the remainder of its competitions for the 2019-20 athletic season, including the 2020 men’s basketball tournament, Westwood One forewent payment of its second installment for 2020, relying on the contract’s “Force Majeure” provision to relieve Westwood One of its financial obligation.[31] In response, the NCAA terminated the agreement.[32] Westwood One thereafter filed suit to enjoin the NCAA from terminating the contract, arguing that “it would be virtually impossible to determine or accurately estimate the losses Westwood One would incur over the next four years if the NCAA were to terminate the Radio Agreement.”[33] The trial court denied Westwood One’s request for preliminary injunction, holding that Westwood One had failed to demonstrate the requisite “irreparable harm.”[34]
On appeal, Westwood One argued that it required an injunction because the termination of the contract would damage its future goodwill in a manner that was impossible to ascertain.[35] For instance, Westwood One argued, the end of its relationship with the NCAA could impair Westwood One’s relationships with organizations such as the NFL, with which Westwood One also has a broadcasting agreement.[36] The court, to the contrary, found that the trial court had not erred in finding that Westwood One’s damages due to loss of goodwill and reputation were readily quantifiable.[37] Accordingly, the court affirmed the trial court’s denial of the preliminary injunction. The parties later settled Westwood One’s remaining claims for damages.[38]
§ 1.5. Bielema v. The Razorback Foundation, Inc., No. 5:20-CV-05104 (W.D. Ark.)
The Razorback Foundation agreed to pay former University of Arkansas coach Bret Bielema a portion of the amount owed on his buyout, effectively settling the parties’ claims against each other stemming from Bielema’s efforts to obtain other employment after Arkansas had fired him at the end of the 2017 season.[39]
The Razorback Foundation initially agreed to pay Bielema to $11.94 million to buy out his contract. As part of the buyout agreement, however, Bielema agreed to use his “best efforts” to obtain new employment and earn a reasonable salary. Bielema agreed to become an outside consultant for the New England Patriots in 2018 in exchange for a $125,000 salary. Taking the position that the Patriots position did not constitute Bielema’s “best efforts” to find employment at a “reasonable salary,” the Foundation ceased making payments to Bielema in January 2019, with Bielema still owed about $7 million of the buyout amount. Bielema sued to collect the remainder of his buyout, and the Foundation filed a counterclaim. In answer to the Foundation’s counterclaim, Bielema alleged that Patriots coach Bill Belichick had significantly overpaid Bielema.
The Foundation ultimately agreed to pay Bielema $3.53 million to resolve the dispute between the parties.
§ 1.6. Hobart-Mayfield, Inc. v. National Operating Committee on Standards for Athletic Equipment, — F. Supp. 3d —-, 2021 WL 1575297 (E.D. Mich. April 22, 2021)
A federal court in Michigan dismissed an antitrust suit alleging that the National Operating Committee on Standards for Athletic Equipment (NOCSAE) illegally conspires with football helmet manufactures to control the market for football helmets and helmet accessories.[40]
Plaintiff Hobart-Mayfield, Inc. markets and sells football helmet shock absorbers called “S.A.F.E. Clips.”[41] The NOCSAE, meanwhile, a nonprofit that develops and establishes test and performance standards for athletic equipment, including helmets at the high school, collegiate, and professional levels.[42] NOCSAE has also entered licensing agreements with football helmet manufacturers such as Riddell, Schutt Sports, and Zenith, whom Hobart-Mayfield alleged comprised nearly 100 percent of the football helmet and helmet “add-on” market.[43] Per NOCSAE’s policy, the addition of an add-on product such as the S.A.F.E. Clip to a previously-approved helmet “creates a new untested model” and allows the helmet manufacturer to declare the certification of the helmet with the add-on “void.[44] As a result, Hobart-Mayfield contended, NOCSAE and the helmet manufacturers had effectively colluded to exclude add-on manufacturers such as Hobart-Mayfield from the market, in violation of the Sherman Act and Michigan antitrust law.[45]
The court disagreed. Because NOCSAE’s did not require that add-on manufacturers such as Hobart-Mayfield be excluded from the market, the plaintiff failed to demonstrate “either an explicit agreement to restrain trade, or ‘sufficient circumstantial evidence tending to exclude the possibility of independent conduct.’”[46] The court similarly held that Hobart-Mayfield had failed to allege a conspiracy between NOCSAE and the manufacturers or intentionally interfered with the plaintiff’s business.[47] Accordingly, the court dismissed the suit for failure to state a claim.
Hobart-Mayfield appealed the ruling to the U.S. Court of Appeals for the Sixth Circuit.
Part II – PROFESSIONAL SOCCER
§ 2.1. Rise, Collapse of European Super League Sparks Legal Disputes
Following the announcement and immediate, backlash-fueled collapse of plans for a so-called European “Super League” (“ESL”) in April, the three clubs who have thus far refused to abandon the Super League project—FC Barcelona, Real Madrid, and Juventus—look set to challenge UEFA and FIFA’s legal authority to block or otherwise impair the institution of a competing league.
In April, citing a desire to “improv[e] the quality and intensity of existing European competitions throughout each season,” 12 of European football’s biggest clubs announced plans to form a new Super League that would consist of 15 permanent members and five rotating spots for other high-achieving European clubs.[48] The 12 ESL founders included six teams from England (Arsenal, Chelsea, Liverpool, Manchester City, Manchester United, and Tottenham Hotspur); three teams from Spain (Barcelona, Real Madrid, and Atletico Madrid); and three teams from Italy (Juventus, AC Milan and Inter Milan).[49] The announcement triggered an uproar among UEFA, national football associations, and fans, particularly in England.[50] In response, nine of the 12 “founding” clubs abandoned their plans to join the ESL.[51]
The remaining three ESL clubs, by contrast, are continuing to mount legal challenges they hope will pave the way for a Super League to come to fruition. In essence, Barcelona, Real Madrid, and Juventus argue that governing bodies such as UEFA and FIFA participate as both regulators who can sanction clubs and commercial competitors, in violation of European competition law.[52] Rather than protecting the game or the sanctity of European competition, these clubs argued, UEFA and FIFA were seeking to protect their own financial interests by using their regulatory power to snuff out a potential competing league.[53] The ESL clubs earned an early victory on this front, with a court in Madrid ordering that UEFA could not discipline or levy “fines” against the ESL clubs for their roles in planning the league, prompting UEFA to suspend its disciplinary actions against the clubs.[54] That court referred the matter to the European Court of Justice (“ECJ”), which may ultimately decide whether UEFA and FIFA can continue to act as regulators in accordance with European competition law, given their status as competitors.[55]
§ 2.2. Spanish Clubs Challenge CVC Investment in La Liga
Although a majority of the league’s members have already approved the transaction, FC Barcelona, Real Madrid, and Athletic Bilbao are challenging a venture capitalist’s investment in La Liga’s media rights under Spanish law.[56]
In August, a majority of La Liga’s teams approved CVC Capital’s $117.3 million investment in the league’s media rights. Under the agreement, CVC is entitled to 11 percent of La Liga’s media revenue for the next 50 years. The deal also obligates CVC to provide $2.9 billion in interest-free loans to league clubs.[57] However, according to Barcelona, Real Madrid, and Athletic Bilbao, the agreement violates a number of Spanish laws.[58] The teams claim that the deal was “adopted as part of an highly irregular and disrespectful process toward with the minimum guarantees required.”[59]
§ 2.3. Major League Soccer, L.L.C. v. F.C. Internazionale Milano S.p.A (U.S. Trademark Trial and Appeal Board, Dec. 9, 2020)
The U.S. Trademark Trial and Appeal Board (“TTAB”) recently issued a ruling favorable to FC Internazionale Milano (“Inter Milan”), dismissing a claim brought by Major League Soccer (“MLS”) that Inter Milan’s registration of the trademark “INTER” would cause a likelihood of confusion with Club Internacional de Fútbol Miami (“Inter Miami”) and other third-party soccer organizations with “inter” in their names.[60]
Inter Milan first applied for a trademark registration in the United States in 2014.[61] The MLS opposed the registration, arguing that the mark was merely “descriptive” in violation of Section 12(e)(1) of the Trademark Act (15 U.S.C. § 1052(e)(1)); and at risk of causing confusion with Inter Miami’s alleged mark in violation of Section 12(d) (15 U.S.C. § 1052(d)).[62] Inter Milan moved to dismiss the Section 12(d) claim.[63]
At first, the MLS cited its “intent-to-use” application for a registration on behalf of Inter Miami in asserting that the Milanese club’s registration posed a likelihood of confusion.[64] Eventually, the MLS pivoted its argument to focus on the use of “inter” by other soccer clubs and organizations in the United States, including a number of youth clubs.[65] The MLS stressed that it was “deeply involved” in youth leagues and lower tiers professional leagues and thus had an interest in averting confusion between Inter Milan and youth and lower tier organizations that used the word “Inter” in their title.[66] In turn, Inter Milan denied that MLS had established the requisite “direct and substantive connection” with these third parties to state a Section 12(d) claim.[67]
A three-judge panel of the TTAB agreed with Inter Milan that the MLS had “not sufficiently pleaded a ‘legitimate interest’ in avoiding a likelihood of confusion between Applicant’s mark and the pleaded third-party marks.”[68] Characterizing the MLS’s relationship to the various organizations and leagues with Inter in their names as “at best, tangential,” the TTAB held that even if the MLS’s allegations were accepted as true, MLS could not show it would be detrimentally affected by any “likelihood of confusion” between the marks.[69]
As of December 2021, the parties were in settlement discussions regarding the MLS’s remaining claim under Section 12(e)(1).[70]
§ 2.4. O.M. by and through Moultrie v. National Women’s Soccer League, LLC, No. 3:21-cv-00683-IM, 2021 WL 2478439 (D. Ore. June 17, 2021)
Teenage star Olivia Moultrie won a preliminary injunction against the National Women’s Soccer League (“NWSL”) that prohibited the league from enforcing its minimum age rule, leading to a settlement that cleared the way for Moultrie to continue playing for the Portland Thorns.[71]
In May 2021, 15-year old phenom Moultrie filed suit against the NWSL seeking a temporary restraining order and injunction precluding the NWSL from enforcing a requirement that players be at least 18 years of age before participating.[72] Moultrie argued that, while she would have to abide by a collectively bargained age limit, the NWSL’s rule—which the league’s teams had unilaterally implemented—violated the Sherman Act.[73] Moultrie emphasized both that the NWSL was the “only option for women to play professional soccer in the United States” and that there were no comparable age limits in male professional soccer leagues.[74] Enforcement of the age rule, Moultrie maintained, would “continually slow her development, delay her improvement, and more generally impede her career as a soccer player.”[75]
After granting the temporary restraining order and holding an evidentiary hearing, District Judge Karin Immergut held that Moultrie had satisfied the requirements for a preliminary injunction.[76] Judge Immergut determined that Moultrie was likely to succeed on the merits of her ultimate claim. The court specifically found that the NWSL teams wielded market power and had engaged in a concerted action to prohibit players under 18 from participating, thereby having an anticompetitive effect on Moultrie’s ability to participate in the market for professional women’s soccer.[77] The court rejected the NWSL’s arguments that the age rule’s alleged effect on cost reduction amounted to a procompetitive justification, or that the non-statutory labor exception to the Sherman Act applied, since the age rule had not been collectively bargained.[78] In addition, Judge Immergut found that Moultrie would suffer irreparable harm if she were prohibited from plying her trade in the NWSL for up to three more years.[79] Finally, the court held that the balance of equities and public interest favored Moultrie, particularly given the lack of an age limit or rule in the MLS or other men’s professional leagues.
The parties settled soon after, allowing Moultrie to continue her professional career.[80]
Part III – NFL
§ 3.1. St. Louis Regional Conv. et al. v. National Football League et al., 1722-CC00976 (Mo. 22nd Jud. Ct.)
The NFL and Los Angeles Rams owner Stan Kroenke agreed to pay $790 million in settlement of a years-long lawsuit stemming from the relocation of the Rams franchise from St. Louis to Los Angeles.[81]
In 2016, a majority of the NFL’s 32 owners approved Kroenke’s bid to move the Rams to Inglewood, California. The City of St. Louis, St. Louis County, and St. Louis Regional Convention and Sports Complex Authority filed suit a year later, alleging that Kroenke and others had fraudulently concealed their intention to move the team for years before the relocation; that the league had violated its own relocation policy in approving the deal; and the Kroenke and the NFL had cost St. Louis millions.[82]
The court had denied the defendants’ for motion for summary judgment dismissal in September 2021.[83] The NFL and Kroenke argued that the NFL’s relocation policy did not constitute a binding contract and that, regardless of whether it did, the St. Louis plaintiffs were not third-party beneficiaries with standing to enforce the policy.[84] Citing evidence that NFL owners considered it “their duty to enforce the Relocation Policy,” the court held that the relocation policy was enforceable.[85] The court further found that “many provisions of the Relocation Policy were intended for the benefit of a club’s home territory,” rendering the St. Louis plaintiffs intended third-party beneficiaries.[86] The court also held that questions of material fact as to whether the NFL and Kroenke knew that they would be moving the team but represented the contrary to the plaintiffs precluded summary judgment on the plaintiffs’ fraud claims.[87]
The litigation engendered strife among the league’s 32 owners. Much to their consternation, several owners have had to turn over extensive phone records and documents during the discovery process.[88] In October 2021, Kroenke reportedly signaled to his fellow owners that he was planning to challenge an indemnification agreement that Kroenke had signed prior to the relocation and pursuant to which Kroenke had previously been paying legal costs for the league’s defense.[89]
§ 3.2. Snyder v. Moag & Co., LLC, No. ELH-20-2705, 2021 WL 3190493 (D. Md. July 28, 2021)
In Snyder v. Moag & Co., LLC, the U.S. District Court for the District of Maryland tossed out a claim by Washington Football Team (“WFT”) owner Daniel Snyder alleging that John Moag, whose company had helped Snyder sell minority interests in the team, had spoliated evidence relating to a separate defamation claim brought by Snyder against an Indian publication.[90]
Snyder had filed suit against an “obscure website” in India that had published a story about a rumored connection between Snyder and Jeffrey Epstein.[91] According to Snyder, Moag deliberately deleted text messages and emails from his phone relevant to the India litigation.[92]
Although the court recognized that Moag had a duty to preserve potential evidence, the court held that Snyder had failed to meet the remaining two elements of a spoliation claim: a “culpable state of mind” and the relevance of the alleged information.[93] Snyder, per the court, “presented no real evidence” that Moag had deleted text messages or emails from his phone “with the express purpose of depriving [Snyder] of the evidence in this litigation.”[94] Further, finding the record devoid of evidence that Moag intentionally deleted materials relevant to the India litigation or had even been aware of it, the court found that Moag had not deleted relevant evidence.[95] Snyder, the court concluded, had merely been “fishing” for relevant evidence from Moag.[96]
§ 3.3. PSSI Stadium LLC v. City of Pittsburgh Zoning Board of Adjustment, No. 600 C.D. 2020, 2021 WL 3355011 (Pa. Comm. Ct. Aug. 3, 2021)
The Commonwealth Court of Pennsylvania determined that the proposal to spell out “HEINZ FIELD” in section of seating in Heinz Field does not violate a Pittsburgh zoning ordinance prohibiting “exterior” advertising signage, finding instead that the painted seats would constitute permitted interior signage.[97]
Heinz Field is a nearly 70,000 seat stadium the primary home of the Pittsburgh Steelers and the University of Pittsburgh football team. PSSI Stadium LLC, the stadium’s main tenant, applied for approval from the Pittsburgh Zoning Board of Adjustment (“ZBA”) to paint a section of Heinz Field’s seats.[98] The proposed signage, PSSI argued, would be a “permitted interior sign under Section 919.03.A of the City of Pittsburgh’s Zoning Code.”[99] The ZBA rejected the request, however, reasoning that because the “HEINZ FIELD” seat painting would be visible from above the stadium and from a number of buildings and locations in downtown Pittsburgh, the proposed signage was “analogous to a roof sign.”[100]
The trial court reversed the ZBA’s decision, and the Commonwealth Court affirmed the trial court. As an initial matter, the court held, the ZBA had erred in diverging from a prior decision in which a soccer stadium was allowed to paint its seats to spell out “HOUNDS” on the basis that the seats comprised an “interior” sign.[101] As in that case, the court held, the proposed Heinz Field painting was “plainly not an exterior sign.”[102] Instead, the seat signage was “tantamount to a logo on or near the playing field” and thus qualified as permitted interior signage under Section 919.03.A.[103]
Part IV – MAJOR LEAGUE BASEBALL
§ 4.1. Chattanooga Professional Baseball LLC v. National Casualty Company, No. 20-17422, 2021 WL 4493920 (9th Cir. Oct. 1, 2021)
The U.S. Circuit Court of Appeals for the Ninth Circuit affirmed the dismissal of a claim brought by several minor league baseball teams against their insurers for rejecting their claims for business interruption losses arising from the COVID-19 shutdown.[104]
Each of the teams’ insurance policies contained an exclusion for coverage from “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”[105] However, the teams argued that “other causes,” including “the attendant disease, resulting pandemic, governmental responses to the pandemic, and Major League Baseball (MLB) not supplying players,” were responsible for the interruption of business and resultant losses.[106] Accordingly, the Ninth Circuit’s analysis hinged on the determination of “causation” in each of the ten states in which the teams resided.[107]
Eight of the ten states (California, Oregon, West Virginia, Idaho, Indiana, Maryland, Tennessee, and South Carolina) employ the “efficient proximate cause” analysis, under which the legal cause is that which “sets the other causes in motion” without being too remote.[108] Because the Ninth Circuit identified the COVID-19 virus as the domino that set the other causes in motion, the court held that the teams in these states properly had their claims dismissed.[109] The court also rejected the claims brought under Texas law, which requires the claimant to establish that a concurrent, covered “peril” caused the alleged loss.[110] The Texas teams could not establish a cause “concurrent” to the spread of the virus.[111] The Ninth Circuit also held that the teams had not established a “efficient intervening cause” that “broke the causal chain” from the COVID-19 virus, as required to recover under Virginia law.[112] Finally, the court rejected the teams’ equitable arguments for deeming the insurance policies’ virus exclusions unenforceable.[113]
§ 4.2. Sports Technology Applications, Inc. v. MLB Advanced Media, L.P., No. 0652609/2014 (Sup. Ct. N.Y.)
Sports Technology Applications, Inc. (“STA”) won a $2 million verdict against MLB Advanced Media, L.P. (“MLBAM”) from a Supreme Court of New York jury in New York City.[114]
STA, an app developer and software company, entered a licensing deal with MLBAM in 2012 in which STA agreed to develop an app, which would allow users to predict plays in-game and challenge fellow users for the chance to win “virtual” prizes.[115] In exchange for the MLBAM’s promotion of the app, STA agreed to make a series of payments to MLBAM totaling millions.[116] The parties’ relationship quickly soured, however, and STA sued MLBAM in 2014.[117]
According to STA, MLBAM failed to adequately promote the app or disclose that it was a significant shareholder of PrePlay, a competitor to STA. While admitting that it did not promote the app to the extent required by the parties’ agreement, MLBAM blamed the lack of promotion on the app’s delayed launch and alleged myriad technological problems. MLBAM further denied that it had any obligation to disclose its relationship with PrePlay to STA.[118]
The jury sided with STA after a trial in 2021. The court later denied MLBAM’s motion for judgment as a matter of law or new trial.[119]
§ 4.3. Landis v. Washington State Major League Baseball Stadium Public Facilities District, 11 F.4th 1101 (9th Cir. Sep. 1, 2021)
In Landis v. Washington State Major League Baseball Stadium Public Facilities District, the Ninth Circuit remanded a suit to the trial to the trial court for a determination of whether T-Mobile Park, home of the Seattle Mariners, provides adequate sightlines of the playing field for its handicap-accessible seating in accordance with the Americans with Disabilities Act (“ADA”).[120]
The ADA requires “full and equal enjoyment of places of public accommodation by individuals with disabilities.”[121] In 1996, the U.S. Department of Justice (“DOJ”) published its Accessible Stadiums guidelines, in which the DOJ interpreted the ADA to mandate that “all or substantially all of the wheelchair seating locations must provide a line of sight over standing spectators.”[122] The guidance requires that wheelchair users be able to see the field “between the heads and over the shoulders of the persons standing in the row immediately in front and over the heads of the persons standing two rows in front.”[123]
Plaintiffs, all of whom use wheelchairs, alleged that the sightlines did not comply with the Accessible Stadiums requirements.[124] According to plaintiffs’ expert, “the sightlines of spectators using wheelchairs were nearly always more obstructed than the sightlines of spectators not using wheelchairs.”[125] Defendants’ expert disagreed, concluding that wheelchair-using spectators could see over the shoulders and between the heads of people in both of the first two rows in front of the seating.[126] The trial court sided with the defendants in finding that the wheelchair-accessible seats had “comparable,” if not greater, visibility than non-accessible seating.[127]
On appeal, the Ninth Circuit held that while the trial court analyzed the “first requirement” of the Accessible Stadiums standard—that wheelchair-using spectators be able to see over the shoulders of the row in front of them—the lower court had failed to assess whether spectators could see over the second row in front of them.[128] In the Ninth Circuit’s view, the trial court had failed to address evidence and testimony submitted by the plaintiffs regarding spectators two rows in front of wheelchair-accessible seats.[129] Accordingly, “not satisfied that the district court analyzed the second Accessible Stadiums requirement” but not expressing any opinion as to whether T-Mobile Court was in compliance with the ADA, the Ninth Circuit remanded the case to the trial court for a proper application of Accessible Stadiums.[130]
Judge Patrick Bumatay concurred in the result, but disagreed with the majority’s application of the Accessible Stadiums guidance as an “authoritative” document.[131]
§ 4.4. In Re: Houston Astros, LLC, No. 14-20-00769-CV, 2021 WL 2965268 (Ct. App. Tx. July 15, 2021)
On a writ of mandamus, the Court of Appeals of Texas in Houston dismissed a class action brought by a class of Houston Astros season ticket holders arising out of the revelation that Astros illegally stole signs from 2016 to 2019.[132]
In January 2020, MLB Commissioner Rob Manfred issued a report in which he concluded that the Astros had illicitly stole opposing teams’ pitching signs, including during their World Series-winning 2017 season and American League-winning 2019 season.[133] The plaintiffs alleged that the Astros “knowingly, intentionally, and deceptively selling season tickets with full knowledge that Astros employees and representatives were surreptitiously engaged in a sign stealing scheme in violation of MLB rules.”[134] If they had known the Astros were cheating, these season ticket holders averred, they would have never purchased season tickets.[135] The Astros moved to dismiss the complaint, asserting that the plaintiffs’ “disappointment” over the team’s indiscretions.[136] The trial court denied the motion, prompting the Astros to petition for a writ of mandamus.[137]
In reviewing whether the plaintiffs had stated legally cognizable causes of action, the Court of Appeals analyzed Mayer v. Belichick, 605 F.3d 223 (3d Cir. 2020).[138] The plaintiff in Mayer was a New York Jets season ticket holder who sued the New England Patriots and Bill Belichick for their alleged role in the “Spygate” videotaping scandal. The Third Circuit held that the plaintiff did not have a legally protected right “to see an ‘honest’ game played in compliance with the fundamental rules of the NFL” and thus had not suffered a cognizable injury.[139] The Texas court determined that the Astros’ ticketholders claim likewise stemmed from the “embarrassment, disappointment, shame, and disgrace” of the sign-stealing scandal, rather than any misrepresentation by the Astros or their representatives.[140] The ticket itself merely guaranteed entry to the game – not that the home team would play the game honestly or fairly.[141] The court thus dismissed the suit.[142]
The Cleveland Guardians (of the MLB) settled a trademark infringement suit brought by the Cleveland Guardians (roller derby team), allowing both teams to continue using the name.[143]
Cleveland’s baseball team changed its name from “Indians” to “Guardians” in July 2021. The Guardians roller derby team, however, had formed in 2013 and registered the “Cleveland Guardians” name with the Ohio Secretary of State in 2017.[144] The roller derby filed suit in October, alleging “There cannot be two ‘Cleveland Guardians’ teams in Cleveland, and, to be blunt, Plaintiff was here first.'”[145]
The settlement clears the way for the baseball team to begin the 2022 season as the Cleveland Guardians.
PART V – NBA
§ 5.1. Easter Unlimited, Inc. v. Rozier, No. 18-CV-06637 (KAM), 2021 WL 4409729 (E.D.N.Y. Sept. 27, 2021)
Charlotte Hornets guard Terry Rozier successfully moved for summary judgment dismissal of several claims arising out of his “Scary Terry” line of clothing and merchandise and its alleged similarity to the “Ghost Face” mask popularized in the Scream horror film series.[146]
Plaintiff Easter Unlimited (d/b/a Fun World) is a costumer and novelty item business that has held copyright and trademark registrations for the “Ghost Face” mask since the early 1990’s.[147] Fun World granted Dimension Films a license to use the mask for Scream.[148] In 2018, while Rozier was playing for and excelling with the Boston Celtics, fans and media began referring to him endearingly as “Scary Terry.”[149] Hoping to capitalize on this new moniker, Rozier began selling “Scary Terry” clothing that featured a cartoon caricature of Rozier wearing what he referred to as the “Scream mask.”[150] Plaintiff thereafter filed a variety of claims for copyright and trademark infringement.[151]
The court found that Rozier’s use of the “Ghost Face” copyright constituted fair use.[152] Among other things, the court determined that Rozier’s use of the mask in his merchandise: (1) was, to some extent, transformative; (2) parodic to the extent it constituted a “humorous and whimsical reimagination of the Ghost Face Mask”; and (3) satirical insofar as it was “a means of satirizing and ridiculing the perception of ruthless, high-scoring athletes in the NBA, as well as underscoring the humor in the Scary Terry moniker.”[153] In the court’s view, the risk of the “Scary Terry” moniker “usurping” the Ghost Face mask’s position in the market for novelty wear was low.[154]
The court similarly rejected the plaintiff’s trademark related claims.[155] In addition to deeming the “Ghost Face” mark descriptive and therefore “weak,” the court found that a dearth of evidence that the Scary Terry designs were similar or would cause consumer confusion.[156]
§ 5.2. Bertuccelli v. Universal City Studios LLC, No. 19-1304 (E.D. La.)
After several years of litigation and having already had a summary judgment motion denied, Universal Studios and other defendants settled a suit brought by the creators of the New Orleans Pelicans’ “King Cake Baby” mascot asserting that the movie studio stole his idea to create a character for the Happy Death Day film series.[157]
A mask featuring a “cartoonish baby face” figures prominently in both 2017’s Happy Death Day and 2019’s Happy Death Day 2 U.[158] Plaintiffs alleged that the mask infringes the copyright of the King Cake Baby, which plaintiffs created in 2009.[159] In support of their motion for summary judgment, the defendants argued that the plaintiffs could not establish “substantial similarity” between the masks.[160] But the court disagreed, concluding that a fact finder could find that the masks were “substantially similar.”[161]
The original mezzanine UCC foreclosure sale that was scheduled for May 1, 2020 was temporarily enjoined by the New York Supreme Court on April 30, 2020 on the grounds that the terms of the foreclosure sale were not commercially reasonable in light of the coronavirus pandemic and that Executive Order 202.8’s prohibition on foreclosures extends to UCC foreclosures of mezzanine debt. The court then issued a final decision in 1248 Assoc Mezz II LLC on May 18, 2020, vacating its prior temporary restraining order and ruling that the scheduled UCC foreclosure could move forward, as it was not prohibited by Executive Order 202.8.[162] The court reached this conclusion by noting that, “had the Executive Order intended to prohibit sales of collateralized assets…governed by the UCC, such prohibition would have been explicitly provided for within that Executive Order.”[163] The court then went on to concur with the mezzanine lender’s argument that the foreclosure of a mortgage is “a judicial proceeding, whereas the proposed (and Noticed) sale addresses a disposition of collateral pursuant to Article 9 of the UCC, a non-judicial proceeding,”[164] ultimately concluding that Executive Order 202.8 “addresses enforcement of a judicially ordered foreclosure,”[165] which does not cover foreclosures conducted under the UCC.
National Collegiate Athletic Assn. v. Alston, 141 S. Ct. 2141 (June 21, 2021) ↑
See Docket, Case No. 49D01-2009-CT-033968, Ind. Sup. Ct., Westwood One Radio Networks, LLC, f/k/a Westwood One Radio Networks, Inc. v. The National Collegiate Athletic Association, NIT, LLC. ↑
Bielema v. The Razorback Foundation, Inc., No. 5:20-CV-05104 (W.D. Ark.) ↑
Hobart-Mayfield, Inc. v. National Operating Committee on Standards for Athletic Equipment, — F. Supp. 3d —-, 2021 WL 1575297 (E.D. Mich. April 22, 2021). ↑
See Leading European Football Clubs Announce New Super League Competition, The Super League, https://thesuperleague.com/press.html (last accessed November 22, 2021). ↑
See note 48, supra. Although FC Bayern Munich and Borussia Dortmund in Germany and Paris St. Germain in France were also tabbed as “permanent” members, those clubs did not join in the initial Super League announcement. ↑
A Special Purpose Acquisition Company (“SPAC”) is a publicly traded blank check company created to take a private company public through a merger. At its core, a SPAC is a form of regulatory arbitrage in which market participants capitalize on the varying liability exposure of taking a company public. A SPAC typically has two years to identify a target company and complete the business combination, often referred to as a “de-SPAC” transaction, or liquidate and return the proceeds from the IPO to the shareholders. When a SPAC proposes a merger, the shareholders have the option to participate in the merger or redeem their shares at the initial IPO price with accrued interest. Typically, SPAC sponsors receive a “promote”—founder shares in the form of 20% convertible securities of the SPAC’s equity for a nominal price as compensation.
Increased private litigation, enhanced regulatory scrutiny, and changing market dynamics have called into question the utility of SPACs. Critics argue that SPACs are rife with conflicts of interest, erode investor protection, and are incredibly dilutive. Conversely, proponents aver that the investment vehicle improves market efficiency, helps reverse the trend of technology companies remaining private, and allows retail investors to participate in the upside of early-stage high growth companies. To the extent SPACs continue to provide financial incentives to market participants, and enjoy less liability exposure than conventional IPOs, SPACs will remain a relevant component of our capital markets. As such, market participants most adroit at navigating the evolving landscape will obtain a competitive advantage in the marketplace.
PRIVATE LITIGATION DEVELOPMENTS:
Private litigation against SPACs has increased and is expected to escalate. Lawsuits have targeted each step of the SPAC lifecycle, from the IPO process, to proxy solicitation, to the post–de-SPAC transaction. Of particular interest, on March 25, 2021, plaintiffs filed a class-action lawsuit against Multiplan Corp., the surviving entity from a de-SPAC transaction in the Delaware Court of Chancery (“DCC”).
The plaintiffs allege that the board of directors and the SPAC sponsor breached their fiduciary duty during the de-SPAC merger. The claims stem from a director’s duty to act loyally and disclose material information when seeking shareholder action. Specifically, the plaintiffs claim the defendants failed, disloyally, to disclose information necessary for plaintiffs to exercise their redemption rights knowledgeably. On January 3, 2022, the DCC denied the defendants’ motion to dismiss, allowing the plaintiffs’ case to move forward except for two named defendants.
In re Multiplan Corp. Stockholder Litigation (“In Re Multiplan Corp.”) is likely to have broad-reaching implications, as it is the first time a Delaware court has had an opportunity to apply Delaware corporate law to SPACs’ unique characteristics. Of note, Vice Chancellor Lori W. Will opined, given the mechanics of a SPAC, plaintiffs’ claims are direct, not derivative, and “[t]he entire fairness standard of review applies due to inherent conflicts between the SPAC’s fiduciaries and public stockholders in the context of a value-decreasing transaction.”[1]
Momentously, barring an appeal, In re Multiplan Corp. establishes that features common in SPACs are enough to rebut the presumptive protection of the business judgment rule and trigger an entire fairness review in Delaware court. Specifically, a sponsor’s promote in the form of founder shares at a nominal price creates a unique benefit to the sponsors that competes with the interest of public stockholders. The windfall founder shares’ beneficiaries would receive even in a value-decreasing transaction is misaligned with public stockholders’ interest to redeem their shares unless the value of the post-merger entity is greater than the full value of their investment with interest. Stated succinctly, the potential conflict between the SPAC sponsors and public stockholders resulting from their different incentives in a bad deal versus no deal is sufficient to rebut the business judgment rule.
In re Multiplan Corp. provides guidance for lawyers to structure SPACs in a manner that helps fiduciaries meet their standard of conduct under Delaware law and maintain the protection of the business judgment rule as a standard of review. Presumably, SPACs that structure their sponsors’ promote to align the financial incentives of SPAC sponsors with that of public stockholders will help mitigate conflicts of interest in de-SPAC transactions and maintain the protection of the business judgment rule in the pleading stages of litigation. Additionally, as Vice Chancellor Will points out, “one can imagine a different outcome if the defendants provided public stockholders all material information about the target.” Consequently, one can expect much more robust disclosure in de-SPAC transactions.
REGULATORY DEVELOPMENTS:
Along with an increase in private litigation, the Securities and Exchange Commission (“SEC”) has shown a keen interest in the proliferation of SPACs in the capital markets. On December 22, 2020, the Division of Corporation Finance of the SEC released a Disclosure Guidance for SPACs. The SEC staff emphasized that a SPAC preparing to conduct an IPO or present a de-SPAC transaction to shareholders “should consider carefully its disclosure obligations under the federal securities laws as they relate to conflicts of interest, potentially differing economic interests of the SPAC sponsors, directors, officers and affiliates and the interests of other shareholders and other compensation-related matters.”[2] Additionally, on April 8, 2021, Acting Director of the Division of Corporation Finance of the SEC John Coates opined that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor for forward-looking statements might not apply to de-SPAC transactions.[3] Of note, the PSLRA safe harbor and associated reduced §§ 11, 12 liability exposure in private litigation are the primary source of regulatory arbitrage opportunity of SPACs over conventional IPOs.
Subsequently, on April 12, 2021, the SEC published a joint statement by Acting Director Coates, and Acting Chief Accountant of the SEC Paul Munter, on Accounting and Reporting Considerations for Warrants Issued by SPACs (“Statement”).[4] The Statement indicates that certain warrants commonly issued by SPACs contain terms that should be classified as a liability rather than equity under U.S. GAAP. The Statement had a chilling effect on the SPAC market, as numerous registrants had to restate or amend their filings.
As anticipated, the SEC is starting to crack down on perceived abuse in the SPAC market with enforcement actions. On July 13, 2021, the SEC announced charges against Stable Road Acquisition Company (“SRAC”), its sponsor, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich. All parties have settled with the SEC except Kokorich, against whom the SEC has filed a separate complaint. Under the terms of the settled order, the settling parties agreed to pay more than $8 million in aggregate, tailored investor protection undertakings, and forfeiture of the promote the sponsors would have received if the merger were ultimately approved.[5]
According to the settled order, Momentus’s multi-billion-dollar revenue projections were premised on misleading statements about Momentus’s development of commercially viable space propulsion technology. Additionally, the order asserts SRAC “engaged in negligent misconduct by repeating and disseminating Momentus’s misrepresentations in Commission fillings” and to investors without proper due diligence. In a statement, SEC Chair Gary Gensler stated in part, “[T]his case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors…the fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders.” The case imposes gatekeeper-related obligations on SPAC sponsors and signifies a significant escalation in the SEC’s activity in the SPAC market.
In a speech on December 9, 2021, Gensler reiterated his trepidation of the proliferation of SPACs in the capital markets and touted his regulatory philosophy that like activities should be treated alike. He expressed his concerns that SPAC investors are not benefiting from the protection they would otherwise get from securities laws in traditional IPOs. Accordingly, he has asked the staff for rule proposals for the Commission’s consideration to mitigate information asymmetry, conflicts, and fraud in SPAC transactions.[6]
Undoubtedly, the SEC will have a tremendous impact on the evolution of SPACs, especially if Gensler’s public comments materialize in the form of SEC rules on disclosure, marketing practices, and gatekeeper obligations. As the SEC develops its approach to regulating SPACs, the Commission will have to balance policy goals and underpinning principles with an evolving financial market–for instance, finding the proper balance between investor protection, democratizing finance, and maintaining an efficient market.
MARKET DEVELOPMENTS:
Litigation risk, regulatory activities, and market dynamics have curtailed SPAC market activity. However, as SPAC market participants obtain regulatory clarity, process litigation risks, and calibrate market dynamics, SPACs are likely to evolve with innovative deal structures. On November 24, 2021, Pershing Square Capital Management filed a registration statement with the SEC for the subscription warrants of its special purpose acquisition rights company (“SPARC”).[7] A SPARC has features similar to a SPAC; however, amongst other things, a SPARC has an opt-in rather than an opt-out financing structure. A SPARC does not raise capital in its IPO, but instead issues warrants exercisable into the common stock of the SPARC if the SPARC enters into a binding agreement for an initial business combination transaction. Proponents of SPARCs maintain that SPARC features are more protective of investors than those of SPACs, by minimizing conflicts and aligning the interests of the sponsors with those of the general investing public.
Of particular note, a SPARC eliminates the opportunity cost for investors as their funds from a conventional SPAC IPO sit idle in a trust account while a SPAC seeks a target company. Additionally, a SPARC mitigates the time pressure associated with conventional de-SPAC transactions, often a source of leverage against a SPAC during merger negotiations and a liability hotbed. A central claim in litigations against SPACs often includes allegations that the SPAC sponsors were pressured to accept any deal within the two-year time limit to avoid liquidating the SPAC and forfeiting the sponsor’s promote. It remains to be seen if the SEC will declare the PSTH SPARC registration statement effective, or if the SEC will approve the NYSE proposed rule change to allow PSTH SPARC warrants to trade on the NYSE. Nonetheless, SPACs are becoming increasingly adaptive and provide transactional lawyers tremendous flexibility to structure deals, as market-driven SPAC structures are helping to shape the evolution of the SPAC market.
CONCLUSION:
Accessing the public market through a SPAC or a variation thereof is fraught with litigation, regulatory, and market risks. As SPACs continue to evolve to mitigate their associated risks while capitalizing on their benefits, a convergence of conventional and innovative deal structures will ensue with corresponding pros and cons. For instance, a SPARC opt-in feature is analogous to a conventional Independent Sponsor Model (IDM) in which a sponsor identifies a target company then seeks investors to finance the deal. Like an IDM and a conventional private equity deal, a SPARC will have a higher level of uncertainty that the sponsor will be able to raise the funds and close the deal than would a conventional SPAC. However, like an IDM, a SPARC helps eliminate the opportunity cost of idle capital. Understanding the trend lines and parallel structure between conventional and emerging investment vehicles will be very helpful to navigate the evolving landscape.
Interestingly, the legal system, regulators, and market forces are converging to address the drawbacks of SPACs—particularly, conflicts of interests and information asymmetry. As SPACs continue to evolve, policymakers should consider who ought to be at the forefront driving these changes. As the complexities of the evolution of SPACs continue to unfold, transactional attorneys will need a deep understanding of the policy priorities of key regulators, litigation trends, market dynamics, deal structures, and economic drivers to best serve the needs of their clients. Not to mention, ingenuity and forethought will be at a premium.
Snell & Wilmer L.L.P. One Arizona Center 400 E. Van Buren Phoenix, AZ 85004-2202 (602) 382-6388 [email protected] www.swlaw.com
§ 1.1. Tribal Litigation & The Third Sovereign
We have been writing this annual update of cases relevant to tribal litigation for years. Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citations to most relevant circuit and even district court cases in every volume. This resulted in a chapter that had grown to almost seventy pages in length and had increasingly made it difficult for the reader to identify the most recent cases.
Beginning with the 2019 Edition, we decided to change the format of this chapter to both be more consistent with the other chapters in this volume, and to focus on the cases decided in the last year. This chapter continues with that format and focuses on cases decided between Oct. 1, 2020, and Oct. 1, 2021. While other chapters have arranged themselves by circuit, we begin with a Supreme Court overview and then structure this chapter’s subsections around sovereigns: Indian Tribes, the United States, and the fifty sister States. Within each subsection we provide a concise overview with more limited and deliberate citation, followed by longer and more intentional discussion of recent cases. We hope the reader appreciates the change in format, and we welcome comments via email to any of the chapter authors.
Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.[1] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.[2] Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the U.S. president or a state’s governor), and a tribal council or senate (the legislative body). Tribal courts adjudicate most matters arising from the reservation or under tribal law.[3]
Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.[4] Thus, state laws generally “have no force” in Indian Country.[5] While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”[6]
This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty. Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,[7] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.
§ 1.2. Indian Law & The Supreme Court
§ 1.2.1. The 2020–2021 Term
The Supreme Court hears an average of between two and three new Indian law cases every year.[8] During the 2020–2021 term, the Court decided two Indian law cases.[9]
United States v. Cooley, 141 S. Ct. 1638 (2021).[10] The U.S. Supreme Court declared unanimously that tribal police officers have the authority to temporarily detain and search non-Natives on public rights-of-way through Indian lands if they are suspected of violating federal or state law.[11] This ruling is significant for Indian Country as it solidifies rights by tribes to exercise their sovereignty while removing previous limitations.
The Court’s decision reversed the Ninth Circuit Court of Appeals’ ruling that tribal safety patrol officers lacked the power to detain and search the defendant, Joshua James Cooley because he was a non-Native.[12] Cooley was initially arrested on tribal lands after an officer searched his vehicle, where evidence was found leading to a federal drug and firearms possession charge.[13] Cooley moved to suppress the evidence found in the search, arguing the tribal police officer lacked the authority to investigate and detain him because he is a non-Native. The Ninth Circuit agreed and ruled in favor of Cooley.
In overturning the Ninth Circuit, the Supreme Court based its decision on the long-standing Federal Indian Law precedent of United States v. Montana,[14] stating that tribes do not have jurisdiction over non-Natives on reservations unless their behavior “threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.”[15] The Court ruled that the power of tribal officers to detain and investigate non-Natives on highways running through tribal lands is an exercise of sovereign authority necessary to protect tribal communities against threats to their health and welfare. Justice Stephen Breyer wrote the opinion and stated that ruling otherwise “would make it difficult for tribes to protect themselves against ongoing threats” such as “non-Native drunk drivers, transporters of contraband, or other criminal offenders operating on roads within the boundaries of a tribal reservation.”[16]
Arguably, the most significant piece of Justice Breyer’s opinion is that the charges Cooley faced were not tribal allegations, but arose under “state and federal laws that apply whether an individual is outside a reservation or on a state or federal highway within it.”[17] This means there is now precedent in place authorizing tribal police officers to investigate and temporarily detain non-Native motorists if there is suspicion of state and federal crimes—and not simply alleged violations of tribal law.
Justice Alito wrote a one-paragraph concurrence clarifying when tribal police officers have authority on public rights-of-way. Essentially, he wrote tribal officers have the power to stop non-Natives if: (1) the officer has a “reasonable suspicion that the motorist may violate or has violated federal or state law;” (2) the search was necessary to protect themselves or others; and (3) the officer has probable cause to detain the motorist until a non-tribal officer arrives on the scene.
The Cooley decision is important for tribes to continue acting in a sovereign capacity to protect their tribal lands and those who live and travel within their boundaries.
Yellen v. Confederated Tribes of the Chehalis Rsrv., 141 S. Ct. 2434 (2021).[18]In a 6-3 decision, the Supreme Court held that Alaska Native Corporations (“ANCs”) are entitled to COVID-19 relief funds, solidifying that ANCs qualify as Indian tribes under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. In this ruling, SCOTUS reversed a unanimous Washington D.C. Circuit panel that initially sided with the Plaintiff tribes and against ANCs.[19]
Justice Sotomayor, writing for the majority, indicated ANCs qualify for funding under the CARES Act because in the Indian Self-Determination and Education Assistance Act (“ISDEAA”), which created a federal legal definition of “tribe,” ANCs were included. The opinion states: “under the plain meaning of ISDEAA, ANCs are Indian tribes regardless of whether they are also federally recognized ‘tribes’ or not.” Specifically, the ISDEAA defines an Indian tribe as “any Indian tribe, band, nation or other organized group or community, including any Alaska Native village or regional or village corporation as defined in or established under the Alaska Native Claims Settlement Act (“ANCSA”), which is recognized as eligible for the special programs and services provided by the United States to the Indians because of their status as Indians.” Therefore, since the ISDEAA includes ANCs in the definition of an Indian tribe, and the CARES Act is also a federal statute using the term Indian tribe for eligibility purposes, the Supreme Court held ANCs are eligible for CARES Act funds.
The Plaintiff tribes argued this decision would potentially open doors for other non-federally recognized Indian groups to be reorganized under the ISDEAA. However, the Court disagreed and stated that ANCs are “entities created by federal statute and granted an enormous amount of special federal benefits as part of a legislative experiment tailored to the unique circumstances of Alaska and recreated nowhere else.” Justice Sotomayor further indicated that the “[C]ourt’s decision today does not vest ANCs with new and untold tribal powers, as respondents fear,” but “[i]t merely confirms the powers Congress expressly afforded ANCs and that the executive branch has long understood ANCs to possess.” Based on this ruling, ANCs are unambiguously “Indian tribes” under the ISDEAA.
Justice Gorsuch, joining with Justices Thomas and Kagan, writing for the dissent, indicated the “recognized as eligible” clause in the ISDEAA refers to the “government-to-government recognition that triggers eligibility for the panoply of benefits and services the federal government provides to Indians” and ANCs are not eligible for CARES Act funding. The dissent argued the plain meaning of the definition is far from clear and said “[e]ven if we could somehow set aside everything we know about how the term is used in Indian law and the CARES Act itself, it’s far from clear what plain meaning the court alludes to or how ANCs might fall within it.”
§ 1.2.2. Preview of the 2021–2022 Term
As of October 20, 2021, the Supreme Court has granted certiorari in two Indian law cases for the 2021–2022 term: Denezpi v. United States and Ysleta del Sur Pueblo v. Texas.[20] In Denezpi v. United States, the case presents the following question: “Is the Court of Indian Offenses of Ute Mountain Ute Agency a federal agency such that Merle Denezpi’s conviction in that court barred his subsequent prosecution in a United States District Court for a crime arising out of the same incident?” In Ysleta del Sur Pueblo v. Texas, the case presents the following question: “Whether the Restoration Act provides the Pueblo with sovereign authority to regulate non-prohibited gaming activities on its lands (including bingo), as set forth in the plain language of Section 107(b), the Act’s legislative history, and this Court’s holding in California v. Cabazon Band of Mission Indians,[21] or whether the Fifth Circuit’s decision affirming Ysleta I correctly subjects the Pueblo to all Texas gaming regulations.” If any new cases are granted and decided, they will be included in next year’s volume.
§ 1.3. The Tribal Sovereign
§ 1.3.1. Tribal Courts
More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands. Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority. As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.
While tribal courts are similar in structure to other courts in the United States, the approximately 275 Indian courts currently functioning throughout the country are unique in many significant ways.[22] It cannot be overemphasized that every tribal court is different and distinct from the next.[23] For example, the qualifications of tribal court judges vary widely depending on the court.[24] Some tribes require tribal judges to be members of the tribe or to possess law degrees, while others do not.[25] Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.
Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court. While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another. For example, the Navajo tribe has its own bar exam that tests knowledge of Navajo tribal law.[26]
Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing. If counsel has never appeared before a particular tribal court, it would be wise to solicit common court practices from persons who regularly appear before the court.
Tribal court jurisdiction depends largely on: (1) whether the defendant is a tribal member;[27] and (2) whether the dispute occurred in Indian Country,[28] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member, or fee lands within the boundaries of an Indian reservation.[29] These two highly complex issues should be analyzed first in any tribal business dispute.
In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian). Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.[30] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.[31] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.[32]
In the “path-making” decision of Montana v. United States,[33] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”[34] To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”[35]
These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.[36] The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”[37] These exceptions have, oddly, become known as the “Montana rule.”
There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions. This section highlights a couple of the most relevant.[38]
Smith v. Landrum, 334 Mich.App. 511, 965 N.W.2d 253 (Mich. Ct. App. Oct. 29, 2020). Plaintiffs, who were not American Indians, brought quiet title action seeking a prescriptive easement over land located on the L’Anse Indian Reservation and owned by a non-Indian Defendant. Previous owners in the chain of title were tribal members, but the land was transferred to non-Indians in 2012. At the time of the dispute, the land was not held in trust for the tribe or any tribal member. At the trial level, Defendant argued on his motion for summary disposition that the state court lacked subject-matter jurisdiction to impose the easement, even when the current landowner and parties were non-Indians. In contrast, Plaintiffs argued that the state court had subject-matter jurisdiction because “the land [was] owned in fee simply by Defendant, and [was] not held in trust by the United States government for an Indian person.” The trial court opined that either tribal court, or a federal district court, had jurisdiction over the dispute, however, the Michigan Court of Appeals disagreed.
On appeal, the court addressed whether a state court had subject-matter jurisdiction to decide such an easement dispute when Plaintiffs and Defendant were non-Indians and the land was located on an Indian reservation. In deciding this issue, the court relied on the Williams test[39] and the Montana rule. Williams and its progeny provide that a state may assert jurisdiction over a dispute involving a non-Indian and arising within an Indian reservation if: “(1) the state’s exercise of authority is not preempted by incompatible federal law; and (2) the state’s exercise of authority does not infringe on the right of reservation Indians to make their own laws and be ruled by them.”[40] With neither party raising any issues of federal preemption, the court turned to the second Montana exception in addressing the second Williams prong. The court concluded that “the exercise of state jurisdiction over this easement dispute would in no way interfere with the tribe’s power to control and govern its members and internal affairs.”[41] Neither party was an Indian, and the land was neither land held in trust for the tribe nor owned by an Indian. Accordingly, the court held that the presumption was against tribal jurisdiction, and the state court had jurisdiction to decide the easement dispute.
Ute Indian Tribe of the Uintah & Ouray Rsrv. v. McKee, 482 F. Supp. 3d 1190 (D. Utah 2020). The Ute Indian Tribe of the Uintah and Ouray Indian Reservation sued Gregory McKee and associated companies, who owned land on the reservation that was not owned or held by the Tribe, to enforce the Tribal Court’s judgment. The Tribal Court found that Mr. McKee and the associated companies had failed to prove their right to use water the United States owned in trust for the Tribe, awarding the Tribe $142,718 in damages for water misappropriation. Both parties moved for summary judgment. The district court denied the Tribe’s motion and granted the non-members’ motion. In concluding that it had jurisdiction over the suit, the district court relied on MacArthur v. San Juan County[42] for the proposition that enforcing a tribal court order rests on the Tribe’s regulatory and adjudicatory authority, which is “a matter of federal law giving rise to subject matter jurisdiction.”[43]
Moving on, the court determined that the Tribal Court lacked jurisdiction to decide the water misappropriation dispute. Mr. McKee was not a member of the Tribe, and the tribal resources were on land held in fee by non-members. Accordingly, the Tribe would have authority to regulate non-members’ conduct only pursuant to the Montana exceptions. The land in question was conveyed by the United States to Mr. McKee’s predecessors in interest, including an easement binding him and the associated companies at the time of the dispute. Additionally, Mr. McKee leased a separate parcel of land from the Tribe, consenting to Tribal jurisdiction over his use of the leased property. However, the court concluded that neither Montana exception supports jurisdiction in this case.
