The ubiquity of social media has been accompanied by an advertising boom that is lucrative for influencers and brands alike. The benefit to companies is immense because of lower costs compared to traditional advertising methods. For a fraction of the price of traditional radio, television, or print advertising, influencers can reach thousands, sometimes millions of followers with brand recommendations. However, the relationships come with serious risk for companies choosing to tie their reputation to influencer accounts and personalities.
As of 2022, the average daily social media usage of internet users worldwide amounted to 147 minutes per day, up from 145 minutes in the previous year.[1] In 2021, Americans spent on average more than 1,300 hours on social media.[2] It is no wonder businesses find it valuable to capture even a fraction of that screen time for social media advertising. Social media advertising through influencers allows brands to reach individuals who may otherwise not encounter their product. Gamers, makeup artists, musicians, and socialites can amass large numbers of followers attracted to their personality, celebrity status, content, or expertise in a certain field. To influencers’ followers, a brand recommendation from a trusted influencer is akin to a referral from a friend. Companies see the benefit in these interactions and pay lucrative contracts to capitalize on the relationships built by influencers.
Influencer Code of Conduct
While this kind of advertising can be profitable for both influencer and brand, there are risks associated with tying a company’s image to an individual. The publicly expressed opinions and behavior of the influencer, as well as their political and social leanings, may not always align with the values of the brand. On a grand scale, there have been instances where famous individuals lost sponsorships after unfavorable public incidents. For example, golfer Tiger Woods lost his sponsorships with Gatorade, AT&T, and Gillette in the wake of his alleged extramarital affairs. More recently, Adidas faced immense pressure to break ties with artist Ye, formerly known as Kanye West, in the wake of his social media and public statements on race and politics, particularly antisemitic posts on Instagram and Twitter; Adidas and a wide range of other brands eventually cut ties with Ye. On a smaller scale, brands utilizing social media influencers must conduct the same evaluation of whether an influencer’s words or actions should continue to be associated with the brand. Often the solution is to disassociate with the influencer to avoid the perception of being complicit or tacitly approving of the actions of their brand ambassador.
Influencer contracts or influencer marketing agreements set forth the relationship between the parties and outline, for instance, the amount of content an influencer must generate to earn compensation. Additionally, moral/conduct clauses are essential to permit the brand to terminate a contract when the actions of the influencer fail to align with the brand’s values. Such contracts are an excellent tool for managing what can sometimes be unpredictable business relationships. The contracts, however, do not always account for conduct that occurred prior to the inception of the marketing relationship. In that regard, thorough and comprehensive vetting prior to entering into an influencer agreement is essential.
Internet activity, unless purposefully removed, is stored and accessible for years. With throngs of relentless internet sleuths digging into every post, like, and interaction, there have been countless instances of previous conduct, sometimes decades old, inciting public uproar. In 2022, media and fans called for corporate sponsors to reevaluate their relationship with the Dallas Cowboys after a 1957 photo surfaced of owner Jerry Jones at a Little Rock, Arkansas, protest against school integration. Former players and colleagues jumped to Jones’s defense; the outrage eventually quieted, and sponsors remained in place. However, Jones’s story shows the precarious position in which brands may find themselves when the influencer relationship draws public ire for past behavior. Contracting parties must address this reality to ensure there are clear grounds for severing the sponsorship relationship.
As with any contracting relationship, prevention is better than cure. I am reminded of the proverb cautioning the reader to walk with the wise and become wise, instead of making companionship with fools and suffering harm. The notion holds true in the ever-evolving world of social media influencer advertising. The choice of a social media partnership should come down to more than just the number of followers. Companies and brands must exhaustively vet influencers’ online presences and must account for conduct-based severance terms in their influencer contracts/influencer marketing agreements.
Compliance with FTC Disclosure Requirements
Influencers must be aware of their responsibility to conspicuously disclose endorsements, sponsorships, and partnerships with brands and companies. The Federal Trade Commission (“FTC”), in its efforts to protect consumers from deceptive advertising, has turned a keen eye to the prevalent use of influencer advertising. One of the most common pitfalls for influencers is the failure to clearly disclose partnerships, which can lead to deceptive advertising. To that end, the FTC released a guide to influencers, “Disclosures 101 for Social Media Influencers” (the “Guide”) which provides a condensed and simple reference tool for social media advertising.[3] The Guide warns, “If you endorse a product through social media, your endorsement message should make it obvious when you have a relationship (‘material connection’) with the brand. A ‘material connection’ to the brand includes a personal, family, or employment relationship or a financial relationship – such as the brand paying you or giving you free or discounted products or services” (emphasis added). Thus, even brand publicity in exchange for free products requires adherence to the strict disclosure guidelines. The simple reference tool of the Guide can save influencer clients from losing brand opportunities, or worse, facing legal consequences for false advertising. Practitioners should keep an eye on the FTC’s regulation in this field, as the Commission has approved a request for comment seeking public input on proposed changes to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising.[4] This development signals an impending change and likely stricter regulation of influencer advertising.
SEC Prosecution of Deceptive Advertising in Securities
Practitioners must also advise influencers of the pitfalls of promoting or encouraging the public to purchase stocks and other investments. In a November 1, 2017, statement, the Securities and Exchange Commission (“SEC”) cautioned celebrities “and others” against endorsing the purchase of stocks. The SEC warned those endorsements could be unlawful without disclosure of “the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”[5] Recent prosecution by the SEC shows the warning was not toothless.
In December 2022 the SEC charged eight social media influencers in a $100 million stock manipulation scheme promoted on Twitter and Discord.[6] As described by Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, the SEC complaint filed in the US District Court for the Southern District of Texas alleged the defendants “used social media to amass a large following novice investors and then took advantage of their followers by repeatedly feeding them a steady diet of misinformation, which resulted in fraudulent profits of approximately $100 million.”[7] Despite the seriousness of this example, social media activity promoting securities need not be nefarious to draw the SEC’s attention; failure to disclose partnership and sponsorship is sufficient for prosecution.
Several recent SEC prosecutions highlight the importance of properly disclosing sponsorships and compensation. Socialite and media personality Kim Kardashian reached a $1.26 million settlement with the SEC over a 2021 post promoting cryptocurrency without disclosing the amount she was paid for the advertisement.[8] The same fate befell boxer Floyd Mayweather Jr. and music producer DJ Khaled, who also failed to disclose payments in exchange for promoting companies purporting to sell securities.[9] As social-media-propelled investment opportunities such as non-fungible tokens (“NFTs”) and cryptocurrency increase in popularity, it is tempting to push social media posts promoting these items. Practitioners must advise against doing so without adequate scrutiny of the brand/company, without understanding the assets to be promoted, and most importantly, without disclosing the nature of the sponsorship and compensation. Consumer transparency remains the paramount concern of the FTC and SEC. Following a few simple publicly available guidelines may help to avoid prosecution.
A recent decision interpreting the Illinois Biometric Information Privacy Act (BIPA) serves as a stark warning to all businesses collecting personal information, and specifically biometric information that may be subject to the requirements of BIPA: obtain informed consent or prepare for potentially crippling financial penalties. Answering a certified question from the United States Court of Appeals for the Seventh Circuit, the Supreme Court of Illinois, in Cothron v. White Castle Sys., Inc., 2023 IL 128004, concluded “that a claim accrues under the Act with every scan or transmission of biometric identifiers or biometric information without prior informed consent” in violation of section 15(b) or 15(d).
In Cothron, a group of Illinois residents, led by a former manager of White Castle (“Plaintiff”), filed a putative class action against the fast-food franchise alleging it violated Section 15(b) (applicable to the collection or capture of biometric data) and 15(d) (applicable to the disclosure or dissemination of biometric data) of BIPA when it required its employees to scan their fingerprints to access pay stubs and computers and then transmitted the scan to a third party for verification—all without first obtaining the employees’ informed consent. White Castle argued that the Plaintiff’s suit was untimely because it accrued in 2008—that is, only when the company first obtained Plaintiff’s biometric information and transmitted it to a third party after BIPA took effect. Plaintiff responded that “a new claim accrued each time she scanned her fingerprints and White Castle sent her biometric data to its third-party authenticator.”
BIPA Actions Accrue with Every Scan or Transmission
The court, in a 4–3 decision, held that claims arising under Section 15(b) and 15(d) of BIPA accrue each time a company either collects or discloses an individual’s biometric information without prior informed consent. Under Section 15(b) and 15(d), respectively, companies are prohibited from collecting or disclosing a person’s or a customer’s biometric identifier or biometric information “unless it first” obtains informed consent (emphasis added).[1] Relying on the common definitions of “collect” and “disclose,” the majority determined White Castle’s process of collection clearly fell within the scope of the statute: White Castle obtained its employee’s initial fingerprint scan and stored it for authentication purposes. Thereafter, when the employee needed to access company computers, for instance, a second fingerprint scan was then obtained and sent to a third-party vendor to compare both fingerprints and verify the employee’s identity. In the majority’s view, White Castle failed “to explain how such a system could work without collecting or capturing the fingerprint every time the employee needs to access his or her computer.”
Nevertheless, White Castle argued that interpreting BIPA to allow for repeated accruals of claims by one individual “would constitute ‘annihilative liability’ not contemplated by the legislature and possibly be unconstitutional.” The company contended “if [the] plaintiff is successful and allowed to bring her claims on behalf of as many as 9500 current and former White Castle employees, class-wide damages in her action may exceed $17 billion.” The court was unpersuaded by these arguments, concluding that “policy-based concerns about potentially excessive damage awards under [BIPA] are best addressed by the legislature … [to] make clear its intent regarding the assessment of damages under [BIPA].”
Majority’s Rule Will Render BIPA Compliance Burdensome
The dissenting opinion contends the majority’s interpretation is unsupported by the statute’s plain language and, in no uncertain terms, “will lead to consequences that the legislature could not have intended.” For example, the dissent observed “that the ‘precise harm’ the legislature sought to prevent [in enacting BIPA] was an individual’s loss of the right to maintain biometric privacy.” With that in mind, the dissent argues that a private entity may obtain an individual’s biometric information in violation of BIPA only once as there is only “one loss of control or privacy, and this happens when the information is first obtained.” Accordingly, in the dissent’s view, subsequent scans cannot be considered as obtaining additional biometric information because “White Castle already has it.”
Turning to the implications of the majority’s rule, the dissent highlighted two areas of concern. First, under the majority approach, plaintiffs are incentivized to delay bringing their claims as long as possible, thereby impermissibly “racking up damages.” Second, in light of the potential $17 billion damages award White Castle may face, the dissent argued the majority’s interpretation is clearly contrary to legislative intent. In sum, the dissent concluded that “[i]mposing punitive, crippling liability on businesses could not have been a goal of the Act, nor did the legislature intend to impose damages wildly exceeding any remotely reasonable estimate of harm.”
Navigating a Post-Cothron World
The Cothron decision illustrates that statutory claims for alleged privacy violations can quickly turn into “bet the company” litigation. This risk is particularly acute whenever the potentially applicable statutory regime includes a private right of action for alleged violations. To effectively mitigate this risk, companies must clearly identify the regulatory requirements that apply to any personal information—not just biometric information—collected and processed as part of operations from any individual, whether a customer, employee, independent contractor, vendor, or other individual. With this foundation, companies can develop, implement, and regularly update comprehensive and robust compliance protocols with respect to the collection, processing, storage, and destruction of the regulated personal information.
In light of the Cothron decision, and specifically with respect to biometric information, any business collecting and processing biometric data should consider implementing the following best practices:
develop a system for providing written notice and obtaining informed consent prior to the collection of biometric information
ensure the written notice clearly informs the individual of: (1) the entity collecting or storing biometric information; (2) the entity’s purpose for collection, use, and storage; (3) whether the biometric information will be disclosed or disseminated to other parties, and if so, the specific purpose for each such disclosure or dissemination; and (4) how long the entity will use or store the information
maintain a program for tracking the written consents and releases authorizing the entity to collect, process, and disclose biometric information
develop, implement, and enforce a policy for destruction of biometric information that no longer serves a legitimate business purpose.
In Consumer Financial Protection Bureau (“CFPB”) examinations, an assessment factor in the CFPB’s implementation of the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Consumer Compliance Rating System (“CC Rating System”) is “self-identification of consumer compliance issues and corrective action undertaken as such issues are identified” (“self-cures”).[1] The CFPB Supervision and Examination Manual states:
This early detection can limit the size and scope of consumer harm. Moreover, self-identification and prompt correction of serious violations represents concrete evidence of an institution’s commitment to responsibly address underlying risks. In addition, appropriate corrective action, including both correction of programmatic weaknesses and full redress for injured parties, limits consumer harm and prevents violations from recurring in the future.[2]
These statements raise practical questions about how to implement a self-cure, including the implementation of a “full redress for injured parties.”
Holland & Knight’s Consumer Protection Defense and Compliance Team (“Holland & Knight”)[3] and NERA Economic Consulting’s Antitrust and Competition Practice (“NERA”)[4] recently worked together on a project in which a financial institution sought to implement a self-cure resulting from an inadvertent coding issue that affected the frequency of the financial institution’s review of consumers’ interest rates for certain credit products. In this article, we discuss questions we encountered in the course of the case and how they were addressed.
Redress Analysis
It is instructive to think about full redress as one would think about economic damages, in which one calculates affected individuals’ loss of economic value from the wrongful act.[5] Isolating a consumer’s loss of economic value involves assessing what the consumer’s economic situation would have been but for the wrongful act (“but-for scenario”) and comparing it to the consumer’s actual economic situation with the wrongful act (“actual scenario”).[6]
Modeling but-for scenarios can be particularly involved for consumer financial products because the products can be complex and one might have to model multiple interactions between the consumer and the financial institution. For example, a difference in interest rates between the actual and but-for scenarios for a credit card program could affect (1) the allocation of payments between interest and principal; (2) outstanding balances, number of installments, late payment fees (when applicable), etc.; and (3) the accrual of interest.
A rigorous framework for approaching redress is important as redress analysis can face scrutiny from the CFPB and result in protracted interaction with the agency, including potential escalation to a formal enforcement action.[7] In addition, as supervised entities are likely to engage with the agency and/or their prudential regulators repeatedly, choosing a method for redress analysis may commit the financial institution to the methodology should similar issues arise in the future.
Case Study
In a recent project, Holland & Knight and NERA worked with the legal, business, and data and analytics teams at a financial institution to assess the financial institution’s (1) redress approach and associated payment amounts to affected customers and (2) updates to its procedures and associated code that required redress.
Technical Assistance
NERA’s review and analyses of the financial institution’s materials, including computer scripts and associated generated inputs and outputs, helped the financial institution to identify coding errors in the financial institution’s computer scripts that impacted interest calculations for a credit product. NERA also assisted the institution with potential remedies and their implementation, and provided an independent review of the financial institution’s code that implemented a remedy.
NERA’s role involved working with outside counsel and directly with the financial institution to analyze the issue and associated data, audit computer scripts, recommend solutions, and assist with the implementation of a redress analysis. To perform this work, NERA’s experts drew on their collective experience and expertise with damages analyses and consumer financial services products, as well as their experience with programming languages (including, for example, SAS, Stata, R, Python, and VBA) and technical knowledge, to understand the structure of the client’s data and business logic. The NERA team was able to communicate directly with the data and analytics team at the financial institution and review the financial institution’s code associated with the project of implementing redress for the coding error that resulted in incorrect interest calculations for a credit product. This work provided the legal team at the financial institution with more insight into their internal processes and supported the in-house data and analytics team with insight into the likely perspectives used by regulators in the context of redress analyses.
Rhetorical Approach
Holland & Knight, as outside counsel, provided guidance through the supervisory process and interactions with the CFPB. Specific guidance included a comprehensive analysis of applicable CFPB regulations and innovative compliance recommendations to implement a self-cure and address other critical compliance observations. The law firm also effectively liaised with regulators to disclose the coding issue and the implemented self-cure.
NERA contributed memoranda and exhibits that described the redress analysis for submissions that Holland & Knight made to the CFPB on behalf of the financial institution. Due to the NERA team’s experience writing expert reports and presenting to regulators, the memoranda and exhibits featured clear, compelling language and graphics to explain the redress approach in ways that all parties (the financial institution, in-house counsel, outside counsel, and regulators) could easily understand. In addition to contributing exhibits to counsel’s responses to the CFPB, including responses to the CFPB’s notice of Potential Action and Request for Response (“PARR letter”),[8] NERA created memoranda that were attached to letters to the CFPB. The team also prepared high-level executive summaries to assist counsel in their preparation for meeting with the CFPB. The executive summaries summarized the redress procedure and highlighted features of the procedure that, when there was ambiguity, erred on the side of benefiting affected customers.
Strategic Perspective
The CFPB accepted the self-cure redress approach in this project. We think that the preparation and work at the supervisory stage by the financial institution, Holland & Knight, and NERA provided for effective responses to the CFPB that may have mitigated a protracted process.
That said, should the process have continued, the NERA team was structured so that, if needed, an economic expert could provide testimony in an enforcement action or litigation. The team included PhD economists who could testify on economic issues, which are broader in scope than the calculations performed in the redress analysis. This was strategically valuable: because the consulting team was already familiar with the case and the financial institution, duplicative work would have been avoided had the issue proceeded to enforcement or litigation, whether with a regulator or a plaintiff class action attorney.
Dr. Ling Ling Ang is a director and Tilling Lee is an associate director at NERA Economic Consulting. The opinions expressed in this article are those of the authors and do not necessarily reflect the views of NERA Economic Consulting or its clients. Leonard Bernstein, Da’Morus Cohen, and Anthony DiResta are partners at Holland & Knight LLP.
Consumer Fin. Prot. Bureau, CFPB Supervision and Examination Manual 7–10 (Jan. 2023) (PDF pp. 22–25) [hereinafter CFPB Manual]. ↑
Holland & Knight’s team was led by Anthony DiResta, Esq.; Leonard Bernstein, Esq.; and Da’Morus Cohen, Esq. ↑
NERA’s team was led by Dr. Ling Ling Ang, Dr. Alan Grant, and Tilling Lee. ↑
See, e.g., Mark A. Allen, Robert E. Hall & Victoria A. Lazear, Reference Guide on Estimation of Economic Damages, inReference Manual on Scientific Evidence 429 (Academies Press 3d ed. 2011). ↑
Id. at 432; Roman L. Weil, Daniel G. Lenz & Elizabeth Evans, Litigation Services Handbook 4–12 (John Wiley & Sons, Inc. 6th ed. 2017). ↑
CFPB Manual, supra note 1, at Overview 5–6 (PDF pp. 7–8). ↑
“A PARR letter provides an entity with notice of preliminary findings of conduct that may violate Federal consumer financial laws and advises the entity that the Bureau is considering taking supervisory action or a public enforcement action based on the potential violations identified in the letter. Supervision invites the entity to respond to the PARR letter within 14 days and to set forth in the response any reasons of fact, law or policy why the Bureau should not take action against the entity. The Bureau often permits extensions of the response time when requested.” Bureau of Consumer Fin. Prot., Request for Information Regarding the Bureau’s Supervision Program, Docket No. CFPB-28-0004 (Feb. 12, 2018). ↑
Board responsibilities are complex and continue to grow, with directors being held accountable for the governance, oversight, and, if necessary, management of the organization. This evolution of board responsibilities is long-term and has been further intensified by the pandemic and the economic uncertainty facing organizations of all types today. The chief legal officer (“CLO”), the chief financial officer (“CFO”), and other senior officers join the chief executive officer (“CEO”) as those with the senior-most responsibilities from the management side in ensuring that proper governance, oversight, and management are occurring.
The recent, ongoing developments regarding the survival of certain banks, and perhaps even the future shape of the banking industry as a whole, stand as a testament to the fact that the CEO, CFO, and the general counsel (“GC”) and CLO must join with the board and others in focusing on operational and capital cash flows. Indeed, both the CEO and CFO were named as defendants in securities litigation arising from the failures of Silicon Valley Bank and Signature Bank. Too often, companies deemed to be healthy have not focused on cash flows, which are often the critical indicator of a company’s ability to survive. Troubled companies understand the importance of the cash flows—for some, unfortunately, when it is too late.
Case Study
Sophisticated businesses, large and otherwise, recognize the importance of tracking cash flows. One of the authors of this article served as the CFO of a diversified holding company that was the managing general partner of two sizable general partnerships. In each one, the other two general partners were major insurance companies. However, the experiences in a partnership setting are equally applicable to a corporate structure.
Each partnership met quarterly. An important component of these meetings was the CFO’s review and discussion of financial and operational results. Every one of these discussions focused on partnership cash flows—basically, the receipts and disbursements from the normal course of operations, investment income, capital expenditures, and other significant cash items. Cash was addressed comprehensively.
All of the partners agreed that this was more useful than reviewing the income statement because it avoided esoteric accounting entries, as well as footnotes that may be confusing and distracting. The cash data was much more understandable and gave a clearer picture of financial performance, a picture that was supported by money in the bank or other liquid assets.
These meetings were an exercise in highly effective governance. The general partner representatives were informed and involved, and their institution had “skin in the game.” They understood the business and recognized that the tracking of the cash flows was the most effective way to stay on top of the business. They designated to their respective internal audit staffs the responsibility for reviewing the accounting work of the managing general partner’s accounting staff and that of the partnership’s external auditor.
Cash Flow Emphasis: Can’t Be Overrated
Directors of any company, in any line of business, would do well to adopt effective techniques to improve their financial oversight. Continuous oversight and interpretation of cash flows by board and senior management are essential. Very simply, cash flows are the organization’s lifeblood.
Cash flows can be measured in an effective, timely manner; and, to repeat, cash data can be much more understandable and give a clearer financial picture than an income statement. The comparison of budgeted to actual receipts and disbursements often gives a much clearer financial picture than reported revenues and expenses and net income on a generally accepted accounting principles (“GAAP”) income statement. Discussions about the causes of cash flow variances can uncover problems and opportunities without the need for approximations or adjustments. The cash flows either did, or did not, occur within the particular time period.
Operational and capital cash flows are concrete results not easily subject to manipulation. Thus, they can serve as a safeguard against efforts to manipulate income through revisions in accruals or reclassifications of operating expenses to capital expenditures. They can also avoid misunderstanding of results that include unbudgeted, one-time charges or results that have been adjusted to exclude such charges.
Accurate cash flow information can also help to highlight possible weaknesses in controls and negative developments not readily apparent in income statement measures, as in a case where a strong, corporate emphasis on customer sales growth, combined with a relaxing of the company’s product financing and credit granting controls, may be increasing risk to an unacceptable level.
It should be noted that certain cash flow information can be very complex—for example, the statement of cash flows that is presented in GAAP. This cash flow information is viewed by some as arcane and difficult to understand. Further, it does not provide the useful insights of business unit receipts and disbursements.
Authority for Cash Flow Management and Cash Control
Who should be given the authority for budgeting the operational cash flows, tracking the actual cash flows, developing the variance reports, and providing explanations of the variances that occur? There are many options. However, an effective approach involves having the company’s operating units work with a centralized financial unit such as treasury, financial analysis, or accounting or some combination of these financial units. The board typically looks to the CFO to play a major role in structuring the team responsible for budgeting, measuring, and explaining cash flows. Both the internal auditor and the external auditor can provide input to the team and assist in ensuring accuracy.
Analytical Model
An analytical model, as shown here, aids in understanding and monitoring operational and capital cash flows. To analyze performance, such a model is developed and monitored for each business unit that generates cash flows. The model identifies basic requirements such as working capital, capital expenditures, and debt service and determines if cash flows will be adequate.
If operational cash flows do not provide enough for adequate working capital, do not fund budgeted capital expenditures, or do not cover the required debt service, the business operation is in the “crisis” zone. The options for the business operation are to “fix” or to “liquidate.”
Cash Flows: The Analytical Model.
The model also determines a risk-adjusted return on equity. When added to the basic capital requirements, this establishes the market capital requirements. As can be seen in the cash flows model, if the operational cash flows exceed the basic capital requirements but fall short of market capital requirements, the business operation is “underperforming.” While not in “crisis” mode, steps need to be taken to improve performance.
If the operational cash flows exceed the market capital requirements, the operation is in the “performing” zone. This shows an opportunity to invest and grow, pay down debt, buy back stock, or make cash distributions to equity holders.
This relatively simple presentation of cash flow data can give the board a solid understanding of whether its firm generates a positive cash flow and if its cash flow is adequate to meet present and future needs. This ability to monitor whether a firm is generating a sufficient cash flow will improve a board’s oversight and control system, in good times and bad. A board that understands the components of basic capital and market capital requirements, and how they are affected by cash flows, has considerable insight into the risks confronting the firm and can effectively address its oversight responsibilities.
Cash Control Activity
Cash control activity comprises two parts. The first involves managing the firm’s receipts and disbursements. The second involves monitoring the company-wide cash position.
Controlling a firm’s cash inflows and outflows involves monitoring information and control reports between the firm’s operations centers and its cash management center; then, the flow of control reports from the cash management center to senior financial management. To effectively monitor cash inflows and outflows, the firm focuses on the following: the varying liquidity requirements and forecasting difficulties facing the different operations centers, development and implementation of effective reporting guidelines, and the manner and frequency with which periodic variance reports are developed and transmitted.
Liquidity Requirements and Forecasting Difficulties
Any attempt at developing an effective cash control system must start with the varying liquidity requirements and forecasting difficulties of the firm. Different sectors of a firm often have different liquidity needs and face unique problems in developing their forecasts.
Good cash forecasts are built on the correct recognition of the amounts of inflows and outflows expected to take place, and when these are expected to occur. The various areas within the firm may be able to forecast the timing for these cash flows, but they experience difficulty in estimating the amounts involved.
Electricity and gas utilities are examples of firms with this type of problem. As winter and summer approach, forecasters must predict the weather conditions in order to determine the projected revenues and expenses in the forecasting period. The timing of the revenues does not pose much of a problem for these firms because most bill a certain percentage of their customers on each day during the month.
With flows for previous forecasting periods available, it is not difficult to accurately estimate the percentage of revenues expected at a point in time. The problem is estimating the total amount of revenues for the period. Similarly, the timing of major outflows is predictable, but the problem is forecasting the amounts (like revenues) that will be affected by actual weather conditions.
Senior financial management must have consolidated cash forecasts early enough to permit them to react to the problems forecasted. This leads to the requirement that the cash management center obtain the data from the areas within the firm responsible for forecasting early enough to permit the consolidation of the data. The different areas may require varying lead times, particularly those subject to volatile revenues based on uncontrollable factors such as weather, and those with foreign exchange exposure.
Timing of the cash forecasts depends on when the various areas are able to prepare their estimates and on the time required to consolidate them and prepare the other cash-related data. Once the reporting times are set, they must be observed. This is particularly critical in the early stages of implementing a cash control system.
Each area of activity within the firm is constantly confronted with operating pressures, making it difficult for the various areas to complete their forecasts on time. However, those responsible for this activity need to know that their forecasts are being used and are important to the well-being of the entire company. Also, the cash management center needs to respond immediately when the forecasts are not received on time. Those areas that are late should be contacted as soon as the deadline has been missed, with a follow-up in writing. A further method for enforcing the guidelines is to maintain a checklist of the times at which the forecasts are received and forward the checklist to senior financial management.
Company-wide Cash Flow Reporting Structures
Similar consideration must be given to shaping the guidelines for reporting the actual cash inflows and outflows. These guidelines must be realistic and recognize the constraints that each of the areas faces.
An important point in the reporting of the inflows and outflows is the tie between cash management and cash control. The same information required for the cash management center can also be used for cash control purposes. A basic structure is set out here.
Reporting Relationships for Cash Flows.
Controlling the company-wide cash position requires the monitoring of all headquarters, division, and subsidiary bank accounts. Monitoring the headquarters-controlled cash position should be fairly straightforward because the cash management center is in constant communication with the headquarters’ accounting staff. Guidelines for maintaining the cashbook on each bank account, handling the support data, and reconciling the accounts are established in accordance with the requisites for internal control.
A means of monitoring non-headquarters-controlled accounts on a current basis must be developed. A weekly report indicating beginning and ending balances and total inflows and outflows along with monthly bank reconciliations permits timely monitoring of these accounts.
The importance of a firm’s cash flows has focused increased attention on the need for cash control systems. An effective cash control system enables the monthly, weekly, or daily monitoring of operation centers’ cash flows. This, in turn, creates an awareness of any unwarranted cash flow variances on a timely basis.
Cash Is King
Cash is “king” not only today—it has always been king.
One story that is often heard in financial circles describes the damage to a major firm whose board reviewed quarterly financial results with its sole focus on the income statement. The company’s board was told that operating income for the quarter was $490 million and was projected to increase to $525 million in the following quarter. According to this data, everything looked rosy, and no further questions were raised. However, the cash flow for the following quarter was projected to be a negative $475 million, a $1 billion difference. The firm filed for bankruptcy a few months later. Whether apocryphal or not, the point of the story is clear: ignoring cash flows can be dangerous for corporate health and bad for directors who should know better.
Understanding and monitoring cash flows is an important aid to boards in addressing their continually expanding responsibilities to oversee and direct their firms. Monitoring cash flows is an important tool in effective risk management, serves as a powerful check and balance on other forms of financial and operational reporting, and can aid in fraud detection. CFOs should coordinate the necessary financial and operational resources and take the lead in monitoring cash flows and, in doing so, create effective presentations to keep board members on top of the truest measure of a company’s finances—adequate cash flow. Also, CLOs can and should be an important check and balance regarding the existence and effectiveness of the cash flow management and control structure and their boards’ understanding and oversight of the structure.
