Editors

Contributors

Do We Finally Have a Final Answer on ESG Investments and ERISA’s Fiduciary Duties?

Linda Haynes
Diane Dygert

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

PBGC Addresses Withdrawal Liability Assumptions for First Time in New Proposed Rule

Can 401(k) Fee Dispute Cases Survive Based on Bare Allegations Supported by Monday-Morning Quarterbacking?

Are We There Yet? Emergency Declarations and COVID Relief are Extended Into 2023

Ben Conley
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

Are Birth Control and Plan B Next? Texas Judge Targets Preventative Care Mandate in the Name of Religious Liberty

Sam Schwartz-Fenwick

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

Agency FAQs Reveal Employers Continue to Struggle with No Surprises Act & Transparency in Coverage Implementation

Joy Sellstrom
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

Equal Access to Travel Benefits

Sam Schwartz-Fenwick
Ada Dolph

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

Sixth Circuit Affirms Dismissal of 401(k) Breach of Fiduciary Duty Case, Supports Selection of Actively-Managed Funds

Novel Retirement Plan Correction Opportunity Offered by the IRS

Benjamin Spater

Seyfarth Shaw LLP
560 Mission Street
31st Floor
San Francisco, CA 94105
(415) 397-2823
[email protected]
www.seyfarth.com

PBGC Finally Publishes Final Rule on Special Financial Assistance Program

Ryan Tzeng
Joel Wilde
Alan Cabral
Seong Kim

Seyfarth Shaw LLP
2029 Century Park East
Suite 3500
Los Angeles, California 90067-3021
(310) 277-7200
[email protected]
[email protected]
[email protected]
[email protected]
www.seyfarth.com

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

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

Between a Rock and a Hard Place…ESG Investments in 401(k) Plan Line-Ups

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

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

§ 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:

1. 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
2. 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:

1. The SFA amount calculated without regard to any benefit suspensions (i.e., a non-MPRA plan);
2. The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
3. 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:

1. 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
2. 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:

1. The SFA amount calculated without regard to any benefit suspensions (i.e., a non- MPRA plan);
2. The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
3. 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.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.).
7. 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.
8. 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.
9. Monitor guidance issued by the agencies and court rulings relating to NSA and other ongoing price transparency efforts.
10. 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.
11. 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:

1. The entity imposing the premium assessment was the State legislature (not an administrative agency), making it more likely to be a tax;
2. 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
3. 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.

Kathleen Cahill Slaught and Ryan Tikker

Editors

Chelsea Mikula

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 hostile or unwilling.[77]
• If the witness is a child, or an adult with communication problems due to a mental or physical disability.[78]
• If the witness’s recollection is exhausted.[79]
• 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.”

[1] See Fed. R. Civ. P. 16.

[2] Id.

[3] Id.

[4] See Basista v. Weir, 340 F.2d 74, 85 (3d Cir. 1965)

[5] See Fed. R. Civ. P. 26.

[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.).

[19] U.S. Const. amend. VI.

[20] See Kiernan v. Van Schaik, 347 F.2d 775, 778 (3d Cir. 1965); McCoy v. Goldston, 652 F.2d 654, 657 (6th Cir. 1981) abrogated on other grounds.

[21] U.S. Const. amend. VII; Kiernan, 347 F.2d at 778.

[22] Fleming v. Chicago Transit Auth., 397 F. App’x 249, 249-50 (7th Cir. 2010) (quoting Jury Selection & Serv. Act of 1968, 28 U.S.C. §§ 1861-74 (2006)).

[23] Irvin v. Dowd, 366 U.S. 717, 727 (1961).

[24] Zia Shadows, L.L.C. v. City of Las Cruces, 829 F.3d 1232 (10th Cir. 2016).

[25] Turner v. Murray, 476 U.S. 28 (1986).

[26] Wainwright v. Witt, 469 U.S. 412, 423 (1985).

[27] Harris v. Pulley, 885 F.2d 1354, 1361 (9th Cir. 1988).

[28] Id. at 1362.

[29] Id. at 1361.

[30] Id.

[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).

[34] Hopkins, 618 F. App’x at 962.

[35] U.S. Const. amend. VII.

[36] Lorillard v. Pons, 434 U.S. 575, 583 (1978).

[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).

[41] Mu’Min v. Virginia, 500 U.S. 415, 431 (1991).

[42] United States v. Piancone, 506 F.2d 748, 751 (3d Cir. 1974).

[43] Id.

[44] United States v. Delgado, 668 F.3d 219, 228 (5th Cir. 2012).

[45] Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. February 25, 2000).

[46] Fed. R. Civ. P. 47(a).

[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).

[53] See 28 U.S.C. § 1865(b).

[54] 28 U.S.C. § 1866.

[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).

[65] Id.

[66] Id.

[67] Id.

[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).

[69] Powers v. Ohio, 499 U.S. 400, 409 (1991).

[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).

[73] Linden v. CNH Am., LLC, 673 F.3d 829, 840 (8th Cir. 2012).

[74] Black’s Law Dictionary 460 (6th ed. 1990).

[75] Fed. R. Evid. 611(c).

[76] McClard v. United States, 386 F.2d 495, 501 (8th Cir. 1967).

[77] Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 12-13 (1st Cir. 1993).

[78] United States v. Rojas, 520 F.3d 876, 881 (8th Cir. 2008) (citing U.S. v. Butler, 56 F.3d 941, 943 (8th Cir. 1995)).

[79] United States v. Carpenter, 819 F.3d 880, 891 (6th Cir. 2016), reversed and remanded on other grounds, 138 S.Ct. 2206, 201 L. Ed. 2d 507 (2018).

[80] U.S. v. Hernandez-Albino, 177 F.3d 33, 42 (1st Cir. 1999).

[81] United States v. Grassrope, 342 F.3d 866, 869 (8th Cir. 2003) (permitting leading questions when examining a sexual assault victim).

[82] U.S. v. Mulinelli-Navas, 111 F.3d 983, 990 (1st Cir. 1997).

[83] See United States v. Lin, 101 F.3d 760, 770 (D.C. Cir. 1996).

[84] United States v. Jacobs, 215 Fed. Appx. 239, 241 (4th Cir. 2007) (citing United States v. Lewis, 10 F.3d 1086, 1089 (4th Cir. 1993)).

[85] Raysor v. Port Authority of New York & New Jersey, 768 F.2d 34, 40 (2d Cir. 1985).

[86] Id.

[87] Elgabri v. Lekas, 964 F.2d 1255, 1260 (1st Cir. 1992).

[88] See Rosa-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] See U.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).

[93] Id. at 718-19.

[94] United States v. Logan, 121 F.3d 1172, 1175 (8th Cir. 1997).

[95] United States v. Lemon, 497 F.2d 854, 857 (10th Cir. 1974).

[96] See Fed. R. Evid. 607.

[97] Id.

[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] See Davis 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 also United 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.”).

[105] Perez-Solis, 709 F.3d at 464.

[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).

[110] Behler, 199 F.R.D. at 556.

[111] 353 F.2d 324, 325-26 (1st Cir. 1965).

[112] 927 F.2d 838, 841 (5th Cir. 1991).

[113] 250 F.3d 10, 16-17 (1st Cir. 2001).

[114] 237 F.3d 8, 16-17 (1st Cir. 2001).

[115] 248 Fed. Appx. 718, 726 (6th Cir. 2007).

[116] 653 F.2d 915, 920-21 (5th Cir. 1981).

[117] United States v. James, 510 F.2d 546, 551 (5th Cir. 1975).

[118] United States v. Blackwood, 456 F.2d 526, 529-30 (2d Cir. 1972).

[119] Id.

[120] Fed. R. Civ. P. 26(a)(2).

[121] Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993).

[122] Fed. R. Evid. 901.

[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.”).

[124] Id.

[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.”).

[127] In re L.P., 749 S.E.2d 389, 392-392 (Ga. Ct. App. 2013).

[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).

[131] Dente v. Riddell, Inc., 664 F.2d 1, 2 n.1 (1st Cir. 1981).

[132] Mills v. Texas Compensation Ins. Co., 220 F.2d 942, 946 (5th Cir. 1955).

[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] See United 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] See United 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).

[142] Adams, 271 F.2d at 1242.

[143] Id.

[144] Palmer v. Hoffman, 318 U.S. 109, 116 (1943).

[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.”).

[153] Fed. R. Civ. P. 50(a)(2).

[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).

[159] Id.

[160] Daly v. Moore, 491 F.2d 104 (5th Cir. 1974) (explaining that a court should refuse instructions not applicable to the facts).

[161] Fed. R. Civ. P. 51(b)(3).

[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).

[164] Fed. R. Civ. P. 51.

[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).

[168] Fed. Rules Civ. Proc. Rule 51; Foley v. Commonwealth Elec. Co., 312 F.3d 517, 90 Fair Empl. Prac. Cas. (BNA) 895 (1st Cir. 2002).

[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).

[181] Taylors v. Reo Motors, Inc., 275 F.2d 699, 705-06 (10th Cir. 1960).

[182] United States v. DeCoito, 764 F.2d 690, 695 (9th Cir. 1985).

[183] United States. v. Welch, 945 F.2d 1378, 1383 (7th Cir. 1991).

[184] Pierce v. Ramsey Winch Co., 753 F.2d 416, 431 (5th Cir. 1985).

[185] United States v. Chadwell, 798 F.3d 910, 914-15 (9th Cir. 2015).

[186] United States v. Aragon, 983 F.2d 1306, 1309 (4th Cir. 1993).

[187] Johnson v. Richardson, 701 F.2d 753, 757 (8th Cir. 1983).

[188] United States v. de la Cruz-Paulino, 61 F.3d 986, 997 (1st Cir. 1995).

[189] United States v. Gonzales, 121 F.3d 928, 945 (5th Cir. 1997), overruled on other grounds.

[190] United States v. Anthony, 565 F.2d 533, 536 (8th Cir. 1977); Unites States v. Johnson, 584 F.2d 148, 157-58 (6th Cir. 1978).

[191] McGowan v. Gillenwater, 429 F.2d 586, 587 (4th Cir. 1970).

[192] United States v. Wiesner, 789 F.2d 1264, 1268 (7th Cir. 1986).

[193] Fed. R. Civ. P. § 51(b)(3).

[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).

[203] Collins, 226 F.3d at 464.

[204] Charlotte Cty. Develop. Co. v. Lieber, 415 F.2d 447, 448 (5th Cir. 1969).

[205] United States v. Balsam, 203 F.3d 72, 86 (1st Cir. 2000).

[206] Budoff v. Holiday Inns, Inc., 732 F.2d 1523, 1527 (6th Cir. 1984).

[207] United States v. Barfield Co., 359 F.2d 120, 123-24 (5th Cir. 1966).

[208] Dennis v. General Elec. Corp., 762 F.2d 365, 367 (4th Cir. 1985).

[209] Fed. R. Civ. P. 50(b).

[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).

[216] McGinnis, 817 F.3d at 1254.

[217] Id.

[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).

[219] Fed. R. Civ. P. 59.

[220] Fed. R. Civ. P. 59(b).

[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).

[227] McGinnis, 817 F.3d at 1254.

[228] Fed. R. Civ. P. 59(d).

[229] Fed. R. Civ. P. 50(b).

[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

Editor

Contributors

§ 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.

Nippon Shinyaku Co., Ltd. v. Sarepta Therapeutics, Inc., 25 F.4th 998 (Fed. Cir. 2022)

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.

Editors

Assistant Editor

Contributors

§ 1.1. Introduction

Over the last few years, we have continued to see a large push for a narrowing of the use of noncompetition agreements, including the Biden Administration issuing an executive order directing multiple federal departments and agencies to take action against the unfair use of noncompete agreements and revise guidance on no-poach agreements. On January 5, 2023, the Federal Trade Commission (“FTC”) gave notice of a proposed rule to ban noncompete clauses for all workers, including independent contractors, volunteers, and interns. The proposed rule broadly prohibits traditional post-employment noncompetes and would result in significant changes for employers that routinely use noncompetes to protect their valuable trade secrets. If it becomes effective, the rule would require employers to rescind existing noncompete agreements within 180 days of publication of a final rule and to provide individualized notice to all current and former workers previously covered by a noncompete that the noncompete is no longer in effect. Further, this rule supersedes any state law contrary to the noncompete ban, but not any law providing greater protections for workers. The public comment period ended on March 20, 2023, after which the FTC will review the comments and publish a final rule. If and when the rule goes into effect, protecting trade secrets will be more important than ever for employers.

Additionally, the continued remote work and access to technology during these unprecedented times will continue to create more opportunities for departing employees to retain and misuse their former employer’s confidential information. Trade secret misappropriation litigation will continue to be on the rise. This Chapter provides an overview of recent developments in case law and will continue to serve as a practical guide for business law practitioners navigating new changes in employee mobility issues and the protection of trade secrets.

§ 1.2. Employee Mobility: Breach of Duty of Loyalty; Breach of Fiduciary Duties

§ 1.2.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.2.2. First Circuit

There were no qualifying decisions within the First Circuit.

§ 1.2.3. Second Circuit

Zurich Am. Life Ins. Co. v. Nagel, 590 F. Supp. 3d 702 (S.D.N.Y. 2022), reconsideration denied, 2022 WL 1173885 (S.D.N.Y. 2022). The District Court found that an employee emailing documents to his personal account or retaining those documents after his employment was terminated did not constitute a breach of his fiduciary duties to the company because there is no evidence that he ever shared those documents with anyone other than his lawyer. Because the employee did not use the information to compete or divert business opportunities from his former employer, simply sending and keeping the information was not a breach of fiduciary duty. Further, the employee’s attempt to use those documents to leverage a severance package did not constitute a breach of fiduciary duty.

§ 1.2.4. Third Circuit

There were no qualifying decisions within the Third Circuit.

§ 1.2.5. Fourth Circuit

Adnet, Inc. v. Soni, 2021 U.S. Dist. LEXIS 177825 (E.D. Va. 2021), appeal filed (Oct. 20, 2021). The U.S. District Court for the Eastern District of Virginia denied an employer’s motion for summary judgment of claims brought against three employees for breach of loyalty, tortious interference, and business conspiracy, and granted the employees competing motion. There, the U.S. Army awarded a contract to the employer. The employer hired three employees who incorporated their own company providing similar services as the employer. The Army transitioned the work originally awarded to the employer to a third party, General Dynamics Technology, Inc. (GDIT). The employer and the employees’ company competed for the subcontract with GDIT. GDIT awarded the subcontract to the employees’ company. The work with GDIT was to begin after the employees’ job termination with the employer. The District Court denied the employer summary judgment on its breach of the duty of loyalty claim, and granted the employees competing motion, because the employer did not have a preexisting contractual or client relationship with GDIT and the employees were preparing for future employment rather than soliciting employer’s current clients. The District Court also denied the employer summary judgment on the tortious interference claim because the employer failed to establish the existence of a valid contractual relationship or business expectancy. Finally, the District Court also denied the employer summary judgment on its conspiracy claims because their predicate acts failed.