Focusing on Montana’s first exception, the court disagreed with the Tribe’s argument that the existing easement created a consensual relationship between Mr. McKee and the Tribe. Neither Mr. McKee nor the Tribe were parties to the conveyance, and the record showed no evidence that the parties ever entered into an agreement relating to the easement. Additionally, the court could not construe the existing lease to confer Tribal jurisdiction over conduct “wholly unrelated to the lease.”[44] The Tribe presented no evidence that Mr. McKee used the disputed water on the leased land. Turning to the second exception, the court reasoned that the diversion of a total of $142,718 worth of water over sixteen years did not meet the threshold of “catastrophic for tribal self-government.”[45] In summary, the Tribe failed to prove that either Montana exception applied. Because the Tribe lacked authority to regulate the disputed water diversion, the district court found that the Tribal Court lacked jurisdiction over the dispute in the first instance. Accordingly, the court granted Mr. McKee’s motion for summary judgment.
McCormick, Inc. v. Fredericks, 946 N.W.2d 728 (N.D. 2020). In 2010, McCormick and Fredericks created Native Energy Construction wherein Fredericks was the majority owner. Fredericks also served as Native Energy’s President, while McCormick and Northern Improvement provided management services to Native Energy for a 5% management fee. In 2014, the parties executed a purchase agreement for Fredericks’s purchase of McCormick’s interest in Native Energy. However, Fredericks could not complete the purchase and the business was involuntarily dissolved in May 2015. In 2016, McCormick, individually and derivatively on behalf of the entities, brought an action against Fredericks, alleging breach of contractual and fiduciary duties, conversion, and other claims. Fredericks filed counterclaims for similar allegations and requested a judicially supervised winding up of Native Energy. A three-day trial followed in 2018, where the jury found Fredericks breached his fiduciary duties and awarded McCormick damages. However, Fredericks argued that the district court lacked jurisdiction to decide his counterclaim related to the management fee.
Regarding his counterclaim, Fredericks asserted that the Three Affiliated Tribes of the Fort Berthold Reservation had jurisdiction because “the management fee agreement was a contract made on the reservation between [] McCormick, a non-Indian, and Fredericks, a tribal member.” The Supreme Court of North Dakota disagreed, finding that Fredericks failed to show how the Montana exception applied. In relevant part, the Court found that Fredericks had not claimed that the management fee involved “a consensual relationship with the tribe.” Instead, Fredericks’ claims arose from his ownership interest in Native Energy, a North Dakota LLC. Accordingly, the district court had jurisdiction to decide the parties’ claims, and the Court had jurisdiction to decide the appeal.
Big Horn Cty. Elec. Coop., Inc. v. Big Man, 526 F.Supp.3d 756 (D. Mont. Feb. 26, 2021). Big Horn County Electric Cooperative (“BHCEC”) filed an action against Big Man and several Judges and Justices of the Crow Tribal Health Board (“Tribal Defendants”). BHCEC sought declaratory and injunctive relief in response to a civil action brought against BHCEC in Crow Tribal Court. BHCEC provided electrical service to Big Man, an enrolled member of the Crow Tribe, but terminated that service in January 2012. Big Man sued BHCEC in Tribal Court, alleging that BHCEC’s actions violated the Crow Law and Order Code, which prohibited such termination during certain winter months. BHCEC filed suit in the district court, asserting that the Crow Tribal Court lacked jurisdiction over BHCEC, a non-Indian entity. Magistrate Judge Cavan found that the land was tribal trust land and subject to tribal jurisdiction, and that, even if the land was alienated to non-tribal members, Montana exceptions allowed the Tribe to exercise jurisdiction. BHCEC timely objected, but after examining the issues, the district court adopted Judge Cavan’s recommendations in full.
The district court agreed with Judge Cavan’s conclusion that Big Man’s homesite was properly considered tribal land, rejecting BHCEC’s objections on this issue. The homesite was “designated tribal trust land owned by the Tribe and held in trust by the United States.”[46] Accordingly, the Tribe had the right to condition BHCEC’s conduct therein. However, the district court also stated that even if the land was alienated from the Tribe’s control, the Tribe had jurisdiction to adjudicate the dispute under both Montana exceptions. Pursuant to the first exception, the court concluded that BHCEC “[had] chosen to avail itself of the Tribe’s customer base and in doing so created a consensual relationship.”[47] Similarly, the court found that termination of electric service during the winter months “had a direct effect on the health and welfare of the Tribe and therefore satisfie[d] the second Montana exception.”[48] Termination of electric service during the cold winter months would “clearly imperil[] the health and welfare of any Tribal member who obtain[ed] the service from BHCEC—a class of approximately 1,700 members —and therefore the Tribe itself.”[49] The court granted Tribal Defendants’ motion for summary judgment, but BHCEC filed an appeal with the Ninth Circuit, which remains unresolved at the time of this writing.
§ 1.3.2. Exhaustion of Tribal Court Review
The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts. If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually[50] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.[51] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss[52] or stay[53] the case.
Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.[54] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.[55] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.[56] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”[57] And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”[58]
After the tribal court has ruled on the merits of the case[59] and all appellate options have been exhausted,[60] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.[61] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.[62] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.[63]
There are several exceptions to the exhaustion doctrine. First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”[64] Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”[65] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.[66]
Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated. Several of these cases were decided in the last year.[67]
Cross v. Fox, 497 F. Supp. 3d 432 (D.N.D. 2020). Plaintiffs were members of the Mandan, Hidatsa, and Arikara Native American Tribes (“MHA”) and have diagnosed health problems that limit their mobility. Plaintiffs brought action against tribal officials in federal district court asserting that the rule requiring non-residents of the tribal reservation to return to the reservation to vote, while permitting residents of the reservation to vote by absentee ballot, impermissibly burdened their ability to vote, in violation of the Indian Civil Rights Act (“ICRA”) and the Voting Rights Act (“VRA”).
The Defendants filed a Motion to Dismiss for lack of subject matter jurisdiction and a failure to exhaust tribal remedies. Plaintiffs argued that because the federal district court has jurisdiction over their federal statutorily-based VRA claims, they should be relieved of tribal exhaustion requirements for the ICRA claims. Plaintiffs argued that the district court should excuse tribal exhaustion on the basis that the MHA Tribal Court is not an adequate judicial forum to hear their claims.
In its analysis, the district court outlined the principles underlying the tribal court exhaustion requirement and highlighted that “even where a federal question exists, due to considerations of comity, federal court jurisdiction does not properly arise until available remedies in the tribal court system have been exhausted.”[68] This is to ensure certain interests of both tribal and federal courts are advanced including: “(1) supporting tribal self-government and self-determination; (2) promoting the orderly administration of justice in the federal court by allowing a full record to be developed in the Tribal Court; and, (3) providing other courts with the benefit of the tribal courts’ expertise in their own jurisdiction.”[69] Thus, the District Court declined to waive exhaustion, holding that this was purely an intra-tribal dispute into which it would not interject itself.
United States v. Hump, No. 3:19-CV-03020-RAL, 2021 WL 274436 (D.S.D. Jan. 27, 2021). The United States moved for summary judgment in a lawsuit that it brought against Defendants David and Karen Hump (“the Humps”). In 1974, Congress authorized the creation of the Indian Loan Guarantee and Insurance Program (“ILGP”), which allowed the Secretary of Interior to guarantee up to ninety percent of the unpaid principal and interest due on loans made by lenders to qualified Indian borrowers. If a borrower defaults on a loan guaranteed by the ILGP, the lender can submit a claim for loss to the Department of Interior (“DOI”).
In 2004, Farmers State Bank of Faith, South Dakota (“the Bank”) sought loan guarantees from the DOI under the ILGP for loan funds issued to the Humps to acquire interests in Indian trust land.[70] The DOI issued loan guarantees in February 2004, and the Bank consolidated the Humps’ earlier notes. The Humps filed for Chapter 12 bankruptcy in October 2005. Id. The Bank submitted a claim for a loss for $1,411,362.25 to the DOI, and in 2007, the DOI paid the Bank’s claim. Once their Chapter 12 Reorganization Plan was confirmed in 2007, the Humps executed and delivered a promissory note to the United States to repay the loan by September 2034. The promissory note allowed for acceleration of the entire debt in the event of default.
The Humps defaulted on their Promissory note, making their final payment in December 2014. In 2018, the DOI accelerated and declared the remaining debt ($1,211,782.16) immediately due. After all other efforts to collect failed, the United States brought this action to foreclose the mortgage, sell the property, and collect any remaining deficiency.
The Humps challenged this action, in part, claiming that the United States had not fulfilled its requirement to first exhaust tribal court remedies. The Court disagreed, stating that exhaustion of tribal court remedies was not necessary in the current case. The Court held that the United States was not required to exhaust its remedies in tribal court because tribal self-government and self-determination were not implicated in this matter. Rather, this was a dispute between the United States and individuals who have defaulted on a loan guaranteed by the federal government under a federal program. Although the Indian trust land was located within Cheyenne River Sioux Indian Reservation, the Tribe was not involved in this action in any capacity.
JW Gaming Dev., LLC v. James, No. 3:18-CV-02669-WHO, 2021 WL 2531087 (N.D. Cal. June 21, 2021). Plaintiff JW Gaming Development, LLC (“JW Gaming”) previously obtained a judgment that defendant Pinoleville Pomo Nation (“PPN”), a federally recognized tribe, was liable for breaching a loan agreement by failing to pay.[71] Shortly after judgment was entered, PPN constituted its Tribal Court for the first time. PPN filed a civil complaint in the Tribal Court that sought to: “(1) declare the judgment issued in this case invalid; (2) limit and control—indeed, vitiate—the scope of enforcement of that judgment; and (3) impose roughly eleven million dollars in liability on JW Gaming for alleged fraud stemming from the same loan agreement here.”[72] PPN argued that the Tribal Court did not have authority to issue any injunction.
Before consideration of the motions filed by JW Gaming, the district court needed to address whether JW Gaming needed to exhaust its tribal court remedies as PPN claimed. The Court stated that the requirement of tribal court exhaustion is not absolute and that there are several exceptions under which the movant need not exhaust tribal court remedies before seeking or obtaining injunctive relief in federal court.[73]
Here, the Promissory Note in the dispute included a waiver of tribal court exhaustion, and the Court asked two questions: “Can exhaustion be waived in this case? And if it can be, has it been waived here?” The Court concluded that the answer to both was “yes.”
To answer the first question, the Court relied on the Supreme Court ruling in Merrion v. Jicarilla Apache Tribe,[74] which established that a tribe, as a sovereign, can waive its rights to exercise one of its sovereign powers. However, PPN did not contest that exhaustion could be waived, but instead argued that no waiver occurred. To address this second question of waiver, the Court deferred to the Supreme Court and Ninth Circuit which have both uniformly laid out the standard for waiver of sovereign powers as requiring the power be “expressly waived in unmistakable terms within the contract” at issue.[75] The district court held that the Promissory Note provision was an express, clear, and unequivocal waiver and therefore, exhaustion of tribal court remedies had been waived and was not required in this case.
Fettig v. Fox, No. 1:19-CV-096, 2020 WL 9848691, (D.N.D. Nov. 16, 2020), report and recommendation adopted, No. 1:19-CV-00096, 2020 WL 9848706 (D.N.D. Dec. 3, 2020). Plaintiffs are members of the Mandan, Hidatsa, and Arikara Native American Tribes (“MHA”) who own a beneficial interest in land Allotments 1110A and 1111A held in trust by the United States and located within the exterior boundaries of the Fort Berthold Indian Reservation (“Fort Berthold”). Defendants include the MHA Nation’s Section 17 Corporation and tribal office holders. Plaintiffs’ primary complaint was that Defendants in 2013 installed an underground water pipeline (the “2013 Pipeline”) across Allotments 1110A and 1111A without first securing an easement from the United States acting in its trust capacity through the Department of the Interior’s (“DOI”) Bureau of Indian Affairs (“BIA”). Plaintiffs allege that the 2013 Pipeline is a trespass. Plaintiffs also allege that defendants temporarily ran an aboveground pipeline across their allotments without first obtaining an easement.
Defendants argued in their brief that this was a purely tribal dispute and the action should be dismissed for failure to exhaust tribal court remedies. However, Defendants also claimed in their brief that the United States owned the 2013 Pipeline. The district court therefore analyzed the question of the necessity of tribal exhaustion through both lenses—if the United States owned it and if the Tribe or one of its entities owned it.
If the United States did own the pipeline, the court stated that this would be straight forward. It would not be a purely tribal dispute and there would be no tribal remedies to exhaust with respect to Plaintiffs’ request for injunctive relief. After all, the United States did not consent to be sued in tribal court.
If the 2013 Pipeline was owned by the Tribe or one of its entities, the court contends that an argument can be made that tribal court exhaustion is not required. Specifically the court states that, “federal law has left no room for tribal court adjudication when it comes to a request for injunctive relief in a situation where an allottee’s land is being used for right-of-way purposes without the requisite grant of right-of-way—either by an easement granted by the United States or a federal court condemnation judgment. And, if that is the case, tribal-court exhaustion arguably would not be required due to the tribal court’s lack of power to adjudicate the dispute and requiring exhaustion would serve no purpose other than delay.”[76]
Despite this analysis, the Court ultimately withheld a decision on the question of tribal-court exhaustion on the basis that the tribal defendants committed on the record to the court that if it required BIA exhaustion, they would not make the argument for tribal-court exhaustion and would allow the BIA’s consideration of the issues to play out.[77]
Loonsfoot v. Brogan, No. 2:21-CV-89, 2021 WL 1940400 (W.D. Mich. May 14, 2021). This was a habeas corpus action brought by two pretrial detainees under 25 U.S.C. § 1303. Petitioners were detained by Respondent Baraga County Sheriff Joseph Brogan pursuant to orders from the Keweenaw Bay Indian Community Tribal Court and are enrolled tribal members of the Keweenaw Bay Indian Community Ojibwa tribe of Michigan.
While the Court acknowledged that it considers habeas petitions filed by persons under the custody of a state or the United States, the Keweenaw Bay Indian Community was neither. Petitioners asked the Court to order their release from pretrial detention and argued that their attempts to exhaust their remedies in tribal courts were futile.
The Court found that Petitioners had not given the tribal trial court, nor the tribal appellate court, an opportunity to resolve the constitutional issues they raised in their habeas petition. Further, Petitioners did not allege any facts to support the inference that exhaustion would be futile. On this basis, the Court dismissed the petition without prejudice.
Ledford v. Ledford, No. 1:20-CV-00170-MR-DSC, 2021 WL 2014871 (W.D.N.C. May 19, 2021). Plaintiff, who was not tribally affiliated, brought action against her stepson and his sons, who are all members of the Eastern Band of Cherokee Indians (EBCI). Plaintiff’s deceased husband (Defendants’ father and grandfather and EBCI member) attempted to leave Plaintiff a life estate in the home they shared. The home is a part of the EBCI reserve, and in subsequent judicial proceedings the Tribal Council of the EBCI invalidated the life estate provision of the will and evicted Plaintiff. Plaintiff alleged that Defendants provided false testimony that contributed to the Tribal Council’s decision and brought this action in Federal Court alleging subject matter jurisdiction based upon diversity of citizenship. Defendants moved to dismiss for several reasons including Plaintiff’s failure to exhaust tribal remedies.
The district court held that Plaintiff had not shown that the court’s exercise of jurisdiction would be proper in part due to her failure to exhaust tribal remedies. Specifically, Plaintiff had the opportunity to challenge Tribal Council’s decision on her husband’s will under Cherokee Code § 117-40 and failed to properly do so. She also had the opportunity to appeal her eviction order from the Tribal Court to the Cherokee Supreme Court under Cherokee Code § 7-2(e) and again failed to properly do so. Thus, Defendants’ Motion to Dismiss was granted and the Complaint dismissed with prejudice.
Becker v. Ute Indian Tribe of Uintah & Ouray Rsrv., 11 F.4th 1140 (10th Cir. 2021). The dispute involved a former land division manager for the Ute Indian Tribe, asserting that the Ute courts have the authority to decide whether the tribe’s employment agreement with him was valid. The Tenth Circuit panel overturned a Utah federal judge’s ruling that the tribe had waived the requirement that Plaintiff had to exhaust tribal remedies for his claims that the tribe breached his contract by failing to pay him monthly compensation after his employment was terminated. The Tenth Circuit concluded that the questions the tribe had raised regarding the validity of the agreement, as well as the threshold question of whether the tribal court has jurisdiction over the parties’ dispute, must be resolved in the first instance by the tribal court itself.
The court further held that the waiver provision in the agreement would only have been applicable if the agreement was determined to be valid; however, the tribe asserted nonfrivolous challenges to the validity of the agreement. The court ruled that tribal exhaustion did not apply to Plaintiff’s claims and noted that although there are some exceptions to the exhaustion rule, Plaintiff had not shown that they should apply in this case. The court remanded the case to be dismissed.
§ 1.3.3. Tribal Sovereignty & Sovereign Immunity
An axiom in Indian law is that Indian tribes are considered domestic sovereigns.[78] Like other sovereigns, tribes enjoy sovereign immunity.[79] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.[80] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”[81] Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”[82]
Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad. With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”[83]
Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,[84] whether in tribal, state, or federal court.[85] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.[86]
Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.[87] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.[88] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”[89]
Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.[90] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma[91] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.[92] In C & L Enterprises, the tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.[93] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.[94]
Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”[95] Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract. If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal. Below are summaries from some of the most relevant sovereign immunity cases of the last year.[96]
**Immunity may be asserted by tribal corporations, as well as tribal governments. Some recent sovereign immunity cases dealing with tribal corporations are collected and discussed in § 8.3.4.
Engasser v. Tetra Tech, Inc., No. 219CV07973ODWPLAX, 2021 WL 911887 (C.D. Cal. Feb. 9, 2021). The court held that when a tribe enters into a Professional Services Agreement (“PSA”) that includes a Dispute Resolution provision, this does not act as a waiver of tribal sovereign immunity. In previous cases, courts have come to this conclusion where “the dispute resolution procedure was not binding, the tribe did not unequivocally submit to a court’s jurisdiction, or the tribe expressly retained its sovereign immunity.”[97] Here, the PSA clearly stated that nothing in the PSA acts as a waiver of sovereign immunity. Additionally, the provision did not contemplate binding arbitration, nor did it “reflect an unequivocal intent to submit to the jurisdiction of a particular court.”[98] Accordingly, because the PSA did not act as a clear and unequivocal waiver of tribal sovereign immunity, the tribal entity was immune from suit for lack of jurisdiction.
Muscogee (Creek) Nation v. Poarch Band of Creek Indians, 525 F.Supp.3d 1359 (M.D. Ala. Mar. 15, 2021). Here, the court considered a tort-of-outrage claim where Defendants knowingly excavated Plaintiffs’ sacred burial grounds after Defendants came to own the land containing such burials. Both sides of the suit included tribal entities. Defendants included tribal officials named in their official capacity. Because precedent is silent regarding whether sovereign immunity applies when tribal entities exist on both sides of a lawsuit, the district court held that sovereign immunity is still applicable unless waived by either side. With no explicit waiver present, both tribes could still assert sovereign immunity. To determine whether such immunity also applied to the individual tribal officials, the court looked to Idaho v. Coeur d’Alene Tribe.[99]Idaho v. Coeur d’Alene Tribe explains that certain suits may be subject to tribal sovereign immunity, regardless of whether they are brought against the sovereign or its officials, so long as they invoke “special sovereignty interests.”[100] Where the relief sought would effectively result in the tribe’s loss of title for lands it has long held as its own, such special sovereignty interests bar the claim.
Here, Plaintiffs asked the court “to order [Defendants] to cease the activities [they] currently carr[y] out [on the property], alter the site drastically at the [P]laintiffs’ direction to transform it back into the condition in which they desire it to remain, and then leave the land alone.”[101] In light of this, the court found that the conditions in this case were sufficiently similar to those in Coeur d’Alene, thus invoking special sovereignty interests. Accordingly, the claims against Defendants were dismissed on tribal sovereign immunity grounds.
Weaver v. Gregory, No. 3:20-CV-0783-HZ, 2021 WL 1010947 (D. Or. Mar. 16, 2021). Eric Weaver (“Plaintiff”) filed suit against Ron Gregory (“Defendant”) alleging that he was subjected to retaliation after reporting harassment and discrimination during his time as a tribal police officer. Plaintiff sued Defendant individually, not in his official capacity as a member of the Warm Springs Tribe. While Plaintiff contended that the tribe waived its sovereign immunity under Chapter 390 of the Warm Springs Tribal Code, the court found that such chapter is only applicable to “activities by the Warm Springs law enforcement personnel conducted under SB 412—i.e., the enforcement of criminal and traffic laws of the State of Oregon.”[102]
Here, Plaintiffs’ alleged harassment on the job did not implicate such laws. Additionally, the court refused Plaintiffs’ interpretation of precedent that the location of the tortious actions, whether on or off tribal land, makes a difference. However, to the extent Plaintiff’s claims were made against Defendant in his individual capacity, those were not protected under tribal sovereign immunity. Because recovery against Defendant for his individual actions does not “disturb the sovereign’s property,” those claims could proceed.[103] The claims against Defendant in his official capacity as a tribal authority, though, were barred under tribal sovereign immunity.
Jensen v. Budreau, No. 20-CV-997-BBC, 2021 WL 1546055 (W.D. Wis. Apr. 20, 2021). Defendants were the tribal entity Red Cliff Band of Lake Superior Chippewa and a patrol officer who works for the tribe’s police department. Plaintiff contended that Defendants violated her Fourth and Fifth Amendment rights by failing to give her medical care or allow her to rinse her eyes after being sprayed with pepper spray. Plaintiff pointed out that pursuant to Wis. Stat. §§ 165.92(3), “unless otherwise provided in a joint program plan under § 165.90(2)” or an agreement between the tribe and state, “a tribe is liable for all acts and omissions of its law enforcement officers while they are acting within the scope of their employment.” Additionally, under § 165.92(3m)(a), where a tribal law enforcement officer enforces laws of the state, the tribe must: “waive sovereign immunity ‘to the extent necessary to allow the enforcement in the courts of this state of its liability’ . . . or maintain adequate liability insurance that provides that the insurer will waive the sovereign immunity defense up to the limits of the insurance policy.” Accordingly, two actions were relevant. First, the tribe had an agreement with the state that did not modify the tribe’s liability. Second, Defendants’ attorney submitted a claim to the tribe’s insurance company, thus suggesting that the tribe may have waived its immunity at least in part. The court found that neither of these actions were compelling. Because a waiver must be expressly given, the court held that the circumstances were not sufficient to overcome tribal sovereign immunity, and the claims were barred.
Self v. Cher-Ae Heights Indian Cmty. of Trinidad Rancheria, 274 Cal. Rptr. 3d 255 (2021), review denied (Apr. 28, 2021). Plaintiffs were two individuals who commonly used a parcel of coastal land for recreational and business purposes. Plaintiffs brought this suit after Defendant Cher-Ae Heights Indian Community of the Trinidad Rancheria (“Cher-Ae”) acquired such parcel of land in fee absolute. During the process of entering the land into trust, Plaintiffs initiated a quiet title suit to a public easement for vehicle access and parking on the property. Plaintiffs asserted that the “immovable land” exception should apply here to bar a tribal sovereign immunity defense, but the court disagreed. The Supreme Court explained the immovable land exception in State of Georgia v. City of Chattanooga,[104] describing that “when a state purchases real property in another state, it is not immune to suit over rights to the property.” However, the Supreme Court has never extended this exception to tribes.
Here, the court offered three reasons why it should be deferential to Congress to determine whether immunity is available under these circumstances. First, it has been the Supreme Court’s standard practice to defer to Congress regarding tribal immunity. Second, Congress has long been deeply entrenched in the public policy of supporting tribal land acquisition. Finally, the facts here operate as a “poor vehicle for extending the immovable property rule to tribes” because Plaintiffs do not claim any ownership interest in the property; they are mainly pursuing an easement.[105] Accordingly, the court found that tribal sovereign immunity “bars a quiet title action to establish a public easement for coastal access on property owned by an Indian tribe,” and Plaintiffs’ claims failed for lack of merit.[106]
Dutchover v. Moapa Band of Paiute Indians, No. 219CV01905KJDBNW, 2021 WL 1738869 (D. Nev. May 3, 2021). In this case, Plaintiff alleged that he was wrongfully harassed and retaliated against while working as a police officer for the Moapa Tribal Police Department. Dismissing the Plaintiff’s complaint, the court held that the tribe did not expressly waive its sovereign immunity, and so the suit was barred. Furthermore, the court reasoned that simply entering into a federal contract and “enacting, promoting, and adhering to federal law, including Title VII” does not in itself waive immunity.[107] Here, Defendants funded Plaintiff’s employment with a federal grant and had policies in place offering protection “similar to those offered by Title VII.”[108] Ultimately, these actions, considered together, were not sufficient to waive sovereign immunity.
Great Plains Lending, LLC v. Dep’t of Banking, No. 20340, 2021 WL 2021823 (Conn. May 20, 2021). Great Plains Lending (“GPL”) and Clear Creek were created by the Otoe-Missouria Tribe of Indians (“Tribe”) to offer lending services. After an investigation, the Department of Banking allegedly found that loans offered by the entities violated Connecticut’s usury and banking laws. Accordingly, the Department’s commissioner issued temporary cease and desist orders, orders for restitution to Connecticut residents, and a notice of intent for permanent cease and desist letters, as well as to impose civil penalties. To determine whether such actions could proceed against the tribal entities, this case contemplated three primary questions concerning tribal sovereign immunity under the arm of the tribe doctrine. First, which party bears the burden of proof to establish that the entity is an arm of the tribe? Second, what legal standard governs that inquiry? Lastly, to what extent does a tribal officer share the tribe’s immunity for his actions connected to the business entity?
Considering the first inquiry, the court found that the burden rests on the party seeking immunity under the arm of the tribe doctrine. A tribe itself does not share in this burden when establishing its own sovereign immunity, but entities seeking immunity by extension bear the burden of “demonstrating the existence of that relationship and the entity’s ultimate entitlement to share in tribal sovereign immunity.”[109] The court reasoned this approach by noting that the entity seeking immunity will have the best access to evidence for proving the relationship.
Next, the court turns its attention to determining which test is proper for an arm of the tribe inquiry. Ultimately, the multi-pronged test in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort,[110] is found to be the most fitting. This test called courts to consider several factors when determining if a sufficient relationship exists between the entity and the tribe: (1) method of creation; (2) purpose; (3) control; (4) tribal intent; and (5) financial relationship. The court slightly altered the test, explaining that the sixth factor, tribal policy, should color the consideration of the remaining five factors.
Ultimately, the court found that all five factors weigh in favor of extending tribal sovereign immunity to Great Plains: the entity was created under tribal law for the purpose of generating revenue for the Tribe, the entity’s officers are appointed by the tribal council and the entity is ultimately controlled by tribal officials, the Tribe unequivocally voiced its intent to extend immunity to the entity, and the Tribe wholly owns and acts as primary beneficiary of the entity. Overall, the entity promotes tribal self-governance and economic development, and denying sovereign immunity would directly interfere with the policies of the Tribe. On the other hand, there was much less evidence detailing a relationship between Clear Creek and the Tribe. Accordingly, tribal sovereign immunity extended to Great Plains, but may not necessarily extend to Clear Creek.
In light of this determination, the court chose to extend partial immunity to John R. Shotton as chairman of the Tribe. The court stated that such immunity extends where the Tribe is the real party in interest, which is the case here, and the individual was acting in his capacity as a tribal official. There was no evidence in the record that Shotton’s activities went beyond the scope of his tribal authority, so he was afforded immunity from the civil penalties sought against him. However, tribal sovereign immunity does not protect against injunctive relief ordered by the Department, so he may be enjoined from “violating Connecticut usury and banking laws in connection with his duties for the [T]ribe and the entities.”[111] Moreover, the judgment was reversed insofar as it required further proceedings to determine whether Great Plains was an arm of the Tribe, but the judgment is granted insofar as it requires further proceedings to make such a determination for Clear Creek and Shotton’s involvement with the latter entity.
Cayuga Indian Nation of New York v. Seneca Cty., New York, 978 F.3d 829 (2d Cir. 2020), cert. denied, No. 20-1210, 2021 WL 2301979 (U.S. June 7, 2021). In this case, Appellees are a tribe (“Cayuga”) who refused to pay taxes on acquired parcels of land located in Seneca County. Appellants (“Seneca County”) pursue two main arguments: (1) that Cayuga was subject to such taxes under the “immovable property exception” to tribal sovereign immunity; and (2) that the U.S. Supreme Court case City of Sherril v. Oneida Indian Nation of New York,[112] ended immunity for tax foreclosure actions, like the one here.
To the first argument, the court noted that the issue here is beyond the scope of the exception. The exception has been interpreted in the past to solely apply where there are “competing claims to a right or interest in real property.”[113] Here, the main claim involved money, not property, and the remedy sought for such financial debt merely implicated property. Additionally, a plain reading of the Restatement (Second) of Foreign Relations Law of the United States also denies application of the exception; no case since the Restatement’s inception has applied the exception where a foreign sovereign’s nonpayment of taxes was at issue.
Turning to Seneca County’s second argument, the court agreed with past courts’ interpretation that “Sherrill does not strip tribes of their immunity from suit in tax foreclosure proceedings.”[114] Because the right to impose taxes on tribes for acquired land and a tribe’s right to immunity from suit are distinct, a party may demand compliance with state laws while also facing limitations in the ways that it may enforce such laws. Here, satisfactory avenues existed that Seneca County may pursue to collect the taxes, aside from the remedy of foreclosure. Seneca County may “enter into an agreement with the tribe ‘to adopt a mutually satisfactory regime for the collection of this sort of tax’” or Seneca County may seek legislation. Accordingly, because such alternatives existed and are feasible, Seneca County is barred from seeking foreclosure for Cayuga’s nonpayment of taxes under tribal sovereign immunity, and the district court’s judgment to that effect is affirmed.
Dotson v. Tunica-Biloxi Gaming Comm’n, 835 F. App’x 710 (5th Cir. 2020), cert. denied, No. 20-7721, 2021 WL 2405253 (U.S. June 14, 2021). Here, the court held that the Tunica-Biloxi Gaming Commission was an arm of the Tunica-Biloxi Tribe of Louisiana. As such, the Commission was sheltered from suit regarding alleged violations of gaming regulations and laws, fabricating evidence, falsifying documents, defaming Plaintiff, lying under oath, and falsifying error codes on a slot machine. While Plaintiff contended that the suit could move forward because he sued a casino employee, a specific official, this argument was not persuasive to the court. Here, the court refused to consider whether a suit may be brought solely against a tribal official, instead focusing on the person’s immunity under the arm of the tribe doctrine. Because tribal sovereign immunity extended to the Gaming Commission, and accordingly to its employees, the suit could not move forward against an employee in his/her official capacity with the Commission. Accordingly, the district court’s dismissal of Plaintiff’s claims was affirmed.
Ledford v. E. Band of Cherokee Indians, No. 1:20-CV-00005-MR-WCM, 2020 WL 6693133 (W.D.N.C. Nov. 12, 2020), aff’d as modified, 845 F. App’x 260 (4th Cir. 2021). April Ledford (“Plaintiff”) filed suit against the Eastern Band of Cherokee Indians (“Defendant”) under the Indian Civil Rights Act of 1968 (“ICRA”), alleging that Defendant violated her due process rights by terminating a life estate she held in Cherokee, North Carolina. Considering Defendant’s Motion to Dismiss for lack of subject-matter jurisdiction and Plaintiff’s amended complaint, the court held that Defendant did not expressly waive sovereign immunity. First, the court stated Defendant did not waive its tribal sovereign immunity simply by breaking its own laws, “acting beyond the scope of its authority, or acting in bad faith.” Additionally, contrary to Plaintiff’s interpretation, it was not Congress’s intention to pass the ICRA as a vessel for such claims. Because both arguments failed, Defendant’s motion was granted, and Plaintiff’s complaint was dismissed.
State ex rel. Workforce Safety & Ins. v. Cherokee Servs. Grp., LLC, 955 N.W.2d 67 (N.D. 2021). In this case, Workforce Safety and Insurance (“WSI”) sent a cease and desist letter to Hudson Insurance to stop writing workers’ compensation coverage in North Dakota. Hudson Insurance provides such coverage to the Cherokee Nation and several Cherokee entities. Additionally, WSI brought action against several Cherokee entities and Steven Bilby (the executive manager of the entities), alleging that they were liable for unpaid workers’ compensation premiums. While the Cherokee Nation owns no sovereign land in North Dakota, tribal sovereign immunity may still extend if the arm of the tribe doctrine applies. To make such determination, the court adopted the six-prong test laid out in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino and Resort.[115]
Initially, the court established that the Cherokee Nation made no waiver of its immunity. Turning back to the test, the court stated that the following non-exhaustive factors should be analyzed to decide whether the Cherokee Nation’s immunity extends to the Cherokee entities, and accordingly, Hudson Insurance and Bilby: (1) how the economic entities are created; (2) their purpose; (3) their structure, ownership, and management, including the extent of tribal control; (4) the tribe’s intent to share its immunity; (5) the financial relationship between the tribe and entities; and (6) the policy behind tribal sovereign immunity, and whether recognizing immunity in this case would further such policy. Ultimately, the court did not itself employ the test, instead reversing the lower judgment and remanding the issue of whether immunity extends under the arm of the tribe doctrine to the administrative law judge.
§ 1.3.4. Tribal Corporations
A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).[116] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.[117] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.[118]
Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.[119] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.[120] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.[121]
An Indian corporation may also be organized under tribal or state law.[122] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).[123] Under federal common law, the corporation likely enjoys immunity from suit.[124] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.[125]
Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.
There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit. In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act. Below find a discussion of recent cases dealing with tribal corporations.[126]
** Some cases Dealing with Tribal Corporations are discussed in 8.3.3 because they deal with whether a Tribal Corporation may assert their tribe’s sovereign immunity.
Jim v. Shiprock Associated Sch., Inc., 833 F. App’x 749 (10th Cir. 2020). Plaintiff (Ms. Kim Jim) sued her employer (Shiprock Associated Schools, Inc.), a private corporation that served the Navajo Nation, for discrimination under Title VII. The employer-corporation moved for summary judgment, claiming the protection of Title VII’s “exception for Indian tribes.”[127] The district court determined that the employer was an Indian tribe, granting summary judgment based on the Title VII exception.[128] Plaintiff appealed the district court’s decision, the Tenth Circuit affirmed.
The central issue of the case was whether the district court properly characterized the corporation as an Indian tribe. The Tenth Circuit reviewed the district court’s determination de novo, explaining that “[w]hether an entity is a tribal entity depends on the context in which the question is addressed.”[129] Although the Tenth Circuit had not previously addressed tribal characterization in the context of Title VII, it found that “courts elsewhere have considered an entity an ‘Indian tribe’ under Title VII when a tribe created and controlled the enterprise” in question.
On appellate review, the Court first found that the corporation was created by the Navajo Nation. The Court cited the Navajo Nation’s statutes which empower the tribe to establish local school boards.[130] Under this authority, the Court reasoned, “the Navajo Nation’s Board of Education empowered the corporation to operate educational programs.”[131] The Court further noted that the corporation must operate such educational programs “under the Tribally Controlled Schools Act [(25 U.S.C. §§ 2501–11)].”[132]
Due to the corporation’s educational purpose, the Court explained that it “acts through a local school board whose members are elected under the Navajo Election Code,” which requires each board member to be “enrolled in the Navajo Nation.”[133] In addition to the board members, the Navajo Nation, the Court noted, “comprise[d] over 98% of the students and roughly 80% of the school employees.”[134]
Despite what the Court categorized as “the heavy involvement of tribal members,” Plaintiff argued that the corporation was not a tribal entity because: (1) “some students and employees [were] not members of an Indian tribe”; and (2) “the corporation was formed under state law.” The Court, however, concluded that each of “these observations do little to diminish the role of the Navajo Nation.”
The Court then found that the corporation “operate[d] under tribal oversight” because the school board, which was under the control of the corporation, remained ultimately “accountable to the Navajo Nation for educational performance.”[135]
Accordingly, the Court affirmed the district court’s determination that the corporation was “an ‘Indian tribe’ under Title VII” because the corporation served the Navajo community, obtained its governing board from the Navajo Nation, followed Navajo law, and oversaw schools populated by Navajo students and staffed by Navajo employees.
Nguyen v. Cache Creek Casino Resort, No. 2:20-cv-1748-TLN-KJN PS, 2021 WL 22434 (E.D. Cal. Jan 4, 2021), adopted in full, No. 2:20-cv-01748-TLN-KJN, 2021 WL 568212 (E.D. Cal. Feb. 16, 2021) (appeal filed). Plaintiff (Hung M. Nguyen) sued defendant Cache Creek Casino Resort, an enterprise controlled by the Yocha Dehe Wintun Nation (“the Tribe”), regarding Plaintiff’s detainment and ejection from the Casino’s premises. Cache Creek entered a special appearance to contest the court’s subject matter jurisdiction, arguing that “as an enterprise wholly owned by a sovereign tribal entity, the court has no power to rule on [Plaintiff’s] claims.”[136] The central issue before the Court was “whether a tribal entity can be sued in federal court,” which “involves examining whether: (A) the enterprise ‘functions as an arm of the tribe;’ and (B) the tribe has waived its immunity.”[137]
The Court first explained that, in the Ninth Circuit, courts “consider five factors when ‘determining whether an entity is entitled to sovereign immunity as an arm of the tribe: (1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; and (5) the financial relationship between the tribe and the entities.’”[138] Applying the five factors to this case, the Court determined that Cache Creek Casino was an arm of the Yocha Dehe Wintun Nation. The Court came to this conclusion because the Cache Creek Casino was wholly owned and operated by the Tribe, governed by a tribal council, and generated revenue for the benefit of the Tribe.
The Court then determined that Plaintiff had failed to provide “evidence that the Tribe [had] ‘unequivocally expressed’ an intent to waive its immunity to suit in a federal court.”[139] Consequently, the Tribe’s immunity remained intact, the court lacked subject-matter jurisdiction, and Plaintiff’s claims had to be dismissed.
Dutchover v. Moapa Band of Paiute Indians, No. 219CV01905KJDBNW, 2021 WL 1738869 (D. Nev. May 3, 2021). Plaintiff (Eddie Dutchover) sued the Moapa Band of Paiute Indians (“the Tribe”), eight individual Tribe members, the Moapa Tribal Council, and Moapa Tribal Enterprises for the hostile work environment Plaintiff endured as a police officer with the Moapa Tribal Police Department.
Plaintiff recounted various incidents of derogatory name-calling and disparate treatment, arguing that the Tribe member’s hostility occurred because of his “Caucasian/Hispanic” race. Due to the racial nature of the allegations, Plaintiff brought several claims alleging violations of Title VII, Equal Protection, and the Civil Rights Act of 1871. The Tribe, claiming sovereign immunity, moved to dismiss the case.
In response, Plaintiff argued “that there is a corporate entity created by the Tribe that runs the police department, is the actual employer, and does not enjoy sovereign immunity.”[140] The Tribe argued “that there is no corporate entity that runs the police department, but if there were, it would be an arm of the Tribe and enjoy sovereign immunity.”[141] The Court agreed with the Tribe.
The Court explained that “certain factors” are considered “[t]o determine if an entity is an arm of a tribe that enjoys sovereign immunity”; specifically, “courts consider: (1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; and (5) the financial relationship between the tribe and the entities.”[142] Applying these factors to the case, the Court concluded that “whatever corporation may exist to manage the police department would be an arm of the Tribe that enjoys sovereign immunity.”[143]
The Court reached its conclusion because there was no evidence that the Tribe intended to create a corporate entity that would not share in the Tribe’s immunity and “[m]any of the defendants s[a]t on the Tribe’s governing board, indicating that the Tribe ha[d] involvement and control over any such corporate entity.”[144] Consequently, the claims against the Tribe and the corporate entity Plaintiff alleged to have controlled the police department were dismissed.
State ex rel. Workforce Safety & Ins. v. Cherokee Servs. Grp., LLC, 955 N.W.2d 67 (N.D. 2021). Workforce Safety Insurance (“WSI”) initiated an administrative proceeding against Cherokee Services Group, LLC; Cherokee Nation Government Solutions, LLC; Cherokee Medical Services, LLC; Cherokee Nation Technologies, LLC (collectively referred to as the “Cherokee Entities”); Steven Bilby, the executive general manager of the Cherokee Entities; and Hudson Insurance Company (“Hudson”) for unpaid workers’ compensation premiums under North Dakota’s workers’ compensation laws. WSI ordered the Cherokee Entities to pay the unpaid premium and determined that Bilby was personally liable for any balance that remained unpaid. WSI also ordered Hudson to cease and desist from writing workers’ compensation coverage in North Dakota.
Following WSI’s issued order, the Cherokee Entities, Bilby, and Hudson requested an administrative hearing. During the hearing, WSI’s collections supervisor did not dispute that the Cherokee Entities wholly owned by the Cherokee Nation acted as an arm of the tribe. Consequently, the administrative law judge (“ALJ”) reversed WSI’s decision, concluding the Cherokee Entities and Bilby are protected by tribal sovereign immunity. Additionally, the ALJ found that WSI had no authority to issue cease and desist orders to insurance companies like Hudson. WSI appealed the ALJ’s order to the district court. The district court concluded that the Cherokee Entities and Bilby were not entitled to sovereign immunity. The district court also held that WSI has authority to issue a cease and desist order to Hudson. The Cherokee Entities, Bilby, and Hudson appealed the district court judgment.
On appeal, the Cherokee Entities argued that the Cherokee Nation is entitled to tribal sovereign immunity and the sovereign immunity extends to the Cherokee Entities as arms of the tribe. Tribal sovereign immunity, the Cherokee Entities claimed, would preclude WSI from enforcing workers’ compensation laws against them. The Supreme Court of North Dakota first noted that it has “previously concluded [that] state charted corporations and business owned by tribal members are not arms of the tribe”; however, because “the Cherokee Entities are organized under the laws of the Cherokee Nation,” an analysis “to determine whether an entity qualifies as an arm of the tribe” may proceed.[145]
The Supreme Court of North Dakota adopted the Tenth Circuit’s “non-exhaustive six-part test to determine whether a tribal entity qualifies as an arm of the tribe.”[146] Specifically, “[t]he test examines: (1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; (5) the financial relationship between the tribe and the entities; and (6) the policies underlying tribal sovereign immunity and its connection to tribal economic development, and whether these policies are served by granting immunity to the economic entities.”[147] Looking to these factors, the Court concluded that the ALJ found that the Cherokee Entities are wholly owned by the Cherokee Nation, which only addressed the first step of the test. Consequently, the Court remanded to the ALJ to make further findings, consider all the factors given in the test, and determine whether the Cherokee Entities qualify as an arm of the Cherokee Nation entitled to sovereign immunity.
Manzano v. S. Indian Health Council, Inc., No. 20-CV-02130-BAS-BGS, 2021 WL 2826072 (S.D. Cal. July 7, 2021). Plaintiff (Carolina Manzano) sued her former employer, South Indian Health Council, Inc. (“SHIC”), alleging harassment and wrongful termination. SHIC was formed by seven tribes—the Barona Band of Mission Indians, the Campo Band of Mission Indians, the Ewiiaapaayp Band of Kumeyaay Indians, the Jamul Indian Village of California, the La Pasta Band of Mission Indians, the Manzanita Band of the Kumeyaay Nation, and the Viejas Band of Kumeyaay Indians—to provide health care to the Native and non-Native residents of its service area.
SHIC initially began as a satellite operation of the Indian Health Council in Pauma Valley, operating out of trailers on the Sycuan reservation. In 1982, SHIC incorporated as a nonprofit corporation and moved to the Barona Reservation. In 1987, SHIC’s Board of Directors acquired land in Alpine, California, which was placed into federal trust and remained the entity’s permanent location. SHIC’s health services were provided under self-determination contracts with the Indian Health Services, a federal agency within the Department of Health and Human Services, which recognized SIHC as a tribally-operated service unit. In response to Plaintiff’s suit, SHIC moved to dismiss, claiming entitlement to tribal sovereign immunity.
The central issue before the Court was whether SICH, as a tribal organization but not a tribe itself, was entitled to sovereign immunity. First, the Court noted that “[t]ribal sovereign immunity ‘extends to business activities of the tribe, not merely to governmental activities.’”[148] The Court then explained that when a tribe does establish “an entity to conduct certain activities,” the entity is entitled to immunity only “if it functions as an arm of the tribe.”[149]
To determine whether an entity is considered an arm of the tribe, the Court explained that the following factors are relevant: “(1) the method of creation of the entity; (2) its purpose; (3) its structure, ownership, and management, including the amount of control the tribe has over the entity; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; and (5) the financial relationship between the tribe and the entity.”[150] Applying these factors to the case, the Court concluded that SIHC is an arm of the tribe and entitled to tribal sovereign immunity.
With regards to SIHC’s method of creation, the Plaintiff argued “that SIHC’s articles of incorporation do not describe SIHC as a tribal corporation or specify any tribal status or affiliation,” and, therefore, should not be viewed favorably for purposes of the five-factor analysis.[151] The Court disagreed, concluding that “articles of incorporation that are silent regarding sovereign immunity are not dispositive of an entity’s claim to sovereignty.”[152] Additionally, the Court addressed Plaintiff’s argument “that SICH’s incorporation solely under state law defeats a favorable finding on [the first] factor,” explaining that the “case law is indeterminate on this point.”[153] Specifically, the Court noted that some “[c]ourts have held that an entity’s state incorporation does not preclude tribal status [] where the entity is also incorporated under tribal law,” whereas other courts, outside the context of sovereign immunity, “have held that incorporation does not change an entity’s tribal status.”[154] Consequently, the Court found that “[b]ecause the majority of case law does not consider state incorporation detrimental to tribal status,” SIHC’s state incorporation did not weigh against its claim of immunity.[155]
Big Sandy Rancheria Enterprises v. Bonta, 1 F.4th 710 (9th Cir. 2021). In July 2018, Big Sandy Rancheria Enterprises (“Big Sandy”), a federally charted tribal corporation wholly owned and controlled by the Big Sandy Rancheria of Western Mono Indians (“the Tribe”), sued the Attorney General of California (“Attorney General”) and the Director of the California Department of Tax and Fee Administration (“the Director”), seeking declaratory and injunctive relief. Specifically, Big Sandy, a wholesale cigarette distributor, challenged California’s cigarette excise tax as applied to its distribution business, arguing that tribal sovereignty preempted the law. Big Sandy was chartered under section 17 of the Indian Reorganization Act (“IRA”) and its controlling Tribe was federally recognized.
The Director and Attorney General moved to dismiss Big Sandy’s tax claim on jurisdictional grounds under the Tax Injunction Act.[156] This Act prohibits district courts from “enjoining, suspending or restraining the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”[157] Although the Director and Attorney General acknowledged the existence of an exemption to the Tax Injunction Act available to Indian Tribes, each asserted that Big Sandy was not itself an Indian tribe or band and, therefore, could not invoke the federal courts’ jurisdiction under 28 U.S.C. § 1362. In response, Big Sandy argued that it was a federally recognized Indian tribe, rather than merely a federally-chartered corporation wholly owned by a federally recognized Indian tribe. The district court agreed with the Director and Attorney General, dismissing Big Sandy’s tax claim for lack of jurisdiction. Big Sandy appealed.
The central issue before the Ninth Circuit with regards to Big Sandy’s tax claim was whether Big Sandy’s status “as [an] ‘incorporated tribe’ under section 17 of the [IRA]” equated to being considered “an ‘Indian tribe or band’ for jurisdictional purposes.”[158] The Ninth Circuit, considering the relevant statutory language, legislative history, and circuit precedent narrowly construing § 1362, concluded that Big Sandy was “not an ‘Indian tribe or band’ within the meaning of § 1362.”[159] Specifically, while reviewing numerous authorities, the Court found support for “the district court’s construction of ‘Indian tribe or band’ as [being] limited to ‘the Tribe in its constitutional form,’ as distinct from its corporate form.’”[160] The Court also noted that “the Tribe, not [Big Sandy], appears on the Federally Recognized Indian Tribes List,” and that Big Sandy failed to “allege that the federal government, in issuing the Tribe a section 17 charter, recognized [Big Sandy] as a distinct political entity or government.”[161] Instead, the Court determined that section 17’s “incorporated tribe” language merely “suggests that the entity is an arm of the tribe.”[162] Consequently, the district court was found to have properly dismissed Big Sandy’s claim.
Great Plains Lending, LLC v. Dep’t of Banking, No. 20340, 2021 WL 2021823 (Conn. May 20, 2021). On May 4, 2011, the Otoe-Missouria Tribe of Indians (“the Tribe”), through the Tribal Council, adopted the Otoe-Missouria Tribe of Indians Limited Liability Company Act (“the LLC Act”) and the Otoe-Missouria Tribe of Indians Corporations Act (“the Corporations Act”). The Tribe created Great Plains Lending LLC (“Great Plains”) and American Web Loan, Inc., doing business as Clear Creek Lending (“Clear Creek”) (collectively, “Tribal Entities”), pursuant to the LLC Act and the Corporations Act, respectively. John R. Shotton, chairman of the Tribe served as secretary and treasurer of both Tribal Entities.
Following an investigation by the Department of Banking (“Department”), the Commissioner of Banking (“Commissioner”) found that the Tribal Entities “had violated Connecticut’s banking and usury laws by making small consumer loans to Connecticut residents via the Internet without a license to do so.”[163] On October 24, 2014, the Commissioner issued temporary cease and desist orders to the Tribal Entities and Shotton (collectively, “Plaintiffs”), orders that restitution be made to the Connecticut residents, and a notice of intent to issue permanent cease and desist orders, as well as impose civil penalties. Plaintiffs responded by filing a motion to dismiss the administrative proceedings for a lack of jurisdiction. The Commissioner denied the motion to dismiss. On administrative appeal, the trial court determined that the Tribal Entities possessed sovereign immunity in the administrative proceeding and remanded the case back to the Commissioner. The Commissioner, however, once again denied Plaintiff’s motion to dismiss, concluding that the entities had failed to demonstrate they were arms of the Tribe. Plaintiffs appealed.