As co-chairs of the American Bar Association’s 2021 European Private Target Mergers & Acquisitions Deal Points Study, published in early 2023, we thank all our friends and colleagues around the world (listed in the credits) who invested their time in providing responses to the online questionnaire, and those who double-checked the validity and consistency of data. This publication of the Market Trends Subcommittee of the ABA Business Law Section’s M&A Committee is a valuable resource reflecting the main trends observed in share deals targeting European businesses; it includes current data and comparisons with prior editions as well as with the US Private Target M&A Deal Points Studies.
Study Sample
The latest edition of the EU Study analyzes share purchase deals for acquisitions of privately held targets in Europe signed or completed in 2019, 2020, or 2021 that met the following criteria: (a) transaction value was at least EUR 15 million; (b) the transaction was a pure share deal; and (c) the target or a substantial part of its assets or operations were in Europe.
The deal points analyzed in the EU Study include Financial Provisions, Pervasive Qualifiers, Representations and Warranties, Covenants, Conditions to Closing, Indemnification Provisions, and Dispute Resolution Mechanism.
Unlike the US Private Target studies, which rely on publicly available transactional documents, the EU Study sample consists of sanitized share purchase agreements provided by working group members’ firms in Austria, Czech Republic, Denmark, Finland, France, Germany, Italy, Lithuania, Luxembourg, Norway, Portugal, Romania, Spain, Switzerland, the United Kingdom, and the United States. As acquisition deal documents are not generally publicly available in Europe, the contribution by working group members’ firms is key for the existence of the EU Study.
The study sample consisted of:
106 acquisition agreements
subject to applicable law in 18 different jurisdictions – usually (in 75% of deals) the target’s jurisdiction
with transaction values ranging from EUR 15M to EUR 4.49B (median transaction value: EUR 41M)
for targets in a broad array of industries (the top three: technology, industrial goods & services, and healthcare)
with Corporate buyers representing a majority (51%), the remaining buyers being Financial (37%) and Entrepreneurial (11%).
How to Get a Copy of the EU Private Target Deal Points Study
All members of the M&A Committee of the Business Law Section received an e-mail alert on January 25, 2023, with a link to the study. If you are not currently a member of the M&A Committee but don’t want to miss future e-mail alerts, committee membership is free to Business Law Section members, and you can sign up on the M&A Committee’s homepage. ABA members who are not currently members of the Business Law Section can sign up to join on the Section’s membership webpage.
The published editions of the European Private Target Deal Points Study are available for download by M&A Committee members from the Market Trends Subcommittee’s Deal Points Studies page on the ABA’s website. Also available at that link are the most recently published versions of the other studies published by the Market Trends Subcommittee, including the US Private Target Mergers & Acquisitions Deal Points Study, Canadian Public Target M&A Deal Points Study, Carveout Transactions M&A Deal Points Study, and Strategic Buyer/Public Target M&A Deal Points Study.
The next edition of the EU Study is already in the making, to cover deals signed or closed in 2022 or 2023. We invite interested practitioners to reach out to participate.
When an entity shares data outside of its organization, the following questions often arise: Does the FCRA or GLBA (or both) apply to the specific type of data sharing? And how do these laws impact a company’s financial privacy notices?
The answer to these questions comes down to the relationship between the Gramm-Leach-Bliley Act and its implementing Regulation P (GLBA) and the Fair Credit Reporting Act and its implementing Regulation V (FCRA), and the common financial privacy notice used to satisfy disclosure and opt-out requirements under both laws. To understand which law governs the particular data sharing at issue, the key questions to ask are: With whom you are sharing the data (affiliates or non-affiliates), and for what purposes?
Data Sharing with Non-Affiliates: GLBA
The GLBA requires that a financial institution provide a privacy notice to consumers: (i) prior to disclosing nonpublic personal information (NPI) about the consumer to any non-affiliated third party (outside of certain exceptions); or (ii) at or before the time that the institution enters into a continuing customer relationship with that consumer. Among other things, the notice must provide the consumer with the right to opt out of the disclosure of NPI to non-affiliated third parties. Stated another way, the GLBA only specifically restricts the sharing of NPI with a non-affiliated third party. In the financial privacy notice model form on the website of the Consumer Financial Protection Bureau (CFPB), certain categories of sharing relate specifically to the GLBA opt-out requirement and its exceptions. Namely, the model form lists these categories that discuss sharing:
“For our everyday business purposes—such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus;”
“For our marketing purposes—to offer our products and services to you;”
“For joint marketing with other financial companies;” and
“For non-affiliates to market to you.”
The financial institution must describe whether it shares each type of specific information under the above categories and whether the consumer can limit the sharing. The first three categories describe exceptions to the GLBA requirement, which means that a consumer does not have a federal right to limit those types of sharing (although opt-out rights may exist under state laws, and an institution also is free to offer a voluntary opt-out opportunity). Sharing under the fourth category (non-affiliate marketing) is subject to the GLBA opt-out requirement and affirmative opt-in requirements under certain state laws. Properly populating these categories is critical to maintaining GLBA compliance regarding when NPI may be shared with non-affiliates.
Data Sharing with Affiliates: FCRA
In contrast to the GLBA, the FCRA regulates sharing of information between affiliated entities. An “affiliate” is generally any company that controls, is controlled by, or is under common control with another company. Generally, whenever consumer information is shared between affiliates, the FCRA will come into play. However, understanding the type of information shared and for what purposes (i.e., marketing or non-marketing purposes) will determine how the information is disclosed in the notice and whether the consumer has a right to opt out of the sharing and/or use of such information. FCRA affiliate sharing and marketing rules impact the following sections of the financial privacy notice:
“For our affiliates’ everyday business purposes—information about your transactions and experiences;”
“For our affiliates’ everyday business purposes—information about your creditworthiness;” and
“For our affiliates to market to you.”
Therefore, the first question is to assess whether the sharing is for an everyday business purpose or a marketing purpose. In the everyday business purpose context, the entity must next ask whether the sharing relates to “information about transactions and experiences” or “information about creditworthiness.” Both of these the categories map to the FCRA’s definition of a “consumer report.”
Specifically, for purpose of “information about transactions and experiences,” a consumer report does not include any:
report containing information solely as to transactions or experiences between the consumer and the person making the report; [or]
communication of that information among persons owned by common ownership or affiliated by corporate control.
For purpose of “creditworthiness” a consumer report does not include:
communication of other information among persons related by common ownership or affiliated by corporate control, if it is clearly and conspicuously disclosed to the consumer that the information may be communicated amongst such persons and the consumer is given the opportunity, before the time that the information is initially communicated, to direct that such information not be communicated among such persons.
Transactions and Experience vs. Creditworthiness
This means that if a financial institution wishes to share “transaction and experience” information with an affiliate, the financial institution must disclose that fact on the financial privacy notice, but does not have to give the consumer an opt-out right. If a financial institution wishes to disclose “creditworthiness” information with an affiliate in a manner that might otherwise cause the information to be considered a “consumer report” (i.e., for the affiliate’s everyday business purposes), the financial institution must disclose that fact on the financial privacy notice and provide the consumer with an opt-out right; otherwise, the financial institution risks being considered a “consumer reporting agency,” making it subject to a variety of burdensome regulatory requirements.
The FCRA itself does not provide clear guidance as to what constitutes “transaction or experience” information. However, the Federal Trade Commission, the former regulatory agency for the FCRA, explained in a 2011 staff report called “40 Years of Experience with the Fair Credit Reporting Act” (which, by the way, is an excellent FCRA resource) that:
[r]eports limited to transactions or experiences between the consumer and the entity making the report are not consumer reports. An opinion that is based only on transactions or experiences between the consumer and the reporting entity is also within the exception. For example, a creditor’s description of an account as “slow pay” would not be a consumer report if the description was based on the creditor’s own experience and did not come from a [consumer reporting agency].
The FTC also noted that a list provided by a creditor showing customers who have an account balance of $10,000 or more would be transaction or experience information. In contrast, any information beyond the reporting entity’s own first-hand transactions or experiences with a consumer would not qualify as transaction and experience, and the consumer would be entitled to opt out of such sharing to the extent that the information bears on the consumer’s creditworthiness or other personal characteristics, and is being shared in a manner that might otherwise cause the financial institution to be considered a consumer reporting agency. Moreover, application information “supplied by the consumer (including lists of [the consumer’s] assets and liabilities, and lists of the names of companies from whom the customer has purchased insurance and securities) is not the creditor’s ‘transaction or experience’ information because it includes the customer’s transactions with entities other than the creditor.”
Sharing for Marketing Purposes
In addition, if the sharing is for marketing purposes as opposed to everyday business purposes, specific rules under the FCRA will govern the use of such information. The FCRA provides that a regulated person may not use “eligibility information” about a consumer received from an affiliate to make a solicitation for marketing purposes to the consumer, unless:
it is clearly and conspicuously disclosed to the consumer;
the consumer is “provided a reasonable opportunity and a reasonable and simple method to ‘opt out,’”; and
the consumer has not opted out.
Under the FCRA, when eligibility information is shared to make solicitations for marketing purposes, the entity must disclose the sharing and provide an opportunity for the consumer to opt out before the information may be used for marketing purposes. Note that this opt-out is separate from the opt-out provided when sharing occurs between affiliates for everyday business purposes.
At a broad level, “eligibility information” is defined to mean any information that would be a “consumer report” under the FCRA, but for the exceptions for “transaction and experience” information and information that is shared under the authority of the affiliate-sharing opt-out. Thus, it generally includes any written, oral, or other communication of any information that bears on a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living that is used (or expected to be used) or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for: (A) credit or insurance to be used primarily for personal, family, or household purposes; (B) employment purposes; or (C) any other permissible purpose under the FCRA. However, note that eligibility information does not include “aggregate or blind data that does not contain personal identifiers such as account numbers, names, or addresses.”
Thus, when eligibility information is shared between affiliates for solicitation or marketing purposes, this sharing must be properly disclosed in the “affiliates to market to you” category on the notice, and the consumer must have a right to opt out of the use of such information for marketing purposes.
Conclusion
It can be difficult to grasp the nuances between the GLBA and FCRA and how the different categories of data sharing in the financial privacy notice relate to the requirements under each law. But understanding the interplay between these two laws is critical when sharing any consumer information, no matter who the recipient is.
In a perfect world, all technology vendors would present their clients with balanced legal agreements that perfectly represent the commercial deal between the parties and fully meet the client’s business and legal requirements. Unfortunately, we don’t live in a perfect world, and experience has shown that some vendors are better than others at creating transparent and fair contracts. Based on my own experience, the following list may be helpful to counsel acting on behalf of users in negotiating technology services agreements.
1. RFPs and vendor proposals do matter.
If the client began the contracting process by issuing a Request for Proposal (RFP) and then awarding the deal to the winning vendor based on the vendor’s proposal, then it is critical to incorporate the vendor’s proposal in the contract by reference. This ensures that the extensive promises made by the vendor in its response to the RFP are actually included in the contract. This is not only fair to the client but fair to all the other proponents that were not chosen for the transaction. The winning vendor’s proposal is not supposed to be a marketing bluff: clients do rely upon the representations and promises made in such documents, and the successful proponent should be held accountable.
Unfortunately, some vendors do attempt to disavow their own proposals, even going so far as to say that their responses are not legal contracts that did not pass through the vendor’s own legal approval, and so cannot be incorporated into the final contract. This approach seemingly undercuts the trust process at the beginning of the relationship and strikes me as a red flag that the vendor may be acting unscrupulously and seeking to distance themselves from the various commitments made in their proposal, potentially including pricing and other key assurances. If the client accepts this and decides to proceed with such vendor regardless, it will be important for the client to scrupulously ensure that all of the critical components contained in the vendor’s proposal (and the requirements of the client’s RFP) are actually expressly included in the vendor’s contract, including those related to security/cyber resilience, location of vendor personnel, service levels, certifications, etc.
2. Read the SOW(s).
The Statement of Work (SOW) is the document that describes, in very plain and detailed language, the scope of the actual deliverables and services to be provided by the vendor, applicable project phases/timelines/milestones, pricing, the various responsibilities of the parties, any assumptions/dependencies, staffing, compensation to be paid by the client and any other salient business terms. Unfortunately, SOWs are often the place where some vendors try to reject critical legal and business terms otherwise contained in the main body of the services agreement, through the insertion of net new (and flatly contradictory) terms. This includes the repudiation of legal representations/warranties, the addition of different payment and termination provisions (and sometimes inclusion of robust termination fees), deemed acceptance provisions, attempts to override service levels, etc.
Equally problematic are SOWs that are poorly drafted with many capitalized and undefined terms, vague or no real vendor obligations (or merely commitments to define critical technological or other requirements after the SOWs are signed by the parties—what lawyers like to call “agreements to agree”) and no actual timelines/deadlines. While many lawyers are not comfortable drafting SOWs, it is a vast error not to have client-side tech lawyers do at least one review of the draft SOW before signing with a view to eliminate intentional or otherwise inadvertent language that contradicts the main legal document or otherwise undercuts it.
3. Understand the vendor’s services.
It is important for lawyers counselling clients in the tech space to understand which services/technology are under the control of the vendor in question, versus the portions that are under the control of the vendor’s own affiliates, or any third-party subcontractors of the vendor and other large outsourcing providers. Such an understanding is crucial from the perspective of the flow-down conditions that one should include in the technology services agreement. Vendors should be fully responsible (and liable) for the actions and omissions of their own affiliates and direct subcontractors, particularly in the areas of privacy, cybersecurity, and performance. However, it will be more difficult for vendors to make bespoke promises on behalf of larger vendors, such as Microsoft and Amazon.
Depending on their own regulatory/compliance requirements, some clients may wish to control whether the vendor can assign some of its rights and performance obligations under the relevant agreement to certain approved affiliates or control the use of subcontractors, i.e., only to those located in certain geographic locations/countries or control where their client/user data is being processed. All of this must be understood and documented in the technology contract signed by the vendor.
4. Use the right form of technology agreement.
There are multiple considerations concerning the form of the technology agreement. Firstly, some vendors use a cascade of interrelated and interdependent agreements to form their contract, so it is critical for client counsel to review all of them and understand their order of precedence to ensure that amendments are made to various documents as necessary.
Secondly, certain large vendors employ omnibus “one-size fits all” contracts that incorporate various international terms that are inappropriate for the particular transaction. These include global data protection agreements and services agreements that (inappropriately) reference and hold US and Canadian customers responsible for complying with European data protection laws, anti-corruption law, anti-bribery laws, antislavery laws, export controls and other non-relevant provisions. Thus, clients should insist that their vendors use localized services agreements that contain appropriate terms regarding governing laws, jurisdictions, applicable data protection laws (including mandatory data/security breach notification provisions, including timelines) so that the client can satisfy its own regulatory and legal requirements. If localized versions of the services agreement are not available, then the client and its counsel should factor in the additional time required to negotiate the necessary amendments to make them so.
Lastly, the negotiated amendments must be appropriately incorporated into the overriding/master vendor document, as many standard vendor tech contracts contain a myriad of hyperlinks to ever-changing standard form agreements located on the vendor’s website that would override and contradict these carefully negotiated amendments. Be especially careful to ensure that the relevant Order Form/document specifically references the amended Master Services Agreement and related Exhibits rather than boilerplate standard form terms.
5. Open-source licenses are real agreements, and compliance matters.
While I am a proponent of the use of open-source software (OSS) in technology offerings, I remain dismayed by those vendors that deny their usage of OSS, or otherwise plead ignorance that such OSS is governed by actual OSS licenses, each with their own legal requirements and compliance obligations. While litigation involving OSS is relatively rare, it does occur, as evidenced by the recent 2022 case Software Freedom Conservancy Inc. v. Vizio Inc. In this decision, the US District Court for the Central District of California confirmed that the Software Freedom Conservancy could proceed on a breach of contract claim against product maker Vizio for using OSS (licensed under the GNU General Public License Version 2 and the GNU Lesser General Public License Version 2.1.) in violation of those agreements, confirming the validity of OSS agreements as both copyright licenses and as contractual agreements, each with separate remedies. In other words, OSS licenses are real legal agreements.
Accordingly, if the vendor does use OSS, its technology contracts should contain explicit representations and warranties that confirm the vendor’s usage of such OSS complies with the applicable OSS licenses that governs such code on an ongoing basis to ensure that the client is not in breach of any such OSS licenses through its use. Moreover, client counsel should also seek an indemnity from the vendor if such vendor is in breach of any applicable OSS license, uses any incorrect OSS license or incorrectly combines them in a way that makes the client susceptible to any damages/claims.
6. Future-proof your technology agreement as much as possible.
Technology contracts exist in a rapidly changing environment, and it is important to recognize that the tech transaction does not end at contract execution. As much as possible, tech contracts should be drafted in ways that ensure critical terms remain relevant during the life of the agreement. References to crucial privacy and other legislation should contain language that may be amended or replaced. References to intellectual property representations/warranties and indemnities should not refer to patents that were granted at the date of the agreement’s execution, but instead should be ongoing. The contract should also allow for parties to manage technological change through provisions regarding change management and should contain appropriate governance provisions for ongoing monitoring of performance, and periodic re-evaluation and adjustments, if required, to service levels and other mutually agreed service considerations.
Other recommended provisions include informal and formal dispute resolution, and scheduling periodic meetings with the vendor to get insight as to new product roadmaps, development, etc. While this may make the contract longer, it is worth it if the agreement provides an appropriate vehicle to further manage customer risk, forestall commercial disputes and account for necessary changes during the life cycle of the business arrangement.
7. Anticipate and manage the exit.
Lastly, all good things must come to an end, and tech agreements are notorious for ignoring the exit, as the parties don’t want to deal with the prospective divorce during the “honeymoon” phase of negotiating the original contract. However, preparing for an orderly and a smooth exit is a critical concern for most clients, especially those that may become heavily dependent on their vendor. If the client anticipates it will require a wind-down phase to transition off the vendor’s services and seek a replacement provider, then they must build this requirement into the contract, including the length of the termination assistance period, any changes to the services, the fees for such termination assistance services (if different from the standard fees), whether a transition assistance plan is required, and any limitations that could impact the client’s right to obtain such ongoing services.
The return of customer data, including timing, format, and any related costs, should also be addressed, as well as any ongoing right of the vendor to use client data post-termination/expiration, including client generated data, even in any anonymized/de-identified form. Clients should also ensure through their legal agreements that customer data is never “held hostage” in the event of any fee disputes or otherwise. The tech contract should also robustly address the secure destruction/deletion of all client data and any other critical exit-related terms, including which limited provisions of the agreement (representations/warranties, limitations of liability, indemnities, confidentiality, audit rights, etc.) should survive termination/expiration of the agreement (and for how long). There should be no surprises.
Federal Government Response to Dobbs Begins to Take Shape
Diane Dygert
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
Taking Surprise out of the No Surprises Act
Caroline Pieper
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
Ninth Circuit Discusses Use of Occupational Data in Long-Term Disability ERISA Benefits Denial
Kathleen Cahill Slaught
Seyfarth Shaw LLP 560 Mission Street 31st Floor San Francisco, CA 94105 (415) 397-2823 [email protected] www.seyfarth.com
Ryan Tikker
Seyfarth Shaw LLP 2029 Century Park East Suite 3500 Los Angeles, California 90067-3021 (310) 277-7200 [email protected] www.seyfarth.com
Employers May Have to Pay More in 2022 Under New ACA Limits
Joy Sellstrom Mary Kennedy
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] [email protected] www.seyfarth.com
Leaked Opinion Becomes Reality—Roe v. Wade is Overturned
Diane Dygert
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
H.R. 7780 – Mental Health Matters Act Passes House
Kathleen Cahill Slaught
Seyfarth Shaw LLP 560 Mission Street 31st Floor San Francisco, CA 94105 (415) 397-2823 [email protected] www.seyfarth.com
Ryan Tikker
Seyfarth Shaw LLP 2029 Century Park East Suite 3500 Los Angeles, California 90067-3021 (310) 277-7200 [email protected] www.seyfarth.com
Between a Rock and a Hard Place…ESG Investments in 401(k) Plan Line-Ups
Linda Haynes
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
Matthew Catalano
Seyfarth Shaw LLP 620 Eighth Avenue 32nd Floor New York, New York 10018-1405 (212) 218-3319 [email protected] www.seyfarth.com
Class Action Lawsuit Filed Against Washington State’s Long Term Cares Act – Dismissed!
Liz Deckman Kira Johal
Seyfarth Shaw LLP 999 Third Avenue Suite 4700 Seattle, Washington 98104-4041 (206) 946-4929 [email protected] [email protected] www.seyfarth.com
SECURE 2.0: Here We Go Again
Liz Deckman
Seyfarth Shaw LLP 999 Third Avenue Suite 4700 Seattle, Washington 98104-4041 (206) 946-4929 [email protected] www.seyfarth.com
Sarah Magill Christina Cerasale
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] [email protected] www.seyfarth.com
No More Surprises, But Much Uncertainty Over Non-Network Bills
Diane Dygert Ben Conley
Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] [email protected] www.seyfarth.com
Ninth Circuit Clarifies De Novo Review Standard and Newly-Raised Arguments in ERISA Litigation
Kathleen Cahill Slaught
Seyfarth Shaw LLP 560 Mission Street 31st Floor San Francisco, CA 94105 (415) 397-2823 [email protected] www.seyfarth.com
Ryan Tikker
Seyfarth Shaw LLP 2029 Century Park East Suite 3500 Los Angeles, California 90067-3021 (310) 277-7200 [email protected] www.seyfarth.com
§ 1.1. Do We Finally Have a Final Answer on ESG Investments and ERISA’s Fiduciary Duties?
At the end of November, the DOL issued final regulations on ERISA’s fiduciary duties when investing plan assets. According to the DOL, these final regulations retain the longstanding core principles that an ERISA fiduciary must focus on the relevant risk-return factors when evaluating plan investments, and the fiduciary duty to manage plan assets includes managing (and potentially exercising) the rights associated with ownership of such assets (e.g., proxy voting). As we’ve covered on our blog over the last several years, the DOL’s guidance concerning ERISA’s fiduciary duties and responsibilities when evaluating plan investments and the potential role of environmental, social and governance (ESG) factors in that analysis has changed significantly.
§ 1.1.1. Evolution of DOL Guidance on ESG
Over the years, the DOL has provided guidance concerning ERISA’s fiduciary duties and responsibilities when investing plan assets, including the role of factors that are arguably non-economic or “non-pecuniary” (e.g., ESG or sustainability factors) in those duties. The DOL’s guidance on this topic has evolved and varied over time as the economic environment and administrations have changed.
§ 1.1.2. 2015
In Interpretive Bulletin 2015-01 (IB 2015-1), the DOL allowed that a fiduciary could make investment decisions considering non-pecuniary factors, such as ESG, as “tie breakers” — i.e., the expected risk-return characteristics of alternative proposed investments are the same. Further, the DOL acknowledged that when the fiduciary prudently determined that the investment is justifiable based solely on its economic considerations, then there is no need to evaluate collateral factors as tie breakers. In that bulletin, however, the DOL also acknowledged that in some cases ESG may have a direct relationship with the economic and financial value of the plan’s investment. In those instances, ESG factors are not merely collateral considerations or tie breakers, but rather are a proper component of the fiduciary’s analysis of the economic merits of competing investment choices.
§ 1.1.3. 2018 through 2020
In Field Assistance Bulletin 2018-01 (FAB 2018-01), the DOL appeared to limit IB 2015-1 by warning fiduciaries against taking an expansive view on whether ESG factors are economically relevant to a prudent investment selection. That same administration in June 2020 followed up with proposed regulations addressing the topic. Those regulations indicated that ERISA fiduciaries should focus on “pecuniary” factors when evaluating an investment or investment strategy, and it cast doubt on whether ESG factors could meet that standard. The same DOL also then issued proposed rules in August 2020 regarding a fiduciary’s responsibility when exercising shareholder rights (including voting proxies) associated with the plan’s assets.
When both of those rules were finalized and published in November and December 2020, they indicated that plan fiduciaries must evaluate investments and investment strategies based solely on “pecuniary” factors; made it clear that the DOL was skeptical that ESG factors were pecuniary in nature; and severely restricted a fiduciary’s ability to vote proxies for the plan’s assets.
§ 1.1.4. 2021 through 2022
The current administration announced in March 2021 that it would not enforce the 2020 regulations and subsequently issued proposed regulations revising those rules. Those proposed regulations continued to emphasize the importance of the risk-return analysis of a proposed investment, but they also made it clear that such an analysis could include evaluating the potential economic effects of climate change and other ESG factors on the proposed investment. Those proposed regulations were finalized in November 2022, which we discuss below.
§ 1.1.5. Longstanding Principles Affirmed
In the preamble to the final regulations, the DOL emphasized that the final rule does not change the following “longstanding principles”:
ERISA’s duties of prudence and loyalty require ERISA fiduciaries to focus on risk and return factors when investing plan assets; and
An ERISA fiduciary’s duty to manage plan assets includes exercising rights associated with those assets (e.g., proxy voting).
The regulation provides that an ERISA fiduciary will satisfy ERISA’s duties of loyalty and prudence when considering an investment or investment course: (a) if the fiduciary has given “appropriate consideration” to the facts that the fiduciary “knows or should know” are relevant to that particular investment or investment course, and (b) acts accordingly. For this purpose, “appropriate consideration” includes:
The fiduciary determines that the investment or investment course of action is reasonably designed to further the plan’s purpose when considering the potential risk and return compared to the potential risk and return of reasonably available alternatives; and
For plans that are not participant-directed plans (e.g., not 401(k) plans), the fiduciary considers the following factors: the diversification of the portfolio; the liquidity and current return of the portfolio relative to the plan’s anticipated cash flow requirements; and the projected return of the portfolio relative to the plan’s funding objectives.
In the preamble, the DOL indicates that the new language in the final rule establishes the following three principles:
A fiduciary’s decision must be based on the factors that the fiduciary “reasonably determines are relevant to a risk and return analysis, using appropriate investment horizons consistent with the plan’s investment objectives and taking into account the funding policy of the plan”.
The risk and return factors may include the economic effects of climate change and other ESG factors.
The weight given to any factor “should appropriately reflect and assessment of its impact on risk and return”.
The preamble also confirms that, under the final rule, an ERISA fiduciary is not required to consider ESG factors when making an investment decision. This is a change from the proposed regulations which (at the very least) suggested that an evaluation of ESG factors was required when evaluating an investment or investment course of action. The 2020 final rule included special documentation requirements when a fiduciary decided that alternative investments were economically indistinguishable and the fiduciary “breaks the tie” by relying on other factors. The new 2022 final rule eliminated those special requirements because the DOL concluded that they were unnecessary given that the existing ERISA fiduciary duties and responsibilities are commonly understood to include documenting investment decisions.
§ 1.1.6. Defined Contribution Plans
The final rule includes some minor changes to clarify how ERISA’s loyalty and prudence duties apply to participant-directed defined contribution plans (e.g., 401(k) plans). The DOL cautions in the preamble that these clarifications do not suggest that a lower standard applies when a fiduciary of a participant-directed defined contribution plan is making an investment decision. Also in the preamble, the DOL agreed with a commentor that the relevant analysis when constructing a menu of investment options for such a plan involves answering the following:
“First, how does a given fund fit within the menu of funds to enable plan participants to construct an overall portfolio suitable to their circumstances? Second, how does a given fund compare to a reasonable number of alternative funds to fill the given fund’s role in the overall menu?”
The DOL regulation also includes special guidance with respect to the duty of loyalty for such fiduciaries. Specifically, a fiduciary does not breach ERISA’s duty of loyalty solely because the fiduciary considers preferences expressed by participants in a manner consistent with the fiduciary’s duty of prudence. The DOL justified including this new provision by noting that accommodating participant stated preferences could increase participation and ultimately lead to greater retirement security. This does not mean, however, that a fiduciary may add (or continue to offer) an imprudent investment option in a participant-directed plan that participants prefer. According to the preamble, this new language does not reflect a change in the DOL’s position.
The final rule retains the rescission of the prior prohibition against a qualified default investment alternative (“QDIA”) or any component of the QDIA from having any “investment objectives, goals, or principal investment strategies that include, consider, or indicate the use of one or more non-pecuniary factors in its investment objectives”. According to the preamble, the DOL now believes that such a requirement would not protect plan participants and could only serve to harm participants. The DOL does caution that selecting (and retaining) a QDIA continues to be subject to the same fiduciary duties and responsibilities under the final rule as all other investments.
§ 1.1.7. Exercising Shareholder Rights
In the final regulation, the DOL recognizes that the “fiduciary act of managing plan assets includes the management of voting rights (as well as other shareholder rights) appurtenant to shares of stock.” It also emphasizes that the fiduciary duty to manage plan assets includes exercising the shareholder rights associated with those assets, and fiduciaries should exercise those rights to protect the plan’s interests. As a result, fiduciaries should weigh the cost and effort of voting proxies (or exercising other shareholder rights) against the significance of the issue to the plan. In addition, consistent with the proposal, the final regulation:
Eliminates several provisions that were previously couched as “safe harbors” because the DOL was concerned that fiduciaries would believe they had permission to abstain from voting proxies without properly considering the plan’s interests as a shareholder; and
Prohibits a fiduciary from following the recommendations of a proxy advisory firm or other service provider unless the fiduciary determines that the firm or other service provider’s proxy voting guidelines are consistent with ERISA’s fiduciary duties and responsibilities.