Additional Cases of Note

LStar Dev. Grp., Inc. v. Vining, 2021 U.S. LEXIS 181972 (E.D.N.C. 2021) (denying defendant’s motion to dismiss plaintiff’s breach of fiduciary duty and conflict of interest claim which alleged that employees violated their duty of loyalty to plaintiff by forming defendant entity using plaintiff’s money, equipment, employees, and facility to operate the entity, and attempted to divert plaintiff’s corporate business opportunities to defendant entity).

§ 1.2.6. Fifth Circuit

Trench Tech Int’l, Inc. v. Tech Con Trenching, Inc., 2022 U.S. Dist. LEXIS 100280 (N.D. Tex. 2022). Trench Tech Int’l designs, manufactures, and sells trench-digging machines. Trench-Tech, Ltd. (owned by Trench Tech Int’l), was the domestic seller of parts for Trench Tech Int’l. An owner of Trench Tech Int’l had a son who worked for Trench Tech Ltd. The son downloaded design drawings owned by Trench Tech Int’l to his personal laptop. He and another Trench Tech Ltd. employee then left for a competitor, Tech Con Trenching (Tech Con). Tech Con allegedly used the downloaded information to build several machines. Trench Tech Int’l and Trench Tech Ltd. (Plaintiffs) sued Tech Con and the former employees (Defendants) for trade secret misappropriation and breach of fiduciary duty, among other claims. Defendants moved for summary judgment, arguing, in part, that the son owed a duty of confidence and fiduciary duty only to his direct employer, Trench-Tech, Ltd., and not to the owner of the trade secrets, Trench Tech Int’l. The court rejected this argument, noting that defendants failed to cite any authority restricting a confidential or fiduciary relationship to employer-employee relationships. The son was entrusted with trade secrets and “knew” of his duty to maintain their confidentiality. As such, the formalities of plaintiffs’ formation did not preclude a finding that he breached his duties.

Additional Cases of Note

Winsupply E. Houston v. Blackmon, 2021 U.S. Dist. LEXIS 225067 (S.D. Tex 2021) , appeal dismissed 2022 U.S. App. LEXIS 34871 (5th Cir. (Tex.) 2022) (denying preliminary injunction stemming from defendant’s alleged breach of fiduciary duty where (1) defendant had already terminated her employment with the plaintiff, thus ending her fiduciary duty to the plaintiff and (2) the plaintiff’s ultimate harm—loss of customer sales—could be compensated by a damages award).

§ 1.2.7. Sixth Circuit

There were no qualifying decisions within the Sixth Circuit.

§ 1.2.8. Seventh Circuit

Cary v. Northeast Ill. Reg’l Commuter R.R. Corp., 2021 U.S. Dist. LEXIS 244865 (N.D. Ill. 2021). Cary resigned from her position with Metra. In connection with her employment and resignation, Cary sued Metra and forwarded certain confidential documents to her attorney and her own personal email address. Metra filed a counterclaim against Cary for breach of fiduciary duty based on Cary’s act of forwarding the confidential documents. Cary moved to dismiss the counterclaim and argued that forwarding documents to oneself and one’s counsel cannot support a claim for breach of fiduciary duty. Metra argued that any act sharing of sharing confidential documents outside the workplace could support its claim. The Court found that each party’s position was “too extreme.” While the Court noted that no Illinois court had directly addressed this issue, it found that “Illinois law would likely not punish an employee who lawfully obtains records; discloses only those records reasonably necessary to develop a lawsuit; and discloses the records only to the employee’s attorneys and, later, to the pertinent government agency.” Nevertheless, Metra’s counterclaim survived due to the need for more information regarding the nature of the confidential documents at issue.

§ 1.2.9. Eighth Circuit

Moeschler v. Honkamp Krueger Fin. Servs., Inc., 2021 U.S. Dist. LEXIS 179787, (D. Minn. 2021). The U.S. District Court for the District of Minnesota denied the employer’s motion for a preliminary injunction seeking to restrict a former employee’s ability to work for a direct competitor, in part on the grounds that soliciting customers from memory does not constitute statutory misappropriation of trade secrets. Former employee, Peter Moeschler (Moeschler), resigned from his position at asset management company, Honkamp Krueger Financial Services, Inc. (HKFS), to work for competitor Mariner, LLC (Mariner). The same day that he resigned, he filed an action for declaratory judgment that HKFS’s restrictive covenants were unenforceable. HKFS filed counterclaims against Moeschler and Mariner alleging breach of contract, violation of Iowa’s Uniform Trade Secrets Act (IUTSA), and tortious interference with contractual relations. Moeschler called former clients based on public information or phone numbers he had committed to memory, which HKFS claimed resulted in an $11 million loss of assets to Mariner. Moeschler submitted an affidavit stating that he deleted all business contacts at the time of his resignation and that he hired a forensic expert to ensure he did not have protected information on his personal devices. The court declined to consider names and general information retained in a former employee’s memory to be trade secrets, so Moeschler had not used or disclosed trade secrets. However, the District Court did find that although he did not violate IUTSA, HKFS had established a likelihood of success on the claim that Moeschler breached an agreement prohibiting use of HKFS’s client contacts. Nonetheless, the court denied HKFS’s motion for a preliminary injunction on the grounds that HKFS failed to establish irreparable harm.

§ 1.2.10. Ninth Circuit

Aitkin v. USI Ins. Serv., LLC, 607 F. Supp. 3d 1126 (D. Ore. 2022). District of Oregon held that breach of garden leave provision could not serve as a predicate breach for breach of loyalty claim law under Oregon law. Plaintiff submitted his resignation on February 4, 2021. Defendants argue that because plaintiff failed to provide 60-days’ notice as required by the Employment Agreement, his resignation was not effective until April 4, 2021. Defendants claimed that plaintiff breached a duty of loyalty he owed to USI between February 4, 2021, and April 4, 2021, when he publicly displayed on his LinkedIn page that he worked for Alliant and directed his former USI clients to call Alliant representatives.

While the court acknowledged that plaintiff breached the garden leave provision of his Employment Agreement by not providing 60-days’ notice, the employee has the power to terminate his employment at any time. Thus, defendants could not compel plaintiff to remain their employee after he resigned, and his resignation was effective on the date he provided. And plaintiff only owed defendants a duty of loyalty until the date and time he effectively resigned.

Accordingly, for defendants to have a viable claim that plaintiff breached his duty of loyalty, they must present facts showing plaintiff’s breaching conduct before he resigned on February 4, 2021. Defendants provide no such evidence. Defendants only allegation that plaintiff engaged in conduct breaching his duty of loyalty is that on information and belief, plaintiff participated in and withheld information about a planned group departure from USI. But under Oregon law, nothing prevents an employee under contract from seeking other employment. Oregon law generally favors the freedom of employees to choose where they work. Because defendants present no evidence that plaintiff engaged in conduct that breached his duty of loyalty while he was employed at USI, the Court granted summary judgment for plaintiff on this claim.

Best Label Co. v. Custom Label & Decal, LLC, 2022 WL 1189884 (N.D. Cal. 2022). California district court found that alleged unlawful statements made to divert business to customers were not preempted by state trade secret statute. Defendants argued causes of action for breach of duty of loyalty, unlawful interference with prospective economic advantage, and statutory unfair competition, respectively, are superseded by CUTSA. While it is true that CUTSA can supersede other claims, it only does so if the claim(s) are based on the same nucleus of facts as the misappropriation of trade secrets claim for relief. Plaintiff argued it premised these claims on defendants’ alleged statements made to divert business to plaintiff’s competitor, defendant CLD, while the individual defendants still worked for plaintiff. Plaintiff also premised these causes of action upon defendants’ alleged solicitation of BLCI/BLC LLC employees to join its competitor, defendant CLD, while defendants were still employed by BLCI/BLC LLC. The court found that they stand as independent claims, supported by alleged facts beyond misappropriation of trade secrets, and therefore were not superseded by CUTSA.

§ 1.2.11. Tenth Circuit

Southwest Preferred Fin., Inc. v. Bowermeister, 2022 N.M. App. Unpub. LEXIS 190 (N.M. Ct. App. 2022). Plaintiff Southwest Preferred Financial, Inc. (“Southwest”) appealed the judgment of the district court dismissing all of Southwest’s claims following a bench trial. The appellate court affirmed the district court’s judgment dismissing all claims. Southwest hired Jason Bowermeister (“Bowermeister”) to fill an entry-level, unskilled position at Southwest’s gold and precious metals store. He signed a written agreement not to compete in 2012 and another noncompete agreement in 2013 that was significantly more expansive. The 2013 noncompete agreement prohibited Bowermeister from working for or forming any competitive business within 25 miles of anywhere Southwest had a physical store or anywhere Southwest has an internet presence for three years following termination of employment. Bowermeister resigned and then later formed a business that bought and sold precious metal and coins. Southwest initiated a lawsuit; the district court held a bench trial and concluded that the noncompete agreement was too large and wide, and it was not supported by consideration because Bowermeister did not receive an increase when he signed the new agreement in 2013. Southwest failed to establish that there were any damages proximately caused by competition from Bowermeister’s business, and Southwest failed to offer any evidence of harm as a result of Bowermeister’s conduct that resulted in a breach of the duty of loyalty. The appellate court, affirming the district court’s dismissal of all claims, agreed with the district court that the 2013 agreement was unreasonably restrictive in terms of the length of time, the geographic area, and the types of employment precluded, which was sufficient to make the agreement unenforceable, and that Southwest did not suffer any harm as a result of a breach of fiduciary duty or breach of the duty of loyalty.

§ 1.2.12. Eleventh Circuit

Klaas v. Allstate Ins. Co., 21 F.4th 759 (11th Cir. (Ala.) 2021), cert. denied 143 S. Ct. 233 (2022) and 143 S. Ct. 85 (2022). Allstate, an insurance company, informed former employees who retired after 1990—in 2013—that it would stop paying the premiums on their life insurance policies at the end of 2015. For many years, Allstate offered employees who met certain qualifications life insurance that continued into retirement, and Allstate provided its employees with information about life insurance in summary plan descriptions. The summary plan descriptions reserved for Allstate the right to modify or terminate the benefit plan. Allstate had previously made representations, both orally and in writing, to employees that their retiree life insurance benefits were “paid up” or “for life.” After the company made this decision, two putative classes sued Allstate seeking declaratory and injunctive relief and alleged that Allstate (1) violated the Employee Retirement Income Security Act of 1974 (ERISA) by no longer paying the insurance premiums and (2) breached its fiduciary duty to them by failing to provide full and accurate information about their retiree life insurance. The district court granted summary judgment to Allstate on all claims, concluding that the benefit plan documents unambiguously gave Allstate the power to terminate the life insurance benefits and that retiree classes’ claims for breach of fiduciary duty were time barred. The plaintiffs appealed, arguing that the district court (1) erred by concluding that the language in the benefit plan documents was unambiguous and by failing to consider extrinsic evidence and (2) incorrectly determined that their breach of fiduciary duty claims were untimely. The Eleventh Circuit held that (1) Allstate’s actions did not give rise to an ERISA § 502(a)(1)(B) claim because the summary plan descriptions unambiguously gave Allstate the right to terminate the retiree life insurance and the district court correctly granted summary judgment to Allstate. The Eleventh Circuit also held that none of the employees filed their respective suits within six years of the last action by the employer that could constitute a breach of fiduciary duty so the actions occurred outside of statute of repose period and were subject to summary judgment.

Gimeno v. NCHMD, Inc., 38 F.4th 910 (11th Cir. (Fla.) 2022). Plaintiff Raniero Gimeno’s spouse, Justin Polga, was employed by NCHMD, Inc., which is a subsidiary of NCH Healthcare System, Inc. During the initial hiring process, with the help from NCHMD’s human resources staff, Polga completed enrollment paperwork for life insurance benefits through an ERISA plan. Gimeno was the primary beneficiary under the plan, and NCH Healthcare was the named plan administrator. Polga elected to receive supplemental coverage, but did not submit the necessary evidence of insurability form because it was not included in the enrollment paperwork. NCHMD’s human resources staff did not notify him that the form was necessary or missing. Nonetheless, for three years, NCHMD deducted premiums corresponding to the supplemental life insurance coverage from Polga’s paychecks. Polga died, and Gimeno filed a claim for benefits with the plan’s insurance company under 29 U.S.C. § 1132(a)(1)(B), which allows a beneficiary to bring a civil action “to recover benefits due to him under the terms of his plan.” The insurance company refused to pay any supplemental benefits because it had never received the form. Gimeno sought leave to amend his complaint to assert his claims for breach of fiduciary duty under section 1132(a)(3), but the district court denied. The appellate court reversed and remanded to allow Gimeno to bring a claim for breach of fiduciary duty. The appellate court found that both NCHMD and NCH Healthcare were fiduciaries under ERISA as those who “‘exercise[] any discretionary authority or discretionary control respecting management’ or ‘administration’ of the plan.” In finding NCHMD as a fiduciary despite it not being a named administrator, the appellate court relied on the factual circumstances under which NCHMD’s human resources staff effectively assumed the function of administrating the plan for Polga.

§ 1.2.13. D.C. Circuit

Hirecounsel D.C., LLC v. Connolly, 2021 U.S. Dist. LEXIS 242370 (D.D.C. 2021) (unpublished). Defendant Connolly worked for plaintiff, HIRECounsel D.C., LLC, a legal staffing and document management company. Connolly, based in HIRECounsel’s Boston office, worked as a managing director of client relations. Connolly signed an agreement with HIRECounsel. The agreement contained a nondisclosure covenant, which forbid the use, disclosure, or removal of HIRECounsel’s confidential information. The agreement also contained a noncompetition restriction, which lasted for 12 months and forbid Connolly from being employed by a competitor of HIRECounsel within 75 miles of any its offices. Connolly eventually resigned from HIRECounsel and joined a competitor, Beacon Hill Staffing, LLC, in their Boston office. Further, HIRECounsel learned that Connolly allegedly screenshotted confidential information during a virtual meeting with superiors who had shared their computer screens with meeting participants. Connolly then allegedly forwarded the screenshot to his personal email address ten days before resigning. HIRECounsel sued alleging two breaches of contract and a violation of the District of Columbia Uniform Trade Secrets Act (DCUSA). Connolly moved to dismiss. In his Motion to Dismiss, Connolly argued that the noncompete provision was unenforceable because it was not reasonable. The court disagreed, noting that HIRECounsel has legitimate business interests in stopping former employees from taking confidential client information to competing firms. Further, the court noted that courts applying DC law have upheld 100-mile restrictive noncompete agreements. Second, Connolly argued that HIRECounsel failed to allege a violation of the nondisclosure covenant. The court disagreed. The court noted that HIRECounsel sufficiently described the image as containing “a confidential internal report” and that forwarding the image to his personal email violated the agreement. Finally, Connolly argued that he did not misappropriate trade secrets under DCUTSA because he did not access the information without permission nor did he use it for purposes other than work at HIRECounsel. The court disagreed, noting that he took the screenshot for use unrelated to his employment with HIRECounsel and that it was improper for him to email the screenshot to his personal email ten days before resigning. The court also noted that the plain language of DCUTSA does not require an improper use; simply acquiring a trade secret through an improper means is sufficient to violate the statute.