On appeal, the trial court rendered judgment sustaining the appeal and remanded the case to the Commissioner for further proceedings regarding Plaintiff’s entitlement to tribal sovereign immunity. Plaintiffs appealed, claiming that the trial court should have rendered judgment in their favor as a matter of law. The Commissioner and Department (collectively, “Defendants”), cross appealed, challenging the legal standard adopted by the trial court and its decision to remand the case for further administrative proceedings. The Supreme Court of Connecticut granted review to address three significant issues of first impression with respect to whether a business entity shares an Indian tribe’s sovereign immunity as an arm of the tribe. Specifically, the Court “consider[ed]: (1) which party bears the burden of proving the entity’s status as an arm of the tribe; (2) the legal standard governing that inquiry; and (3) the extent to which a tribal officer shares in that immunity for his or her actions in connection with the business entity.”[164]
With respect to the second consideration, the Court adopted the first five Breakthrough factors, which included: “(1) the method of creation of the economic entities, (2) the purpose of those entities; (3) the structure, ownership, and management of the entities, including the amount of control the tribe has over them; (4) the tribe’s intent with respect to sharing its sovereign immunity; [and] (5) ‘the financial relationship between the tribe and the entities.’”[165] Under the first factor, the Court focused on the law under which the Tribal Entities were formed, finding that “[b]ecause both entities were created under tribal law on the [T]ribe’s own initiative,” the factor weighed heavily in favor of arm of the tribe status.[166] Applying the remaining four factors, the Court found “that Great Plains [was] an arm of the tribe entitled to tribal immunity” but that, with regards to Clear Creek, a remand for further proceedings was necessary because the record was “insufficient to support a similar conclusion.”[167]
Yellen v. Confederated Tribes of the Chehalis Rsrv., 141 S. Ct. 2434 (2021). On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), allocating eight billion dollars “of monetary relief to ‘Tribal governments.’”[168] Under the CARES Act, the term “Tribal government” was defined as “the ‘recognized governing body of an Indian tribe.’” “Indian tribe,” in turn, was defined under the CARES Act by reference to its definition in the Indian Self-Determination and Education Assistance Act (“ISDA”).[169] ISDA defined “Indian tribe” as “any Indian tribe, band, nation, or other organized group or community, including any Alaska Native village or regional or village corporation as defined in or established pursuant to the Alaska Native Claims Settlement Act, which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians.”[170]
On April 23, 2020, the Treasury Department determined that Alaska Native corporations (“ANCs”), while not federally recognized tribes, were eligible for CARES Act relief and set aside more than five-hundred million dollars for them. Despite ISDA’s express inclusion of ANCs in the definition of “Indian tribe,” several federally recognized Indian tribes challenged the Treasury Department’s determination, “arguing that only federally recognized tribes are Indian tribes under ISDA” and, thus, “under the CARES Act.”[171] The district court disagreed, “ultimately enter[ing] summary judgment for the Treasury Department and the ANCs.” The court of appeals reversed, concluding that “the recognized-as-eligible clause is a term of art requiring any Indian tribe to be a federally recognized tribe.” The Supreme Court of the United States granted certiorari to “determine whether ANCs are eligible for the CARES Act funding set aside by the Treasury Department.”
The central question before the Court was whether ANCs satisfy ISDA’s definition of Indian tribe. Justice Sotomayor, writing for the majority, concluded that “[u]nder the plain meaning of ISDA, ANCs are Indian tribes, regardless of whether they are also federally recognized tribes.”[172] Consequently, the court of appeals was reversed, and the ANCs were found to be entitled to CARES Act funding.
§ 1.4. The Federal Sovereign
§ 1.4.1. Indian Country & Land Into Trust
The IRA authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.[173] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.[174]Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.[175] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.
Despite the Carcieri ruling, Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.[176] Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.[177] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.[178]
In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”[179] The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.[180] The second prong examines whether this jurisdictional status remained intact in 1934.[181] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld Interior’s application of the two-part test outlined in M-37029.[182] M-37029 appears to be a non-statutory Carcieri fix.
As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.[183] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming. Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust. Rather, Patchak brought an action under the APA[184] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe. The remedy Patchak sought was for the issuance of an injunction prohibiting the Interior from taking the land into trust. The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri. Both the federal government and the tribe argued that only the Quiet Title Act (QTA)[185] could grant the waiver of sovereign immunity. Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.
The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.[186] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.
The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit. This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.[187]
The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.[188] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final agency determination” subject immediately to judicial review.[189] If a BIA official issues the decision, however, the decision is subject to administrative exhaustion requirements[190] before it becomes a “final agency action.”[191] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.[192] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.” In October 2017, the Trump Administration’s Interior Department announced a consultation regarding a rulemaking that would reverse the “Patchak Patch,” and impose a much newer criteria for off-reservation land-into-trust applications. Assuming that rulemaking results in new Part 151 regulations, litigation will certainly follow.
A brief discussion of several of the year’s most prominent cases involving the diminishment of an Indian reservation and/or the taking of land into trust follow:[193]
Little Traverse Bay Bands of Odawa Indians v. Whitmer,998 F.3d 269 (6th Cir. 2021): In 2015, the Little Traverse Bay Bands of Odawa Indians (the “Band”) filed a lawsuit seeking a declaration that the Treaty of 1855 created a permanent reservation. To fully understand this case, a brief history of the Band’s interactions with the federal government is necessary.
Prior to the colonization of the Americas, the Band inhabited a section of land that is now considered northern Michigan. As settlers moved to this land, the Band contacted President Andrew Jackson seeking to sell some of their land and, in return, be allowed to stay in Michigan. In 1835, the government agreed, and the Band ceded around fourteen million acres to the United States, retaining 100,000 acres for themselves. In 1855, seeking a more permanent arrangement, the Band began negotiations with the federal government to purchase hundreds of individual tracts of land in Michigan. This finalized agreement was called the Treaty of 1855.
Under federal law, Indian Country is land set apart for the use of Indians under the superintendence of the government. In this case, the Court held that as the treaty provided for individually owned allotments of land, it did not create a collective Indian reservation. The Court looked to the Treaty’s text and the accompanying negotiations to determine that both the Band and the federal government intended to provide tribal members with individual titles to non-federally governed land instead of a communal title—which would have been more indicative of a reservation.
Eastern Band of Cherokee Indians v. U.S. Dep’t of Interior, No. CV 20-757 (JEB), 2021 WL 1518379 (D.D.C. Apr. 16, 2021): In 2018, the Catawba asked the Bureau of Indian Affairs (“BIA”) to take a 16-acre parcel of land in North Carolina—the Kings Mountain Site—into trust so that they could build a casino on it. After the BIA agreed, the Eastern Band of Cherokee Indians (“EBCI”), who have their own North Carolina casinos, filed an action under the Administrative Procedure Act (“APA”) stating that the casino construction could destroy Cherokee artifacts or remains. While the Catawba are headquartered in South Carolina, around 253 members reside in North Carolina. As such, they are governed by both the South Carolinian specific Settlement Act (“Settlement Act”) and the Indian Gaming Regulatory Act (“IGRA”). EBCI claims that (1) the Settlement Act categorically bars the Catawba from operating a casino under IGRA; (2) the Settlement Act precludes the Catawba from having land taken into trust under the Indian Reorganization Act (“IRA”); and (3) the Kings Mountain Site is not eligible for gaming activities under IGRA. The Court disagreed on all three counts.
Looking to the text of the Settlement Act, the Court determined that it was only intended to apply to the Catawba’s actions in South Carolina. Under this interpretation, the Court found that IGRA governs the Catawba in North Carolina. Therefore, the Kings Mountain Site was properly taken into trust under the IRA and the Catawba may operate a casino on its land under IGRA. Having resolved claims one and two in the Catawba’s favor, the Court held that the Kings Mountain Site fits under the “restored lands” exception to the general rule that lands taken into trust after October 17, 1988, may not be used for gaming. Rejecting many of EBCI’s arguments, the Court determined that the Kings Mountain Site undoubtably meets the definition of “restored lands,” and affirmed that gaming could take place on the land.
Kalispel Tribe of Indians v. U.S. Dep’t of Interior, 999 F.3d 683 (9th Cir. 2021): In 2001, the Department of Interior (“DOI”) took a 145-acre parcel of land into trust for the Spokane Tribe. The Spokane Tribe immediately began the process to request a new gaming establishment, but the administrative process took over ten years to complete. During this process, the Kalispel Tribe of Indians objected multiple times asserting that the new gaming facility—proposed to be located two miles from a Kalispel casino—would cause them significant economic harm and render them unable to meet existing debt obligations. After undertaking an objective analysis of Kalispel’s financial projections, the Secretary concluded that if the new casino were permitted to open, Kalispel would be able to fulfill its loan obligations. Therefore, the Secretary found that the proposed gaming facility would be in the Spokane Tribe’s best interest and would not be detrimental to the surrounding community—meeting the requirements put forth under IGRA. In 2017, Kalispel sued the Secretary in federal district court alleging that the Secretary’s determination violated IGRA. The district court held that the determination complied with IGRA, was supported by substantial evidence, and was neither arbitrary nor capricious—a ruling Kalispel appealed.
The Ninth Circuit agreed with the district court and affirmed. Under IGRA, off-reservation gaming must be: (1) in the best interest of the Indian Tribe; and (2) not be detrimental to the surrounding community. Here, Kalispel argued that as the additional gaming would cause any detriment to a nearly Indian tribe, it should not be allowed—regardless of the net impact on the surrounding community. Using the principals of statutory interpretation, the Court interpreted “surrounding community” to include “local governments and nearby Indian Tribes located within a 25-mile radius of the site of the proposed gaming establishment.”[194] While the Court agreed that Kalispel is undoubtably part of the surrounding community, they disagreed with the argument that any detriment to Kalispel is an overall detriment to the surrounding community. Holding that IGRA requires the Secretary to weigh the many adverse interests of the surrounding community when deciding if there is a net detrimental effect, the Court rejected Kalispel’s argument that any detriment to Kalispel precluded the Secretary from authorizing the gaming facility. Kalispel’s argument that the Secretary’s determination was arbitrary and capricious because it failed to fully consider the economic detriments to Kalispel was also rejected. Looking to the administrative record, the Court found that there was ample evidence that the Secretary properly considered and weighed the detriments with the benefits when making the determination. The Court thus held that the Secretary’s decision was neither arbitrary nor capricious.
Hardwick v. United States, No. 79-cv-01710-EMC, 2020 WL 6700466 (N.D. Cal. Nov. 13, 2020): The Buena Vista Rancheria of Me-Wuk Indians (the “Tribe”) filed this suit seeking an order requiring the BIA to take restored Rancheria lands into trust under the 1983 Stipulated Judgment (the “Judgment”). The Judgment restored the reservation status of seventeen Rancherias and provided a mandatory trust election provision wherein class members could restore the enumerated rancherias to trust status. In both 1996 and 2010, the Tribe requested that the BIA take the Rancheria into trust. The BIA denied these requests stating that the Rancheria was ineligible to be brought into trust under the mandatory trust provisions of the Judgment as the Tribe did not meet the requirements of a class member, or successor in interest. The Court disagreed.
As the Judgment’s text did not define either term, the court relied on the plain meaning from Black’s Law Dictionary and held that status as a class member or successor in interest does not turn on the legal form of entity and, as such, is not restricted to individuals. The Tribe thus was a valid class member under the Judgment and could properly invoke the mandatory trust election provision.
Stand Up for Cal.! v. State of Cal., 64 Cal. App. 5th 197 (2021). In 2005, the North Fork Tribe submitted an application requesting that the BIA take a 305-acre parcel of land into trust for the purpose of gaming. In 2011, the Secretary authorized the land for gaming and in 2012, the Governor concurred, fulfilling an IGRA requirement. In 2014, California voters rejected Proposition 48—the statute ratifying the tribal-state compact—and therefore rejected the ratification of the North Fork gaming project. The issue before the Court was if the voter rejection of Proposition 48 invalidated the Governor’s concurrence. The Court found that legislative changes could restrict or eliminate the Governor’s concurrence.[195] From this, the Court held that the voter’s rejection of the compact-ratifying statute was an expression of their intent to reject gaming on the 305-acre parcel and therefore impliedly expressed their will to annul the Governor’s concurrence. Reversing and remanding for further proceedings, the Court instructed the trial court to overrule North Fork’s demurrers.
Stand Up for Cal.! v. U.S. Dep’t of Interior, 994 F.3d 616 (D.C. Cir. 2021). In 2013, the California based Wilton Rancheria tribe petitioned the Department of the Interior (“DOI”) to take a plot of land into trust for gaming use. In 2017, the Department agreed and acquired title to a 30-acre parcel known as Elk Grove. Subsequently, a group of plaintiffs including Stand Up for California! (“Stand Up”) brought suit against DOI claiming that the Department: (1) incorrectly delegated the authority to acquire land to an official who could not wield the authority; (2) was barred from acquiring land on behalf of Wilton members as the Tribe was distributed assets under the Rancheria Act; and (3) failed to adhere to National Environmental Protection Act (“NEPA”) obligations when selecting the Elk Grove location. The court dismissed all three claims.
With respect to claim one, the court interpreted the relevant statues and regulations—most importantly 25 C.F.R. § 151.12—to mean any BIA official can decide to take land into trust for DOI as long as they are subject to administrative review. Therefore, the court held that DOI properly delegated the decision-making authority, affirming the district court. Stand Up’s second claim—that the Rancheria Act precludes DOI from taking land into trust on behalf of Wilton members—was similarly dismissed. The court stated that a court-approved settlement to restore recognition of a tribe and Indian status for members can invalidate the limitations of the Rancheria Act. Further, the court held that as the Rancheria Act has no impact on DOI with regards to the Wilton Rancheria, it was irrelevant that some members may have received assets. Finally, with respect to the third claim, the court held that DOI met their responsibilities under NEPA when preparing the required Environmental Impact Study (“EIS”). An EIS must simply adequately consider and disclose the environmental impact of the proposed action. The court determined that DOI undertook a thorough analysis of potential issues, properly notified the public of their plans to select the Elk Grove location and provided adequate time for public comment—as evidenced by the active participation of Stand Up during the comment period. Finding all arguments to be without merit, the Court dismissed claim three.
§ 1.4.2. Federal Approval for Reservation Activity
Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight. The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.[196] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”[197] Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”[198]
Per Section 81’s year 2000 revisions, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.[199] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.[200] Failure to secure secretarial approval could render the agreement null and void.[201] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.[202] Regardless of whether Secretary approval is necessary, all parties should be careful how they draft agreements which may encumber the land.[203] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (NIGC) for approval pursuant to the Indian Gaming Regulatory Act (IGRA).[204] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.[205] The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.
Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the BIA and/or a tribal business license to properly do business with a tribe.[206] Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors. Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.[207]
With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.[208] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415 every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.[209] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land. The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior. Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).
There are some caveats, though. First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval). Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects. The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process. HEARTH Act implementing regulations went into effect in 2013.[210] As of October 2018, the BIA lists twenty-six tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.[211] The following highlights one case decided in the last year.[212]
Texas v. Alabama Coushatta Tribe of Texas, No. 9:01-CV-299, 2021 WL 3884172 (E.D. Tex. Aug. 31, 2021): In 2016, the Alabama Coushatta Tribe of Texas (the “Tribe”) sought guidance from the National Indian Gaming Commission (the “NIGC”) regarding whether the Tribe’s lands were eligible for gaming. The NIGC determined that the Indian Gaming Regulatory Act of 1988 (“IGRA”) applied to the Tribe. Accordingly, the NIGC determined that the Restoration Act, which bars gaming that violates Texas law, did not apply. As a result, the Tribe opened a facility offering electronic bingo gambling games. The State of Texas sought to enjoin these operations, arguing that the Restoration Act applies to the Tribe. The Fifth Circuit subsequently found that the Restoration Act and the Texas law it invokes, and not the IGRA, governs the permissibility of gaming operations on the Tribe’s lands.
On remand, the State of Texas sought to hold the Tribe in contempt for continuing the gaming operations. The Eastern District Court of Texas once again held that the Restoration Act does not apply to the Tribe. The court stated that the Restoration Act has been interpreted by the Fifth Circuit as prohibiting tribes from engaging in any gaming activity prohibited by Texas law. Under Texas’s Bingo Enabling Act, bingo is a permissible gaming activity so long as the act’s requirements are complied with, such as receiving a license. As a result, the court found that because Texas regulates bingo gaming, that gaming activity is not prohibited by the laws of the State of Texas within the meaning of Section 207(a) of the Restoration Act. The court concluded that the Tribe’s bingo gaming is not subject to the laws of Texas, including the Restoration Act, unless and until the state prohibits that gaming activity outright.
§ 1.4.3. Labor and Employment Law & Indian Tribes
When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers. For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.[213] Moreover, tribal employers may not be subject to certain federal labor and employment laws.[214]
Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964[215] and the Americans with Disabilities Act[216] expressly exclude Indian tribes,[217] and state anti-discrimination laws usually do not apply to tribal employers.[218] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.[219]
The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers. The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),[220] the Employee Retirement Income Security Act (ERISA),[221] the Fair Labor Standards Act (FLSA),[222] the National Labor Relations Act (NLRA),[223] and the Age Discrimination in Employment Act (ADEA),[224] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.[225]
Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.[226] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.[227] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.[228] Following this reasoning, the Department of Labor has stated that the FMLA[229] applies to tribal employers.[230] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.[231] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.[232]
Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities. For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.[233]
In the last year, federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers. More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns. Several of the most prominent cases from the last year are discussed below:[234]
Scalia v. Red Lake Nation Fisheries, Inc., 982 F.3d 533 (8th Cir. 2020): Red Lake Fisheries, Inc. (the “Fishery”) is a fishery operating on the Red Lake Indian Reservation in Minnesota, a corporation organized under tribal law and comprised solely of tribal members.[235] The Fishery received two citations under the Occupational Safety and Health Act (OSHA) after a boat capsized on a reservation lake and two employees drowned.[236] OSHA proposed a penalty of $15,521. The Fishery contested both the citations and the penalty. An administrative law judge (“ALJ”) granted the Fishery’s motion to dismiss. The Secretary of Labor argued that OSHA applied to tribal businesses unless Congress stated otherwise and thus, the ALJ erred in granting the motion. The Eighth Circuit Court of Appeals (1) found that OSHA enforcement would dilute the principles of tribal sovereignty; (2) noted that OSHA completely omits mention of Indian commerce when defining “employer;” and (3) observed that the Red Lake Reservation had “preserved for the [Red Lake] Band [of Chippewa Indians] an independence not experienced on other reservations.” Thus, the Court held that even if OSHA were to apply to Indian activities in other circumstances, it did not apply here where the corporation was organized under tribal law and was comprised exclusively of enrolled Tribe members.
Miller v. United States, 992 F.3d 878 (9th Cir. 2021): Plaintiff was a police officer with The Reno-Sparks Indian Colony (The “Tribe”).[237] Pursuant to a self-determination contract with the Bureau of Indian Affairs, the Tribe’s employees were deemed to be federal government employees for the purpose of Federal Tort Claims Act coverage. The Tribe terminated Plaintiff’s employment, alleging that Plaintiff had fraudulently filed an unemployment claim. Plaintiff denied the allegation and stated he was the victim of identity theft, but the termination was upheld. Plaintiff filed an administrative wrongful termination claim with the Department of Interior claiming that he was the victim of “continuous employment harassment” and the termination was retaliation for the workplace harassment complaint that Plaintiff filed with the Tribe. He also claimed he was denied a proper investigation as guaranteed by department policy. The Department of Interior denied Plaintiff’s claim and informed him of his right to sue in federal court. Plaintiff filed suit against the United States alleging the same facts as he did in the administrative claim. In addition, Plaintiff found out that the Tribe knew that he was the victim of identity theft before they upheld the termination,[238] so he amended his complaint to add claims of negligent and grossly negligent termination.
To determine whether the discretionary function exception barred Plaintiff’s claims, the court considered if “(1) the act or omission on which the claim is based ‘involves an element of judgment or choice’; and (2) ‘that judgment is of the kind that the discretionary function exception was designed to shield.’”[239] Because the Tribe was not bound to act in a particular way, the decision to terminate an employee was a discretionary choice, satisfying the first prong of the test. In evaluating the second prong, the court noted that the inquiry about whether the judgment was intended to be shielded was an objective one: whether the employer’s actions were susceptible to policy analysis and not whether the subjective intent was actually based on policy considerations. The court stated that hiring employees is the type of policy judgment that Congress intended the discretionary function exception to shield. Because terminating employees is just the flip side of hiring, termination decisions are equally shielded.[240] Thus, the claims rooted in retaliation were covered by the discretionary function exception.[241]
However, Plaintiff’s second claim, alleging a lack of investigation pursuant to policy, was based upon a violation of procedural rules whereas the other claims were based upon retaliation. The procedural violation could not satisfy the first prong of the test, whether there was an element of choice in the act, because the Tribe’s policy documents created a mandatory duty to investigate. Accordingly, the exception could not apply. Similarly, the claim for negligent and grossly negligent termination was not covered under the exception because the BIA handbook mandated that Tribal employees could not be disciplined for exonerated allegations; thus, the Tribe lacked discretion to fire Plaintiff on grounds that it knew to be false and unsubstantiated. On these final claims, the court remanded the case.
Chicken Ranch Rancheria of Me-Wuk Indians v. Newsom, 1:19-CV-0024 AWI SKO, 2021 WL 1212712 (E.D. Cal. Mar. 31, 2021):[242] California (the “State”) entered into class III gaming compacts with a number of Indian Tribes that were set to end on December 31, 2020, with an automatic extension to June 30, 2022.[243] The Tribal Plaintiffs[244] negotiated with the State to come up with a new agreement to replace the 1999 compacts. However, the Tribal Plaintiffs alleged that the State negotiated in bad faith by exceeding the scope of the permissible subjects of negotiation pursuant to Section 2710(d)(3)(C) of the Indian Gaming Regulatory Act (“IGRA”), which limits the subjects of negotiation to topics related to gaming and those consistent with the IGRA’s purpose.[245]
The Tribal Plaintiffs first objected to provisions about employment standards. The anti-discrimination provision precluded employers from engaging in discrimination of persons in protected groups seeking to work or working for the gaming operation or gaming facility. The minimum wage provision required compliance with the State’s minimum wage law and the federal minimum wage laws under the Fair Labor Standards Act. The final employment standard provision required the Tribal Compact to enact a Tribal Labor Relations Ordinance in order for gaming activities to continue. The court held that the catch-all provision of Section 2710(d)(3)(C)(vii) (“any other subjects that are directly related to the operation of gaming activities”) covered all three employment standards provisions because without the operation of gaming activities, the jobs would not exist and without the jobs, the operation of gaming activities could not exist. However, because of the indirect connection to gaming activities, the State needed to provide meaningful concessions in exchange for making demands to these topics. The State argued that their negotiations represented meaningful concessions and the court held that this holistic bundled approach was disapproved of.[246] Instead, a specific concession should have been made for each topic—a quid pro quo.
The Tribal Plaintiffs also objected to a provision which required the enactment of an ordinance that granted the tribal court jurisdiction and authority to recognize and enforce tribal or state earnings withholding orders, such as spousal and child support, entered against any person employed at the gaming operation or gaming facility. The court agreed with the Tribe’s argument that this topic was beyond the permitted scope and not related to the operation of gaming activities because of spousal and child support obligations, though affected by employment, would exist even in the absence of the gaming job.
Because the State could not show that it had offered meaningful concessions in regard to the employment provisions nor that the earnings withholding provision, neither was a permissible topic under Section 2710(d)(3)(C) and the court adjudicated that the State did not negotiate in good faith.
Ohlsen v. United States, 998 F.3d 1143 (10th Cir. 2021): The United States Forest Service entered into an agreement, under the authority of the Cooperative Funds and Deposits Act (“CFDA”), with the Isleta Pueblo for a forest protection project involving the cutting and masticating of trees. The agreement established the Pueblo employees were not federal employees for any purposes, including the Federal Tort Claims Act (“FTCA”). The Forest Service directed the Pueblo to masticate wood that had already been slashed and left on the forest floor to decrease the risk of wildfire in a high priority treatment area. The wood on the floor had reached levels well beyond the agreed-upon limit by that time. While doing so, the masticator struck a rock, caused a spark, and ignited the surrounding bush. The fire continued for three months, burning 17,912 acres, and destroying property.
Insurance companies and owners of destroyed property filed suit against the U.S. government based upon the negligence of Pueblo crewmembers. The government asserted that the claim was barred because the Pueblo crewmembers were independent contractors, an exception under the FTCA. Plaintiffs argued that the CFDA required the Pueblo workers to be considered federal employees. The court disagreed and interpreted the statutory language to mean that the CFDA excludes cooperators from being deemed federal employees outside the FTCA or Federal Employees Compensation Act rather than automatically including them in either instance.
Having decided that the CFDA did not automatically render the Pueblo workers as federal employees, the court applied the Lilly test[247] to determine whether the workers were independent contractors. First, court noted that the intent between the parties was clear because the agreement unequivocally stated that the Pueblo workers “shall not be deemed to be Federal employees for any purposes. . . .”[248] Second, the government’s control over specifications, safety, and precise performance requirements encompasses general supervisory authority rather than control over day-to-day operations—a power retained by the Pueblo. The other Lilly factors were not disputed and thus the court considered these two to be dispositive. Thus, the Pueblo were independent contractors and the U.S. government could not be subject to tort liability for the Pueblo’s negligence under the FTCA.
Dutchover v. Moapa Band of Paiute Indians, 219CV01905KJDBNW, 2021 WL 1738869 (D. Nev. May 3, 2021): Plaintiff worked as a police officer for the Moapa Band of Paiute Indians (the “Tribe”) where he was allegedly the victim of harassment and a hostile work environment. Plaintiff alleged that the Tribe had waived sovereign immunity by entering into a federal contract and by enacting, promoting, and adhering to federal law, including Title VII. Plaintiff alleged that the policies and training that the Tribe offered, including an anti-discrimination training offered by a federal employee, signaled an adoption of Title VII and thus a waiver of sovereign immunity. The court disagreed because a waiver of sovereign immunity must be express and cannot be implied through behaviors such as the training Plaintiff described. Because the Tribe had not waived sovereign immunity, Plaintiff’s claims arising out of the workplace conduct, including a § 1983 claim and Title VII claim, were dismissed.
Plaintiff also argued that there was a corporate entity created by the Tribe that ran the police department and, as the actual employer, did not enjoy sovereign immunity. The Tribe denied the existence of such an entity and argued that even if such an entity did exist, it would be an arm of the Tribe covered by sovereign immunity. The court agreed because there was no indication that the Tribe intended to create a corporation that didn’t share sovereign immunity, especially where many of the defendants sat on the Tribe’s governing board indicating the Tribe’s involvement and control over any such corporate entity. The court held that a waiver of a tribe’s sovereign immunity cannot be implied through behavior such as workplace training; it must be express. Where a tribe is involved with and maintains control over a corporate entity, the entity, even as an actual employer, is an arm of the tribe that enjoys sovereign immunity.
Butler v. Leech Lake Band of Ojibwe, CV 20-2332(DSD/KMM), 2021 WL 2651981 (D. Minn. June 28, 2021): Plaintiff, employed as a Director with the Leech Lake Band of Ojibwe (the “Band”), brought suit against the Band and two managers of the Band for age discrimination under the Age Discrimination in Employment Act of 1967 (“ADEA”); violation of the Equal Pay Act (EPA); retaliation, harassment, intimidation, and wrongful demotion and termination, all under Title VII of the Civil Rights Act of 1964 (“Title VII”); and violations of state law.
The court held that it did not have jurisdiction over the claims because the ADEA, EPA, and Title VII, all specifically exempt tribal employers from this suit. Without an explicit waiver of sovereign immunity, those claims could not proceed. The individually named managers, also employees of the Band, could not be sued in an individual capacity because Title VII and the ADEA did not provide for such liability. While the EPA does not prohibit individual liability, the court reasoned that since the Plaintiff could not bring the EPA claim against the Band, she also could not bring the EPA claim against individual officers of the Band. With all the federal law claims dismissed, the court declined to extend pendent jurisdiction over the remaining state law claims. The court held that without an explicit waiver, a tribal employer retains sovereign immunity and cannot be sued under the Age Discrimination in Employment Act of 1967, Equal Pay Act, nor Title VII.
Great Plains Lending, LLC v. Dep’t of Banking, No. 20340, 2021 WL 2021823 (Conn. May 20, 2021): The Plaintiffs, Great Plains Lending, LLC, American Web Loans, Inc. (doing business as Clear Creek Lending), and John R. Shotton (chairman of the Otoe-Missouria Tribe of Indians (the “Tribe”), were investigated by the Defendants, the Commissioner of Banking (“Commissioner”) and the Department of Banking. The investigation found that the Plaintiff companies were violating Connecticut’s banking and usury laws by making small consumer loans with excessive interest rates to state residents via the internet without a license to do so. The Commissioner ordered the Plaintiff companies to cease and desist, pay restitution to the state residents, and pay civil penalties. The Plaintiffs filed a motion to dismiss the administrative proceedings for a lack of jurisdiction alleging that the companies were arms of the tribe and Shotton was entitled to sovereign immunity because he was acting within his official capacity as an employee of the Tribe. The motion was dismissed and this appeal followed.
First, the court found that the companies did indeed enjoy sovereign immunity as arms of the Tribe. Next, the court stated that two conditions needed to be met for sovereign immunity to extend to a Tribe’s employee or officer: (1) the Tribe, not the individual, is the real party in interest; and (2) the Tribal official acted within the scope of his/her/their authority. In evaluating the first prong of the test, the court observed that the Defendant “department is seeking relief from Shotton nominally because of his official policy-making capacity as a high ranking officer of the Tribe and an officer of the entities, rather than as a result of his personal actions taken within the scope of his official capacity.”[249] Because Shotton was targeted for his ranking and status rather than his personal actions, the court determined the Tribe was the real party in interest.
Turning to the second prong, the court noted that it was not enough to allege that Shotton’s actions were a violation of state law to establish that his actions were outside his capacity as a corporate official. Because the Defendants failed to allege or prove that any actions were taken to further Shotton’s personal interests, as distinct from the tribe’s interests, the court found that Shotton was acting within his official capacity. Putting together the two prongs, the court held that the Tribe’s sovereign immunity extended to Shotton as an official of the Tribe.
The court ultimately held that the burden of proving that a company or entity is an arm of the Tribe entitled to sovereign immunity falls on the company or entity claiming the entitlement. Two conditions must be met for sovereign immunity to extend to a Tribe’s employee or officer: (1) the Tribe, not the individual, must be the real party in interest; and (2) the Tribal official must have acted within the scope of his/her/their authority.
Manzano v. S. Indian Health Council, Inc., 20-CV-02130-BAS-BGS, 2021 WL 2826072 (S.D. Cal. July 7, 2021): Plaintiff brought claims of harassment and wrongful termination against her former employer, Defendant Southern Indian Health Council, Inc. (“SIHC”). Pursuant to Title V of the Indian Self-Determination and Education Assistance Act (“ISDEAA”), SIHC entered into a compact with the Indian Health Service (“IHS”) in which the IHS transferred authority to SIHC to make decisions about the federal funding and execution of federal programs, services, functions, and activities for the benefit of American Indians. Defendant moved to dismiss the case based on Tribal sovereign immunity.
Plaintiff made evidentiary objections to the Compact agreement. Plaintiff stated that the Compact agreement was untimely, not relevant, and not properly authenticated. Because these evidentiary issues concerned facts essential to the issue of sovereign immunity, the court first resolved them, in favor of the Defendants, before using a five-step analysis to determine whether SIHC was entitled to Tribal sovereign immunity.
First, the method of creation weighed toward sovereign immunity because SIHC operated on Tribal land, provided health care to tribal communities, was comprised of federally recognized tribes, all of which were passed resolutions authorizing SIHC to assume authority from the government for the services provided. The fact that SIHC was incorporated under state law did not defeat a favorable finding on this factor. SIHC’s purpose was to provide healthcare to Tribal communities and the Compact agreement was to promote the autonomy of member tribes in healthcare. The second factor also weighed in favor of SIHC. Third, the structure, ownership, and management weighed in favor of SIHC because SIHC was fully managed by member tribes through their representatives on the managing board who were enrolled members of each Tribe. Fourth, while not explicit in the Compact agreement, there were indications that there was Tribal intent for SIHC to share in sovereign immunity. Specifically, (1) the transfer of power between IHS and SIHC document stated that it was for the benefit of the tribes because it would “allow SIHC to better assert its sovereign status and that of its Members by assuming greater funding for and control over its operations;” (2) SIHC entered into the Compact “to carry out the services provided by the SIHC in a manner consistent with the Compact and SIHC’s self-governance” (emphasis added); and (3) the ISDEAA stated that when an Indian tribe authorizes an inter-tribal consortium, such as the SIHC, the consortium has the same rights and responsibilities as a Tribe, including Tribal sovereign immunity.[250] Last, the financial relationship between SIHC and the Tribes supports findings of sovereign immunity because SIHC would have been unable to receive funding without the involvement of Tribes. Altogether, the court found SIHC was entitled to Tribal sovereign immunity as an arm of the Tribe.
The court then considered whether the Uniformed Services Employment and Reemployment Rights Act (“USERRA”) abrogated SIHC’s Tribal immunity. USERRA’s definition of an employer does not include Tribes or Tribal organizations and had no unequivocal expression of abrogation. Looking to the legislative history, the Court noted that a House Report stated that an explicit statement to include tribes was necessary as to avoid confusion about interpretation; however, the recommendation was not adopted and so the court was unable to find that Congress unambiguously sought to override Tribal sovereign immunity and apply USERRA to Tribal employers.
Finally, the court rejected Plaintiff’s argument that Defendant waived sovereign immunity by failing to raise it in bylaws or corporate filings because waivers of sovereign immunity must be express rather than implied. The case was dismissed for lack of subject matter jurisdiction.
Jim v. Shiprock Associated Sch., Inc., 833 Fed. Appx. 749 (10th Cir. 2020): Plaintiff sued her employer, Shiprock Associated Schools, Inc., (the “corporation”) a private corporation that served the Navajo Nation, for discrimination under Title VII. To decide whether to characterize the corporation as an Indian tribe for the purposes of Title VII, the court considered whether the Tribe created and controlled the enterprise. The court determined that here, the corporation was created under the auspices of the Navajo Nation and the Nation’s statutes authorized chapters to establish local school boards. The Navajo Nation Board of Education, in turn, empowered the corporation to operate educational programs. Every board member was required to be an enrolled member and most students and employees were also members. Further, the corporation operated under tribal oversight. Though the school received funding from the U.S. Bureau of Indian Education, it was tribally controlled. Ergo, the private corporation constituted an Indian Tribe and was held to be exempt from Title VII.
Beetus v. United States, 4:19-CV-00044-SLG, 2021 WL 1093617 (D. Alaska Mar. 22, 2021): Plaintiff alleged that she was sexually assaulted by an employee of the Native Village of Tanana’s Culture Camp while she attended the camp as a minor. The camp was organized, managed, and funded pursuant to an ISDEAA contract between the United States and the Tanana Tribal Council (“TTC”) and/or the Tanana Chiefs Conference (“TCC”). Plaintiff brought various tort claims claiming that the assault committed against her was proximately caused by TCC/TTC’s failure to adequately safeguard minors and Plaintiff asserted that since TTC/TCC were carrying out their ISDEAA contractual duties at the time of the incident, the United States was instead liable for the tort of the tribal employee pursuant to Section 314 of the Federal Tort Claims Act.[251] The U.S. government moved to dismiss for lack of subject matter jurisdiction.
To determine whether the act of the Tribal employee fell within Section 314, the court employed the Ninth Circuit’s Shirk[252] test in which the court first determines whether the alleged activity is encompassed by the ISDEAA contract and then decides whether the tortious action falls within the scope of the tortfeasor’s employment, as defined by the contract, under state law.[253]
Though the U.S. tried to argue that TTC was an independent contractor not covered under the Federal Torts Claim Act, the court found that: (1) TCC’s funding agreement with the U.S. extended coverage to TTC;[254] (2) the funding agreement between TCC and the U.S. authorized TCC to carry out functions pertaining to health and safety at the camp; and (3) because TCC’s funding agreement extended to TTC, TTC employees were authorized to carry out functions pertaining to health and safety at the camp. Accordingly, the first prong was met—the tortious action, negligent supervision and failure to train, was encompassed by the ISDEAA contract.
The court declined to determine whether the second prong was met—i.e., whether the tortfeasor’s actions fell within the scope of employment—because the U.S. only argued that an assault cannot be within the scope of employment and the Plaintiff also pleaded claims of negligent hiring and supervision, both of which are facially within the scope of employment. In light of the findings, the court denied the U.S.’s motion to dismiss.
Unite Here Local 30 v. Sycuan Band of the Kumeyaay Nation, 20-CV-01006 W (DEB), 2020 WL 7260672 (S.D. Cal. Dec. 10, 2020): Plaintiff, a labor union seeking to represent Sycuan Casino Resorts, filed a motion to dismiss Defendant Sycuan Band of Kumeyaay Nation’s (the “Tribe”) counterclaim for declaratory relief. The Tribe owned the Casino Resort and, pursuant to the Indian Gaming and Regulatory Act, entered into a compact with the State of California. California required the Tribe to adopt an ordinance which set out procedures for organizing casino employees into a union. The ordinance required the Tribe to enter into a contract if the union offered a writing stated it would comply with the terms of Section 7 of the ordinance. The Union alleged that it offered such a writing by delivering a letter to the Tribe’s top elected official and thus the Tribe automatically accepted the offer under the ordinance terms. The Tribe in turn denied that it entered a contract and alleged that federal law, the National Labor Relations Act, preempted and invalidated the ordinance.
The Union sought to compel arbitration pursuant to the ordinance; the Tribe filed a counterclaim seeking a declaratory judgment stating that federal law preempted and invalidated California’s requirement that the Tribe enter into a contract with the Union. Because all the facts were admitted, the court found that a contract was formed. Further, the ordinance clearly had an arbitration agreement which included a limited waiver of sovereign immunity for the purpose of arbitration. Though it did not explicitly state that the Tribe agreed to arbitrate issues of preemption, the court found that it was broad enough to apply to the present issue. Ergo, the counterclaim was dismissed as to not interfere with the arbitrator’s rightful authority.
Engasser v. Tetra Tech, Inc., 519 F.Supp.3d 703 (C.D. Cal. 2021): Tetra Tech, Inc. entered into an agreement with the California Department of Resources Recycling and Recovery to clean up after the Camp Fire which burned a significant amount of the ancestral land of the Mechoopda Indian Tribe of Chico Rancheria, California. Tetra Tech entered into an agreement with the Mechoopda Cultural Resource Preservation Enterprise (“Mechoopda”) to provide Tribal monitoring of the cleanup. Mechoopda was a wholly owned and unincorporated entity of the Tribe and thus immune from suit, pursuant to sovereign immunity, absent a waiver. The agreement between Tetra Tech and Mechoopda called for the parties to indemnify and defend one another against losses and claims caused by the other’s misconduct or omissions and to resolve disputes arising out of or related to the agreement prior to commencing litigation. The agreement stated that “[a]ny court with competent jurisdiction shall have the authority to enforce this provision and to determine if the meet and confer process has been satisfied,” but also stated that “[n]othing herein shall be construed as a waiver of sovereign immunity.”[255]
A Mechoopda Tribal monitor filed suit against Tetra Tech for wage-and-hour violations under the Fair Labor Standards Act and California law. Tetra Tech demanded Mechoopda to defend and indemnify Tetra Tech; Mechoopda did not, and Tetra Tech filed a third-party complaint. The court found that Mechoopda did not waive sovereign immunity where the contract expressly stated it was not waived and the consent to jurisdiction was not clear and unequivocal. Thus, the court dismissed Tetra Tech’s complaint against Mechoopda.
Reed v. Hyatt, 1:19-CV-00122-MR, 2020 WL 5899100 (W.D.N.C. Oct. 5, 2020): Plaintiff alleged that he was unlawfully detained by the Defendants, police officers employed by the Cherokee Police Department. Plaintiff alleges that the officers struck him and aggressively pressed on his neck causing him to spit. Plaintiff alleged that the office interpreted the spitting as voluntary and struck him in the face. The Plaintiff, while detained during pretrial, filed a § 1983 suit against the officers. However, the court reaffirmed prior case law by holding that Tribal employees are not state employees and thus cannot be state actors for the purposes of § 1983. Thus, the court dismissed the suit.
Soloniewicz v. Sugar Factory, LLC, HHBCV196118245S, 2020 WL 9074514 (Conn. Super. Ct. Dec. 30, 2020): A restaurant, Sugar Factory, operated in a Connecticut Tribal casino. A wage dispute arose between the restaurant and a server. The Tribe had no wage laws and so the claim was filed under state law. Sugar Factory argued that the court had no jurisdiction over the case because the restaurant was located on a Tribal reservation. The court rejected this contention because sovereign immunity strips a court of jurisdiction when the dispute directly affects the Tribe, its members, employees, or their agents—none of which were relevant here. The motion to dismiss was denied.
Mendenhall v. United States, 3:20-CV-00312 SLG, 2021 WL 2004780 (D. Alaska May 19, 2021): Plaintiff was assaulted by a security guard, Mr. Ireton, employed by the Alaska Native Tribal Health Consortium (“ANTHC”). ANTHC employees are deemed federal employees for the purposes of the Federal Tort Claims Act (“FTCA”), so Plaintiff sued the United States pursuant to the FTCA alleging: (1) Mr. Ireton and another the security guard acted negligently during the encounter; (2) ANTHC managers and/or supervisors failed to train or monitor Mr. Ireton; and (3) Mr. Ireton and another security guard violated Plaintiff’s civil and constitutional rights during the encounter.
The United States asserted that Plaintiff could not bring the negligence claim under the FTCA because intentional torts are an exception to the FTCA’s waiver of sovereign immunity. Plaintiff responded that his complaint asserted the employee’s negligence, not an intentional tort. The court disagreed because “without the intentional tortious actions of the security guards, Plaintiff would have no claim for relief.”[256] The complaint, though couched in terms of negligence, arose from an intentional tort and so the court held it was barred.
Regarding the Plaintiff’s claims for negligent training and supervision, the United States asserted that the claim was barred either because Plaintiff did not properly exhaust his administrative remedies or because the discretionary function exception applied. The court disagreed with the United States about the administrative remedies because the Plaintiff provided information in the administrative claim form about the location and date of the incident, the nature and extent of his injury, and a description of how the incident occurred. This was sufficient to give notice to the Department of Health and Human Services to commence an investigation. However, the court did agree that the claim was barred by the discretionary function exception because the statutory chapter that the Plaintiff asserted mandated training for licensed security guards also stated that an employer is not required to seek licensure for employees providing unarmed security on the employer’s premises. Because the guards in question were providing unarmed security on ANTHC’s premises, the statutory scheme did not mandate training nor licensure. Last, the court dismissed the civil and constitutional rights claims because the security guards were not state actors and were federal actors only for the purposes of the FTCA.
§ 1.4.4. Federal Court Jurisdiction
Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction. Such cases may involve a federal question[257] or claims that are brought involving diversity of citizenship.[258] Litigation that arises from a deal with a federally recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,[259] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.[260] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.[261] However, courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.[262] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.
The following highlights several of the more relevant cases decided in the last year.[263]
Big Sandy Rancheria Enterprises v. Becerra, 1 F.4th 710 (9th Cir. 2021). Big Sandy Rancheria Enterprises (“BSRE”), a tribal corporation wholly owned by the Big Sandy Rancheria of Western Mono Indians (“the Tribe”), sought declaratory and injunctive relief against the Attorney General of California and the Director of the California Department of Tax and Fee Administration, claiming it was exempt from California cigarette tax regulations on inter-tribal sales of tobacco. The district court granted Defendants’ motion to dismiss for lack of jurisdiction. BSRE appealed.
The Ninth Circuit affirmed. The Tax Injunction Act (“TIA”) prohibits district courts from enjoining the assessment of any state tax where a plain and speedy remedy is available in State court. Federally recognized Indian tribes, however, are exempt from the TIA because federal law “confers federal jurisdiction over claims ‘brought by any Indian tribe.’”[264] But here, the claims were brought by BSRE—not the Tribe. The BSRE is a tribal corporation, which the Ninth Circuit determined not to be a “Indian tribe or band” within the meaning of § 1362. In other words, the court held that the language of § 1362 is limited to tribes in their constitutional—not corporate—form. In support of its conclusion, the court noted that section 17 of the Indian Reorganization Act allows tribal corporations to waive sovereign immunity for economic purposes and that “it would be odd to allow a section 17 corporation to selectively claim the benefits of sovereignty in order to challenge a tax.”[265] Accordingly, the court held that the TIA’s jurisdictional bar applied to BSRE and affirmed the district court’s dismissal of BSRE’s claim for lack of jurisdiction.
Cole v. Alaska Island Cmty. Servs., 834 Fed. App’x 366 (9th Cir. 2021). Plaintiff Cole brought an antitrust action against Southeast Alaska Regional Health Consortium (“SEARHC”) and Alaska Island Community Services (“AICS”). SEARHC is a consortium of federally recognized Alaska tribes, and AICS merged into SEARHC before this action and does not exist as a separate entity. The district court denied Cole’s claims for lack of subject matter jurisdiction due to SEARHC’s tribal sovereign immunity. On appeal, the Ninth Circuit affirmed, briefly noting that SEARHC satisfied the “arm of the tribe” test and was thus entitled to sovereign immunity. Because Cole did not meet his burden of proving the existence of subject matter jurisdiction, the Ninth Circuit affirmed the district court’s dismissal of his claims.
Holtz v. Oneida Airport Hotel Corp., 826 Fed. App’x 573 (7th Cir. 2020). Plaintiff Holtz sued her former employer Oneida Airport Hotel Corporation (“the Hotel”), an Oneida Nation-owned hotel, for wrongfully terminating her under the Indian Civil Rights Act. Holtz asserted various federal, state, and tribal law claims. Defendants removed the case to federal court, after which the district court dismissed the suit based on the doctrine of tribal sovereign immunity and, alternatively, Holtz’s failure to state a claim upon which relief could be granted. Holtz appealed.
The Seventh Circuit affirmed the dismissal, but only on the alternative basis that Holtz failed to state a claim. The court declined to apply the “arm of the tribe” test to determine whether the Hotel was entitled to sovereign immunity because the record was too thin to make a determination. But making such a determination was unnecessary since the Court had an alternative basis for affirming the dismissal. Since Holtz’s allegations only “amount[ed] to a conspiracy to wrongfully terminate her employment,” she did not state a claim upon which relief could be granted.[266] Accordingly, the Fifth Circuit affirmed the district court’s dismissal without addressing the jurisdictional issues raised by the Hotel’s potential entitlement to sovereign immunity.
Mitchell v. Bailey, 982 F.3d 937 (5th Cir. 2020). Plaintiff Mitchell, a Texas resident, asserted state-law claims in federal court against both the Hoopa Valley Tribe and one of its members, Bailey, in his official capacity. Asserting both federal-question and diversity jurisdiction, Mitchell sought to recover damages for an injury he sustained allegedly due to the Tribe’s and Bailey’s negligence while participating in the Tribe’s disaster-relief efforts in Wimberley, Texas, following severe flooding in the area. The district court granted Defendants’ motion to dismiss on the grounds that Mitchell’s claims were barred by the doctrine of tribal sovereign immunity as enunciated in Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc.[267] Mitchell appealed.
The Fifth Circuit vacated the district court’s judgment but affirmed the dismissal on the grounds that the district court lacked original jurisdiction. First, since Mitchell did not assert any federal claims, there was no federal question which might support federal-question jurisdiction. The court noted that “[t]he prospect of a tribal sovereign immunity defense does not, in and of itself, ‘convert a suit otherwise arising under federal law into one which, in the statutory sense, arises under federal law.’”[268] The court in effect reaffirmed the principle that “[u]nder the well-pleaded complaint rule, an anticipatory federal defense is insufficient for federal jurisdiction.”[269]
Second, the Fifth Circuit found that the district court had no diversity jurisdiction over the case. The Fifth Circuit held for the first time that “Indian tribes are not citizens of any state for the purpose of diversity jurisdiction.”[270] In other words, tribes are “‘stateless entities’ for the purpose of diversity jurisdiction.” And since “the presence of a single stateless entity as a party to a suit destroys complete diversity,” the Fifth Circuit found that district court lacked diversity jurisdiction.[271] Accordingly, the Fifth Circuit vacated the district court’s judgment and affirmed the order of dismissal.
Oneida Indian Nation v. Phillips, 981 F.3d 157 (2d Cir. 2020). The Oneida Nation of New York (“the Nation”) sued Phillips, a member of the Nation and the purported owner of a parcel of tribal land. The Nation sought declaratory and injunctive relief arising out of Phillips’ assertion of rights over the land. In granting judgment for the Nation, the district court found that there were no issues of material fact because Phillips conceded that the parcel of land was located within the Nation’s reservation as recognized by the governing treaty. Crucially, the district court dismissed Phillips’s counterclaim as barred by sovereign immunity. Phillips appealed.
The Second Circuit affirmed. In justifying its exercise of jurisdiction over the case, the court held that “tribal sovereign immunity . . . is not synonymous with subject matter jurisdiction” because: (1) “[t]ribal sovereign immunity can be waived” whereas a lack of subject matter jurisdiction cannot; (2) “tribal sovereign immunity operates essentially as a . . . defense” whereas subject matter jurisdiction is “fundamentally preliminary” and an “absolute stricture” on the court; and (3) “a waiver of sovereign immunity cannot, on its own, extend a court’s subject matter jurisdiction.”[272] The court then highlighted “the divergence of opinion as to the precise nature of tribal sovereign immunity” but found no need to address or resolve it in this case.[273]
Judge Menashi concurred in the judgment, but he concluded that the court’s dicta regarding sovereign immunity were “misguided.” Menashi disagreed with the court’s speculation that “tribal sovereign immunity should perhaps be reconceptualized as belonging to some category of jurisdiction” that is not synonymous with subject matter jurisdiction. In Judge Menashi’s view, Circuit precedent is clear that “tribal sovereign immunity deprives a court of subject-matter jurisdiction over a lawsuit” and that “tribal sovereign immunity is coextensive with federal sovereign immunity.” Thus, Judge Menashi elected not to deviate from precedent which holds that tribal sovereign immunity is “a limit on a court’s subject-matter jurisdiction.” But because he believed Phillips’s counterclaim failed on the merits, he concurred in the judgment.
Engasser v. Tetra Tech, Inc., No. 2:19-CV-07973-ODW, 2021 WL 911887 (C.D. Cal. Feb. 9, 2021) (appeal filed). Defendant Tetra Tech entered into a Professional Services Agreement (“PSA”) with Mechoopda Cultural Resource Preservation Enterprise (“MCRPE”), an unincorporated entity wholly owned by the Mechoopda Indian Tribe of Chico Rancheria (“the Tribe”). The purpose of the PSA was for Tetra Tech to employ tribal monitors to supervise cleanup after a fire that burned some of the Tribe’s ancestral land. Plaintiff Engasser, a tribal monitor employed by Tetra Tech, sued Tetra Tech for wage-and-hour violations under the Fair Labor Standards Act and California law on behalf of himself and a putative class of other tribal monitors. Tetra Tech filed a third-party complaint against MCRPE seeking indemnification pursuant to a provision in the PSA. MCRPE moved to dismiss Tetra Tech’s complaint on the grounds that MCRPE had not waived its tribal sovereign immunity.
The district court granted the motion noting that the sovereign immunity of a tribe extends to its economic and governmental activities, so long as the acting entity functions as an arm of the tribe. The court found that MCRPE was an “arm of the tribe” and was thus entitled to sovereign immunity. Although entities like MCRPE sometimes waive sovereign immunity in agreements like the PSA at issue in this case, MCRPE expressly preserved its sovereign immunity in the PSA and did not include in the PSA any provisions that often amount to a waiver of sovereign immunity. Accordingly, the court held that MCRPE was entitled to sovereign immunity and granted its motion to dismiss.