§ 1.1.8. Plans Covered by Final Regulation
It is important to remember that this regulation only applies to plans that are subject to ERISA’s fiduciary duties and responsibilities for investing plan assets. As a result, they do not apply to: plans excluded from ERISA (e.g., governmental plans, church plans that have not elected to be covered under ERISA); plans without assets (e.g., unfunded welfare plans); and plans that are not subject to ERISA’s fiduciary rules (e.g., supplemental executive retirement plans, “top hat” deferred compensation plans).
§ 1.1.9. Conclusion
With these final regulations: we are still left with the question of whether it is ill-advised for plan fiduciaries to engage in “ESG investing” especially for those investments based solely on ESG considerations. While the final rule acknowledges that ESG factors may be appropriate factors to consider in the risk and return analysis, with the continued proliferation of class-action litigation attacking plan fees and investment selections for participant-directed defined contribution plans, a properly structured fiduciary process (including appropriate documentation of that process) remains a must.
Linda Haynes and Diane Dygert
§ 1.2. PBGC Addresses Withdrawal Liability Assumptions for First Time in New Proposed Rule
On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published its final rule (“Final Rule’) on the Special Financial Assistance (“SFA”) Program established under the American Rescue Plan Act of 2021 (“ARPA”). The Final Rule contains a number of significant developments and amendments from the interim final rule (“IFR”), including for example, expanding investment options for SFA assets, providing for separate interest rate assumptions for SFA versus non-SFA assets, loosening restrictions for benefit increases, and adding a new condition for phased recognition of SFA assets in calculating withdrawal liability. The Final Rule becomes effective on August 8, 2022. There is a thirty (30) day public comment period solely on the new phase-in condition for withdrawal liability starting from the Final Rule publication date.
Under the SFA Program, a financially troubled multiemployer pension plan may receive a one-time lump sum payment intended to be sufficient to allow it to pay all benefits due from the date the SFA payment is received through the last day of the plan year ending in 2051. We previously wrote about the IFR and explained the various eligibility conditions for SFA and the calculations involved. (Click here for our earlier Legal Update titled PBGC Issues Much Anticipated Interim Final Rule On Special Financial Assistance Under American Rescue Plan Act).
The following is a high-level summary of the key changes and developments from the Final Rule.
§ 1.2.1. Separate Interest Rate Assumptions for SFA and Non-SFA Assets
Under the Final Rule, the SFA amount will now be calculated using two different interest rate assumptions: one for SFA assets and another for non-SFA assets. This is an important development because the interest rates are used to calculate the total SFA amount, and with this new approach, plans should receive more in financial aid in most instances. Previously under the IFR, plans were required to use the same interest rate assumption for both SFA and non-SFA assets. This did not take into account that the IFR also required SFA and non-SFA assets to be segregated, with SFA assets limited to more conservative investments. Thus, using the same interest rate assumption for both pools of assets was not an accurate way for plans to project actual expected investment returns. This also meant that the SFA could fall short of the amount the plan would need to pay all benefits due through the plan year ending 2051.
Recognizing this issue, the Final Rule now bifurcates the required interest rate assumptions as follows:
For Non-SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the third segment funding rate plus 200 basis points; and
For SFA asserts, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the average of the three funding segment rates plus 67 basis points.
For plans whose applications are approved on or before August 8, 2022 (i.e., the Final Rule date), a supplemental application must be filed with the PBGC to take advantage of the two different interest rate assumptions. If an application is still pending as of August 8, 2022, then the plan will need to withdraw the application, revise and refile.
§ 1.2.2. Investment of SFA Assets
The Final Rule allows plans to invest up to 33% of SFA assets in return seeking investments (e.g., publicly traded common stock, equity funds that invest primarily in public shares, bonds, etc.), with the remaining 67% restricted to investment grade fixed income securities. Previously under the IFR, 100% of SFA assets were required to be invested in investment grade fixed income securities. This development adds an important element in the investment of SFA assets, and it could significantly increase the likelihood that plans will be able to avoid insolvency through 2051.
For plans receiving SFA amounts before August 8, 2022, the investment restrictions under the IFR will continue to apply unless a supplemental application is filed with the PBGC.
Seong Kim, Alan Cabral, Ryan Tzeng, and Ronald Kramer
§ 1.3. MPRA Plans
The Final Rule revises the methodology for determining the SFA amount for plans that suspended benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”).
Previously under the IFR, a single method was used to calculate SFA amounts for plans that suspended benefits under the MPRA (“MPRA plans”) and those that did not (“non- MPRA plans”). Under the MPRA, benefit suspensions were approved if plans could demonstrate that such suspensions would enable the plan to avoid insolvency indefinitely. To qualify for SFA, MPRA plans must permanently reinstate any suspended benefits. However, under the IFR, an MPRA plan would only receive amounts necessary to avoid insolvency through 2051. Thus, under the IFR, MPRA plans were faced with the dilemma of either keeping any benefit suspensions in place to avoid insolvency indefinitely, or receiving SFA, reinstating benefits, and risking insolvency in the future.
To help alleviate this issue, the Final Rule provides that the SFA amount for MPRA plans is the greater of the following:
The SFA amount calculated without regard to any benefit suspensions (i.e., a non-MPRA plan);
The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
The SFA amount equal to the present value of reinstating suspended benefits through 2051 (including make-up payments).
§ 1.3.1. Retroactive Benefit Increases
The Final Rule allows retroactive benefit increases beginning ten years after receiving SFA, provided the plan can demonstrate to the PBGC that it will continue to avoid insolvency. The IFR did not permit retroactive benefit increases at all during the SFA period (i.e., through 2051), and only permitted prospective benefit increases when certain conditions were satisfied.
§ 1.3.2. Merger Involving SFA Plans
The IFR contained a number of restrictions and conditions, including PBGC approval, that are applicable in the event of merger of a plan receiving SFA. The Final Rule, however, removes restrictions on prospective benefit increases, allocation of assets, and allocation of expenses. The PBGC explained that such conditions would “unduly impede beneficial mergers.” In addition, a merged plan may apply for a waiver of certain other restrictions.
§ 1.3.3. Transfer from SFA Plan to Health Plan
While the PBGC was initially hesitant to permit reallocation of contributions between SFA plans and other employee benefit plans, the Department of Labor suggested that there may be circumstances that would justify good faith reallocations of income or expenses between plans (e.g., health benefit cost increases due to legislative changes). Addressing this narrow circumstance, the Final Rule now permits an SFA plan to apply to the PBGC for permission to temporarily reallocate to a health plan up to 10% of the contribution rate negotiated on or before March 11, 2021. The SFA plan must demonstrate that the reallocation of contributions is necessary to address an increase in healthcare costs required by a change in Federal law, and that the reallocation does not increase the risk of insolvency for the SFA plan. Plans can begin applying five years after receiving SFA, and reallocation of contributions relating to any single change in Federal law can last for no more than five years, with a limit of ten years cumulatively for all reallocation requests.
§ 1.3.4. Withdrawal Liability
The Final Rule adds a “phase-in” feature intended to ensure that SFA funds are not used to subsidize employer withdrawals.
Under the IFR, all SFA funds must be included as plan assets in determining unfunded vested benefits. As a result, it is likely that withdrawal liability would be significantly reduced when calculated immediately after plans receive SFA funding. After the changes in the Final Rule, however, the reduction in withdrawal liability will be more gradual, as plans are required to “phase-in” the recognition of SFA assets.
The phase-in period begins the first plan year in which the plan receives SFA and extends through the end of the plan year in which the plan expects SFA to be exhausted. To determine the amount of SFA assets excluded each year, the plan multiplies the total amount of SFA by a fraction, the numerator of which is the number of years remaining in the phase-in period, and the denominator is the total number or years in the phase-in period. The phased recognition of SFA assets does not apply to plans that received SFA funds under the terms of the IFR unless a supplemental application is filed. If the plan files a supplemental application, the phased recognition applies to withdrawals occurring on or after the date the plan files the supplemental application.
Solely for this new condition for determining withdrawal liability, there is a thirty (30) day public comment period starting on July 8, 2022, the date of publication of the Final Rule in the Federal Register.
§ 1.3.5. SFA Measurement Date and Lock-In Applications
To provide filers with more flexibility, the Final Rule redefines the “SFA measurement date” as the last day of the third calendar month preceding the plan’s initial application date. Previously under the IFR, the SFA measurement date was defined as the last day of the calendar quarter preceding the plan’s initial application date. In addition, the Final Rule creates a mechanism to permit plans in priority groups 5, 6, and any additional priority groups established by the PBGC, to file a “lock-in application.” A lock-in application allows the plan to freeze its base data (i.e., SFA measurement date, census data, non-SFA interest rate assumption, and SFA interest rate assumption) when it is unable to file an application because the PBGC has temporarily closed the filing window. Eligible plans may file lock-in applications after March 11, 2023, and on or before December 31, 2025.
§ 1.3.6. Conclusion
As practitioners continue to digest the new Final Rule, there may be other issues that come up that are not addressed. As noted above, there will also be a thirty (30) day public comment period solely on the phase-in approach to calculating withdrawal liability, which may lead to additional changes. We will continue to monitor for further developments in that regard, and for any additional clarifying guidance from the PBGC. Stay tuned…
Ryan Tzeng, Joel Wilde, Alan Cabral, and Seong Kim
§ 1.4. Can 401(K) Fee Dispute Cases Survive Based on Bare Allegations Supported by Monday-Morning Quarterbacking?
2022 has seen an increase in putative class actions brought under the Employee Retirement Income Security Act (ERISA) (29 U.S.C. §§ 1109 and 1132) against plan fiduciaries. Plaintiffs typically allege that plan fiduciaries breached the duties that ERISA imposes of employee retirement plans, namely, that the fiduciaries breached their duties of loyalty and prudence by including subpar investment options in employee 401(k) plans. These suits are seemingly driven by Monday-morning quarterbacking, where disillusioned plan participants with the benefit of hindsight contend that investment decisions were imprudent. In fact, since 2019, over 200 lawsuits challenging retirement plan fees have been filed against employers in every industry. See Jacklyn Willie, Suits Over 401(k) Fees Nab $150 Million in Accords Big and Small, Bloomberg Law (Aug. 23, 2022), https://bit.ly/3Uel7y5.
A 401(k) fee case involving such a dispute, Matney v. Barrick Gold of N. Am., Inc., 2022 WL 1186532 (D.Ut. Apr. 21, 2022), and the corresponding appeal filed to the Tenth Circuit Court of Appeals, is garnering significant attention from the U.S. Chamber of Commerce and several other business groups. The Chamber of Commerce, the American Benefits Counsel, the ERISA Industry Committee, and the National Mining Association recently filed an amicus brief in November 2022 urging the Tenth Circuit Court of Appeals to affirm the district court’s decision to dismiss the ERISA lawsuit against Barrick Gold of North America, Inc.
§ 1.4.1. The Matney Decision
The plaintiffs in Matney alleged that the plan fiduciaries violated ERISA when it failed to monitor, investigate, and ensure plan participants paid reasonable investment management fees and recordkeeping fees during a period of time. The plaintiffs alleged that each plan participant’s retirement assets covered expenses incurred by the plan, including individual investment fund management fees and recordkeeping fees, which were allegedly excessive, costing the proposed class millions of dollars in direct losses and lost investment opportunities. In support of their claims, the plaintiffs provided example of fees (measured as expense ratios) charged by a select group of funds in the plan, compared to fees charged by other funds in the marketplace. Id. at *5.
In April 2022, U.S. District Judge Tena Campbell dismissed the suit, finding that the plaintiff participants had failed to state a claim. Judge Campbell found that the plaintiffs made “apples to oranges” comparisons that did not plausibly infer a flawed monitoring decision making process.” Id. at *10. The court ultimately found that ERISA does not require plan fiduciaries to offer a particular mix of investment options, whether that be ones that favor institutional over retail share classes, ones that favor collective investment trusts (CITs) to mutual funds, or ones that choose passively-managed over actively-managed investments. Id.
As to the plaintiff participants’ concerns over allegedly improper recordkeeping fee arrangement with Fidelity, Judge Campbell dismissed this claim as well, finding that the court could not infer that the process was flawed, or that a prudent fiduciary in the same circumstances would have acted differently.
Finally, Judge Campbell found that in the context of the participants’ allegations of violations of ERISA’s duty of loyalty, they did not allege facts creating a reasonable inference that the plan fiduciaries were disloyal to the plan participants. On the contrary, Judge Campbell concluded that their allegations of disloyalty were conclusions of law or altogether conclusory and unsupported statements. Id. at *14.
§ 1.4.2. The Matney Amicus
The Amicus Brief filed in support of the Defendants-Appellees noted that in many ERISA fee cases like the plaintiff participants in Matney, the complaint contains no allegations about the fiduciaries’ decision-making process, which is a key element in an ERISA fiduciary-breach claim. Instead, complaints including the one in Matney typically contain allegations with the benefit of 20/20 hindsight that plan fiduciaries failed to select the cheapest or best-performing funds, or the cheapest recordkeeping option, often using inapt comparisons to further the point. Then, the plaintiffs ask the court to make a logical leap from the circumstantial allegations that the plan’s fiduciaries must have failed to prudently manage and monitor the plan’s investment line-up.
The Amicus Brief further averred that allowing suits to proceed like the 401(k) fee dispute case in Matney risks having the effect of severely harming employees’ retirement savings. Indeed, failing to dismiss meritless cases at the pleading stage would invite costly discovery and pressure plan sponsors into a narrow range of options available to participants, like passively-managed, low-cost index funds.
§ 1.4.3. Conclusion
We are closely watching the pending Matney appeal in front of the Tenth Circuit. Following the United States Supreme Court’s decision in Hughes v. Northwestern Univ., 142 S.Ct. 737 (2022), we have been monitoring how courts have interpreted this ruling and its impact on the 401(k) excessive fee space. The Hughes case requires a context-specific inquiry to assess the fiduciaries’ duties to monitor all plan investments and remove any imprudent ones and ultimately reaffirmed the need for courts to evaluate the plausibility pleading requirement established by Rule 8(a), Twombly, and Iqbal. It remains to be seen how other Circuit Courts interpret Hughes and how they will respond to this recent flurry of 401(k) fee cases.
Kathleen Cahill Slaught and Ryan Tikker
§ 1.5. Are We There Yet? Emergency Declarations and COVID Relief Are Extended into 2023
HHS has announced that the COVID-19 Public Health Emergency (PHE) has been extended another 90 days, and will run until January 11, 2023.
In response to the COVID-19 pandemic, two separate emergency declarations have been in effect: (1) the COVID-19 PHE and (2) the COVID-19 National Emergency. These emergency declarations provide different types of COVID-related relief for participants and group health plans. While the COVID-19 pandemic is winding down, these emergency declarations and their related relief remain in effect.
§ 1.5.1. The COVID-19 Public Health Emergency
HHS first declared the COVID-19 PHE in January 2020. The COVID-19 PHE declarations last for 90 days unless an extension is granted. Since January 2020, the COVID-19 PHE has been renewed every 90 days.
HHS recently extended the COVID-19 PHE an additional 90 days. This means that the COVID-19 PHE will run until January 11, 2023, unless another extension is granted.
Accordingly, the COVID-19 PHE will permit the following COVID-related relief to continue into 2023:
COVID-19 Testing: in-network and out-of-network COVID-19 testing are at no cost to participants.
COVID-19 Vaccines: in-network COVID-19 vaccines are at no cost indefinitely, but after the end of the COVID-19 PHE, plans may impose cost-sharing for non-network administration.
Expanded Telehealth Coverage: telehealth coverage is permitted to be offered to employees whether or not the employee is enrolled in the employer’s medical plan.
SBC Advanced Notice Requirements: the SBC advanced notice requirements for mid-year changes are relaxed when necessary to implement COVID-19 coverages/benefits.
The Biden Administration has advised that it will provide at least 60 days’ advanced notice prior to allowing the PHE to expire, so unless the Administration provides such notice before mid-November, it is reasonable to assume the PHE will be extended again.
§ 1.5.2. The COVID-19 National Emergency
Unlike the COVID-19 PHE, the COVID-19 National Emergency is declared by the President and the declarations last for one-year unless an extension is granted. On March 13, 2020, the COVID-19 National Emergency was announced, and it has been extended every year since. Currently, the COVID-19 National Emergency is set to expire on March 1, 2023.
The COVID-19 National Emergency gave rise to the “Outbreak Period” in which certain deadlines were extended to provide relief from COVID-19. The COVID-19 National Emergency will permit the Outbreak Period to continue into 2023, which will permit the following deadlines to be extended until the earlier of (a) one year after the deadline, or (b) 60 days after the end of the Outbreak Period:
COBRA election deadline
COBRA premium payment deadline
HIPAA special enrollment deadline
ERISA claims filing deadline
Fiduciary relief for delayed provision of notices
Keep in mind, the deadlines applicable to the Outbreak Period are determined on an individual by individual basis and cannot last more than one year from the date the individual or plan was first eligible for relief. For more information regarding the COVID-19 National Emergency and Outbreak Period, see our prior Legal Updates.
Please contact the employee benefits attorney at Seyfarth Shaw LLP with whom you usually work if you have any questions regarding the COVID-19 PHE or COVID-19 National Emergency.
Ben Conley and Mary Kennedy
§ 1.6. Are Birth Control and Plan B Next? Texas Judge Targets Preventative Care Mandate in the Name of Religious Liberty
To promote healthier lifestyles in an effort to ultimately reduce the cost of health care in the United States, the Affordable Care Act (ACA) requires private health plans to provide first dollar coverage for evidence-based preventive care. As a result, such things as immunizations and cancer screenings must be covered without the requirement to pay a co pay or meet a deductible. A recent decision by a federal district court in Texas allows employer plan sponsors to exclude coverage for certain preventive treatments to which they objected.
One of the results of this ACA preventive care requirement was to empower the Federal Government to deem certain medical treatments as being effective preventive care and thus necessary for coverage by group health plans. In Braidwood Management Inc v Becerra, 4:20-cv-00283 (N.D. TX), a Court found that an employer who objected to a certain preventive treatment on religious grounds could be exempted from offering that otherwise mandated treatment.
Specifically, in this matter the Court held that the professed Christian beliefs of a for-profit employer exempted it from providing PrEP, a medication that lowers the risk of HIV transmission by over 99%, despite coverage of PrEP being mandated as an effective preventive treatment under the Affordable Care Act. In reaching this holding, the Court noted that the employer objected to covering PrEP as:
[H]e believes that (1) the Bible is “the authoritative and inerrant word of God,” (2) the “Bible condemns sexual activity outside marriage between one man and one woman, including homosexual conduct,” (3) providing coverage of PrEP drugs “facilitates and encourages homosexual behavior, intravenous drug use, and sexual activity outside of marriage between one man and one woman,” and (4) providing coverage of PrEP drugs in Braidwood’s self-insured plan would make him complicit in those behaviors.
The Government argued that the employer put forth no evidence that PrEP increased any of the activities to which it objected. The Court found that argument irrelevant, since the employer believed that PrEP had this impact. The Court also acknowledged that despite this religious objection, the Government had a compelling interest in mandating that benefit plans offer PrEP. However, the Court nevertheless found this compelling interest insufficient to trump the employer’s religious beliefs because the government did not prove how exempting religious for-profit employers from the mandate would impact the compelling interest of slowing/stopping HIV transmission. The Court further noted that the Government could simply solve the issue by paying for PrEP for individuals covered by a health program that did not cover PrEP.
This ruling is significant in that it shows the increasing tension in jurisprudence between public health of employees and society-at-large on the one hand and the religious rights of private employers on the other. Importantly, this line of case law could also raise tension under Title VII as Courts thread the permissibility of an employer’s religious belief to oppose homosexual behavior and its legal mandate not to discriminate against homosexual employees.
The impact of this ruling is not limited to PrEP. Rather, this ruling provides fertile ammunition for employers to argue that their religious beliefs justify their exemption from a whole host of otherwise required medical treatments, including birth control and Plan-B. Stay tuned as we continue to track legislation and court rulings that impact access to health care coverage.
Sam Schwartz-Fenwick
§ 1.7. Agency FAQs Reveal Employers Continue to Struggle with No Surprises Act & Transparency in Coverage Implementation
With staggered effective dates continuing over the course of the next several years, the No Surprises Act (NSA) and Transparency in Coverage requirements impose a number of additional compliance obligations on group health plan sponsors. The DOL, HHS and the Treasury recently issued joint guidance in the form of Frequently Asked Questions (FAQs) attempting to clarify a number of these obligations.
§ 1.7.1. Guidelines for Transparency in Coverage Machine-Readable Files Notice
As described in earlier legal updates, the agency Transparency in Coverage guidelines contain a host of new requirements, including the requirement that plans make machine-readable files publicly available on the plan’s website no later than 7/1/2022. The agencies had previously indicated that if an employer-sponsored plan maintained no such website, the employer would be required to post the files (or a link to the files) on their public-facing website. Needless to say, this caused great consternation among large employers that carefully curate their public-facing website, so the new FAQs elaborate on and relax this requirement.
Under the new guidance, an employer can satisfy the posting requirement through a link posted on the plan’s third-party administrator (TPA) or insurance carrier’s public website alone. To rely on a TPA/carrier posting, the plan/employer must enter into a written agreement with the TPA/carrier under which the vendor assumes this obligation. (But the guidance reiterates that if the vendor fails to properly post the machine-readable files on its website, the plan will remain liable for violating the disclosure requirements.)
Employers who posted a link to the machine-readable files on their own public website may choose to remove it once they have a written agreement in place.
§ 1.7.2. Guidelines for Disclosure of NSA Notice
The NSA requires entities governed by the NSA (including health plans, insurance carriers and providers) to notify affected individuals of their rights with respect to balance billing. The DOL offered a model notice to satisfy this requirement. Because the regulations were broadly applicable to a diverse array of entities, there was some uncertainty surrounding how they applied in the context of group health plans. The FAQs attempted to clarify this uncertainty as follows:
The FAQs specify the three ways in which plans and issuers must satisfy the notice obligation:
Make the notice publicly available. It remains unclear what this means in the context of an employer-sponsored group health plan. Presumably the website posting referenced below should satisfy this obligation, but further guidance would be welcome.
Post the notice on the public website of the plan. Here, the agencies clarify that a plan with no public website (i.e., most employer-sponsored health plans) can satisfy this obligation by entering into a written agreement with the plan’s insurance carrier or TPA under which the TPA/carrier posts the information on a public website where information is normally made available to participants. The FAQs reiterate that the plan ultimately remains liable for any failure on the part of its TPA/carrier.
Include information regarding protections against balance billing on any Explanation of Benefits (EOB) subject to the new requirements.
As noted above, the DOL has provided a model notice and has updated its model since initial issuance. The FAQs would permit plans to use either version for plan years beginning before January 1, 2023, but thereafter plans must use the revised notice.
The FAQs also clarified that for plans not subject to state balance billing obligations (which would include most self-funded plans), any information in the notice applicable to state guidelines can be removed.
§ 1.7.3. Confirms Applicability to Plans with No Network and Plans Only Offering In-Network Coverage
Because the NSA generally affords protections with respect to non-network services, there was some uncertainty surrounding whether and to what extent those protections would apply for plans with no network (e.g., reference-based pricing plans) or plans that only extend in-network coverage. The FAQs included several clarifications on these points.
Because the NSA requires that certain non-network claims be processed as if they were performed in-network, there had been some uncertainty regarding whether and to what extent these rules apply to (a) plans with no network, or (b) plans with no non-network coverage. The FAQs confirm that the provisions do apply to these types of plans, at least with respect to emergency services and air ambulance services.
In contrast, the provisions that prohibit balance billing and/or limit cost sharing for non-emergency services apply only to services provided by a nonparticipating provider with respect to a visit to a participating health care facility. Therefore, the prohibitions on balance billing and/or provisions that limit cost sharing for nonemergency services provided by nonparticipating providers with respect to a visit to certain participating facilities would never be triggered if a plan does not have a network of participating facilities.
If a plan has no network, the payment amount should be calculated using the NSA’s existing hierarchy (All-Payer Model Agreement, state law, or qualifying payment amount (QPA) using an eligible database).
The FAQs reiterate earlier guidance that requires plans with no network to impose reasonable guardrails to ensure that the plan does not subvert the Affordable Care Act’s limits on out-of-pocket maximums.
The FAQs clarify that if a plan limits network coverage to emergency air ambulance services, then it must only provide non-network coverage for emergency (not nonemergency) air ambulance services.
The FAQs also clarify that the air ambulance provisions apply to pick-ups outside of the U.S. and provide guidance on how to determine the QPA in that context.
§ 1.7.4. Confirms Applicability to Behavioral Health Crisis Facility
The FAQs confirm that the NSA protections can apply in the context of a behavioral health crisis facility if the services otherwise meet the definition of “emergency services” and are provided in connection with a visit to a facility that meets the definition of an “emergency department of a hospital” or “independent freestanding emergency department”.
§ 1.7.5. Clarifications Regarding Calculation of Qualifying Payment Amount
While the NSA attempted to establish a framework for plans to calculate the QPA in most instances (with a fallback allowing plans to rely on an eligible database if data was unavailable), there remain some circumstances where such calculation is not adequately addressed. The FAQs provide certain clarifications for these situations, including the following.
Plans must calculate a median rate based on each provider specialty if the plan’s payment rates vary based on specialty.
If plans offer multiple benefit options across different TPAs, the FAQs clarify that the plan must only determine the QPA for an NSA-protected service based on the rate for the TPA administering the benefit option in which the participant has enrolled (i.e., no coordination across TPAs is required).
The FAQs reiterate that the EOB relating to an NSA claim must include all required information under the NSA rather than directing the participant or provider to a website where that information is available.
Joy Sellstrom and Ben Conley
§ 1.8. Equal Access to Travel Benefits
As more employers announce that they cover travel benefits under their medical plans that will allow participants to be reimbursed for certain travel expenses necessary in order to access otherwise covered medical benefits, proponents on the pro-choice and anti-abortion platforms seek ways to support or block those benefits.
In the weeks since the Dobbs decision was released, the ripple effects of the decision continue to arise in unexpected ways. Litigants are challenging as discriminatory under Title VII, employer travel benefits that enable employees to travel in order terminate pregnancies in states where it remains legal. Specifically, litigants have begun to assert that providing travel benefits for the purpose of terminating a pregnancy is unlawful if the employer does not also allow travel benefits for pregnant women who intend to carry their pregnancy to term.
There is a long history of employees using Title VII as a tool to ensure equal benefit treatment in situations where only certain classes of employees are eligible for a benefit. The nuance in the recent challenges is that employees during pregnancy do not typically need to travel for a benefits purpose (e.g., to receive adequate prenatal care). Further, to date these claims do not appear to be an allegation that only certain pregnant employees have access to a travel benefit to terminate a pregnancy. This makes the success of this type of claim far from certain. However, even if these cases are dismissed for failure to state a cognizable claim, this type of action remains significant in showing the new types of litigation claims that employers will need to contend with post-Dobbs. It is expected that other cases may be filed under Title VII asserting claims of religious discrimination. For instance, an employee may claim that their religious rights are being infringed on if they are tasked with approving abortion related travel benefits and abortion violates their religious beliefs.
To navigate this increasingly divisive environment, it remains a best practice to clearly communicate the scope of any post- Dobbs policy and to work with counsel to ensure that the policy is properly tailored to best mitigate litigation risk in a rapidly changing legal climate. Please stay tuned as we continue to provide updates on litigation and statutory trends post-Dobbs.
Sam Schwartz-Fenwick and Ada Dolph
§ 1.9. Sixth Circuit Affirms Dismissal of 401(K) Breach of Fiduciary Duty Case, Supports Selection of Actively-Managed Funds
In a published opinion on June 21, 2022, Smith v. CommonSpirit Health, 37 F.4th 1160 (6th 2022) a three-judge panel affirmed a Kentucky district court’s dismissal of a putative class action against a plan administrator and plan sponsor. The plaintiff, Yousaun Smith, claimed breaches of fiduciary duty in violation of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132(a)(2). Smith worked for Catholic Health Initiatives, now known as CommonSpirit Health, and participated in the CommonSpirit defined-contribution 401(k) plan.
Smith claimed that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when index funds available on the market offered higher returns and lower fees. Particularly, he pointed to three-year and five-year periods in which three actively managed funds trailed related index funds in their rates of returns.
The panel also considered the contention that actively managed funds were per se imprudent for inclusion because they might underperform more conservative investment options over a set period of time.
“[T]here is nothing wrong with permitting employees to choose them in hopes of realizing above-average returns over the course of the long lifespan of a retirement account – sometimes through high-growth investment strategies, sometimes through highly defensive investment strategies. . . It is possible indeed that denying employees the option of actively managed funds, especially for those eager to undertake more or less risk, would itself be imprudent.” Instead, the Sixth Circuit found that offering actively managed funds in addition to passively managed funds was merely a reasonable response to customer behavior. Id. at 1166.
The Sixth Circuit also considered whether CommonSpirit violated its fiduciary duty by imprudently offering specific actively managed funds. ERISA and Supreme Court precedent require that plan fiduciaries ensure that all fund options remain prudent options.
The panel, however, found that Smith did not plausibly plead that CommonSpirit violated this obligation either. Smith pointed to the performance of the Fidelity Freedom Funds versus the Fidelity Freedom Index Funds, over a five-year period, noting that the actively-managed freedom funds trailed the index funds by as much as 0.63 percentage points per year. The Sixth Circuit wrote that it was still prudent to offer an actively managed fund that costs more but may generate greater returns over the long haul. It also rejected that a participant could simply point to a fund with better performance to create a showing of imprudence. That alone is not itself sufficient. Instead, the panel wrote that these claims, “require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.” Id. at 1166.