§ 1.2.14. State Cases

There were no qualifying decisions within the State Cases.

§ 1.3. Restrictive Covenants: Covenants Not to Compete

§ 1.3.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.3.2. First Circuit

Idexx Lab’ys v. Bilbrough, 2022 U.S. Dist. LEXIS 136676 (D. Me. 2022), report and recommendation adopted, dismissed by, 2022 U.S. Dist. LEXIS 181179 (D.Me. Oct. 4, 2022). Magistrate Nivoson of the U.S. District Court of Maine recommended dismissal of plaintiff Idexx Laboratories’ (Idexx) claim against its former employee, Bilbrough. The Court reasoned that the majority of courts have rejected the theory that the Inevitable Disclosure Doctrine (IDD) applies based on the language and history of the Defend Trade Secrets Act (DTSA). Idexx alleged that Bilbrough would necessarily misappropriate its trade secrets in his current employment at a competitor in violation of the federal DTSA and the Maine Uniform Trade Secrets Act (MUTSA). Thus, Idexx sought to enjoin him from disclosing Idexx’s trade secrets and from working on product offers that implicated the trade secret information. The Court dismissed the claim for failing to assert an actionable federal claim. Regarding his motion to dismiss, Bilbrough focused on the third element of a misappropriation claim, arguing Idexx had not sufficiently alleged an actionable “use” of its trade secrets. Idexx’s claim was based on the information Bilbrough knew and the concern that he would disclose the information. The Court found that to the extent there is an ambiguity in the DTSA, a review of the development of the statute suggests Congress did not intend the IDD to apply to DTSA claims. Based on the plain language of the statute, the Court held that the IDD does not apply to claims brought pursuant to the DTSA, thus Idexx had not alleged an actionable claim under the DTSA. Regarding the MUTSA claim, the Court stated that whether a court could apply the IDD is an open question under Maine law and therefore, the issue should be decided in state court.

§ 1.3.3. Second Circuit

New York Packaging II LLC v. Mustang Mktg. Grp. LLC, 2022 WL 604136 (E.D.N.Y. 2022). The District Court found that a company looking to enforce a covenant not to compete had failed to show that irreparable harm would occur if a former employee breached its noncompete clause. The Court rejected the argument that irreparable harm must be assumed based on an alleged breach of the noncompete. It also held that general allegations of loss of client relationships and customer good will is not sufficient to show irreparable harm.

§ 1.3.4. Third Circuit

Howmedica Osteonics Corp. v. Howard, 2022 WL 16362464 (D.N.J. 2022). Defendants Howard and Petulla were two surgical supply sales employees who lived and worked in California for a New Jersey-based corporation. Their employment agreements contained New Jersey choice-of-law provisions, as well as noncompete and customer nonsolicit provisions. Both Howard and Petulla resigned to go to a competitor. The court conducted a conflict-of-law analysis and determined that California’s interest was not materially greater than New Jersey’s and as such, the noncompete’s enforceability should be evaluated under New Jersey law. The court found New Jersey’s interest was as great as California’s because Howmedica’s senior leadership team was partially based in New Jersey; the company’s research and development, finance, and operations departments were located in New Jersey; the equipment and inventory were shipped from New Jersey; and the agreements were voluntarily negotiated to designate New Jersey law to control. The court found that under New Jersey law, the agreements were enforceable because customer relationships and goodwill are protectable interests under New Jersey law. They were not overly broad in scope at 12 and 18 months respectively and were limited to the geographic area the sales employees serviced. The court, however, blue-penciled the definition of customer to include only current customers, not prospective customers. The court granted summary judgment to Howmedica on its breach-of-contract claims for violations of the restrictive covenants.

Syzygy Integration LLC v. Harris, 616 F. Supp. 3d 439, 2022 WL 2869317 (E.D. Pa. 2022), appeal dismissed 2022 WL 18587916 (3d Cir. (Pa.) 2022. Harris signed an operating agreement with plaintiff Syzygy midway through his employment. Syzygy is a government contractor providing communications technology to the military, law enforcement, and other related agencies. The operating agreement entitled Harris to 2% of the membership interests in Syzygy and also contained various restrictive covenants, including an agreement not to compete. After Harris resigned in March of 2022, he received a buyout of his shares of the company. Syzygy learned of Harris’s intent to join a competitor and brought suit seeking an injunction in April 2022. Despite the fact that since joining the competitor firm, Harris had not solicited any customers, been a part of any client pitches, or done any sort of business development, the court found that he was likely in violation of his noncompete because he had become “engaged in ‘any other business’ which competes ‘in whole or in part’ with any business engaged in by” Syzygy. The court held that Syzygy’s minor breaches of the operating agreement, by failing to provide Harris with certain tax forms, did not relieve him of his obligations to comply with the agreement. The court granted the application for the preliminary injunction enforcing the noncompete agreement under Pennsylvania law, and blue-penciled the five-year agreement with no geographic restriction to one with no geographic restriction for two years.

Rago v. Trifecta Techs., Inc., 2022 WL 2916688 (E.D. Pa. 2022). A former executive Rago worked for Trifecta Technologies. He brought suit against Trifecta for failure to pay wages pursuant to his employment agreement. Trifecta brought counterclaims against Rago claiming he breached his noncompetition and employment agreements by disparaging the company and competing with it after his termination. He moved to dismiss the counter claims for breach of the noncompetition agreement because he signed that agreement three days after he signed his employment agreement with Trifecta. He argued that because he already had agreed to the terms and conditions of employment, the noncompetition agreement was not supported by adequate consideration and was not “ancillary to an employment relationship” as required under Pennsylvania law. The court denied Rago’s motion to dismiss the counterclaims because his employment agreement that was signed three days prior to the noncompete referred to the noncompete agreement. Thus, as to the argument that the noncompete was not supported by adequate consideration, the Court held that the three-day gap between signing the agreements did not evince an effort by Trifecta to impose a noncompete later on in the relationship, and instead the same consideration for the employment agreement was also adequate for the noncompete.

ADP, Inc. v. Levin, 2022 WL 1184202 (3rd Cir. (N.J.) 2022). Matthew Levin, ADP’s Chief Strategy Officer, resigned his position to join competitor Benefitfocus as its president and CEO. ADP quickly filed a breach-of-contract claim, seeking a temporary restraining order and a preliminary injunction to prevent Levin from starting his new job. ADP claimed that Levin’s move violated several Restrictive Covenant Agreements that he had signed which prohibited him from providing “substantially similar services” as ADP to a competing business for 12 months after he left ADP. The District Court declined to issue a temporary restraining order and ruled from the bench denying ADP’s request for a preliminary injunction without any written opinion. ADP subsequently appealed claiming that the District Court abused its discretion. Upon review, the Third Circuit Court found that the District Court abused its discretion by failing to make findings on the record in compliance with Rule 52 of the Federal Rules of Civil Procedure and applying the wrong legal standard. However, instead of issuing a reversal and remand, the Circuit Court exercised its power under Rule 52 to issue its own ruling affirming the District Court’s decision because it reached the same conclusion under the correct legal standard. The Circuit Court held that to satisfy the irreparable harm prong of the four-factor balancing test for ruling on a preliminary injunction, the moving party had to establish they would specifically and personally risk irreparable harm if relief was denied. The Circuit Court found that ADP failed to meet its burden because it offered only conclusory allegations of how Levin had the potential to harm ADP and failed to show that Levin might actually cause any of the potential harm in his new role. Therefore, although a party seeking a preliminary injunction is not required to show actual harm by violation of the restrictive covenants, they must make a showing that is more than just speculative by showing a connection between the alleged potential harm and the employee’s new role.

§ 1.3.5. Fourth Circuit

Power Home Solar, LLC v. Sigora Solar, LLC, 2021 U.S. Dist. LEXIS 163753 (W.D. Va. 2021).^[1] The U.S. District Court for the Western District of Virginia held that a reasonable duration does not redeem a restrictive covenant where the function and geographic scope of the noncompete covenant vastly exceed a reasonable prohibition on trade. There, first, the noncompete covenant prohibited employees from engaging in “any employment or business” related to the commercial or residential solar-energy market in the entire United States. Second, the noncompete covenant’s geographic scope restricted all competition within 100 miles of each location of the employer’s locations. The District Court held that the noncompete covenant’s function and geographic scope were both exceptionally broad where it restricted employees from engaging in any employment or business related to the commercial or residential solar-energy market in the entire United States and effectively prohibited former employees from seeking employment in the solar-energy business in large swaths of the middle and eastern regions of the U.S.

§ 1.3.6. Fifth Circuit

Clark v. Truist Bank, 2022 U.S. Dist. LEXIS 17625 (N.D. Tex. 2022). Insurance broker Clark worked for insurance company McGriff Insurance Services in Texas. Clark and the predecessor company to McGriff, Regions Insurance, Inc., entered into an employment agreement that included a noncompete covenant providing that for two years following the end of his employment, Clark would not solicit, accept, service, or assist in the solicitation or acceptance of any insurance business of any customers for whom he had sold, serviced, managed, or consulted regarding insurance products in the 12 months before the end of his employment. Clark resigned and joined Edgewood Partners Insurance Center (EPIC). Nine of Clark’s customers moved their business from McGriff to EPIC to be serviced by Clark. McGriff sued, and moved for summary judgment to enforce the noncompete. After a brief application of the Texas Supreme Court’s three-part reasonableness test, the court found that Regions had a legitimate business interest in protecting its clients and business, and that a two-year prohibition on soliciting or servicing former customers whose accounts Clark serviced during his final year of employment did not unduly restrict Clark. Clark argued that the noncompete was unenforceable as to the nine clients who transferred to him because he did not solicit the clients, and McGriff had no protectable interest in customers who voluntarily left. This argument was rejected because the court “lack[ed] any indication” that Texas courts would narrow a noncompete in such a manner. Despite Texas law requiring an evaluation of any injury likely to the public due to noncompete enforcement, the court did not consider the impact of enforcement on a client’s right to work with the insurance broker of their choosing. The court found that the noncompete was enforceable and breached by Clark and granted McGriff’s motion.

Additional Cases of Note

Allied Pipe, LLC v. Paulsen, 2021 U.S. Dist. LEXIS 243510 (S.D. Tex. 2021)^[2] (declining to set aside a noncompete clause as unreasonable where the defendant expressly agreed in the contract that “the restrictions imposed herein are: (i) reasonable as to scope, time, and area; [and] (ii) necessary for the protection of the Buyer and the Company’s legitimate business interests”); Sutherland Glob. Servs., Inc. v. Sengupta, 2021 U.S. Dist. LEXIS 254355 (W.D. Tex. 2021), report and recommendation adopted 2022 WL 566191 (W.D. Tex. 2022) (applying New York law) (finding a substantial threat of irreparable harm, despite plaintiff’s two-month delay in seeking injunctive relief, where the defendant’s new position was substantially similar to his position at plaintiff’s company and the defendant violated the noncompete agreement prior to his employment ending with the plaintiff); Winsupply E. Houston v. Blackmon, 2021 U.S. Dist. LEXIS 225067 (S.D. Tex. 2021), appeal dismissed 2022 U.S. App. LEXIS 34871 (5th Cir. (Tex.) 2022) (finding that the plaintiff did not have a valid noncompete agreement with defendant because the agreement—originally between the defendant and another company, which plaintiff purchased all of the equity in but remained a separate entity from—could not be assigned or transferred to the plaintiff without the defendant’s consent); Direct Biologics, LLC v. McQueen, 2022 U.S. Dist. LEXIS 94514 (W.D. Tex. 2022), appeal filed (June 2, 2022) (denying a preliminary injunction on the grounds that there was no irreparable injury; although defendant, who left for a competitor, was a highly-trained employee who possessed critical knowledge about plaintiff’s business, that alone was not enough to give rise to a presumption of irreparable injury, which some Texas courts have found where there is “proof that a highly trained employee is continuing to breach a non-competition covenant”).

§ 1.3.7. Sixth Circuit

RECO Equip., Inc. v. Wilson, 2021 U.S. App. LEXIS 32413 (6th Cir. (Ohio) 2021). Jeffrey Wilson and Joseph Craig Russo left their jobs at RECO Equipment, Inc., to start a competing business. Wilson’s employment contract stated that he could not compete with RECO for three years after leaving and within 50 miles. After Wilson and Russo left, RECO found that they had retained or taken its confidential information, including retaining a company cell phone and uploading company files to a personal DropBox account. RECO sued for breach of contract and misappropriation of trade secrets and moved for a preliminary injunction. The district court granted the motion, ordering Wilson to comply with the noncompete agreement, among other relief. On appeal, regarding the noncompete agreement, Wilson did not dispute that he breached the agreement by opening a competitor company. He argued only that the agreement was unenforceable because it was not reasonable, a requirement under Ohio law for noncompete agreements that must be established by clear and convincing evidence. The court held that RECO failed to meet this burden because it presented no evidence about whether the three-year restriction imposed undue hardship on Wilson—one of the factors necessary to find a noncompete agreement reasonable under Ohio law. Because RECO failed to establish that the noncompete agreement was reasonable, RECO could not, at that time, be likely to succeed on the merits of its breach-of-contract claim based on the noncompete agreement. Accordingly, the court vacated this part of the district court’s preliminary injunction.

Union Home Mortg. Corp. v. Cromer, 31 F.4th 356 (6th Cir. (Ohio) 2022). Erik Cromer worked as a managing loan officer for plaintiff and signed a noncompete as part of his employment. In January 2021, Cromer left for a competitor and plaintiff filed suit. The court held the noncompete provision preventing Cromer from working within a 100-mile radius in “the same or similar capacity” for 22 months was unenforceable as written. The court vacated the district court’s preliminary injunction holding that the lower court had failed to analyze whether the noncompete provision was reasonable under Ohio law and therefore enforceable.