Stalnaker v. Bonnell as Tr. of United States of Am. & Totonaca Tribe of Mexico Irrevocable Tr., No. 4:20-CV-3100, 2021 WL 37534 (D. Neb. Jan. 5, 2021). Plaintiff sued Defendants under the Nebraska Uniform Fraudulent Transfer Act in state court. Defendants removed to federal court, asserting both federal question and diversity jurisdiction. Defendants partially based their assertions of diversity and federal question jurisdiction on the presence of the (apparently fictitious) Totonaca Tribe of Mexico in the suit. Plaintiff moved to strike Defendants’ Notice of Removal, and the magistrate judge recommended that the case be remanded to state court.
The district court accepted the recommendation. It questioned whether the tribe was truly present in the case and noted that, even if it were present, “an Indian tribe is not a citizen of any state and cannot sue or be sued in federal court under diversity jurisdiction.”[274] The court also rejected Defendants’ assertion of federal question jurisdiction, citing Peabody Coal Co. v. Navajo Nation,[275] for the principle that “the presence of a tribal sovereign as a party is not by itself sufficient to raise a federal question.” Accordingly, the case was remanded to state court.
Nguyen v. Cache Creek Casino Resort, No. 2:20-cv-1748-TLN-KJN PS, 2021 WL 22434 (E.D. Cal. Jan 4, 2021), adopted in full, No. 2:20-cv-01748-TLN-KJN, 2021 WL 568212 (E.D. Cal. Feb. 16, 2021) (appeal filed). Plaintiff Nguyen sued the Cache Creek Casino Resort (“the Casino”), asserting various state- and federal-law claims arising from Nguyen’s detention on the Casino’s premises. The Casino, owned by the Yocha Dehe Wintun Nation (“the Tribe”), moved to dismiss, arguing that it was an “arm of the tribe” and that it had not waived sovereign immunity.
The magistrate judge agreed that the Casino was an arm of the tribe because: 1) the Casino, which was formed as a tribal business, is wholly owned and operated by the Tribe; 2) the Casino is governed by a tribal council; and 3) revenues generated by the Casino are for the benefit of the Tribe. The magistrate judge also agreed that the Resort had not waived its sovereign immunity: “Without an unequivocal waiver of sovereign immunity from a tribe or an authorization from Congress, federal courts lack the requisite subject-matter jurisdiction to rule on matters involving tribes.” Here, on a tribal–state compact and the Tribe’s adoption of the accompanying Tort Claims Ordinance, the magistrate judge concluded that the Tribe’s express waiver regarding tort claims applied only to its administrative process, where a three-member commission would review any such claims. The Ordinance did not evince intent to waive its immunity to suit in federal court. Accordingly, the magistrate judge found that the Casino had a valid sovereign immunity defense.
Grondal v. United States, 513 F.Supp.3d 1262, (E.D. Wash. 2021). In a complex dispute arising out of a lease, Defendant Wapato Heritage asserted a crossclaim against its codefendants, the Colville Tribes. Wapato Heritage argued that when the Colville Tribal Enterprise Corporation (“CTEC”), an instrumentality of the Colville Tribes, waived sovereign immunity in a lease agreement, it also waived the Tribes’ sovereign immunity. Applying a provision of the Colville Tribal Code that prohibits tribal corporations from waiving the Tribes’ sovereign immunity, the district court found that CTEC had not waived the Tribes’ sovereign immunity. Wapato Heritage also asserted an alternative argument that the Colville Tribes waived sovereign immunity through their litigation conduct in this case. Although “[c]ertain litigation conduct may constitute a waiver,” the court found that the Tribes’ participation in the litigation did not amount to “sufficiently clear litigation conduct” constituting a waiver of sovereign immunity.[276] Indeed, the Tribes had been asserting sovereign immunity from the outset of litigation.
Separately, Wapato Heritage asserted a claim against the U.S. government, citing 28 U.S.C. § 1353 for the proposition that federal district courts have jurisdiction over any “civil action involving the right of any person, in whole or in part of Indian blood or descent, to any allotment of land under any Act of Congress or Treaty.” Because Wapato Heritage is an LLC and not a “person . . . of Indian blood or descent,” the court found it could not exercise jurisdiction over its claims against the government.[277] Thus, the district court rejected all of Wapato Heritages jurisdictional arguments and dismissed the claims premised on them.
Loring v. Daly, No. CV 19-05133-PHX-JAT (JFM), 2021 WL 2105571 (D. Ariz. May 25, 2021). Plaintiff Loring, who was previously confined in the Salt River Pima Maricopa Indian Community’s Department of Corrections (“Salt River DOC”), brought a civil rights action against Salt River DOC’s director and lieutenant director under 42 U.S.C. § 1983 and the Religious Land Use and Incarcerated Persons Act. Defendants moved to dismiss, arguing that the court did not have subject matter jurisdiction due to tribal sovereign immunity.
The court granted Defendants’ motion. Although sovereign immunity does not bar suits for damages against tribal officials in their individual capacities, the court found that Loring’s individual-capacity claims were masked official-capacity claims. This is because his alleged injuries “arise from a policy, practice, or custom of the Salt River DOC, over which Defendants have policymaking authority, at the direction of the Community Council, which is an official-capacity claim.”[278] Additionally, Loring’s claims were primarily aimed at changing Salt River DOC policy. Accordingly, Defendants had a valid sovereign-immunity defense, and the Court dismissed Plaintiff’s claims.
Debraska v. Oneida Bus. Comm., No. 20-C-1321, 2020 WL 6204320 (E.D. Wis. Oct. 22, 2020). Plaintiffs, members of the Oneida Nation, sued Defendants Oneida Business Committee, Oneida Election Board, and Oneida Tribe of Indians of Wisconsin for actions they took in relation to the 2020 Oneida Nation Primary Election. Defendants filed a motion to dismiss, to which Plaintiffs failed to reply. The district court granted the motion based on Plaintiffs’ failure to respond and based on the substantive arguments in Defendants’ motion that the court lacked jurisdiction over all of Plaintiffs’ claims.
First, the court agreed with Defendants that the First and Fourteenth Amendments of the U.S. Constitution are not applicable to Indian Nations as separate sovereigns pre-existing the Constitution. Second, the court agreed that the Indian Civil Rights Act does not create a private right of action to secure the rights contained therein and thus does not provide a basis for federal question jurisdiction. Third, the court agreed that a 42 U.S.C. § 1983 action is unavailable to persons alleging deprivation of constitutional rights under color of tribal law and thus did not provide a basis for federal jurisdiction. Finally, the court agreed that it lacked jurisdiction over Plaintiffs’ claims arising under tribal law. Accordingly, the court granted Defendants’ motion to dismiss.
Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin v. Evers, No. 18-CV-992-JDP, 2021 WL 1341819 (W.D. Wis. Apr. 9, 2021) (appeal filed). Plaintiffs, four Ojibwe Tribes, believed that the State of Wisconsin and several of its municipalities improperly taxed certain reservation properties allotted to the them by an 1854 Treaty. Accordingly, the tribes sought declaratory and injunctive relief from various officers of the State of Wisconsin as well as several Wisconsin townships and their assessors. As this was a civil matter, brought by federally recognized Indian tribes, arising under the laws and treaties of the United States, the court held that it had subject-matter jurisdiction under 28 U.S.C. § 1331 and § 1362.
Mille Lacs Band of Ojibwe v. Cty. of Mille Lacs, 508 F. Supp. 3d 486 (D. Minn. 2020). Plaintiffs, including the Mille Lacs Band of Ojibwe (“the Tribe”), brought action against County of Mille Lacs and certain County officials, seeking declaratory judgment that the Tribe possessed inherent tribal authority to establish a police department with authority to investigate violations of federal, state, and tribal law within its reservation. Defendants contended that there was no basis under federal law for the court to exercise federal question subject matter jurisdiction over Plaintiffs’ claims.
The court rejected Defendants’ arguments, holding that “questions of federal common law can serve as a basis for the exercise of federal question subject matter jurisdiction” and that “[f]ederal courts have often treated the scope of a tribe’s inherent sovereign authority as a matter of federal common law.”[279] Since Plaintiffs raised issues of federal common law—i.e., issues of tribal sovereignty—on the face of their well-pleaded complaint, the court held that it had subject matter jurisdiction over their claims.
Newtok Vill. v. Patrick, No. 4:15-cv-00009 RRB, 2021 WL 735644 (D. Alaska Feb. 25, 2021). Plaintiffs, including Newtok Village (“the Tribe”), brought a number of claims against a group of former members of the Tribe who claimed to comprise the true Newtok Village tribe. The Defendants argued that the court lacked subject matter jurisdiction because Plaintiffs failed to present a federal question in their complaint. The court disagreed, noting that “a suit against Defendants allegedly impersonating a recognized tribal governing body potentially falls under a variety of federal statutes, particularly in light of the fact that such misrepresentation interferes with federal government contracts [made pursuant to the Indian Self-Determination Act].”[280] Accordingly, the court found that Plaintiffs’ complaint was adequate to establish federal question jurisdiction.
South Dakota v. Frazier, No. 4:20-cv-03018-RAL, 2020 WL 6262103 (D.S.D. Oct. 23, 2020). The State of South Dakota filed a lawsuit against the Cheyenne River Sioux Tribe (“the Tribe”) and the Tribe’s Chairman Harold Frazier (“the Chairman”) in both his individual and official capacity because he directed the Tribe to post signs purporting to lower the speed limit on a federal highway without notifying the State. The Tribe argued that the court lacked subject matter jurisdiction and that sovereign immunity barred the suit against both the Tribe and the Chairman.
The court disagreed with the Tribe’s jurisdictional arguments but partially agreed with its sovereign-immunity arguments. Regarding jurisdiction, the court noted that “federal law controls which party has the authority to determine the speed limit on a federal highway located within an Indian reservation.”[281] Thus, the court held that it had subject matter jurisdiction. The court, however, held that sovereign immunity prevented suit against the Tribe—but not against the Chairman in his official capacity to the extent injunctive relief was sought. As the court explained, tribal immunity does not bar a suit for injunctive relief against individuals, including tribal officers, responsible for unlawful conduct. Accordingly, the court dismissed the State’s claims against the Tribe but enjoined the Chairman from altering highway signage.
§ 1.5. The State Sovereign
With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties. These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.[282]
Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”[283] Within Indian Country, on the other hand, “the initial and frequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”[284] When the legal incidence falls on tribes, tribal members, or tribal corporations,[285] “[s]tates are categorically barred” from implementing the tax.[286]
When the legal incidence falls on non-Indians, however, a more nuanced analysis applies. Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.[287] Because Congress does not often explicitly preempt state law,[288] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.[289] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.[290]
In New Mexico v. Mescalero Apache Tribe,[291] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”[292] In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.[293]
When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands.
The issues of preemption and infringement are regularly litigated in the federal courts. The following highlights several of the more relevant cases decided in the last year.[294]
Big Sandy Rancheria Enterprises v. Bonta, No. 19-16777, 2021 WL 2448226 (9th Cir. June 16, 2021). The US Court of Appeals for the Ninth Circuit evaluated whether California cigarette tax regulations apply to intertribal cigarette sales by a federally chartered tribal corporation. Big Sandy Rancheria Enterprises (“Big Sandy”), a cigarette distributor owned by a federally recognized Indian tribe, challenged California’s imposition of a cigarette excise tax (“Cigarette Tax”) on its intertribal transactions. Big Sandy also claimed that California’s cigarette distribution regulations, as well as the licensing, recordkeeping, and reporting requirements, were preempted by federal law and tribal sovereignty.
The district court dismissed Big Sandy’s claim that the Cigarette Tax should not apply to its distribution of cigarettes to other Indian tribes. Dismissing for lack of subject matter jurisdiction, the district court noted that the Tax Injunction Act prohibits district courts from enjoining, suspending, or restraining the collection of any tax under state law where a remedy may be had in state court. This jurisdictional bar extends to both injunctive and declaratory relief to limit the ability of a federal district court to interfere with taxes, which are a local concern.
Despite this jurisdictional barrier, Big Sandy pointed out an exception to the Tax Injunction Act under 28 U.S.C. § 1362, which grants district courts jurisdiction over actions brought by Indian tribes. The Ninth Circuit nevertheless affirmed the decision below, finding that Big Sandy was not an Indian tribe within the meaning of § 1362. Rather, Big Sandy was classified as a federally chartered corporation under the Indian Reorganization Act. Accordingly, in forming the corporation, Big Sandy waived tribal sovereign immunity and therefore could not invoke the exception under § 1362. Thus, the Ninth Circuit affirmed dismissal of the tax claim.
The district court also dismissed Big Sandy’s challenge to California’s regulations governing cigarette distributions, as well as the licensing, reporting, and recordkeeping requirements. The Ninth Circuit affirmed this decision, finding that application of the challenged regulations did not violate principles of tribal self-governance. The Court further reasoned that federal regulation under the Indian Trader Statutes did not preempt the challenged regulations. The Ninth Circuit joined the Tenth Circuit and the Oklahoma Supreme Court in treating intertribal sales made outside of the tribal enterprise’s reservation as “off reservation” activity.[295] As such, tribal sovereignty principles did not preclude California from regulating Big Sandy’s intertribal cigarette sales under the challenged regulations.
Rogers Cty. Bd. of Tax Roll Corr. v. Video Gaming Techs., Inc., 141 S. Ct. 24 (2020). The Supreme Court denied the petition for a writ of certiorari over a 2019 Oklahoma Supreme Court case.[296] In that case, a non-Indian owner of electronic gaming equipment (“Gaming Company”) leased the equipment to a business entity of the Cherokee Nation. The Gaming Company sued the Rogers County Board of Tax Roll Corrections (“County Board”), seeking review of the assessment of ad valorem taxes on the leased equipment. The Gaming Company argued that because the equipment was leased exclusively to the Cherokee Nation for gaming, it was preempted from taxation under federal law. Applying the Bracker test, the Supreme Court of Oklahoma ultimately found the ad valorem taxation of leased gaming equipment to a tribe’s business entity preempted by the Indian Gaming Regulatory Act.
Justice Thomas dissented from the Supreme Court’s denial of certiorari, arguing that disagreement among courts on the issue merited review.[297] Justice Thomas also highlighted the opportunity to clarify the application of preemption principles among federal, state, and tribal law. Ultimately, Justice Thomas emphasized that this denial of certiorari would lead to amorphous preemption law and “geographical happenstance” with respect to a state’s ability to raise revenues.
Pickerel Lake Outlet Ass’n v. Day Cty., 953 N.W.2d 82 (S.D. 2020). The Pickerel Lake Outlet Association (“Lake Association”) and non-Indian owners of permanent improvements around the lake (collectively “Plaintiffs”) challenged ad valorem property taxes assessed against them by Day County. The Plaintiffs claimed that federal law preempted taxation because their structures were located on land held in trust for the Sisseton-Wahpeton Oyate Indians (“Tribe”). The circuit court upheld the disputed taxes and the Plaintiffs timely appealed. Id.
The Lake Association leased the trust land surrounding the lake from the Bureau of Indian Affairs (“BIA”). As a result, the Tribe collected ad valorem property taxes from the Plaintiffs for their structures. However, Day County also assessed taxes against the Plaintiffs for the same structures. Here, the Plaintiffs objected to the assessment of taxes by Day County, theorizing that federal law expressly or implicitly prohibits the taxing of permanent improvements located on trust land without regard to ownership. The Plaintiffs based this objection on a provision of the Indian Reorganization Act of 1934 (“IRA”), which exempts land acquired pursuant to its requirements from state and local taxes.
First, the Supreme Court of South Dakota assessed whether 25 U.S.C. § 5108, a statute within the IRA, expressly preempted Day County from taxing the structures.[298] Given that the terms of § 5108 were inapplicable to this case, the Plaintiff’s argument that § 5108 preempted taxation was conditioned upon the requirement that the Tribe’s land was acquired under the IRA. Because the Court was unable to find any support to indicate that the land was ever transferred by way of fee-to-trust under the IRA, the preemption argument under § 5108 failed.
Next, the Court evaluated whether a provision of Article XXII of the South Dakota Constitution (“Provision”) expressly preempted the taxes. The Provision requires that states provide a disclaimer of title and jurisdiction over Indian lands within the state. However, because the language of the Provision contemplated land held by Indians, not structures owned by non-Indians, Day County was not expressly preempted from assessing ad valorem taxes on the structures.
Lastly, the Court evaluated the legislative scheme to determine whether Day County was impliedly preempted from assessing the taxes. The principal question, then, was whether the federal government intended to control, regulate, and manage taxation of structures owned by non-Indians on trust land and prohibit state regulation of the same area. Based on the express language and congressional intent, the Court found that Day County’s taxation did not implicate Indians, and thereby did not implicate federal law. Thus, the Court affirmed, finding that federal law did not preempt the assessment of ad valorem property taxes on structures owned by non-Indians on trust land.
Warehouse Mkt. Inc. v. State ex. Rel. Oklahoma Tax Comm’n, 481 P.3d 250, 252 (Okla. 2021). The sublessee of a commercial building located on federally restricted tribal land brought an interpleader action in district court. The sublessee sought determination of whether sales tax was owed to the Oklahoma Tax Commission (“OTC”) or the Muscogee (Creek) Nation (“Tribe”). The sublessee sought to interplead the sales tax to the court to determine who was entitled to the taxes, as well as whether the OTC could tax the sublessee at all. The district court dismissed the Tribe on sovereign immunity grounds and further held that the OTC could not collect the sales tax until the dispute between the OTC and the Tribe was resolved in another forum.
Upon review, the Supreme Court of Oklahoma determined that the sublessee’s action constituted a tax protest, not an interpleader action. As such, the exhaustion of administrative remedies was a jurisdictional prerequisite to seeking relief in the trial court. The Court reasoned that once the trial court dismissed the Tribe on sovereign immunity grounds, it was without authority to take further action, shifting the cause from interpleader to a tax protest. The Court further explained that the Oklahoma Legislature mandated a specific procedure for taxpayers to follow when challenging tax assessments, which requires an administrative process that cannot be bypassed. Therefore, because administrative remedies with respect to both the OTC and the Tribe had not been exhausted, the Oklahoma Supreme Court reversed and remanded with instructions to dismiss.
S. Point Energy Ctr. LLC v. Arizona Dep’t of Revenue, No. 1 CA-TX 20-0004, 2021 WL 1623343 (Ariz. Ct. App. Apr. 27, 2021). In this case, the Arizona Court of Appeals consolidated five lawsuits brought by taxpayers challenging the State’s power to tax property located on tribal land. South Point Energy Center LLC, a non-Indian taxpayer (“Taxpayer”), owned and operated an electrical generating plant (“Plant”) on land leased from the Fort Mojave Indian Tribe (“Tribe”). The Taxpayer sued to recover property taxes paid on the Plant. The tax court granted summary judgment to the Arizona Department of Revenue (“ADOR”), finding that tribal sovereignty did not preempt taxation of the Plant. On appeal, the Taxpayer argued that the tax court erred on several grounds. These grounds included rejecting the notion that 25 U.S.C. § 5108 preempts state property taxes on tribal land, failing to categorize the Plant as a permanent improvement, and erroneously applying the Bracker balancing test.
Upon review, the Court found that the tax court erred in failing to classify the Plant as tax exempt permanent improvement under § 5108, which preempts taxation of land held in trust by the United States for an Indian tribe. The Court cited several federal cases[299] applying the text of § 5108 and concluded that taxes of permanent improvements on trust land are exempt regardless of ownership. Accordingly, the Court vacated the grant of summary judgment and held that § 5108 established a categorical exemption for permanent improvements on Indian land held in trust by the United States.
The Court highlighted failure of the tax court to recognize that federal law, rather than state law, governs whether property is a permanent tax-exempt improvement under § 5108. The Court noted that despite a Lease provision requiring the Taxpayer to remove all improvements at the end of the term, both parties preliminarily agreed that the Plant contained both personal property and permanent improvements. Hence, the Court determined that the factors set out in Whiteco Industries should be used to evaluate the classification of Plant assets.[300] The Court remanded the case to determine which of the Plant assets constitute permanent improvements under Whiteco, as well as whether property taxes on the non-permanent improvement assets are preempted under Bracker.
Flandreau Santee Sioux Tribe v. Terwilliger, 496 F. Supp. 3d 1307, 1309 (D.S.D. 2020). The Flandreau Santee Sioux Tribe (“Tribe”) sought a declaration that federal law preempted a statewide excise tax on gross receipts (“Tax”) against a non-Indian contractor for casino renovations performed on the reservation. In 2018, the district court granted summary judgment on the Tribe’s federal preemption claim under the Indian Gaming Regulatory Act (“IGRA”). Because the district court found for the Tribe under both prongs of the Bracker test, the court did not reach the Tribe’s claim that the Tax was also preempted under the Indian Trader Statutes. The defendants subsequently appealed to the Eighth Circuit Court of Appeals, which reversed the district court’s holding that imposition of the Tax was preempted under IGRA. Accordingly, the Tribe now seeks a declaration prohibiting imposition of the Tax on the contractor and a refund for amounts paid.
On remand, the Court held that the Tax was preempted by both IGRA and the Indian Trader Statutes. With respect to the Indian Trader Statutes, the Court explained that the term “trade” includes the sale of construction materials and services to Indians on reservation land, thereby expressly preempting the Tax. However, even if the Indian Trader Statutes did not expressly preempt the Tax, the Court noted that the Tax would nevertheless be preempted under the Bracker test. Thus, the Court found the Tax preempted by the Indian Trader Statutes.
With respect to IGRA, the Court held that the Tax was not expressly preempted by federal law. However, because preemption is not limited to cases of express preemption, the Court applied the Bracker balancing test to assess the federal, tribal, and state interests.
Federal Interests: With respect to tribal sovereignty, the Court noted the federal policy in favor of tribal self-sufficiency, particularly as it relates to tribal gaming. The Court pointed to ample evidence demonstrating the extensive regulations IGRA places on Indian gaming. Given the federal involvement in ensuring the quality of gaming and protecting tribal self-sufficiency, the Court concluded that the federal government has a strong interest in the regulation of Indian gaming facilities. Accordingly, this federal interest weighed against the imposition of the Tax. Additionally, the Court noted that the Tax undermined the Tribe’s ability to generate revenue from gaming and reduced demand for casino activities. Because casino renovations are directly tied to increased gaming revenue, the Tribe’s ability to generate revenue was hindered in direct contradiction to the federal goals set forth under IGRA. The Court highlighted that gaming revenues are used by the Tribe to fund programs such as social services, transportation, and housing. Based on this evidence, the Court held that the federal interests weighed against imposition of the Tax.
Tribal Interests: After weighing the federal interests, the Court turned to an evaluation of the tribal interests at stake. Because the Tribe reimbursed the contractor for the full amount of the Tax, the economic burden of the Tax ultimately fell on the Tribe, weighing against the imposition of the Tax. Additionally, the Tax hindered principles of tribal sovereignty by impeding the Tribe’s ability to fully realize gaming revenue and allocate funds appropriately. Similarly, the Tax interfered with the Tribe’s ability to make its own laws and be governed by them, frustrating notions of tribal sovereignty and self-determination. Thus, overall tribal interests also weighed against imposition of the Tax.
State Interests: Lastly, in assessing the State’s interests and justifications for imposing the Tax, the Court noted the requirement that South Dakota demonstrate a clear nexus between the taxed activity and the government function provided. The Court found that the sporadic, indirect, and de minimis State contributions provided to the Tribe, contractor, and project demonstrated a lack of state interest. This, coupled with the minimal impact of the Tax on the State’s general fund, ultimately weighed against the Tax. Applying the Bracker test, the Court held that South Dakota’s interest in imposing the Tax did not outweigh the federal and tribal interests. Therefore, the Tax was preempted by federal law under IGRA and the Indian Trader Statutes. Accordingly, the Court ordered judgment in favor of the Tribe.
Town of Ledyard v. WMS Gaming, Inc., No. 20418, 2021 WL 1567671 (Conn. Apr. 21, 2021). This case stems from a state court suit in which the Mashantucket Pequot Tribal Nation (“Tribal Nation”) challenged the authority of the State of Connecticut and the Town of Ledyard (“Town”) to impose property taxes on slot machines owned by a gaming company and leased to the Tribal Nation. The state action was stayed pending the outcome of a federal court action filed by the Tribal Nation. In the federal action, the Tribal Nation alleged that the Town lacked the authority to impose the property tax because it was preempted by federal regulation and infringed upon the Tribal Nation’s sovereignty. In the present action, the Town sought attorney’s fees pursuant to General Statutes § 12-161a. This statute allows a trial court to award attorney’s fees to a municipality if the fees were incurred as a result of proceedings to collect delinquent personal property taxes.
In 2012, the federal court proceeding concluded when the district court determined that federal law preempted the Town’s authority to impose the taxes. Thereafter, the parties executed a stipulation agreeing that the Town was entitled to reasonable attorney’s fees incurred in the underlying state action. However, the parties disagreed regarding the collection of attorney’s fees in connection to the Tribal Nation’s federal action. The trial court concluded that the gaming company was also liable for the attorney’s fees in connection with the federal action pursuant to § 12-161a. On remand, the Appellate Court disagreed, concluding that the statutory language required a more restrictive nexus to the collection proceeding in which the attorney’s fees were requested. On appeal, the Town claimed that the Appellate Court improperly construed § 12-161a to limit collection of attorney’s fees to only those incurred in the state court action.
Here, the Court agreed with the Town, finding the Appellate Court’s interpretation of § 12-161a too constrained. The Court followed general rules of statutory interpretation to determine the meaning of “as a result of and directly related to” within the context of § 12-161a. Finding the phrase ambiguous, the Court turned to extratextual sources and concluded that the legislature did not intend for a municipality to only be entitled to fees incurred in the state court action of delinquent personal property taxes. Instead, the legislature avoided using such specific language in order to attain a broader reach. Therefore, because the Tribal Nation and the gaming company coordinated to bring the federal lawsuit, the fact that the gaming company was not a formal party to the action did not bar the Town’s entitlement to attorney’s fees. Accordingly, a municipality may be entitled to attorney’s fees incurred in a related federal action that is “a result of and directly related to” a state tax collection proceeding. The court noted, however, that the holding was limited to the breadth of § 12-161a as applied to this specific case.
Aquinnah/Gay Head Cmty. Ass’n. Inc. v. Wampanoag Tribe of Gay Head (Aquinnah), 989 F.3d 72, 75 (1st Cir. 2021). The Commonwealth of Massachusetts sought declaratory judgment that the Indian Land Claims Settlement Act of 1987 (“Settlement Act”) allowed it to prohibit the Wampanoag Tribe of Gay Head (“Tribe”) from conducting gaming on settlement lands. This action arose after the Tribe planned to build a gaming facility on the Tribe’s trust lands. After removal of the case, the Town of Aquinnah (“Town”) and the Aquinnah/Gay Head Community Association (“Community Association”) intervened. The district court entered a preliminary injunction prohibiting the Tribe from continuing casino construction. The Court of Appeals reversed in part and remanded for entry of final judgment. On remand, the district court entered partial judgment for the Tribe. The Tribe subsequently appealed.
In part, the Settlement Act provided that settlement lands shall be subject to the laws, ordinances, and jurisdiction of the Commonwealth. Soon after, however, Congress enacted the Indian Gaming Regulatory Act (“IGRA”) to regulate gaming on Indian land. Here, the Tribe sought to partake in Class II gaming. The Commonwealth sued, arguing that the Tribe needed a gaming license from the Massachusetts Gaming Commission. Conversely, the Tribe claimed it did not need a license because IGRA impliedly repealed the Settlement Act provisions subjecting gaming activity to the laws of the Commonwealth. The Tribe also maintained that IGRA repealed the provision mandating compliance with permitting. The district court entered a final judgment for the Tribe on the gaming issue, but against the Tribe on the permitting issue, reasoning that the Tribe had not appealed the permitting issue and thus found the issue waived.
On this appeal, the Court evaluated whether a party that could have raised an issue in a first appeal, but failed to do so, may raise the issue on a successive appeal. The Tribe argued that IGRA undid the Tribe’s waiver of sovereign immunity with respect to suits arising out of gaming activities. The Court disagreed, noting that historically, a congressional enactment cannot override a tribe’s voluntary waiver of tribal sovereign immunity. Therefore, the Court found that the Tribe could not raise the issue of sovereign immunity in a district court, disregard it on appeal, and then seek to employ it again in a later appeal. Additionally, because the Court did not find the present case an “exceptional circumstance,” the Court declined to overlook the Tribe’s waiver of the permitting issue. Hence, the Court found that the Tribe waived the permitting issue and tribal sovereign immunity through its litigation conduct. Accordingly, the Court held that the district court’s ruling was not so erroneous as to preclude the application of law of the case doctrine.
Brackeen v. Haaland, 994 F.3d 249, 265 (5th Cir. 2021). In a 325-page decision, the Fifth Circuit Court of Appeals upheld the constitutionality of the Indian Child Welfare Act (“ICWA”). The Court found that certain ICWA provisions validly preempted contrary state law and did not commandeer states. However, the Court held that the provisions commanding state agency action were not valid preemption provisions and therefore not preempted by ICWA. The district court ruled that 25 U.S.C. §§ 1901–23 and §§ 1951–52 exceeded congressional powers by violating the anticommandeering doctrine and therefore did not preempt conflicting state law. Notwithstanding, because state law is naturally preempted to the extent of conflict with federal law, the Court found no precedent to support the district court’s limit on federal preemption. Thus, the Supremacy Clause requires state judges to follow ICWA to the extent that the rights set forth under ICWA conflict with state laws.
§ 1.6. Conclusion
Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities. Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country. As a result, these transactions have prompted increased litigation in tribal and nontribal forums. Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.
To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties. Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion. As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.
* Ryan D. Dreveskracht is an attorney with Galanda Broadman, PLLC. Ryan practices out of the firm’s Seattle office, focusing on representing businesses and tribal governments in complex litigation. He is also devoted to defending individuals’ constitutional rights and handles civil rights and intentional tort cases.
† Heidi McNeil Staudenmaier is the Partner Coordinator of Native American Law & Gaming Law Services for Snell & Wilmer, L.L.P., where she is based in the firm’s Phoenix, Arizona office. Heidi is the past Chair of the State Bar of Arizona Indian Law Section, past President of the Maricopa County Bar Association, a member of the Executive Council for the ABA Business Law Section, past Chair of the Business and Corporate Litigation Committee, and has held numerous other leadership positions within the Section. She is also a Lifetime Honorary Director for the Iowa College of Law Foundation Board.
‡ Paloma Diaz is an attorney in the Commercial Litigation Group at Snell & Wilmer, L.L.P. Paloma has assisted in the representation of a variety of clients across multiple industries, including matters involving breach of contract, intellectual property disputes, gaming, and financial services litigation. Special thanks to Snell & Wilmer, L.L.P. Commercial Litigation attorney Christian Fernandez for his assistance in drafting this chapter.
[1] The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 Tulsa L.J. 1 (1997).
[2] Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 560 (2001). See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11-12 (1997).
[3] Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997).
[4]Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832).
[9]Wilson v. Oklahoma, 141 S. Ct. 224, 208 L. Ed. 2d 1 (2020), was initially granted certiorari but was later vacated and remanded considering McGirt v. Oklahoma, 140 S. Ct. 2452 (2020). Essentially, a citizen of the Cherokee Nation alleged crime was committed within the treaty-set boundaries of the Cherokee Nation, but the State of Oklahoma claimed they had jurisdiction. Wilson, 335 F. App’x at 784. McGirt offered much-needed clarity on criminal cases within Indian territory regarding Oklahoma tribes.
[10] Kelsey Haake helped to collect and summarize the cases in this section. Kelsey is a second-year law student at University of Pennsylvania Carey Law School and expects to graduate in May 2023.
[11]United States v. Cooley, 141 S. Ct. 1638, 1639 (2021).
[18]Alaska Native Vill. Corp. Ass’n, Inc. v. Confederated Tribes of Chehalis Rsrv., 141 S. Ct. 976, 208 L. Ed. 2d 510 (2021), was initially granted certiorari but was later consolidated with Yellen v. Confederated Tribes of the Chehalis Reservation because it addressed the same issue on Alaska Native Corporations receiving Title V funds of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
[20]SeeUnited States v. Denezpi, 979 F.3d 777 (10th Cir. 2020); State of Texas v. Ysleta del Sur Pueblo, 955 F.3d 408 (5th Cir. 2020).
[24] B.J. Jones, Role of Indian Tribal Courts in the Justice System, Native American Monograph Series, 7, (Mar. 2000), http://www.nrc4tribes.org/files/Role%20of%20Indian%20Tribal%20Courts-BJ%20Jones.pdf.
[25]Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. Rev. 297, 306 (2004).
[26] Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 Fordham L. Rev. 3085, 3159 (2013).
[27]SeeMontana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations.” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation).
[28] Indian Country includes: (1) all land within the limits of any Indian reservation, (2) “dependent Indian communities” within the borders of the United States, and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000). “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction.” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998).
[29] “The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members]. It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added).
[30]Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quoting United States v. Mazurie, 419 U.S. 544, 557 (1975)).
[31]Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, 259 F. Supp. 3d 713, 716 (W.D. Mich. 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority. The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.). jurisdictional
[32]Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands). Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members. Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right of way granted to a state for the purposes of the construction and use of a state highway. Strate v. A-1 Contractors, 520 U.S. 438 (1997).
[35]Plains Commerce, 554 U.S. 316 (2008). Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries, 450 U.S. at 564, the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178-79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007). More recently, however, the Ninth Circuit has indicated a reversion to its original rule. SeeWater Wheel, 642 F.3d 802.
[37]Id. It appears, however, that courts have become more sympathetic to the second exception as of late. See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017).
[38] Roman Buss helped to research and summarize the cases in this section. Roman is a third-year law student at Sandra Day O’Connor College of Law at Arizona State University and expects to graduate in May 2022.
[39] The Williams test refers to the rule generated by Williams v. Lee, 358 U.S. 217 (1959).
[50] Exhaustion is not always required. SeeNat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n.21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”).
[51]Id. at 857 (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (“Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands. To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction. But this is a question that must be answered first by the tribal courts of the Navajo Nation.”).
[52]Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4–*5 (N.D. Nov. 28, 2007). The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012).
[53]SeeRincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but seeProgressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same).
[55]Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”).
[56]SeeFord Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce, 128 S. Ct. at 2726. It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling. In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659. However, the Drumm court found that exhaustion was not required in the absence of a pending action in tribal court. Id. at 684.
[57]Nat’l Farmers Union, 471 U.S. at 857; see, e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies).
[58]See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996).
[60]See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see alsoWhitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies).
[61]See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”).
[63]Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”). A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue. See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903-904 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert.denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); United States ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012).
[65]Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n.14 (1997).
[66]El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999).
[67] Streator Bates helped to collect and summarize the cases in this section. Streator is a third-year law student at the Georgetown University Law Center. He expects to graduate in May 2022.
[68]Fox, 497 F. Supp. 3d at 436 (citing Auto-Owners Ins. Co. v. Tribal Court of Spirit Lake Indian Reservation, 495 F.3d 1017, 1021 (8th Cir. 2007)).
[69]Id. (citing Hengle v. Asner, 433 F. Supp. 3d 825, 860 (E.D. Va. 2020), motion to certify appeal granted, No. 3:19CV250 (DJN), 2020 WL 855970 (E.D. Va. Feb. 20, 2020)).
[73]Id. at 5 (citing Nat’l Farmers Union Ins. Companies v. Crow Tribe of Indians, 471 U.S. 845, 856 (1985); Grand Canyon Skywalk Dev., LLC v. ‘Sa’ Nyu Wa Inc., 715 F.3d 1196, 1200 (9th Cir. 2013)).
[74]Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 148 (1982).
[75]James, 2021 WL 2531087, at *6 (citing Grand Canyon, 715 F.3d at 1205; accord Merrion, 455 U.S. at 148).
[79]SeeSanta Clara Pueblo v. Martinez, 436 U.S. 49, 57–58 (1978).
[80] Tribal immunity can be abolished via federal statute. Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015–16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”). Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755–56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359–60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license).
[81]Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008).
[83]Kiowa Tribe v. Mfg. Tech., Inc., 523 U.S. 751, 760 (1998) (Constitution provides a basis for suits to enforce state election and campaign finance laws). The U.S. Supreme Court has yet to take a position on this matter.
[84]Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978).
[85]Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998).
[86]Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (even evidence of vexatious and bad faith litigation did not amount to a waiver of immunity, and “even where the results are deeply troubling, unjust, unfair, and inequitable”).
[87]In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”). See alsoDemontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the tribe).
[88]Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (Indian tribe’s removal of action to federal court did not waive its sovereign immunity). But seeGuidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that by raising the issue of attorney’s fees was sufficient to constitute a waiver its right to claim sovereign immunity on the issue of attorney’s fees when defendant subsequently claimed for fees against the tribe).
[89]Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see alsoGilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity).
[90]E.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth., 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf.Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court).
[91]C & L Enter., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411 (2001).
[92]Id. at 418; seeTrump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super. LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract).
[95]Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that chairman of tribal business committee did not have authority to waive immunity); see alsoSandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286–87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity). But seeRush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent).
[96] Hanna Reinke helped to research and summarize the cases in this section. Hanna is a third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2022.
[124]Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity). C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena).
[125]SeeSeaport Loan Products et al. v. Lower Brule Community Development Enterprise LLC, 981 N.Y.S.2d 638 (N.Y. Sup. Ct. 2013) (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction).
[126] Reid Edwards helped to research and summarize the cases in this section. He is a third-year law student at the University of Notre Dame Law School and expects to graduate in May 2022.
[127]Jim, 833 F. App’x at 749; see 42 U.S.C. § 2000e(b).
[173] 25 U.S.C. § 463 (2000) (transferred to 25 U.S.C. § 5103); seeTOMAC v. Norton, 433 F.3d 852, 866–67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5).
[176] Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), https://www.standupca.org/off-reservation-gaming/Cowlitz%20Record%20of%20Decision%2012-17-2010.pdf/at_download/file. The Cowlitz Indian Tribe was not federally recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time. Id. The D.C. District Court upheld the BIA’s Record of Decision. Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014). The D.C. Circuit upheld the District Court. Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), https://www.bia.gov/sites/bia.gov/files/assets/public/oig/pdf/idc1-031724.pdf. Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues. However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior. Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016).
[178]See, e.g., Stand Up for California! v. U.S. Dep’t of the Interior, 204 F. Supp. 3d 212 (D.D.C. 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally recognized tribe under jurisdiction” in 1934 as required under Carcieri).
[179] Memorandum from Hilary C. Tompkins, U.S. Dep’t of the Interior, Office of the Solicitor, to Sally Jewell, Secretary of the Interior, U.S. Dep’t of the Interior (Mar. 12, 2014) https://www.doi.gov/sites/doi.opengov.ibmcloud.com/files/uploads/M-37029.pdf (hereinafter “M-37029 Memorandum”).
[182]Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 850 F.3d 552 (D.C. Cir. 2016); see alsoStand Up for California!, 204 F. Supp. 3d at 212; Citizens for a Better Way v. U.S. Dep’t of the Interior, No. 12-3021, ECF No. 168 (E.D. Cal. Sept. 24, 2015); No Casino in Plymouth v. Jewell, No. 12-1748, ECF No. 100 (E.D. Cal. Sept. 30, 2015); Cnty. of Amador v. Dep’t of Interior, No. 12-1710, ECF No. 95 (E.D. Cal. Sept. 30, 2015).
[183]Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak, 132 S.Ct. 2199 (2012).
[186] The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013).
[187] The statute of limitations under the APA is six years. See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”).
[188] Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151).
[193] Alexandra Nathe helped to research and summarize the cases in this section. Alexandra is a third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2022.
[202] The approval process for alternative energy projects on tribal lands has been particularly burdensome. See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 Indian L. Newsl. 3 (2011). For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 Am. Indian L. Rev. 527 (2011).
[203]Outsource Servs. Mgmt., LLC. v. Nooksack Bus. Corp., 198 Wash. App. 1032 (2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino. When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation. The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. § 81. The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself. Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”).
[204] 25 U.S.C. §§ 2701–21 (1988). The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions. In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations. SeeColo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006); Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006. This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing).
[205] 25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006).
[206] 25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140–41 (1996). “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984). For an example of tribal business license requirements, see NAVAJO NATION CODE, 5 N.N.C. § 401, et seq. (2005).
[207]See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, No. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)). The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’” However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity.
[209] Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits. See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013).
[211] United States Department of Interior, HEARTH ACT of 2012, https://www.bia.gov/bia/ots/hearth (last visited Oct. 28, 2018).
[212] Kelsey Haake helped to collect and summarize the cases in this section. Kelsey is a second-year law student at University of Pennsylvania Carey Law School and expects to graduate in May 2023.
[213]See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114–15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generallyNew Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332–33 (1983) (discussing applicability of state laws to tribes).
[214]Seegenerally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 Ariz. Att’y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but seeState ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State ex rel. Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253–54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the Act and submitting to the jurisdiction of the Workers’ Compensation Administration).
[215] 42 U.S.C. §§ 2000e–2000e-17 (1991). Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (finding Title VII expressly does not authorize suits against tribes because the term employer does not include an Indian tribe).
[217]Id. §§ 2000e(b)(1), 12111(5). Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination. See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act). See alsoMorton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge).
[218]See, e.g., Ariz. Rev. Stat. Ann. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws). Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect. SeeSanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see alsoAroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67-68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer).
[219]SeeHardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity).
[221]Id. §§ 1001–61. Congress amended ERISA in 2006 to apply Indian tribal commercial enterprises, but tribal governments remain exempt. 29 U.S.C. §§ 1002(32) (as amended by Pension Protection Act of 2006, 29 U.S.C. § 1002(32)).
[225]N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”).
[226]Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116-17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see alsoReich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA).
[227]SeeReich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493-94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434-35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights).
[228]Reich, 4 F.3d at 493–94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see alsoMashantucket Sand & Gravel, 95 F.3d at 174.
[233]Cf.Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes).
[234] Martyna Sawicka helped to research and summarize the cases in this section. Martyna is a third-year law student at the James E. Rogers College of Law, University of Arizona, and expects to graduate in May 2022.
[235] All employees are members of the Red Lake Band of Chippewa Indians. Only members of the Tribe own shares in the Fishery.
[236] The citations were for (1) failure to require use of personal flotation devices; (2) failure to report death of an employee within eight hours.
[237] “[P]ursuant § 102 of the Indian Self-Determination Act, 25 U.S.C. § 5321, the Tribe entered into a “self-determination contract” with the BIA governing tribal law-enforcement services. Such contracts under the ISDA allow a tribe to perform tasks that would otherwise have been carried out by the Federal Government and to do so using ‘money that the Government would have otherwise spent on the program.’”
[238] Plaintiff’s claim of identity theft was confirmed by a letter from the Nevada Department of Employment, Training & Rehabilitation.
[239] Berkovitz v. United States, 486 U.S. 531, 536 (1988); see also United States v. Gaubert, 499 U.S. 315, 322–23 (1991).
[240] Plaintiff attempted to argue that there was a policy basis for a carve out for the bad faith and intentional tort claims. However, the court rejected this argument because this argument was based on Nevada law, which relied on subjective intent, and federal law, applicable here, relies on an objective analysis.
[241] To defeat the discretionary function exception as to retaliation-based claims, the Plaintiff must point to some applicable federal statute, regulation, or policy that specifically proscribes such a retaliatory action; the Plaintiff here did not do so.
[242] In addition to the employment issues described, this case also addresses whether the following are within the permitted scope of Section 2710(d)(3)(C) of the Indian Gaming Regulatory Act: 1) allocation of tort liability and jurisdiction over tort claims of casino patrons 2) environmental protection 2) contribution to funds that off-set the negative effects of gaming and allocate money to Indian tribes in California that do not operate gaming facilities. Because these portions did not discuss labor and employment issues, they are not detailed here.
[243] Class III gambling consists of Nevada-style gambling (whereas classes I and II consist of social games, bingo, and non-card games). In order for an Indian tribe to conduct class III gaming it must enter into a compact with the state in which they are located.
[244] Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria.
[245] One purpose is to prevent a state from seeking to wrongfully inhibit an Indian tribe from engaging in class III gaming activity.
[246] “To establish that meaningful concessions were made, the State Defendants need to argue specifically what concessions were offered in exchange for what topics: ‘the State argues that the value of its offers during compact negotiations should be analyzed as a whole, not piecemeal …. we disagree that the State makes ‘meaningful concessions’ whenever it offers a bundle of rights more valuable than the status quo…’” (quoting Rincon Band of Luiseno Mission Indians of Rincon Reservation v. Schwarzenegger, 602 F.3d 1019, 1040 (9th Cir. 2010)).
[247]Lilly v. Fieldstone, 876 F.2d 857 (10th Cir. 1989).
[251] The section states, “[A]n Indian tribe, tribal organization or Indian contractor is deemed hereafter to be part of the Bureau of Indian Affairs in the Department of the Interior or the Indian Health Service in the Department of Health and Human Services while carrying out any such contract or agreement and its employees are deemed employees of the Bureau or Service while acting within the scope of their employment in carrying out the contract or agreement … [A]ny civil action or proceeding involving such claims brought hereafter against any tribe, tribal organization, Indian contractor or tribal employee covered by this provision shall be deemed to be an action against the United States and will be … afforded the full protection and coverage of the Federal Tort Claims Act.”
[252]Shirk v. U.S. ex rel. Dept. of Interior, 773 F.3d 999 (9th Cir. 2014).
[253] Both prongs must be met for the tribal employee’s actions to be covered under the Federal Tort Claims Act.
[254] The provision stated: “Funds provided under this Agreement may be allocated to and expended by an Alaska Native Village (“Village”) which is a party to this Agreement in accordance with the terms of the Compact, this Agreement, and a Memorandum of Agreement (“MOA”) approved by TCC and the Village. The Federal Tort Claims Act will apply to [programs, services, functions, and activities] carried out by the Village under such MOA and to the village and its employees to the same extent as if they had been carried out directly by TCC … TCC will be responsible for assuring compliance by the Village with the Compact, this Funding Agreement, and the MOA.”
[257] 28 U.S.C. § 1331 (“The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”).
[258]Id. § 1332 (“The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between . . . citizens of different states.”).
[259]SeePeabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accordTTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714–15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See alsoBurlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal).
[260]SeeYsleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”).
[261]SeePayne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726–27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728–29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040–41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329–30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898–99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But seeCook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf.R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602–03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”).
[262]See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split).
[263] Owen Toepfer helped research and summarize the cases in this section. Owen is a third-year law student at Notre Dame Law School and expects to graduate in May 2022.
[264]Big Sandy Rancheria Enterprises, 1 F.4th at 719.
[282]White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980).
[283]Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694–95 (9th Cir. 2004).
[284]Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005).
[285] There has been some question as to what exactly constitutes a tribally owned corporation. The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe. It is then actually a part of the tribe per se” and is nontaxable. Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted). Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.” Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999).
[286]Wagnon, 546 U.S. at 101; see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”). See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345–46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted).
[287]SeeMcClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172-73 (1973).
[288]Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”). See alsoCalifornia v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”).
[290]Id. at 144; see alsoAroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9–11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws).
[294] Miranda Martinez helped to research and summarize the cases in this section. Miranda is a second-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2023.
[295] In Big Sandy, the Ninth Circuit noted that the district court properly declined to balance federal, state, and tribal interests under the Bracker balancing test. The court explained that Bracker is only applicable where a tribe challenges a state’s regulation of transactions between the tribe and nonmembers on the tribe’s land. Given the significant geographic component to tribal sovereignty, the court properly declined to apply the Bracker test to cigarette sales outside the Rancheria.
[296]Video Gaming Techs., Inc. v. Rogers Cty. Bd. of Tax Roll Corr., 475 P.3d 824, 826, cert. denied, 141 S. Ct. 24 (2020).
[298] Because both parties agreed that the Bracker balancing test did not apply to the present case, the court instead applied a standard preemption analysis. Day Cty., 953 N.W.2d at 86.
[299] The Court cited United States v. Rickert, which established that a state may not tax land held in trust by the United States. This case further explains that every reason to show that the land was not subject to local taxation also applies to permanent improvements. 188 U.S. 432, 442 (1903). Notably, Congress enacted § 5108 to codify the holding of Rickert. Additionally, the Court cited Mescalero Apache Tribe v. Jones, under which the Supreme Court held that permanent improvements owned by an Indian entity on trust land were immune from a state ad valorem property tax. 411 U.S. 145, 158 (1973). The Mescalero Court noted that because permanent improvements are so intimately connected with the use of the land itself, a provision relieving the land of state tax burdens must be construed to encompass permanent improvements as well. Id. Lastly, the Court noted a 2013 Ninth Circuit case, which held that § 5108 categorically bars a state tax on permanent improvements on trust land regardless of whether the improvements are Indian owned. Confederated Tribes of the Chehalis Rsrv. v. Thurston Cty. Bd. of Equalization, 724 F.3d 1153, 1158 (9th Cir. 2013).
[300] The six Whiteco factors include: (1) If the property is capable of being moved and if it has been moved; (2) Whether the property is designed or constructed to remain permanently in place; (3) Whether there are circumstances that tend to show the expected or intended length of affixation (4) How substantial and time-consuming it would be to remove the property; (5) How much damage the property will sustain upon removal; and (6) The manner of affixation of the property to the land. Whiteco Indus. Inc. v. Comm’r of Internal Revenue, 65 T.C. 664, 672 (1975).
Snell & Wilmer L.L.P. 1200 17th Street, Suite 1900 Denver, CO 80202 303.635.2085 [email protected]
Byeongsook Seo is a member of the Snell & Wilmer L.L.P.’s commercial litigation practice. He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors. Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation. His honors include Colorado Super Lawyers and The Best Lawyers in America. Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.
Contributors
Melissa Donimirski
Heyman Enerio Gattuso & Hirzel LLP 300 Delaware Avenue, Suite 200 Wilmington, DE 19801 302.472.7314 [email protected]
Melissa N. Donimirski is an attorney with Heyman Enerio Gattuso & Hirzel LLP in Wilmington, Delaware. She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court. Melissa is Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University. Melissa has also co-edited and co-authored a treatise on business divorce, which is published by Bloomberg BNA.
Janel M. Dressen
Anthony Ostlund Louwagie Dressen & Boylan P.A. 90 South 7th Street 3600 Wells Fargo Center Minneapolis, MN 55402 612.492.8245 [email protected]
Janel Dressen is a lawyer and shareholder with the litigation boutique firm Anthony Ostlund Baer & Louwagie P.A., located in Minneapolis, Minnesota. Janel has 19 years of experience as a trial lawyer and problem solver. She assists her clients to avoid and prepare for business and employment-related disputes in and outside of the courtroom. Janel spends a significant amount of her time resolving family-owned and privately held business disputes for owners that are in need of a business divorce. In 2019, Janel was selected by her peers to the Top 50 Women Minnesota Super Lawyers list by Super Lawyers. In 2017, Janel was honored as one of Minnesota’s Attorneys of the Year.