The Sixth Circuit also noted that its decision paralleled the Eighth Circuit’s in a similar claim, where the Eighth Circuit rejected an employees’ claim that plan administrators breached a fiduciary duty by offering actively managed stock and real estate funds in addition to passively managed ones, where it concluded that it was “not imprudent for a fiduciary to provide both investment options.” Davis v. Washington Univ. in St. Louis, 960 F.3d 478, 485 (8th Cir. 2020). In fact, the two general investment options “have different aims, different risks, and different potential awards that cater to different investors. Comparing apples to oranges is not a way to show that one is better or worse than the other.” Id.
This supports that a plaintiff participant cannot merely point to another index investment that has performed better in a five-year snapshot of a fund to plausibly plead an imprudent decision. Necessarily, this construction could mean that every actively managed fund with below-average results over the most-recent five-year period could create a plausible ERISA violation. This rings true when one considers that the lifespan of these funds may be a 50-year period. We will continue to watch the challenge of these 401(k) disputes and how courts handle similar cases at the motion to dismiss level. These matters have become increasingly more common over the past year.
Kathleen Cahill Slaught and Ryan Tikker
§ 1.10. Novel Retirement Plan Correction Opportunity Offered by the IRS
On June 3, 2022, the IRS announced the launch of a “pre-examination” compliance program. Under the new program, the IRS sends letters to plan sponsors about an upcoming examination of their retirement plan or plans. The letter gives the plan sponsor 90 days to voluntarily review its retirement plan(s) for plan document and operational compliance, and self-report any errors and/or corresponding corrections back to the IRS no later than the end of the 90 day period. Following the IRS’s review of the plan sponsor’s response, the IRS can issue a closing letter or may choose to conduct a limited or full scope audit. Like all pilot programs, the IRS will evaluate the program’s effectiveness and determine whether it will be a permanent fixture of its compliance strategy. So is this new pre-examination compliance program a good thing or a bad thing for plan sponsors? Will the IRS use this to expand its audit abilities by having plan sponsors do its work for them, or will the program end up reducing the odds of a plan being subject to a full scope audit that could drag on for months or longer?
§ 1.10.1. Background
If you listen carefully, you may occasionally hear employee benefits practitioners applaud the IRS’ Employee Plans Compliance Resolution System (aka EPCRS), described in Revenue Procedure 2021-30, as being one of the most successful compliance programs in IRS history. This may be so. The program is designed to allow plan sponsors the opportunity to make reasonable corrections of retirement plan tax errors without penalty (and in many cases without even identifying the plan sponsor), other than the imposition of a user fee if a filing is made with the IRS. Moreover, since the form of its initial pilot program in the early 1990s, EPCRS has periodically and consistently evolved to further address difficulties facing plan sponsors intending to be compliant, but who are occasionally set-back by the complexities of the retirement plan regimes.
§ 1.10.2. New IRS Pilot Program
The latest compliance-related enterprise is a new pilot program, announced last month, which concerns compliance errors discovered upon IRS examinations of retirement plans (i.e., plan audits). When such errors are discovered by the IRS upon audit, EPCRS is often no longer available and the consequences can be particularly costly. Inevitably, it would be significantly less expensive for a plan sponsor who self-identifies errors and utilizes EPCRS before being notified of the examination. But that doesn’t always happen.
The essence of the new pilot program is to give plan sponsors a “90-day warning” to self-identify and report any errors that would have been precluded from EPCRS, had the errors been identified by the IRS on exam.
If a plan sponsor fails to respond within the 90-day window, the IRS will schedule an exam.
Errors that the plan sponsor identifies, may be either self-corrected if otherwise eligible under EPCRS. If not eligible for self-correction under EPCRS, the plan sponsor can enter into a closing agreement with the IRS to make the appropriate corrections at the cost of the voluntary compliance program (aka VCP) fee—which is likely to be a small fraction of the cost that would be facing the plan sponsor if the error(s) were discovered by the IRS upon examination.
After reviewing the plan sponsor’s response, the IRS may just enter into a closing agreement bringing the matter to an end, but reserves the right to conduct a limited or full scope exam, presumably if the response is not up to snuff.
We’re told from our industry sources that the IRS has unofficially stated that the pilot program presently is limited only to 100 defined contribution plans that have been identified for potential errors relating to compliance with the requirements of Internal Revenue Code section 415 (the annual contribution limit applicable to tax-favored retirement plans). If the pilot program is successful, the IRS intends to apply it more broadly.
§ 1.10.3. Benefits Counsel’s Perspective
Through a non-cynical lens, an expanded version of this program can be a win-win for plan sponsors and the IRS. Plan sponsors get a valuable heads up that an exam is coming and a “second chance” to correct errors. On the other hand, the IRS presumably can more efficiently allocate its resources.
Naturally, if you receive one of these letters, our advice is to conduct a robust review of the issues identified in the letter and prepare an appropriate response with the help of your Seyfarth Shaw employee benefits counsel.
We encourage you to contact us immediately if you receive one of these notices from the IRS.
Benjamin Spater
§ 1.11. PBGC Finally Publishes Final Rule on Special Financial Assistance Program
On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published its final rule (“Final Rule’) on the Special Financial Assistance (“SFA”) Program established under the American Rescue Plan Act of 2021 (“ARPA”). The Final Rule contains a number of significant developments and amendments from the interim final rule (“IFR”), including for example, expanding investment options for SFA assets, providing for separate interest rate assumptions for SFA versus non-SFA assets, loosening restrictions for benefit increases, and adding a new condition for phased recognition of SFA assets in calculating withdrawal liability. The Final Rule becomes effective on August 8, 2022. There is a thirty (30) day public comment period solely on the new phase-in condition for withdrawal liability starting from the Final Rule publication date.
Under the SFA Program, a financially troubled multiemployer pension plan may receive a one-time lump sum payment intended to be sufficient to allow it to pay all benefits due from the date the SFA payment is received through the last day of the plan year ending in 2051. We previously wrote about the IFR and explained the various eligibility conditions for SFA and the calculations involved. (Click here for our earlier Legal Update titled PBGC Issues Much Anticipated Interim Final Rule On Special Financial Assistance Under American Rescue Plan Act).
The following is a high-level summary of the key changes and developments from the Final Rule.
§ 1.11.1. Separate Interest Rate Assumptions for SFA and Non-SFA Assets
Under the Final Rule, the SFA amount will now be calculated using two different interest rate assumptions: one for SFA assets and another for non-SFA assets. This is an important development because the interest rates are used to calculate the total SFA amount, and with this new approach, plans should receive more in financial aid in most instances. Previously under the IFR, plans were required to use the same interest rate assumption for both SFA and non-SFA assets. This did not take into account that the IFR also required SFA and non-SFA assets to be segregated, with SFA assets limited to more conservative investments. Thus, using the same interest rate assumption for both pools of assets was not an accurate way for plans to project actual expected investment returns. This also meant that the SFA could fall short of the amount the plan would need to pay all benefits due through the plan year ending 2051.
Recognizing this issue, the Final Rule now bifurcates the required interest rate assumptions as follows:
For Non-SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the third segment funding rate plus 200 basis points; and
For SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the average of the three funding segment rates plus 67 basis points.
For plans whose applications are approved on or before August 8, 2022 (i.e., the Final Rule date), a supplemental application must be filed with the PBGC to take advantage of the two different interest rate assumptions. If an application is still pending as of August 8, 2022, then the plan will need to withdraw the application, revise and refile.
§ 1.11.2. Investment of SFA Assets
The Final Rule allows plans to invest up to 33% of SFA assets in return seeking investments (e.g., publicly traded common stock, equity funds that invest primarily in public shares, bonds, etc.), with the remaining 67% restricted to investment grade fixed income securities. Previously under the IFR, 100% of SFA assets were required to be invested in investment grade fixed income securities. This development adds an important element in the investment of SFA assets, and it could significantly increase the likelihood that plans will be able to avoid insolvency through 2051.
For plans receiving SFA amounts before August 8, 2022, the investment restrictions under the IFR will continue to apply unless a supplemental application is filed with the PBGC.
§ 1.11.3. MPRA Plans
The Final Rule revises the methodology for determining the SFA amount for plans that suspended benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”).
Previously under the IFR, a single method was used to calculate SFA amounts for plans that suspended benefits under the MPRA (“MPRA plans”) and those that did not (“non- MPRA plans”). Under the MPRA, benefit suspensions were approved if plans could demonstrate that such suspensions would enable the plan to avoid insolvency indefinitely. To qualify for SFA, MPRA plans must permanently reinstate any suspended benefits. However, under the IFR, an MPRA plan would only receive amounts necessary to avoid insolvency through 2051. Thus, under the IFR, MPRA plans were faced with the dilemma of either keeping any benefit suspensions in place to avoid insolvency indefinitely, or receiving SFA, reinstating benefits, and risking insolvency in the future.
To help alleviate this issue, the Final Rule provides that the SFA amount for MPRA plans is the greater of the following:
The SFA amount calculated without regard to any benefit suspensions (i.e., a non- MPRA plan);
The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
The SFA amount equal to the present value of reinstating suspended benefits through 2051 (including make-up payments).
§ 1.11.4. Retroactive Benefit Increases
The Final Rule allows retroactive benefit increases beginning ten years after receiving SFA, provided the plan can demonstrate to the PBGC that it will continue to avoid insolvency. The IFR did not permit retroactive benefit increases at all during the SFA period (i.e., through 2051), and only permitted prospective benefit increases when certain conditions were satisfied.
§ 1.11.5. Merger Involving SFA Plans
The IFR contained a number of restrictions and conditions, including PBGC approval, that are applicable in the event of merger of a plan receiving SFA. The Final Rule, however, removes restrictions on prospective benefit increases, allocation of assets, and allocation of expenses. The PBGC explained that such conditions would “unduly impede beneficial mergers.” In addition, a merged plan may apply for a waiver of certain other restrictions.
§ 1.11.6. Transfer from SFA Plan to Health Plan
While the PBGC was initially hesitant to permit reallocation of contributions between SFA plans and other employee benefit plans, the Department of Labor suggested that there may be circumstances that would justify good faith reallocations of income or expenses between plans (e.g., health benefit cost increases due to legislative changes). Addressing this narrow circumstance, the Final Rule now permits an SFA plan to apply to the PBGC for permission to temporarily reallocate to a health plan up to 10% of the contribution rate negotiated on or before March 11, 2021. The SFA plan must demonstrate that the reallocation of contributions is necessary to address an increase in healthcare costs required by a change in Federal law, and that the reallocation does not increase the risk of insolvency for the SFA plan. Plans can begin applying five years after receiving SFA, and reallocation of contributions relating to any single change in Federal law can last for no more than five years, with a limit of ten years cumulatively for all reallocation requests.
§ 1.11.7. Withdrawal Liability
The Final Rule adds a “phase-in” feature intended to ensure that SFA funds are not used to subsidize employer withdrawals.
Under the IFR, all SFA funds must be included as plan assets in determining unfunded vested benefits. As a result, it is likely that withdrawal liability would be significantly reduced when calculated immediately after plans receive SFA funding. After the changes in the Final Rule, however, the reduction in withdrawal liability will be more gradual, as plans are required to “phase-in” the recognition of SFA assets.
The phase-in period begins the first plan year in which the plan receives SFA and extends through the end of the plan year in which the plan expects SFA to be exhausted. To determine the amount of SFA assets excluded each year, the plan multiplies the total amount of SFA by a fraction, the numerator of which is the number of years remaining in the phase-in period, and the denominator is the total number or years in the phase-in period. The phased recognition of SFA assets does not apply to plans that received SFA funds under the terms of the IFR unless a supplemental application is filed. If the plan files a supplemental application, the phased recognition applies to withdrawals occurring on or after the date the plan files the supplemental application.
Solely for this new condition for determining withdrawal liability, there is a thirty (30) day public comment period starting on July 8, 2022, the date of publication of the Final Rule in the Federal Register.
§ 1.11.8. SFA Measurement Date and Lock-In Applications
To provide filers with more flexibility, the Final Rule redefines the “SFA measurement date” as the last day of the third calendar month preceding the plan’s initial application date. Previously under the IFR, the SFA measurement date was defined as the last day of the calendar quarter preceding the plan’s initial application date.
In addition, the Final Rule creates a mechanism to permit plans in priority groups 5, 6, and any additional priority groups established by the PBGC, to file a “lock-in application.” A lock-in application allows the plan to freeze its base data (i.e., SFA measurement date, census data, non-SFA interest rate assumption, and SFA interest rate assumption) when it is unable to file an application because the PBGC has temporarily closed the filing window. Eligible plans may file lock-in applications after March 11, 2023, and on or before December 31, 2025.
§ 1.11.9. Conclusion
As practitioners continue to digest the new Final Rule, there may be other issues that come up that are not addressed. As noted above, there will also be a thirty (30) day public comment period solely on the phase-in approach to calculating withdrawal liability, which may lead to additional changes. We will continue to monitor for further developments in that regard, and for any additional clarifying guidance from the PBGC.
Ryan Tzeng, Joel Wilde, Alan Cabral, and Seong Kim
§ 1.12. Federal Government Response to Dobbs Begins to Take Shape
As we have been covering, the Supreme Court has overturned Roe v. Wade in their Dobbs v. Jackson Women’s Health Organization, leaving it to states to regulate access to abortion in their territory. The Biden Administration’s response to the overturning of Roe V. Wade in Dobbs v. Jackson Women’s Health Organization is taking shape and it has directed the Federal governmental agencies to look at what they can and should do to protect women’s health and privacy. Over the last few weeks, those agencies have been weighing in.
Initially, during the week of June 27th, we saw the following agency activity:
Tri-Agency Guidance re Contraceptive Coverage: On June 27th, the agencies responsible for enforcing the provisions of the Affordable Care Act (ACA) — the Departments of Health and Human Services, Labor, and Treasury – issued a letter directed to health plans and insurers “reminding” them that group health plans must cover, without cost-sharing, birth control and contraceptive counseling for plan participants. They note that they are concerned about a lack of compliance with this mandate, and that they will be actively enforcing it.
HHS Guidance re HIPAA Privacy: Shortly after, HHS issued guidance regarding the privacy protections offered by HIPAA relating to reproductive health care services covered under a health plan, including abortion services. This guidance reminds covered entities that HIPAA permits, but may not require, disclosure of PHI when such disclosure is required by law, for law enforcement purposes, or to avert a serious threat to health or safety. The guidance described the following disclosure scenarios, without an individual authorization, as breaching HIPAA’s privacy obligations:
“Required by Law:” An individual goes to a hospital emergency department while experiencing complications related to a miscarriage during the tenth week of pregnancy. A hospital workforce member suspects the individual of having taken medication to end their pregnancy. State or other law prohibits abortion after six weeks of pregnancy but does not require the hospital to report individuals to law enforcement. Where state law does not expressly require such reporting, HIPAA would not permit a disclosure to law enforcement under the “required by law” provision.
“For Law Enforcement Purposes:” A law enforcement official goes to a reproductive health care clinic and requests records of abortions performed at the clinic. If the request is not accompanied by a court order or other mandate enforceable in a court of law, HIPAA would not permit the clinic to disclose PHI in response to the request.
“To Avert a Serious Threat to Health or Safety:” A pregnant individual in a state that bans abortion informs their health care provider that they intend to seek an abortion in another state where abortion is legal. The provider wants to report the statement to law enforcement to attempt to prevent the abortion from taking place. However, HIPAA would not permit this as a disclosure to avert a serious threat to health or safety because a statement indicating an individual’s intent to get a legal abortion, or any other care tied to pregnancy, does not qualify as a serious an imminent threat to the health and safety of a person or the public, and it generally would be inconsistent with professional ethical standards.
On Friday, July 9th, the Biden administration issued an “Executive Order on Protecting Access to Reproductive Healthcare Services.” The Executive Order creates the Interagency Task Force on Reproductive Healthcare Access and instructs different agencies in broad brushstrokes in at least three areas:
Access to Services: The Secretary and Health and Human Services is to identify possible ways to:
protect and expand access to abortion care, including medication abortion, and other reproductive health services such as family planning services;
increase education about available reproductive health care services and contraception;
ensure all patients receive protections for emergency care afforded by law.
The Secretary of Health and Human Services is directed to report back to the President in 30 days on this point.
Legal Assistance: The Attorney General and Counsel to the President will encourage lawyers to represent patients, providers and third parties lawfully seeking reproductive health services.
Physical Protection: The Attorney General and Department of Homeland Security will consider ways to ensure safety of patients, providers, third parties, and clinics, pharmacies and other entities providing reproductive health services.
Privacy and Data Protection: Agencies also will consider ways to: address privacy threats, e.g., the sale of sensitive health-related data and digital surveillance, protect consumers’ privacy when seeking information about reproductive health care services, and strengthen protections under HIPAA with regard to reproductive healthcare services and patient-provider confidentiality laws.
It did not take long for the agencies to respond:
On Monday, July 11th, in a letter to health care providers, HHS Secretary Xavier Becerra said that the federal Emergency Medical Treatment and Active Labor Act requires health care providers to stabilize a patient in an emergency health situation. Given the Supremacy Clause of the Constitution, that statute takes precedence over conflicting state law. As a result, that stabilization treatment could include abortion services if needed to protect the woman’s life.
Also on Monday, the Federal Trade Commission announced that it is taking action to ensure that sensitive medical data, including location tracking data on electronic applications, is not illegally shared. The FTC gave several examples of existing enforcement activity and noted it will aggressively pursue other violations.
We are certain to see more responses to the Executive Order and will update this space. Should you have any questions, please contact your Seyfarth attorney. We will continue to monitor and provide updates as developments unfold.
Emily Miller, Ben Conley, and Sam Schwartz-Fenwick
§ 1.13. Taking Surprise Out of the No Surprises Act
The cost of health care is on the rise, and patients across the United States are more frequently experiencing a bit of shock when their medical bills arrive in their mailbox. Even before the COVID-19 pandemic, rising health care costs were top of mind for many, including lawmakers.
Many states have passed restrictions or prohibitions on surprise billing, which often occurs when patients receive emergency or out-of-network care and the providers bill the difference between their billed charges and the amount paid by the patient’s health plan. This is also referred to as balance billing and the costs are usually both significant and unexpected. It often occurs in emergency care but can occur in nonemergency situations—for example, when an individual is unknowingly treated by an out-of-network provider at an in-network facility.
As other price transparency rules and legislation relating to welfare plans started flooding in during recent years, Congress passed legislation addressing the balance-billing issue at the federal level. On December 27, 2020, the No Surprises Act (NSA) was signed into law as part of the Consolidated Appropriations Act of 2021 (CAA). It is one of the many recent targeted efforts to increase price transparency in the health care world and reduce sticker shock when individuals are paying for care.
The law went into effect January 1, 2022, and aims to reduce surprise billing experienced by patients when they unwillingly or unintentionally receive services from an out-of-network provider. Since the initial passage of NSA, regulations and guidance have been released attempting to clarify the rules for plans, issuers and providers, and a number of court cases have been filed.
With the vast array of recent legislation impacting health and welfare plans, many employers are struggling to navigate the complex requirements being imposed as well as the practical implications of NSA. This article will review some of the key provisions of the law related to surprise billing, cost sharing and dispute resolution between providers and plans, and it will provide a list of action steps for health plan sponsors.
§ 1.13.1. What Types of Health Plans Are Subject to NSA?
Generally, NSA applies to insured and self-insured group health plans that provide coverage for emergency services, including both nongrandfathered and grandfathered plans under the Patient Protection and Affordable Care Act (ACA). However, group health plans constituting “excepted benefit” plans, health reimbursement arrangements, account-based group health plans and short-term limited duration insurance plans are not required to comply. NSA also applies to providers and health plan issuers.
§ 1.13.2. Emergency Care and Out-of-Network Air Ambulance Services
Under NSA, health plans must cover “emergency services” (including post-emergency stabilization services and out-of-network air ambulance services) without prior authorization, regardless of network status, without limiting the definition of emergency medical condition to those based only on diagnosis codes and regardless of any other plan provision (other than those related to an exclusion, coordination of benefits or permissible waiting period). Out-of-network emergency care requirements and limits cannot be more restrictive than those applicable to in-network care.
In addition, certain cost-sharing requirements are imposed on out-of-network emergency care. These provisions require health plans to pay claims at certain minimum levels of coverage and provide patient cost sharing equal to in-network levels. The cost-sharing requirements are discussed in greater detail below.
§ 1.13.3. Nonemergency Care from Out-of-Network Providers at In-Network Facilities
The emergency care rules described above also apply if a patient receives covered benefits under a plan from an out-of-network provider at an in-network facility, unless certain notice and consent requirements are satisfied by the provider. Where a patient receives nonemergency care and/or poststabilization services, balance billing may generally occur after notice and consent are provided and obtained by the provider. However, even if a provider issues notice and obtains consent, balance billing is still prohibited for certain types of nonemergency services, such as ancillary services relating to emergency care, diagnostic services and services provided by out-of-network providers when no in-network providers are available to provide care at the facility.
It is important to note that emergency care and air ambulance services cannot be balance billed even if the provider gives notice and obtains consent. Rather, balance billing may occur after notice and consent only for certain types of nonemergency care and poststabilization.
§ 1.13.4. Cost-Sharing Requirements
Although ACA already provides financial protection against excessive cost sharing by requiring minimum levels of coverage for emergencies and other situations, NSA expands the scope of these protections and also adds a prohibition against balance billing. Under NSA, cost sharing for emergency care and out-of-network services provided at in-network facilities must be the same as in-network cost sharing (based on the “recognized amount”) and must count toward in network deductibles and out-of-pocket maximums. The recognized amount is the lesser of billed charges or (1) the All-Payer Model Agreement of the Social Security Act (SSA), (2) applicable state law where the SSA All-Payer Model Agreement does not apply or (3) the qualifying payment amount (QPA) (the lesser of the median contract rate for the plan in the applicable geographic region or the provider’s billed charge).
For purposes of self-funded group health plans, the QPA is likely the applicable standard unless the plan has decided to opt in to applicable state law. For fully insured plans, the applicable standard is likely state law. If the QPA is the recognized amount for a certain claim, the plan must provide a disclosure to the provider indicating the QPA, information on the independent dispute resolution (IDR) process, contact information for the plan and a statement certifying that the QPA was calculated in accordance with NSA.
§ 1.13.5. Payment Disputes and the Independent Dispute Resolution Process
NSA lays out specific procedures for providers to follow in objecting to payment amounts and outlines mandatory procedures for negotiating and settling payment disputes with health plans. A binding IDR process is available to plans and providers for determining an out-of-network rate for services covered by NSA once the parties have openly negotiated with each other for 30 days.
The plan or provider must affirmatively initiate the IDR process. If the process is utilized by the parties to determine a payment rate, the IDR entity will consider the QPA, services provided, historical contracts, the training and experience of the provider, and the market share of the plan and provider. The parties may jointly select a certified IDR entity within three business days after the initiation of the IDR process; if an IDR entity is not selected on a timely basis, an IDR entity will be selected for the parties and assigned no later than six business days after the IDR process has been initiated. The DOL, HHS and IRS maintain a list of certified IDR entities online and, in April 2022, released the Federal Independent Dispute Resolution (IDR) Process Guidance for Disputing Parties for certified IDR entities to follow in administering the IDR process.’ Several lawsuits have been filed by providers over the payment dispute process, and one court has vacated part of a prior interim federal rule requiring IDR entities to give deference to the QPA (removing the presumption in favor of the QPA during an arbitration).
Although the IDR process does not replace the ACA external review requirements (which are used to resolve disputes between plans and individuals over adverse benefit determinations), it is possible for a dispute to go through both the IDR process and the external review process. For example, a claim initially denied but later required to be covered as a result of the external review process might subsequently go through the IDR process in order to determine the payment amount.
§ 1.13.6. Publicly Available Notice
NSA requires plans and providers to post a publicly available notice regarding the various balance-billing protections under the law. The notice should be posted on a public website of the plan and included on each explanation of benefits for an item or service to which the NSA requirements apply. A model notice has been made available by the agencies.
§ 1.13.7. Enforcement of NSA
In order to enforce the rules under NSA, agencies can rely on enforcement mechanisms under the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code and the Public Health Service Act. In addition, the agencies may increase enforcement mechanisms available to them through future rulemaking.
§ 1.13.8. Future Guidance Expected
Additional guidance is expected from the agencies relating to NSA and implementation of its new rules. Employers and plan sponsors should keep a close eye on the headlines and court decisions in order to ensure continued compliance. In addition, employers should not forget about other ongoing price transparency efforts including, but not limited to, additional price transparency requirements within CAA (such as an advance explanation of benefits and a price comparison tool) and the transparency in coverage regulations requiring health plans to disclose in-network provider negotiated rates, historical out-of-network allowed amounts for providers, and in-network negotiated rates and historical net prices for covered prescription drugs.
§ 1.13.9. Recommended Action Steps for Health Plan Sponsors
Health plan sponsors should consider the following steps to work toward compliance with NSA.
Review and update the definition of emergency services under the plan to ensure the scope of the definition complies with NSA. Emergency care now encompasses a much broader scope of services—including some services not typically thought of as emergency.
Review and update cost-sharing provisions under the plan, taking into consideration the requirement that cost sharing for emergency care and out-of-network services at in-network facilities must be the same as in-network cost sharing.
Review processes for calculating in-network accumulators (e.g., deductibles and out-of-pocket maximums) in light of the requirement that cost sharing for emergency care and out-of-network services at in-network facilities must count toward in-network deductibles and out-of-pocket maximums.
Analyze and update standards reviewing emergency care claims so as not to run afoul of the requirement that claims not be denied automatically based solely on diagnosis codes.
If the plan is a self-funded group health plan, decide whether to opt in to state law or rely on the QPA for purposes of setting the “recognized amount’ If the QPA will be utilized, determine what the median contract rate will be based on.
Draft a publicly available notice (keeping in mind that the agencies have developed a model notice) discussing the protections under NSA, and determine how the public notice will be made available for the plan. Consider whether it should be included in the plan’s summary plan description(s) (SPD(s)) or other plan-related materials (e.g., explanation of benefits, open enrollment materials, etc.).
Connect with third-party administrators and insurance carriers regarding delegation of and responsibility for handling payment disputes and the IDR process. This may include reviewing and negotiating service agreements with plan service providers to determine whether and how they will implement compliance with the IDR requirements on behalf of the plan.
Consult with legal counsel to determine whether the plan and/or SPD should be updated to reflect or describe the payment dispute and IDR process.
Monitor guidance issued by the agencies and court rulings relating to NSA and other ongoing price transparency efforts.
Periodically and consistently review and update provider network directories so that plan participants are aware of which providers are considered in network. Carriers should make these changes, but plan sponsors should monitor carriers and update contracts to ensure directories are kept up to date.
Review and update ongoing fiduciary compliance efforts relating to the plan, including establishing a fiduciary committee, adopting or revising policies and procedures for the fiduciary committee, and monitoring plan service providers.
Caroline Pieper
§ 1.14. Ninth Circuit Discusses Use of Occupational Data in Long-Term Disability ERISA Benefits Denial
In an unpublished decision, a three-judge panel of the Ninth Circuit in Kay v. Hartford Life and Accident Ins. Co., 2022 WL 4363444 (9th Cir. 2022) reversed Judge Michael Anello’s decision out of the Southern District of California to deny Plaintiff Anne Kay’s claim for benefits under the Employee Retirement Income Security Act (ERISA).
Kay had stopped working in August 2015 due to escalating back pain. She applied for and received disability benefits under her employer’s long-term disability plan, administered by Hartford Life and Accident Insurance Company. Hartford terminated her benefits in July 2016 and upheld its termination in an administrative appeal, finding that she was not disabled from performing her occupation as it is recognized in the general workplace.
The Ninth Circuit found that the district court abused its discretion by denying Kay’s motion to augment the record. Id. at *1. In an ERISA case, a court may exercise its discretion to consider evidence outside of the administrative record only when circumstances clearly establish that additional evidence is necessary to conduct an adequate de novo review of the benefit decision. The Ninth Circuit wrote that because ERISA guarantees plan participants a statutory right to a “full and fair review” of a disability claim, additional evidence is necessary when an administrator tacks on a new reason for denying benefits in a final decision, thereby precluding the plan participant from responding to that rationale for denial at the administrative level.
In denying Kay’s claim for LTD benefits, Hartford offered a new rationale based on new supporting evidence. As a clinical specialist, Kay was required to travel up to 80% of the time, to work over 40 hours per week, and to move equipment that weighed upwards of 270 pounds. Hartford’s initial determination was based on a finding that she was not disabled from these duties. In Hartford’s denial of her appeal, the administrator concluded that the travel and lift requirements were not essential to her occupation in the “general workplace.” To support this rationale, Hartford produced a new occupational report defining the essential duties of Kay’s role as a hybrid of two definitions from the Department of Labor’s Dictionary of Occupational Titles, and a medical report from a physician concluding that Kay was not disabled from performing those duties. Id.
The district court denied Kay’s motion to augment the administrative record with evidence intended to refute Hartford’s new rationale. The Ninth Circuit found that in so doing, the district court effectively insulated the Hartford’s decision from a “full and fair review.”
The Ninth Circuit also found that it was also an error for Hartford and the District Court to define Kay’s position to omit the 80% travel and 270-pound lifting requirements. Id. at *2. The Hartford plan definition of occupation included the employee’s vocation “as it is recognized in the general workplace.” Id.
The Ninth Circuit recognized that while the DOT are an appropriate source for insurers applying a “general workplace” or “national economy” standard to consider an employee’s occupational duties, a proper administrative review requires that the insurer analyze, in a reasoned and deliberative fashion, what the claimant actually does before it determines what the essential duties of a claimant’s occupation are. Id.