§ 1.3.8. Seventh Circuit

Custom Truck One Source, Inc. v. Norris, 2022 U.S. Dist. LEXIS 34291 (N.D. Ind. 2022). Norris worked for CTOS as an account manager. As part of his employment agreement, Norris agreed to certain noncompetition provisions restricting his right to compete in a geographic area defined as the “Territory.” Norris resigned from CTOS and formed his own company, which operated in the same industry. Norris resided in (and operated his company from) the Territory; however, all of Norris’s clients were located outside the Territory. CTOS sued Norris for breach of the noncompetition clause and moved for a temporary restraining order. The Court addressed whether CTOS had a legitimate protectable interest in preventing Norris’s actions. Norris argued that the provision was unenforceable because all of Norris’s clients were based outside the Territory. Norris argued that CTOS only had a protectable interest in the place where competition occurred, and Norris did not compete for any customers within the Territory. CTOS argued that “the mere formation of a business inside the Territory” was a violation regardless of where the businesses’ customers were located. According to CTOS, Norris’s acts of sending emails and making calls from within the Territory were sufficient. The Court agreed that Norris was conducting business within the Territory through his formation of the business and his communications. However, it raised questions regarding whether CTOS could possibly have a legitimate, protectable interest in preventing Norris from operating within the Territory when he was only competing for clients outside the Territory. The Court concluded that CTOS failed to meet its burden of showing a likelihood of success on the merits and it denied CTOS’s motion.

Concentric, LLC v. Mages, 2021 U.S. Dist. LEXIS 194740 (E.D. Wis. 2021). Mages worked for Courtney Industrial Battery for 28 years. When Concentric purchased Courtney Industrial Battery, it offered Mages a position. Mages accepted the position and began working for Concentric. However, Mages did not sign an employment agreement with Concentric until two months after starting her new position. The employment agreement contained noncompetition and confidentiality provisions. Two years later, Mages resigned and began working for one of Concentric’s competitors. Concentric sued Mages and moved for a temporary restraining order. Mages argued that the noncompetition provisions of her employment agreement were unenforceable because they were not supported by consideration. Mages argued that she received no consideration because she was already working for Concentric when she signed the agreement. Concentric argued that its continued employment of Mages constituted adequate consideration because Mages’s employment was strictly conditioned upon signing the employment agreement. The Court found a likelihood that Concentric could show the employment agreement was supported by consideration. It highlighted evidence demonstrating that Mages negotiated her employment agreement during the period she worked for Concentric without a signed agreement in place and that Concentric would have terminated Mages if the negotiations failed.

In re Adegoke, 632 B.R. 154 (Bankr. N.D. Ill. 2021). Adegoke worked for 3Cloud for approximately one year before resigning. When he resigned, 3Cloud sued Adegoke for, among other things, breach of restrictive covenants in Adegoke’s employment agreement. Adegoke argued that the restrictive covenants were not enforceable because he was not employed for a “substantial period of time.” The Court noted that, in the context of post-employment restrictive covenants, Illinois courts indicated that an employment must last for a “substantial period of time” to support restrictive covenants. (Otherwise, an employer could hire an employee for a short period of time for the sole purpose of imposing restrictive covenants.) However, the Court found that a “substantial period of time” should not be required under the circumstances. 3Cloud had invested significant resources in training Adegoke. Despite Adegoke’s unsatisfactory performance, 3Cloud tried to maintain the employment relationship by moving Adegoke into a different role. 3Cloud never decreased Adegoke’s salary and it paid Adegoke a bonus. Nevertheless, Adegoke voluntarily chose to resign. Under the circumstances, the Court found that no “substantial period of time” was required. Nevertheless, in an abundance of caution, the Court proceeded to evaluate whether the employment satisfied the “substantial period of time” requirement. The Court noted a split in authority among Illinois cases regarding what constitutes a “substantial period of time:” some cases upheld a bright-line rule requiring two years of employment while others found that additional factors must be considered. The Court rejected the bright-line approach and found that, under the circumstances, Adegoke’s one year of employment constituted a “substantial period of time.”

DM Trans, LLC v. Scott, 38 F.4th 608 (7th Cir. (Ill.) 2022). Six employees left DM Trans, LLC d/ba Arrive to work for a competitor named Traffic Tech. Arrive sued the employees and Traffic Tech and moved for a temporary restraining order. The Court denied the TRO, and Arrive appealed. On appeal, the defendants argued that part of the appeal was moot under Texas law because the noncompetition provisions had expired (for all except one of the defendants) and because three of the employees no longer worked with Traffic Tech. Regarding the first issue, the Court determined that the claims were not moot because, under Texas law, the District Court had the equitable authority to extend the duration of the restrictive covenants. Thus, the restrictive covenants could still have legal effect despite the expiration of their term. Regarding the second issue, the Court found that the employees’ departure from Traffic Tech did not render the issues moot because injunctive relief could still be appropriate and effective. Specifically, the Court noted that injunctive relief might prevent Traffic Tech from rehiring the defendants or prevent the defendants from working with any similar competitor of Arrive. The Court retained jurisdiction over the appeal.

Gillaspy v. Club Newtone, Inc., 2021 U.S. Dist. LEXIS 157249 (N.D. Ind. 2021). Gillaspy worked as a fitness instructor for Club Newtone. Gillaspy asserted claims for sexual discrimination and harassment under Title VII. Club Newtone asserted a counterclaim against Gillaspy for breach of contract alleging, among other things, that Gillaspy entered into a noncompetition agreement and that since she ceased working for Club Newtone she breached Section 2 of said noncompetition agreement. According to Newtone, Section 2 of the noncompetition agreement precluded Gillaspy from entering into or attempting to enter into “Restricted Business,” interfering with Club Newtone’s employees, interfering with Club Newtone’s customers, and utilizing Club Newtone’s confidential information and intellectual property. Gillaspy moved to dismiss Club Newtone’s counterclaim on grounds that the Court lacked subject matter jurisdiction over Newtone’s breach-of-contract claim. In declining to exercise supplemental jurisdiction over Newtone’s breach-of-contract claim, the Court noted that Gillaspy’s Title VII claims and Club Newtone’s breach-of-contract counterclaim have no overlapping elements and the claims necessarily rely on different evidence. The Court went on to find that Club Newtone failed to explain how evidence of conduct occurring after Gillaspy was terminated will disprove or defend liability from Gillaspy’s Title VII claims, which involve how she was treated during her term of employment. As a result, the Court held that the employment relationship between the parties, standing alone, is insufficient to establish supplemental jurisdiction and dismissed Newtone’s breach-of-contract claim against Gillaspy.

§ 1.3.9. Eighth Circuit

Miller v. Honkamp Krueger Fin. Servs., Inc., 9 F.4th 1011 (8th Cir. (S.D.) 2021). The Eighth Circuit Court of Appeals overturned a preliminary injunction a South Dakota federal judge issued in favor of former employer Honkamp Krueger Financial Services, barring former employee Cara Miller from working at Mariner Wealth Advisors, her new employer, pending the outcome of the case. Miller had entered into an employment agreement with Honkamp that contained restrictive covenants, including a noncompete provision prohibiting her from working for a competitor for a year, and a nonsolicitation provision. Later, both parties entered into an ancillary agreement that updated the nonsolicitation agreement prohibiting Miller from accepting unsolicited clients. Honkamp was subsequently acquired by company Bluecora, Inc. and terminated Miller’s employment. Miller initiated an action against Honkamp and Bluecora seeking a declaration that the restrictive covenants and ancillary agreement were unenforceable. She also began working for Mariner Wealth Advisors, a direct competitor to Honkamp. Honkamp counter-claimed seeking a preliminary injunction enforcing the noncompete and nonsolicitation provisions against Miller and Mariner. The district court granted the preliminary injunction in favor of Honkamp. The Court of Appeals vacated the preliminary injunction and reversed the district court, holding that: (1) under Iowa law, the noncompete provision of an employment agreement did not survive termination of the employment agreement; and (2) under South Dakota law, the nonsolicitation provision, which prohibited Miller from accepting unsolicited business from her former clients, fell outside South Dakota statute setting out permissible exceptions to general prohibition on restraints on exercise of trade and thus was void as violating South Dakota public policy.

Progressive Techs., Inc. v. Chaffin Holdings, Inc., 33 F.4th 481 (8th Cir. (Ark.) 2022), reh’g en banc denied 2022 WL 2906576 (8th Cir. (Ark.) 2022). Progressive sought an injunction against David Chaffin and Chaffin Holdings, Inc. for breaching a noncompete agreement. Chaffin and Chaffin Holdings appealed the district court’s preliminary injunction entered against them. The Eighth Circuit Court of Appeals overturned a preliminary injunction, holding that Progressive has not shown a fair chance of prevailing on the breach of the noncompete agreement, including the noncustomer solicitation agreement. Chaffin owned Arkansas State Security, Inc., which sold and maintained video security equipment for school districts. Chaffin in 2013 sold his business to Progressive and agreed to continue working at the company as an employee. The parties entered into an employment agreement, which contained a noncompete agreement with four restrictive covenants: The first covenant (the competition restriction) barred Chaffin from being involved in the “Video Security Business” throughout the state of Arkansas for five years. The second covenant (the customer-solicitation restriction) barred Chaffin from soliciting any of Progressive’s current or prospective customers for video security sales or for the purpose of terminating their business with Progressive for five years. The third covenant (the employee-solicitation restriction) barred Chaffin from soliciting any Progressive employees for two years. The fourth covenant (the nondisclosure clause) barred Chaffin indefinitely from disclosing any proprietary information. After six-and-a-half years, Progressive terminated Chaffin. Chaffin began soliciting Progressive clients. Progressive sued, claiming Chaffin breached the restrictive covenants in the noncompete agreement and misappropriated trade secrets in violation of the Arkansas Trade Secrets Act. While the Court acknowledged the validity of strict noncompete agreements in relation to the sale of a business, the Court categorized the agreement here as an employment agreement, drawing more scrutiny. The Court found the restrictions too lengthy and went beyond what is required to protect Progressive’s interests.

Ronnoco Coffee, LLC v. Castagna, 2021 WL 5937427 (E.D. Mo. 2021). Plaintiff Ronnoco Coffee, LLC filed this action against Defendants Kevin Castagna and Jeremy Torres to enforce noncompetition and confidentiality agreements against each of them, and to enjoin the threatened misappropriation of trade secrets. Defendants had been employed by Trident Beverage, Inc. before Ronnoco acquired 80% of Trident’s shares. Thereafter, defendants were employed by both Trident and Ronnoco. Ronnoco and defendants entered into a Fair Competition Agreement, which expressly prohibited defendants from: 1) engaging in any business or activity that competes with “the business of” Ronnoco both during their employment and for two years after employment with Ronnoco; 2) from soliciting Ronnoco’s employees, clients, or customers; and 3) from disclosing Ronnoco’s confidential and proprietary information. Defendants left their employment and began working for Thirsty Coconut, a direct competitor of Trident. The Court granted Ronnoco’s Request for a Temporary Restraining Order, and Preliminary Injunction against defendants prohibiting defendants from violating the terms of their Agreement. At the end of the bench trial, the Court dissolved the injunction and dismissed the case. In analyzing the trade secret claim, the Court held that while Ronnoco owned Trident by a stock purchase where they bought 80%, the stock purchase did not equate to the purchase of assets, and therefore Trident was still the legal holder of the trade secrets. The Court found that it was a basic principle of corporate law that a subsidiary is a legal entity separate from its parent. The shareholders may be the same but their property is distinct. Thus the parent, Ronnoco, cannot sue to enforce the subsidiary, Trident’s, property, including the trade secrets alleged in this suit.

§ 1.3.10. Ninth Circuit

Aitkin v. USI Ins. Servs., LLC, 2022 WL 1439128 (9th Cir. (Ore.) 2022). The Ninth Circuit upheld a preliminary injunction issued against an insurance sales representative for violation of his noncompetition agreement under Oregon law. In affirming the district court order, the Ninth Circuit, found, among other reasons, that the noncompete clause did not violate public policy. The Court rejected the employee’s argument that his noncompete clause violated public policy because he is entitled to the goodwill generated from his client relationships. The Court found, as the district court noted, Oregon common law establishes that employers have a protectable interest in the goodwill generated by their employees.

Millennium Health, LLC v. Barba, 2021 WL 4690949 (9th Cir. (Ore.) 2021). The Ninth Circuit upheld a preliminary injunction against two healthcare employees for violation of their noncompetition agreements governed by Oregon law. On appeal, the employees only challenged the district court’s finding that the employer had a likelihood of success on the merits in enforcing the noncompetition agreements against them. They argued that an employee seeking to void a “voidable” noncompetition agreement cannot be preempted by their employer’s effort to enforce the covenant, especially where, as here, the employee has not yet formally left their employment or violated the agreement.

The Court rejected the employee’s argument. Oregon treats noncompetition agreements that do not comply with the statutory requirements of Oregon Revised Statute § 653.295 as “presumptively valid rather than void ab initio.” Neither employee received notice that a noncompetition agreement would be a condition of their employment two weeks prior to commencing their employment. Thus, their noncompetition agreements were voidable. Oregon courts treat a voidable noncompetition agreement as valid and enforceable if the employee has not taken affirmative steps to void the agreement at the time the employer seeks to invoke the noncompetition agreement. Because the agreement had not been voided at the time that defendant sought to invoke the contract, the agreement was valid and in effect.

§ 1.3.11. Tenth Circuit

There were no qualifying decisions within the Tenth Circuit.

§ 1.3.12. Eleventh Circuit

Vital Pharms., Inc. v. Alfieri, 23 F.4th 1282 (11th Cir. (Fla.) 2022). Vital, a producer of energy drinks, hired the four relevant individuals in 2019, and these individuals signed employment agreements, which contained three restrictive covenants. The four individuals agreed to: (1) not to work for a competing company during the term of their employment with Vital and for a period one year from their termination or cessation date, (2) not to solicit Vital employees to join a competing company (which was valid for one year from termination), and (3) never to disclose or to utilize for their own benefit, or for any third party’s benefit any of Vital’s confidential information, including its product formulae and its marketing sales information. These four individuals later joined Elegance Brands, which is a company that primarily produces alcoholic beverages, but developed a cannabidiol-infused caffeinated drink in 2019, Gorilla Hemp. Vital sued the four individuals and Elegance Brands alleging that (1) all the individuals violated their noncompete covenants by working for Elegance Brands within a year after leaving Vital, (2) one individual, Christopher Alfieri, violated the employee nonsolicitation covenant by encouraging the rest of the individuals to join Elegance Brands, and (3) Elegance Brands and Alfieri engaged in tortious interference with Vital’s contractual relationships with the other three former employees. Vital moved for a preliminary injunction and asked the district court to (1) enjoin all the individuals from violating their noncompete covenants by working for Elegance Brands during the one-year term of the covenants, (2) enforce Alfieri’s nonsolicitation covenant, and (3) asked Elegance Brands be enjoined from interfering with all the individuals’ restrictive covenants and from using any confidential information belonging to Vital. The district court granted the motion in part (1) determining that the restrictive covenants were valid and enforceable under Florida law since the covenants were justified by Vital’s “legitimate business interests” in its product formulae, in its other confidential information, and in its customer relationships and (2) rejecting the argument that Vital was required to “identify specific customers” to establish a legitimate business interest in its customer relationships. One of the individuals, Amy Maros, then appealed the preliminary injunction against her and Vital timely cross-appealed the partial denial of preliminary injunctive relief against Alfieri and another individual. The Eleventh Circuit held that: (1) Maros’s appeal was moot because the noncompete and employee nonsolicitation covenants in the employment agreement had already expired, (2) Vital did not prove its entitlement to all of the preliminary relief it obtained against Maros, because it could not rely on its customer relationships to establish a legitimate business interest as Vital failed to name and prove a substantial relationship with any specific clients, and (3) the district court abused its discretion when it applied the presumption of irreparable harm to the nondisclosure covenant, because there was no finding that Maros disclosed confidential information.