Ankura One North Wacker Dr. Suite 1950 Chicago, IL 60606 312.252.9533 [email protected]
John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, CFLC, CIRA, MBA, JD, is a Senior Managing Director in the disputes and economics practice of Ankura, a global business advisory and expert services firm. He serves as a business valuation, forensic accounting and damages expert witness, arbitrator, and advisor. John is frequently consulted regarding business disputes, shareholder disputes and post-acquisition transaction disputes. In addition, he is the current Chair of the Dispute Resolution Committee of the Business Law Section and a Member at Large of the Standing Committee on Audit of the American Bar Association.
Neschis & Tolitano, LLC 311 West Superior Street Suite 314 Chicago, Illinois 60654 (312) 600-9797 [email protected]
Samuel Neschis is a member of Neschis & Tolitano, LLC in Chicago, Illinois. He concentrates his practice in business and commercial litigation and regularly represents parties in complex litigation including shareholder disputes, disputes involving claims of unfair competition, and contractual disputes. He is the former chair and current co-newsletter editor of the Illinois State Bar Association’s Business and Securities Law Section Council.
John C. Sciaccotta
Aronberg Goldgehn 330 N. Wabash Ave. Suite 1700 Chicago, IL 60611 312.755.3180 [email protected]
John C. Sciaccotta is a Member at Aronberg Goldgehn. He focuses his practice on litigation, arbitration and business counseling matters with a special emphasis on complex civil trial and appellate cases brought in federal and state courts throughout the United States. John has also been appointed by the American Arbitration Association as an Arbitrator and Lawyer Neutral to adjudicate various claims and disputes in arbitration. For many years he has advised public and privately held businesses, lenders, employers and individuals in business transactions and disputes. He is experienced in dealing with numerous industries and business activities and has a specialty focus on representing entities in business divorce and complex ownership dispute resolution. John is highly active in professional associations and within his community. Among his activities, he is Co-Founder and current Chair of the Chicago Bar Association’s Business Divorce and Complex Ownership Disputes Committee. He served on the CBA’s Board of Managers from 2017 to 2019.
§ 1.1. Introduction
This chapter provides summaries of developments related to business divorce matters that arose from October 1, 2020, to September 30, 2021, from mostly nine states. Each contributor used his or her best judgment in selecting cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive. The reader should be mindful of how any case in this chapter is cited. Some jurisdictions have rules that prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. We hope this chapter assists the reader in understanding recent developments in business divorces.
§ 1.2. Access to Books and Records
§ 1.2.1. California
Ramirez v. Gilead Sciences, Inc., 66 Cal.App.5th 218 (Jul. 2, 2021). Beneficial owner of corporation’s shares filed a petition for a writ of mandate seeking to compel corporation to allow him to inspect its books and records. The petition was denied. A registered owner or record holder holds shares directly with the company. A beneficial owner holds shares indirectly, through a bank or broker-dealer. The appellate court affirmed the petition’s denial because only the record owner of the shares or holders of voting trust certificates have standing to inspect a corporation’s books and records under the plain language of Corporate Code section 1601.
§ 1.3. Business Judgment Rule
§ 1.3.1. Colorado
Walker v. Women’s Prof. rodeo Ass’n, Inc., 2021 COA 105M (Sep. 9, 2021). Members brought action against women’s professional rodeo association and rodeo company for breach of fiduciary duty, breach of contract, declaratory judgment, and injunctive relief against the association. The complaint was dismissed as failing to assert plausible claims for relief, considering the business judgment rule. The members’ claims were based on allegations that the association misapplied certain of its internal rules related to how members are compensated for participating in rodeo events. The court noted that fraud, self-dealing, unconscionability, and similar conduct are exceptions to the business judgment rule, which shields the actions of directors who engage in reasonable and honest exercise of their judgment and duties. Since the members had not alleged that the association engaged in fraudulent or similar wrongful conduct, the appellate court affirmed dismissal and chose not to override the association’s interpretation and application of its rules.
§ 1.4. Dissolution
§ 1.4.1. California
Cheng v. Coastal L.B. Assocs., LLC, 69 Cal.App.5th 112 (Sep. 1, 2021). This action involved the purchase of minority interests in an LLC that was equally owned by several siblings, pursuant to Corporations Code 17707.03, subd. (c)(1). Section 17707.03, subd. (c)(1), allows members of an LLC to respond to an application for judicial dissolution by purchasing the interests of the applicant members for fair market value of their interests. The applicant members in this action appealed the trial court’s order confirming the consensus valuation of three appraisers. The applicant members asserted on appeal that the trial court’s order instructing three disinterested appraisers to (a) review each other’s initial valuation reports, (b) confer with each other, and (c) try to reach a consensus valuation violated to Section 17707.03. The appellate court disagreed because there was no statutory language that prohibited or restricted a trial court’s authority to instruct the appraisers as it did.
§ 1.4.2. Delaware
Mehra v. Teller, 2021 WL 300352 (Del. Ch. Jan. 29, 2021). The Delaware Court of Chancery ordered dissolution of a two-member, two-manager LLC due to deadlock, despite also finding that the circumstances giving rise to the deadlock were contrived. In this action, the subject LLC had two members – Mehra and Teller. Teller held a greater membership interest, but Mehra was responsible for the company’s day-to-day management. Accordingly, the two agreed that the LLC would be managed by a two-person board, consisting of Mehra and Teller, and that board action required unanimity. The LLC agreement further provided that, if Teller and Mehra deadlocked, the company would be automatically dissolved.
After facing a series of business setbacks, Teller became critical of Mehra’s management and wished to exit the business partnership. Teller thus devised a plan in which he called a meeting of the board, and proposed a resolution that would remove Mehra from his role as CEO. When Mehra refused to vote on the resolution, Teller declared deadlock and sought to dissolve the company. The Court held that Teller proved that the parties have an irreconcilable disagreement concerning Mehra’s continuing management of Holdco and was sufficient to result in dissolution of the company. In so holding, the Court noted that, where unanimity is the voting threshold, either an abstention or a “no” vote may result in deadlock.
§ 1.4.3. New York
Garcia v. Garcia, 187 A.D.3d 859 (N.Y. App. Div. 2020). As part of a judicial dissolution proceeding, an LLC member appealed a special referee’s finding that he was lawfully expelled. The Appellate Division affirmed the Supreme Court’s interpretation of the operating agreement to allow for expulsion even without a listed mechanism for expulsion in the operating agreement. The court found that expulsion was valid using the general action procedure in the operating agreement, which was a majority vote of members.
§ 1.5. Jurisdiction, Venue, and Standing
§ 1.5.1. Delaware
Lone Pine Res., LP v. Dickey., 2021 WL 3211954 (Del. Ch. Jun. 7, 2021). In an action alleging breach of fiduciary duty for usurpation of corporate opportunities, theft of trade secrets and unjust enrichment, the Delaware Court of Chancery held that it did not have jurisdiction over defendant w entities under the conspiracy theory of jurisdiction where the only jurisdictional hook in Delaware was the formation of plaintiff Delaware entities, which action the Court held was not related to the conspiracy the Complaint sought to rectify relating to the Colorado entities.
In this action, plaintiff entities together operate a crude oil purchasing business. Together, they brought an action alleging that one of their co-founders leveraged his insider positions and the parties’ established structure to operate a secret side business, operated through Colorado entities formed by defendant Dickey, which he fed with the plaintiffs’ business opportunities and property. While the Court held that it had jurisdiction over Dickey for certain claims, it determined that it had no basis to exercise conspiracy theory jurisdiction over the Colorado entities, who had no well-pled contacts with Delaware. The Court held that Dickey’s actions forming Plaintiffs in Delaware was not reasonably related to the conspiracy by which the Colorado defendants were allegedly usurping business opportunities belonging to Plaintiffs. The Court additionally held that it did not have jurisdiction over Dickey for claims related to breaches of fiduciary duty to an LLC for which Dickey was not a manager.
United Food & Commercial Workers Union & Participating Food Indus. Emp’rs Tri-State Pension Fund v. Zuckerberg, 2021 WL 4344361 (Del. Sept. 23, 2021). The Delaware Supreme Court streamlined the standard for determining whether demand upon a board of directors is excused. The Court determined, as an initial matter, that exculpated care claims cannot establish that demand is futile. The Court further adopted the Court of Chancery’s three-part test for determining, on a director-by-director basis, whether demand should be excused as futile:
whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
§ 1.5.2. Florida
Rappaport v. Scherr, 322 So. 3d 138 (Fla. Dist. Ct. App. 2021). In a dispute between a minority shareholder and a majority shareholder arising out of the majority’s shareholder’s self-interested conduct during negotiations for the sale of the business to a third party, the court addressed the requirement that a shareholder make a demand to institute litigation on the corporation’s board of directors prior to filing a derivative action. The Florida District Court of Appeal reversed a judgment entered in favor of the minority shareholder in his derivative action because the minority shareholder had not made a pre-suit demand to institute litigation on the board of directors.
The minority shareholder alleged that the majority shareholder breached his fiduciary duty during the sale of the business by concealing information from the minority shareholders and negotiating with the buyer of the business in a manner that furthered his own interests at the expense of the other shareholders. The defendant moved to dismiss the complaint as the plaintiff had not alleged that he had made a demand on the board of directors to institute the action as required by section 607.07401(2) of the Florida Business Corporation Act, which was in effect in 2017 when the complaint was filed. The trial court denied the motion to dismiss and subsequently entered judgment in favor of the plaintiff after a bench trial. However, the appellate court reversed, holding that, as it was undisputed that the plaintiff had not filed a pre-suit demand, the complaint should have been dismissed. The court noted that the plaintiff had made a demand after the filing of the suit but held that this post-filing demand did not comply with the statutory requirement.
The court also rejected the plaintiff’s argument that his failure to make a demand was excused because the demand would have been futile. The court noted that some jurisdictions do provide for a futility exception to the demand requirement. However, in 2017, when the complaint was filed, section 607.07401(2) of the Florida Business Corporation Act was in effect and governed the requirements for the filing of derivative actions by shareholders of corporations. That section did not contain a futility exception to the demand requirement making Florida, at that time, a “universal-demand” jurisdiction.
The court did note that, in 2019, the Florida legislature amended the statute, (now renumbered as section 607.0742). The amended statute, which became effective January 1, 2020, does contain a futility exception to the demand requirement.
Yarger v. Convergence Aviation Ltd., 310 So. 3d 1276, 1281 (Fla. Dist. Ct. App. 2021). In a suit brought by a corporation against a non-resident director, the court examined the issue of whether Florida’s long arm statute provides a court with personal jurisdiction over a non-resident director of a Florida corporation or non-resident manager of a Florida limited liability company for actions that the director or manager took within Florida on behalf of the corporation or LLC.
Orval Yarger, a resident of Illinois, was a director of Convergence Aviation, Ltd. (“Convergence”), a Florida corporation, as well as a manager of Convergence Aviation & Communications, LLC (CACL), a Florida limited liability company that Convergence had formed to purchase and manage property that would be used to house aircrafts that Convergence owned. Yarger was involved in an airplane accident involving an airplane owned by Convergence. The accident occurred in Kentucky while Yarger was returning to Illinois. Yarger kept certain parts that he purchased for the airplane and Convergence sued him for conversion in Florida state court. Yarger moved to dismiss the complaint for lack of personal jurisdiction. The trial court denied the motion to dismiss and Yarger appealed.
Convergence argued that Florida courts had jurisdiction over Yarger pursuant to Florida’s long arm statute (Fl. Stat. § 48.193(1)(a)), which provides, in pertinent part, that a person submits to the jurisdiction of Florida courts for any cause of action arising out of the person’s operating, conducing, engaging in, or carrying on a business or business venture in Florida or having an office or agency in the state. Convergence argued that Yarger was subject to personal jurisdiction under the long arm statute as he carried on activities on behalf of Convergence and CACL in Florida and as the conversion claim arose out of those actions. However, the appellate court held that, because Yarger’s actions within Florida were conducted as an agent of Convergence and CACL rather than for his personal benefit, the long arm statute did not provide a basis for Florida courts to exercise jurisdiction over him personally.
§ 1.5.3. Illinois
Tufo v. Tufo, 2021 IL. App. 192521 (1st Dist. March 24, 2021). This was a business divorce case between two brothers who operated the very successful Discount Fence Co. The Appellate Court affirmed the Circuit Court’s decision finding that the Plaintiff lacked standing under Illinois law to bring a derivative action because of his personal animosity toward the Defendant, and that therefore, he was not qualified to serve in a fiduciary capacity as a representative of the class of shareholders whose interests rests on the fair and impartial prosecution of the action. The Court recognized a conflict between the Plaintiff’s interests and the interests of the parties he purported to represent. The Court also disqualified the Plaintiff for lack of standing based upon the fact that the Plaintiff knew of the wrongdoing before he became a shareholder.
The Court, although having found that the Plaintiff proved the Defendant’s breaches of fiduciary duty by usurping corporate opportunities, also rendered that the Plaintiff failed to present clear and convincing evidence that the Plaintiff’s breach caused any damages.
§ 1.5.4. Massachusetts
Mullins v. Corcoran, 488 Mass. 275, 172 N.E.3d 759, 763 (2021). In a dispute between owners of a real estate development business, the court addressed the issue of whether the doctrine of issue preclusion bars a party from litigating the same issue in separate actions, where the party filed one action individually and the other action derivatively on behalf of an entity.
The case arose out of a dispute between Joseph Mullins, Joseph Corcoran and Gary Jennison, who jointly owned Corcoran, Mullins, Jennison, Inc. and indirectly owned Cobble Hill Center, LLC. Both entities engaged in real estate development and management. The parties’ dispute centered around plans that Corcoran and Jennison had generated for the development of a property known as the Cobble Hill Center site. Mullins initially consented to the plans, but then withdrew his consent. In 2014, Mullins sued Corcoran and Jennison for breach of an agreement that parties had entered into governing the operation of their business and for breach of fiduciary duty for proceeding with the development of the property after his withdrawal of consent (the “2014 Action”). Corcoran and Jennison counterclaimed against Mullins for breach of the agreement and breach of fiduciary duty for initially consenting to the development plans but then withdrawing consent. At the trial, Mullins introduced alternate plans for the development of the site as evidence that Corcoran and Jennison could have mitigated the damages on their counterclaim. The trial court entered judgment against Mullins on both his complaint and on the counterclaim but found that Corcoran and Jennison could have mitigated their damages through one of the alternate plans introduced by Mullins, and, therefore, reduced the damages awarded to them on the counterclaim.
In 2017, while the 2014 Action was still pending, Mullins filed a separate action in which he alleged breaches of the agreement and breaches of fiduciary duty that he alleged occurred after the filing of the 2014 complaint (the “2017 Action”). In the 2017 Action, Mullins also asserted derivative claims on behalf of Cobble Hill Center, LLC. The allegations in the 2017 action centered on Corcoran and Jennison’s refusal to proceed with any of the alternate plans for the Cobble Hill Center site presented by Mullins. Corcoran and Jennison moved for judgment on the pleadings based on the doctrine of issue preclusion. The trial court stayed the case until after the judgment in the 2014 Action had been entered, at which point, the motion for judgment on the pleadings was granted. Mullins appealed that decision and the Massachusetts Supreme Court then transferred the case to itself on its own motion.
The court observed that “[t]he doctrine of issue preclusion provides that when an issue has been actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties whether on the same or different claim.” With regard to Mullins’ individual claims, the court held that they were barred by issue preclusion because he had been presented about the alternate plans for development of the property at the trial in the 2014 Action.
However, the more complicated issue was whether issue preclusion barred Mullins’ derivative claims on behalf of Cobble Hill Center, LLC as, in order for issue preclusion to a bar a claim, the party against whom preclusion is asserted must have been a party or in privity with a party to the prior adjudication. The 2014 Action had been filed by Mullins individually not derivatively on behalf of the LLC. The court observed that, because corporations are treated as distinct from their shareholders, ordinarily the parties to direct actions by shareholders and derivative actions filed by shareholders on behalf of their corporations are not considered to be the same. Therefore, ordinarily, a direct action by a shareholder should not be preclusive of a separate derivative action brought by a shareholder on behalf of the corporation. However, the court recognized an exception to that rule for closely held entities where ownership and management are in the same hands. Because Cobble Hill Center, LLC had only three members, all of whom participated in the 2014 Action, the Court held that the LLC’s interests were adequately represented in the 2014 Action. Therefore, the court held that issue preclusion barred Mullins from asserting the same claims in the 2017 Action derivatively on behalf of the LLC that he had asserted individually in the 2014 Action.
§ 1.5.5. New York
Durst Buildings Corp. v Edelman Family Co., No. 652036/2021, 2021 WL 2910316 (N.Y. Sup. Ct. Jul. 8, 2021). An equal member of a Delaware LLC sought judicial dissolution in New York pursuant to a jurisdiction and venue clause selecting New York County in the LLC operating agreement. The Supreme Court dismissed the claim for lack of subject matter jurisdiction, citing that New York courts do not have the subject matter jurisdiction over judicial dissolutions of foreign entities.
§ 1.5.6. Minnesota
Poultry Borderless Co., LLC v. Froemming, No. 20-CV-1054 (WMW/LIB), 2021 WL 354087 (D. Minn. Feb. 2, 2021). The plaintiff, a Texas LLC, sued one of its co-owners, a Minnesota LLC, and its members in federal court invoking 28 U.S.C. § 1332 diversity jurisdiction. The plaintiff and defendant LLCs are both equal owners of TFC Poultry LLC. The court determined that the company, TFC Poultry, was an indispensable party because the plaintiff LLC’s claims were derivative claims alleged on TFC Poultry’s behalf. The plaintiff argued that the claims were direct, not derivative because the board’s composition directly injured the plaintiff. The court concluded that LLC members only have derivative standing when an alleged wrongdoer controls an entity, making TFC poultry an indispensable party. Once the court found TFC Poultry to be an indispensable party, the court dismissed the case for lack of subject-matter jurisdiction because TFC Poultry is a corporate citizen of both Mexico and Minnesota and therefore, there was not proper diversity jurisdiction.
Ross v. Dianne’s Custom Candles, LLC, No. A20-1543, 2021 WL 3852272 (Minn. Ct. App. Aug. 30, 2021). Plaintiff, a member of a Minnesota LLC, brought an action for oppressive conduct seeking judicial dissolution or buyout under Minn. Stat. § 322C.0701 against the LLC and its majority member. Alternatively, the plaintiff sought damages from the defendants for the breach of the duty of good faith and fair dealing. The plaintiff argued that he uniquely suffered losses from not receiving any salary or distribution to offset his tax liability from his ownership interest. As alleged, this injury was partly due to the LLC’s excessive compensation to the majority member. The Court of Appeals agreed with the district court that the claims were derivative, not direct, claims because improper use of corporate funds injures the corporation directly, not the member. The injury is the improper diversion of corporate funds, which requires a derivative action to remedy.
§ 1.5.7. Texas
Cooke v. Karlseng, 615 S.W.3d 911 (Tex. 2021). The Texas Supreme Court reversed and remanded the judgment of the Texas Court of Appeals that Texas courts lack jurisdiction to hear derivative claim asserted directly. In this case, a limited partner sued his business partners for looting the partnership of which he was a member by moving partnership assets to new business entities with which he was not associated without compensating him. The Texas Court of Appeals held that the claim for damages properly belonged to the partnership, not to plaintiff, and that, because the claim was not pleaded derivatively, the court lacked jurisdiction to decide the matter. Citing to Pike v. Texas EMC Mgmt., LLC, 610 S.W.3d 763 (Tex. 2020), the Texas Supreme Court reversed, holding that the authority of a partner to recover for injury to his partnership interest is not a matter of constitutional standing that implicates subject-matter jurisdiction. The Court additionally noted that statutory provisions “define and limit a partner’s ability to recover certain damages.” However, those provisions go to the merits of the claim and do not strip a court of subject-matter jurisdiction to render a judgment in such a case.
§ 1.6. Claims and Issues in Business Divorce Cases
§ 1.6.1. Accounting
§ 1.6.1.1. Colorado
Sensoria, LLC v. Kaweske, 2021 WL 2823080 (D. Colo. Jul. 7, 2021). Investor in a holding company for various cannabis-related entities, on its own behalf and derivatively on behalf of holding company, brought action seeking to recover its investment in holding company against holding company, its subsidiaries, its owner, its managers, its law firm, and other, separate entities that were in competition with holding company allegedly created by holding company’s owner and manager to siphon off assets and cash of holding company. The cannabis-related businesses were legal under Colorado state law. However, Defendants moved to dismiss all claims because the underlying illegality of the business under federal law (Controlled Substances Act, 21 U.S.C. §§ 802, et seq. (“CSA”)), which prevented the federal court from granting any relief that would endorse or require illegal activity or that would impose a remedy paid from assets derived from criminal activity. Since many of the forms of the sought-after remedy would require the court endorsing or implementing criminality, the court dismissed several of the investor’s claims. But one of the few claims that did survive was a claim for accounting. The court determined that the accounting claim was not subject to an illegality defense.
§ 1.6.2. Alternative Entities
§ 1.6.2.1. Delaware
Pearl City Elevator, Inc. v. Gieseke, 2021 WL 1099230 (Del. Ch. Mar. 23, 2021). The Delaware Court of Chancery construed limitations on the transfer of membership interests the subject LLC Agreement in deciding a Section 18-110 action to determine the proper makeup of the company’s Board of Governors. The Court determined that plaintiff Pearl City had complied with the requirements of the LLC Agreement and had acquired sufficient equity to change the composition of the Board. The LLC in question was owned 50% by plaintiff Pearl City and 50% by a disaggregated group of “General Members.” Both Pearl City and the General Members were each entitled to appoint three members to the LLC’s Board of Governors. The LLC Agreement permitted either party to appoint an additional member to the Board of Governors upon accumulation of more than 56% of the LLC’s units.
Pearl City subsequently initiated a campaign to cross the 56% threshold, doing so by engaging in private purchases of membership interests from disaggregated General Members. Members of the Board of Governors elected by the General Members refused to acknowledge such acquisition for purposes of appointing an additional board member, arguing that Pearl City failed to comply with the terms of the LLC Agreement when obtaining additional membership units. In construing the LLC Agreement, the Court held that the Agreement requires Board approval for membership transfers only where the transfer is to a non-Member. The Court further held that the Board may require a legal opinion relating to certain considerations set forth in the LLC Agreement and may defer recognition of any transfer until such opinion is obtained, and that advance notice of a transfer is not required before effectuation of a transfer of membership interests, but that the LLC Agreement provided that notice to the Board was required before such transfer would be deemed effective. The Court found that Pearl City complied with the foregoing requirements and was entitled to add an additional board member to the Board of Governors, thereby obtaining control of the company.
§ 1.6.2.2. New York
Eikenberry v. Lamson, No. 516653/20, 2021 WL 722837 (N.Y. Sup. Ct. Feb. 19, 2021). The plaintiff sued her alleged partner and various limited liability companies, claiming that the partnership oversaw the entities. The Supreme Court held that a plaintiff could demonstrate that a partnership operated a limited liability entity, but only if the plaintiff alleged facts showing that the partnership intended to survive the creation of the entity and that the entity was created to serve a specific purpose. The plaintiff did not meet that factual burden, and the Supreme Court dismissed all the plaintiff’s claims related to alleged corporate activity.
Farro v. Schochet, 190 A.D.3d 689 (N.Y. App. Div. 2021). The plaintiff, previously a 50% LLC member, commenced direct and derivative claims against the LLC, the other 50% LLC member, and a lender after a cash-out merger eliminated his interest. The Appellate Division found that appraisal is the exclusive remedy under New York’s Limited Liability Company Law § 1005. The plaintiff also could not seek recission of the merger on the grounds of fraud under § 1005, repeating that appraisal was a member’s sole and exclusive remedy under New York’s LLC Law. The plaintiff also could not maintain a derivative action for breach of fiduciary duty, removal of a manager, or equitable request for accounting because he lacked a membership interest, and his only remedy was appraisal.
Compare to Johnson v. Asberry, 190 A.D.3d 491 (N.Y. App. Div. 2021). The defendant LLC member appealed the denial of their motion to dismiss. The Appellate Division affirmed the denial because the plaintiff LLC member properly alleged fraud by omission that resulted in a freeze-out merger. The Appellate Division found that equitable relief would be an available remedy for the alleged fraud, citing New York’s Business Corporation Law § 623[k].
§ 1.6.3. Breach of Fiduciary Duty
§ 1.6.3.1. Florida
Taubenfeld v. Lasko, 324 So. 3d 529 (Fla. Dist. Ct. App. 2021). In a case arising out of a dispute between two fifty percent shareholders of a corporation, the court addressed the pleading requirements for claims of breach of fiduciary duty and aiding and abetting breach of fiduciary duty. The plaintiff, who had been the president of the corporation, alleged that the defendant usurped the position of president and assumed sole control over the company. The plaintiff further alleged that the mother of the defendant then established a separate limited liability company that provided the same services as the corporation. The defendant, with the assistance of his mother, father, and brother, transferred assets of the corporation including its business relationships, customer list, and vehicles to the new company. The plaintiff filed a derivative action on behalf of the corporation alleging that the defendant had breached his fiduciary duties of loyalty and care by wasting the corporation’s assets through causing them to be transferred to the new company. The plaintiff’s complaint also included claims of aiding and abetting breach of fiduciary duty against the defendant’s mother, father, and brother.
The trial court dismissed the complaint finding that the allegations lacked sufficient factual support regarding the specific duty that the plaintiff was alleging that the defendant owed and because the nexus between the defendant’s conduct and the damage to the corporation was unclear and speculative. However, the appellate court reversed, holding that the allegations that the defendant had mounted a takeover of the company, diverted the corporation’s relationships and revenues to the new company, and executed documents to transfer the corporation’s assets to a competitor were sufficient to state a claim that the defendant had breached his fiduciary duties as an officer of the corporation. The court further held that the plaintiff had stated claims for aiding and abetting breach of fiduciary duty against the defendant’s mother, father, and brother as he had alleged that each of these family members knew of the defendant’s breaches and assisted those breaches by, among other things, helping him divert assets to the new company.
§ 1.6.3.2. Minnesota
Clintsman v. Gervais, No. 62-CV-19-8677, 2021 WL 3417833 (Minn. Dist. Ct. Mar. 23, 2021). Two sibling plaintiffs commenced an action against their five siblings involving their family real estate business, which consisted of various Minnesota limited liability companies. Plaintiffs’ claims included oppression, breach of the duty of good faith and fair dealing, and breach of statutory and common law fiduciary duties. The district court granted summary judgment for the plaintiffs on their claims of oppression, breach of the duty of good faith and fair dealing and breach of fiduciary duties. The court found that undisputed evidence of multitudes of derogatory comments made by the defendants along with intentional exclusion from material communications and secret recordings supported finding that the defendants were liable for at least one act of unfairly prejudicial conduct constituting oppression and breach of fiduciary duties. The court then granted the plaintiffs’ motion for a fair value buyout from the family LLCs.
§ 1.6.3.3. Texas
Straehla v. AL Glob. Servs., LLC, 619 S.W.3d 795 (Tex. App. 2020). The Court of Appeals of Texas held that Plaintiff AL Global Services established a prima facie case that defendant Jorrie breached his fiduciary duty of loyalty and duty not to usurp corporate opportunities. In so holding, the Court noted that, while the Texas Business Organizations Code does not directly address the duties a manager or member owes to their LLC, the Court of Appeals has previously held that the Code “presume[s] the existence of fiduciary duties.” In this case, defendant Jorrie, a member and manager of AL Global diverted opportunities owned by the company to his own business, which had originally served as a subcontractor to AL Global. Among other things, Jorrie encouraged and exploited a personal relationship between his business partner and one of AL Global’s clients to move related business opportunities into his own, competing business. The Court additionally held that a prima facie case had been plead for knowing participation in breach of fiduciary duties against employees of the client, one of whom was engaged in the personal relationship with Jorrie’s business partner.
§ 1.6.3.4. New York
John v. Varughese, 194 A.D.3d 799 (N.Y. App. Div. 2021). The plaintiff brought a derivative breach of fiduciary duty claim against the managing member of the LLC. The Supreme Court entered judgment after a nonjury trial in favor of the managing member because of the operating agreement’s exculpatory clause, which exculpated the managing member from breach of fiduciary duty liability, except for actions or omissions that were “in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.” Id. at 801. The Appellate Division reversed the Supreme Court as to one act and found that the managing member intentionally breached a fiduciary duty by transferring $50,000 from the LLC to an unrelated entity that he then used for his personal attorney’s fees not authorized by the LLC’s operating agreement. The court entered judgment in favor of the plaintiff on that claim.
Celauro v. 4C Foods Corp., 187 A.D.3d 836 (N.Y. App. Div. 2020). Celauro, a minority shareholder of a family-owned, closely held corporation, 4C Foods Corp., filed suit against the majority shareholders for breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. The Supreme Court awarded summary judgment for the defendants regarding these claims. The Appellate Division affirmed, finding that the defendants did not breach a fiduciary duty or an implied covenant of good faith and fair dealing by following a valid stock transfer restriction that required majority consent for any transfer of shares. The defendants acted appropriately to avoid disrupting the corporation’s operations. The transfer of shares would have given the plaintiff more than 20% of voting shares, allowing the plaintiff to pursue a judicial dissolution proceeding under N.Y. Bus. Corp. Law § 1104-a. The Appellate Court also found that the plaintiff did not suffer damages by increasing the authorized amount of non-voting shares and issuing a non-voting share dividend because the defendants adopted an amendment to the shareholder agreement that appraised the non-transferable shares at pre-dilution value.
Shilpa Saketh Realty, Inc. v. Vidiyala, 191 A.D.3d 512 (N.Y. App. Div. 2021). A minority shareholder sued the other shareholders of a pharmaceutical corporation for fraud, breach of fiduciary duty, and unjust enrichment in connection with the sale of the corporation. The plaintiff alleged that it relied on the defendants to negotiate on its behalf. Before the sale, a stock purchase agreement reduced only the plaintiff’s percentage of shares, which the plaintiff alleged was misrepresented by the defendants. The plaintiff signed the stock purchase agreement, which included a general release of claims against the corporation and its equity holders. The Supreme court dismissed the plaintiff’s claims as barred by the release as a matter of law. The Appellate Division reversed, finding that plaintiff’s claims were not barred as a matter of law by the release because the plaintiff may have reasonably relied on the defendants to act on its behalf. The court noted the plaintiff alleged a united relationship at the time of negotiations. The court also excused the plaintiff from reading the agreements, though the court did not explain its reasoning.
CIP GP 2018, LLC v. Koplewicz, 194 A.D.3d 639 (N.Y. App. Div. 2021). An investment company sued its business partners from a cannabis laboratory venture for breach of contract, promissory estoppel, unjust enrichment, breach of fiduciary duty, minority oppression, and misappropriation of trade secrets. The plaintiff appealed the Supreme Court’s dismissal of its claims of promissory estoppel, unjust enrichment, breach of fiduciary duty, minority oppression, and misappropriation of trade secrets. The Appellate Division found that the plaintiff adequately alleged an oral partnership and then reversed the Supreme Court’s dismissal of the plaintiff’s unjust enrichment and promissory estoppel claims. The court found these claims not to be duplicative because a plaintiff may pursue both quasi-contract theories and breach of contract. The Appellate Division affirmed the dismissal of the breach of fiduciary duty and minority oppression claims as duplicates of the breach of contract claim. The court further affirmed the dismissal of the misappropriation of trade secrets claim because the plaintiff failed to allege that business methods it shared willingly were trade secrets.
§ 1.6.4. Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing
§ 1.6.4.1. Delaware
In re Cellular Telephone P’ship Litig., 2021 WL 4438046 (Del. Ch. Sept. 28, 2021). The Delaware Court of Chancery held that a majority partner did not breach the subject partnership agreement by “manag[ing] the Partnership however it wished” because a Management Agreement executed by the Partnership delegated broad authority to manage the business and affairs of the Partnership to AT&T, despite the efforts of the minority partner to demonstrate that AT&T exceeded the scope of authority delegated in the Management Agreement. The Court noted that, because the Management Agreement was between AT&T and the Partnership, a derivative claim for breach of the Management Agreement might have succeeded. This was because AT&T’s failure to comply with the provisions of the Management Agreement would give rise to a breach that is cognizable only derivatively, while Plaintiffs’ direct claim was focused on AT&T exceeding the scope of its delegated authority.
The action involved a general partnership between AT&T, which held 98.119% of the partnership interest, and the minority partners, who collectively owned the remaining 1.881% partnership interest. The partnership agreement provided that governance of the partnership was delegated to an Executive Committee. The Partnership Agreement provided for a three-member Executive Committee, with two representatives appointed by the majority partner and one by the minority partners. In practice, however, AT&T only acted through the Executive Committee on formal matters, such as authorizing a distribution to the partners, and generally ran the business of the Partnership as it pleased.
Plaintiffs sought to prove a direct claim for breach of the Partnership Agreement under Section 15-405(b)(1) of the Delaware Partnership Act by demonstrating that AT&T exceeded its delegated authority under the Management Agreement. The Court held that the delegation of authority was expansive and ruled in favor of AT&T on the direct claim. The Court noted, however, that AT&T’s failure to comply with its contractual commitments regarding how AT&T would exercise its delegated authority could support a claim for breach of the Management Agreement, a claim that could only be brought derivatively. Because plaintiffs failed to assert such a claim, the Court ruled in favor of AT&T.
§ 1.6.4.2. Florida
Triton Stone Holdings, L.L.C. v. Magna Business, L.L.C., 308 So. 3d 1002, 1005 (Fla. Dist. Ct. App. 2020). In a case arising out of negotiations between the members of a struggling limited liability company for the sale of some of the members’ interests to another member, the court addressed the requirements for enforceability of an agreement for the transfer of membership interests. After a two-day meeting between the representatives of the four members of Lotus, a Florida limited liability company, the parties handwrote a document containing certain agreed upon terms for the sale by three of the members to the fourth member. The agreed upon terms memorialized in the handwritten document included the purchase price, term, governing law, identity of personal guarantors, and costs and fees in the event of default. The handwritten document referenced future contracts and promissory notes to be drafted; however, no future contracts or promissory notes were ever drafted. The purchasing member made some of the payments identified in the handwritten document but failed to make all of the payments. The selling members filed suit to enforce the handwritten document, which they alleged constituted an enforceable agreement for the sale of their membership interests. The purchasing member argued that the handwritten document was not enforceable because it lacked essential terms.
The trial court found that the handwritten document was enforceable and entered judgment for the selling members. However, the appellate court reversed, holding that the handwritten document was unenforceable as it lacked essential terms. The court looked to the company’s operating agreement, which provided that no transfer shall be valid unless the transferee signs the operating agreement as appropriately amended to take account of the terms of the transfer. The court further held that, while certain terms were contained in the handwritten document, essential terms regarding the transfer of the interests were not included. Among the missing material terms were a closing date, provisions for the issuance and transfer of certificates, releases, indemnification provisions, and any provision for mandatory execution of the operating agreement or amendment. As the handwritten document lacked essential terms and as the parties had failed to follow the mandatory procedure for a transfer of membership interests set forth in the operating agreement, the court held that the handwritten document was not enforceable.
§ 1.6.4.3. Texas
Adam v. Marcos, 620 S.W.3d 488 (Tex. App. 2021). The Court of Appeals of Texas upheld the trial court’s refusal to find breach of an oral partnership agreement where the agreement was between an attorney and his client. Plaintiff Adam – a businessman – and defendant Marcos – had a long-standing attorney/client relationship by which Marcos provided legal services for Adam’s various business ventures. The two subsequently orally agreed to form a partnership for future joint ventures, sharing costs and profits evenly. Marcos would provide legal services, while Adam would run the day-to-day operations. The agreement was purportedly seal with a celebratory “fist bump,” but no agreement was ever reduced to writing. Marcos provided Adam with startup funds in the amount of $250,000 and subsequently provided all legal services free of charge. Adam denied the existence of such an agreement, instead claiming that Marcos provided funds for Adams to invest in his companies, and that the legal services were provided in barter for other de minimis services.
While the Court credited Marcos’ testimony that that an oral agreement to form a partnership existed, the Court held that such arrangement was invalid because of the attorney/client relationship between the two parties. The Court held that a presumption of unfairness or invalidity attaches to contracts between attorneys and their clients due to the fiduciary nature of the relationship. The Court further held that Marcos failed to carry his burden to prove the fairness and reasonableness of the agreement, including the burden to establish that Adam was informed of all material facts relating to the agreement, particularly where Marcos, Adam’s attorney, allowed him to agree to a “fist bump” deal without any formal writing.
§ 1.6.5. Fraud
§ 1.6.5.1. Colorado
McWhinney Centerra Lifestyle Center LLC v. Poag And McEwen Lifestyle Centers-Centerra LLC, 2021 COA 2 (Jan. 14, 2021). Financing member of LLC filed suit against managing member of LLC after a failed joint venture to build and operate a shopping center. Financing member asserted breach of fiduciary duty and breach of contract claims under an operating agreement requiring the application of Delaware law, as well as common law fraudulent concealment, intentional interference with contractual obligations, civil conspiracy, and intentional inducement of breach of contract. Following a bench trial, the court concluded managing member breached both its fiduciary duties and contractual obligations under the agreement and awarded $42,006,032.50 to financing member in damages plus interest but dismissed most of financing member’s intentional tort claims under the economic loss rule. The court of appeals first noted that the operating agreement’s choice of law provision did not govern related tort claims. Then, the appellate court reversed the dismissal of the intentional tort claims due to recent developments in Colorado precedent that ruled that the economic loss rule cannot bar statutory tort claims even if they are related to the operating agreement. The appellate court extended the precedent’s rationale to apply to common law intentional tort claims. However, the dismissal of the civil conspiracy claim was affirmed because the claim was based on an alleged conspiracy to breach the operating agreement and, thus, remained subject to the economic loss rule.
§ 1.6.6. Interference
§ 1.6.6.1. Florida
Bridge Financial, Inc. v. J. Fischer & Associates, Inc., 310 So. 3d 45, 49 (Fla. Dist. Ct. App. 2020). In a case involving a shareholder-employee’s copying of customer information for the use by a competing business, the court addressed the issue of whether a shareholder of a corporation can tortiously interfere with the corporation’s business relationships. Three former employees of J. F. Fischer & Associates, Inc. (“JFA”), a corporation that provides tax preparation services, copied and appropriated the customer list and then resigned to form a competing company. One of those employees, Adam Palas (“Palas”), was a five percent shareholder of JFA. The employees used the customer list to solicit JFA’s clients for their new business. JFA sued for violation of the Florida’s Uniform Trade Secrets Act (“FUTSA”) and tortious interference with a business relationship. A jury found for JFA. The defendants moved for a new trial, arguing that the customer list did not constitute a trade secret. The trial court denied the motion and the defendants appealed. The appellate court affirmed the denial of the motion for a new trial holding that the customer list did constitute a trade secret under the FUTSA because the JFA had spent a significant amount of time, effort, and money developing the client list, which was kept on a password protected server and was not publicly available.
However, with regard to the tortious interference claim, the trial court had entered judgment on the pleadings in favor of Palas because he was a five percent shareholder of the corporation. JFA filed a cross-appeal of this judgment. The appellate court affirmed the trial court’s entry of judgment on the pleadings, explaining that a tortious interference claim must be directed to a third party that interferes with a business relationship. Therefore, as Palas was an owner of the corporation, he was a party to the corporation’s business relationships with its clients and “could not interfere with a business relationship with himself”.
§ 1.6.7. Equitable/Statutory Relief
§ 1.6.7.1. Colorado
Sensoria, LLC v. Kaweske, 2021 WL 2823080 (D. Colo. Jul. 7, 2021). Investor in a holding company for various cannabis-related entities, on its own behalf and derivatively on behalf of holding company, brought action seeking to recover its investment in holding company against holding company, its subsidiaries, its owner, its managers, its law firm, and other, separate entities that were in competition with holding company allegedly created by holding company’s owner and manager to siphon off assets and cash of holding company. The cannabis-related businesses were legal under Colorado state law. However, Defendants moved to dismiss all claims because the underlying illegality of the business under federal law (Controlled Substances Act, 21 U.S.C. §§ 802, et seq. (“CSA”)), which prevented the federal court from granting any relief that would endorse or require illegal activity or that would impose a remedy paid from assets derived from criminal activity. Since many of the forms of the sought-after remedy would require the court endorsing or implementing criminality, the court dismissed several of the investor’s claims, including theft, fraud, negligent misrepresentation, breach of fiduciary, aiding and abetting breach of fiduciary duty, civil conspiracy, unjust enrichment/constructive trust, mandatory injunction, RICO, and securities law-based claims.
However, the court did not dismiss certain other claims because they did not directly implicate the CSA in any way. The Court permitted an accounting and recission claim to survive but dismissed all aspects of the investor’s equitable claims that would have the practical effect of transferring cannabis-related assets to the investor. As for the investor’s derivative claims on behalf of the holding company against its law firm, the Court permitted a malpractice claim to proceed because the allegations raised issues of disloyalty and conflict of interest.
§ 1.6.7.2. Minnesota
Gerring Properties Inc. v. Gerring, No. A20-0032, 2020 WL 7490729 (Minn. Ct. App. Dec. 21, 2020), review denied (Mar. 16, 2021). The parties in Gerring Properties Inc. are two equal shareholder factions of brothers and their children that reached a shareholder deadlock regarding two family corporations. One brother was terminated from the corporation and brought a claim seeking equitable relief under Minn. Stat. § 302A.751, subd. 1(b)(4). The Court of Appeals affirmed the district court’s finding that the brother reasonably expected to be continually employed by the companies. The court further supported the district court’s finding that his termination violated that reasonable expectation even with evidence of the brother’s misconduct after weighing that misconduct against evidence that the termination was meant to force the brother and his wife to transfer shares and become less than 50% shareholders. This conduct and the admitted shareholder deadlock supported the need for an equitable remedy of a buyout. After the district court evaluated equitable remedies by a special master’s report, the Court of Appeals did not find that the district court abused its discretion by not applying a marketability discount to the buyout value or ordering a dissolution after the buyout failed. The district court did not abuse its discretion by adopting the special master’s valuation or awarding attorney fees under Minn. Stat. § 302A.751 because of specific findings that the opposing faction of shareholders acted “arbitrarily, vexatiously, and in bad faith,” which included failure to hold shareholder meetings, comply with court-ordered disclosure of financial records, and unfair use of bank loan proceeds.
§ 1.6.7.3. New York
ALP, Inc. v. Moskowitz, No. 652326/2019, 2021 WL 2416509 (N.Y. Sup. Ct. June 11, 2021). As part of a history of family business conflict and litigation between the children of artist Peter Max, the plaintiff corporation and its CEO, the daughter of Peter Max, sought a preliminary injunction to enjoin a special shareholder meeting pursuant to New York’s Business Corporation Law §§ 706(d), removal of directors, and 716(c), removal of officers. The plaintiffs alleged that the son and the father’s guardian entered into an improper shareholder voting agreement. The agreement promised the guardian’s vote to re-elect the son and oust the daughter as CEO and board chair in exchange for the son’s promise to return the artwork and intellectual property currently owned by the corporation to the father. The plaintiffs provided evidence that the guardian previously supported the daughter as an officer and director of the corporation and that the son breached his fiduciary duties by improperly diverting corporate assets. The Supreme Court found that the plaintiffs demonstrated a likelihood of success on the claims and would suffer irreparable harm if the vote were allowed to take place, resulting in the significant diversion of the corporation’s assets.
§ 1.7. Valuation and Damages
§ 1.7.1. California
Cheng v. Coastal L.B. Assocs., LLC, 69 Cal.App.5th 112 (Sep. 1, 2021). In an appeal regarding the value of the plaintiff’s membership interest in a judicial dissolution action regarding a Limited Liability Company (“LLC”), the California Appellate Court concluded that the standard of value under the statute for corporate shares do not apply to membership interests in Limited Liability Companies. The Appellate Court affirmed the Trial Court decision, which relied on a majority appraisal by the panel of three appraisers it had appointed in which the appraisers used a fair market value standard of value and considered discounts. The Appellate Court considered that the parties had stipulated to an order that the standard of value is fair market value, and commented, “Fair market value includes discounts reflected in the market… had the Legislature intended to apply a ‘fair value’ standard to purchase of membership interests… it would have done so expressly in the statutory language.” Furthermore, the Appellate Court considered that the definition of “fair market value” from Internal Revenue Service, Revenue Ruling 59-60 has largely been adopted in California, “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”
Furthermore, the Appellate Court concluded that the Trial Court was not required to de novo determine the value when the appointed appraisers panel did not unanimously agree because the Trial Court found no error in the appraisers’ separate appraisals and acted in its authority to order the appraisers to confer to explore for a consensus on valuation.
§ 1.7.2. Delaware
In re Cellular Telephone P’ship Litig., 2021 WL 4438046 (Del. Ch. Sept. 28, 2021). In an action where the Delaware Court of Chancery found breach of a partnership agreement, the Court declined to award a dissociation remedy under the subject partnership agreement, which would have required the sale of the majority partner’s partnership interest to the minority partner, finding that such a remedy would “be unconscionably disproportionate.” Instead, to remedy the breach of the partnership agreement, the Court ordered the majority partner to pay compensatory damages equal to the pro rata value that the minority partner would have received had the partnership agreement not been breached. The Court noted that, “[i]f the plaintiffs had shown that AT&T had committed a breach that deprived the minority partners of meaningful value, and particularly if AT&T’s breach was willful or persistent, then dissociation damages could be warranted. The damages awarded were nominal.
§ 1.7.3. Illinois
Payroll Servs. by Extra Help v. Haag, 2021 IL App (5th) 200036-U. In an appeal regarding the value of the defendant’s 25 percent shareholder interest in a privately-owned corporation pursuant to the parties’ shareholder agreement, the Illinois Appellate Court affirmed the Trial Court’s decision to determine that the fair market value is the average of the valuations prepared by the plaintiff’s and defendant’s respective experts.
At trial, the Court determined that the analysis prepared by the defendant’s expert was not a “valuation” within the meaning of the shareholders agreement, and instead a “calculation analysis.” The Court considered that the defendant’s expert “’explained that a calculation analysis does not include all of the valuation procedures required for a valuation analysis,’ and that if a valuation analysis had been performed, ‘the results may have been different, and the difference may have been significant.” The defendant’s expert testified at trial that the expert and client “agreed on a calculation engagement because of a lack of reliable financial data and an inability to gain cooperation from” the company.
Regarding the shareholders agreement, the Court noted that the purchase price “shall be equal to the sum of the fair market value… determined by the Fair Market Value Determination, as hereinafter defined… Fair Market Value Deter determination shall be defined by the valuation of the Corporation by a mutually agreed upon business valuation company…. If there cannot be a mutually agreed upon business valuation company then such valuation shall be the average of two valuations (one chose by the Corporation and one chosen by the Shareholder whose shares are being sold).”
The Court considered “that the parties did not agree on the meaning of the term ‘valuation’ as used in the Agreement.” Ultimately, the Court “determined that the term ‘valuation’ should be defined in accordance with the definition of ‘valuation’ in the business valuation industry, and that the calculation analysis submitted by… [defendant’s] expert was not a sufficient ‘valuation’ under the terms of the Agreement.”
Furthermore, the Court noted that the… [defendant’s expert’s] testimony and correspondence indicated that… [defendant’s expert] was aware of ‘valuation’ in the business valuation industry. During its analysis, the Court considered that both experts were CPAs and that AICPA valuation standards contain definitions, which it quoted as stating “There are two types of engagements to estimate value – a valuation engagement and a calculation engagement. The valuation engagement requires more procedures than the calculation engagement.”
During the second round of summary judgment motions, the defendant’s supporting memorandum for the motion was accompanied by a “’Full’ Valuation” prepared by defendant’s expert which came to the same valuation quantum conclusion as the original “calculation analysis.” Defendant’s expert “stated that she conducted additional research and inquiries… conducted a comparative analysis of the company over time … and performed the valuation engagement and reached a conclusion in compliance with the AICPA Statement on Standards for Valuation Services;” that “Every piece of evidence obtained through the more in-depth review and examination of… [the company] affirmed her earlier opinion that a guideline company valuation method was the most appropriate… and that the consideration of… [the company’s recent acquisition of payroll companies supported” her conclusion and that “She uncovered nothing in the review that changed her initial opinion.”
Ultimately, the Court concluded that the “Full” Valuation “met the definition of ‘valuation’ under the terms of the Agreement” and declared “That the fair market value… was the average of the valuations” by the plaintiff’s and defendant’s respective experts.
On appeal, the plaintiff’s claimed that the defendant’s expert’s “Full” Valuation was a not a “valuation” within the meaning of the shareholders agreement. The plaintiff’s contended that the defendant’s expert did not ever perform a “valuation,” “But instead offered the same ‘calculation analysis’ and renamed it a business valuation.”
The Appellate Court noted that “’valuation is not defined in the Agreement. The Agreement does not specify the type of engagement required to estimate value,” and that “The plaintiffs, as drafters of the Agreement, could have included provisions requiring… using only a valuation engagement that complied with the standards of the AICPA, but that was not done here.” The Appellate Court found “error in the trial court’s determination that ‘valuation’ should be defined in accordance with the definition of ‘valuation’ in the ‘business valuation industry.” In absence of a definition in the Agreement, the word ‘valuation’ should be assigned its plain and ordinary meaning.”
Further, the Appellate Court considered definitions of “valuation” from popular dictionary and a legal dictionary. Nevertheless, the Appellate Court concluded that “Even if the meaning of ‘valuation,’ as defined in the [AICPA] Statement on Standards, was applicable, it would not alter the outcome of this case… it recognizes ‘two types of engagements to estimate [the] value [of a business] – a valuation engagement and a calculation engagement.” In reaching this conclusion, the Appellate Court noted that “The plaintiffs presented no evidence to rebut… [defendant’s expert’s] testimony that she complied with her obligations to perform a valuation engagement.”
§ 1.7.4. Indiana
Hartman v. BigInch Fabricators & Constr. Holding Co., 161 N.E.3d 1218 (Ind. 2021). In an appeal from a Court of Appeals decision which found that valuation discounts did not apply in a closed-market compulsory buy-back sale of shares of a minority interest, the Indiana Supreme Court determined that there is no universal rule prohibiting discounts in these situations and where the shareholders agreement suggests fair market value as the standard that discounts may be particularly applicable. The Supreme Court reversed the Court of Appeals.
The shareholders agreement specified that the company would buy the interest at “appraised market value,” determined by an independent valuator in according with generally accepted accounting principles. In this case, the independent valuator applied discounts for both lack of control and lack of marketability.
At trial, the plaintiff contended that discounts did not apply because this is a compulsory closed-market sale and that the agreement does not specify fair market value as the valuation standard. Plaintiff did not exercise his contractual right to obtain an additional third-party valuation.
The Trial Court found that as used in the agreement, the “adjective” of “appraised” modified the term “market value” and that “appraised market value” meant fair market value. However, the Appellate Court found that in a compulsory sale that discounts are not applicable and reversed the Trial Court.
As stated by the Supreme Court in its decision on this appeal, “we hold that the parties’ freedom to contract may permit these discounts, even for shares in a closed-market transaction,” and “under the plain language of this shareholder agreement – which calls for the ‘appraised market value’ of the shares – the discounts apply.”