In this case, the Ninth Circuit found that the record reflected that Hartford’s occupational specialist defined Kay’s occupation by matching DOT titles to generic job descriptions from Indeed.com and failed to select DOT titles that approximated her actual job responsibilities, including her position’s extensive travel and lifting requirements. Id.
While Hartford’s policy definition explicitly did not define occupation as including the specific job Kay was performing, the Ninth Circuit found that the occupational review needed to better match with her actual job duties. Failing to do so would not be a reasoned and deliberate analysis, as is required by Ninth Circuit precedent. As for the impact of this decision, questions remain as to how closely a theoretical job in the “general workplace” or “national economy” standard will need to match with an employee’s actual job duties. Plan administrators should review the participant’s actual job duties when evaluating the essential duties of the job and be sure to document all references for the administrative record.
Kathleen Cahill Slaught and Ryan Tikker
§ 1.15. Employers May Have to Pay More in 2022 under New ACA Limits
The IRS has announced adjustments decreasing the affordability threshold for plan years beginning in 2023, which may cause employers to have to pay more for ACA compliant coverage in 2023.
The IRS recently released adjustments decreasing the affordability threshold for plan years beginning in 2023 in Revenue Procedure 2022-34.
Under the Affordable Care Act (ACA), applicable large employers (ALEs) that do not offer affordable minimum essential coverage to at least 95% of their full-time employees (and their dependents) under an eligible employer-sponsored health plan may be subject to an employer shared responsibility penalty. Generally speaking, coverage is affordable if the employee-required contribution for self-only coverage is no more than 9.5% (as adjusted each year) of the employee’s household income. The adjusted percentage for 2022 is 9.61%. For more information regarding the 2022 affordability threshold, see our prior Blog Post here.
§ 1.15.1. Adjusted Percentage for 2023
Under Revenue Procedure 2022-34, the adjusted percentage for 2023 will be 9.12%. This is a decrease of 0.49% from the 2022 affordability threshold of 9.61%, and is the lowest affordability threshold to date by far.
§ 1.15.2. Federal Poverty Line (FPL) Safe Harbor
Making calculations based on each employee’s household income would be administratively burdensome. Accordingly, there are three safe harbors for determining affordability based on a criterion other than an employee’s household income; namely an employee’s Form W-2 wages, an employee’s rate of pay, or the FPL. If one or more of the safe harbor methods can be satisfied, an offer of coverage is deemed affordable. The FPL safe harbor is the easiest to apply, since an employer has to do just one calculation and can ignore employees’ actual wages, and is intended to provide employers with a predetermined maximum required employee contribution that will in all cases result in coverage being deemed affordable. Under the FPL safe harbor, employer-provided coverage offered to an employee is affordable if the employee’s monthly cost for self-only coverage does not exceed the adjusted percentage (9.12% for 2023) of the federal poverty line for a single individual, divided by 12. The federal poverty guidelines in effect 6 months before the beginning of the plan year may be used for an employer to establish contribution amounts before the plan’s open enrollment period.
For plan years beginning in 2023, a plan will meet the ACA affordability requirement under the FPL safe harbor if an employee’s required contribution for self-only coverage does not exceed $103.28 per month.
Given the large decrease in the adjusted percentage, employer-sponsored health coverage that was considered to be affordable prior to 2023 may no longer be considered affordable in 2023. Therefore, employers may have to pay more for ACA compliant employer-sponsored health coverage in 2023. If you have any concerns about the affordability of your health care coverage offerings, please reach out to one of our Employee Benefits attorneys directly.
Joy Sellstrom and Mary Kennedy
§ 1.16. Leaked Opinion Becomes Reality — Roe v. Wade Is Overturned
Culminating a flurry of late June opinions released by SCOTUS this week, the court today in Dobbs v. Jackson Women’s Health Organization has taken the extraordinary step of ending decades of precedent surrounding the protections for abortion-related services under the U.S. Constitution. The opinion has been widely anticipated since a draft opinion was leaked, and overturns the prior SCOTUS opinions in Roe v. Wade (1973) as well as Planned Parenthood v. Casey (1992).
The result is that states will be allowed to regulate abortion access within their borders. As we have previously covered, employers with facilities and employees in states which restrict access to abortion, prenatal, contraceptive and other similar services will be faced with a decision on how to ensure equal access for health plan services to their workforce.
Diane Dygert
§ 1.17. H.R. 7780 – Mental Health Matters Act Passes House
H.R. 7780, or the Mental Health Matters Act, passed the House by a 220-205 vote in September 2022. The bill has been received by the Senate and has been referred to the Committee on Health, Education, Labor, and Pensions. The Act claims that it would improve access to behavioral health services for children, students, and workers, respond to the growing behavioral health needs of communities across the country by investing in access to behavioral health services, equipping schools to better respond to the needs of its students, and improve access to behavioral health benefits in job-based health coverage.
The Act would authorize the Secretary of Labor to impose civil monetary penalties for violations of the Employee Retirement Income Security Act (ERISA) that were added by the Mental Health Parity and Addiction Equity Act. It also would authorize $275 million over ten years to the Department of Labor for enforcement of the Mental Health Parity Act and requirements of ERISA that relate to mental health and substance abuse disorder benefits.
It would also deem forced arbitration clauses, class action waivers, and representation waivers unenforceable for ERISA Section 502 claims and common law claims relating to a plan or benefits under a plan, when brought by or on behalf of a plan participant or beneficiary.
This bill garnered a reaction from the ERISA Industry Committee (ERIC), which is a national nonprofit organization exclusively representing the largest employers in the United States in their capacity as sponsors of employee benefit plans for their nationwide workforces. ERIC noted its opposition to the bill, citing that it would significantly increase costs and reduce access to benefits. In particular, ERIC noted that the bill proposes doubling the budget for the Employee Benefits Security Administration to fund litigation against plan sponsors. ERIC cautioned that the bill as currently written would also eliminate discretionary clauses (with respect to single-employer plans), which grant a plan administrator the authority to interpret the plan document and resolve disputes pursuant to the extensive DOL regulations.
In contrast, the White House urged passage of the legislation, citing that it will expand access to mental health and substance use services for youth, and help prevent Americans from being improperly denied mental health and substance use benefits by ensuring a fair standard of review by the courts and banning forced arbitration agreements.
It remains to be seen whether the Senate will pass the Mental Health Matters Act as written, or with watered-down provisions.
We will continue to watch the progression of the Mental Health Matters Act and its handling in the Senate. Passage of the Act as written would call for widespread changes to ERISA litigation generally, particularly whether its language regarding the elimination of discretionary clauses, arbitration clauses and class action waivers.
Kathleen Cahill Slaught and Ryan Tikker
§ 1.18. Between a Rock and a Hard Place… ESG Investments in 401(K) Plan Line-Ups
The ever-evolving landscape of environmental, social and governance (ESG) factors and 401(k) plan investment options may have just become even more complicated.
§ 1.18.1. Yet Another Twist
As we’ve covered on our blog over the last few years, the DOL’s guidance on whether environmental, social and governance (ESG) investments are an appropriate investment for ERISA plans has changed significantly. The Securities and Exchange Commission (“SEC”) has added a new potential twist that could place fiduciaries of retirement plans, like 401(k) plans, and the Board of Directors of companies that sponsor such plans in a very difficult position. Specifically, the SEC recently released correspondence related to its denial of the request from two different companies to exclude from its proxy materials a shareholder’s proposal concerning the investment options under the company’s retirement plan.
§ 1.18.2. The Shareholder’s Proposal
Shareholders in a public company have the right to bring certain matters to a vote in order to require the company to take an action that it otherwise might not take. Such shareholder proposals are typically voted on by shareholders using a “proxy voting” process, where a shareholder submits a proposal to the company for inclusion in the company’s proxy statement. If the proposal is included, shareholders can effectively vote for or against the proposal at a shareholder meeting. This proxy voting process is regulated by the SEC, and a company seeking to exclude a shareholder proposal from its proxy statement can request a “no action” letter from the SEC staff addressing whether the proposal can be excluded.
Here, the relevant shareholder’s proposal was for the Board to prepare a report reviewing the company’s retirement plan investment options and the Board’s assessment of how those options align with the company’s climate action goals. In its request, the shareholder asserted that:
every investment option in the company’s retirement plan (including the default investment option(s)) contains “major oil and gas, fossil-fired utilities, coal, pipelines, oil field services, or companies in the agribusiness sector with deforestation risk”; and
the retirement plan does not offer any equity funds that are “low carbon” and only includes a very limited number of funds that screened for “environmental/social impact.”
The shareholder also noted that the retirement plan investment options contradicted the company’s stated climate reduction commitment, which the shareholder asserted raises reputational risks for the company and could make it difficult to retain employees. Two companies sought to exclude this proposal from their proxy statements and requested a “no action” letter from the SEC staff permitting them to do so. These requests were denied.
§ 1.18.3. Evolution of SEC’s Position on Shareholder Proposals
The SEC’s refusal to exclude the proposal is part of a decades-long evolution of the SEC’s position on how to implement SEC Rule 14a-8 (the “Shareholder Proposal Rule”). Under the Shareholder Proposal Rule, a company may exclude shareholder proposals under certain circumstances, including where the proposal involves the company’s “ordinary business operations.” Before doing so companies generally request that the SEC staff issue a “no action” letter indicating the staff’s agreement that a shareholder proposal can be excluded. In a recent speech, the Director of the SEC’s Division of Corporate Finance laid out the history from the 1960s to today of how stakeholders sought to influence social policy through shareholder proposals and the SEC’s recognition that a proposal involving “substantial public policy” might go beyond “ordinary business” and might not be excluded.
Most recently, on November 3, 2021, the SEC staff published Staff Legal Bulletin 14L (CF), providing a broader interpretation of the Shareholder Proposal Rule than had been seen under the Trump-era SEC, and highlighting that proposals involving human capital and climate would be less likely to be excluded. Specifically, the SEC stated the “staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” This statement is significant as it reflects the continued march toward taking into account all stakeholders, a fundamental principle of ESG.
While Bulletin 14L advances the ESG focus of the Biden Administration, it received mixed reviews from the SEC Commissioners, with the SEC Chair praising it, while Commissioners Hester Pierce and Elad Roisman released a sharply critical statement. Thus, while the SEC staff has indicated it will take a broad approach to shareholder proposals, the open disagreement amongst Commissioners reflects that the SEC’s internal debate over the Shareholder Proposal Rule is far from over.
§ 1.18.4. What’s a Plan Fiduciary to Do?
In its request to exclude the shareholder’s proposal, the company raised two ERISA-related concerns. First, the company noted that the Board did not have responsibility for, or other control of, the company’s retirement plan. Second, the company asserted that applicable law (i.e., ERISA) mandates that a responsible fiduciary select retirement plan investment options solely in the interest of plan participants. In response, the shareholder asserted that the proposal was limited to a report and that it did not request or require any changes to the company’s retirement plan investment options. Further, the shareholder asserted that the proposal was consistent with the Biden administration’s initiatives for fiduciaries to consider climate impact when evaluating the investment options under a retirement plan.
So, what happens if the requested report concludes that the retirement plan’s investment options do not align with the company’s climate action goals, with the Board’s related assessment reaching the same conclusion? Does it put the company at risk for potentially having its retirement plan investment options misaligned with its overall ESG strategy? For many companies, the Board is not the ERISA fiduciary responsible for making decisions related to the retirement plan’s investments. So, the Board, itself, likely would not be in a position to actually change any investments as a result of such assessment.
The question then is what, if anything, should ERISA plan fiduciaries do with such a report?
Would some plan participants allege that the ERISA fiduciaries breached their fiduciary duties if they don’t change investment options as a result of such a report?
Would other plan participants allege a breach of fiduciary duty if the fiduciaries do change the investment options as a result of such a report?
ERISA requires plan fiduciaries to act in the sole interest of plan participants, even under the guidance cited by the shareholder here (and described here), and analyze the risk-return of a particular investment. So, plan fiduciaries could face allegations of breach of fiduciary duties if they simply change investments as a result of such a report without careful analysis.
The SEC’s ruling may be just another chapter in this story. If a company’s shareholders approve one of these proposals, it will be interesting to see the ultimate outcome. Yet another reason to stay tuned to the ever-evolving landscape of environmental, social and governance (ESG) factors, and ERISA’s fiduciary duties and responsibilities when evaluating a retirement plan’s investments.
Linda Haynes and Matthew Catalano
§ 1.19. Class Action Lawsuit Filed Against Washington State’s Long-Term Cares Act — Dismissed!
A federal judge has dismissed a class action lawsuit that challenged the Washington Long-Term Cares Act (“Cares Act”), ruling that because the Cares Act is not established or maintained by an employer and/or employee organization, it is not an employee benefit plan and therefore not governed or preempted by ERISA. The Court also held that the premiums assessed by the Cares Act constitute a state tax. As such, only state courts, not U.S. federal courts, have jurisdiction to rule on the Cares Act.
§ 1.19.1. Background
As we discussed in our prior blog post and legal update, the Washington Cares Act passed in 2019 and was set to begin collecting payroll taxes from Washington employees in January 2022 to help pay for the long-term care (“LTC”) expenses of the State’s residents. However, Governor Inslee announced in December 2021 that the State would pause collection of the tax from employers until lawmakers reassessed revisions to the program.
§ 1.19.2. Latest Developments
On April 25, 2022, Judge Zilly of the U.S. District Court for the Western District of Washington dismissed a class action lawsuit that challenged the Cares Act, holding that the Court does not have jurisdiction for two reasons: (1) the Cares Act is not governed or preempted by the federal Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and thus ERISA does not confer jurisdiction on the federal courts; and (2) the Cares Act’s premium constitutes a tax, and the Tax Injunction Act drastically limits federal district court jurisdiction to interfere with local concerns as to the collection of taxes. As a result, the Court dismissed the action as any legal challenges to the Cares Act must be brought in state court.
§ 1.19.3. Not Pre-Empted by ERISA
In its opinion, the Court noted that ERISA applies to employee benefit plans that are established or maintained by an employer and/or employee organization. The Court determined that the Cares Act was a creation of the Washington legislature, which is neither an employer or an employee organization as defined by ERISA; therefore, the Cares Act is not an ERISA-covered employee benefit plan. In so doing, the Court rejected plaintiffs’ assertion that the State acted as an employer when it passed the Cares Act. This was because the Cares Act assesses a premium on all covered employees in the State, not just those employed by the State. Consequently, the Court determined that the State acted as a sovereign when it adopted the Cares Act, unlike when it adopts employee health or pension benefit plans that extend or accrue benefits only to individuals while they are employed by the State.
§ 1.19.4. Cares Act’s Premiums Constitute a Tax
The State’s motion to dismiss the lawsuit argued that the Cares Act’s premiums were a tax imposed on employees’ wages and thus, the federal court lacks jurisdiction as state tax challenges must be brought in state courts. To determine whether the Cares Act’s premiums are a tax or insurance premium, the court reviewed three factors set forth in prior case law:
The entity imposing the premium assessment was the State legislature (not an administrative agency), making it more likely to be a tax;
The parties required to pay the premium assessment include a large group of people, and the broader the group affected, the more likely it is to be a tax; and
The ultimate use of the premium assessment is to directly benefit all members of the public who paid premiums for the requisite period and meet the criteria for receiving LTC services. Therefore, the Cares Act provides a general benefit to the public, making it more likely to be a tax, even if the amounts collected under it are segregated in special funds.
The Court agreed with the defendants that the Cares Act is analogous to the unemployment insurance scheme, payments which are undisputedly taxes. Therefore, the federal Court lacked jurisdiction pursuant to the Tax Injunction Act, under which state courts have exclusive jurisdiction over challenges to state taxes.
§ 1.19.5. Takeaways for Employers
The ruling in Pacific Bells LLC et al. V. Inslee et al. demonstrates that despite the challenges to the Cares Act in federal court, further challenges may very well be made in state court. During oral arguments, plaintiffs sought a ruling from the Court that the Cares Act premiums constitute an income tax that is barred by the Washington State Constitution. The Court noted that such arguments should be litigated within the State’s administrative and/or judicial system.
Liz Deckman
§ 1.20. SECURE 2.0: Here We Go Again
The SECURE Act, passed just before the onset of the COVID-19 pandemic at the end of 2019, significantly altered the retirement plan landscape. In 2021, another bill, Securing a Strong Retirement Act of 2021, was considered but never passed. The bill was revised and reconsidered in 2022, renamed the Securing a Strong Retirement Act of 2022 (“SECURE 2.0”), recently passed the House on March 29, 2022, and has been referred to the Senate. SECURE 2.0 builds on the SECURE Act and, if enacted, will require another close review of current retirement plan provisions and administration.
Is SECURE 2.0, as passed by the House, better than the original SECURE Act? Below are some of its provisions so plan sponsors and administrators can decide for themselves.
Required Minimum Distributions. The original SECURE Act raised the RMD age from 70-1/2 to age 72 beginning in 2020. Under SECURE 2.0, the RMD age would increase to age 73 in 2023, age 74 in 2030, and age 75 in 2033. Also, excise taxes for certain RMD failures would be reduced.
Mandatory Cashout Limit. The mandatory cashout limit, when distributions can be made without a participant’s consent, would increase to $7,000 from $5,000 in 2023.
Automatic Enrollment and Escalation in New 401(k) and 403(b) Plans. Newly established 401(k) and 403(b) plans would be required to automatically enroll eligible employees at 3% with automatic increases on and after January 1, 2024. Plans in existence prior to the enactment of SECURE 2.0, along with other limited exceptions, would be exempt from this rule.
Catch-Up Contributions. Beginning in 2024, participants at ages 62, 63, and 64, would be able to contribute up to $10,000 (indexed for cost-of-living) as catch-up contributions, an increase from the current limit of $6,500. Additionally, beginning in 2023, all catch-up contributions (other than those made to SEPs or SIMPLE IRAs) must be Roth contributions.
Employer Matching Contributions on Student Loan Repayments. Beginning in 2023, 401(k), 403(b), and governmental 457(b) plans would be permitted to match a participant’s student loan payments similar to plan elective deferrals.
Long-Term/Part-Time Workers. The original SECURE Act amended the Code to provide that part-time employees who work at least 500 hours each year for three consecutive years must be eligible to make salary deferrals into a 401(k) plan. SECURE 2.0 would amend ERISA to include both 401(k) and 403(b) plans, and change the eligibility requirement to 500 hours in two years. The first group of part-time workers could become eligible for a plan in 2023, not 2024 as is the case under the original SECURE Act.
Roth Matching Contributions. For 401(k), 403(b), and governmental 457(b) plans, plan sponsors could permit employees to elect that matching contributions be treated as Roth contributions.
Hardship. For hardship withdrawals, plans would be permitted to rely on an employee’s self-certification that the employee has incurred a hardship. Additionally, SECURE Act 2.0 would harmonize the rules for hardship distributions under 403(b) plans with the 401(k) plan rules (e.g., making account earnings under a 403(b) plan available for hardship distributions).
403(b) Investment in Collective Investment Trusts. Investment in Collective Investment Trusts (CITs) is currently permitted in various plans, including 401(k) plans, and is often used as a lower cost investment option for participants. 403(b) plans have historically been prohibited from investing in CITs, but SECURE 2.0 would specifically allow it beginning in 2023.
Other interesting proposals in SECURE 2.0 include permitting employers to offer small financial incentives to encourage participation in 401(k) plans, and penalty-free withdrawals of plan account balances (of up to $10,000) to victims of domestic abuse. Also, while the proposal eliminates the requirement to provide certain annual notices to employees who have not enrolled in an individual account plan as long as they receive an annual reminder notice of plan eligibility, it also adds a requirement to provide paper statements to 401(k) plan participants at least once a year and at least once every three years to pension plan participants. Finally, the proposal notably does not include any provisions about the much talked about elimination of Roth conversions.
As noted, this bill has only been passed by the House. Although there was significant bipartisan support in the House, it is likely that the provisions will be modified as the bill makes its way through the Senate.
Liz Deckman, Sarah Magill and Christina Cerasale
§ 1.21. No More Surprises, but Much Uncertainty over Non-Network Bills
Last summer and fall, the Departments of Treasury, Labor, and Health and Human Services issued Interim Final Rules (IFRs), implementing the sweeping changes that applied to out-of-network health care providers and health plans under the No Surprises Act. While much of the IFR content was welcome relief for health plans and participants, not all providers were content with the new rules, leading to the filing of several lawsuits. One such lawsuit was recently decided by the federal court in the Eastern District of Texas, which has struck down portions of the IFRs related to determining disputed payment levels.
If a health plan and an out-of-network provider cannot agree on a payment amount, the No Surprises Act requires that the appropriate amount be determined by an independent arbitrator, referred to as an “IDR entity.” When choosing between the provider’s requested payment rate and the plan’s offer, the IDR entity is directed to consider the plan’s “qualifying payment amount” or “QPA.” As we described in our Legal Update, the QPA is the lesser of the provider’s billed charge or the plan’s median contracted rate for the same or similar service in the geographic region where the service is performed. The IDR entity is to consider the QPA, the training and experience of the provider, the market share of the plan and provider, any contract history, and the services provided. The Court said that the IFRs require the IDR entity to presume the plan’s QPA is correct, and consider other factors listed in the Act only if credible and demonstrate the appropriate rate is materially different from the QPA, which imposes a heightened burden to overcome the QPA presumption.
The Court found that the agencies did not follow proper notice and comment, and failed to follow the text of the No Surprises Act itself when it set forth its guidance as to how IDR entities were to give deference to the QPA when arriving at a provider’s payment amount. As a result, the Court vacated the portion of the IFRs at issue. The Court’s decision indicated that the No Surprises Act contained sufficient detail on the IDR process to allow arbitrations to proceed in the absence of the regulatory presumption in favor of the QPA as the appropriate payment level.
§ 1.21.1. What’s Next?
While the administration may appeal the ruling, the decision has nationwide impact immediately. Similar cases filed in other Federal districts may be put on hold pending any appeal, or revision of the IFRs in final rules.
§ 1.21.1. Implications for Plan Sponsors
Most plan sponsors have delegated the IDR process to their third-party administrators (or insurance carriers, in the case of fully-insured plans), so it is likely that no immediate action is required for most plans. Plan sponsors should be aware, however, that in the absence of the regulatory presumption in favor of the QPA, there is a greater risk that an arbitrator would side with the provider rather than the plan, resulting in potentially greater payment obligations from the plan sponsor.
Mark Casciari and Ronald Kramer
§ 1.22. Ninth Circuit Clarifies De Novo Review Standard and Newly Raised Arguments in ERISA Litigation
Recently, the Ninth Circuit addressed and further clarified the requirement of a “full and fair review” in the context of a long-term disability benefit case under the Employee Retirement Income Security Act (ERISA). In matters that go to litigation, the Ninth Circuit held that a district court may not rely on rationales that the plan administrator did not raise as grounds for denying a claim for benefits. By failing to make arguments during the administrative process, but raising them for the first time at litigation, this can be found to be a violation of the “full and fair review” afforded by ERISA.
In Collier v. Lincoln Life Assurance Co. of Boston, 53 F.4th 1180 (9th Cir. 2022) the Ninth Circuit considered an appeal under ERISA of a plan administrator Lincoln Life Assurance Company of Boston’s denial of her claim for long-term disability benefits. The participant Collier pursued an internal appeal after Lincoln denied her claim for LTD benefits. Lincoln again denied her claim. On de novo review, Judge James Selna of the Central District of California affirmed the administrator’s denial of her claim, finding that Collier was not credible and that she had failed to supply objective medical evidence to support her claim. The district court concluded that because a court must evaluate the persuasiveness of conflicting testimony and decide which is more likely true on de novo review, credibility determinations are inherently part of its review.
Apparently not so. The participant appealed, and the Ninth Circuit reversed, finding that the district court adopted new rationales that the plan administrator did not rely upon during the administrative process. The Ninth Circuit expressly held a district court clearly erred by adopting a newly presented rationale when applying de novo review.
The Ninth Circuit clarified that when a district court reviews de novo a plan administrator’s denial of benefits, it examines the administrative record without deference to the administrator’s conclusions to determine whether the administrator erred in denying benefits. It wrote that the district court’s task is to determine whether the plan administrator’s decision is supported by the record, not to engage in a new determination of whether the claimant is entitled to benefits. Id. at 1182.
The plaintiff Collier worked as an insurance sales agent when she experienced persistent pain in her neck, shoulders, upper extremities, and lower back, which she contended limited her ability to type and sit for long periods of time. She underwent surgery on her right shoulder and later returned to work, where she claimed that she continued to experience persistent pain. After applying for workers compensation, which recommended her employer institute ergonomic accommodations for Collier to allow her to work with less pain, Collier eventually stopped working, citing her reported pain as the cause.
After engaging in the administrative appeal process with Lincoln, she filed suit in the Central District of California. For the first time in its trial briefs, Lincoln argued that the participant was not credible. It further argued that her doctor’s conclusions were not supported by objective evidence, as they relied upon her subjective account of pain. Finally, Lincoln argued that her restriction could be accommodated with ergonomic equipment, such as voice-activated software. Id. at 1184.
As this was an ERISA action for LTD benefits, the administrative record was the only documentary evidence admitted by the district court. Judge Selna issued a findings of fact and conclusions of law affirming Lincoln’s denial of LTD benefits. Reviewing the decision de novo, Judge Selna concluded that Collier failed to demonstrate she was disabled under the terms of the plan. The court adopted Lincoln’s reasoning in determining she was not disabled, namely relying upon a finding that Collier’s pain complaints were not credible and that she failed to support her disability with objective medical evidence.
In reversing the decision by the district court, the Ninth Circuit wrote that a plan administrator “undermines ERISA and its implementing regulations when it presents a new rationale to the district court that was not presented to the claimant as a specific reason for denying benefits during the administrator process.” The Ninth noted it has “expressed disapproval of post hoc arguments advanced by a plan administrator for the first time in litigation.” Id. at 1186.
While the Ninth Circuit has held that a plan administrator may not hold in reserve a new rationale to present in litigation, it has not clarified whether the district court clearly errs by adopting a newly presented rationale when applying de novo review. It explicitly does so now, finding that a “district court cannot adopt post-hoc rationalizations that were not presented to the claimant, including credibility-based rationalizations, during the administrative process.” Id. at 1188.
The Collier ruling places strict mandates on plan administrators to specifically and expansively delineate the bases for denials at the administrative stage. Simply stating that a claimant does not meet a policy definition, such as the disability standard under the applicable plan, is now not enough.
Tucker Ellis LLP 950 Main Avenue, Suite 1100 Cleveland, OH 44113 216-696-2476 [email protected]
Giovanna Ferrari
Seyfarth Shaw LLP 560 Mission Street, Suite 3100 San Francisco, CA 94105 415-544-1019 [email protected]
§ 10.1 Introduction
Trial lawyers eagerly anticipate the day they begin opening statements in the courtroom and get to take their client’s matter to trial. With a trial comes a lot of hard work, preparation, and navigation of the civil rules and local rules of the jurisdiction. This chapter provides a general overview of issues that a lawyer will face in a courtroom, either civil or criminal. The authors have selected cases of note from the present United States Supreme Court docket, the federal Circuit Courts of Appeals, and selected federal District Courts, that provide a general overview, raise unique issues, expand or provide particularly instructive explanations or rationales, or are likely to be of interest to a broad cross section of the bar. It is imperative, however, that prior to starting trial, the rules of the applicable jurisdiction are reviewed.
§ 10.2 Pretrial Matters
§ 10.2.1 Pretrial Conference and Pretrial Order
Virtually all courts require a pretrial conference at least several weeks before the start of trial. A pretrial conference requires careful preparation because it sets the tone for the trial itself. There are no uniform rules across all courts, so practitioners must be fully familiar with those that affect the particular courtroom they are in and the specific judge before whom they will appear.
According to Federal Rule of Civil Procedure 16, the main purpose of a pretrial conference is for the court to establish control over the proceedings such that neither party can achieve significant delay or engage in wasteful pretrial activities.[1] An additional goal is facilitating settlement before trial commencement.[2] Following the pretrial conference, the judge will issue a scheduling order, which “must limit the time to join other parties, amend the pleadings, complete discovery, and file [pre-trial] motions.”[3]
A proposed pretrial conference order should be submitted to the court for review at the conference. Once the judge accepts the pre-trial conference order, the order will supersede all pleadings in the case.[4] The final pretrial conference order is separate from pretrial disclosures, which include all information and documents required to be disclosed under Federal Rule of Civil Procedure 26.[5]
§ 10.2.2 Motions in Limine
A motion in limine, which means “at the threshold,”[6] is a pre-trial motion for a preliminary decision on an objection or offer of proof. Motions in limine are important because they ensure that the jury is not exposed to unfairly prejudicial, confusing, or irrelevant evidence, even if doing so limits a party’s defenses.[7] Thus, a motion in limine is designed to narrow the evidentiary issues for trial and to eliminate unnecessary trial interruptions by excluding the document before it is entered into evidence.[8]
In ruling on a motion in limine, the trial judge has discretion to either rule on the motion definitively or postpone a ruling until trial.[9] Alternatively, the trial judge may make a tentative or qualified ruling.[10] While definitive rulings do not require a renewed offer of proof at trial,[11] a tentative or qualified ruling might well require an offer of evidence at trial to preserve the issue on appeal.[12] A trial court’s discretion in ruling on a motion in limine extends not only to the substantive evidentiary ruling, but also the threshold question of whether a motion in limine presents an evidentiary issue that is appropriate for ruling in advance of trial.[13] Where the court reserves its ruling on a motion in limine at the outset of trial and later grants the motion, counsel should remember to move to strike any testimony that was provided prior to the ruling.