Perma-Liner Indus., LLC v. D’Hulster, 2022 U.S. Dist. LEXIS 93981 (M.D. Fla. 2022), report and recommendation adopted 2022 WL 3138995 (M.D. Fla. 2022). Perma-Liner, a company specializing in rehabilitating existing sewer systems without excavation, using cured-in-place-pipe technology, alleged that Gerald D’Hulster, the company’s founder and former president, competed against it in violation of restrictive covenants contained in four contracts between the parties. The parties entered into four contracts containing restrictive covenants between 2012 and 2019. These restrictive covenants prohibited D’Hulster from engaging in any competing business, soliciting customers or suppliers that transact business with Perma-Liner, and disclosing confidential information or soliciting employees of Perma-Liner. D’Hulster’s employment at Perma-Liner ended in April 2019. Perma-Liner alleged that, months later, D’Hulster formed a competing company, Paramount Pipe Lining Products and became its CEO, in breach of the restrictive covenants, months after his employment at Perma-Liner. Perma-Liner further alleged that D’Hulster solicited Perma-Liner’s customers, vendors, and employees, and was using Perma-Liner’s confidential information and trade secrets, including customer lists and intimate knowledge of Perma-Liner’s business, pricing, and operations, to compete with it. Perma-Liner additionally alleged that due to D’Hulster’s actions it led its company to lose customers and sales revenues due to forced discounting. Perma-Liner also contended that D’Hulster disclosed confidential and trade secret information he learned with Perma-Liner to create Paramount products that directly overlap with product lines that were developed by Perma-Liner through extensive research and development. D’Hulster denied any connection to Paramount, or that he violated the restrictive covenants. The court recommended the entry of a preliminary injunction that prohibits D’Hulster from having an interest in, or being employed by, a business in the United States that inspects and rehabilitates pipes, or soliciting Perma-Liner’s customers, employees, vendors or suppliers during the pendency of litigation. The court explained that Perma-Liner satisfied the four prerequisites for entry of a preliminary injunction as to the defendant’s alleged breach of the noncompetition and nonsolicitation provisions of the 2019 equity appreciate rights agreement cancellation acknowledgment and release.

Arrington v. Burger King Worldwide, Inc., 47 F.4th 1247 (11th Cir. (Fla.) 2022). Plaintiffs were all employees of Burger King franchise restaurants at some point between 2010 and 2018. From at least 2010 until 2018, Burger King incorporated into its standard franchise agreement, a “No-Hire Agreement.” The No-Hire Agreement restricted hiring any employee of Burger King or of another Burger King franchisee for six months after the employee leaves the first Burger King restaurant. Plaintiffs alleged antitrust violations, asserting that the No-Hire Agreement prevented them from obtaining employment at other Burger King restaurants and, as a result, caused them to be paid artificially depressed wages, suffer decreased benefits, and be deprived of job mobility. The district court dismissed the action, finding that Burger King and each of its independent franchisees together constituted a single enterprise, so they were not capable of conspiring under the Sherman Act. The appellate court reversed and remanded. The appellate court reviewed the independent nature of Burger King’s and its franchisees’ hiring process, including the standard franchise agreement that expressly emphasized the “independent nature of each franchisee’s relationship with Burger King,” and the Burger King Franchise Disclosure Document that explicitly embraced competition among Burger King and its franchisees. The court then found that, in the absence of the No-Hire Agreement, each independent Burger King restaurant would pursue its own economic interests when hiring employees. As a result, the court ruled that “the No-Hire Agreement deprive[d] the marketplace of independent centers of decision making about hiring, and therefore of actual or potential competition.”

§ 1.3.13. D.C. Circuit

There were no qualifying decisions within the D.C. Circuit.

§ 1.3.14. State Cases

Blue Mountain Enters., LLC v. Owen, 74 Cal. App. 5th 537 (2022), as modified (Jan. 19, 2022). The California Court of Appeal found that Business and Professions Code section 16601 applied to a three-year post-termination nonsolicitation of customer provision in an employment agreement and upheld the trial court’s decision to enforce the provision against the executive/seller who entered into a joint venture. The court found that section 16601 applied as a matter of law because the defendant disposed of all of his ownership interest in one transaction agreement while concurrently agreeing under an employment agreement and that both contracts, along with other contracts the parties executed, were drafted to accomplish the parties’ joint venture. The court also found that the trial court correctly found that the defendant’s letter for his new business constituted a solicitation as a matter of law because the letter went well beyond an announcement by actively encouraging customers to leave and do business with his new company.

Lastly, the court affirmed the trial court’s award of $600,000 in attorney fees to the plaintiff as the prevailing party on the grounds that plaintiff secured a temporary restraining order, a preliminary injunction, and a permanent injunction against defendant based on the breach of the customer nonsolicitation provision. The court found that the trial court was diligent in arriving at its attorney fee determination and that there was no basis on which to conclude that the trial court’s attorney fee award was “clearly wrong” or that the trial court otherwise abused its discretion in determining the amount of the attorney fee award.

Prudential Locations, LLC v. Gagnon, 151 Hawai’i 136 (2022). A brokerage firm brought action against a former broker, claiming the broker violated a noncompete agreement by establishing a new group and soliciting brokerage firm’s agents. The Circuit Court denied brokerage firm’s motion for partial summary judgment and granted the former broker’s motion for partial summary judgment. Brokerage firm appealed, and the Intermediate Court of Appeals vacated the order. The Supreme Court granted certiorari review.

The Hawaii Supreme Court held that the noncompete clause was not ancillary to the protection of non-trade-secret, confidential business information and that the desire to prevent a real estate broker from forming a competing firm was not a legitimate purpose for a noncompete clause. The mere termination of three agents’ employment with the brokerage firm and subsequent employment with real estate broker’s new firm did not demonstrate a violation of the nonsolicitation clause. Solicitation, for purposes of a nonsolicitation clause in an employment agreement, requires an active initiation of contact. The Court found that there was a genuine issue of material fact regarding the broker’s active initiation or contact with coworker that precluded summary judgment on brokerage firm’s claim that broker violated nonsolicitation clause.

Skaf v. Wyo. Cardiopulmonary Servs., P.C., 495 P.3d 887 (Wyo. 2021). The Wyoming Supreme Court reversed the district court’s order confirming an arbitration award, vacated the award, and remanded the case to the district court. Dr. Michel Skaf, a cardiologist, signed an agreement not to compete when he became a shareholder in Wyoming Cardiopulmonary Services (“WCS”). The noncompete clause stated that he could not practice medicine for a period of two years following termination of employment within a 100-mile radius of Casper, Wyoming and each outreach clinic. After WCS terminated Dr. Skaf for cause, he immediately set up his own practice in Casper, providing cardiology services to patients. In arbitration, an arbitrational panel determined that the covenant not to compete was enforceable once it modified the scope of the prohibited services and narrowed the geographic area. The district court confirmed the arbitration panel’s decision to enforce the covenant not to compete. Upon appeal, Dr. Skaf argued, in part, that a noncompete agreement between physicians is a violation of public policy and is always unenforceable and that the arbitration panel’s decision should be vacated because it rests on a manifest error of law (that the noncompete agreements are strongly favored in Wyoming and their enforcement promotes public policy). The Wyoming Supreme Court declined to find that physician noncompete agreements are per se void as against public policy, reasoning that the Wyoming Legislature has not acted to ban or limit physician noncompete agreements. Additionally, the Wyoming Supreme Court determined that the arbitration panel began with a manifest error by applying a nonexistent public policy that noncompete agreements are strongly favored in Wyoming, which led to another manifest error of law—rewriting restrictions in the covenant which resulted in wholesale contract revision.

Hassler v. Circle C. Res, 505 P.3d 169 (Wyo. 2022). The Wyoming Supreme Court concluded that it is no longer tenable for courts to use the blue-pencil rule to modify unreasonable noncompete agreements. Because plaintiff’s noncompete agreement was unreasonable on its face, the Court determined it was void in violation of public policy. Plaintiff Circle C provides day and residential habilitation services to disabled clients. Plaintiff hired defendant Ms. Charlene Hassler as a CNA to provide residential habilitation care in her home for one of its long-term adult clients. At the time of hire, plaintiff signed a noncompete and nonsolicitation agreement. Plaintiff was notified that the client was changing providers and that Ms. Hassler was leaving its employ. Client remained in Ms. Hassler’s home for residential habilitation services and transferred to another provider for day rehabilitation. Upon receiving a cease-and-desist letter from plaintiff’s attorney to stop her activities for at least one year, pursuant to the noncompete and nonsolicitation agreement, Ms. Hassler responded that she would not do paid services starting August 7, 2017. However, the client continued to live in Ms. Hassler’s home, and she occasionally helped with the client’s care. Moreover, Ms. Hassler was paid through Medicaid for her services.

To be enforceable, a noncompete agreement must be (1) in writing, (2) part of a contract of employment, (3) based on reasonable consideration, (4) reasonable in duration and geographical limitations, and (5) not against public policy. When courts encounter unenforceable restrictions on trade, they have taken three approaches. The blue-pencil approach enables the court to enforce the reasonable terms of the agreement once its unreasonable provisions are excised. Noting that allowing a court to reform an agreement that otherwise would be void strays from rational and well-established black letter rules of contract interpretation and enforcement, the Wyoming Supreme Court overruled adoption of the liberal blue-pencil rule. It concluded that the noncompete agreement at issue was unreasonable on its face and, therefore, void in violation of public policy.

LGCY Power, LLC v. Superior Court, 75 Cal. App. 5th 844 (2022). The California Court of Appeal found that where a California employee is sued by the employer for trade secret misappropriation in a separate state based on an out-of-state forum selection clause, the employee may separately sue in California to void the provision, despite the ongoing litigation in a sister state.

Despite finding employee’s claims related to the same transaction or occurrence as the employer’s case in Utah and the employee having already answered that complaint, the Court of Appeal affirmed the trial court’s decision overruling employer’s demurrer to dismiss the employee’s action. The Court held that although employee signed his employment agreement prior to Labor Code Section 925 taking effect, the employment agreement had been orally modified thereafter, and therefore the statute governed the agreement. The Court further reasoned Labor Code Section 925 provided for an exception to California’s compulsory cross complaint rules and the employee did not need to bring his claims as a cross-complaint in the Utah action. Lastly, the Court held an employee can request the contract be rendered void even after the employer has initiated litigation and the employee’s compulsory claims would have otherwise been due.

§ 1.4. Customer and Employee Nonsolicitation Agreements

§ 1.4.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.4.2. First Circuit

There were no qualifying decisions within the First Circuit.

§ 1.4.3. Second Circuit

Permanens Cap. L.P. v. Bruce, 2022 WL 3442270 (S.D.N.Y. 2022), report and recommendation adopted, 2022 WL 4298731 (S.D.N.Y. 2022). The District Court found that a provision prohibiting the solicitation of employees was unenforceable as it did not protect a legitimate interest of the employer, but rather prohibited the former employee from communicating with current employees about other job opportunities. It also found that a provision prohibiting solicitation of clients was unenforceable because it encompassed prospective, dormant, and occasional clients and prohibited more than active solicitation of clients, but also anything that could interfere, disrupt, or attempt to disrupt the former employer’s relationships with the clients, which was overly broad.

§ 1.4.4. Third Circuit

There were no qualifying decisions within the Third Circuit.

§ 1.4.5. Fourth Circuit

Power Home Solar, LLC v. Sigora Solar, LLC, 2021 U.S. Dist. LEXIS 163753 (W.D. Va. 2021).^[3] The U.S. District Court for the Western District of Virginia held that an employer’s nonsolicitation clause was unenforceable because it was overly broad and unduly burdensome on its former employees. A competitor allegedly induced former employees to cease their employment with the employer and join the competitor. The employer asserts that its former employees breached the nonsolicitation covenant. The employer’s nonsolicitation covenant prohibited employees from contacting any of the employer’s active customers or customers that the employer solicited in the last two years while employed and for a period of 12 months following termination. The District Court found, however, that this covenant was too broad as it restricted employees from contacting any of the employer’s customers, regardless of the employee’s prior contact with them. The District Court also determined the nonsolicitation agreement was unduly burdensome because it prohibited a former employee’s contact with customers and those that the employer solicited (even if the customers did not become actual customers) over a two-year period. Thus, the District Court held the nonsolicitation agreement unenforceable because it was not narrowly tailored and was unduly burdensome.

Volt Power, LLC v. Butts, 2021 U.S. Dist. LEXIS 160586 (E.D.N.C. 2021). The U.S. District Court for the Eastern District of North Carolina denied summary judgment to a former employee, Butts, where it found triable issues of fact regarding Butts’s solicitation of Volt Power, LLC’s employees and customers. Volt’s employee manual prohibits personal use of Volt’s computers, network systems, electronic mail systems, and the like. Volt brought a breach-of-contract claim alleging that Butts violated the restrictive covenants prescribed under the executive common unit profits agreement by soliciting customers whom Butts worked with or whom he received confidential information from while working for Volt. Butts argued that Volt did not produce any evidence to support its solicitation allegation and moved for summary judgment. However, the court disagreed. Because there was evidence that a codefendant learned about potential opportunities with Volt’s competitor from Butts, several employees left Volt shortly after Butts resigned, Butts shared his new contact information with Volt employees, and a codefendant shared customer contact and bid information with Butts while said codefendant was still working for Volt, the court found there were still triable issues of fact and summary judgment was inappropriate as to the breach of the nonsolicitation agreement.