Furthermore, the Supreme Court found that case law regarding statutory buyouts “doesn’t control” because “the valuation terms come not from a statute but from a contract.” The Supreme Court also commented that the parties’ freedom to contract may permit discounts and that the plaintiff had provided no evidence to show that the independent appraiser had not correctly quantify fair market value.
§ 1.7.5. Iowa
Guge v. Kassel Enters., 962 N.W.2d 764 (Iowa 2021). The Iowa Supreme Court ruled that in a buyout under Iowa’s election-to-purchase-in-lieu-of-dissolution statute, where both parties’ experts included transaction costs as a reduction to the value of a minority interest of stock in a corporation under a net asset value approach, that it was error for the Trial Court to not reduce value for the transaction costs on the enterprise level. However, where there was no evidence of intention to liquidate that an adjustment for built-in gains tax is not warranted. The Supreme Court reversed the Trial Court regarding the transaction costs and remanded the case.
This was the first time that the Supreme Court addressed a “fair value” determination under Iowa’s election-to-purchase-in-lieu-of-dissolution statute. The family-owned corporation held farmland which did not generate any income from operations. During its analysis, the Supreme Court considered that, in its view, the weight of authority leans towards courts not discounting values for tax consequences absent contemplation of liquidation triggering built-in gain tax consequents.
§ 1.7.6. Kentucky
Kenneth D. Parrish, DMD, Ph.D., P.S.C. v. Schroering, 2021 WL 1431604 (Ky. Ct. App. Apr. 16, 2021). In an appeal of a jury’s decision to determine its own buyout price of a professional practice partnership 50 percent ownership interest instead of an appraisal under the terms of the partnership agreement, the Kentucky Appeals Court considered that there was no evidence that the appraisers used the wrong valuation approach under the agreement. The Appeals Court reversed and remanded the case back to the Trial Court.
In this case, the agreement stated that the buyout price under the partnership agreement was to be the average of the closest of two of the three appraisal experts. The two closest appraisals when averaged resulted in a negative value. Those two appraisals were based on the net asset value approach. The appraiser retained by the partner being bought out concluded a substantially higher, positive value, than either of the other two appraisers. That appraiser used an income approach. The jury decided to make its own value determination because it believed that a demonstrable mistake of fact underlies the two closest appraisals.
On appeal, the plaintiff contended that it was improper for review of the appraisals to go to the jury. The Appeals Court considered that there was no indication that the two appraisers misinterpreted the partnership agreement’s provision regarding value and that they chose the asset approach because they deemed the partnership to have insufficient cash flow to justify use of the income approach. Consequently, the Appeals Court concluded that the two appraisers’ rationale for applying the asset approach was not a demonstrable mistake of fact and the standard that would allow a jury to review an appraisal had not been met.
§ 1.7.7. Minnesota
Ionlake, LLC v. Girard, No. CV 20-640 (SRN/BRT), 2021 WL 632605 (D. Minn. Feb. 18, 2021). Third-party defendant, Derrick Girard, is a founding member of the plaintiff, Ionlake, LLC. The third-party defendant moved to amend his counterclaim to claim punitive damages pursuant to Minn. Stat. § 549.20 against his uncle and co-founder of Ionlake, LLC, Wade Girard. Section 549.20 requires that the claimant show by “clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others,” which is statutorily defined as meaning that “the defendant has knowledge of facts or intentionally disregards facts that create a high probability of injury to the rights or safety of others.” The District Court of Minnesota found that Derrick sufficiently alleged facts to support a punitive damages claim by alleging that his uncle falsely filed a copyright application as the sole owner of a software program owned by the LLC, created a competing company to sell licenses for the software program, threatened to suspend the LLC’s access to the software, and then fulfilled that threat by terminating the LLC’s access to the software.
Mork & Assocs., Inc. v. Willow Run Partners, No. A19-1914, 2021 WL 771693 (Minn. Ct. App. Mar. 1, 2021). Willow Run Partners (WRP) was a limited partnership with the sole purpose of developing and operating a low-income residential apartment building. After initiating claims revolving around the embezzlement of WRP funds, limited partners and the managing general partner, Mork, agreed to submit the dispute to a receiver. The district court disagreed with the receiver regarding the interpretation of distribution under the Limited Partnership Agreement (LPA) and distributed funds equally between general and limited partners by rendering the repayment priority moot. According to the district court, the repayment priority was moot because the sale proceeds exceeded the initial contributions made by the general and limited partners. The Court of Appeals reversed the district court’s interpretation of the LPA that disregarded repayment, finding that the LPA required the repayment priority. The first step of the LPA repayment unambiguously referred to past distributions, not future distributions. The LPA also lists the steps in numerical order, and each step refers to the balance from the previous step. Without this priority plan, the general partners received more than they would have under the plan. Considering the language and effect of the repayment priority plan, the Court of Appeals reversed the district court’s interpretation of the LPA.
§ 1.7.8. Nebraska
Wayne L. Ryan Revocable Tr. v. Ryan, 308 Neb. 851, 957 N.W.2d 481 (2021). In this appeal, the Nebraska Supreme Court upheld all the Trial Court’s findings in a family-owned business buyout dispute regarding the value of the shares of the founder’s majority ownership interest in the corporation.
On appeal, the company contented that the Trial Court had failed to independently review all the relevant evidence because in its decision it adopted all the plaintiff’s proposed valuation findings, the plaintiff’s expert’s proposed valuation “improperly assumed synergies,” and disregarded Letters of Intent from potential buyers during an attempt to solicit bids for acquisition of the company. The Supreme Court said a Trial Court may consider a variety of material valuation factors because the “real objective is to ascertain the actual worth of what the [shareholder] loses” and listed a variety of examples of commonly considered business valuation factors. Furthermore, the Supreme Court undertook its own de novo review of the record and found that the determination of the Trial Court regarding value was based on fact, principle and reasonableness.
The Supreme Court pointed out that there was no evidence that synergies were incorporated into the valuation and that the Trial Court considered that two of the Letter of Intent bids were near the concluded value by the plaintiff’s expert which the Trial Court adopted. In addition, the Supreme Court noted that since there was not a completed or nearly completed transaction upon which to extract pricing evidence and that the attempt to solicit to solicit bids for acquisition of the company was defective, that the attempt “did not reliably reflect the market’s view regarding… [the company’s] value.”
Ultimately, the Supreme Court found that the Trial Court reviewed “each area of disagreement between the valuation expert and found [plaintiff’s expert’s] valuation to be reasonable and supported by the evidence” and that “each part of [defendant’s expert’s] analysis… reflected a downward bias which rendered his conclusions unreliable.”
§ 1.7.9. New York
Derderian v. Nissan Lift of New York, Inc., 192 A.D.3d 1021 (N.Y. App. Div. 2021). A 50% shareholder sought the judicial dissolution of the closely held corporation. The corporation elected to purchase the plaintiff’s shares, but after a valuation hearing, the Supreme Court determined that the shares had no fair market value. The Appellate Division affirmed this finding because the corporation’s valuation expert properly considered the threat of creditor judgments of more than $3 million, and the plaintiff sold inventory out of trust. Further, the plaintiff did not come forward with credible evidence to invalidate the expert’s testimony.
Derderian v. Nissan Lift of New York, Inc., 192 A.D.3d 1021 (N.Y. App. Div. 2021). A 50 percent shareholder in a corporation in a judicial dissolution of a closely-held corporation case appealed the Trial Court’s decision that the value of his shares is zero. The Supreme Court of New York, Appellate Division affirmed the Trial Court’s decision because “The determination of a factfinder as to the value of a business, if it’s within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” and that the Trial Court’s “determination that the fair value… was zero is supported by the evidence.”
The Appellate Division Court noted “The corporation’s expert testified that the petitioner’s stock shares had no value due to his having sold inventory out of trust, and the resulting impact upon the corporation’s assets of the petitioner having done so… [and] he factored into his valuation that at least two creditors had commenced separate actions against the corporation seeking judgments in excess of more than $3 million.” In addition, the Appellate Division Court noted “Although the petitioner’s expert prepared a report in which she opined that the value of the corporation exceeded $6 million, when cross-examined, her testimony revealed that the valuation set forth in her report was flawed since it neither accounted for the actions commenced against the corporation nor for the inventory that had been sold out of trust by the petitioner.”
§ 1.7.10. North Carolina
Finkel v. Palm Park, Inc., 2020 NCBC LEXIS 137. In a breach of fiduciary and constructive fraud dispute among members of a Limited Liability Company, the North Carolina Superior Court entered a judgment for judicial dissolution. The parties sought to avoid dissolution of the company by agreeing to purchase the interest of the plaintiff’s minority member interest at fair value and agreed that the Limited Liability Company, which held real estate, should be valued under the net asset value approach without discounts. A dispute arose regarding the valuation.
The Court issued an Amended Final Judgment allowing the majority owner to elect to purchase the minority owner’s interest. The majority owner made the election. The Court appointed “a receiver solely for the purpose of managing the operations and business… until the sale of… [plaintiff’s] membership interest to… [the majority owner defendants] is completed.” The parties jointly retained a real estate appraiser to value the real estate properties and who undertook a net asset value calculation.
The majority owner defendants objected to the jointly retained real estate appraiser’s report and a Court hearing occurred. The parties disagreed over whether the company was a real estate holding company, as the plaintiff asserted, or an investment holding company, as defendants asserted. The defendants retained an accredited business valuation expert who testified at the hearing and based his valuation an orderly liquidation premise. The plaintiff asserted that an orderly liquidation premise is not appropriate because the purpose of the buyout was to avoid a dissolution liquidation.
The Court noted that under the relevant statute, “The buyout of the ‘complaining member’ was to occur ‘at its fair value in accordance with any procedures the court may provide’… There exists no case law on the standards for applying this statute.” Furthermore, the Court noted that relevant case law exists that a court has flexibility in determining fair value, cited valuation factors cited in the case law, and agreed with the parties that U.S. Internal Revenue Ruling 59-60 provides useful guidance for valuation of closely-held companies such as the subject company. The Court decided that fair market value, under Revenue Ruling 59-60, was informative and quoted that definition of fair market value. In addition, the Court commented that fair market value is not focused on the specific participants in a specific transaction, rather it assumes a sale between a hypothetical buyer and hypothetical seller. It continued that according to relevant case law, “market value is not the sole determinant of fair value but is a factor to be given heavy weight. It is the starting point for any valuation.”
Regarding the real estate appraiser’s report, the Court agreed with the defendants that the report was “suspect” considering that the appraiser corrected “significant errors” in his original report, but “for some reason, was attempting to justify the values reached in the [original] Reports. However, he did so without providing a sound basis for the changes in his assumptions and methodology.” The Court accepted the real estate appraiser’s overall methodology considering that he was “highly experienced and respected” and that his methodology was generally accepted in commercial real estate appraisal. The defendant’s business valuation expert used aspects of the real estate appraiser’s values and methodology, but deducted liquidation costs, capital gains taxes and profit participation payment, under an orderly liquidation premise.
The Court used the defendant’s business valuation expert’s report as a starting point and considered that the parties agreed that discounts were not appropriate. Furthermore, it considered that, pursuant to Revenue Ruling 59-60, “there is no dispute that the orderly liquidation premise is an accepted method for determining the fair market value of holding companies.”
Ultimately, the Court decided that it could and would consider the fact of an actual dissolution would not occur in this case, but that the evidence showed that the company faced considerable business challenges and declining market conditions, and the business provided a livelihood for the defendants. The Court concluded by rejecting the subtraction of capital gains taxes, and noting that, under fair value “this does not necessarily consider the specific circumstances involved in this case in assessing the equities” and “the statue provides that flexibility.” Therefore, the Court used the orderly liquidation valuation, based upon the defendants’ business valuation expert’s valuation but with correction for subtraction of capital gains taxes.
§ 1.7.11. Utah
Armstrong v. Sabin, 2021 WL 3473256 (D. Utah Aug. 6, 2021). In this case, the defendant elected to purchase the member interests of the other two owners in a Limited Liability Company in lieu of dissolution. The defendant owned 40 percent, and the other two members, the plaintiffs, each owned 30 percent. According to the U.S. District Court for the District of Utah, “The parties were unable to agree on the value of the Plaintiff’s interests, so the court must determine the value under” the Utah statute and held a hearing “to determine the fair market value of the applicant member’s interest in the limited liability company as of the day before the petition under” the Utah statute “was filed or as of any other date the district court determines to be appropriate under the circumstances and based on the factors the district court deems appropriate.”
The Court noted that the Utah statute requires “the Court must determine (A) the appropriate valuation date” and “(B) the fair market value of Plaintiff’s 30% interests on that date.” In determining the appropriate valuation date, the Court considered that defendant had “acted in ways that devalued” the company, “but cannot ignore the Plaintiff’s part… Both of these actions subsequently lowered” the company’s “value.” It noted, “Plaintiff’s proposed valuation date would allow Plaintiff’s to avoid the consequences of their own actions would not be equitable.” Considering the date stated in the Utah statute, the Court selected the date it deemed “the most equitable valuation date… because it captures the fruits of both parties’ actions.”
In beginning its analysis of fair market value, the Court considered that the relevant section of the Utah statue did not define fair market value but noted that the definition in the International Glossary of Business Valuation Terms is consistent the with the definition in other portions of the Utah Code. It concluded therefore that the Court would use the fair market value definition from the International Glossary of Business Valuation Terms.
Next, the Court considered that the differences in the asserted valuations “are the result of differences in (1) the projections used and (2) the discounts applied.” Both parties’ experts used the discounted cash flow method to determine the value of the income of the company and the Court found that to be an appropriate methodology because the company could have rehired employees and continued operating as of the selected valuation date.
Regarding projections, the Court considered and compared the experts’ respective projections and internal company evidence regarding projections, such as sales plans and budgets. In selecting among the projections of growth, it deemed appropriate the projection which “would have been known or knowable as of the valuation date.” Furthermore, the Court considered that evidence existed “that the liquid herbal supplement industry is expected to grow more rapidly in the coming years because of an aging population and the general focus on health…. [and] enjoyed unusual growth during the COVID-19 pandemic, which was ongoing as the time of the valuation date.” It concluded, “Because of these opposing factors, the Court will rely upon the averages of the expert’s projected growth.”
Furthermore, the Court resolved the different assertions regarding projected gross profit by relying upon actual product costs applied to historical financial statements with a similar customer base, which “relies on data that was known or knowable as of the valuation date.” In resolving differences among asserted projected operating expenses, the Court selected the use of historical operating expense, which “excluded all of the disputed expenses and nonessential expenses from the calculations” and “separately calculated salaries for employees with fixed salaries and employees with variable salaries like commissions. However, the Court adjusted “for the lower revenue projected by the Court,” selected the “average of the experts’ projected depreciation and amortization,” and subtracted income taxes.
In determining terminal value beyond the forecasted period in the valuation, the Court noted “the parties had very similar capitalization rates” and the Court applied the last projected future year’s cash flow and capitalization rate.
Regarding discounts, the Court rejected the plaintiffs’ contention that their individual 30% interests should be valued as one 60% interest. The Court stated “the fair market value standard requires the Court to consider what separate hypothetical buyers would pay for each Plaintiff’s interest. To conclude otherwise would implement a different standard such as investment value, which considers who is buying the interests and the value to that specific person.” It also found that there was not oppressive conduct, that the two 30% owners could together exercise voting control, and that even if there hypothetically was oppressive conduct that both sides were similarly engaged in misconduct. The Court therefore concluded “there is not basis – legal or equitable – to exclude the discounts typical of a fair market value analysis.” Ultimately, the Court relied upon and applied the percentage discounts for lack of control and lack of marketability from the only expert’s report which had quantified such discounts.
§ 1.7.12. Virginia
Jones v. A Town Smoke House & Catering Inc., 106 Va. Cir. 168 (2020). This matter was before the Circuit Court of the City of Waynesboro, Virginia, to establish the value for the purchase in lieu of dissolution of the plaintiff’s one-third ownership interest in the shares of stock of a private corporation.
Both parties’ experts used income approaches. The plaintiff’s expert primarily used a capitalization of income method because he deemed the current income level stabilized and the defendant’s expert used, with a 100% weight, a discounted cash flow approach because he deemed that future cash flows will vary as a result of the then recently passed Tax Cuts and Jobs Act of 2017 which changed the way depreciation is calculated for income tax purposes. Each expert also considered other methodologies.
On a more detailed basis, the Court found that the plaintiff’s expert’s view that the income level was stabilized was inconsistent with his testimony that in applying the market-based approach, which was his secondary-weighted methodology, he considered that the company experienced “operational inefficiencies.” The Court viewed this inconsistency as a failure by the plaintiff’s expert to adjust in his income approach for those inefficiencies.
Regarding the market-based approach, the Court deemed it a less reliable methodology because of the lack of similarity in qualitative and quantitative characteristics of potentially comparable companies or transactions, lack of information regarding the motivation of the buyers and sellers of potentially comparable transactions, and whether the terms of potentially comparable transactions were all in cash. Furthermore, the Court considered that “income methods are utilized to value stock in a corporation as a going concern.”
In its analysis, the Court reviewed pertinent sections of the Virginia Code regarding fair value and determined that “Application of minority or marketability discounts in a corporate dissolution are therefore discretionary after consideration of all relevant facts and circumstances of the case.” Regarding minority discounts, the Court noted that “all three corporate shareholders own equal shares therefore, there is not a controlling interest by any one shareholder” and therefore a minority position discount is not applicable. The Court also found that “discounted cash flow calculations inherently incorporate the applicable discount for lack of control and all three shareholders own a minority position.” The Court did not apply a minority discount, in distinction from the discount for lack of control which it had mentioned.
Regarding marketability discounts, the Court stated, “Virginia does not follow the majority rule and instead requires the application of the marketability discount unless doing so would be unjust or inequitable.” The Court also considered that the plaintiff’s “stock is a restricted stock given the limitations imposed by the bylaws…. [the] stock is a minority interest in a corporation. No dividend has been paid on the stock, there was no pending prospects of a public offering or sale of business, and there were no prospective buyers of the stock.” In addition, the Court reviewed the parties’ contentions regarding whether oppressive conduct occurred. It found that oppressive conduct had been established and commented “Abrupt removal of a minority shareholder from positions of employment and management can be a devastatingly effective squeeze-out technique.” As a result, the Court deemed this a “squeeze-out” of a minority owner case. Accordingly, “the Court finds that application of the marketability discount would be unjust and inequitable in this case.”
The collection and use of data by digitally focused businesses can create different competition issues depending on the type of data in question and the relevance of data to the practice under scrutiny. Where the data in question relate to personal information, particular questions arise surrounding the interplay among privacy, data protection, and competition law. The global trend in the data-driven digital economy is that of moving toward greater privacy and data protection rules, led by the European Union’s General Data Protection Regulation, among others. In developed countries, in particular, policymakers and enforcers are faced with the important and thorny question of whether privacy or data protection considerations should inform the competitive assessment of conduct adopted by digital businesses, given that data and its use are integral to the business models of many economic actors in the digital economy, not least the large online platforms.
The different responses to the role of privacy and data protection in competition assessments have created a divide between those who view privacy as a non-economic matter better dealt with under other policies than competition and those who view privacy and other data policies as an integral part of the economic bargain struck between providers of digital services and users. There are touchpoints between these separate-but-related areas of policy that policymakers and enforcers have to consider in their approach. From a substantive outcome perspective, these policies do not always give the same answer to the same question, as they pursue different aims.
For example, complex and voluminous data protection obligations can affect competition adversely, if such obligations present disproportionate compliance costs and barriers for small- and medium-sized enterprises. Yet, a right to data portability provided under data protection rules can have potentially procompetitive effects by enabling multi-homing and lowering barriers to entry/expansion for rivals. Yet again, a competition law remedy that requires access to data by an undertaking’s rivals can infringe privacy rules, while a merger that combines unique datasets can potentially hamper the development of existing or potential competition and simultaneously have privacy-distorting effects depending on what the merged entity does with the datasets.
Ideally, policy responses and enforcement on the touchpoints among privacy, data protection, and competition should aim at advancing each of these interests without unnecessarily impinging on the others. Achieving that requires cooperation between the relevant enforcers and regulators, but that cooperation may be difficult to realize while the normative questions remain unanswered about whether privacy or data protection concerns should be part of the competitive assessment at all.
In some jurisdictions around the world, regulators and enforcers appear to be answering the question of whether data protection and privacy concerns are relevant to an assessment under competition law in the affirmative, particularly when it comes to the practices of “Big Tech.” Jurisdictions that have been particularly active in this space where competition law and data protection intersect from a policy and/or enforcement practice point of view include the United Kingdom, Germany, France, Australia, and the European Union. In these jurisdictions, a growing list of ongoing investigations and decisions in the areas of, in particular, merger control and abuse of dominance, directly engages with issues that arise at the intersection of data protection and privacy and the competition law analysis.
In the United States, antitrust regulators historically have not regarded privacy issues alone as a proper basis for merger or conduct enforcement, citing concerns about the limitations of existing U.S. antitrust doctrine and the possibility that enforcement centered on privacy could deter procompetitive innovation. Instead, in the United States, privacy concerns and issues relating to the alleged misuse of data by platform and other businesses have been squarely within the province of consumer protection regulation, which addresses distinct harms and vindicates different rights than antitrust law.
That historical outlook may be ripe for change, however, with the appointment of new enforcers whose writings and public statements have strongly suggested the need to consider privacy issues in the context of antitrust enforcement and the possible passage of new legislation that would mandate that concerns about privacy be analyzed in determining whether a particular transaction or type of behavior violates the Sherman Act. Most immediately, the question of whether privacy plays a role in antitrust analysis will be addressed in the government’s cases against Google and Facebook.
In Europe, the most prominent abuse of dominance case is the ongoing procedure against Facebook in Germany for allegedly exploitative data processing. Also, the Autorité de la concurrence (French competition authority) is currently investigating the impact of Apple’s recent changes to its privacy policy on third-party app providers. Merger control cases on a European Union level where privacy considerations were taken into account in the commission’s assessment include the Microsoft/LinkedIn, Facebook/WhatsApp, and Google/Fitbit mergers. On the level of new legislation, there have been competition law–related developments in the European Union (draft Digital Markets Act) and in Germany (recent amendment to the German Act against Restraints of Competition). These pieces of legislation mainly contain ex ante regulations and target large online platforms qualifying as so-called gatekeepers. The obligations imposed on these companies concern, inter alia, access to data and data portability.
In Canada, until recently at least, the Competition Bureau has been clear that its mandate is limited to conduct that harms competition and does not extend to privacy (or data security) concerns unrelated to competition and that Canadian competition policy does not, and should not, assume that “big is bad.” Despite the bureau’s historically “separatist perspective” (i.e., that privacy law and competition law address different harms and vindicate different rights), based on past enforcement action, policy documents, and statements by bureau officials, there appeared to be several areas of actual or potential privacy/competition law convergence in Canada; namely, misleading advertising/deceptive marketing practices (where the bureau has already taken enforcement action in respect of misleading claims about how firms collect, use, store, and discard consumer data) and, possibly, merger review and abuse of dominance. However, a speech by the Commissioner of Competition (the head of the Competition Bureau) in October 2021 calling for a comprehensive review and “moderniz[ation]” of the Canadian Competition Act to more effectively address potential competition issues in the digital economy portends a potentially fundamental shift in the bureau’s position on the question of whether privacy is a competition law issue.
Although enforcers have thus far focused most of their attention on Big Tech, the privacy- and data-related conduct of non-Big Tech companies can and is likely to attract the attention of competition authorities. In the United States, for example, many traditional brick and mortar retailers and e-commerce firms are looking to launch marketplaces, and there are several specialty e-commerce retailers that have amassed significant data that could be perceived as giving rise to the same competitive concerns as those identified in the investigations and lawsuits filed against so-called Big Tech. Moreover, there are several precedents already that suggest that the U.S. Federal Trade Commission is prepared to litigate against non-Big Tech firms, relying in part on claims that they misused certain large data sets. This indicates that the theories that have made headlines in the United States in connection with enforcement actions directed to Big Tech are potentially transferable to other data-centric businesses. Based on experience in other areas, it appears safe to anticipate that the Canadian Competition Bureau will follow the lead of its U.S. counterpart, and possibly sooner rather than later.
In Europe, as the protection of personal data may be an element of quality of a certain product or service, agreements or exchanges of information among competitors on privacy policies and the level of data protection are at risk of falling afoul of competition legislation such as Article 101 TFEU. Also, smaller firms may arguably be in a dominant position in a given market due, for example, to their possession of essential data that is needed by other companies to compete in that market. Even below the threshold of market dominance, recent legislation in some European countries in the area of so-called relative market power may extend privacy and data protection concerns to the conduct of companies in relation to companies that are dependent on them.
Finally, in Japan, information and competition laws have received much attention, especially in the context of platform business. Among other things, in 2019, the Japan Fair Trade Commission issued guidelines on the “superior bargaining position… between digital platform operators and consumers” and made clear that undue acquisition and utilization of consumers’ information by online platforms can be deemed as “abuse of superior bargaining position.” These guidelines are of note for both Big Tech and non-Big Tech firms alike, as a dominant position is not required; rather, relative superiority between parties is sufficient for demonstrating superior position.
DISCLAIMER: The views and opinions expressed in this article are entirely those of the authors and do not represent any policies or positions of any firm or other organization.
This article is based on the abstract prepared by the authors for a program of the same name sponsored by the Antitrust Law Committee and presented on September 22, 2021, at the ABA Business Law Section’s 2021 Virtual Annual Meeting.
The 2022 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.[1] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-five states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; (24) Wisconsin and (25) Wyoming.[2] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.[3] The California and Connecticut programs are expressly not business court programs as such.[4]
§ 1.2. Recent Developments
§ 1.2.1. Business Court Resources
American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.[5] The ACBCJ’s Sixteenth Annual Meeting took place in Jackson, Mississippi from October 27, 2021 to October 29, 2021.[6] Among other topics, the meeting addressed intellectual property rights, “The Cost of Truth,” artificial intelligence, shareholder wealth and corporate purpose, and private practice and regulatory authority post-COVID. In 2021, the ACBCJ sponsored two additional clerkship positions in the ABA Section of Business Law’s Diversity Clerkship Program.[7]
Section, Committee, and Subcommittee Resources.The ABA Section of Business Law provides a Diversity Clerkship Program that sponsors second year law students of diverse backgrounds in summer clerkships with business and complex court judges.[8] In 2021, two additional clerkship positions were added through the ACBCJ’s sponsorship. The Section of Business Law has created a pamphlet, Establishing Business Courts in Your State.[9] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides 150 documents and/or hyperlinks to business court resources.[10] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Section of Business Law meetings. The Section’s Judges Initiative Committee also provides links to business court resources, such as judicial opinions published by various business courts, and standardized forms used in business and complex litigation courts.[11] The Section also has established a Business Courts Representatives (BCR) program,[12] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.
Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts have developed an innovative training curriculum[13] and faculty guide[14] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”[15] The Business Courts Blog[16] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years,[17] as well as recent developments in business courts. In 2021, there were articles and reports addressing some aspects of business courts.[18] There are also various legal blogs addressing business courts in particular states.[19]
§ 1.2.2. Developments in Existing Business Courts
Cook County, Illinois Circuit Court Law Division Commercial Calendar
In 2021, the mandatory arbitration rule governing Illinois’ Cook County Circuit Court’s Commercial Calendar Section was amended to state: “Mandatory Arbitration will be held in those commercial … cases assigned to the Law Division … with damages of less than $50,000 and no retained expert witness as defined in Supreme Court Rule 213(f)(3).”[20] Cases coming within the Commercial Calendar’s jurisdiction include claims “for, among other things, breach of contract (including breach of loan agreements or guarantees, construction contracts, breach of warranty), employment disputes, employment discrimination, qui tam claims, civil and/or commercial fraud, conspiracy, interference with business relationships, or shareholder disputes.”[21] The Cook County Circuit Court’s Chancery Division hears business disputes in equity, separately from the Commercial Calendar Section.[22] Commercial Calendars were first established by administrative order in 1992, and became operational in 1993, making this one of the oldest modern business courts in the United States.[23] There are currently eight judges assigned to the Commercial Calendar Section,[24] with Uniform Standing Orders applicable to all of these judges,[25] though the individual judges may have forms or practices unique to their individual calendars.
Florida’s Complex Business Litigation Courts
As it was last year, Florida is lucky enough to have six circuit court divisions dedicated to resolving complex business litigation (“CBL”). Florida’s six CBL judges are spread across Orange County (Ninth Judicial Circuit), Miami-Dade County (Eleventh Judicial Circuit), Hillsborough County (Thirteenth Judicial Circuit), and Broward County (Seventeenth Judicial Circuit). The judges currently assigned to hear CBL cases are: Judge John E. Jordan (Division 2-43) in Orlando,[26] Judges Michael A. Hanzman (Division 43) and William Thomas (Division 44) in Miami,[27] Chief Judge Jack Tuter (Division 07) and Judge Patti Englander Henning (Division 26) in Fort Lauderdale,[28] and Judge Darren D. Farfante (Division L) in Tampa.[29] Judges Hanzman and Farfante were each newly-assigned to CBL divisions in 2021, and an upcoming change to the CBL courts will likely include a new assignment in Miami upon the anticipated completion of Judge Thomas’ CBL term in December 2021.
In an effort to address a growing backlog due to the ongoing pandemic, in April of 2021, the Florida Supreme Court issued Administrative Order AOSC20-23, which, among other things, created new case management requirements for civil cases and required the chief judge of each judicial circuit to implement specific case management deadlines according to the complexity of each case. In the circuits with CBL divisions, the resulting orders varied slightly. In the Ninth, Thirteenth, and Seventeenth Judicial Circuits, Chief Judges Donald A. Myers, Jr., Ronald N. Ficarrotta, and Jack Tuter issued orders providing that CBL matters should continue to proceed in accordance with previously established rules, but setting new requirements for cases on the general and streamlined tracks.[30] In the Eleventh Judicial Circuit, Chief Judge Bertila Soto issued Administrative Order 21-09, which required litigants in existing cases to file case management reports providing a “comprehensive inventory of the current status of the case,” and for judges presiding over newly-filed cases to issue a case management order not later than 120 days from the filing of the complaint.[31]
Cases may be directly filed or reassigned/transferred to a complex business division based on a number of factors, including: the nature of the case; complexity of the issues; complexity of discovery; number of parties in the case; and specific criteria enumerated by each circuit.
State-wide Business Court in Georgia
Georgia’s State-wide Business Court has been adjudicating business disputes for just over a year since it first began accepting cases on August 1, 2020. During much of its first year, the State-wide Business Court operated under proposed rules pending final approval of permanent rules. On May 13, 2021, the Supreme Court of Georgia approved the Rules of the Georgia State-wide Business Court. Those rules then took effect on August 1, 2021. The rules are a comprehensive resource for proceedings in the State-wide Business Court, and set out many of the responsibilities of the parties, judge, and clerk.[32] The State-wide Business Court may recommend to the Supreme Court changes and additions to these rules in the future. The State-wide Business Court has also created forms to be used in connection with its cases.[33]
In its first year, the State-wide Business Court handled 43 disputes and issued more than 100 substantive and procedural orders. Notably, of the 43 disputes before the State-wide Business Court, 14 were rejected due to the requirement that parties consent to its jurisdiction.[34] The mutual-consent requirement limits the State-wide Business Court’s jurisdiction in two primary ways. First, if a case is filed directly in the State-wide Business Court, within 30 days, a defendant may file an objection to jurisdiction, with a proposed order, requesting transfer of the case to a venue-appropriate court, and that request must be granted.[35] Second, for cases already pending in a Georgia state or superior court, within 60 days after service of the lawsuit on all defendants, a party may unilaterally petition to transfer the action to the State-wide Business Court; a party opposing transfer may object within 30 days of the filing of the petition to transfer, and a timely objection will be dispositive, precluding transfer to the State-wide Business Court.[36]
Indiana Commercial Courts
In January 2021, the Indiana Supreme Court introduced two new changes to the Commercial Courts. First, the Indiana Commercial Court was expanded to include dockets in Hamilton, Madison, St. Joseph, and Vigo counties, with the Court now covering a total of 10 counties (dockets already existed in Allen, Elkhart, Floyd, Lake, Marion, and Vanderburgh).[37]
Additionally, the Indiana Supreme Court adopted a new rule regarding the appointment process for new Commercial Court judges.[38] The rule provides that the Commercial Court Committee, or a designated subcommittee, will accept and review applications when an open position occurs. The Committee will then provide the Supreme Court with a list of up to three recommended nominees.
This new rule has already been exercised by the Supreme Court, which in June appointed Judge Thomas Massey to the Vanderburgh County Commercial Court after the retirement of Judge Richard D’Amour in April.[39]The Court will receive another appointment opportunity following the retirement of St. Joseph County Judge Steven Hostetler in September.[40]
Iowa Business Specialty Court
The goal of the Iowa Business Specialty Court (“Iowa Business Court”) is to provide litigants with an expeditious and cost-effective court system where parties and their attorneys can have their cases heard before one of five Iowa District Court judges with business litigation experience.[41] The Iowa Business Court became a component of the Iowa court system in 2016.[42]
A case is eligible for the Iowa Business Court if it meets or exceeds $200,000 in compensatory damages or the claim primarily seeks injunctive or declaratory relief.[43] The case must also meet one of nine dispute types, including but not limited to business disputes involving breach of contract, fraud, or misrepresentations and tort claims between or among business entities.[44] Cases may be transferred to the Iowa Business Court by motion or joint consent.[45] Cases transferred to the Iowa Business Court will remain in the county the case was originally filed and venued.[46]
Starting January 1, 2022, the State Court Administrator is expected to report findings from annual reviews and make recommendations for the Iowa Business Court’s improvement to the Iowa Supreme Court.[47]
Maine Business and Consumer Court
In November 2020, eFiling in all Maine Business and Consumer Court (also known as the Business and Consumer Docket, or “BCD”) cases statewide became mandatory, and the BCD Procedural Rules, which are part of the Maine Rules of Civil Procedure, were amended to operate consistent with the Odyssey Electronic Filing System (EFS).[48]
Michigan Business Courts
In May 2020, the administrative agency of the Michigan Supreme Court, the State Court Administrative Office, formed a committee to investigate and report on the experiences and best practices of Michigan courts as the courts struggled to grapple with the myriad of new challenges brought by the COVID-19 pandemic. Aptly named the Lessons Learned Committee, this group of judges and attorneys issued a preliminary report of their findings in late June 2021. Although this report is not limited to business court cases, it could certainly affect how business court proceedings are conducted.
Not surprisingly, the report focused heavily on the use of videoconferencing to facilitate remote participation in court proceedings, with Zoom as the primary technology employed. By April 2021, Michigan trial courts had conducted over 3 million hours of court proceedings over Zoom. Overall, the Committee found Zoom to be an effective platform for conducting most hearings. Remote proceedings are more efficient and reduce the costs of litigation by reducing the hours attorneys bill for travel and time spent waiting in court. Hearings conducted via Zoom provide attorneys with greater flexibility to manage their calendars and plan their workdays.
The Committee also uncovered anecdotal evidence of unexpected benefits from using Zoom. Clients were less intimidated by remote hearings than in-person proceedings, without losing respect for the judicial process. Additionally, minors appearing via Zoom appeared less anxious and more engaged with the proceedings.
However, no change comes without a price. At times, Zoom proceedings suffered from frozen screens and garbled sound due to unstable internet connections. Some judges prohibited litigants and attorneys from participating remotely from their car, perhaps without realizing that for some, the car provided the quietest environment for remote participation. Moreover, trial courts did not find Zoom preferable to in-person proceedings for lengthy evidentiary hearings and trials. However, even in those proceedings, Zoom provides some advantages, such as greater flexibility in coordinating the appearance of expert witnesses.
The Committee surveyed nearly 1,500 attorneys. Eighty-two percent wanted hearings conducted via Zoom indefinitely. The top choices among attorneys for Zoom hearings were non-evidentiary hearings, such as status and scheduling conferences, pretrial hearings, and hearings on motions. This was followed by hearings on traffic violations, civil infractions, summary proceedings, guardianships/conservatorships, criminal pleas, and sentencing, in that order.
Based on its findings, the Committee recommended new rules and practices related to remote participation in court proceedings to improve the efficiency and effectiveness of the courts and promote access to justice. Judges should be encouraged to replace courtrooms full of waiting attorneys with an approach to hearings that assigns specific times to each proceeding. Judicial officers should be permitted to conduct court hearings and other business from sites other than the courthouse. The courts should experiment with the practice of engaging visiting judges remotely by assigning judges with a lighter docket to hear cases in other, backlogged counties via Zoom.
Looking to judicial practices more broadly, the Committee recommended a planning committee at the state level to review and improve court operations, technology, and judicial procedures on an on-going basis. Michigan’s judicial system should modernize and develop a unified case management and electronic filing system. The Committee also recommended a recurring technology symposium to enable all county IT departments and court administrators across the state to collaborate on court technology and software applications.[49]
Additionally, a training program could assist county courts in developing stronger, more collaborative working relationships with their funding units. In some counties, the courts’ funding source did not recognize the need for courts to continue operations during the pandemic. Emergency and essential hearings were delayed as courts struggled to educate decision-makers and advocate for the courts’ status as an essential service. Another barrier to justice the Committee discovered was that large areas of Michigan lack sufficient internet connectivity to participate remotely in court proceedings. The Committee encouraged the judiciary to proactively advocate for legislation to modernize the state’s technology infrastructure. Finally, case management takes a toll on a judge’s health that should not be ignored. The administration of justice would benefit from a five-year program addressing stress management and self-care of judicial officers.
Pandemic-Driven Changes to Michigan’s Court Rules. Faced with the lingering pandemic, in July 2021 the Michigan Supreme Court adopted a series of changes to the Michigan Court Rules. Most significant was the addition of section G to Michigan Court Rule 2.407, which governs the use of videoconferencing in court proceedings. The new rule requires trial courts to use remote participation technology, either videoconferencing or telephone conferencing, “to the greatest extent possible,” even if only some participants are able to participate remotely. Mich. Ct. R. 2.407(G), (G)(2).
In doing so, courts must uphold Constitutional rights and ensure that critical judicial procedures are followed. For example, remote proceedings must allow confidential communications between a party and his or her counsel; grant the public access to proceedings in real time or through a video recording, except in closed proceedings; and must be conducted in a manner that enables a transcript to be produced later. Mich. Ct. R. 2.407(G)(3)-(5). To promote fairness and to maximize access to justice, courts are also instructed to verify participants’ ability to participate remotely, provide reasonable notice of such hearings, and waive any related court fees. Mich. Ct. R. 2.407(G)(1), (7).
Going forward, virtual proceedings in business courts will continue to be the rule, except for evidentiary hearings and trials. As courts, counsel, and litigants become more comfortable with virtual court proceedings, evidentiary hearings and bench trials by Zoom may become more common in business (and other civil) cases. However, remote jury trials will likely continue to be fairly uncommon in business and other civil cases, for at least the near future.
New York Commercial Division
New York Courts Modify Rule 3(a) To Provide For Additional Neutrals.On December 20, 2021, a new rule will go into effect in the New York State court system providing for alternative dispute resolution before mediators and neutral evaluators.[50] In the past, neutrals were limited to court-appointed mediators, who are required to undergo 40-hours of training. Neutral evaluators only require 6 hours of training. The purpose of the modification is to expand the diversity of individuals serving as neutrals.
New York Courts Adopt Rule 36 For Virtual Evidentiary Hearings and Non-Jury Trials. On December 13, 2021, a new rule will go into effect in New York State courts regarding virtual evidentiary hearings and non-jury trials.[51]The new rule provides for evidentiary hearings and non-jury trials, as well as virtual examinations of individual witnesses, via video technology, so long as the parties consent and the requirements of the rule are met. The rule requires that the video technology enable: (1) “a party and the party’s counsel to communicate clearly;” (20 “documents, photos and other things that are delivered to the court to be delivered to remote participants;” (3) “interpretation for a person of limited English proficiency;” (4) “a verbatim record of trial;” and (5) “public access to remote proceedings.” The rule does not address instances where both parties do not consent.
Commercial Division Gets a New Corporate Disclosure Rule.On December 1, 2021, a new Commercial Division rule will go into effect, requiring corporate entities litigating or seeking to intervene in cases to submit statements disclosing any corporate parent or publicly held companies that are sufficiently invested in the party or proposed intervenor.[52]
Rule 35 requires a non-governmental corporate party and a non-governmental corporation that seeks to intervene in a case to “file a disclosure statement that: (1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or (2) states that there is no such corporation.” The new rule also provides that such disclosure statements must be filed with a party or intervenor’s “first appearance, pleading, petition, motion, response, or other request addressed to the court” and that a supplemental statement must be filed if any required information changes.
Commercial Division Rules Expanded to General Civil Practice. Administrative Order 270/2020—which adopts certain Commercial Division Rules into the Uniform Civil Rules for the Supreme Court in New York—went into effect on February 1, 2021.[53] In signing this order, Chief Judge Marks described the Commercial Division as “an efficient, sophisticated, up-to-date court, dealing with challenging commercial cases” that “has had as its primary goal the cost-effective, predictable and fair adjudication of complex commercial cases[.]” Further, he acknowledged the Commercial Division’s role in dealing with the “unique problems of commercial practice,” and praised its “function[] as an incubator, becoming a recognized leader in court system innovation, and demonstrating an unparalleled creativity and flexibility in development of rules and practices[.]”
Judge Marks’s order comes after the Administrative Board of the Courts requested public comment on the advisability of adopting Commercial Division Rules into general civil practice, and after review of those public comments. Notably, the order specifically refers to the “unique opportunit[y]” created by the COVID-19 pandemic to institute new reforms.
Many of the new rules include changes to discovery practices in the general part. For example:
Rule 202.20 limits parties to 25 interrogatories (including sub-parts). Similarly, unless otherwise stipulated by the parties or ordered by the court, Rule 202.20-b limits parties to 10 depositions each, with each deposition limited to 7-hours in length.
Rule 202.20-e(a) requires parties to “strictly comply with discovery obligations by the dates set forth in all case scheduling orders . . . [n]on-compliance with such an order may result in the imposition of an appropriate sanction against that party pursuant to CPLR 3126.” Moreover, Rule 202.20-e(b) provides that “[i]f a party seeks documents from an adverse party as a condition precedent to a deposition of such party and the documents are not produced by the date fixed, the party seeking disclosure may ask the court to preclude the non-producing party from introducing such demanded documents at trial.”
Rule 202.20-a now requires parties to meet and confer regarding privilege logs and review. Such meet and confers should include a discussion of the use of categorical privilege logs.
The new rules also incorporate additional motion practice and filing requirements including:
Rule 202.8-b replaces the inconsistent page limits in place in the individual practices of non-Commercial Parts with standard word counts for all filings. Specifically, “affidavits, affirmations, briefs and memoranda of law in chief” are limited to 7,000 words each and “reply affidavits, affirmations, and memoranda” are limited to 4,200 words. Attorneys are further required to certify the word count of all filings.
Rule 202.8-g adopts the Commercial Division and federal practice requirement that parties seeking summary judgment submit a “short and concise statement, in numbered paragraphs, of the material facts as to which the moving party contends there is no genuine issue to be tried.”
Rule 202.8-e requires parties seeking emergency injunctive relief to give notice of the date, time, and place and manner of any such motion to their adversaries. Applications for temporary injunctive relief must be accompanied by a statement either that (1) such notice has been given, (2) notice could not be given despite a good faith effort to do so; or (3) providing such notice would cause significant prejudice to the moving party. The moving party must also provide the opposing party with copies of all supporting papers for the motion.
Finally, the new rules implement changes to increase efficiency for court appearances, such as:
Rule 202.1 adopts the Commercial Division requirement that counsel appearing at any conference must “be familiar with the case in regard to which they appear and be fully prepared and authorized to discuss and resolve the issues which are scheduled to be the subject of the appearance.”
Rule 202.23 eliminates the “cattle call” calendar and now requires “[s]taggered court appearances[,]” including for oral argument on motions, which must be assigned a “set time” or “time interval” for when the court expects to hear oral argument.
Proposed Rules on Proportionality, Reasonableness, and Early Case Assessment Disclosures. On September 14, 2021, the New York State Unified Court system published a request for comment on proposed modifications to Rule 11 to include a preamble about proportionality and reasonableness and to add provisions allowing the Court to direct early case assessment disclosures and analysis prior to and after the preliminary conference.[54]
The modified rule would provide that: “The court may direct plaintiff to produce a document stating clearly and concisely the issues in the case prior to the preliminary conference. If there are counterclaims, the court may direct the party asserting such counterclaims to produce a document stating clearly and concisely the issues asserted in the counterclaims. The court may also direct plaintiff and counterclaim plaintiff to each produce a document stating each of the elements in the causes of action at issue and the facts needed to establish their case.”
The modified rule also would provide that: “The court may further direct, if a defendant filed a motion to dismiss and the court dismissed some but not all of the causes of action, plaintiff and counterclaim plaintiff to revisit the documents to again state, clearly and concisely, the issues remaining in the case, the elements of each cause of action and the facts needed to establish their case.”
According to the announcement, “[t]he goal of these recommendations is to streamline the discovery process so that discovery is aligned with the needs of a case and not a search for each and every possible fact in the case.”
Proposed Rules on Electronically Stored Information. On September 7, 2021, the New York State Unified Court System published a request for comment on proposed additional rules and guidelines for Electronically Stored Information (“ESI”).[55] According to the proposal, “[t]he goal of the revisions is to address e-discovery in a more consolidated way, modify the rules for clarity and consistency, expand the rules to address important ESI topics consistent with the CPLR and caselaw, and to provide further detail in Appendix A – Proposed ESI Guidelines than is practical in the Commercial Division Rules.”
The first modification proposal contains significant additions to Rule 11. Specifically, the modified rule would provide that parties are to confer regarding electronic discovery prior to the initial conference and specifically indicates that electronic discovery will be discussed at any initial conference. The proposed modifications to the rule also address efficiency and cost with respect to electronic discovery. The modified rule would provide that “[t]he costs and burdens of ESI shall not be disproportionate to its benefits” and adopts a cost-benefit analysis similar to the standard in Federal Court. The modified rule also encourages the parties to use technology-assisted review when appropriate. Lastly, the modified rule adds a claw-back provision for inadvertently produced ESI that is subject to either attorney-client privilege or the work product doctrine.
The second major proposed modification is to Appendix A to Commercial Division Rule 11-c—which currently addresses only non-party ESI. The modifications to Appendix A would replace the non-party guidelines “with new guidelines to cover all aspects of ESI, from parties and non-parties alike.” The drafters of the proposal developed these guidelines based on “rules and practices set forth in the ESI guidelines of several federal district and state courts, federal and New York decisional law, and commentaries published by The Sedona Conference.” The newly proposed ESI guidelines (1) encourage early discussion of ESI; (2) limit discovery requests to what is proportional to the needs of the case; (3) encourage informal resolution of disputes regarding ESI; and (4) provide that the requesting party should defray non-parties reasonable production costs. The modifications also include general guidance on a number of specific ESI issues, including: (1) the importance of technical competence in e-discovery; (2) the obligation of counsel to actively assist in preservation, collection, search, review, and production of ESI; (3) defensible preservation and collection of sources of ESI; (4) processes for determining if ESI is “not reasonably assessable”; (5) processes for determining acceptable formats for ESI production; and (6) a claw-back provision for inadvertently produced documents. The remainder of the proposed modifications serve to streamline the rules and correct references based on the proposed modifications.
North Carolina Business Court
The Honorable James L. Gale retired from the North Carolina Business Court in September 2021. After a lengthy career as a business litigator, Judge Gale joined the Business Court in 2011. His decade of service included serving for three years as Chief Business Court Judge. Held in high esteem by all, Judge Gale authored more than 200 opinions and served in the American College of Business Court Judges, the ABA’s Business Law section, the Sedona Conference, and the North Carolina Conference of Superior Court Judges. Governor Roy Cooper appointed the Honorable Julianna Theall Earp to serve as the first woman judge of the Business Court. Following a lengthy career with Fox Rothschild LLP, Judge Earp was sworn in by Judge Gale in May 2021. Governor Cooper also appointed the Honorable Mark A. Davis to serve as a Business Court judge. Judge Davis previously served as an associate justice on the Supreme Court of North Carolina and an associate judge on the North Carolina Court of Appeals. The Honorable Gregory P. McGuire completed nearly seven years of service as a Business Court judge and has returned to private practice.
West Virginia Business Court Division
In the past year, twenty-two motions to refer cases to the West Virginia Business Court Division were filed. Of these, thirteen were granted, six were denied, and four were pending as of year’s end. Since the Court’s inception, there have been 201 motions to refer filed, with a total of 116 of those motions granted. The Business Court Division has resolved ninety-one of these. At the end of 2020, there were 25 cases pending before the Business Court Division with an average age of 688 days.[56] The average age of the 5 cases disposed of in 2020 was 828 days.
As in numerous courts across the country, the COVID-19 pandemic caused delays in holding trials and mediations in the business court. But business court judges had been using video or teleconferencing technology for several years before the pandemic, making adapting to the pandemic easier than it otherwise would have been.
The business court also adopted protocols allowing for both bench and jury trials. The court followed the protocols that the West Virginia Supreme Court of Appeals adopted for resuming operations. Before jury selection in the jury trial discussed in the summaries of cases below, the judge sent out a questionnaire to prospective jurors regarding COVID-19 and medical reasons for jury service excusal. This ensured that the fifty jurors who appeared for in-person jury selection were able to serve. For both the jury and bench trials, attorneys or witnesses coming from “red” or “hot spot” areas, as defined on the website used by the West Virginia Supreme Court, were required to arrive early and self-quarantine for fourteen days or obtain a negative COVID-19 test result before appearing in court.
In both trials, the accommodations worked smoothly and were very well-received by the litigants, courthouse staff, and parties. The judge, parties, attorneys, and jurors were all ready and willing to be flexible, cooperative, and follow accommodations and safety protocols to ensure everyone’s safety while permitting in-person trials to continue.
Wisconsin Commercial Docket Pilot Project
Last year, the Wisconsin Supreme Court extended Wisconsin’s Commercial Docket Pilot Project for an additional two years. The Court originally approved the Project in 2017. After the additional two-year extension ends in 2022, the Court will determine whether it should proceed to a permanent, statewide program. Since its inception, the Project has expanded from eight to twenty-six participating counties—Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn. The state’s largest county—Milwaukee—has yet to adopt the Project but that could, of course, change when the Court reviews the Project in 2022.
§ 1.2.3. Other Developments
Wyoming Chancery Court
In March 2019, the Wyoming Legislature set out to create a court that would resolve commercial, business, and trust cases on an accelerated schedule.[57] Now, nearly three years later, the Wyoming Chancery Court is open for business. In the time between the enabling legislation’s enactment and opening day, the Wyoming Supreme Court laid the administrative groundwork by developing and adopting rules for the new court.[58] These rules reflect the Chancery Court’s legislatively defined characteristics, including specialized jurisdiction, expedited discovery and resolution, and non-jury trials.