Motions in limine are not favored and many courts consider it a better practice to deal with questions as to the admissibility of evidence as they arise at trial.[14]
§ 10.3 Opening Statements
One of the most important components of any trial is the opening statement—it can set the roadmap for the jury of how they can find in favor of your client. The purpose of an opening statement is to:
“acquaint the jury with the nature of the case they have been selected to consider, advise them briefly regarding the testimony which it is expected will be introduced to establish the issues involved, and generally give them an understanding of the case from the viewpoint of counsel making a statement, so that they will be better able to comprehend the case as the trial proceeds.”[15]
It is important that any opening statement has a theme or presents the central theory of your case. As a general rule, a lawyer presents facts and evidence, and not argument, during opening statements. Being argumentative and introducing statements that are not evidence can be grounds for a mistrial.[16] It is also important that counsel keep in mind any rulings on motions in limine prohibiting the use of certain evidence. Failure to raise an objection to matters subject to a motion in limine or other prejudicial arguments can result in the waiver of those rights on appeal.[17] And the “golden rule” for opening statements is that the jurors should not be asked to place themselves in the position of the party to the case.[18]
Defense counsel may decide to reserve their opening until their case in chief — this is a strategic decision and is typically disfavored in jury trials.
§ 10.4 Selection of Jury
§ 10.4.1 Right to Fair and Impartial Jury
The right to a fair and impartial jury is an important part of the American legal system. The right originates in the Sixth Amendment, which grants all criminal defendants the right to an impartial jury.[19] However, today, this foundational right applies in both criminal and civil cases.[20] This is because the Seventh Amendment preserves “the right of trial by jury” in civil cases, and an inherent part of the right to trial by jury is that the jury must be impartial.[21] Additionally, Congress cemented this right when it passed legislation requiring “that federal juries in both civil and criminal cases be ‘selected at random from a fair cross section of the community in the district or division where the court convenes.’”[22]
Examples of ways that jurors may not be impartial include: predispositions about the proper outcome of a case,[23] financial interests in the outcome of a case,[24] general biases against the race or gender of a party,[25] or general biases for or against certain punishments to be imposed.[26]
Over the years, impartiality has become more and more difficult to achieve. This is due mainly to citizens’ (potential jurors) readily available access to news, and the news media’s increased publicity of defendants and trials.[27] In Harris, the Ninth Circuit analyzed whether pre‑trial publicity of a murder trial biased prospective jurors and prejudiced the defendant’s ability to receive a fair trial.[28] The court recognized that “[p]rejudice is presumed when the record demonstrates that the community where the trial was held was saturated with prejudicial and inflammatory media publicity about the crime.”[29] However, the court found that despite immense publicity prior to trial, because the publicity was not inflammatory but rather factual, there was no evidence of prejudice in the case.[30]
§ 10.4.2 Right to Trial by Jury
All criminal defendants are entitled to a trial by jury and must waive this right if they elect a bench trial instead.[31] However, a criminal defendant does not have a constitutional right to a bench trial if he or she decides to waive the right to trial by jury.[32] In civil cases, the party must expressly demand a jury trial. Failure to make such a demand constitutes a waiver by that party of a trial by jury.[33] For example, in Hopkins, the Eleventh Circuit explained that a plaintiff waived his right to trial by jury in an employment discrimination case when he made no demand for a jury trial in his Complaint and did not file a separate demand for jury trial within 14 days after filing his complaint.[34] Some jurisdictions require payment of jury fees to reserve the right to a jury trial.
Additionally, not all civil cases are entitled to a trial by jury. First, the Seventh Amendment expressly requires that the amount in controversy exceed $20.[35] Additionally, only those civil cases involving legal, rather than equitable, issues are entitled to the right of trial by jury.[36] Equitable issues often arise in employment discrimination cases where the plaintiff seeks backpay or another sort of compensation under the ADA, ERISA, or FMLA.[37]
Another issue that arises in civil cases is contractual jury trial waivers. Most circuits permit parties to waive the right to a jury trial through prior contractual agreement.[38] Generally, the party seeking enforcement of the waiver “must show that consent to the waiver was both voluntary and informed.”[39]
§ 10.4.3 Voir Dire
Voir dire is a process of questioning prospective jurors by the judge and/or attorneys who remove jurors who are biased, prejudiced, or otherwise unfit to serve on the jury.[40] The Supreme Court has explained that “voir dire examination serves the dual purposes of enabling the court to select an impartial jury and assisting counsel in exercising peremptory challenges.”[41]
Generally, an oath should be administered to prospective jurors before they are asked questions during voir dire.[42] “While the administration of an oath is not necessary, it is a formality that tends to impress upon the jurors the gravity with which the court views its admonition and is also reassuring to the litigants.”[43] Moreover, jurors under oath are presumed to have faithfully performed their official duties.[44]
Federal trial judges have great discretion in deciding what questions are asked to prospective jurors during voir dire.[45] District judges may permit the parties’ lawyers to conduct voir dire, or the court may conduct the jurors’ examination itself.[46] Although trial attorneys often prefer to conduct voir dire themselves, many judges believe that counsel’s involvement “results in undue expenditure of time in the jury selection process,” and that “the district court is the most efficient and effective way to assure an impartial jury and evenhanded administration of justice.”[47]
“[I]f the court conducts the examination it must either permit the parties or their attorneys to supplement the examination by such further inquiry as the court deems proper or itself submit to the prospective jurors such additional questions of the parties or their attorneys as the court deems proper.”[48] However, a judge still has much leeway in determining what questions an attorney may ask.[49] For example, in Lawes, a firearm possession case, the Second Circuit found that it was proper for a trial judge to refuse to ask jurors questions about their attitudes towards police.[50] If, on appeal, a party challenges a judge’s ruling from voir dire, the party must demonstrate that trial judge’s decision constituted an abuse of discretion.[51] Thus, it is extremely difficult to win an appeal regarding voir dire questioning.[52]
§ 10.4.4 Jury Selection Methods
Each court has its own proceeds for jury selection. The two basic methods are the struck jury method and the jury box method (also known as strike-and-replace). At a high level, the methods differ with respect to how many prospective jurors are subject to voir dire and the order in which jurors can be challenged or struck from the jury panel. For example, the jury box method seats the exact number of jurors in the jury box needed to form a viable jury, and allows voir dire and challenges to those jurors.. The stuck method allows voir dire of a larger number of prospective jurors, usually the number of jurors needed to form a viable jury, plus enough prospective jurors to cover all preemptory challenges. Counsel should review local and judge rules to determine which method will be applied. Where there is no set rule or judicial preference, counsel may stipulate with opposing counsel as to the method.
§ 10.4.5 Challenge For Cause
A challenge “for cause” is a request to dismiss a prospective juror because the juror is unqualified to serve, or because of demonstrated bias, an inability to follow the law, or if the juror is unable to perform the duties of a juror. 18 U.S.C. § 1865 sets forth juror qualifications and lists five reasons a judge may strike a juror: (1) if the juror is not a citizen of the United States at least 18 years old, who has resided within the judicial district at least one year; (2) is unable to read, write, or understand English enough to fill out the juror qualification form; (3) is unable to speak English; (4) is incapable, by reason of mental or physical infirmity, to render jury service; or (5) has a criminal charge pending against him, or has been convicted of a state or federal crime punishable by imprisonment for more than one year.[53]
In addition to striking a juror for these reasons, an attorney may also request to strike a juror “for cause” under 28 U.S.C. § 1866(c)(2) “on the ground that such person may be unable to render impartial jury service or that his service as a juror would be likely to disrupt the proceedings.”[54]
A challenge “for cause” is proper where the court finds the juror has a bias that is so strong as to interfere with his or her ability to properly consider evidence or follow the law.[55] Bias can be shown either by the juror’s own admission of bias or by proof of specific facts that show the juror has such a close connection to the parties, or the facts at trial, that bias can be presumed. The following cases illustrate examples of challenges for cause:
S. v. Price: The Fifth Circuit explained that prior jury service during the same term of court is not by itself sufficient to support a challenge for cause. A juror may only be dismissed for cause because of prior service if it can be shown by specific evidence that the juror has been biased by the prior service.[56]
Chestnut v. Ford Motor Co.: The Fourth Circuit held that the failure to sustain a challenge to a juror owning 100 shares of stock in defendant Ford Motor Company (worth about $5000) was reversible error.[57]
United States v. Chapdelaine: The First Circuit found that it was permissible for trial court not to exclude for cause jurors who had read a newspaper that indicated co‑defendants had pled guilty before trial.[58]
Leibstein v. LaFarge N. Am., Inc.: Prospective juror’s alleged failure to disclose during voir dire that he had once been defendant in civil case did not constitute misconduct sufficient to warrant new trial in products liability action.[59]
Cravens v. Smith: The Eighth Circuit found that the district court did not abuse its discretion in striking a juror for cause based on that juror’s “strong responses regarding his disfavor of insurance companies.”[60]
§ 10.4.6 Peremptory Challenge
In addition to challenges for cause, each party also has a right to peremptory challenges.[61] A peremptory challenge permits parties to strike a prospective juror without stating a reason or cause.[62] “In civil cases, each party shall be entitled to three peremptory challenges. Several defendants or several plaintiffs may be considered as a single party for the purposes of making challenges, or the court may allow additional peremptory challenges and permit them to be exercised separately or jointly.”[63]
Parties can move for additional peremptory challenges.[64] This is common in cases where there are multiple defendants. For example, in Stephens, two civil codefendants moved for additional peremptory challenges so that each defendant could have three challenges (totaling six peremptory challenges for the defense).[65] In deciding whether to grant the defendants’ motion, the court recognized that trial judges have great discretion in awarding additional peremptory challenges, and that additional challenges may be especially warranted when co-defendants have asserted claims against each other.[66] The court in Stephens ultimately granted the defendants’ motion for additional challenges.[67]
Parties may not use peremptory challenges to exclude jurors on the basis of their race, gender, or national origin.[68] Although “[a]n individual does not have a right to sit on any particular petit jury, . . . he or she does possess the right not to be excluded from one on account of race.”[69] When one party asserts that another’s peremptory challenges seek to exclude jurors on inappropriate grounds under Batson, the party challenged must demonstrate a legitimate explanation for its strikes, after which the challenging party has the burden to show that the legitimate explanation was pre-textual.[70] The ultimate determination of the propriety of a challenge is within the discretion of the trial court, and appellate courts review Batson challenges under harmless error analysis.[71]
Finally, some courts have found that it is reversible error for a trial judge to require an attorney to use peremptory challenges when the juror should have been excused for cause. “The district court is compelled to excuse a potential juror when bias is discovered during voir dire, as the failure to do so may require the litigant to exhaust peremptory challenges on persons who should have been excused for cause. This result, of course, extinguishes the very purpose behind the right to exercise peremptory challenges.”[72] However, courts also acknowledge that an appeal is not the best way to deal with biased jurors. The Eighth Circuit recognized that “challenges for cause and rulings upon them . . . are fast paced, made on the spot and under pressure. Counsel as well as court, in that setting, must be prepared to decide, often between shades of gray, by the minute.”[73]
§ 10.5 Examination of Witnesses
§ 10.5.1 Direct Examination
Direct examination is the first questioning of a witness in a case by the party on whose behalf the witness has been called to testify.[74] Pursuant to Fed. R. Evid. 611(c), leading questions, i.e., those suggesting the answer, are not permitted on direct examination unless necessary to develop the witness’ testimony.[75] Leading questions are permitted as “necessary to develop testimony” in the following circumstances:
To establish undisputed preliminary or inconsequential matters.[76]
If the witness is being impeached by the party calling him or her.[80]
If the witness is frightened, nervous, or upset while testifying.[81]
If the witness is unresponsive or shows a lack of understanding.[82]
Additionally, it is improper for a lawyer to bolster the credibility of a witness during direct examination by evidence of specific instances of conduct or otherwise.[83] Bolstering occurs either when (1) a lawyer suggests that the witness’s testimony is corroborated by evidence known to the lawyer, but not the jury,[84] or (2) when a lawyer asks a witness a question about specific instances of truthfulness or honesty to establish credibility.[85] For instance, in Raysor, the Second Circuit found that it was improper for a witness to bolster herself on direct examination by testifying about her religion or faithful marriage.[86]
When a party calls an adverse party, or someone associated with an adverse party, the attorney has more leeway during direct examination. This is because adverse parties may be predisposed against the party direct-examining him. Because of this, the attorney may ask leading questions, and impeach or contradict the adverse witness.[87] Courts have broadened who they consider to be “associated with” or “identified with” an adverse party. Employees, significant others, and informants have all constituted adverse parties for purposes of direct examination.[88] Further, even if the witness is not adverse, an attorney may also ask leading questions to a witness who is hostile. In order to ask such leading questions, the direct examiner must demonstrate that the witness will be resistant to suggestion. This often involves first asking the witness non-leading questions in order to show that the witness is biased against the direct examiner.[89]
When a witness cannot recall a fact or event, the lawyer is permitted to help refresh that witness’s memory.[90] The lawyer may do so by providing the witness with an item to help the witness recall the fact or event. Proper foundation before such refreshment requires that:
the witness’s recollection to be exhausted, and that the time, place and person to whom the statement was given be identified. When the court is satisfied that the memorandum on its face reflects the witness’s statement or one the witness acknowledges, and in his discretion the court is further satisfied that it may be of help in refreshing the person’s memory, the witness should be allowed to refer to the document.[91]
However, the item/memorandum does not come into evidence.[92] In Rush, the Sixth Circuit found that although the trial judge properly permitted defense counsel to refresh a witness’s memory with the transcript of a previously recorded statement, the trial judge erred in allowing another witness to read that transcript aloud to the jury.[93]
Further, sometimes the party calling a witness wishes to impeach that witness. Generally, courts are hesitant to permit parties to impeach their own witnesses because the party who calls a witness is vouching for the trustworthiness of that witness, and allowing impeachment may confuse the jury or be unfairly prejudicial.[94] Prior to adoption of the Federal Rules of Evidence, a party could impeach its own witness only when the witness’s testimony both surprised and affirmatively damaged the calling party.[95]
However, Federal Rule of Evidence 607 states that “the credibility of a witness may be attacked by any party, including the party calling the witness.”[96] The Advisory Committee Notes of Rule 607 indicate that this rule repudiates the surprise and injury requirement from common law.[97] A party can impeach a witness through prior inconsistent statements, cross-examination, or prior evidence from other sources.[98] However, a party may not use Rule 607 to introduce otherwise inadmissible evidence to the jury.[99] Additionally, a party may not call a witness with the sole purpose of impeaching him.[100] Further, even courts that do not permit a party to impeach its own witness still permit parties to contradict their own witnesses through another part of that witness’s testimony.[101]
§ 10.5.2 Cross-Examination
Cross-examination provides the opposing party an opportunity to challenge what a witness said on direct examination, discredit the witness’s truthfulness, and bring out any other testimony that may be favorable to the opposing party’s case.[102] Generally under the federal rules, cross-examination is limited to the “subject matter” of the direct examination and any matters affecting the credibility of the witness.[103] The purpose of limiting the scope of cross-examination is to promote regularity and logic in jury trials, and ensure that each party has the opportunity to present its case in chief. However, courts tend to liberally construe what falls within the “subject matter” of direct examination.[104] For example, in Perez-Solis, the Fifth Circuit found that a witness’s brief reference to collecting money from a friend permitted opposing counsel to cross-examine him on all of his finances.[105] Additionally, the language of Fed. R. Evid. 611(b) states that although cross-examination “should not” go beyond the scope of direct examination, the court may exercise its discretion to “allow inquiry into additional matters as if on direct examination.”[106] However, if the questioning goes beyond the subject matter, it generally should not include leading questions.
One of the main goals of cross-examination is impeachment. The Federal Rules of Evidence explain three different methods of impeachment: (1) impeachment by prior bad acts or character for untruthfulness,[107] (2) impeachment by prior conviction of a qualifying crime,[108] and (3) impeachment by prior inconsistent statement.[109] Additionally, courts still apply common law principles and permit impeachment through three additional methods as well: (1) impeachment by demonstrating the witness’s bias, prejudice, or interest in the litigation or in testifying, (2) impeachment by demonstrating the witness’s incapacity to accurately perceive the facts, and (3) impeachment by showing contradictory evidence to the witness’s testimony in court.[110] The following present case examples of each of the six methods of impeachment:
Prior bad act or dishonesty: In O’Connor v. Venore Transp. Co.,[111] the First Circuit found that trial judge did not abuse discretion when he allowed defense counsel to cross-examine plaintiff with his prior tax returns with the purpose of demonstrating dishonesty.
Conviction of qualifying crime: In Smith v. Tidewater Marine Towing, Inc.,[112] the Fifth Circuit found that, in Jones Act action arising from injuries plaintiff received while working on a tugboat, defense counsel permissibly crossed the plaintiff about his prior convictions.
Prior inconsistent statement: In Wilson v. Bradlees of New England, Inc.,[113] a product liability case, the First Circuit found that defense counsel appropriately crossed plaintiff with an inconsistent statement made in a complaint filed in a different case against a different defendant.
Bias or prejudice: In Udemba v. Nicoli,[114] the First Circuit found that it was permissible for defense counsel to cross-examine the plaintiff’s wife about domestic abuse to show bias in a case involving excessive force claims against the police.
Incapacity to accurately perceive: In Hargrave v. McKee,[115] the Sixth Circuit found that the trial court should have permitted defense counsel to question a victim about how her ongoing psychiatric problems affected her perception and memory of events.
Contradictory evidence: In Barrera v. E. R. DuPont De Nemours and Co., Inc.,[116] the Fifth Circuit held, in a personal-injury action, that the trial judge erred in denying the use of evidence showing that plaintiff received over $1000 per month in social security benefits because the evidence was admissible to contradict defendant’s volunteered testimony on cross-examination that he did not have a “penny in his pocket.”
Once the right of cross-examination has been fully and fairly exercised, it is within the trial court’s discretion as to whether further cross-examination should be allowed.[117] In order to recall a witness, the party must show that the new cross-examination will shed additional light on the issues being tried or impeach the witness. Further, it is helpful if the party seeking recall demonstrates that it came into possession of additional evidence or information that it did not have when it previously crossed that witness.[118] Further, it is difficult to succeed on an appeal of a trial court’s failure to permit recall for further cross‑examination. This is because courts review a trial judge’s decision for abuse of discretion, and often find that the lack of recall was a harmless error.[119]
§ 10.5.3 Expert Witnesses
Experts are witnesses who offer opinion testimony on an aspect of the case that requires specialized knowledge or experience. Experts also include persons who do not testify, but who advise attorneys on a technical or specialized area to better help them prepare their cases. A few key criteria should be considered at the outset when choosing an expert. First is the level of relevant expertise and the ability to have the expert’s research, assumptions, methodologies, and practices stand up to the scrutiny of cross-examination. Many law firms, nonprofits, commercial services, and government agencies maintain lists of experts categorized by the expertise; those lists are a helpful place to begin. Alternatively, counsel may begin by researching persons who have spoken or written about the subject matter that requires expert testimony. An Internet search is, in many cases, the place to start when developing a list. Counsel also might consider using a legal search engine to identify persons who have provided expert testimony on the subject matter in the past. Westlaw and LexisNexis both maintain expert databases.
Any expert who is on counsel’s list of candidates should produce, in addition to his or her curriculum vitae (CV), a list of prior court and deposition appearances, as well as a list of publications over the last 10 years. In federal court, this information must be disclosed in the expert report, per Federal Rule of Civil Procedure 26(a)(2).[120]
Another consideration when retaining an expert is whether he or she will be a testifying expert, or whether the expert will only act in a consulting role in preparing the case for trial (non-testifying expert) because this will determine the discoverability of the expert’s opinions. Testifying experts’ opinion are always discoverable, while consulting experts’ opinions are nearly always protected from discovery.
A testifying expert must be qualified, and the proponent of an expert witness bears the burden of establishing the admissibility of the expert’s testimony by a preponderance of the evidence. Federal Rule of Evidence 702 sets forth a standard for admissibility, wherein a witness may be qualified as an expert by knowledge, skill, experience, training or education and may testify in the form of an opinion if they meet certain criteria. Opposing counsel may challenge the qualifications of the expert before the expert’s opinions are presented; to do so, opposing counsel can ask to voir dire the expert (usually outside of the presence of the jury). It is for the trial court judge to determine whether or not “an expert’s testimony both rests on a reliable foundation and is relevant to the task at hand,” thereby making it admissible.[121]
§ 10.6 Evidence at Trial
§ 10.6.1 Authentication of Evidence
With the exception of exhibits as to which authenticity is acknowledged by stipulation, admission, judicial notice, or exhibits which are self-authenticating, no exhibit will be received in evidence unless it is first authenticated or identified as being what it purports to be. Under the Federal Rules of Evidence, the authentication requirement is satisfied when “the proponent . . . produce[s] evidence sufficient to support a finding that the item is what the proponent claims it is.”[122]
When an item is offered into evidence, the court may permit counsel to conduct a limited cross-examination on the foundation offered. In reaching its determination, the court must view all the evidence introduced as to authentication or identification, including issues of credibility, most favorably to the proponent.[123] Of course, the party who opposed introduction of the evidence may still offer contradictory evidence before the trier of fact or challenge the credibility of the supporting proof in the same way that he can dispute any other testimony.[124] However, upon consideration of the evidence as a whole, if a sufficient foundation has been laid in support of introduction, contradictory evidence goes to the weight to be assigned by the trier of fact and not to admissibility.[125] It is important to note that many courts have held that the mere production of a document in discovery waives any argument as to its authenticity.[126]
While there are many topics to discuss regarding authentication of evidence, this section will focus on electronically stored information. Proper authentication of e-mails and other instant communications, as well as all computerized records, is of critical importance in an ever-increasing number of cases, not only because of the centrality of such data and communications to modern business and society in general, but also due to the ease in which such electronic materials can be created, altered, and manipulated. In the ordinary course of events, a witness who has seen the e-mail in question need only testify that the printout offered as an exhibit is an accurate reproduction.
Web print out – Printouts of Internet website pages must first be authenticated as accurately reflecting the content of the page and the image of the page on the computer at which the printout was made before they can be introduced into evidence; then, to be relevant and material to the case at hand, the printouts often will need to be further authenticated as having been posted by a particular source.[127]
Text message – When there has been an objection to admissibility of a text message, the proponent of the evidence must explain the purpose for which the text message is being offered and provide sufficient direct or circumstantial corroborating evidence of authorship in order to authenticate the text message as a condition precedent to its admission; thus, authenticating a text message or e-mail may be done in much the same way as authenticating a telephone call.[128]
Social networking services – Proper inquiry for determining whether a proponent has properly authenticated evidence derived from social networking services was whether the proponent adduced sufficient evidence to support a finding by a reasonable jury that the proffered evidence was what the proponent claimed it to be.[129]
§ 10.6.2 Objecting to Evidence
Objections must be specific. The party objecting to evidence must make known to the court and the parties the precise ground on which the objecting party is basing the objection.[130] The objecting party must also be sure to indicate the particular portion of the evidence that is objectionable.[131] However, a general objection may be permitted if the evidence is clearly inadmissible for any purpose or if the only possible grounds for objection is obvious.[132]
The purpose of a specific objection to evidence is to preserve the issue on appeal. On appeal, the objecting party will be limited to the specific objections to evidence made at trial. However, an objection raised by a party in writing is sufficiently preserved for appeal, even if that same party subsequently failed to make an oral, on-the-record objection.[133]
Objections to evidence must be timely so as to not allow a party to wait and see whether an answer is favorable before raising an objection.[134] Failure to timely object results in the evidence being admitted. Once the evidence is admitted and becomes part of the trial record, it may be considered by the jury in deliberations, the trial court in ruling on motions, and a reviewing court determining the sufficiency of the evidence.[135] In some instances, the trial judge may prohibit counsel from giving descriptions of the basis for his or her objections. However, the attorney must still attempt to get in the specific grounds for the objection on the record.[136]
Counsel objecting the evidence should remember to strike the evidence from the record after their objection is sustained.
§ 10.6.3 Offer of Proof
If evidence is excluded by the trial court, the party offering the evidence must make an offer of proof to preserve the issue on appeal.[137] For an offer of proof to be adequate to preserve an issue on appeal, counsel must state both the theory of admissibility and the content of the excluded evidence.[138] Although best practice is to make an offer of proof at the time an objection is made, an offer of proof made later in time, even if it is made at a subsequent conference or hearing, may be acceptable.[139] An offer of proof can take several different forms:
A testimonial offer of evidence, whereby counsel summarizes what the proposed evidence is supposed to be. Attorneys using this method should be cautious, however, as the testimony may be considered inadequate.[140]
An examination of a witness, whereby a witness is examined and cross-examined outside of the presence of a jury.[141]
A written statement by the examining counsel, which describes the answers that the proposed witness would give if allowed to testify.[142]
An affidavit, taken under oath, which summarizes a witness’s expected testimony and is signed by the witness.[143] However, this use of documentary evidence should be marked as an exhibit and introduced into the record for identification on appeal.[144]
There are exceptions to the offer of proof requirement. First, an offer of proof is unnecessary when the content of the evidence is “apparent from the context.”[145] Second, a cross-examiner who is conducting a proper cross-examination will be given more leeway by a court, since oftentimes the cross-examiner does not know what a witness will say if permitted to answer a question.[146]
§ 10.7 Closing Argument
Different than an opening statement, closing argument is the time for advocacy and argument on behalf of your client. It is not an unfettered right, however, and there are certain rules to remember about closing argument. First, present only that which was presented in evidence and do not deviate from the record.[147] You also do not want to comment on a witness that was unable to testify or suggest that a defendant’s failure to testify results in a guilty verdict.[148] Further, an attack on the credibility or honesty of opposing counsel is considered unethical.[149] But that does not mean lawyers cannot comment on the credibility of evidence and suggest reasonable inferences based on the evidence.[150] In addition, keep in mind, generally, courts are “reluctant to set aside a jury verdict because of an argument made by counsel during closing arguments.”[151]
§ 10.8 Judgment as a Matter of Law
Federal Rule of Civil Procedure 50 governs the standard for judgment as a matter of Law, sometimes referred to as a directed verdict in state court matters.[152] A motion for judgment as a matter of law “may be made at any time before the case is submitted to the jury” and the motion “must specify the judgment sought and the law and facts that entitle the movant to the judgment.”[153] But, “[a] motion under this Rule need not be stated with ‘technical precision,’” so long as “it clearly requested relief on the basis of insufficient evidence.”[154] Although it may be “better practice,” there is no requirement that the motion be made in writing.[155] The Sixth Circuit Court of Appeals has even held that it is “clearly within the court’s power” to raise the motion “sua sponte.”[156]
Importantly, Rule 50 uses permissive, not mandatory, language, which means, “while a district court is permitted to enter judgment as a matter of law when it concludes that the evidence is legally insufficient, it is not required to do so.” The Supreme Court has gone as far as to say “the district courts are, if anything, encouraged to submit the case to the jury, rather than granting such motions.”[157] There is a practical reason for this advice: if the motion is granted, then overturned on appeal, a whole new trial must be conveyed. Conversely, if the case is allowed to go to the jury, a post-verdict motion or appellate court can right any wrong with more ease.
In entertaining a motion for judgment as a matter of law, courts should review all of the evidence in the record, but, in doing so, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence.[158] Credibility determinations, the weighing of the evidence, or the drawing of legitimate inferences from the facts are jury functions, not those of a judge.[159] The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury might reasonably find a verdict for that party. Since granting judgment as a matter of law deprives the party opposing the motion of a determination of the facts by a jury, it is understandable that it is to be granted cautiously and sparingly by the trial judge.