Wolff v. CapeSide Psychiatry, PLLC, 2021 U.S. Dist. LEXIS 153818 (D.S.C. 2021). The U.S. District Court for the District of South Carolina held that the nonsolicitation clause of an independent contractor agreement was enforceable because it contained essential terms, was sufficiently definite, and included specific nonsolicitation requirements. Wolff entered the agreement with CapeSide Psychiatry where Wolff was to provide telepsychiatry services to patients. The agreement included a nonsolicitation clause that applied during any and all periods of engagement with CapeSide Psychiatry and for two years thereafter. Pursuant to the agreement, Wolff was prohibited from enticing, soliciting, or encouraging, directly or indirectly, any of CapeSide Psychiatry’s employees, agents, representatives, or independent contractors to leave CapeSide Psychiatry’s employment. Wolff was also prohibited from soliciting or discouraging any patient, customer, or prospective customer from doing business with CapeSide Psychiatry. Because the ICA and the nonsolicitation clause contained enough detail and the required terms were sufficiently definite, the court found the ICA and nonsolicitation clause enforceable.

§ 1.4.6. Fifth Circuit

Sunbelt Rentals, Inc. v. Holley, 2022 U.S. Dist. LEXIS 64557 (N.D. Tex. 2022), appeal dismissed 2022 U.S. App. LEXIS 29597 (5th Cir (Tex.) 2022). Jimmy Holley worked at Sunbelt Rentals for over 20 years, during which time Holley signed an employment agreement containing a nonsolicitation clause. Holley later resigned and began a new job at a competitor company. Sunbelt sued Holley, claiming Holley actively solicited former customers in breach of his nonsolicitation agreement. Sunbelt sought a preliminary injunction to prohibit Holley’s solicitation. At issue was the type of conduct that establishes solicitation. Holley argued the term “solicit” required active conduct, while Sunbelt claimed the term “solicit” included a broader range of conduct. The court discussed a spectrum of possible solicitation conduct, finding that a reasonable construction of a nonsolicitation clause must include more than just active conduct. The court found that solicitation could include conduct between the middle of two extremes – active employee conduct on one side, and requests instigated entirely by former clients on the other. The court examined Holley’s conduct, including his testimony that at the time of his resignation, he communicated to clients the contact information of his successor at Sunbelt and did not provide any clients with information about his new employment. The court denied Sunbelt’s request for a preliminary injunction to prohibit Holley’s solicitation, noting that although Holley’s conduct contained bad facts, his behavior did not rise to the level of solicitation.

Additional Cases of Note

Allied Pipe, LLC v. Paulsen, 2021 U.S. Dist. LEXIS 243510 (S.D. Tex. 2021)^[4] (finding sufficient consideration supported the enforceability of the nonsolicitation agreement where plaintiffs provided defendant access to confidential information).

§ 1.4.7. Sixth Circuit

Hobbs v. Fifth Third Bank, N.A., 2021 U.S. Dist. LEXIS 227661 (S.D. Ohio 2021). Myron Hobbs, an insurance broker, moved to a new employer and brought along some of his long-term customers. He agreed to a nonsolicitation provision with the new employer prohibiting him from engaging with current or prospective customers for 24 months following termination. After several acquisitions and “corporate machinations” by the employer that left “the operative facts here a little murky,” Hobbs’s relationship with his employer soured. He would not sign a general release of claims or an offer letter sent by the entity that purchased his employer’s assets. His employer treated this as a resignation. Hobbs sued for, among other things, breach of contract, and sought a preliminary injunction preventing the employer from enforcing the restrictive covenants in his employment agreement or telling customers or potential customers that Hobbs was precluded from doing business with them. Although the typical procedural posture would be for the former employers to seek a preliminary injunction to prevent Hobbs from violating the restrictive covenants, the court did not find the posture of this case to be precluded. The court proceeded to the four preliminary-injunction factors, first concluding that Hobbs “established some likelihood of success” on at least one of his arguments and therefore that the first factor “weighs at least somewhat in his favor.” But Hobbs failed the second factor: whether movant would suffer irreparable injury without the injunction. The court agreed with Hobbs that the damages associated with depriving Hobbs of a right to solicit existing customers would be at least somewhat speculative, which supports finding irreparable harm. But the court disagreed that injunctive relief would remedy or prevent this harm. Hobbs pointed to his long-term customers’ fear of becoming enmeshed in a lawsuit as the harm to be prevented, but the court explained that a preliminary injunction would not extinguish such a fear. Specifically, adjudication on the merits would still proceed, with both parties likely seeking discovery from the long-term customers and embroiling them in the lawsuit despite a preliminary injunction. The court held that preliminary injunctive relief was therefore improper based on this conclusion for factor two.

Slinger v. Pendaform Co., 2022 U.S. App. LEXIS 16391 (6th Cir. (Tenn.) 2022). Jack Slinger was fired for cause from Pendaform, a plastic-manufacturing company, for saying “don’t be the last man standing” to his coworkers. Pendaform alleged Singer violated the nonsolicitation clause in his employment agreement which bars “soliciting any of [PendaForm’s employees] to resign from their employment.” The court held that a nonsolicitation clause that bars soliciting employees to resign their employment is void under Wisconsin law as an unreasonable restraint on trade. The court relied on precedent from the Wisconsin Supreme Court which found similar nonsolicitation clause unenforceable.

§ 1.4.8. Seventh Circuit

There were no qualifying decisions within the Seventh Circuit.

§ 1.4.9. Eighth Circuit

There were no qualifying decisions within the Eighth Circuit.

§ 1.4.10. Ninth Circuit

Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102 (9th Cir. (Cal.) 2021). The Ninth Circuit held in a dispute between two health care staffing agencies that nonsolicitation provisions in business-to-business collaboration agreements are not per se violations of the Sherman Act.

The Ninth Circuit framed the issue on appeal as whether a nonsolicitation provision in a collaboration agreement constitutes a “naked” restraint on trade warranting a per se Section 1 violation. Aya argued it did. Alternatively, Aya argued that the nonsolicitation provision violated Section 1 under a rule-of-reason analysis. The United States Department of Justice (DOJ) weighed in and filed an amicus brief arguing that all naked nonsolicitation agreements between market competitors are per se violations.

The Ninth Circuit rejected the arguments of both Aya and the DOJ. The Ninth Circuit explained that while Section 1 bars restraints on trade, courts distinguish between naked restraints and ancillary restraints. Naked restraints are explicitly anticompetitive. Ancillary restraints, while restraints on competition, are subordinate, collateral, and necessary to a legitimate transaction. Naked restraints are per se violations of Section 1, while ancillary restraints are evaluated through a three-step, burden-shifting, rule-of-reason factual analysis.

The Ninth Circuit then looked at the purpose of the nonsolicitation provision and the broader market effects. The Ninth Circuit said that given the purpose of an agreement was to supply travel nurses, the nonsolicitation provision was necessary for AMN to ensure it would not lose personnel. AMN could not meaningfully enter into staffing subcontractor agreements without nonsolicitation protections. Absent staffing subcontractors, there would be less nurses for hospitals facing chronic nurse shortages. Thus, the Ninth Circuit determined that the nonsolicitation agreement was ancillary to the collaboration agreement and had important pro-competitive benefits for the health care market.

§ 1.4.11. Tenth Circuit

ORP Surgical, LLP v. Howmedica Osteonics Corp., 2022 U.S. Dist. LEXIS 84398 (D. Colo. 2022), amended and superseded by 2022 U.S. Dist. LEXIS 170132 (D. Colo. 2022), appeal dismissed 2022 WL 19039680 (10th Cir. (Colo.) 2022).^[5] After a bench trial, the District Court found in favor of plaintiff/counter-defendant ORP Surgical, LLP (“ORP”) on its breach-of-contract claim and all counterclaims (breach of the two agreements, unfair trade practices, and tortious interference) and entered judgment in favor of defendant Howmedica Osteonics Corp., a subsidiary of Stryker Corp. (“Stryker”) on ORP’s claim for corporate raiding. Stryker contracted with ORP, an independent company with sales representatives, who sold Stryker products on commission. Stryker and ORP had entered into two agreements: the joint sales representative agreement (“joint SRA”) and the trauma sales representative agreement (“trauma SRA”), which both granted ORP the exclusive right to sell Stryker products in certain locations, specified which non-Stryker products ORP could and could not sell, and permitted either party to voluntarily terminate the contract so long as they complied with certain post-termination restrictions. In the event of a termination of the contract, ORP would be prohibited from selling competitive products for a year and in exchange, Stryker would pay ORP “restriction payments” equal to ORP’s commissions from Stryker sales made in the previous 12 months before termination. Additionally, both contracts included one-year nonsolicitation/non-divert provisions that would survive the contracts. Stryker terminated the contracts, contending that because termination was for “cause,” Stryker was not bound by the contracts’ terms and was not obligated to pay the restriction payments. ORP contended that there was no “cause” and that the payment obligations, sales restrictions, and nonsolicit/non-divert covenants applied.

The District Court found that Stryker’s independent “causes” for terminating the joint SRA and the trauma SRA were not credible and Stryker did not have “cause” to terminate the contracts, concluding that ORP was entitled to the restriction payments outlined in the contracts (applying New Jersey law to interpret the contracts). Additionally, the District Court determined that Stryker breached the contracts’ provisions regarding nonsolicitation of any current employee or independent contractor working for ORP, as evidenced by compelling evidence of solicitation and diversion that the defendants and their witnesses could not credibly explain away. Further, while Stryker attempted to argue that the sales representatives would have come to Stryker of their own accord, the District Court reasoned that the contracts prohibited all solicitation and diversion, not only necessary or effective solicitation and diversion. The District Court concluded that ORP is entitled to damages.

§ 1.4.12. Eleventh Circuit

Usi Ins. Servs. LLC v. Se. Series of Lockton Co., LLC, 2022 U.S. Dist. LEXIS 96215 (N.D. Ga. 2022). Three employees left USI to go work for Lockton, which are competing insurance brokerage firms. In 2017, USI purchased all issued and outstanding equity interests of Wells Fargo Insurance Services. At the time of the stock purchase and sale agreement, Dean Anderson, Taylor Anderson, and Roger Maldonado were employed by USI. Dean Anderson and Taylor Anderson executed employment agreements when employed by Wells Fargo Insurance Services, which applied to their employment with USI. Upon the closing of the purchase agreement between Wells Fargo Insurance Services and USI, Roger Maldonado accepted an at-will position at USI’s office in Atlanta, Georgia. Lockton reviewed the employment agreements of all the employees including whether the recruit was subject to a noncompete or nonsolicit provision and when and how a recruit could resign from their employer. USI filed a lawsuit and set forth the following three tortious interference with contractual and business relations claims: Lockton (1) engaged in wrongful and malicious conduct designed to induce the Andersons to breach the notice provisions and the duty of loyalty provisions of their employment agreements, (2) engaged in wrongful and malicious conduct designed to have Maldonado and the Andersons breach their noncompete covenants, client noncompete covenants, and nonsolicitation covenants, and (3) wrongfully and maliciously raided USI’s Aviation Practice Group. Lockton in its counterclaims set forth the following two substantive claims against USI: (1) tortious interference with contractual and business relations based on USI’s alleged false and misleading statements about Lockton’s ability to service its customers, and (2) deceptive trade practices based on the same allegations of false and misleading statements by USI regarding Lockton’s ability to service its customers. On March 10, 2021, the court dismissed the counterclaim for deceptive trade practice and the claim asserting tortious interference with business relations and the tortious interference with contractual relations claim to the extent that it was based on USI attorney communications. On March 29, 2022, the court held that the defendant Lockton was not entitled to summary judgment on all three tortious interference with contractual and business relations claims because while aware of the employment agreements, Lockton directly induced the employees to breach multiple provisions of their agreements plus provided them legal counsel and indemnity with regard to any legal challenges they faced from USI. The court concluded accordingly that Lockton was not entitled to summary judgment on USI’s claims against it based on an absence of evidence of improper conduct.

§ 1.4.13. D.C. Circuit

There were no qualifying decisions within the D.C. Circuit.

§ 1.4.14. State Cases

There were no qualifying decisions within the State Cases.

§ 1.5. Misappropriation of Trade Secrets

§ 1.5.1. United State Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.5.2. First Circuit

Amyndas Pharms., S.A. v. Zealand Pharma A/S, 48 F.4th 18 (1st Cir. (Mass.) 2022). The First Circuit Court of Appeals affirmed a Massachusetts District Court decision to dismiss all claims against a foreign corporation according to a binding forum selection clause. Amyndas Pharmaceuticals (Amyndas) entered into a confidential disclosure agreement (CDA) with Zealand Denmark to share information pursuant to business and services relationships between the parties and their respective affiliates. In April 2017, the biotechnology companies ultimately terminated the CDA. In August 2018, Zealand Denmark announced a collaboration with Alexion to develop complement-targeted therapeutics. Amyndas filed a complaint alleging misappropriation of trade secrets. The Court ultimately held that the forum selection clause in the CDA was mandatory and unambiguous. Even so, Amyndas argued that enforcing the clause would be unreasonable in the interest of public policy and as such, the Court should refuse to enforce the forum selection clause. These arguments included the bulk of the alleged conduct occurring in the US, a strong US preference for plaintiff’s choice of forum, and the inconvenience of litigating in a distant forum. The Court stated that though the Defend Trade Secrets Act (DTSA) guarantees a federal forum for trade secret theft claims under 18 U.S.C. § 1836, the DTSA was not meant to supersede the forum selection decisions of sophisticated parties except regarding unusual cases. The entry of judgments under Fed. R. Civ. P. 54(b) is reserved for unusual cases in which the costs and risks of multiplying the number of proceedings and of overcrowding the appellate docket are outbalanced by pressing needs of the litigants for an early and separate judgment. Given Amyndas’s failure to identify facts to suggest this issue qualified as an unusual case, the Court maintained its enforcement of the forum selection clause. The fact that the DTSA provides a federal cause of action with some extraterritorial reach does not prevent private parties from contracting either outside it or around it.

§ 1.5.3. Second Circuit

Turret Labs USA, Inc. v. CargoSprint, LLC, 2022 U.S. App. LEXIS 6070 (2d Cir. (N.Y.) 2022). This case affirmed that parties asserting trade secret misappropriation claims under the Defend Trade Secrets Act (“DTSA”) or New York law, must specifically detail in a pleading the “reasonable measures” employed to maintain the secrecy of the alleged trade secret. Prior to this case, the Second Circuit had not construed the meaning of the DTSA’s “reasonable measures” requirement. In Turret Labs, the Second Circuit affirmed the lower court’s granting of a motion to dismiss, concluding that plaintiff Turret Labs failed to adequately allege that “reasonable measures” were taken. Although there was an agreement providing the plaintiff’s customer with exclusive access to the alleged trade secret, the agreement did not contractually obligate the customer to maintain confidentiality of the alleged secret. The Second Circuit explained that the DTSA gives scant guidance on what constitutes “reasonable measures” to keep information secret. The analysis “will often focus on who is given access, and on the importance of confidentiality and nondisclosure agreements to maintaining secrecy.” The Second Circuit also concluded that plaintiff Turret Labs’s failure to execute a contract with a nondisclosure obligation undermined its trade secret misappropriation claim. The Court further noted that any of the alleged security measures in place, such as servers in restricted areas and software access restricted by passwords, were basically irrelevant because all customers of Turret Labs’s customer could view the functionality.