The Wyoming Chancery Court has jurisdiction over actions seeking equitable or declaratory relief and actions seeking monetary relief over $50,000 exclusive of punitive or exemplary damages, interest, and costs and attorney fees.[59] The underlying cause of action must fall within a list of 20 case types.[60] This list covers a wide swath of subjects, including breach of contract, environmental and commercial insurance coverage, Uniform Trust Code, Uniform Commercial Code, internal business affairs and agreements, and securities.[61] Practitioners should note that the monetary threshold does not apply to four listed case types—shareholder derivative actions, dissolutions, certain arbitration issues, and trademarks disputes.[62] Also worth noting is the Chancery Court’s new authority to exercise “supplemental ancillary jurisdiction over any cause of action not listed” among the 20 case types.[63]
Any outline of the new court’s jurisdictional contours is incomplete without addressing party consent. Unique among most modern business courts, Wyoming’s Chancery Court is a full-party consent jurisdiction. Any defendant may object to proceeding in Chancery Court by the day its first pleading is due.[64] If the objection is timely filed, the Chancery Court must dismiss the case without prejudice.[65] But if untimely, the objection is waived.[66] Conversely, parties may remove an eligible case from Wyoming District Court to Wyoming Chancery Court by consenting in writing within 20 days of service on the last defendant and filing a notice of removal.[67]
While parties have the choice to opt-out, they have reason to opt-in. By statutory design, the Chancery Court offers parties a streamlined forum for the “expeditious resolution of disputes.”[68] The court aims to resolve most actions within 150 days.[69] To facilitate such rapid resolutions, the enabling statute grants the Chancery Court “broad authority to shape and expedite discovery”[70] and rules direct the court to “be active in the management of the docketed cases.”[71] In further efforts to streamline cases, the rules mandate electronic filing and service[72]—a first for a Wyoming state trial court—and require parties to receive judicial approval before filing a written discovery motion.[73]
Recognizing that bench trials are generally more expedient than jury trials, the rules provide that all Chancery Court trials will be heard by judge, not jury.[74] Three sitting Wyoming District Court judges experienced in business litigation—Judges John G. Fenn, Richard L. Lavery, and Steven K. Sharpe—will handle Chancery Court cases until a full-time Chancery Court judge is installed by March 2023.[75]
With an operational Chancery Court, the Equality State fully joins the modern business court movement with its unique twist on a commercial court: A court with jurisdiction over both law and equity matters that will operate on an accelerated schedule without juries but with full-party consent.
§ 1.3. 2021 Cases
§ 1.3.1. Arizona Commercial Court
Grein v. Walbar Acquisition Co., LLC[76] (Declining to stay litigation in light of related litigation in foreign state). In this case, the plaintiff was terminated from his position as president of the defendants’ company for allegedly violating the terms of a Confidentiality Agreement. In addition, one of the defendants exercised its option to repurchase the company’s stock that had previously been awarded to the plaintiff pursuant to two separate agreements. The defendants filed suit against the plaintiff in Delaware for breaching the Confidentiality Agreement. Shortly after that case was filed, the plaintiff filed suit in Arizona seeking, among other things, to recover the stock he was allegedly entitled to despite his termination. The defendants sought to dismiss the Arizona case by arguing that the Confidentiality Agreement contained a forum selection clause that governed all disputes between the parties. In the alternative, the defendants sought to stay the Arizona case because of the previously filed pending litigation in Delaware. The defendants argued that such a stay would “result in lower costs, avoid piecemeal litigation and avoid inconsistent results” and would be appropriate because Delaware law governs and the matter involves the internal affairs of a Delaware entity.
The court declined to dismiss the action because the forum selection clause in the Confidentiality Agreement was not an exclusive clause. The court found that the clause did not require that all suits be brought in Delaware, but rather the plaintiff simply consented to jurisdiction in Delaware. The court granted the motion to stay in part. The court stayed issues relating to the Confidentiality Agreement because it was governed by Delaware law, the plaintiff consented to jurisdiction in Delaware, and the Delaware suit was filed first. However, the court found that there was no reason why the plaintiff should not be allowed to pursue the claims under the additional agreements in Arizona. The plaintiff was entitled to his choice of forum. Therefore, the motion to stay was denied in this respect. The court reasoned that there was no forum selection clause in the additional agreements, the plaintiff’s claims under these agreements did not concern “internal affairs” of a Delaware company because the plaintiff was no longer an employee, and the fact that the agreements were governed by Delaware law was not a valid reason to stay the plaintiff’s claims. Thus, the plaintiff could continue to litigate his claims under the additional agreements.
Maricopa County v. Fann[77] (Examining the validity of legislative subpoenas). The plaintiffs, Maricopa County and the Maricopa County Board of Supervisors, filed suit asking the court to declare that two legislative subpoenas requiring the production of materials and documents related to the November 2020 presidential election were illegal and unenforceable. The defendants, the two senators who issued the subpoenas, counterclaimed asking the court to declare the subpoenas valid. The court began by noting it was “hesitant to enter the fray of political disputes between two other branches of government.” The court expressly stated that it was not enforcing the subpoenas and had concerns whether it would have jurisdiction to do so. Rather, the court’s ruling decided the narrow legal issues of “whether the Subpoenas are valid” and “whether the Subpoenas violate separation of powers.”
A.R.S. § 41-1151 authorizes “the presiding officer of either house or the chairman of any committee” to issue a subpoena. First, the court found that the statutory requirements of A.R.S. § 41-1151 were met because the senate president and a committee chair had the statutory power to issue the subpoenas. The court also found that the subpoenas were issued for the proper legislative purpose of assessing the integrity of the election process with the possibility of introducing possible reform proposals. Second, the court held that there was no violation of separation of powers because the entire electoral infrastructure is a legislative creation, and, therefore, the legislature has the power to investigate modifying or improving those delegated powers. Finally, the court held that the subpoenas requesting election materials and documents do not threaten the “right to a secret ballot” nor do they violate state statutes concerning confidentiality. In conclusion, the court found the subpoenas to be valid, but the ruling did nothing to enforce the subpoenas.
Vestar DRM-OPCO, LLC v. Mac Acquisition, LLC[78] (Discussing the applicability of the frustration of purpose doctrine to business leases during the pandemic). In this case, the landlord (Vestar) leased a property to Brinker. In addition, Brinker signed a “Guaranty of Lease Agreement,” under which Brinker agreed to perform any obligation imposed upon the tenant under the lease. Brinker then assigned the lease to Mac Acquisition. The property was to be used as a Macaroni Grill restaurant. The three parties signed a consent to assignment agreement, which stated that Brinker was not released or discharged by the assignment. As a result of the pandemic, Mac Acquisition failed to pay rent every month beginning in April 2020, and Vestar filed suit against Mac Acquisition and Brinker to collect the amount owed. The court found Brinker liable as a result of the guaranty agreement that it signed.
Mac Acquisition argued that the pandemic excused its obligation to pay rent because the purpose of the lease was frustrated. Specifically, Mac Acquisition argued that the purpose of the lease was a sit-down restaurant in a retail center, and the pandemic made the business unsustainable. The court examined the force majeure clause in the lease, which extended the time for performance as a result of acts of God and government regulations or requirements that are not within the control of any party. The court acknowledge that the pandemic qualified under this clause. However, the clause specifically excludes its application to the payment of rent. As a result, the court held that the force majeure clause did not relieve Mac Acquisition of its obligation to pay rent. Next, the court found that the frustration of purpose doctrine was not applicable. Although the lease stated that the tenant intended to initially open a Macaroni Grill restaurant, it went on to state that the premises could be used for any other lawful retail purpose. There was no language that stated a sit-down restaurant was an essential purpose to the lease. The fact that operations became more challenging and less profitable did not justify applying the doctrine of frustration of purpose. In conclusion, Mac Acquisition was liable for the unpaid rent.
§ 1.3.2. Delaware Superior Court Complex Commercial Litigation Division
Unbound Partners Ltd. P’ship v. Invoy Holdings Inc.[79] (Motions for partial dismissal under Delaware Superior Court Civil Rule 12(b) toll the period for answering the entire complaint). In Unbound Partners, the plaintiff brought a breach of promissory note action against the defendant pursuant to 10 Del. C. § 3901, which requires defendants in note actions to answer by affidavit. The plaintiff’s complaint set forth two counts alleging that the defendant breached a promissory note by not making a single payment towards a $2 million loan. The first count asserted that the defendant owed $4 million plus interest under the “Double Principal Option” contained in the note. The second count alternatively pled that the defendant owed $2.3 million plus interest based on the interest rate set forth in the note. The defendant did not file an answer but moved to dismiss the first count under Rule 12(b)(6) arguing that it is an unenforceable penalty based on Delaware public policy. It did not move to dismiss or answer the second count. The plaintiff filed a motion for summary judgment and default judgment on the second count based on the defendant’s failure to answer the complaint and file an affidavit pursuant to 10 Del. C. § 3901.
In upholding Delaware’s strong public policy for trials on the merits, and adopting the majority view of the federal courts, the court held that a pre-answer motion for partial dismissal tolls the period for answering the whole complaint. It further held that a motion for partial dismissal does not support a default on claims not asserted in such a motion. The court did note, however, that Delaware trial courts retain the discretion to order the filing of an answer to a complaint’s unchallenged claims based on the courts’ inherent power to control their dockets and for expediency’s sake. Undoubtedly, the Delaware courts have always been free under Delaware rules to make case-specific judgments to maintain orderly adjudication of claims.
Smart Sand, Inc. v. US Well Servs., LLC[80](Upholding a liquidated damages provision awarding more than $48.2 million). Pursuant to a Product Purchase Agreement (“PPA”), the plaintiff agreed to supply the defendant with frac sand for a monthly non-refundable reservation charge, which defendant was required to pay whether it actually purchased and took the frac sand each month or not. Under the PPA, the defendant agreed to purchase a total of two million tons of frac sand at fluctuating prices. If it failed to purchase frac sand for a given month, the PPA required the defendant to pay an amount equal to $40 multiplied by the difference in frac sand it was required to purchase under the PPA and the amount of frac sand that it had actually purchased. Before the end of the contract, the defendant stopped purchasing frac sand from the plaintiff and terminated the contract early. Accordingly, the plaintiff sent the defendant an invoice for a shortfall payment of more than $48.2 million for its failure to purchase more than 1.2 million tons of frac sand under the agreement.
The court rejected the defendant’s argument that such a “take-or-pay” provision was unconscionable. The court held that the liquidated damages provision was valid and enforceable under Delaware law because (1) the damages were uncertain at the time of contracting, and (2) the liquidated damages were reasonable. Specifically, the court found that the liquidated damages provision was enforceable because the quarterly pricing of frac sand was difficult to ascertain as it was based on the volatile pricing of oil. Moreover, it was the defendant that asked for the $40/ton no-take rate agreed to by the plaintiff. The court found this to be a reasonable rate based on the offer and acceptance between the parties at the time of contracting even though it resulted in a substantial payment. Therefore, the court upheld the liquidated damages provision. Although the defendant likely regretted the agreement it made on the pricing terms in the PPA, the court reinforced that both good and bad contracts governed by Delaware law will be enforced.
ARKRAY Am., Inc. v. Navigator Bus. Sols., Inc.[81] (Examining Delaware’s divergent precedent on whether choice-of-law clauses apply only to contract-based claims).In ARKRAY America, the parties entered into a software and consulting services agreement and a license agreement. Both of the agreements contained similar choice-of-law provisions whereby one agreement was governed by Delaware law while the other agreement was governed by Utah law. The plaintiff terminated the agreements and filed suit after the defendant failed to meet various deadlines and failed to provide a successful software system. The suit involved both breach of contract and fraudulent misrepresentation claims, as well as alleged statutory violations of Minnesota law. The parties agreed that the choice-of-law provisions were valid and applied to the contract-based claims; however, the parties disagreed as to whether the provisions would also apply to the tort and statutory claims.
Finding that the precedent in Delaware is divergent on this issue, the court analyzed the language of the choice-of-law provisions. It applied a two-part test to determine: (1) whether there were any conflicts between the laws of the potentially applicable states; and (2) if so, which state has the most substantial relationship to the dispute. Ultimately, the court concluded that the two choice-of-law provisions at issue were narrow and by their terms applied only to the contract-based claims and not to the tort or statutory claims. In its analysis of the Minnesota statutory claims, the court further found that there was no conflict between the laws of Minnesota, Utah, and Delaware. Therefore, the court concluded that Delaware public policy would not be offended by applying Minnesota law to the statutory claims.
§ 1.3.3. Florida’s Complex Business Litigation Courts
MAS Family Trust v. KLP Holdings, Inc.[82] (Default judgment entered on complaint seeking compensatory damages for alleged loss of company value due to breach of fiduciary duty was void due to failure to hold evidentiary hearing or trial to establish amount of damages). Following the buyer’s failure to make the second payment owed pursuant to an agreement for the sale of an entity, the seller brought claims against the buyer (breach of agreement), the buyer’s guarantor (breach of guaranty), and two officers/directors of the buyer (breach of fiduciary duty). The defendants failed to file responsive pleadings, and a final default judgment was entered as to each following a non-evidentiary hearing with seven days’ notice to the parties. The final judgment held the defendants jointly and severally liable for the damages due pursuant to the agreement (i.e., the amount of the second payment). Subsequently, an officer defendant moved for relief from the judgment, claiming it was void because the underlying claim against him sought unliquidated damages, and the court failed to set the unliquidated damages claim for trial or provide him with adequate notice. After considering the parties’ arguments, Judge Michael Hanzman of the 11th Judicial Circuit’s Complex Business Litigation Division granted the defendant’s motion for relief after finding the judgment void for failure to afford the defendant due process. Analyzing the issues, Judge Hanzman considered that the well-pled allegations of the complaint included claims for liquidated damages against the buyer and guarantor (i.e., seeking the second payment, the amount of which was set forth in the sale agreement), but claims for unliquidated damages against the officer (i.e., seeking compensatory damages for breach of fiduciary duty). Accordingly, the officer was entitled to 30 days’ notice, personal service of the trial setting, and an opportunity to be heard, which were not provided. Thus, the judgment was deemed void as to the objecting officer.
In re: Scurtis v. Rodriguez Consol. Derivative Actions[83] (Plaintiff’s time-barred derivative actions could neither be related back to previously-filed direct action arising from same set of facts nor could statute of limitations be equitably tolled). A limited partner in several real-estate-holding single purpose limited partnerships brought a direct action for breach of contract against the partnerships and his former partner, claiming that the defendants wrongfully sold certain properties without authority and without compensating him. While the limited partner pled no derivative claims on behalf of the partnerships, he sought, through his complaint, to be awarded damages that accrued to the partnerships. Nearly seven years later, the limited partner filed thirteen separate derivative actions on behalf of the partnerships, alleging breaches of fiduciary duties by his former partner and the partnerships’ chief operating officer. The defendants in the derivative actions moved for summary judgment on each claim, asserting that the claims were time-barred by the statute of limitations. The limited partner argued in response that: (1) the derivative actions related back to his original direct action; or (2) the statute of limitations should be equitably tolled because he’d acted in reliance on earlier denials of motions to dismiss his direct action in which the defendants had claimed that he had impermissibly combined direct and derivative actions in a single case. Pointing to the applicable Florida Rule of Civil Procedure, Judge Hanzman noted that nothing in the rule permitted claims in separate lawsuits to be related back to the time an earlier lawsuit was filed. Moreover, the statute of limitations could not be equitably tolled, the court held, because his predecessors had neither found that direct and derivative claims could be combined in the same case nor given the limited partner legal advice (which he would not have been entitled to rely on in any event). While the court noted that the limited partner had indeed sought to “recover for himself damages that belonged to some of the juridical entities he [later sought] to represent derivatively . . . [,] that [did] not transform his direct action into a derivative case,” and the predecessor courts had done nothing more than issue unelaborated orders denying the motions to dismiss. Accordingly, the court granted summary judgment in favor of the defendants on the derivative actions.
§ 1.3.4. State-wide Business Court in Georgia
Savannah Green I Owner, LLC v. ARCO Design/Build, LLC[84] (Interpretation of order declaring a statewide judicial emergency and tolling certain deadlines). This action involves a contract for the design and construction of a large warehouse. Under that agreement, the defendant, ARCO Design/Build would submit monthly payment applications to the plaintiff, Savannah Green I Owner, LLC. ARCO was also required to execute lien waivers after receiving payment from Savannah Green. ARCO was deemed to have received payment under O.C.G.A. § 44-14-366—regardless of whether it, in fact, received payment—60 days after submitting an application to Savannah Green, unless ARCO filed an affidavit of nonpayment or claim of lien within those 60 days. ARCO submitted an application for payment on April 22, 2020. Before then, in March 2020, the Chief Justice of the Supreme Court of Georgia tolled all statutory deadlines and filing requirements by a series of emergency orders declaring, then extending, a statewide judicial emergency in response to the COVID-19 pandemic. On July 10, 2020, the Chief Justice reimposed filing deadlines. Believing its obligations were tolled until this reimposition of deadlines, ARCO waited until September 14 to record its affidavits of nonpayment. A month later, it recorded a claim of lien for outstanding amounts owed against Savannah Green, and by counterclaim in the Business Court action, sought damages to foreclose on that lien and asserted a claim for breach of contract. Savannah Green moved for partial summary judgment arguing that ARCO failed to file an affidavit of nonpayment or claim of lien within 60 days of submitting its application for payment, and that this delay was not excused by the Supreme Court’s emergency orders. The court agreed and granted the motion.
The court first held that O.C.G.A. § 1-3-1(d)(3)’s “computation of time” requirements, apply to Section 44-14-366. All deadlines falling on weekends or holidays are thus extended to the next business day. And as a result, the court found “[i]n a world without COVID-19” ARCO would have had until Monday, June 22 to file its claim of lien.
The court then held that this deadline was not tolled by the Supreme Court’s emergency order. Analyzing the plain text of the emergency order, its amendments, and the analogous statute that authorized the Chief Justice to enter them, the court held that the tolling of deadlines in the emergency order was not so expansive as to capture the statutory deadline in Section 44-14-366. The emergency order applies only to deadlines, time schedules, and filing requirements for “litigants” in “judicial proceedings” or legal proceedings related to civil or criminal cases. And while Section 44-14-366 imposes a statutory deadline, it is not a “legal” deadline imposed on litigants, nor is it a deadline in a “legal proceeding” or “judicial proceeding.” As a result, ARCO was required to file its affidavit of nonpayment by June 22, 2020. In failing to do so, its application for payment was “deemed paid” by operation of law.
Martin v. Hauser, Inc.[85](Enforceability of restrictive covenants and courts’ “blue pencil” authority).This action arose from an employment agreement with restrictive covenants. Martin sought a declaration that those covenants, including restrictions on client solicitation, employee recruitment, and supplier interference, were invalid and could not be enforced by his former employer, Defendant Hauser, Inc., an Ohio-based insurance and employee benefits brokerage firm. Martin was hired by Hauser as a team leader and signed the subject agreement shortly after starting at the company. He was later promoted to an executive vice president position. After controversy emerged regarding Hauser and its CEO, Martin began negotiating with, then resigned to join, one of Hauser’s competitors. Hauser asserted that Martin recruited two Hauser employees to join his competing company and solicited Hauser’s existing and potential clients in violation of the restrictive covenants.
The court granted in part and denied in part Martin’s request for a declaratory judgment and injunctive relief. First, the court held that the agreement was overbroad because it prohibited the solicitation of “former customers or clients,” and found its three-year non-solicitation provision presumptively unreasonable under the Georgia Restrictive Covenants Act (applicable to all restrictions longer than two years), which presumption Hauser’s evidence could not overcome. The court exercised its authority to modify, or “blue pencil,” the covenant. It found such modification appropriate to (1) protect Hauser’s legitimate business interests, since it invested heavily in Martin who had access to Hauser’s confidential information; and (2) effectuate the parties’ intent, as they clearly intended for there to be some post-employment constraint on Martin’s solicitation of customers. As a result, the court reduced the non-solicitation term to one year and added that this restriction would only apply to clients of Hauser when Martin resigned. Second, the court found unreasonable, declined to modify, and struck the two remaining restrictive covenants concerning non-recruitment of Hauser employees and non-interference with its suppliers. In addition to having three-year durations, the court noted those provisions lacked any geographic or other limitation to constrain their territorial reach. They failed to reasonably articulate the scope of prohibited activity, instead employing broad, ambiguous language that seemed “to apply to all Hauser employees, agents, representatives, and associates—wherever they are in the world and regardless of (i) what they do for the company, (ii) whether Plaintiff ever had any contact with them, and (iii) whether or not [they terminated their] association with Hauser to engage with a competing business.” In deciding to strike, rather than modify, these covenants, the court noted that they were “boilerplate restrictions” not updated for more than a decade, not tailored to specific employees, and not drafted to comply with the laws of the state where employed.
§ 1.3.5. Indiana Commercial Court
Aegean LLC v. The Ohio Security Ins. Co.[86] (Denying defendant’s motion to dismiss or transfer venue). The court denied Taggart Insurance Center Inc.’s Motion to Dismiss or Transfer Venue because it found that (1) Marion County, the county where the suit was brought, was a preferred venue under Indiana Trial Rule 75, and (2) Taggart had irrevocably consented to venue in Marion County under Indiana Commercial Court Rule 4.
If a suit is initially brought in a county that meets the preferred venue requirements of Ind. R. Tr. P. 75(A)(1)-(9), a transfer of venue will not be granted. Trial Rule 75(A)(2) provides, in relevant part, that preferred venue lies in “the county where the land…is located…if the complaint includes a claim…relating to such land… .” Taggart argued that Marion County was not a preferred venue because the action did not have a nexus with Aegean’s Marion County location. Instead, Taggart argued that Clark County was the preferred venue as the county where either the principal office of a defendant organization is located or the office or agency of a defendant organization to which the claim relates or out of which the claim arose is located. Aegean argued that because this dispute involved a property insurance policy issued to Aegean, located in Marion County, Marion County was the preferred venue under Trial Rule 75(A)(2). The court found that, because the policy was issued to Aegean in Indianapolis, and Aegean is seeking recovery under this policy due to cancelled seminars at the Indianapolis location as well as locations around the country, the complaint included a claim relating to land. Marion County was a preferred venue as the county where the land at issue is located.
The court also addressed the Indiana Commercial Court Identifying Notice rule. Under Indiana Commercial Court Rule 4, if a party seeks to have an eligible case assigned to the Commercial Court Docket, the attorney representing that party shall file a Notice Identifying Commercial Court Docket Case (the “Identifying Notice”). If a party does not consent to assigning the case to the Commercial Court Docket, the attorney representing that party shall file a Notice of Refusal to Consent to Commercial Court Docket (the “Refusal Notice”). This notice must be filed not later than the latter to occur of the following: (1) thirty days after service of the Identifying Notice; or (2) the thirty days after the date the non-consenting party first appears in the case. If no Refusal Notice is timely filed by any party that has appeared in the case, the assignment of the case is deemed permanent. Aegean filed a Complaint and an Identifying Notice on February 4, 2021. Taggart filed an appearance in this case on March 3, 2021. Therefore, Taggart was required to file a Refusal Notice on or before April 2, 2021. It did not. Because no Refusal Notice was timely filed, the assignment of the case was deemed permanent, and Taggart was found to have irrevocably consented to venue in the Marion County Commercial Court. On October 5, 2021, the Indiana Court of Appeals affirmed the Commercial Court’s decision to deny the motion to dismiss.[87]
Decker v. Star Fin. Group, Inc.[88] (Granting defendant’s motion to compel arbitration and motion to dismiss). In Decker, the plaintiffs alleged that Star Financial Group (“Star”), in October 2019, improperly charged a fee with regard to bank transactions involving the plaintiffs’ checking account at Star. The transactions were subject to contractual documents including a document titled Terms and Conditions (the “Terms”). The Terms, in relevant part, stated that it, along with any other documents given by Star pertaining to the account, established rules which controlled the account. The Terms further stated that after notification of any changes to the Terms, continued use of the account after the effective date of such changes would constitute agreement to the new terms.
In June 2020, the plaintiffs and Star discussed the situation in an attempt to reach a resolution regarding an alleged improper fee. However, in August 2020, Star included an Addendum along with the plaintiffs’ bank statement, which waived the plaintiffs’ right to try claims covered by arbitration in court before a judge or jury. In March of 2021, the plaintiffs filed suit. Star moved to have the proceedings dismissed and the case ordered to arbitration in accordance with the Addendum. In response, the plaintiffs argued that the Addendum was (1) outside the scope of the original Terms and Conditions, (2) was not made in good faith, and (3) that they did not receive reasonable notice.
In issuing its opinion, the court summarized Indiana caselaw which favors arbitration agreements. In Indiana, when construing arbitration agreements, every doubt is to be resolved in favor of arbitration. A party seeking to compel arbitration must demonstrate: (1) there is an enforceable agreement to arbitrate the dispute; and (2) that the disputed matter is the type of claim that the parties agreed to arbitrate. In analyzing the Addendum, the court concluded that the Terms were clear and within their ordinary meaning, and that they contemplated such changes as were made in the Addendum. The court also noted that Indiana law has not imposed a general duty of good faith within the relationship between banks and their customers, except in instances where the alleged injury results from fraud. Last, the court found that Addendum language was in capital and bold font and was thus in accordance with the standards required by Indiana case law and provided reasonable notice. On October 6, 2021, the plaintiffs appealed the Commercial Court’s Order to the Indiana Court of Appeals.[89] To date, the appeal remains pending.
Midwest Serv. and Supply, Inc. v. Auto-Owners Ins. Co.[90] (Granting plaintiff’s motion for leave to file second amended complaint). In Midwest Service, the plaintiff moved for leave to file a Second Amended Complaint to correct an earlier damages allegation and to join the plaintiff’s wholly owned subsidiary as an additional plaintiff in the case. The defendant argued that the motion should be denied due to (1) plaintiff’s undue delay, bad faith and dilatory motive after the parties had already agreed upon a court-ordered deadline to add parties; (2) the futility of the proposed amendments; and (3) the undue prejudice that would result to the defendant. The plaintiff in response argued that the court had full discretion to grant its motion notwithstanding the earlier case-management order deadline, and that Indiana’s Trial Rules, Commercial Court Rules, the Commercial Court Handbook, and applicable caselaw all instruct the court to liberally allow pleading amendments.
The court noted that Indiana law is indeed clear that leave to amend should be granted unless the amendment will result in prejudice to the opposing party. The court found that defendant had failed to demonstrate why plaintiff should not be granted leave to amend, and noted that the Second Amended Complaint did not add any additional defendants, causes of action, or prayers for relief. Additionally, the court pointed out that the motion was filed less than one year after the case had been filed, and more than one year before the date of the jury trial. Thus, there was ample time for any additional discovery that may result.
Pier 48 Indy, LLC v. Dugan[91] (Denying defendant’s motion to quash non-party subpoena duces tecum). In Pier 48 Indy, the plaintiff, a restaurant business LLC, sued one of its members, Kelli J. Dugan, over alleged breaches of contractual and fiduciary duties Dugan owed to Pier 48 Indy. Pier 48 Indy claimed that Dugan engaged in self-interested acts that served to enrich herself at the expense of Pier 48 Indy. Pier 48 Indy served a subpoena duces tecum on Dugan’s employer, Natera, Inc., a non-party. Dugan filed a Motion to Quash on July 26, 2021. Pier 48 Indy filed a Response in Opposition to the Motion to Quash on August 10, 2021.
Under Ind. Trial Rule 26(B)(1), parties “may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action[.]” A discovery request is valid “if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.” T.R. 26(B)(1). The Commercial Court Rules maintain the broad scope of discovery through Ind. Comm. Ct. Rule 6(A), which states, in part, “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case[.]”[92] Parties may also seek discovery from non-parties. However, the court may quash or modify a subpoena upon a showing that the subpoena is “unreasonable and oppressive” under Ind. Trial Rule 45(C)(1).
In her Motion to Quash, Dugan argued that the majority of the discovery sought from Natera could be obtained from Dugan directly, and the subpoena, therefore, was both cumulative and unduly burdensome. Pier 48 Indy countered that because their claims in this action involve Dugan’s alleged untrustworthiness, Pier 48 Indy should not have to rely on Dugan to provide fully complete discovery responses. Because Dugan asserted that she had already provided all responsive discovery documents in her custody and control and indicated that she would not produce emails housed on Natera servers without Natera’s authorization, the court found that Dugan’s argument that Pier 48 Indy could obtain the documents from a more convenient source no longer applied. The court further found that the discovery requests were sufficiently tailored to topics of information that could lead to the discovery of admissible evidence. The court therefore denied Dugan’s Motion to Quash Non-Party Subpoena duces tecum.
Gage v. SourceOne Group, LLC[93] (Granting partial summary judgment in favor of Defendant/Counterclaim Plaintiff SourceOne Group, LLC and Defendant Joy DenHouter). The litigation in Gage stemmed from the dissolution of a business relationship between Plaintiffs Gage and Grabill Insurance Center (“GIC”), and Defendant SourceOne. In December 2011, SourceOne entered into an Independent Contractor Agreement with Gage, who, at the time, was president of GIC. SourceOne and GIC, in connection with this business relationship, entered into a Joint Marketing, Ownership and Aggregation Agreement on January 1, 2012. Under this Agreement, Gage was retained as an independent contractor by SourceOne to perform marketing, managing, and administering services. Gage brought this action after he advised Defendant DenHouter of his intent to terminate the relationship and accept an offer with a competitor in April 2017. Defendant/Counterclaim Plaintiff SourceOne Group, LLC and Defendant Joy DenHouter ultimately sought to dismiss portions of the Third Amended Complaint through a motion for summary judgment.
Indiana Trial Rule 56 mirrors Federal Rule of Civil Procedure 56, but Indiana’s summary judgment procedure is different than federal summary judgment practice. Indiana courts require the moving party to affirmatively negate an opponent’s claim, as compared to federal summary judgment practice which allows the moving party to merely show that the party carrying the burden of proof lacks evidence on a necessary element. The intention of this practice is to err on the side of letting marginal cases proceed to trial on the merits.
The court granted the defendants’ partial summary judgment motion as to the Indiana Sales Representative Act claim because the Act only applies to wholesalers, and the court found that SourceOne is not a “wholesaler.” The court also granted partial summary judgment on the breach of fiduciary duty by DenHouter. This claim was based on DenHouter owing a fiduciary duty to Gage because they were both signatories to the Joint Marketing Agreement. However, contractual relationships do not create a fiduciary duty, and therefore, the court granted summary judgment as to this claim. The court then granted summary judgment on the claim of unjust enrichment because such claims are typically inapplicable when a contract exists. Because plaintiffs did not allege any damages in the unjust enrichment claim that were not already alleged in their breach of contract claims, the court concluded that this claim did not have a basis in law. The court denied partial summary judgment in favor of defendants on the issue of whether Gage violated the Independent Contractor Agreement and whether the non-compete provisions should be tolled in any duration. The motion for partial summary judgment on the alleged violation of the Independent Contractor Agreement was denied.
§ 1.3.6. Iowa Business Specialty Court
Tammy Welbes v. DuTrac Cmty. Credit Union[94](Motion to dismiss breach of contract and breach of the implied covenant of good faith and fair dealing). In this pre-trial opinion, the court reviewed Defendant DuTrac Community Credit Union’s pre-answer motion to dismiss, which argued in favor of dismissal of Plaintiff Tammy Welbes’s claims for breach of contract and breach of the implied covenant of good faith and fair dealing (bad faith). The petition asserted that defendant has a standard practice of assessing overdraft charges where the transaction is subject to a “debit hold.” Plaintiff alleged that when a customer authorizes a transaction from their account, defendant permits the receiving merchant to request a “debit hold” on the funds transferred, which may be larger than the amount authorized by the customer. Transactions subject to these “debit holds” may incur overdraft fees even if the transaction does not make the account balance negative.
The court’s inquiry was limited to whether this practice violated the parties’ account agreement. The court granted defendant’s motion in relation to the bad faith claim because the agreement stated the defendant may charge such a fee, and it is not a breach to charge fees where the agreement authorized it. However, the court overruled the defendant’s motion with regards to the breach of contract claim because doing so would require evidence beyond the scope of a motion to dismiss. The court further ruled the breach of contract claim was not preempted by federal fee disclosure laws.
Robert Colosimo v. Anthony Colosimo and A&R Env’t, LLC[95](Enforceable agreement joint venture ownership interests). In this case, two brothers sought the court’s involvement in a matter where their business relationship in several joint endeavors went sour. The court found that after the brothers reached an agreement regarding their respective interests, Defendant Anthony Colosimo devoted time, effort, and equity to his business, Sparta Environmental (“Sparta”), with no involvement from Plaintiff Robert Colosimo.
The court analyzed two issues: (1) whether there was an enforceable agreement regarding how the brothers were to separate their respective interests in Sparta; and (2) alternatively, whether plaintiff was estopped from denying an alleged business promise that he would transfer his business interest in Sparta to his brother. The court found for defendant in both respects. The court concluded there was clear and convincing evidence that the brothers’ respective actions towards the growth and equity of Sparta evidenced an agreement to separate with defendant retaining interest in Sparta. Moreover, the court concluded it would be unjust to not enforce plaintiff’s promise to transfer his interest considering his lack of involvement in the company.
§ 1.3.7. Kentucky Business Court Docket
Ken Combs Running Store, Inc. v. Owners Ins. Co.[96] (Dismissal of claims for insurance coverage of business disruption due to COVID-19). Plaintiff operates a retail specialty sports store in Louisville, Kentucky, which has a commercial insurance policy issued by defendant. Plaintiff alleged that the Governor’s executive order requiring closures due to COVID-19 caused plaintiff to not operate between March 25 and June 29, 2020. Plaintiff filed a business income loss claim with defendant, which defendant denied. Plaintiff brought an action against defendant for a declaratory judgment that defendant is obligated to provide coverage, breach of contract, and unjust enrichment. The court found that plaintiff’s insurance policy did not cover the claim under its unambiguous terms because it covered only “business income loss resulting from physical loss or damage that may be remedied by repair, rebuilding, or replacement of the property.” Therefore, the court granted defendant’s motion to dismiss the declaratory judgment and breach of contract claim with prejudice. The court granted defendant’s motion to dismiss the unjust enrichment claim without prejudice.
Wilkins v. Lastique Int’l Corp.[97] (Shareholder demand for inspection of corporate records). Plaintiff, a shareholder and former long-time employee of defendant, brought an action for inspection of defendant’s corporate books and records. The court treated plaintiff’s “Motion for Summary Order of Inspection” under the applicable standard for motions for summary judgment. The court found that “there remains a genuine issue of material fact as to whether his demand is made in good faith and for the proper purpose of investigating corporate misconduct or for an improper purpose of obtaining leverage in the buyout negotiations.” The court further found that plaintiff failed to describe with “particularity the records sought or shown that they are directly connected with his purpose of valuing his shares.” Therefore, the court denied plaintiff’s Motion for Summary Order of Inspection.
§ 1.3.8. Maine Business and Consumer Docket
Black v. Cutko[98](Lease of designated public lands).In 1993, the people of Maine ratified Article IX, Section 23 of the Maine Constitution, to require that designated public lands cannot be “reduced” or their “uses substantially altered” unless two thirds of both houses of the Maine Legislature agree to any such change. The central question presented in this case was whether certain decisions made in 2014 and 2020 by the Bureau of Public Lands (the “BPL”)—the Executive Branch agency that holds title to the lands for the benefit of all Maine people—to lease portions of two parcels of public reserved land in the Upper Kennebec Region to Central Maine Power Company (“CMP”) to construct part of the New England Clean Energy Connect (“NECEC”) transmission corridor were proper.
Maine Sen. Russell Black, along with 18 other individuals and entities, filed a complaint against BPL and CMP, alleging that the execution of the 2014 and 2020 leases was ultra vires and asserting that the Maine Constitution required a two-thirds legislative vote before the NECEC could cut a 150-foot wide, one-mile long corridor across two parcels that are considered Public Reserved Land. Initially, BPL took the position that leases such as the ones at issue here are categorically exempt from the requirements of Article IX, Section 23, and thus the agency was not obligated to make a “reduction” or “substantial alteration” determination. The court rejected that contention in a March 2021 Order. In response, BPL argued that it actually did consider the substantial alteration issue and determined that the 2020 lease would not substantially alter the uses of the public trust lands.
In reviewing the administrative record, the court found no competent evidence supporting BPL’s assertion that it made the requisite public, pre-execution findings that the 2020 lease would not reduce or substantially alter the uses of the lands. Although BPL had conducted in 2014 what it termed a “resource-based analysis,” that is not the standard called for in Article IX, Section 23 and in 12 M.R.S.A. § 598. Moreover, although BPL relied on a “management plan” finalized in 2019 to support the proper determination, the court concluded that “designing and implementing a management plan is not the same as making a public, pre-lease determination that the lease would not frustrate the essential purposes as articulated in the Maine Constitution and as defined by the Maine Legislature.” The court vacated the lease for NECEC to bisect the public lands, stating that “BPL exceeded its authority when it entered into the 2020 lease with CMP, and BPL’s decision to do so is reversed.” BPL and CMP have appealed the decision to the Maine Supreme Judicial Court.
§ 1.3.9. Massachusetts Business Litigation Session
UMNV 205-207 Newbury, LLC v. Caffé Nero Americas, Inc.[99](Frustration of purpose due to COVID-19).UMNV 205-207 Newbury, LLC (“UMNV”) filed a lawsuit against its former tenant, Caffé Nero Americas, Inc. (“Caffé Nero”), seeking to recover unpaid rent and other expenses. Caffé Nero operated a chain of cafés, including a location on Boston’s Newbury Street (“Newbury Street café”) in premises owned by UMNV. Between March and June 2020, Caffé Nero was forced to close its Newbury Street café temporarily to comply with an order from the Massachusetts Governor’s office barring all restaurants from offering on-premises dining during the COVID-19 pandemic. Upon closing its Newbury Street café, Caffé Nero wrote to UMNV to explain that it would not be able to pay rent while the café was closed. UMNV refused to waive or reduce any of the rent payments due under Caffé Nero’s 15-year lease and, instead, sent Caffé Nero a letter purporting to terminate the lease and ordering Caffé Nero to quit the premises. Caffé Nero remained but continued not to pay rent. In June 2020, the Governor allowed restaurants to resume first outdoor and then indoor dining. Caffé Nero reopened its Newbury Street location accordingly, but nevertheless closed the Newbury Street café and quit the premises in October 2020 after continuing not to pay rent and reaching no agreement with UMNV.
Deciding UMNV’s motion for partial summary judgment on the issue of Caffé Nero’s liability for breach of the lease, the court denied UMNV’s motion and instead granted summary judgment for Caffé Nero despite the fact that Caffé Nero had not cross-moved. As the court noted, the lease for the Newbury Street café provided that Caffé Nero could use the leased premises “solely” for “[t]he operation of a Caffé Nero themed café under Tenant’s Trade Name and for no other purpose.” As such, the court concluded, the fundamental purpose of the lease was frustrated when the Governor required restaurants in Massachusetts to suspend on-premises dining. Because frustration of purpose excused Caffé Nero’s obligation to pay rent, it was not in breach of the lease when UMNV sent its purported letter of termination and order to quit. The court noted that frustration of purpose might not have excused Caffé Nero’s duty to pay rent if the lease had permitted it to use the premises for a different purpose, not barred by the Governor’s order. The court rejected UMNV’s argument that the lease’s force majeure provision barred application of the frustration of purpose doctrine, concluding that this provision addressed the separate doctrine of impossibility of performance. The court also concluded that another provision, providing that Caffé Nero’s obligations under the lease constitute “separate and independent” covenants, did not prevent application of the frustration of purpose doctrine because other provisions of the lease still contemplated the doctrine could apply.
Athru Group Holdings, LLC v. SHYFT Analytics, Inc.[100](Breach of fiduciary duty).In late 2017, Athru Group Holdings, LLC (“Athru”) sold its one-fifth stake in SHYFT Analytics, Inc. (“SHYFT”), for 75 cents per share to eleven buyers including, Medidata Solutions, Inc. (“Medidata”). Six months later, Medidata acquired SHYFT outright, paying $2.95 per share to purchase all the SHYFT stock it did not own, including the stock that Athru had just recently sold to the ten other buyers. Athru filed suit, alleging that it would not have sold its interest in SHYFT if it had known that SHYFT was interested in being acquired or that Medidata intended to acquire it. In particular, Athru alleged claims for breach of fiduciary duty against a director and a CEO/director of SHYFT as well as claims of fraud and misrepresentation, breach of contract, and violation of c. 93A against various combinations of these two individuals, SHYFT, and Medidata.
The court dismissed Athru’s complaint in full. Because SHYFT was a Delaware corporation, the court applied Delaware law to analyze the breach of fiduciary duty claim. Applying Delaware law, the court concluded that SHYFT’s officers and directors did not have a duty to disclose to Athru SHYFT’s alleged interest in merging with Medidata. Even assuming there had been preliminary merger discussions between SHYFT and Medidata, SHYFT’s officers and directors had no duty to disclose such discussions to SHYFT’s shareholders, like Athru, until fundamental terms of a merger agreement were finalized. Turning to the fraud and misrepresentation claims, the court similarly concluded that the defendants, some of whom had purchased shares from Athru, did not owe Athru a duty to disclose any preliminary merger discussions. Athru argued that such a duty existed because Athru’s understanding that SHYFT would not be acquired was “basic to” the parties’ share purchase agreements. The court rejected this argument, noting that the agreement provided for Athru to receive additional compensation if its SHYFT stock was resold at a certain price. The court dismissed Athru’s c. 93A claim because it was “wholly derivative” of Athru’s unavailing fraud claim. And the court dismissed the remaining breach of contract claims because they needed to be submitted to an independent auditor under the alternative dispute resolution procedures set forth in the various stock purchase agreements.
Needham Bank v. Guaranteed Rate, Inc.[101](Misappropriation of trade secrets and breach of confidentiality agreements). Needham Bank (“Needham”) brought suit against a former employee, Edward Coppinger (“Coppinger”), and his new employer, Guaranteed Rate, Inc. (“GRI”). Beginning in 2014, Coppinger worked as a Vice-President of Residential Lending for Needham. In this role, he was responsible for originating and closing residential mortgages through his personal and professional contacts. At various times during his employment, Coppinger was required to sign agreements providing that he would not use Needham’s confidential information outside the scope of his employment. These agreements defined confidential information to include client lists. In January 2021, Coppinger left Needham to take a similar position at GRI, a competitor of Needham in the business of providing residential mortgages. Evidence showed that before leaving Needham, Coppinger had sent customer lists and information about closed loans from his work email to his personal email account. Coppinger edited one of these lists to delete names of customers he did not recognize, add additional customers, and add customers’ email addresses. GRI, in turn, took this list and uploaded its client database. When Coppinger received a letter from Needham informing him that he had allegedly breached the confidentiality agreements, GRI sequestered this client list.
Needham moved for a preliminary injunction, asserting misappropriation of trade secrets and breach of the confidentiality agreements, among other claims. Applying the familiar preliminary injunction standard, the court first assessed Needham’s likelihood of success on the merits. The court concluded that Needham had failed to allege a viable claim under the Massachusetts Uniform Trade Secrets Act (“MUTSA”) because it had not alleged a protected trade secret. The customer list—the only document that Coppinger had been shown to have accessed and used—was readily ascertainable by proper means from public records and thus failed to constitute a trade secret. Similarly, the court expressed skepticism as to the viability of Needham’s breach of contract claim to the extent it was based on the customer list. Under the MUTSA, nondisclosure obligations only protect economically valuable information if that information constitutes a trade secret. As the court had previously found, the customer list did not meet this standard. Nevertheless, the court concluded that Needham had a likelihood of succeeding on the merits to the extent it alleged breaches based on Coppinger’s disclosure of information beyond the customer list. This included documents that Coppinger had emailed to himself and shared with GRI detailing the loan and credit information of Needham’s customers. The court rejected Needham’s claims for breach of a non-solicitation provision because the provision was ambiguous and lacked a temporal or geographic limitation. And the court expressed doubt as to the success of Needham’s tortious interference with contractual relations claim based on the facts. On the remaining preliminary injunction factors, Needham fared better. The court found that Needham had shown a plausible risk of suffering irreparable harm in the form of damage to its customer relationships. The court also found that the balance of harms tipped in Needham’s favor. With that, the court granted Needham’s motion in part, ordering Coppinger to return the customer list and customer information and refrain from soliciting any customer on the list for six months. GRI was also ordered to continue sequestering the customer contacts it had received from Coppinger and uploaded into its database.
§ 1.3.10. Michigan Business Courts
Benteler Auto. Corp. v. TG Mfg., LLC[102] (Requirements contract, statute of frauds). For years, defendant supplied automotive engine parts to plaintiff under a requirements contract. In anticipation of each shipment under the contract, plaintiff-buyer would send a scheduling agreement to the supplier stating the quantity of parts it required. In May 2019, the buyer emailed a scheduling agreement to defendant-seller dictating not only a quantity term, but also a new price and other new terms. One of the new terms obligated the seller to provide a six-week inventory when the buyer transitioned to a new supplier. Moreover, it stated that the seller’s acceptance “shall be conclusively presumed by Seller’s signature on this Order or by Seller’s shipment of the goods.” Without countersigning it, the seller continued to ship parts to the buyer.
In holding the terms of the May 2019 scheduling agreement enforceable, the court followed the Michigan Court of Appeals’ application of the UCC’s statute of frauds to requirements contracts. In that context, periodically-issued “material releases,” such as this scheduling agreement, satisfy the statute of frauds when coupled with automotive supply contracts – even when those contracts consist of boilerplate language and do not result from negotiations between the parties.
Brooks Williamson & Assoc., Inc. v. Braun[103] (Breach of fiduciary duty in employment context). At issue was whether the defendants owed fiduciary duties to their employer, plaintiff, a wetland consulting company. Three of the five defendants were part-time, hourly employees without employment agreements, confidentiality agreements, or non-competition agreements. One of the plaintiffs, Williamson, the president and sole owner of the company, acknowledged that these individuals were not officers, directors, or shareholders of the company, despite his characterization of them as key employees. Yet, the plaintiffs argued these employees owed fiduciary duties to the company by virtue of the agency relationship that existed as a consequence of their employment. Additionally, the plaintiffs argued that Berninger, another defendant, functioned as the company’s de facto Chief Operating Officer.
In granting summary disposition (summary judgment) to the defendants, the court rejected these arguments and noted that in Michigan employees generally do not owe fiduciary duties to their employers. As to Berninger, the company’s alleged de facto COO, the court found no evidence that Williamson or the company had reasonably placed in him the “faith, confidence, and trust” necessary for a fiduciary relationship to arise. The court also found it significant that Berninger was not an actual officer or director of the company.
General Motors LLC v. FCA US LLC[104] (Fraud, fraud by omission, unfair competition, civil conspiracy). In the aftermath of the Great Recession, European automaker Fiat acquired financially-distressed Chrysler to form FCA. According to General Motors (GM), FCA then initiated an alleged multimillion-dollar bribery scheme with key union officials at the UAW to weaken GM’s financial position, in anticipation of a future FCA-GM merger on terms favorable to FCA. In September 2020, GM filed suit against FCA, alleging fraud, fraud by omission, unfair competition, and civil conspiracy, among other claims, related to the collective bargaining agreement (CBA) GM had negotiated with the UAW in 2015.
The UAW is a union that supplies workers to certain automotive manufacturers, including GM and FCA. The labor negotiations process is structured so that the UAW’s contracts with each automaker all expire at the same time, on the same date. Typically, the UAW targets the best-performing automaker as the “lead” company and negotiates the first CBA with the lead. Then, the UAW uses a technique called pattern bargaining to pressure remaining automakers to pattern their CBAs after the lead’s. GM was the lead in 2011 and expected to be the lead again in 2015 “based on objective factors.” However, the UAW unexpectedly chose FCA as the lead, and FCA set an unfavorable pattern (from GM’s perspective) by granting the UAW large wage increases for Tier One workers and other concessions. Because the risk of a strike was too great, GM ultimately yielded to the UAW’s pressure for similar concessions at a cost to GM of over $1 billion above the tentative agreement GM had reached with the UAW earlier in the negotiations process.
Moreover, FCA’s collective bargaining agreement, and therefore GM’s also, permitted the automakers to take advantage of greater numbers of Tier Two workers, a cheaper source of labor. Leading up to the 2015 bargaining process, the UAW had insisted it would reinstate the former cap on Tier Two workers, limiting that group to 25% of the workforce. GM had structured its workforce in anticipation of this change. FCA, however, maintained a workforce comprising 42% Tier Two employees prior to the 2015 CBA. Thus, FCA benefitted from a lower wage-structure in its workforce prior to the 2015 CBA negotiations. Additionally, FCA was better positioned than GM to immediately benefit from the 2015 pattern CBA, because it already employed much greater numbers of Tier Two workers.
The court granted summary disposition (summary judgment) to FCA on GM’s fraud claims for failure to state a claim on which relief may be granted. GM failed to sufficiently allege facts showing that FCA’s alleged bribery scheme had proximately caused it harm, or that it had suffered a legally cognizable harm. The court rejected GM’s reliance on its tentative bargaining agreement to establish damages because it was speculative that the UAW would have continued to support the agreement absent the alleged bribery scheme. Instead, the court found that the economic force of pattern bargaining and threat of a strike forced GM’s hand. GM’s civil conspiracy claim relied on the fraud claims to supply a separate, actionable tort, and Michigan law requires any claim of unfair competition to be based on fraud. Consequently, these claims failed also.
Sea Land Air Travel Serv., Inc. v. Auto-Owners Ins. Co.[105] (Insurance, COVID-19). Plaintiff Sea Land Air Travel Service, Inc. sued its insurer under a commercial property insurance policy, seeking to recover for the interruption to its business caused by a government-ordered shutdown related to COVID-19. On the complaint alone, the court granted summary disposition (summary judgment) to the insurer on Sea Land’s breach of contract claims, finding that Sea Land had failed to state a cause of action. The policy required that Sea Land’s suspension of operations result from a “direct physical loss or damage to the property” for it to recover loss of business income. The court held that neither the government’s shut-down order nor the potential presence of the virus constituted a direct physical loss. The term “physical loss” should be given its plain meaning, such as water damage, burned premises, or a broken window. Additionally, the true cause of the business interruption was the government’s shutdown order, not the virus, and that order did not prohibit remote work. However, the court declined to adopt the insurer’s reasoning that the virus is a contaminant under the policy and that the policy’s pollution exclusion therefore applied to bar Sea Land’s claims.
§ 1.3.11. New Hampshire Commercial Dispute Docket
Labbe v. Counter Design, Inc.[106](Wage claims relating to an alleged equity interest). The plaintiffs in this case were employees of the defendant, and alleged that the defendant had offered each of them a “two percent (2%) ownership share of the Defendant company as part of [their] continued employment with the Defendant.” Upon an alleged failure to comply with the offer, the plaintiffs brought suit, including claims that this percentage ownership share constituted “wages” within the meaning of New Hampshire’s wage statute.
The statutory definition is broadly worded, and includes the catchall phrase “whether the amount is determined on a time, task, piece, commission or other base of calculation.” Notwithstanding the statutory definition, however, the court concluded that a promise of a percentage equity interest was not something that could be readily calculated, and therefore did not fall within the definition of wages in the statute. Therefore, the court granted the defendant’s motion to dismiss.