§ 10.9 Jury Instructions
§ 10.9.1 General
The purpose of jury instructions is to advise the jury on the proper legal standards to be applied in determining issues of fact as to the case before them.[160] The court may instruct the jury at any time before the jury is discharged.[161] But the court must first inform the parties of its proposed instructions and give the parties an opportunity to respond.[162] Although each party is entitled to have the jury charged with his or her theory of the case, the proposed instructions must be supported by the law and the evidence.[163]
§ 10.9.2 Objections
Federal Rule of Civil Procedure 51 provides counsel the ability to correct errors in jury instructions.[164] The philosophy underlying the provisions of Rule 51 is to prevent unnecessary appeals of matters concerning jury instructions, which should have been resolved at the trial level. An objection must be made on the record and state distinctly the matter objected to and the grounds for the objection.[165] Off-the-record objections to jury instructions, regardless of how specific, cannot satisfy requirements of the rule governing preservation of such errors.[166] A party may object to instructions outside the presence of the jury before the instructions and arguments are delivered or promptly after learning that the instructions or request will be, or has been, given or refused.[167] Even if the initial request for an instruction is made in detail, the requesting party must object again after the instructions are given but before the jury retires for deliberations, in order to preserve the claimed error.[168]
Whether a jury instruction is improper is a question of law reviewed de novo.[169] Instructions are improper if, when viewed as a whole, they are confusing, misleading, and prejudicial.[170] If an instruction is improper, the judgment will be reversed, unless the error is harmless.[171] A motion for new trial is not appropriate where the omitted instructions are superfluous and potentially misleading.[172]
Further, while some courts have been lenient on whether objections are made in accordance with Rule 51, many courts hold that one who does not object in accordance with Rule 51 is deemed to have waived the right to appeal. A patently erroneous instruction can be considered on appeal if the error is “fundamental” and involves a miscarriage of justice, but the movant claiming the error has the burden of demonstrating it is a fundamental error.[173]
§ 10.10 Conduct of Jury
§ 10.10.1 Conduct During Deliberations
Jury deliberations must remain private in order to protect the jury’s deliberations from improper, outside influence.[174] Control over the jury during deliberations, including the decision whether to allow the jurors to separate before a verdict is reached, is in the sound discretion of the trial court.[175] During this time, a judge may consider the fatigue of the jurors in determining whether the time of deliberations could preclude effective and impartial deliberation absent a break.[176] Although admonition of the jury is not required, one should be given if the jury is to separate at night and could potentially interact with third parties.[177]
The only individuals permitted in the jury room during deliberations are the jurors. However, in the case of a juror with a hearing or speech impediment, the court will appoint an appropriate professional to assist that individual and the presence of that professional is not grounds for reversal so long as the professional: (1) does not participate in deliberations; and (2) takes an oath to that effect.[178]
Courts have broad discretion in determining what materials will be permitted in the jury room.[179] Materials received into evidence are generally permitted,[180] including real evidence,[181] documents,[182] audio recordings,[183] charts and summaries admitted pursuant to Federal Rule of Evidence 1006,[184] video recordings,[185] written stipulations,[186] depositions,[187] drugs,[188] and weapons.[189] Additionally, jurors are typically permitted to use any notes he or she has taken over the course of trial.[190] Pleadings, however, are ordinarily not allowed.[191]
§ 10.10.2 Conduct During Trial
Traditionally, the trial judge has discretion to manage the jury during trial.[192] To ensure the jurors are properly informed, the court may, at any time after the commencement of trial, instruct the jury regarding a matter related to the case or a principal of law.[193] If a party wishes to present an exhibit to the jurors for examination over the course of trial, counsel should request that the court admonish the jury not to place undue emphasis on the evidence presented.[194] Additionally, the trial court may, in its informed discretion, permit a jury view of the premises that is the subject of the litigation.[195]
During trial, the court may allow the jury to take notes and dictate the procedure for doing so.[196] The trial court may permit note-taking for all of the trial or restrict the practice to certain parts.[197] A concern of permitting note-taking during trial is that jurors may place too much significance on their notes and too little significance on their recollection of the trial testimony.[198] To mitigate this risk, a judge should give a jury instruction informing each juror that he or she should rely on his memory and only use notes to assist that process.[199]
Allowing a juror to participate in examining a witness is within the discretion of the trial court,[200] although some courts have strongly opposed the practice.[201] If allowed, procedural protections should be encouraged to mitigate the risks of questions.[202] Additionally, the court should permit counsel to re-question the witness after a juror question has been posed.[203]
While trial is ongoing, jurors should not discuss the case among themselves[204] or share notes[205] prior to the case being submitted for deliberations. The same rule applies to communication between jurors and trial counsel[206] or jurors and the parties,[207] although accidental or unintentional contact may be excused.[208]
§ 10.11 Relief from Judgment
§ 10.11.1 Renewed Motion for Judgment as a Matter of Law
Pursuant to Federal Rule of Civil Procedure 50(b) a party may file a “renewed” motion for judgment as a matter of law, previously known as a “motion for directed verdict,” asserting that the jury erred in returning a verdict based on insufficient evidence.[209] However, in order to file a renewed motion, a party must have filed a Rule 50(a) pre-verdict motion for judgment as a matter of law before the case was submitted to the jury.[210] The renewed motion is limited to issues that were raised in a “sufficiently substantial way” in the pre-verdict motion[211] and failure to comply with this process often results in waiver.[212] The renewed motion must be filed no later than 28 days after the entry of judgment.[213]
The standard for granting a renewed motion for judgment as a matter of law mirrors the standard for granting the pre-suit motion under Rule 50(a).[214] A party is entitled to judgment only if a reasonable jury lacked a legally sufficient evidentiary basis to return the verdict that it did.[215] In rendering this analysis, a court may not weigh conflicting evidence and inferences or determine the credibility of the witnesses.[216] Upon review, the court must:
(1) consider the evidence in the light most favorable to the prevailing party, (2) assume that all conflicts in the evidence were resolved in favor of the prevailing party, (3) assume as proved all facts that the prevailing party’s evidence tended to prove, and (4) give the prevailing party the benefit of all favorable inferences that may reasonably be drawn from the facts proved. That done, the court must then deny the motion if reasonable persons could differ as to the conclusions to be drawn from the evidence.[217]
The analysis reflects courts’ general reluctance to interfere with a jury verdict.[218]
§ 10.11.2 Motion for New Trial
Federal Rule of Civil Procedure 59 permits a party to file a motion for new trial, either together with or as an alternative to a 50(b) renewed motion for judgment as a matter of law.[219] Like a renewed motion for judgment as a matter of law, a motion for new trial must be filed no later than 28 days after an entry of judgment.[220]
Rule 59 does not specify or limit the grounds on which a new trial may be granted.[221] A party may move for a new trial on the basis that “the verdict is against the weight of the evidence, that the damages are excessive, or that, for other reasons, the trial was not fair . . . and may raise questions of law arising out of alleged substantial errors in admission or rejection of evidence.”[222] Other recognized grounds for new trial include newly discovered evidence,[223] errors involving jury instruction,[224] and conduct of counsel.[225] Courts often grant motions for new trial on the issue of damages alone.[226]
Unlike when reviewing a motion for judgment as a matter of law, courts may independently evaluate and weigh the evidence.[227] Additionally, the Court, on its own initiative with notice to the parties and an opportunity to be heard, may order a new trial on grounds not stated in a party’s motion.[228]
When faced with a renewed judgment as a matter of law or a motion for new trial, courts have three options. They may (1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct the entry of judgment as a matter of law.[229]
§ 10.11.3 Clerical Mistake, Oversights and Omissions
Federal Rule of Civil Procedure 60(a) provides that “the court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice.” This rule applies in very specific and limited circumstances, when the record makes apparent that the court intended one thing but by mere clerical mistake or oversight did another; such mistake must not be one of judgment or even of misidentification, but merely of recitation, of the sort that clerk or amanuensis might commit, mechanical in nature.[230] It is important to note that this rule can be applied even after a judgment is affirmed on appeal.[231]
§ 10.11.4 Other Grounds for Relief
Federal Rule of Civil Procedure 60(b) provides for several additional means for relief from a final judgment:
mistake, inadvertence, surprise, or excusable neglect;
newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
the judgment is void;
the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
any other reason that justifies relief.
Courts typically require that the evidence in support of the motion for relief from a final judgement be “highly convincing.”[232]
§ 10.12 Virtual Hearings and Trials
In the wake of the COVID-19 pandemic and numerous government shut downs, hearings and trials in both criminal and civil matters have been proceeding electronically. Since 2020, some jurisdictions have required parties to submit an application for a trial to proceed remotely.[233] Courts have almost universally found that the COVID-19 pandemic constitutes “good cause” to permit a remote trial. We also know that courts have been challenged but have ultimately found that trials by zoom are not an abuse of discretion.[234] Many courts now allow a portion of the trial participants to attend remotely.[235] Courts across the United States, however, are divided on whether remote or hybrid remote trials are necessary or practical.[236]
And while trials always present unique and challenging issues, virtual trials present a new set of challenges, especially jury trials. It brings about a whole new set of factors—what makes for a successful trial in person can be very different from a successful trial over a virtual platform. There are new considerations for jury selection, opening statement demonstratives, testimony by witnesses who are no longer in the same room as counsel, presentation of evidence when counsel can no longer bring binders or large boards, jury selection, and a myriad of other issues. What remains the same, however, is that preparation and practice are key. Being familiar with the local court’s practice and working out any technology issues in advance are critical to ensuring a successful virtual trial. To date, the Courts have not created consistent rules for remote trials; every judge has their preferred procedures and technology. Accordingly, it is important to review judge and court rules regarding remote proceedings. For example, many judges have rules that prohibit the coaching of witnesses through off-screen methods, dictate courtroom behavior and appearance, limit public access and recording, and provide guidance on presentation of documents including documents that are filed under seal.[237] These rules not only dictate how the trial proceeds day-to-day, but may provide a basis for motions in limine and should be discussed with your judge in the pre-trial conference.[238] To the extent there are hybrid remote proceedings (and/or social distance requirements in the courtroom), it is important to understand where jurors and witnesses will sit, how Plexiglass partitions may affect the presentation of evidence and argument, what new or different technology needs to be brought to the venue, and whether witnesses, jurors, and attorneys are able to remove masks during certain parts of the trial.
So the question remains will remote trials continue to be part of practice or not? Some would agree with the 1996 Advisory Committee Note to Federal Rule of Civil Procedure 43 “the importance of presenting live testimony in court cannot be forgotten” and that “the opportunity to judge the demeanor of a witness face-to-face is accorded great value in our tradition.”
[6]Luce v. United States, 469 U.S. 38, 40 n.2 (1984).
[7]United States v. Romano, 849 F.2d 812, 815 (3d Cir. 1988).
[8]Frintner v. TruPosition, 892 F. Supp. 2d 699 (E.D. Pa. 2012).
[9]United States v. LeMay, 260 F.3d 1018, 1028 (9th Cir. 2001).
[10]Wilson v. Williams, 182 F.3d 562, 565-66 (7th Cir. 1999).
[11]Id. at 566 (“Definitive rulings, however, do not invite reconsideration.”).
[12]Fusco v. General Motors Corp., 11 F.3d 259, 262-63 (1st Cir. 1993).
[13]Flythe v. District of Columbia, 4 F. Supp. 3d 222 (D.D.C. 2014).
[14]U.S. v. Denton, 547 F. Supp. 16 (E.D. Tenn. 1982).
[15]Henwood v. People, 57 Colo 544, 143 P. 373 (1914). An opening statement presents counsel with the opportunity to summarily outline to the trier of fact what counsel expects the evidence presented at trial will show. Lovell v. Sarah Bush Lincoln Health Center, 397 Ill. App. 3d 890, 931 N.E.2d 246 (4th Dist. 2010).
[16]Testa v. Mundelein, 89 F.3d 445 (7th Cir. 1996) (“being argumentative in an opening statement does not necessarily warrant a mistrial, but being argumentative and introducing something that should not be allowed into evidence may be a predicate for a mistrial.”).
[17]Krengiel v. Lissner Copr., Inc., 250 Ill App. 3d 288, 621 N.E.2d 91 (1st Dist. 1993) (“party whose motion in limine has been denied must object when the challenged evidence is presented at trial in order to preserve the issue for review, and the failure to raise such an objection constitutes a waiver of the issue on appeal.”).
[18]Forrestal v. Magendantz, 848 F.2d 303, 308 (1st Cir. 1988) (suggesting to jury to put itself in shoes of plaintiff to determine damages improper because it encourages the jury to depart from neutrality and to decide the case on the basis of personal interest and bias rather than on the evidence.).
[31]People v. Jordan, 2019 IL App (1st Dist.) 161848.
[32]Singer v. United States, 380 U.S. 24, 36 (1965) (finding that it is constitutionally permissible to require prosecutor and judge to consent to bench trial, even if the defendant elects one); United States v. Talik, No. CRIM.A. 5:06CR51, 2007 WL 4570704, at *6 (N.D.W. Va. Dec. 26, 2007).
[33] Fed. R. Civ. P. 38; Hopkins v. JPMorgan Chase Bank, NA, 618 F. App’x 959, 962 (11th Cir. 2015).
[37]See Lutz v. Glendale Union High Sch., 403 F.3d 1061, 1069 (9th Cir. 2005) (“[W]e hold that there is no right to have a jury determine the appropriate amount of back pay under Title VII, and thus the ADA, even after the Civil Rights Act of 1991. Instead, back pay remains an equitable remedy to be awarded by the district court in its discretion.”); see also Bledsoe v. Emery Worldwide Airlines, 635 F.3d. 836, 840-41 (6th Cir. 2011) (holding “statutory remedies available to aggrieved employees under the Worker Adjustment and Retraining Notification (WARN) act provide equitable restitutionary relief for which there is no constitutional right to a jury trial.”).
[38]K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 758 (6th Cir. 1985); Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986); Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988).
[39]Zaklit v. Glob. Linguist Sols., LLC, 53 F. Supp. 3d 835, 854 (E.D. Va. 2014); see also Nat’l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977).
[40]United States v. Steele, 298 F.3d 906, 912 (9th Cir. 2002) (“The fundamental purpose of voir dire is to ‘ferret out prejudices in the venire’ and ‘to remove partial jurors.’”) (quoting United States v. Howell, 231 F.3d 615, 627-28 (9th Cir. 2000)); Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 189 (4th Cir. 1994) (stating that the purpose of voir dire is to ensure a fair and impartial jury, not to operate as a discovery tool by opposing counsel).
[47]Hicks v. Mickelson, 835 F.2d 721, 726 (8th Cir. 1987).
[48]U.S. v. Lewin, 467 F.2d 1132 (7th Cir. 1972) (citing Fed. R. Crim. P. 24(a)).
[49]U.S. v. Lawes, 292 F.3d 123, 128 (2d Cir. 2002); Hicks v. Mickelson, 835 F.2d 721, 723-26 (8th Cir. 1987).
[50]Lawes, 292 F.3d at 128 (noting that “federal trial judges are not required to ask every question that counsel—even all counsel—believes is appropriate”).
[51]Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. 2000).
[52]Mayes v. Kollman, 560 Fed. Appx. 389, 395 n.13 (5th Cir. 2014); Richardson v. New York City, 370 Fed. Appx. 227 (2d Cir. 2010); c.f. Kiernan v. Van Schaik, 347 F.2d 775, 779 (3d Cir. 1965) (finding that judge’s refusal to ask prospective jurors questions about connection to insurance companies constituted reversible error).
[55]United States v. Bishop, 264 F.3d 535, 554-55 (5th Cir. 2001).
[56]United States v. Price, 573 F.2d 356, 389 (5th Cir. 1978).
[57]Chestnut v. Ford Motor Co., 445 F.2d 967 (4th Cir. 1971); c.f. United States v. Turner, 389 F.3d 111 (4th Cir. 2004) (finding that district court was within its discretion in failing to disqualify jurors who banked with a different branch of the bank that was robbed).
[58]United States v. Chapdelaine, 989 F.2d 28 (1st Cir. 1993).
[59]Leibstein v. LaFarge N. Am., Inc., 767 F. Supp. 2d 373 (E.D.N.Y. 2011), as amended (Feb. 15, 2011).
[60]Cravens v. Smith, 610 F.3d 1019, 1032 (8th Cir. 2010).
[61]See 28 U.S.C. § 1866 (stating that a juror may be “excluded upon peremptory challenge as provided by law”).
[62]Davis v. United States, 374 F.2d 1, 5 (1967) (“The essential nature of the peremptory challenge is that it is one exercised without a reason stated, without inquiry and without being subject to the court’s control.”).
[63] 28 U.S.C. § 1870; see also Fedorchick v. Massey-Ferguson, Inc., 577 F.2d 856 (3d Cir. 1978).
[64]Stephens v. Koch Foods, LLC, No. 2:07-CV-175, 2009 WL 10674890, at *1 (E.D. Tenn. Oct. 20, 2009).
[68]See Batson v. Kentucky, 476 U.S. 79 (1986) (race); J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127 (1994) (gender); Rivera v. Nibco, Inc., 372 F. App’x 757, 760 (9th Cir. 2010) (national origin).
[70]Robinson v. R.J. Reynolds Tobacco Co., 86 F. App’x 73, 75 (6th Cir. 2004).
[71]Rivera v. Illinois, 556 U.S. 148 (2009); see also King v. Peco Foods, Inc., No. 1:14-CV-00088, 2017 WL 2424574 (N.D. Miss. Jun. 5, 2017).
[72]Kirk v. Raymark Indus., Inc., 61 F.3d 147, 157 (3d Cir. 1995) (holding, in asbestos litigation, that trial court’s refusal to remove two panelists for cause was error, and the party’s subsequent use of peremptory challenges to remedy the judge’s mistake required per se reversal and a new trial) (citations omitted).
[87]Elgabri v. Lekas, 964 F.2d 1255, 1260 (1st Cir. 1992).
[88]SeeRosa-Rivera v. Dorado Health, Inc., 787 F.3d 614, 617 (1st Cir. 2015) (employees); United States v. Bryant, 461 F.2d 912, 918-19 (6th Cir. 1972) (informants); United States v. Hicks, 748 F.2d 854, 859 (4th Cir. 1984) (girlfriend).
[89]SeeU.S. v. Cisneros-Gutierrez, 517 F.3d 751, 762 (5th Cir. 2008).
[90] Fed. R. Evid. 612 authorizes a party to refresh a witness’s memory with a writing so long as the “adverse party is entitled to have the writing produced at the hearing, to inspect it, to cross-examine the witness thereon, and to introduce in evidence those portions which relate to the testimony of the witness.”
[91]Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).
[92]Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).
[98]Util. Control Corp. v. Prince William Const. Co., 558 F.2d 716, 720 (4th Cir. 1977).
[99]United States v. Gilbert, 57 F.3d 709, 711 (9th Cir. 1995).
[100]United States v. Finley, 708 F. Supp. 906 (N.D. Ill. 1989).
[101]United States v. Finis P. Ernest, Inc., 509 F.2d 1256, 1263 (7th Cir. 1975); United States v. Prince, 491 F.2d 655, 659 (5th Cir. 1974).
[102]SeeDavis v. Alaska, 415 U.S. 308, 316, 94 S. Ct. 1105, 1110, 39 L. Ed. 2d 347 (1974) (“Cross-examination is the principal means by which the believability of a witness and the truth of his testimony are tested.”).
[103]See Fed. R. Evid. 611(b) (effective December 1, 2011) (“(b) Scope of Cross-Examination. Cross-examination should not go beyond the subject matter of the direct examination and matters affecting the witness’s credibility. The court may allow inquiry into additional matters as if on direct examination.”).
[104]See United States v. Perez-Solis, 709 F.3d 453, 463-64 (5th Cir. 2013); see alsoUnited States v. Arias-Villanueva, 998 F.2d 1491, 1508 (9th Cir. 1993) (cross-examination is within the scope of direct where it is “reasonably related” to the issues put in dispute by direct examination), overruled on other grounds; United States v. Moore, 917 F.2d 215 (6th Cir. 1990) (subject matter of direct examination under Rule 611(b) includes all inferences and implications arising from the direct); United States v. Arnott, 704 F.2d 322, 324 (6th Cir. 1983) (“The ‘subject matter of the direct examination,’ within the meaning of Rule 611(b), has been liberally construed to include all inferences and implications arising from such testimony.”).
[106]Id; see also MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274, 1282 (8th Cir. 1994), cert. denied, 513 U.S. 824, 115 S. Ct. 89, 130 L. Ed. 2d 40 (1994) (“When cross-examination goes beyond the scope of direct, as it did here, and is designed, as here, to establish an affirmative defense (that the statute of limitations had run), the examiner must be required to ask questions of non-hostile witnesses as if on direct.).
[107] Under Fed. R. Evid. 608, if the witness concedes the bad act, impeachment is accomplished. If the witness denies the bad act, Rule 608(b) precludes the introduction of extrinsic evidence to prove the act. In short, the cross-examining lawyer must live with the witness’s denial.
[108] To qualify, “the crime must have been a felony, or a misdemeanor that has some logical nexus with the character trait of truthfulness, such as when the elements of the offense involve dishonesty or false statement. The conviction must have occurred within ten years of the date of the witness’s testimony at trial, or his or her release from serving the sentence imposed under the conviction, whichever is later, unless the court permits an older conviction to be used, because its probative value substantially outweighs any prejudice, and it should, in the interest of justice, be admitted to impeach the witness. If the prior conviction is used to impeach a witness other than an accused in a criminal case, its admission is subject to exclusion under Rule 403 if the probative value of the evidence is substantially outweighed by the danger of unfair prejudice, delay, confusion or the introduction of unnecessarily cumulative evidence. If offered to impeach an accused in a criminal case, the court still may exclude the evidence, if its probative value is outweighed by its prejudicial effect.” Behler v. Hanlon, 199 F.R.D. 553, 559 (D. Md. 2001).
[109] Fed. R. Evid. 608 (bad acts or character of untruthfulness); Fed. R. Evid. 609 (qualifying crime); Fed. R. Evid. 613 (prior inconsistent statement).
[123]U.S. v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (“[T]here need be only a prima facie showing, to the court, of authenticity, not a full argument on admissibility . . . . [I]t is the jury who will ultimately determine the authenticity of the evidence, not the court.”).
[125] Fed. R. Evid. 803(6), 902(11); United States v. Senat, 698 F. App’x 701, 706 (3d. Cir. 2017).
[126]See, e.g., Stumpff v. Harris, 31 N.E.3d 164, 173 (Ohio App. 2 Dist. 2015) (“Numerous courts, both state and federal, have held that items produced in discovery are implicitly authenticated by the act of production by the opposing party); Churches of Christ in Christian Union v. Evangelical Ben. Trust, S.D. Ohio No. C2:07CV1186, 2009 WL 2146095, *5 (July 15, 2009) (“Where a document is produced in discovery, ‘there [is] sufficient circumstantial evidence to support its authenticity’ at trial.”).
[128] Rules of Evid., Rule 901(a). Idaho v. Koch, 334 P.3d 280 (Idaho 2014).
[129]State v. Smith, 2015-1359 La. App. 4 Cir. 4/20/16, 2016 WL 3353892, *10-11 (La. Ct. App. 4th Cir. 2016); see also OraLabs, Inc. v. Kind Group LLC, 2015 WL 4538444, *4, Fn 7 (D. Colo. 2015) (in a patent and trade dress infringement action, the court admitted, over hearsay objections, Twitter posts offered to show actual confusion between the plaintiff’s and defendant’s products.).
[130]Jones v. U.S., 813 A.2d 220, 226-227 (D.C. 2002).
[133]U.S. v. Gomez-Alvarez, 781 F.3d 787, 792 (5th Cir. 2015).
[134]Jerden v. Amstutz, 430 F.3d 1231, 1237 (9th Cir. 2005).
[135]See, e.g., Hastings v. Bonner, 578 F.2d 136, 142-143 (5th Cir. 1978); United States v. Johnson, 577 F.2d 1304, 1312 (5th Cir. 1978); United States v. Jamerson, 549 F.2d 1263, 1266-67 (9th Cir. 1977).
[136]SeeUnited States v. Henderson, 409 F.3d 1293, 1298 (11th Cir. 2005).
[137]Inselman v. S & J Operating Co., 44 F.3d 894, 896 (10th Cir. 1995).
[138]SeeUnited States v. Adams, 271 F.3d 1236, 1241 (10th Cir. 2001) (“In order to qualify as an adequate offer of proof, the proponent must, first, describe the evidence and what it tends to show and, second, identify the grounds for admitting the evidence.”).
[139]Murphy v. City of Flagler Beach, 761 F.2d 622 (11th Cir. 1985).
[140]See id. at 1241-42 (“On numerous occasions we have held that merely telling the court the content of . . . proposed testimony is not an offer of proof.”).
[141] Fed. R. Evid. 103(c) (The trial court “may direct an offer of proof be made in question-and-answer form.”). See, e.g., United States v. Yee, 134 F.R.D. 161, 168 (N.D. Ohio 1991) (stating that “hearings were held for approximately six weeks” on whether DNA evidence was admissible).
[145] Fed. R. Evid. 103(a)(2); Beech Aircraft v. Rainy, 488 U.S. 153 (1988).
[146]Alford v. United States, 282 U.S. 687, 692 (1931).
[147]United States v. Harris, 536 F.3d 798, 812 (7th Cir. Ill. Aug. 6, 2008), overruled on other grounds.
[148]See, e.g., United States v. St. Michael’s Credit Union, 880 F.2d 579 (1st Cir. 1989); Griffin v. California, 380 U.S. 609, 615 (Apr. 28, 1965).
[149] Model Rule of Professional Conduct Rule 3.4(e).
[150]Jones v. Lincoln Elec. Co., 188 F.3d 709, 731 (7th Cir. 1999) (“We find nothing improper in this line of argument. Closing arguments are the time in the trial process when counsel is given the opportunity to discuss more freely the weaknesses in his opponent’s case.”).
[151]Vineyard v. County of Murray, Ga., 990 F.2d 1207, 1214 (11th Cir. 1993).
[152]See, Fed. R. Civ. P. 50(a)(1) (“If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.”).
[154]Arch Ins. Co. v. Broan-NuTone, LLC, 509 F. App’x 453, fn. 5 (6th Cir. 2012) (quoting Ford v. Cnty. of Grand Traverse, 535 F.3d 483, 492 (6th Cir. 2008).
[155]U. S. Indus., Inc. v. Semco Mfg., Inc., 562 F.2d 1061, 1065 (8th Cir. 1977).
[156]Am. & Foreign Ins. Co. v. Gen. Elec. Co., 45 F.3d 135, 139 (6th Cir. 1995).
[157]Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 405 (2006).
[158]Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000); citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 554-555, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Liberty Lobby, Inc., supra, at 254, 106 S.Ct. 2505; Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, n.6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962).
[162] Fed. R. Civ. P. 51(b) (1)-(2); see also Vialpando v. Cooper Cameron Corp., 92 F. App’x 612 (10th Cir. 2004) (explaining that “a district court can no longer give mid-trial instructions without first advising the parties of its intent to do so and giving the parties an opportunity to object to the proposed instruction.”).
[163]Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 WL 3232424 (N.D. Cal. July 28, 2017); see also Daly, 491 F.2d.104 (affirming court’s omission of instructions on the due process requirements of the Fourteenth Amendment since no facts supported a violation).
[165]Estate of Keatinge v. Biddle, 316 F.3d 7 (1st Cir. 2002).
[166]Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 65 Fed. R. Evid. Serv. 1366 (5th Cir. 2004), abrogated on other grounds.
[167] Fed. R. Civ. P. 51(c)(2); Fed. R. Crim. P. 30(d); see also Abbott v. Babin, No. CV 15-00505-BAJ-EWD, 2017 WL 3138318, at *3 (M.D. La. May 26, 2017) (explaining that upon an untimely objection courts may only consider a plain error in the jury instructions).
[169]Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996).
[170]Benaugh v. Ohio Civil Rights Comm’n, No. 104-CV-306, 2007 WL 1795305 (S.D. Ohio June 19, 2007), aff’d, 278 F. App’x 501 (6th Cir. 2008).
[171]Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996) (reversing judgment since the instructions could allow a jury to find the defendant liable based on premise unsupported by law).
[172]United States v. Grube, No. CRIM C2-98-28-01, 1999 WL 33283321 (D.N.D. Jan. 16, 1999) (denying motion for new trial since the omitted instructions were superfluous and potentially misleading); see also Cupp v. Naughten, 414 U.S. 141, 94 S. Ct. 396, 397, 38 L. Ed. 2d 368 (1973); Lannon v. Hogan, 555 F. Supp. 999 (D. Mass.), aff’d, 719 F.2d 518 (1st Cir. 1983) (generally cannot seek such relief based on a claim of improper jury instructions, unless the error “so infect[ed] the entire trial that the resulting conviction violated the requirements of Due Process Clause and the Fourteenth Amendment.”).
[173]Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir. 2002) (failure to make specific objections to jury instructions before jury retires to deliberate results in waiver, and Court of Appeals may review the instruction for fundamental error only.).
[174]United States v. Olano, 507 U.S. 725, 737 (1993).
[175]Cleary v. Indiana Beach, Inc., 275 F.2d 543, 545-46 (7th Cir. 1960); Sullivan v. United States, 414 F.2d 714, 715-16 (9th Cir. 1969).
[176]Cleary, 275 F.2d at 546; Magnuson v. Fairmont Foods Co., 442 F.2d 95, 98-99 (7th Cir. 1971).
[177]See United States v. Williams, 635 F.2d 744, 745-46 (8th Cir. 1980) (“It is essential to a fair trial, civil or criminal, that a jury be cautioned as to permissible conduct in conversations outside the jury room. Such an admonition is particularly needed before a jury separates at night when they will converse with friends and relatives or perhaps encounter newspaper or television coverage of the trial.”); United States v. Hart, 729 F.2d 662, 667 n.10 (10th Cir. 1984) (“[A]n admonition . . . should be given at some point before jurors disperse for recesses or for the day, with reminders about the admonition sufficient to keep the jurors alert to proper conduct on their part.”).
[178]United States v. Dempsey, 830 F.2d 1084, 1089-90 (10th Cir. 1987).
[179]United States v. Gross, 451 F.2d 1355, 1359 (9th Cir. 1971).
[180]United States v. Williams, 87 F.3d 249, 255 (8th Cir. 1996).
[194]United States. v. Venerable, 807 F.2d 745, 747 (8th Cir. 1986).
[195]United States v. Gray, 199 F.3d 547, 550 (1st Cir. 1999).
[196]United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011); United States v. Bassler, 651 F.2d 600, 602 n.3 (8th Cir. 1981).
[197]See, e.g., United States v. Darden, 70 F.3d 1507, 1537 (8th Cir. 1995) (court permitted note-taking while examining exhibits only); United States v. Porter, 764 F.2d 1, 12 (1st Cir. 1985) (court permitted note-taking only during opening statements, closing statements, and jury charge).
[198]United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011).
[199]See United States v. Rhodes, 631 F.2d 43, 45-46 (5th Cir. 1980) (“The court should also explain that the notes taken by each juror are to be used only as a convenience in refreshing that juror’s memory and that each juror should rely on his or her independent recollection of the evidence rather than be influenced by another juror’s notes.”).