§ 1.5.4. Third Circuit

Warman v. Loc. Yokels Fudge, LLC, 2022 WL 17960722 (W.D. Pa. 2022). Plaintiffs were an individual Warman, a trust with the same name, and a chocolate company Chocolate Moonshine, LLC that brought suit against a competing fudge maker and certain individuals to whom plaintiffs had previously licensed their recipe claiming trade secret theft under the Defend Trade Secrets Act (DTSA) and the Pennsylvania Uniform Trade Secrets Act (PUTSA). The defendants argued that all of the ingredients of the recipe, the unified process and operation of making the fudge are in the public domain, have been well known for decades and are disclosed in a patent issued to another party in 1968. Plaintiffs contended that while this information was generally known, its specific trade secret recipe and process was not public, and that several ingredients and techniques changed since the publication of the 1968 recipe. Plaintiff moved for summary judgment on the DTSA and PUTSA claims at the close of discovery, but the court denied the motion. The court held that while a fudge recipe can be a trade secret and the recipe at issue has been found to be a trade secret in prior decisions in state court, there were too many disputed issues of fact that needed to be resolved at trial, including how much the trade secret had been transformed from the original 1968 recipe, whether the compilation of ingredients and processes is unique, the extent to which the claimed trade secret was known outside plaintiffs’ business, and whether reasonable measures were taken to protect it.

§ 1.5.5. Fourth Circuit

AirFacts, Inc. v. Amezaga, 30 F.4th 359 (4th Cir. (Md.) 2022). The U.S. Court of Appeals for the Fourth Circuit vacated a district court ruling and held that “commercial use” was not a threshold requirement to obtaining reasonable royalty damages under the Maryland Uniform Trade Secrets Act (MUTSA). In AirFacts, an employer sued its former employee for trade secret misappropriation of software when the former employee disclosed the software to a noncompetitor third party during the job-interview process. The district court held the employer was ineligible for reasonable royalty damages because it failed to prove the information was disclosed for commercial use. The Fourth Circuit disagreed. In referencing Fifth and Tenth Circuit decisions, the Fourth Circuit held it was inappropriate to condition such awards on commercial use because the MUTSA authorizes reasonable royalty damages for unauthorized disclosure or use of a trade secret. The Fourth Circuit explained that although “commercial use” is not a threshold requirement, courts may factor how the trade secret was used when conducting their analyses. The Fourth Circuit also refused to decide the royalties issue on the merits and limited its holding to rejecting the district court’s ruling that the employer was ineligible for reasonable royalty damages, not that the employer was entitled to said damages.

Additional Cases of Note

GlaxoSmithKline, LLC v. Brooks, 2022 U.S. Dist. LEXIS 27483 (D. Md. 2022) (granting employer’s motion for a temporary restraining order against former employee where employee had access to and improperly obtained trade secret information before and after resignation, the alleged misappropriation risked a devastating impact on employer’s business, and any intrusion on the former employee’s privacy in conducting a forensic analysis on her devices was not outweighed by employer’s interest in confirming that any misappropriated data has been removed from employee’s personal accounts and devices).

§ 1.5.6. Fifth Circuit

Oracle Elevator Holdco, Inc. v. Exodus Sols., LLC, 2021 U.S. Dist. LEXIS 169833 (S.D. Tex. 2021). Oracle Elevator Holdco (Oracle) provides elevator services such as maintenance and repair. Another elevator company, Exodus, provides similar services to Oracle in overlapping locations. David Luxemburg (David) worked as a general manager for Oracle. His daughter, Sarah Luxemberg (Sarah), worked as the owner and operator of Exodus. On multiple occasions, David emailed his daughter pricing proposals that he had originally sent to customers on behalf of Oracle. Upon learning of these communications, Oracle terminated David and sued him for misappropriation of trade secrets. The court analyzed various factors to determine whether the pricing proposals constituted a trade secret. Two factors weighed in favor of finding a trade secret: (1) the information in the pricing proposals could provide value to competitors since customers often chose the lowest bid when deciding to contract with an elevator company and (2) without her father’s emails, Sarah would not have been able to “properly” acquire Oracle’s pricing information. But three significant factors weighed against such finding: (1) Nearly all Oracle personnel had access to the pricing information, (2) Oracle merely guarded the pricing information with password protection rather than, for example, marking the information as confidential, and (3) neither considerable time nor considerable expense was necessary to create the pricing proposal. As such, the court found that the pricing proposals did not constitute a trade secret and David was not liable for misappropriation.

Additional Cases of Note

Cox Operating, LLC, v. Wells Fargo, N.A., 2021 U.S. Dist. LEXIS 239133 (S.D. Tex. 2021), appeal dismissed 2022 WL 1916855 (5th Cir. (Tex.) 2022) (holding that plaintiff’s alleged trade secret, the status of ongoing negotiations for financing, had no “independent economic value” because it “took no investment to create and has no demonstrated value for royalties”); Giddy Holdings, Inc. v. Kim, 2022 U.S. Dist. LEXIS 87679 (W.D. Tex. 2022) (granting plaintiff’s summary judgment motion where defendant improperly acquired his former employer’s trade secrets by accessing them “after his termination” and then misappropriated those trade secrets by using the company’s “investor contact list” to reach out to investors via Twitter as well as screenshotting marketing data from his company account, also after his termination); Maxim Healthcare Staffing Servs., Inc. v. Mata, 2022 U.S. Dist. LEXIS 4944 (W.D. Tex. 2022) (granting plaintiff’s motion for preliminary injunction prohibiting former employee and competitor from using trade secrets, finding that former employee and competitor acquired a contract proposal unique to plaintiff through improper means); Pittsburgh Logistics Sys. v. Barricks, 2022 U.S. Dist. LEXIS 115706 (S.D. Tex. 2022) (determining that although defendant emailed himself his former employer’s customer list, defendant did not misappropriate trade secrets because defendant never used the customer list to garner customers); Sunbelt Rentals, Inc. v. Holley, 2022 U.S. Dist. LEXIS 64557 (N.D. Tex. 2022), appeal dismissed 2022 U.S. App. LEXIS 29597 (5th Cir (Tex.) 2022) (granting in part plaintiff’s request for a preliminary injunction, holding that plaintiff demonstrated a substantial likelihood of prevailing on its trade secret misappropriation claim where plaintiff established defendant forwarded confidential information to his personal email account); Winsupply E. Houston v. Blackmon, 2021 U.S. Dist. LEXIS 225067 (S.D. Tex. 2021), appeal dismissed 2022 U.S. App. LEXIS 34871 (5th Cir. (Tex.) 2022) (holding that plaintiff failed to prove its customer lists were trade secrets because the lists were publicly available and thus “readily ascertainable through proper means”).

§ 1.5.7. Sixth Circuit

Epazz, Inc. v. Nat’l Quality Assur. USA, Inc., __ F. App’x __, 2021 U.S. App. LEXIS 25942 (6th Cir. (Mich.) 2021). This “messy business dispute” relates to a software package that Jadian Enterprises licensed to National Quality Assurance USA, Inc. (NQA). Because this software was critical to NQA’s business and required significant support from Jadian Enterprises, the companies signed an escrow agreement that would allow NQA to obtain the software’s source code from a third party and use it to continue receiving the benefits afforded by the license agreement if Jadian Enterprises breached its agreement with NQA. The software package was later sold to Jadian, Inc., after which the technical support provided to NQA suffered. In response, NQA withheld payment, leading Jadian to withhold further support. Accordingly, NQA asked for, and received, the source code from the third party, and hired another company to provide the support it had wanted from Jadian. Jadian then sued for, among other things, trade secret misappropriation. The district court granted summary judgment to NQA on Jadian’s trade secret claims because the issues were “contractual issue[s], not a trade secret theory,” and allowing the trade secret claims to proceed “would improperly blur the line between contract and tort.” The Sixth Circuit affirmed, holding that any potential error in the summary judgment ruling was harmless, because the agreements between the parties allowed for NQA’s actions—obtaining the code from the third party and using it without paying further subscription fees—such that there could not have been trade secret misappropriation.

B&P Littleford, LLC v. Prescott Mach., LLC, __ F. App’x __, 2021 U.S. App. LEXIS 25590 (6th Cir. (Mich.) 2021). Ray Miller, the former CEO and president of B&P, left and started his own company and allegedly misappropriated trade secret schematics for the benefit of his new company. B&P performed a reasonable investigation at the time but was unable to find any evidence of misappropriation. In 2017, Miller hired a former employee of B&P who allegedly also misappropriated trade secret schematics. In 2018, B&P learned that Prescott Machinery was using B&P schematics and filed suit. The court reversed the district court’s summary judgment ruling that plaintiff’s trade secret claim was barred by a three-year statute of limitations which began to run in 2012. The court held that misappropriating one trade secret does not trigger the limitation period for a claim of misappropriation of a different, but related, trade secret. The court further held that B&P’s prior investigation had tolled the statute of limitation until discovery of misappropriation in 2018.

§ 1.5.8. Seventh Circuit

There were no qualifying decisions within the Seventh Circuit.

§ 1.5.9. Eighth Circuit

ImageTrend, Inc. v. Locality Media, Inc., 2022 U.S. Dist. LEXIS 211741 (D. Minn. 2022). ImageTrend Inc., an emergency medical services (EMS) software developer, alleged that their competitor, Locality Media, conspired with four of ImageTrend’s former employees to steal ImageTrend’s trade secrets. The amended complaint identified broad categories of documents and information, as well as several specific documents, but did not describe with sufficient specificity how those documents and information were inherently confidential or possessed economic value from their secrecy. The court therefore held that ImageTrend’s broad and vague allegations did not plausibly establish that any of the information at issue qualified as trade secret information under the Minnesota Uniform Trade Secrets Act (MUTSA) and the federal Defend Trade Secrets Act (DTSA), nor did the allegations plausibly connect any specific trade secret with a specific act of misappropriation. Thus, the court granted defendants’ motion to dismiss for counts alleging misappropriation of trade secrets.

§ 1.5.10. Ninth Circuit

Precision Indus. Contractors Inc. v. Jack R. Gage Refrigeration Inc., 2021 WL 3472377 (W.D. Wash. 2021). A Washington district court found that there was not sufficient evidence on summary judgment to establish misappropriation by a former employee who submitted competing bids for a competitor. The defendant former employee was provided access to plaintiff’s confidential information during employment, including strategies on how to secure winning bids and information about plaintiff’s existing and potential clients.

In the past, plaintiff had won about 75 percent of the bids it submitted for a specific client. Shortly after a client project was announced, defendant employee abruptly quit. Following this, plaintiff was only awarded one project for the client project even though it submitted five or six bids. Though there were other factors in play, plaintiff believed that part of the reason it lost bids was because defendant used plaintiff’s confidential information to submit bids to the client. Plaintiff eventually moved for summary judgment on its federal and state trade secret misappropriation claims, arguing that the defendant improperly took plaintiff’s confidential information, including bidding sheets, internal costs, manuals, and other techniques developed internally and exclusively for plaintiff’s own use.

Despite this, the court found that while defendant may have had access to some of plaintiff’s confidential information, that in itself did not demonstrate that he misappropriated the information. Moreover, the court noted that it was undisputed that defendant had decades of “know-how and experience,” including with submitting bids for industrial construction projects. In addition, defendant testified that he had no idea what plaintiff’s bids were going to be on the client project. In sum, there was no evidence that defendant misappropriated plaintiff’s trade secrets or acquired them through improper means, that he disclosed the trade secrets to his new company, or that he used the trade secrets in connection with submitting bids for the client project. Accordingly, summary judgment was denied as to plaintiff’s claims for trade secret misappropriation.

MBS Eng’g Inc. v. Black Hemp Box LLC, 2021 WL 2458370 (N.D. Cal 2021). A California district court ruled that plaintiff’s DTSA claim could proceed despite the defendants’ assertions that the company did not do enough to secure the technology’s secrecy when it sold the hemp dryers at issue without prohibiting buyers from reverse-engineering them. “It may be that the ease of reverse engineering bears on the question of what secrecy efforts were reasonable under the circumstances, but defendants cite no authority indicating that the mere possibility of reverse engineering by a third-party purchaser necessarily invalidates a trade secret,” the court stated. The court concluded, “[a]t most, this raises a fact question that should be resolved at summary judgment or trial.”

XpandOrtho Inc. v. Zimmer Biomet Holdings Inc., 2022 U.S. Dist. LEXIS 46698 (S.D. Cal. 2022). A California district court rejected defendant’s motion to dismiss finding allegations of trade secret misappropriation sufficient at the pleading stage. The court held that the identification of “thirteen general trade secrets along with explanations” in the complaint and allegations of facts supporting its efforts to maintain the secrecy of the trade secrets were sufficient. The court rejected defendant’s challenges to the allegations of misappropriation, reasoning that the plaintiff had alleged how defendant gained access to the trade secrets and how it used the information to develop its own offering. The court also found that plaintiff’s allegations that defendant refused to return or destroy the plaintiff’s information after calling off the acquisition were sufficient. Lastly the court rejected defendant’s contention that the trade secret claim sounded in fraud and was thus subject to Rule 9(b)’s heightened pleading requirement.

§ 1.5.11. Tenth Circuit

KeyBank Nat’l Ass’n v. Williams, 2022 U.S. Dist. LEXIS 40880 (D. Colo. 2022). The District Court found that defendants have not met their burden of demonstrating the absence of a genuine dispute as to material facts governing KeyBank’s trade secret misappropriation claims. This case involves defendants’ alleged misappropriation of trade secrets with their former employer, Plaintiff KeyBank National Association. Defendant Williams worked for KeyBank since 2007, and most recently was employed as a Senior Vice President and Regional Manager of Keybank’s commercial mortgage practice. Defendant Weldon was employed as Vice president in plaintiff’s Mortgage Bank group. Both defendants signed several agreements regarding trade secrets. In 2018, both defendants began negotiating new employment with Newmark Knight Frank. Defendant Williams provided Newmark with two types of documents: 1) PDFs containing portions of KeyBank’s internal tracking documents (“Pipeline Reports”) and 2) Excel sheets of the Pipeline Reports. The Pipeline Reports contain KeyBank’s confidential information, including KeyBank’s revenue and fees. Defendant Williams emailed copies of the Pipeline Reports to his personal email account prior to his departure.