Atlantic Anesthesia, P.A. v. Lehrer[107] (Common interest doctrine and crime fraud exception).In this case, the court addressed an issue on which the New Hampshire Supreme Court had not yet ruled: whether the “common interest” provision within the attorney client privilege rule of evidence (“in a pending action and concerning a matter of common interest”) applied in the circumstances.
There was no pending action, but the defendants and a third party had communicated regarding the subject of the later litigation, and the defendants sought to protect discovery of their communications with that third party pursuant to the “common interest” rule.
The court ultimately determined that it need not resolve the issue of whether this doctrine can apply to communications before there is a “pending action,” because it further determined that the crime-fraud exception to the privilege applied in the context of an alleged breach of fiduciary duty. In doing so, the court concluded that the New Hampshire Supreme Court would find persuasive the reasoning of decisions from other jurisdictions finding sufficient parallels between fraud and the intentional breach of fiduciary duties to trigger the exception to the privilege rule.
Schleicher and Stebbins Hotels, LLC v. Starr Surplus Lines Ins. Co.[108] (Jurisdiction of the BCDD).The jurisdiction of New Hampshire’s business court is established by state statute and court rule, and in addition to the types of cases it may consider, both also require consent of all parties to the jurisdiction of the court.
In this case, the defendants sought such a transfer, and the plaintiffs objected. The defendants then argued that the requirement of consent by all parties was not “jurisdictional,” and therefore subject to waiver by the court in the exercise of its general superintendence.
The court determined that the consent requirement in the statute and rule was akin to a subject matter jurisdiction requirement, and therefore the absence of complete consent precluded the court from accepting a transfer of the case to the business court.
§ 1.3.12. New Jersey’s Complex Business Litigation Program
Jenkinson’s South Inc. and Jenkinson’s Pavilion v. Westchester Surplus Lines Ins. Co.[109](Denial of insurance claims relating to COVID-19). This case concerns the fallout from business closures stemming from the COVID-19 pandemic. Specifically, this dispute arises from the denial of insurance claims submitted by plaintiffs in May 2020 under multiple “all risk” primary and excess policies, after the COVID-19 pandemic resulted in the temporary closure of Jenkinson’s boardwalk and amusement business in Point Pleasant Beach, New Jersey. Plaintiffs claimed a loss in excess of $10 million.
All policies held by the plaintiffs included language insuring “against all risks of direct physical loss or damage to Insured Property, except as excluded.” The multiple insurance policies contained various exclusions relating to, inter alia, loss of use, pollutants or contaminants, and loss due to virus or bacteria.
The court denied plaintiffs’ motion for summary judgment and granted the defendant insurance companies’ cross-motions for summary judgment. In doing so, the court found that the defendants met their burden in proving the closure of the plaintiffs’ boardwalk business was a direct result of the COVID-19 pandemic and that no direct physical loss was incurred to the plaintiffs’ property, thus falling outside the scope of the policies’ coverage.
In holding that there was no direct physical loss or damage to plaintiffs’ property to trigger coverage under the policies, the court found that plaintiffs proffered evidence that various employees at the premises had contracted COVID-19 at or around the time that plaintiffs closed their facilities was insufficient and that there was no evidence that the employees contracted COVID-19 because of exposure to the property itself. In addition, the court ruled that plaintiffs failed to make a showing that the concentration of COVID-19 rose to a level where the property was rendered temporarily unsafe or inhospitable, and distinguished the instant scenario from a prior case where the presence and concentration of ammonia in a packaging plant required immediate closure and remediation before the property became safe for human occupancy. The court further noted that Governor Murphy’s Executive Orders that required plaintiffs to close their doors to the public did not require the actual presence of COVID-19 at the property to bar public access.
Finally, the court ruled that the Loss of Use exclusion barred coverage under the policies because plaintiffs’ damages arose out of the inability to use the property for its intended profit-making function, and also that the presence of COVID-19 at the property falls within the pollutant or contaminant and/or Biological material exclusions contained in the various policies.
§ 1.3.13. New York Supreme Court Commercial Division
SL Globetrotter L.P. v. Suvretta Capital Mgmt., LLC[110](Interpretation of conditions precedent in a contract). In this case, Justice Peter Sherwood declined to dismiss plaintiffs’ breach of contract claims, which arose out of a dispute over investment, through a special purpose acquisition vehicle (“SPAC”), in a new public company. The opinion sheds light on the interpretation of conditions precedent in a contract, particularly when they deal with the consistency of relevant financial information.
In July 2018, SL Globetrotter, L.P. and Global Blue Group Holding AG (the “Company”) and Global Blue Group AG (“Global Blue”), a provider of tax-free shopping and currency processing services, engaged Far Point Acquisition Corporation (“FPAC”), a SPAC, in order to consummate a transaction. The transaction would allow the Company to become a public company that would be owned by existing FPAC and Global Blue shareholders as well as investors such as defendants Suvretta Capital Management, LLC and Toms Capital Investment Management LP who made investments through a mechanism known as “private investments in public equity” or “PIPE.” In December 2019 and January 2020, defendants received an Investor Presentation, which included information about the transaction and the investment opportunity. The Investor Presentation explicitly disclaimed any guarantees of future performance and “warned that any forward-looking statements involved numerous risks, uncertainties, or other assumptions that could create a difference in results from those expressed or implied by the Investor Presentation.” On January 16, 2020, defendants entered into agreements pursuant to which they committed to purchase five million shares of the Company for $10 per share, for an aggregate purchase price of $50 million. The parties planned that the Company would use the money it obtained from defendants and other investors to purchase a portion of Global Blue’s shares. In the agreements they executed, defendants acknowledged the possibility of an immediate loss in their investment’s value. On June 19, 2020, FPAC filed a preliminary proxy statement with the Securities and Exchange Commission that explained that the COVID-19 pandemic had a negative impact on Global Blue’s financial performance. Three days later, defendants sent plaintiffs a repudiation letter, which stated that defendants would not perform their obligations under the agreements, including providing the funds necessary to purchase the New Global Blue shares.
Thereafter, plaintiffs sued defendants for breach of contract, and defendants moved to dismiss. In support of their motion to dismiss, defendants asserted that the conditions precedent to their obligation to purchase shares were not satisfied. “A condition precedent is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises[.]” A plaintiff cannot maintain a claim for breach of contract unless all conditions precedent to the defendant’s performance have been satisfied. In this case, defendants primarily argued that conditions precedent to their obligations were not satisfied because in the relevant agreements, Global Blue represented that the information in its proxy statement would not be materially inconsistent with the information included in the Investor Presentation. Defendants pointed to numerous differences between the proxy statement and the Investor Presentation which they argued were material, including (1) that Global Blue’s definitive proxy statement included no financial projections and stated that previous projections could no longer be relied upon, even though the Investor Presentation stated that Global Blue expected an annual revenue growth rate of 3-6%, and (2) that Global Blue’s definitive proxy statement revised financial information that was included in the Investor Presentation.
Justice Sherwood concluded that defendants’ argument failed based on the documentary evidence presented by the parties. Specifically, the court explained that the Investor Presentation included a disclaimer that the information in the presentation was based on the historical financial information included in Global Blue’s audited financial statements. The court also emphasized that the Investor Presentation stated that it contained “forward-looking statements” about future developments that Global Blue could not guarantee would occur, and which Global Blue had no obligation to update or revise. Furthermore, Justice Sherwood noted that defendants specifically acknowledged the risks incident to the transaction, including the possibility of total loss, when they agreed to purchase the shares. Thus, the court declined to dismiss plaintiffs’ breach of contract claims, concluding that “it would be improper to now allow defendants to disclaim their contractual obligations by arguing that the exclusion of forward-looking statements or the inclusion of corrected financial information in the [definitive proxy statement] are material inconsistencies in violation of” the relevant conditions precedent.
Certain Underwriters at Lloyd’s v. AT&T Corp.[111](Insurance policies’ anti-assignment clauses). In Certain Underwriters at Lloyd’s v. AT&T Corp., Justice Cohen of the New York County Commercial Division Court granted a motion for partial summary judgment and determined that Nokia, through its predecessor Lucent, had the right by assignment to seek coverage under certain insurance policies issued to AT&T that contained anti-assignment clauses. Although the general rule in New York is that such anti-assignment clauses are enforceable, this decision highlights how it can be more challenging to bar assignment in the special context of an insurance policy.
The court began its analysis by explaining that “under New York law, the enforceability of a no-transfer clause in an insurance contract is limited.” Specifically, as set forth in the leading First Department case of Arrowood Indemnity Co. v. Atlantic Mutual Insurance Co., “New York generally follows the majority rule that a no-transfer provision in an insurance contract is valid with respect to transfers that were made prior to, but not after, the insured-against loss.” As the First Department explained in Arrowood, “this principle is based on a judgment that while insurers have a legitimate interest in protecting themselves against additional liabilities that they did not contract to cover, once the insured-against loss has occurred, there is no issue of an insurer having to insure against additional risk.” Turning to the facts of the case, the court noted that any potential losses covered by the policies necessarily preceded the assignment because the underlying policies covered only “accidents” or “occurrences” during their respective policy periods, all of which had expired before the SDA was executed. The court thus found that Nokia need not establish that the claimed losses preceded the assignment to be successful on its motion—because all covered losses were by definition pre-assignment losses, and any post-assignment losses were not insurable under the policies.
Ronald Benderson 1995 Trust v. Erie County Med. Ctr. Co.[112](Yellowstone injunction request). In this case, Justice Walker of the Erie County Commercial Division granted plaintiff’s request for a Yellowstone injunction where the defendant landlord provided a faulty notice of default to the plaintiff tenant. This case arises out of a dispute between a commercial real estate tenant-plaintiff and a hospital landlord-defendant in the context of a commercial lease for retail space located in the lobby of the hospital. The initial term of the lease, which was for ten years, provided that the tenant would pay a “Partial Rent” amount until all rentable space was sublet and open for business. The Partial Rent was calculated by “multiplying the Full Rent due for each month by a fraction the numerator of which is the total combined square footage of each subtenant open for business in the [lobby] and the denominator of which is the total square footage of the [lobby].” Plaintiff began paying Partial Rent in accordance with the lease provisions on May 22, 2003. The lease provided plaintiff the option to renew for a second ten-year term, and specified that the full rent for the second ten-year term would increase by a certain amount. The renewal option, however, was silent as to the Partial Rent provision. Plaintiff exercised the renewal option on August 22, 2011, and served defendant with a notice clarifying the rent for the renewal period in accordance with the Partial Rent provision, i.e., the monthly rent for the renewal period multiplied by the Subtenant occupancy rate. Defendant accepted the prorated rent without objection until October 2020. Following a major economic loss during the COVID-19 pandemic and an appraisal which determined that defendant was losing money on its lease of the lobby space, defendant sent plaintiff a notice of a default under the lease. After a few months of trying to resolve their disputes, defendant directed plaintiff to “quit and surrender” the lobby space. Plaintiff then moved for a Yellowstone injunction.
In order to succeed on a Yellowstone injunction, a plaintiff must demonstrate that “(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.” New York courts typically do not require a showing of likelihood of success on the merits and irreparable harm in order to issue a Yellowstone injunction, although the court nonetheless proceeded with an analysis of the usual preliminary injunction factors in reaching its decision in this case.
As an initial matter, the court found that the plaintiff was entitled to the requested relief because the alleged notice of default was defective in a number of respects. For example, it was sent to the wrong party at the wrong address in violation of the notice clause in the lease. Furthermore, the court held that the notice violated then-Governor Andrew Cuomo’s Executive Order providing for a moratorium on commercial evictions during the COVID-19 pandemic. More importantly, the court found that the notice of default was “so impermissibly vague that it was insufficient to commence a ‘cure’ period, as a matter of law.” It claimed for the first time that the Full Rent Commencement date had occurred on an unspecified date in 2014 and that plaintiff “shall pay… [the Full Rent amount],” but also provided two different and logically inconsistent rental rates. The notice went on to say that the renewal option did not include a Partial Rent period. The notice provided thirty days to cure the default “to avoid termination of the Lease,” but did not explain how plaintiff could cure the alleged breach. “Notably, the notice letter was silent as to whether ‘cure’ meant paying increased rent moving forward, paying back-rent for years in the past, or which amount of rent would apply in either case.” Because of these ambiguities with respect to plaintiff’s ability to cure, the notice letter was insufficient to commence a cure period as a matter of law, and thus the “cure” period could not have expired because it was never commenced.
The court went on to address the plaintiff’s likelihood of success on the merits with respect to the remaining Yellowstone factors. Although the court recognized that the defendant had some meritorious public policy arguments with respect to the validity of the lease in question, and that the plaintiff had likely failed to pay the full amount of rent due under the lease, it ultimately granted the plaintiff’s request for injunctive relief, noting New York’s well-settled law that the loss of a leasehold constitutes irreparable harm and that the equities disfavor the forfeiture of valuable leasehold interests, particularly where, as here, the notice of default was a nullity.
Costello v. Molloy[113](Mandatory injunction for reinstatement as member in LLC). In Costello v. Molloy, Justice Gretchen Walsh of the Westchester County Commercial Division denied Plaintiff William Costello’s request for a mandatory injunction against Defendants Ronald Molloy and Curis Partners, LLC reinstating Costello as a member of the LLC. Although the court found that Costello demonstrated a likelihood of success on the merits of his claim that his LLC membership was wrongfully terminated, the court held he failed to clearly establish the type of extraordinary circumstances necessary to warrant the granting of mandatory injunctive relief reinstating his membership in Curis.
Despite finding that Costello had established a likelihood of success on his claim that Defendants breached the Operating Agreement, the court nonetheless denied Costello’s request for a mandatory injunction reinstating him as a Curis member. Specifically, the Court explained that a mandatory injunction is an “extraordinary and drastic remedy” that should only be granted when essential to maintain the status quo pending trial. Because the injunctive relief enjoining Defendants from taking any actions that would prejudice Costello’s purported rights or membership in the LLC—which the court extended under the requested preliminary injunction—was sufficient to protect Costello’s interests, such a drastic remedy was not necessary. The court also reasoned that absent extraordinary circumstances, a mandatory injunction should not issue where, as here, to do so would grant the movant the ultimate relief to which he would be entitled in a final judgment.
§ 1.3.14. North Carolina Business Court
Monarch Tax Credits, LLC v. N.C. Dept. of Revenue[114] (Motion to dismiss for failure to state a claim and for lack of jurisdiction). The North Carolina Department of Revenue brought a motion to dismiss plaintiff’s petition for judicial review and complaint for declaratory relief for lack of jurisdiction under Rules 12(b)(1) and 12(b)(2) and for failure to state a claim upon which relief may be granted under Rule 12(b)(6). The court’s order addressed only Rules 12(b)(1) and 12(b)(2), and deferred ruling on the merits under Rule 12(b)(6). Plaintiff sought declaratory relief on whether defendant unconstitutionally administered tax law to deny tax credits to plaintiff’s investor customers. Plaintiff “formed structured investment partnerships to encourage investment by North Carolina taxpayers related to renewable energy, mill restoration and historic redevelopment” and to use “these partnerships to aggregate investments necessary to fund such projects, and to then allocate to investors the tax credits those projects yield.” The court found plaintiff did not have jurisdiction to challenge defendant’s enforcement of a September 10, 2018 publication as an administrative rule under N.C. Gen. Stat. § 150B-4, but found plaintiff did have jurisdiction to “pursue a direct constitutional claim for the damage it has suffered unaffected by any invocation of sovereign immunity, otherwise known as a Corum[115] claim.”
Ford v. Jurgens[116] (Attorney-client privilege and work product doctrine). Plaintiffs moved to compel the production of certain draft operating agreements and related emails withheld by defendants on the basis of attorney-client privilege and/or the work product doctrine. The court considered and rejected plaintiffs’ arguments that the draft operating agreements were not privileged because: (1) they were not intended to be confidential; (2) any privilege had been waived because defendants “put advice they received from counsel ‘at issue’”; (3) due to the fiduciary exception; or (4) due to the crime-fraud exception. Therefore, the court denied the motion as to the draft operating agreements. As to the related emails, the court granted the motion in part and ordered the production of several transmittal emails that attached draft operating agreements because those emails did not furnish or request legal advice; therefore, they were not attorney-client privileged communications. The court denied the motion as to more substantive emails that were made in the course of giving or seeking legal advice for a proper purpose.
Buckley LLP v. Series 1 of Oxford Ins. Co. NC LLC[117] (Attorney-client privilege and work product doctrine). Both parties moved to compel the production of certain email communications withheld by the opposing party on the basis of attorney-client privilege and/or the work product doctrine. Plaintiff, a law firm, brought the action against defendant, an insurance company, for refusing to provide coverage under an insurance policy for “certain losses associated with the departure of key revenue-generating partners.” Plaintiff hired an outside law firm to provide services relating to an investigation of alleged misconduct of one of plaintiff’s partners. Defendant contended that plaintiff improperly withheld communications between plaintiff and its outside counsel. The court reviewed in camera the challenged communications and determined that certain communications reflected outside counsel’s participation in the investigation “in accordance with plaintiff’s firm policies and were unrelated to the rendition of legal services.” Therefore, the court found such communications were not properly withheld as privileged. On the other hand, the court found that other communications reflecting a primary purpose of giving or receiving legal advice were privileged. The court further considered and rejected plaintiff’s contention that its communications with outside counsel were protected under the work product doctrine. The court reasoned the investigation would have been conducted whether or not litigation was anticipated and no evidence suggested litigation was anticipated.
Plaintiff contented that defendant improperly withheld communications including its internal in-house counsel because the in-house counsel primarily was engaged in her business role rather than in giving legal advice. The court reviewed in camera the challenged communications and determined that most reflected the in-house counsel’s business role in reviewing plaintiff’s claim in the ordinary course of defendant’s insurance business. Therefore, the court found such communications were not properly withheld as privileged.
Erwin v. Myers Park Country Club, Inc.[118] (Shareholder inspection rights). Erwin, a member of Myers Park Country Club, sought to inspect the corporate records of the club related to certain renovations projects and assessments approved by the Board of Directors. The court first examined whether Erwin had an absolute right of inspection pursuant to N.C. Gen. Stat. § 55-16-02(a). The court concluded that Erwin, as a qualified shareholder under the statute, had an absolute right to inspect the minutes of all Myers Park shareholders meetings addressing the renovation project, Myers Park revenue shortfalls, and proposals to address revenue shortfalls. However, because Myers Park had failed to keep the minutes of the shareholder meetings held during the relevant time period, the court allowed Erwin a right of inspection “of all final actions taken by shareholders without a meeting” during the relevant time period, as well as “all communications with shareholders generally” that addressed the project and revenue shortfalls.
Next, the court turned to the qualified right of inspection of records pursuant to N.C. Gen. Stat. § 55-16-02(b), which requires that the demand be made “in good faith and for a proper purpose.” Myers Park argued that Erwin’s demand lacked a proper purpose and was merely an attempt to second-guess the Board’s decision to move forward with the project. The court rejected Myers Park’s attempt to use the Business Judgment Rule to shield its decision process from shareholder inspection, noting that Myers Park failed to overcome the presumption of reasonableness with respect to Erwin’s requests.
However, the court stopped short of granting Erwin’s request to see the minutes from all Board meetings, explaining that the statute only grants the right to inspect minutes that reflect the final action of the Board. Accordingly, the court narrowed the requests to those encompassing only final actions. Likewise, the court only granted Erwin access to the capital operating budgets and capital operating expenditures that were actually approved by the Board.
Lunsford v. JBL Communications, LLC[119] (Discovery sanctions). This opinion deals with a litigant’s eighteen-month attempt to force the opposing party to produce documents. Soon after being served with the complaint in September of 2019, Defendant JBL served discovery requests on Lunsford, to which Lunsford failed to respond. After Lunsford added additional plaintiffs to the lawsuit, JBL again served discovery requests on the new parties as well. By June 2020, JBL sought relief with the Business Court, submitting a Rule 10.9 dispute and contending that plaintiffs’ responses were long overdue. The court ordered plaintiffs to provide a date certain by which they would produce responsive documents. Again, plaintiffs failed to comply. By the time JBL’s first motion for sanctions came on for hearing in August of 2020, plaintiffs had only produced a few documents in an unreadable format and could not give a production timeframe because they had not even begun looking for relevant documents with respect to several email account and at least one mobile device.
The court entered sanctions against plaintiffs, ordering them to pay JBL’s attorneys fees and produce documents consistent with the parties’ agreed-upon ESI protocols within 30 days. Plaintiffs still did not produce any documents within the court-ordered timeframe and instead, sought several extensions of time, and filed an ex parte motion asking the court to suspend the production deadline indefinitely. During a status conference to determine a new discovery schedule, plaintiff’s counsel admitted that he had spent virtually no time on document review and still had no production date in mind. On November 20, 2020, after JBL filed a second motion for sanctions, plaintiffs stated they had no immediate plans to produce documents, citing the large volume of documents and the high cost of their document review vendor. On February 3, 2021, plaintiffs’ attorney admitted at another status conference that although he had now obtained a new vendor, he had no basis for believing he could meet the production schedules he previously agreed to and that his prior assurances were simply “blind optimism.”
In ruling on JBL’s second motion for sanctions, the court rejected plaintiffs’ argument that their recent procurement of a vendor was a mitigating factor, noting that their efforts came only after JBL’s motion. The court also rejected counsel for plaintiffs’ contention that he was unaware of the complexities of electronic discovery involved in this case. Noting plaintiffs’ “casual disregard for court orders and rules alike,” the court entered a sanction prohibited plaintiffs from introducing evidence in support of their claims and defenses against JBL. Additionally, the court once again ordered plaintiffs to produce the documents and pay JBL’s attorneys fees caused by plaintiffs’ failure to obey the court’s prior orders. However, the court declined to strike plaintiffs’ pleadings and enter default judgment or to find them in civil contempt, though it did warn plaintiffs that going forward, “only the most severe sanctions remained.”
Quad Graphics, Inc. v. N. Carolina Dep’t of Revenue[120] (Tax and constitutional law). In this tax appeal, petitioner Quad Graphics, Inc., a Wisconsin corporation that prints books and catalogs for direct mail, filed for judicial review of the ruling of the Office of Administrative Hearings, which had upheld an assessment of sales tax against it. Petitioner argued it was not a “retailer” under N.C. Gen. Stat. § 105-164.3(35)(a) required to pay sales tax because it did not make any sales in North Carolina subject to tax as defined in the statute. Petitioner additionally argued that the state’s attempt to collect sales tax in this instance violated the Commerce Clause of the United States Constitution. Although petitioner had customers in North Carolina and hired a sales representative in North Carolina in 2009, the materials petitioner sold were all printed and delivered to post office locations outside the state, and its contracts specified that title to the materials transferred to the customers when the materials were deposited on the carrier’s shipping dock. Thus, petitioner argued that it did not make actual sales in North Carolina.
The court rejected petitioner’s interpretation of “retailer,” first noting that the Revenue Act imposed both a sales and use tax on retailers, lending support to the Department of Revenue’s ruling. The court also looked to other provisions in the statute, including N.C. Gen. Stat. § 105-164.6, titled “Complementary use tax,” which specifically provided authority for the state to collect a use tax from retailers who sold personal property outside North Carolina for use in the state. Finally, the court looked to N.C. Gen. Stat. § 105-164.8, which requires retailers to collect sales tax on personal property that enters the state, even when that property is delivered to a carrier F.O.B. outside the state.
However, the court agreed with petitioner that the attempted collection of sales tax violated the Commerce Clause. In doing so, the court looked to whether North Carolina had a sufficient “transactional nexus” with the sales in question. Petitioner argued that the controlling case was McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944), where the United States Supreme Court precluded Arkansas from assessing sales tax on goods shipped from Tennessee to Arkansas residents via a common carrier. The court rejected the State’s argument that Dilworth had been overruled by the later Supreme Court opinions Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), noting that neither overruled Dilworth’s principle that “to meet the transactional nexus requirement under the Commerce Clause, a state sales tax must only be imposed on sales where the transfer of title or possession occurs within the taxing state.” The court found that North Carolina lacked a sufficient nexus to the transactions at issue because it was undisputed that the transactions occurred out of state. Therefore, it reversed and granted summary judgment in favor of petitioner.
Columbus Life Ins. Co. v. Wells Fargo Bank, N.A.[121] (Motion to dismiss 12(b)(6) and 12(b)(2)). This case highlights a tension that exists in North Carolina’s (and many other states’) insurance laws. North Carolina has long held that an insurance policy taken out by one who lacks an insurable interest is void against public policy as an illegal wager on human life. However, N.C. Gen. Stat. § 58-58-22(2) requires all insurance contracts to contain a clause barring the insurer from contesting the validity of any policy more than two years after it has been in force for any reason except the failure to pay premiums. In this case, Columbus Life claimed that a $1 million policy taken out in 2005 on a doctor who had never paid premiums and had immediately assigned a collateral interest on the policy was part of a “stranger-originated life insurance,” or “SOLI” scheme. After several subsequent assignments, Wells Fargo came to hold the policy as a securities intermediary for Luxembourg-based LSH, Co. In the action, Columbus Life sought a declaratory judgment that the policy was void ab initio. Wells Fargo and LSH moved to dismiss for failure to state a claim and lack of personal jurisdiction respectively.
Wells Fargo argued that the more recent statute N.C. Gen. Stat. § 58-58-22(2) represented a legislative change in North Carolina’s public policy, barring even SOLI claims after two years. Wells Fargo additionally argued that allowing SOLI claims to be an exception to the strict wording of the statute would wrongfully incentivize insurance companies to accept premiums on suspected SOLI claims as long as possible before seeking to declare the policies void. Despite recognizing a split in authority, the court joined the Supreme Courts of New Jersey and Delaware, reasoning that if the insurance policy never legally came into effect, neither did its two-year incontestability provision. Thus, Columbus’s claims against Wells Fargo were not barred by the statute.
However, the court did dismiss the claims against LSH, concluding that North Carolina’s long-arm statute did not reach it. Even if by becoming a beneficial owner LHS could be said to have entered a “contract of insurance” for purposes of the statute, the action did not “arise” out of any contract entered into by LSH, but rather with the origination of the policy in 2005. Thus, LHS, as a subsequent purchaser, did not establish minimum contacts with North Carolina.
§ 1.3.15. Philadelphia Commerce Case Management Program
Chest-Pac Assocs., L.P. v. Del Frisco’s of Philadelphia, Inc.[122] (Lease termination during COVID-19 would result in unacceptable forfeiture under substantial performance doctrine). In Chest-Pac Associates, the Commerce Court addressed a commercial landlord-tenant dispute involving late rent payments, resulting from the Governor’s executive orders imposing business limitations because of the COVID-19 pandemic. Over a period of months, the restaurant tenant did not make its rent payments, but did actively communicate with the landlord in attempting to reach a negotiated accommodation to save its business by making alternative rent arrangements. The landlord sent a number of default notices (though no notice that it would seek possession), and offered some counter-proposals. After not paying rent from March 2020 on, the tenant paid all past due sums in November 2020, and was current with its rent thereafter. The landlord still brought suit, seeking possession of the premises.
Commerce Court Supervising Judge Gary Glazer granted the tenant summary judgment under the substantial performance doctrine. Pennsylvania law disfavors forfeitures and courts “should not enforce forfeiture ‘when the contract has been carried out or its literal fulfillment has been prevented by oversight or uncontrollable circumstances.’” Rather, “[c]ourts seek to avoid forfeitures particularly where there has been considerable part performance.” “[T[he doctrine of substantial performance was created by the courts to use as an instrument of justice intended to avoid forfeiture because of technical, inadvertent or unimportant omissions.” It “is intended for the protection and relief of those who have faithfully and honestly endeavored to perform their contracts in all material and substantial particulars.” Judge Glazer found the substantial performance doctrine a well-suited tool for this case, in light of the tenant’s efforts and payments, and its technically curing any defaults. Further, “[w]hile the … COVID-19 executive orders do not relieve or excuse [the] obligation to pay rent under the Lease, one cannot turn a blind eye to the unfortunate economic impact that such orders had on [the tenant’s] ability to timely pay its rent, especially since prior to March 2020, [it] was current with its rental obligations.”
Brown v. Cottrell[123](Piercing the corporate veil). In Brown, the plaintiff real estate developer contracted with defendant management company (the “LLC”) to perform project management services on various real estate projects. The LLC’s principal, also named a defendant, represented that he and the LLC had extensive management experience. In fact, the principal gave a false name, prevented plaintiff from discovering his criminal history, and misrepresented the fact that he and his company had little actual experience as project managers. Plaintiff never would have hired defendants had it known the truth.
Judge Glazer, in a non-jury trial, found facts supporting piercing the corporate veil to hold the principal liable. These facts included the LLC did not maintain adequate insurance, the principal and the LLC did not have separate identities, the LLC was grossly undercapitalized and lacked sufficient bank funds to protect creditors, the LLC did not maintain corporate formalities, and personal and business bank account funds were comingled. Both defendants were found liable under breach of contract and fraudulent inducement theories, though the court did limit damages.
Spector Gadon Rosen Vinci, P.C. v. Valley Forge Ins. Co.[124] (Law firm COVID-19 insurance coverage suit). In Spector Gadon, Commerce Court Judge Nina Wright Padilla (now Supervising Judge) addressed insurance coverage for a law firm’s business interruption losses due to the Governor’s executive orders limiting business operations during the COVID-19 pandemic. The court had to analyze the policy language “direct physical loss of or damage to property” to determine the merits of the law firm’s coverage claim. Judge Padilla determined that loss of use alone did not constitute “direct physical loss of or damage to property,” following other case law[125] reaching that same conclusion, which focused on the physical nature of the loss required to meet this policy language.
Judge Padilla also rejected coverage under the policy’s Civil Authority provision as, again, there was no physical loss. Further, there was no evidence the virus was present at the property or within five miles thereof. Moreover, the government shutdown order was issued to control a health crisis, not because of any physical loss at the premises or within five miles thereof. Finally, the policy also had a broad virus exclusion that barred coverage even for losses indirectly caused by viruses.
Lehigh Valley Baseball, L.P. v. Philadelphia Indemnity Ins. Co.[126] (Baseball team COVID-19 insurance coverage suit). In Lehigh Valley Baseball, a minor league baseball team sought coverage for business income losses due to executive orders shutting down its business, issued by the Governors of Pennsylvania and New Jersey to address the COVID-19 pandemic. Like Judge Padilla in Spector Gadon, Commerce Court Judge Glazer found a physical loss was required to invoke coverage, and there was none in this matter. Moreover, even if the court deemed the presence of COVID-19 to constitute a physical loss, the policy had a virus exclusion that precluded coverage for losses from a virus like COVID-19. Judge Glazer rejected the argument that the virus exclusion was void because it was obtained improperly from the Pennsylvania and New Jersey insurance authorities in 2006, on the theory the carrier failed to disclose the virus exclusion reduced existing coverage. Judge Glazer found the plaintiff did not plead any facts supporting the notion that a pre-2006 standard commercial insurance policy would have covered the kind of COVID-19 losses at issue.
Pine View Condo. Ass’n v. The Views at Pine Valley II. L.P.[127](Puffery not fraud). In Pine Valley Condominium Association, a condominium association brought suit against the declarant, developers and various individuals based on construction defects and financial deficiencies. Among other claims, the association alleged fraudulent inducement. The court dismissed this claim on the basis the alleged misrepresentations amounted to puffery, and not a knowing or reckless material misrepresentation upon which the purchasers reasonably relied to their financial detriment. Puffery is defined as an “‘exaggeration or overstatement addressed in broad, vague and commendatory language.’” It is “‘offered and understood as an expression of the seller’s opinion only, which is to be discounted as such by the buyer, and on which no reasonable [person] would rely.’” A seller’s general self-praise of its own product, without any actual detailed promises or guaranties regarding the particular characteristics of what is being sold, is a commonly recognized practice upon which a reasonable person should not rely.
Commerce Court Judge Remy I. Djerassi found the following language to be puffery: (1) the condominium brings modern luxury to life by building upscale residences honoring the surrounding neighborhood’s character; (2) the project will provide distinctive and unique features not to be found elsewhere; (3) the declarant’s personnel and contractors have extensive experience in developing residential communities; and (4) a health care system connected to the condominium is a long-standing and trusted provider, with a mission to provide care, comfort and healing to enrich the lives of older adults through innovative initiatives. Judge Djerassi concluded, “[t]hese representations are indefinite and elusive in meaning and constitute puffery which may not form the basis of a fraud claim.”
§ 1.3.16. Rhode Island Superior Court Business Calendar
CharterCARE Community Bd. v. Lee[128] (Motion to dismiss claim under Uniform Fraudulent Transfer Action). Receivers brought action under the Uniform Fraudulent Transfer Action (“UFTA”) against administrative agent/collateral agent to recover funds that were loaned to company to pay dividends to shareholders. Defendant/administrative agent/collateral agent sought to have action dismissed for failure to state a claim. The court denied the motion to dismiss on the grounds that: (1) defendant was a transferee for purposes of the UFTA; (2) as a collateral agent, defendant is a person for whose benefit the transfers were made; and (3) the transfer was made without the company receiving reasonably equivalent value. In addition, the court found that intent to defraud was not relevant and the plaintiffs did not need to limit their actions to the debtors/company and/or the ultimate recipients of the dividends.
Howland v. Howland[129] (Conveyance of a note in estate dispute).This case tells the sad saga of a woman who meticulously planned the disposition of her assets with input from leading professionals and her children. Since her death in 2009, her children have battled and prevented her estate from closing. The plaintiff children contended that a certain 2003 Note (the “2003 Note”) was indirectly conveyed by the decedent to the 2003 Trust of which they are beneficiaries; that the 2003 Note is in default; and the defendant child, as Trustee, must pay it in full. Defendant asserted that the 2003 Note poured over to the 1997 Trust of which he is beneficiary.
The court recognized that the Uniform Commercial Code provides two routes for conveyance of a note to another person: (1) by indorsing it to another person, R.I.G.L. § 6A-3-201; or (2) by delivery to another person for the purpose of giving the recipient the right to enforce it, § 3-203(a) and that such a transfer “vests in the transferee any right of the transferor to enforce the instrument.” § 3-203(b). The solitary difference between these two methods of conveying the value of a promissory note is one of presumption. See UCC Editor’s Notes, § 3-203, ¶ 2. The court stated “Because the transferee is not a holder, there is no presumption under § 3-308 that the transferee, by producing the instrument, is entitled to payment. The instrument, by its terms, is not payable to the transferee and the transferee must therefore, account for possession of the unindorsed instrument by proving the transaction through which it was acquired. Proof of a transfer to the transferee by a holder is proof that the transferee has acquired the rights of a holder. The transferee is then entitled to the presumption under § 3-308.” Thus, a subsequent possessor of the note without indorsement, who received the note through an intentional transfer for the purpose of giving the recipient the right to enforce the note is the owner of the note.
The court concluded as a matter of law that the plaintiffs established by more than a preponderance of the evidence that (1) the 2003 Note was transferred to the HH FLP Trust; (2) the HH FLP Trust was terminated in 2008; and (3) the 2003 Trust owns all the assets formerly owned by the HH FLP Trust. As such, the 2003 WBP Note was an asset of the 2003 Trust of which the plaintiffs are beneficiaries.
Barletta/Aetna 1-195 Washington Bridge North Phase 2 JV v. State[130] (Public contract bid protest). This action arose out of the bidding process that occurred during the second phase of a construction project (the “Project”) owned by the Rhode Island Department of Transportation (RIDOT). The Department of Administration (the “DOA”, and collectively with RIDOT herein called the “State”) is the state agency in charge of advertising requests for proposals and creating the “Procurement Regulations” which govern the solicitation process for contracts with the State pursuant to G.L. 1956 §§ 37-2-1 et seq. Aetna Bridge Company is a Rhode Island corporation. Barletta Heavy Division, Inc. is a Massachusetts corporation. Aetna and Barletta formed a joint venture (the “JV”) for the purposes of submitting a bid to RIDOT in connection with phase two of the Project. Cardi Corporation had been hired to perform certain work during the first phase of the Project and submitted a bid for the second phase of the Project as well. Following the issuance of the Phase 2 RFP, the three bidders, including the JV, submitted questions to the State in an attempt to clarify the quantity and description of the work completed during Phase 1 of the Project.
The court held: “Here, the Petition of the JV is sufficient to survive the pleading stage. “Specifically, the Petition alleged that (1) the State Respondents’ ‘failure to provide all [bidders] with the same material and competitively useful information constitutes a significant violation” of the State Purchases Act, the Procurement Regulations, and the Phase 2 RFP’; (2) ‘the JV was significantly disadvantaged over Cardi by the procurement process itself’; (3) Respondents ‘failed to equalize the competition and, therefore, compromised the integrity of the competitive procurement process’; (4) Respondents ‘failed to provide all prospective bidders . . . with comprehensive information relative to the Phase 2 RFP,’ which resulted in the solicitation processes being ‘neither comprehensive nor fair’; and (5) Respondents failed ‘to provide a comprehensive and fair solicitation relative to the Phase 2 RFP, the [Respondents’] actions relative to the Phase 2 RFP constitutes palpable abuse of discretion.’” The Petition also alleges that the information describing the work in the Phase 2 RFP and in the Respondents’ responses to the JV’s questions was “false.” The court concluded, assuming “all allegations [in the Petition] are true,” Petitioners have sufficiently pled that there was a significant violation by failing to equalize the competition because Petitioners were disadvantaged by the Respondents’ actions during the solicitation process.
Cambio v. Commerce Park Realty, LLC[131] (Receivership income taxes and tax returns). Receiver brought an action for confirmation that a receivership estate was not responsible for income taxes and for approval for how he intends to prepare the tax returns. The members of the receivership entities objected to the Receiver’s proposal to file a Form 1065 return making certain assumptions including that the properties the Receiver has sold had a zero basis for tax gain purpose with the members being allowed to note any issues or disputes with the filing in a separate statement to accompany the filings. The court confirmed that the Receiver was not responsible for payment of the income taxes. With respect to the preparation of the returns, the court ordered that the members be allowed to provide documentation to the Receiver’s accountant to prepare and file accurate returns.
§ 1.3.17. Tennessee Business Court
Greg Carl v. Tennessee Football, Inc.[132](Motion to dismiss). This case involves a breach of contract dispute. Plaintiffs are holders of permanent seat licenses (“PSL”) for the Tennessee Titans and brought suit against Defendants Tennessee Football Inc. and Cumberland Stadium Inc. (“defendants”). Plaintiffs alleged that defendants increased the price of tickets for individuals that defendants considered to be ticket resellers and restricted the ability of ticket resellers to transfers their tickets or permanent seat licenses. Plaintiffs brought claims of declaratory judgment, breach of contract and breach of the duty of good faith and fair dealing, violation of the Tennessee Consumer Protection Act (“TCPA”), negligent misrepresentation, and promissory estoppel. In response, defendants filed a 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted on all claims except the declaratory judgment claim. defendants asserted that plaintiffs did not meet the heightened pleading requirements for TCPA claims which require pleading with particularity. Defendants also alleged that plaintiffs’ TCPA claim is inadequate because the TCPA claim did not allege that defendants’ conduct caused injury to any plaintiff. Additionally, defendants argued that plaintiffs’ negligent misrepresentation claim should be dismissed.
The court denied defendants’ motion to dismiss as to the plaintiffs’ breach of contract and breach of the duty of good faith and fair dealing claims. Additionally, the court denied defendants’ motion to dismiss as to the TCPA claim. The court held that the allegations in Plaintiffs’ Amended Complaint were sufficient to satisfy TCPA’s enhanced pleadings requirement as the plaintiffs specifically addressed statements by defendants’ employee, inaccurate statements on defendants’ website, and other representations made by defendants to demonstrate that defendants’ position was deceptive and unfair. However, the court held that the plaintiffs failed to allege their claim for negligent misrepresentation sufficiently based on a failure to disclose and granted defendants’ motion to dismiss that claim. Nevertheless, the court held that plaintiffs had adequately pled negligent misrepresentation based on an affirmative misrepresentation. The court also held that plaintiffs’ promissory estoppel claim sought to change the terms of existing, valid contracts and that precedent demonstrated that promissory estoppel was not available as a claim for such purposes. Consequently, the court granted defendants’ motion to dismiss plaintiffs’ promissory estoppel claim. Litigation in this matter will continue.
Christopher Harrod, M.D., LLC v. East Louisiana Surgical Servs., LLC[133](Corporate records request). In this case, Plaintiff Harrod, LLC (“plaintiff”) brought suit against Defendants East Louisiana Surgical Services (“ELSS”), Delta Surgical Services (“DSS”), and Tom Gallaher (collectively, the “defendants”) for failure to provide plaintiff with appropriate access to ELSS’ books and records despite plaintiff’s numerous requests. Plaintiff is one of two members of ELSS and holds 60% of the company’s membership interests. DSS is the ELSS managing member. Plaintiff alleges breach of contract, breach of fiduciary duty, tortious interference with contract, and aiding and abetting breach of fiduciary duty.
Plaintiff filed a motion for judgment on the pleadings requesting an order mandating that defendants provide plaintiff with unaltered copies of defendants’ books of account and records. The court granted plaintiff’s motion. Interpreting Louisiana law, the court held that pursuant to LSA-R.S. § 1319(B) and the terms of the Operating Agreement, plaintiff, as a member of ELSS, was entitled to any of ELSS’s records, including information regarding the business and financial state of the business. The court also ordered defendants to provide other records regarding the business upon plaintiff’s reasonable request. Notably, the court recognized the challenge of protecting confidential information of other unrelated entities whose information was embedded in defendants’ accounting software. The court ordered defendants to file a notice with a sworn statement from a representative with technical knowledge of the accounting system explaining how the system operated, the information contained in the system, the method by which information could be extracted for individual entities, the feasibility of doing so, and what format the information could be produced in. The court then held that it would supplement its order to include instructions as to providing the accounting software records.
Girl Scouts of Middle Tennessee, Inc. v. Girl Scouts of the United States of America[134] (Declaratory judgment and Tennessee Nonprofit Fair Asset Protection Act). Plaintiff Girl Scouts of Middle Tennessee (“GSMT”) brought suit against Defendant Girl Scouts of the United States of America (“GSUSA”) to protect GSMT’s contractual right to offer Girl Scouting in Middle Tennessee. GSMT alleges that GSUSA is requiring GSMT to enter into commercially unreasonable agreements surrounding GSUSA’s technology platform and onboarding process. Specifically, GSUSA has indicated that GSMT is in a “viability review” to address GSMT’s decision not to enter into the technology agreements with GSUSA. GSMT brought claims of declaratory judgment and violations of the Tennessee Nonprofit Fair Asset Protection Act. GSMT alleges that it is a legal entity separate and distinct from GSUSA. Additionally, GSMT asserted that it is responsible for its own governance, finances, operations, and expenses. GSMT also alleged that GSUSA’s governing documents vest the National Council with the sole authority to establish requirements for GSMT to enter into the technology agreements at issue. GSUSA has filed a notice of removal to the United States District Court for the Middle District of Tennessee.
§ 1.3.18. West Virginia Business Court Division
MarkWest Liberty Midstream & Resources L.L.C. v. J.F. Allen Co.[135] (Breach of contract bench trial).This case was referred to the Business Court Division on April 10, 2018 and involves a dispute related to the construction of a hybrid retaining wall at a natural gas processing plant owned by plaintiff. MarkWest contracted with Defendant J.F. Allen Company, a heavy highway contractor and earthmover, to construct a large retaining wall, and J.F. Allen then subcontracted with two other defendants to perform various functions associated with building the wall.
MarkWest sued J.F. Allen and other defendants, alleging that they breached their contract with it by failing to design and build the retaining wall to have a useful life expectancy of 75–100 years, to complete the wall on time, and to meet other requirements in the contract. MarkWest also brought claims for negligence, gross negligence, fraud, negligent misrepresentation, and specific performance. J.F. Allen brought counterclaims for breach of contract, quantum merit and unjust enrichment, enforcement of mechanic’s lien, and declaratory judgment, claiming that MarkWest failed to pay J.F. Allen for its work on the retaining wall and breached the contract in other ways.
The case went to a seventeen-day, in-person bench trial. The judge denied a motion for a fully remote trial but permitted several accommodations to which the parties agreed. These included social distancing in the courtroom, allowing some witnesses to testify remotely, and enforcing mask-wearing and other safety protocols. The case resolved in early 2021.
Directional One Services Inc. USA v. Antero Resources Corp.[136] (Breach of contract jury trial). This case was referred to the Business Court Division on February 19, 2019, and involves a dispute between Directional One Services Inc. USA, a directional drilling contractor, and Antero Resources Corporation, an oil and gas well owner. Antero hired Directional One to perform directional drilling services, and the parties entered into a contract. The dispute giving rise to this case concerned costs associated with equipment that became lodged in the well bore and could not be retrieved. Both parties brought claims concerning alleged breaches of the contract between them.
This case went to trial by jury on August 26, 2020, before the same judge who conducted the in-person bench trial in the MarkWest case above. To ensure the safety of jurors and others, the judge held jury selection offsite to allow for social distancing. This procedure worked so well that other judges in his judicial circuit adopted it. The judge also required mask-wearing and had counsel remain at the dais for argument.
The jury found in favor of the plaintiff, and the judge entered judgment awarding the plaintiff approximately $1.48 million on November 4, 2020.
City of Charleston v. West Virginia Paving, Inc.[137] (Antitrust). This case, consolidated with an action brought by the West Virginia Attorney General and Secretary of Transportation, was an antitrust suit against 11 asphalt and paving companies. The case settled for $101.3 million in October 2020 on the eve of trial. Following the settlement, the judge entered agreed orders of dismissal between the plaintiffs and defendants on December 16, 2020.
In addition to requiring the defendants to pay $101.3 million in both cash and project credits to the state highway fund, the settlement enjoined them from entering into any contract to restrain trade or from monopolizing or attempting to monopolize asphalt manufacturing or Paving Services in West Virginia. It also required the defendants to make certain structural changes in their businesses, to give advance notice of prospective mergers to the West Virginia Attorney General, or to refrain from entering into certain mergers altogether. The case was disposed of on March 24, 2021, following the entry of an agreed order of dismissal of a crossclaim involving three of the defendants.
§ 1.3.19. Wisconsin Commercial Docket Pilot Project
L’Eft Bank Wine Co., LTD. v. Bogle Vineyards, Inc.[138] (Forms battle over an arbitration provision and injunction granted under Wisconsin Fair Dealership Law). A double feature dealing with two issues that come up often in business disputes, especially in Wisconsin, this case arose when Bogle, a wine producer, attempted to terminate L’Eft Bank, Bogle’s Wisconsin wine distributor. L’Eft Bank immediately sought to preserve its dealership, filing suit for violations of the Wisconsin Fair Dealership Law (“WFDL”) and requesting a TRO and temporary injunctive relief. After expedited discovery, Bogle moved to stay the case and compel the parties to arbitrate the dispute, arguing that an arbitration provision in the terms and conditions Bogle sent to L’Eft Bank required the parties to arbitrate. L’Eft Bank argued that Bogle waived any right to arbitrate by engaging in discovery on the injunction and, in any event, L’Eft Bank had already rejected the arbitration provision during prior negotiations with Bogle. The court rejected the waiver argument but held that under Wisconsin’s version of the UCC, the arbitration provision materially altered the parties’ agreement and could not be added to the agreement by way of terms and conditions attached to an invoice. The court found that there was no clear acceptance of the terms, including the arbitration provision, and that binding L’Eft Bank to the terms would result in unreasonable surprise and undue hardship which the UCC prohibits.
Later, following a three-day evidentiary hearing, the court granted L’Eft Bank’s motion for a temporary injunction to preclude termination of its exclusive Bogle dealership. The court held that L’Eft Bank had established a likelihood of success on the merits of its claim that it had a dealership protected under the WFDL under the test established in in Ziegler Co. v. Rexnord, Inc.[139] for determining whether a community of interest exists.
[1] For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History].
[2] For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1039 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Oct. 20, 2021).
[3] Business Courts Bench Book, supra note 1, at xx.
[4]Business Courts History, supra note 1, at 207, 211.
[54] “Request for Public Comment on Proposal to Amend Commercial Division Rule 11 to Include a Preamble on Proportionality and Reasonableness and to Add Provisions Allowing the Court to Direct Early Case Assessment Disclosures and Analysis,” (Sept. 14, 2021), https://www.businesscourtsblog.com/wp-content/uploads/2021/09/01786079.pdf.
[55] “Request for Public Comment on Proposal to Amend Commercial Division Rules 11-c, 8, 1(b), 9(d), 11-e(f), 11-g, and Appendices A, B, E, and F to Provide Additional Guidelines Related to the Discovery of Electronically Stored Information in the Commercial Division,” (Sept. 7, 2021), https://www.pbwt.com/content/uploads/2021/09/Request-for-Public-Comment-ESI.pdf.
[56] The average age was calculated based on the ages of the nine cases for which this information was available. Case ages were not available when a case was subject to a mandatory stay or transferred to a new division.
[58] On September 21, 2021, the Wyoming Supreme Court adopted three sets of rules: Wyoming Rules of Civil Procedure for the Chancery Court, Uniform Rules for the Chancery Court, and Rules for Fees and Costs for the Chancery Court. These rules are available on Chancery Court’s website, https://www.courts.state.wy.us/chancery-court/.
[59] Wyo. Stat. Ann. § 5-13-115(b); W.R.C.P.Ch.C.2(b).
[60] Wyo. Stat. Ann. §5-13-115(b); W.R.C.P.Ch.C.2(b).
[61] Wyo. Stat. Ann. §5-13-115(b); W.R.C.P.Ch.C.2(b).
[62] Wyo. Stat. Ann. §5-13-115(b); W.R.C.P.Ch.C.2(b).
[63] Wyo. Stat. Ann. § 5-13-115(c); W.R.C.P.Ch.C.2(c).
[92] Judge Welch has similarly cited Indiana Commercial Court Rule 6(A) as the basis for compelling discovery in other Commercial Court cases in Marion County, Indiana this year. See Indiana Automobile Insurance Plan v. New Hampshire Insurance Company, No. 49D01-1902-PL-006478, at 7 (Ind. Comm. Ct., Marion Cnty., Jan. 14, 2021) (Order partially granting plaintiff’s second motion to compel production of documents by defendant); see also Backhaul Direct, LLC v. Prass, et al., No. 49D01-2103-PL-010510, at 3 (Ind. Comm. Ct., Marion Cnty., Sept. 9, 2021) (Order granting plaintiff’s motion to compel non-party subpoena).
[125] Judge Padilla principally relies upon Port Authority of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) and 4341, Inc. v. Cincinnati Ins. Cos., 504 F.Supp. 3d 368 (E.D. Pa. 2021). By contrast, Pittsburgh Commerce and Complex Litigation Center Judge Christine A. Ward, also applying Pennsylvania law, interpreted direct physical loss of or damage to property to encompass COVID-19 damages. See MacMiles, LLC v. Erie Ins. Exchange, No. GD-20-7753 (C.C.P. Allegheny May 25, 2021), https://www.businesscourtsblog.com/wp-content/uploads/2021/08/Macmiles-v.-Erie-Judge-Ward-Covid-decision-01759909xB05D9.pdf.