[200]United States v. Richardson, 233 F.3d 1285, 1288-1289 (11th Cir. 2000).
[201]United States v. Rawlings, 522 F.3d 403, 408 (D.C. Cir. 2008); United States v. Bush, 47 F.3d 511, 514-516 (2nd Cir. 1995); DeBenedetto by DeBenedetto v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir. 1985).
[202] Perhaps the most important protection is a screening mechanism where questions are submitted to a judge and reviewed by counsel prior to the question being posed. Rawlings, 522 F.3d at 408; United States v. Collins, 226 F.3d 457, 463 (6th Cir. 2000).
[210]Exxon Shipping Co. v. Baker, 554 U.S. 471, 486, 128 S. Ct. 2605, 2617 n.5, 171 L. Ed. 2d 570 (2008).
[211]CFE Racing Prod., Inc. v. BMF Wheels, Inc., 793 F.3d 571, 583 (6th Cir. 2015).
[212]Id. (explaining that the waiver rule serves to protect litigants’ right to trial by jury, discourage courts from reweighing evidence simply because they feel the jury could have reached another result, and prevent tactical victories at the expense of substantive interest as the pre-verdict motion enables the defending party to cure defects in proof) (quoting Libbey-Owens-Ford Co. v. Ins. Co. of N. Am., 9 F.3d 422, 426 (6th Cir. 1993)).
[213]Bowen v. Roberson, 688 F. App’x 168, 169 (3d Cir. 2017).
[214]McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241, 1254 (11th Cir. 2016).
[215]Bavlsik v. Gen. Motors, LLC, 870 F.3d 800, 805 (8th Cir. 2017).
[218]See, e.g., Stragapede v. City of Evanston, Illinois, 865 F.3d 861, 866 (7th Cir. 2017), as amended (Aug. 8, 2017) (upholding jury verdict in favor of plaintiff for ADA violation when challenged in renewed 50(b) motion on grounds that the jury properly discounted employer’s evidence).
[221]Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (noting that federal courts are guided by the common law’s established grounds for permitting new trials).
[222]Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940).
[223]Kleinschmidt v. United States, 146 F. Supp. 253, 257 (D. Mass. 1956) (explaining that a party seeking new trial on ground of newly discovered evidence has substantial burden to explain why the evidence could not have been found by due diligence before trial).
[224]Gross v. FBL Fin. Servs., Inc., 588 F.3d 614, 617 (8th Cir. 2009) (granting new trial in age discrimination case where jury instruction improperly shifted the burden of persuasion on a central issue).
[225]Warner v. Rossignol, 538 F.2d 910, 911 (1st Cir. 1976) (counsel’s conduct in going beyond the pleadings and evidence to speculate and exaggerate the plaintiff’s injuries, despite repeated warnings from the trial judge, warranted new trial).
[226]See, e.g., Bavlsik v. Gen. Motors LLC, No. 4:13 CV 509 DDN, 2015 WL 4920300, at *1 (E.D. Mo. Aug. 18, 2015) (granting new trial on issue of damages and rejecting defendants’ argument that the record demonstrated a compromised verdict).
[230]In re Transtexas Gas Corp., (5th Cir 2002), 303 F.3d 571.
[231]U.S. v. Mansion House Center North Redevelopment Co., (8th Cir. 1988), 855 F.2d 524, certiorari denied 109 S.Ct. 557, 488 U.S. 993, 102 L.Ed.2d 583 (district court had jurisdiction to modify judgment, even after it was affirmed on appeal, in order to clarify its intentions and conform judgment to parties’ pretrial stipulation).
[232] See United States v. Cirami, 563 F.2d 26, 33 (2d Cir. 1977).
[233]Flores v. Town of Islip, No. 18-CV-3549 (GRB)(ST), 2020 WL 5211052, at *1 (E.D.N.Y. Sept. 1, 2020) (the court granted a motion to proceed with a virtual trial but required counsel and the court staff to have a pre-trial conference to discuss the logistics of a virtual trial).
[234]In re Alle, No. 2:13-BK-38801-SK, 2021 WL 3032712 (C.D. Cal. July 19, 2021). Virginia, Illinois, and Washington courts have also overruled objections to conducting civil jury trial remotely.
[235] See Texas’ Forty-Fifth Emergency Order Regarding COVID-19 State Disaster, wherein Teaxs courts may, even without a participant’s consent, allow or require anyone involved in any hearing, deposition, or other proceeding of any kind—including but not limited to a party, attorney, witness, court reporter, grand juror, or petit juror—to participate remotely, such as by teleconference or videoconference.
[236]Compare Fulton County Superior Court, Georgia initiative to reduce trial backlog by conducting all jury selection remotely with Fourth Judicial Circuit, Florida conclusion that remote trials are too resource intensive.
[237] See, e.g., New Jersey Federal Bankruptcy Court Zoom Trial Guidelines.
[238] For example, see the State of Washington’s Best Practices for Remote Jury Trials, https://www.courts.wa.gov/newsinfo/content/Best%20Practices%20in%20Response%20to%20FAQ.PDF
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§ I. Patent Cases
Arthrex, Inc. v. Smith & Nephew, Inc., 35 F.4th 1328 (Fed. Cir. 2022)
Facts: This case concerns whether the Commissioner for Patents has constitutional authority to decide petitions for rehearing regarding inter partes review (“IPR”) of a patent, which are normally decided only by the Director.
In 2015, Arthrex sued Smith & Nephew (“S&N”) alleging patent infringement. S&N petitioned for IPR, arguing that the Arthrex patent was anticipated. The Patent Trial and Appeal Board (“PTAB” or “Board”) of Administrative Patent Judges (“APJs”) instituted an IPR and agreed with S&N. Arthrex appealed the Board’s decision and the Board’s constitutional authority to issue the agency’s final decision. Arthrex argued that the President did not nominate the APJs nor did the Senate confirm them. The constitutional issue reached the Supreme Court in 2021. See United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021). The Supreme Court reviewed the Appointments Clause and agreed that APJs could not issue any “final decision binding the Executive Branch.” The Supreme Court remedied this by allowing parties to request rehearing of board decisions by the Patent Office’s Acting Director.
On remand, Arthrex requested a rehearing, but the office of the Director was vacant. The rehearing decision thus fell to the Deputy Director, which was also vacant. Under an Agency Organization order, third in line is the Commissioner. The Commissioner denied Arthrex’s rehearing request and ordered that the Board decision be made final. Arthrex appealed to the Federal Circuit.
Held: The Commissioner has the authority to act as the Director and decide whether the Board will issue a rehearing under the Appointments Clause, Federal Vacancies Reform Act, and the Constitution’s separation of powers.
Reasoning: The Federal Circuit explained that under the Appointments Clause, Congress has the authority to vest appointment power in the Heads of Departments. Congress empowered the Secretary of Commerce to appoint the Commissioner of Patents, which the Federal Circuit found to fall within the Appointments Clause.
Arthrex argued that the Commissioner did not have the authority to issue a final binding decision because the Commissioner was not Presidentially appointed. The Federal Circuit rejected this argument because inferior officers may perform the functions and duties when a senior director position is vacant on a “temporary, acting basis.” The Federal Circuit further explained previous Supreme Court precedent that an inferior officer may assume the duties of a superior officer for limited periods under special circumstances without being Presidentially appointed and Senate confirmed.
Arthrex also argued that the Federal Vacancies Reform Act precluded the Commissioner from issuing a final decision. The Federal Circuit disagreed, finding that this Act only applied to non-delegable duties and that deciding rehearing requests is delegable. The Federal Circuit noted that the legislative intent of this Act was to limit what could be considered non-delegable and that no statutory language limited rehearing request decisions to the Director.
Finally, the Federal Circuit rejected Arthrex’s separation of powers argument. Arthrex argued that because the Commissioner could be removed for cause only, the Commissioner could not act as a Director since this would encroach upon Executive power. The Federal Circuit disagreed, explaining that the “for cause” restriction only applied to the Commissioner position; the President could at any time select a different acting Director.
Facts: This case concerns the enforceability of a forum selection clause for IP disputes to preclude inter partes review (“IPR”) of a patent at the Patent Office.
The parties signed a confidentiality agreement that included a forum selection clause for IP actions after the contract term. The agreement specified the District of Delaware as the forum but included administrative proceedings as a type of action subject to the clause. A mutual covenant not to sue barred administrative proceedings and patent validity challenges but ended with the term of the agreement. Sarepta filed an IPR, and Nippon Shinyaku sued in Delaware to enjoin Sarepta from continuing the IPR challenge.
The lower court held that Nippon Shinyaku had not shown a reasonable probability of succeeding on the argument that the agreement effectively barred IPRs. The district court noted IPRs cannot be brought in Delaware, the specified forum, and the mutual covenant not to sue deferred all IPRs for a limited time. The district court read the forum selection clause to apply to standard district court proceedings, but not to IPRs. If Sarepta was forced to wait out the delay imposed by the covenant not to sue, its IPR petitions would be time-barred, a result which the court found would be wrong.
Held: Applying Delaware law to interpret the contract, the Federal Circuit reversed, holding that the plain language of the contract’s forum selection clause effectively precluded IPRs despite that clause mentioning administrative agency actions (which include IPRs).
Reasoning: The Court reasoned that no tension or conflict exists between the forum-selection and no-suit clauses. The covenant not to sue broadly prohibited litigating any issue relating to patents, regardless of the forum. The forum selection clause allowed litigating any issue related to patents, if they can be brought in the District of Delaware. The Court noted that the parties are entitled to bargain away rights, including through use of forum selection clauses. The Court reversed the district court and ordered the entry of a preliminary injunction.
Weisner v. Google LLC, 51 F.4th 1073 (Fed. Cir. 2022)
Facts: This case concerns the patentability analysis for abstract ideas.
Weisner, an independent inventor, sued Google for infringement of four patents related to digital records and physical location history. The patents disclose a system that collects “leg history,” defined as “the accumulation of a digital record of a person’s physical presence across time.” Leg history can be collected automatically or entered manually. Two of the patents disclose using the leg history to improve search results by comparing a previous user’s entries (the “useful person”) to a searching person’s points of interest. The useful person and search results are based on commonalities of previously visited locations that the searching person also visited. Data from the leg history is then used to create a digital travel log of places the searching person previously visited, and in some cases, is used for future searches.
Google moved to dismiss at the pleading stage, arguing all four patents disclosed patent-ineligible subject matter. The Southern District of New York considered all four patents together because they shared identical specifications and had similar claims. The District Court agreed with Google and granted the motion. Weisner appealed.
Held: Patents directed to digital travel logs are generic and patent ineligible, but patents directed to improving search results, even if abstract, may be patent eligible.
Reasoning: The Federal Circuit divided the patents into two claim sets. Claim Set A disclosed only digital travel logs and Claim Set B disclosed digital travel logs and using location histories to improve search results. The Court applied the Alice analysis to both claim sets. Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 217 (2014). At Alice step one, the court “determine[s] whether the claims at issue are directed to … [a] patent-ineligible concept[,]” such as a law of nature, natural phenomena, or an abstract idea. Id. at 217. If so, the Court moves to Alice step two to “consider the elements of each claim both individually and ‘as an ordered combination’ to determine whether the additional elements ‘transform the nature of the claim’ into a patent-eligible application.” Id. In other words, step two is “a search for an ‘inventive concept.’” Id. at 217-18 (quoting Mayo, 566 U.S. at 72).
At Alice step one for Claim Set A, the Court reasoned that humans consistently have kept travel logs and diaries compiling dates and times. In rejecting Weisner’s argument that this travel history was limited to members only (i.e., individuals using the digital record system), the Federal Circuit explained that this was nothing more than “attorney argument” that was not disclosed in the complaint, the patent claims, or specifications. Because Claim Set A was directed to an abstract idea, the Court turned to Alice step two. The Court determined that the specification and claims described components that are conventional and non-inventive. The Court again rejected Weisner’s argument that reserving exclusive access for subscribers or “members” is transformative.
Turning to Claim Set B, the Federal Circuit applied Alice step one to determine that the accumulation of location histories is described in a generic fashion, but that improvements to digital searching were described with sufficient detail. The Court ultimately concluded that Claim Set B is directed to an abstract idea, but that the claims are eligible under Alice step two. The Court reasoned that Claim Set B implemented a specific solution to a technological problem by prioritizing conventional search results. By specifying the mechanism through which the improved search results are achieved, the claims could be patent eligible.
Dissent: Judge Hughes dissented, arguing that all four patents were ineligible. Judge Hughes reasoned that the only improvement was the addition of new searchable data, namely location history.
Am. Nat’l Mfg. Inc. v. Sleep No. Corp., 52 F.4th 1371 (Fed. Cir. 2022)
Facts: This case concerns claim amendments in inter partes review (“IPR”) proceedings.
American National filed IPR petitions challenging many claims of two patents owned by Sleep Number. The Patent Trial and Appeal Board found all but six of the challenged claims unpatentable. Sleep Number filed motions to amend contingent on a finding of unpatentability. Sleep Number not only proposed to amend the patent claims to match those that withstood the challenge, but also proposed amendments “for consistency with terms used in the industry and in related patents.” American National opposed on multiple grounds, including: (1) the amendments were not responsive to a ground of unpatentability; (2) the relevant specification contained an error rendering the claims nonenabled; and (3) the proposed amendments invited a potential change in inventorship. The Board rejected American National’s arguments and granted Sleep Number’s motions to amend. American National appealed and Sleep Number cross appealed.
Held: A party may amend claims during an IPR proceeding to address other issues not responsive to an unpatentability ground, as long as the amendment is also responsive to an unpatentability ground.
Reasoning: The Court first affirmed that the Board could consider proposed claim amendments that are not responsive to an unpatentability ground in IPR proceedings. The Court endorsed the Board’s analysis of this issue in Lectrosonics, Inc. v. Zaxcom, Inc., No. IPR2018-01129, 2019 WL 1118864, at *2 (P.T.A.B. Feb. 25, 2019) (precedential), which interpreted 37 C.F.R. § 42.121(a)(2)(i). That regulation requires that amendments be responsive to a ground of unpatentability. Under Lectrosonics, initially responsive amendments may also address other issues, such as those arising under Section 101 and Section 112.
The Court next rejected American National’s argument that an admitted error in the specification of a priority application necessarily results in non-enablement. Relying on PPG Indus. v. Guardian Indus. Corp., 75 F.3d 1558 (Fed. Cir. 1996), the Court held that obvious specification errors need not destroy enablement if a person of ordinary skill in the art would readily recognize them as errors. Considering the error here obvious in view of the specification itself, the Court affirmed the Board on this issue.
The Court also rejected American National’s argument that adding a term to the claims that was only used in related patents (incorporated by reference and with additional inventors) raised an inventorship issue. The patents themselves made clear that the term was well known in the art, so reciting well-known terms in amended claims does not affect inventorship.
Finding none of the remaining arguments by either American National or Sleep Number persuasive, the Court affirmed the Board’s decisions granting Sleep Number’s motion to amend.
LG Elecs. Inc. v. Immervision, Inc., 39 F.4th 1364 (Fed. Cir. 2022)
Facts: This case concerns how to treat a prior art reference containing an obvious error.
Immervision owns a patent relating to capturing and displaying digital panoramic images using panoramic objective lenses. LG filed two inter partes review (IPR) petitions, each challenging a dependent claim of the patent. Fundamental to LG’s obviousness argument was the Tada reference, which is a U.S. patent claiming priority from and incorporating by reference a Japanese priority patent application. Tada explicitly taught nearly all limitations of the challenged claim but missed one element relating to a particular function of the lenses. To cure this deficiency of Tada, LG’s expert reconstructed the lens in one figure in Tada using the information retrieved from an “aspheric coefficients” table in the Japanese priority document and testified that the reconstructed lens would function as claimed. In response, Immervision’s expert followed the same approach but pointed out an error in the table. Immervision argued that such incorrect disclosure cannot support any obviousness ground. In its final written decision, the Board sided with Immervision and concluded that LG failed to prove that the claim was obvious over Tada. LG appealed.
Held: Obviously erroneous disclosure in prior art reference cannot be used in an invalidity challenge.
Reasoning: On appeal, neither side disputed that the “aspheric coefficients” in the Tada table were erroneous. The question was whether substantial evidence supported the Board’s finding that the error would have been apparent to a person of ordinary skill in the art, causing them to disregard the disclosure.
The Court first set forth the legal standard for evaluating obvious errors in prior art, revisiting In re Yale, 434 F.2d 666 (C.C.P.A. 1970). Yale held that obvious errors in prior art would not prevent a “true inventor” from seeking patent protection later. The Court regarded the Yale standard as sound law and rejected LG’s two interpretations of Yale.
LG contended that the Yale standard imposes a “temporal urgency” requirement: because Immervision’s expert spent over ten hours to correct it, the error was not obvious. The Court disagreed, but recognized that the time and effort an ordinary skilled artisan spent on spotting an error might be a relevant factor. LG also suggested that Yale should be limited to typographical errors, but the Court rejected this.
Applying the Yale standard, the Court agreed that the Board correctly identified several aspects of the table that would alert the ordinary skilled artisan to the error in the aspheric coefficients. These aspects included that the table was corrected in the issued U.S. patent, that comparison between U.S. and Japanese versions showed a transcription error, and that other disclosures in the specification were inconsistent.
Considering the parties’ remaining arguments unpersuasive, the Court affirmed the Board’s finding upholding the claim as supported by substantial evidence.
International Business Machines Corp. v. Zillow Group, Inc., 50 F.4th 1371 (Fed. Cir. 2022)
Facts: This case concerns the subject matter eligibility of computer method claims.
International Business Machines (“IBM”) sued Zillow for infringement of several patents on computer displays of geospatial data. The patents taught displaying layered data on a spatially oriented display (like a map), based on nonspatial display attributes (like visual characteristics—color hues, line patterns, shapes, etc.)
Zillow moved for judgment on the pleadings, arguing ineligible subject matter under 35 U.S.C. § 101. Patent eligibility is assessed using a two-part inquiry developed in the case Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 217 (2014). The first inquiry is whether a patent claim is “directed to” an ineligible law of nature, natural phenomena, or abstract idea. If not, the subject matter of the claim is eligible. If so, the court determines whether the claim nonetheless includes an inventive concept sufficient to transform the nature of the claim into a patent-eligible application.
After applying the two-step framework in Alice, the district court found that two of the patents were ineligible as “directed to abstract ideas, contained no inventive concept, and failed to recite patentable subject matter.” IBM appealed, arguing that the District Court erred under the second step of the Alice framework.
Held: A patentee’s allegation that computer method claims made data analysis more efficient, without reference to the function or operation of the computer itself, was not sufficient to overcome a challenge under 35 U.S.C. § 101.
Reasoning: On appeal, IBM relied on an expert declaration stating that the claimed method allowed for better visualization of data, which in turn resulted in more efficient data analysis. Citing cases applying the Alice framework to software, the Federal Circuit noted that [the step-one] inquiry often turns on whether the claims focus on specific asserted improvements in computer capabilities or instead on a process or system invoking computers merely as a tool. The Federal Circuit found that any improved efficiency of IBM’s patents did not improve the functions of the computer itself, as the claims could be performed by hand and would yield the same improved efficiency.
Dissent: Judge Stoll dissented in part, arguing that IBM had adequately alleged that two of the claims were patent eligible. Judge Stoll reasoned that the claims addressed physical limitations with computer displays wherein large datasets would be “densely packed” and rendered “incomprehensible.”
§ II. Copyright Cases
Unicolors, Inc. v. H&M Hennes & Mauritz, L.P., 142 S. Ct. 941 (2022)
Facts: This case interprets the Copyright Act safe harbor provision, 17 U.S.C. § 411(b), which excuses inaccurate copyright registrations as long as the copyright holder lacked “knowledge it was inaccurate.”
Unicolors owns copyrights in fabric designs and sued H&M for copyright infringement. After the jury found infringement, H&M moved for judgment as a matter of law, arguing that Unicolors’ registration was invalid as inaccurate, negating the suit (a valid copyright registration for the work was a prerequisite for the lawsuit). Unicolors had improperly filed a single application for 31 separate works which were not “included in the same unit of publication” in violation of the Copyright Office regulation in 37 C.F.R. § 202.3(b)(4). Unicolors claimed ignorance of this regulation and inaccuracy, and should be excused by the safe harbor provision. The trial court agreed and denied H&M’s motion.
The Ninth Circuit disagreed with the trial court as it reasoned that the safe harbor provision did not excuse mistakes of law. Unicolors subsequently sought review of the scope of the safe harbor provision by the Supreme Court.
Held: In a 6-3 decision, the Supreme Court held that the safe harbor provision, 17 U.S.C. § 411(b), excuses inaccuracy in a copyright registration that arises from both lack of knowledge of fact and law.
Reasoning: The majority confirmed that Unicolors’ mistake was one of law as it concerned a legal labeling issue that lay people must look to experts to resolve and Unicolors was unaware of the legal mistake when it made the registration.
The majority next interpreted the safe harbor provision to excuse both factual and legal mistakes for several reasons. First, the provision only requires a lack of “knowledge,” which historically means the fact or condition of being aware of something, and does not distinguish between factual or legal mistakes. Second, nearby statutory provisions indicate that had Congress wanted to make such a distinction it knew how to accomplish that explicitly. Third, cases decided before the enactment of this provision overwhelmingly held that mistakes of both law and fact were excused and Congress did not intend to alter this. Last, the majority believed the legislative intent was to facilitate copyright registration by nonlawyers, which supports excusing mistakes of law. Finding none of H&M’s arguments persuasive, the majority vacated the Ninth Circuit’s decision and remanded the case.
Dissent: Justice Thomas dissented, joined by Justice Alito and Justice Gorsuch. The dissent would have dismissed the writ of certiorari without interpreting the statute since Unicolors did not raise the point in the courts below and there was no existing circuit split on the issue.
Gray v. Hudson, 28 F.4th 87 (9th Cir. 2022)
Facts: This case concerns proving music copyright infringement through circumstantial evidence.
The plaintiffs, a group of Christian hip-hop artists, sued singer Katy Perry and several others for copyright infringement in 2016, claiming that Katy Perry’s 2013 hit “Dark Horse” copied a similar ostinato (i.e., a repeating musical phrase or rhythm) in their song “Joyful Noise.” Instead of showing direct copying, the plaintiffs used circumstantial evidence of substantial similarity between the ostinatos in “Joyful Noise” and “Dark Horse.” A jury awarded the plaintiffs $2.8 million in damages. The defendants then moved for judgment as a matter of law (JMOL), which the trial court granted because it found that the ostinato was not copyrightable original expression, or alternatively, the copyright was so “thin” that it could be infringed only by “virtually identical” works, which had not been proven by the plaintiffs. The appeal followed.
Held: A repeating musical phrase or rhythm may not be copyrightable.
Reasoning: The Ninth Circuit reviewed the trial court’s grant of JMOL de novo and agreed with the trial court that plaintiffs had not shown the originality of the Joyful Noise ostinato.
At the outset, the Court revisited the framework for copyright infringement. The Court noted that instead of proving direct copying, the plaintiffs proved that (1) the defendants had “access” to their work and (2) the ostinatos in the works are “substantially similar.” The Court found the second prong dispositive. The Ninth Circuit has traditionally applied a two-part test comprising “extrinsic” and “intrinsic” components and required that “[b]oth tests [are] satisfied for the works to be deemed substantially similar.” Apple Computer, Inc. v. Microsoft Corp., 35 F.3d 1435, 1442 (9th Cir. 1994); Skidmore as Tr. for Randy Craig Wolfe Tr. v. Led Zeppelin, 952 F.3d 1051, 1064 (9th Cir. 2020). While the extrinsic test considers similarities between the ideas and expression of the works from an objective viewpoint, the intrinsic test focuses on what an ordinary reasonable observer thinks. While courts defer to a jury’s finding of intrinsic similarity, courts must also ensure that the objective extrinsic test is satisfied.
Noting the jury’s finding of intrinsic similarity, the Court addressed the extrinsic test. Because this necessarily identifies the “protected material” in a plaintiff’s work, the Court considered the threshold issue of what in the Joyful Noise ostinato qualified as original expression. Upon examining the trial record, the Court concluded that the Joyful Noise ostinato consisted entirely of unprotectible commonplace elements (e.g., the length of each ostinato, the rhythm, the timbre, the musical texture, the use of synthesizers to accompany vocal performers, the pitch sequences, and the scale degrees), as conceded by the plaintiffs’ expert. The plaintiffs argued originality existed in the combination of elements. The Court disagreed, concluding that even the arrangement of musical building blocks in the ostinato was “manifestly conventional.” Accordingly, the Court held that the extrinsic test has not been satisfied.
Finding none of the plaintiffs’ remaining arguments persuasive, the Court affirmed the trial court’s order.
§ III. Trademark/Trade Dress Cases
Meenaxi Enterprise Inc. v. The Coca Cola Company, 38 F.4th 1067 (Fed. Cir. 2022)
Facts: This case involves the requirements for maintaining a statutory cause of action under § 14(3) of the Lanham Act, 15 U.S.C. § 1064(3), for activities outside the United States.
The Coca-Cola Company sought to cancel Meenaxi Enterprise, Inc.’s registrations for THUMS UP and LIMCA under § 14(3) of the Lanham Act, 15 U.S.C. § 1064(3), asserting that Meenaxi was using these marks to misrepresent the source of its goods. Since the 1970s, Coca-Cola has distributed Thums Up cola and Limca lemon-lime soda in India and other foreign markets and obtained registrations for both marks in those countries. Meenaxi distributed Thums Up cola and Limca lemon-lime soda in the United States since 2008 and registered the marks THUMS UP and LIMCA in connection with soft drinks (among other goods) in International Class 32 with the United States Patent and Trademark Office. Coca-Cola claimed that Meenaxi traded on Coca-Cola’s goodwill with Indian-American consumers by misleading them into thinking that Meenaxi’s beverages were the same as those sold by Coca-Cola in India. The Trademark Trial and Appeal Board (“Board”) held in Coca-Cola’s favor and cancelled Meenaxi’s registrations.
Held: To maintain a statutory cause of action under the Lanham Act for activities solely conducted outside the United States, the claimant must provide concrete evidence of reputational injury or lost sales.
Reasoning: The Federal Circuit reversed the Board’s decision to cancel Meenaxi’s registrations. The Federal Circuit held that Coca-Cola failed to establish a statutory cause of action based on lost sales or reputational injury. The Federal Circuit noted that the territoriality principle was not implicated as Coca-Cola based its claim solely on its alleged injury occurring in the United States. The Federal Circuit reasoned that third-party sales of Coca-Cola’s Indian products in the US were limited, and Coca-Cola failed to provide survey evidence that Americans of Indian descent would know the marks’ reputation in India. Thus, Coca-Cola failed to prove the marks’ reputation in the U.S. or establish the right to bring a statutory cause of action under § 14(3) of the Lanham Act, 15 U.S.C. § 1064(3).
Concurrence: Judge Reyna concurred to express that the case should have been governed by the territoriality principle and the well-known mark exception. The territoriality principle indicates that trademark rights do not extend beyond the geographic territory with which the marks are recognized unless the mark itself falls within the limited well-known mark exception.
In re Elster, 26 F.4th 1328 (Fed. Cir. 2022)
Facts: This case concerns the protections of the First Amendment and the registrability of a trademark in contravention of section 2(c) of the Lanham Act.
The applicant Elster sought to register TRUMP TOO SMALL for use on shirts in International Class 25. Elster indicated that this mark stemmed from an exchange between Donald Trump and Senator Marco Rubio during the 2016 presidential primary debate and aims to “convey[ ] that some features of President Trump and his policies are diminutive.” The Examining Attorney refused the application on two grounds: under section 2(c) of the Lanham Act which prohibits registration of a mark that “comprises a name . . . identifying a particular living individual” without the individual’s “written consent”; and section 2(a) of the Lanham Act, which bars registration of trademarks that “falsely suggest a connection with persons, living or dead.” § 1052(c); 1052(a). Elster appealed the refusal, asserting that the mark was political commentary, so refusal infringed on his First Amendment rights as content-based discrimination.
The Trademark Trial and Appeal Board (“Board”) affirmed the Examining Attorney’s refusal solely on section 2(c). The Board noted the government’s compelling interest to protect the named individual’s rights of privacy and publicity. Elster appealed.
Held: The government has no valid interest that could overcome the First Amendment protections afforded to the political criticism embodied in Elster’s TRUMP TOO SMALL mark and the application of section 2(c) to the Elster’s mark is unconstitutional.
Reasoning: The Federal Circuit reasoned that speech that is otherwise protectable does not lose protection merely because the speech is sought as a trademark and is commercial. Because section 2(c) as applied to Elster’s case constituted content-based discrimination, the government must prove that it has an interest in limiting speech on privacy or publicity grounds if that speech involves criticism of government officials.
Regarding President Trump’s privacy interest, the Federal Circuit noted that as a public figure, he enjoys no right of privacy protecting him from criticism in the absence of actual malice. As for publicity grounds, the Federal Circuit made two points. First, President Trump’s name was not used to exploit his commercial interests or dilute the commercial value of his name. Second, registration would not suggest President Trump has endorsed Elster’s products. Because of the President’s status as a public official, and because Elster’s mark communicates his disagreement with and criticism of the then-President’s approach to governance, the government has no interest in restricting Elster’s speech from trademark protection.
The Federal Circuit did not articulate whether to apply strict scrutiny or intermediate scrutiny and noted that the result would be the same under either standard. The Federal Circuit also reserved the question of whether section 2(c) on its face is overbroad and therefore unconstitutional.
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