To prove a claim for misappropriate of trade secrets, KeyBank must prove that: 1) KeyBank possessed a valid trade secrete; 2) the trade secret was acquired, disclosed, or used without consent, and 3) the person acquiring, disclosing, or using the trade secret knew or should have known that the trade secret was acquired by improper means. A claim for misappropriation does not require the “use” of the trade secret; rather, the claim can be established by the acquisition of a trade secret by another who knows or has reason to know that the trade secret was acquired by improper means. Rejecting the defendant’s reliance on a Sixth Circuit case Heartland Home Fin., Inc. v. Allied Home Mortg. Cap. Corp., 258 F. App’x 860, 861 (6th Cir. (Ohio) 2008) (unpublished), the Court determined that summary judgment was inappropriate for the trade secret claims.

§ 1.5.12. Eleventh Circuit

Fin. Info. Techs., LLC v. iControl Sys., USA, LLC, 21 F.4th 1267 (11th Cir. (Fla.) 2021). Financial Information Technologies (Fintech) and iControl Systems (iControl) were competitors who sold niche computer software that rapidly processed electronic payments between retailers and wholesale distributors of alcoholic beverages. Fintech sued iControl, alleging that iControl violated the Florida Uniform Trade Secrets Act (FUTSA) by misappropriating seven Fintech trade secrets. The jury returned a general verdict in favor of Fintech, finding that iControl misappropriated Fintech’s trade secrets and, further, that iControl acted willfully and maliciously in doing so. iControl filed a motion for a new trial on liability and a renewed JMOL motion on damages, alleging that Fintech’s seven alleged trade secrets were never actually secret, and contending that Fintech failed to prove lost profits, as required under FUTSA. Fintech moved for a permanent injunction “prohibiting iControl from doing business in the regulated commerce industry.” The district court denied all three motions. The appellate court affirmed the district court’s judgement with respect to iControl’s liability and Fintech’s request for a permanent injunction, but reversed its judgement on damages. In affirming the two motions, the appellate court made two points. First, Fintech needed to show evidence of misappropriation only as to one as the jury rendered a general verdict. In so ruling, the court reviewed evidence indicating iControl improved its software by receiving assistance from Fintech’s former employees. Second, FUTSA only “authorizes the injunction of specific, identifiable trade secrets,” not “blanket restraint of competition.” Fintech’s request for injunction “wasn’t narrowly tailored and did not identify specific acts to be restrained,” nor was it provided for a specified period of time.

§ 1.5.13. D.C. Circuit

CoStar Grp., Inc. v. Leon Cap. Grp. LLC, 2022 U.S. Dist. LEXIS 101663 (D.D.C. 2022). Plaintiff CoStar Group, Inc. (CoStar) operates a commercial real estate information database. CoStar in turn licenses the database to users. Leon Capital (Leon), a real estate investment and development firm, agreed to a license contract with CoStar. Per their License Agreement, Leon agreed to follow CoStar’s Terms and Conditions, which included a limitation on “access or use” of the database by any “direct or indirect competitors of CoStar,” and the database’s Terms of Use, which provided that only “authorized users” may access the database and forbid “direct or indirect competitors of CoStar” from accessing the database. CoStar alleged that Leon violated both sets of terms. In particular, CoStar alleged that Leon was deemed an indirect competitor, breaking the agreement and requiring Leon to pay remaining annual fees. Additionally, CoStar alleged that Leon’s new Managing Director, Wood, accessed the databased with his former employer’s credentials and “mined” beneficial data for Leon. This access occurred after CoStar terminated Leon’s access. CoStar alleges that this action violated the Terms of Use, in the alternative were fraudulent and constituted unjust enrichment, and finally violated the Computer Fraud and Abuse Act (CFFA). Leon moved to dismiss all claims. Regarding the first claim for unpaid fees, the court ruled the issue moot and dismissed it because Leon had paid the fees after initial filings. Regarding the claims centered on Wood’s access, Leon contended that was a contract dispute between CoStar and Wood’s former employer. The court disagreed, stating that “it is beside the point whether Wood’s actions also violated some [other] agreement . . . .” Additionally, per the respondeat superior doctrine, Leon may be held accountable for Wood’s actions because he used a Leon device and accessed data favorable to Leon. The court concluded that Leon is an “indirect competitor” due to its sufficient direct investments in a directly competing firm. Finally, the court stated that even though Wood had valid credentials, in the sense that they allowed him to log into the database, his access was still unauthorized and therefore met the requirements of a CFAA claim.

§ 1.5.14. State Cases

There were no qualifying decisions within the State Cases.

§ 1.6. Damages

§ 1.6.1. United States Supreme Court

There were no qualifying decisions by the United States Supreme Court.

§ 1.6.2. First Circuit

There were no qualifying decisions within the First Circuit.

§ 1.6.3. Second Circuit

Hosp. Media Network v. Henderson, 209 Conn. App. 395 (Conn. App. Ct. 2021). In this case, the plaintiff employer had employed the defendant employee as its Chief Revenue Officer until 2013, when he was fired for cause. The plaintiff employer then brought an action against the former employee, claiming that, among other things, he violated the Connecticut Uniform Trade Secrets Act (“CUTSA”) and breached his fiduciary duties by simultaneously working for a private equity firm that was involved in the same business sector as plaintiff. The lower court ruled in favor of the plaintiff employer. The Connecticut Court of Appeals affirmed, but remanded the case for a new hearing on damages. The defendant employee then appealed the judgment rendered on remand awarding damages, claiming the trial court (1) exceeded the scope of the court’s remand order, and (2) awarded damages that were inequitable, and predicated on factual findings that were not supported by the record. As to the first point, the Connecticut Court of Appeals concluded that the lower court did not exceed the scope of the remand order. However, the Court of Appeals agreed with the defendant employee that the lower court committed error in ordering the defendant to disgorge $50,000 of the $150,000 consulting fees he received. The appellate court explained that its previous decision prohibited disgorgement of amounts earned by the defendant employee outside of his period of employment with the plaintiff employer, and that the court had previously assumed the defendant employee earned the consulting fees after his employment with the plaintiff employer had ended.

ML Fashion, LLC v. Nobelle GW, LLC, 2022 U.S. Dist. LEXIS 18634 (D. Conn. 2022). This case involves former employees leaving their employer ML Fashion, LLC to form a new competitor company. Plaintiff ML Fashion, LLC lodged a number of claims against the former employees, including but not limited to, claims under the Computer Fraud and Abuse Act (“CFAA”), the Defend Trade Secrets Act (“DTSA”), conversion, breach of fiduciary duty, breach of contract, and tortious interference with a noncompetition agreement. Defendants moved for the court to order plaintiffs to pay certain costs associated with a previously-filed action in the United States District Court for the Northern District of Illinois. They also sought a stay of the proceedings until plaintiffs pay those costs. The defendants also moved to dismiss the Complaint in its entirety, in addition to moving to stay discovery and moving to amend the scheduling order, pending resolution of the motion to dismiss. The court ultimately held that it was appropriate to award defendants costs under Federal Rules of Civil Procedure 41 where plaintiffs initially filed an action in Illinois and litigated it vigorously, imposing costs on defendants, then dismissed it voluntarily and refiled their claims in another court. This case serves as a reminder that parties will likely be subject to costs if Federal Rules of Civil Procedure 41 is violated, and that Federal Rules of Civil Procedure 41 does not require any showing of bad faith in order to recover such costs.

§ 1.6.4. Third Circuit

There were no qualifying decisions within the Third Circuit.

§ 1.6.5. Fourth Circuit

There were no qualifying decisions within the Fourth Circuit.

§ 1.6.6. Fifth Circuit

There were no qualifying decisions within the Fifth Circuit.

§ 1.6.7. Sixth Circuit

There were no qualifying decisions within the Sixth Circuit.

§ 1.6.8. Seventh Circuit

Select Rehab., LLC v. Painter, 2021 U.S. Dist. LEXIS 159437 (S.D. Ill. 2021). Painter and Vasquez worked for Select Rehabilitation. When they resigned from Select Rehabilitation and began working with a competitor, Select Rehabilitation sued for, among other things, breach of the Computer Fraud and Abuse Act (“CFAA”). Select Rehabilitation alleged that Painter and Vasquez stole trade secrets. Painter and Vasquez moved to dismiss the CFAA claim on the basis that Select Rehabilitation failed to allege damages that are recoverable under the act (which defines “damage” as impairment to the integrity or availability of data and “loss” as any reasonable cost to a victim). Select Rehabilitation argued that the misuse of trade secrets constituted recoverable damages under the CFAA. The Court acknowledged a split in authority regarding whether the loss in value of trade secrets (or a competitive edge) constituted damages under the CFAA, but it determined that Select Rehabilitation failed to allege recoverable damages. The Court found that the cases Select Rehabilitation relied upon had been “discredited due to statutory changes.” Allegations of an interruption in access to data were required to state a claim under the CFAA.

§ 1.6.9. Eighth Circuit

There were no qualifying decisions within the Eighth Circuit.

§ 1.6.10. Ninth Circuit

Bladeroom Group, Ltd. v. Emerson Elec. Co., 11 F.4th 1010 (9th Cir. (Cal.) 2021), amended and superseded on denial of reh’g en banc 20 F.4th 1231 (9th Cir. (Cal.) 2021). The Ninth Circuit reversed a $60 million verdict on the grounds that the district court should not have ignored the plain language in an NDA providing that confidentiality obligations would terminate after two years. The court rejected the district court’s reasoning that the two-year limit controlled because it was contrary to the parties’ intent and would lead to an absurd result.

Dr. V Prods., Inc. v. Rey, 68 Cal. App. 5th 793 (2021). A California appellate court found that an order denying a motion for attorneys’ fees under CUTSA is not an appealable order. In the case, plaintiff filed suit against a former employee, alleging the former employee converted and destroyed documents belonging to the plaintiff, which contained “proprietary company information.” After discovery, the plaintiff voluntarily dismissed its trade secret misappropriation claim, and the defendant moved for an award of attorneys’ fees under CUTSA which the court denied. The defendant appealed, and the plaintiff moved to dismiss on the grounds that a denial of a motion for attorneys’ fees under CUTSA is not an appealable order.

The defendant argued that “if a collateral order that directs payment of attorney fees (i.e. “payment of money”) is appealable, by parity of reasoning the opposite should be true.” The appellate court disagreed, citing to case law which made no mention of an order denying the payment of money being appealable. The court also cited other examples where “statutes are not always reciprocal to the parties” and where “some authorize an appeal by one side to a matter but deny that right to the other side.”

The defendant argued that an order denying fees under CUTSA is collateral to the litigation. The court disagreed and cited authority that a party may not normally appeal from a judgment on one cause of action if determination of other causes of action is pending. Defendant’s underlying motion addressed only one of respondent’s causes of action and six remained. The appellate court also stated that because the core of the lawsuit concerned destruction and conversion of corporate documents, the trade secret misappropriation claim was intertwined with the other claims and therefore not collateral. Accordingly, in California, an attorneys’ fees claimant must litigate all claims to conclusion at the trial level, before appealing the fees’ order.

Elation Sys. v. Fenn Bridge LLC, 71 Cal. App. 5th 958 (2021). The Court of Appeal concluded that the trial court erred in granting JNOV on plaintiff’s breach of nondisclosure claim. While the trial court correctly concluded that substantial evidence did not support the jury’s finding of harm or $10,000 in damages for that harm, the Court found that it should have awarded plaintiff nominal damages on this cause of action. The Court reasoned the breach of the nondisclosure was in itself a legal wrong, regardless of whether damage was inflicted. The Court of Appeal noted that, under Section 3360, California courts have held “‘[a] plaintiff is entitled to recover nominal damages for the breach of a contract, despite inability to show that actual damage was inflicted.’” The Court further reasoned that reversal should be granted where, as here, an award of nominal damages would provide “‘absolute entitlement to costs’” or “‘determine some question of permanent right.’” Reversal was appropriate because the nondisclosure provided either party could seek specific performance for a breach, and therefore an award of nominal damages would impact plaintiff’s rights to obtain further equitable relief, such as a permanent injunction preventing the former employee from further breaching the nondisclosure.

§ 1.6.11. Tenth Circuit

ORP Surgical, LLP v. Howmedica Osteonics Corp., 2022 U.S. Dist. LEXIS 84398 (D. Colo. 2022), amended and superseded by 2022 U.S. Dist. LEXIS 170132 (D. Colo. 2022), appeal dismissed 2022 WL 19039680 (10th Cir. (Colo.) 2022). The District Court determined that Stryker did not have “cause” to terminate the two contracts and concluded that ORP was entitled to the restriction payments outlined in the contracts.^[6] The District Court awarded ORP $1,018,896 in damages for the restriction payments outlined in the joint SRA and $3,731,791.47 in damages for the restriction payments outlined in the trauma SRA. The District Court reasoned that there was insufficient evidence that Stryker’s solicitation and diversion tactics were the cause of the sales representatives leaving ORP for Stryker. The District Court explained that its order should not be misconstrued as an indication that Stryker’s solicitation and diversion tactics were okay, but awarded $1.00 in nominal damages for Stryker’s breach of the nonsolicitation provision because the Court cannot award damages where damages were not proved. The District Court awarded ORP reasonable attorney’s fees and expenses. Additionally, the District Court determined that Stryker failed to meet some of its preservation obligations and upon review of the special master’s observations, ordered Stryker and its counsel to reimburse ORP for the full amount of its shares of the special master’s fees and costs, half of which is to be paid by Stryker for its failure to preserve text messages and half to be paid by Stryker’s law firm for counsel’s misconduct during the discovery process.

§ 1.6.12. Eleventh Circuit

Ala. Aircraft Indus. v. Boeing Co., 2022 U.S. App. LEXIS 4039 (11th Cir. (Ala.) 2022). Alabama Aircraft Industries (Pemco) and Boeing were competitors in the aerospace industry. Pemco and Boeing decided to submit a joint bid to the United States Air Force concerning a contract to maintain, repair, and upgrade the Air Force’s fleet of KC-135 Stratotanker aircraft. Pemco and Boeing signed a contract, but the teaming arrangement fell apart when Boeing terminated the agreement upon finding that the Air Force reduced the number of KC-135s available for the contract. The two companies pursued the opportunity independently. Boeing’s bid was 1.28% lower than Pemco’s, and Boeing won the contract. Pemco went out of business and into bankruptcy. Pemco sued Boeing on several theories of liability, including a misappropriation-of-trade-secrets claim, damages of which allegedly amounted to $100 million. The district court dismissed the claim in a pretrial order, finding that the Alabama law, and not the parties’ choice of Missouri law for the agreement, applied and that the claim was time-barred under Alabama law. This was detrimental to Pemco as its claim was not time-barred under Missouri law. The appellate court reversed. The court reviewed the parties’ choice-of-law provision in the agreement, which provided “[t]he interpretation of this Agreement and the rights and liabilities of the parties to this Agreement shall be governed by the law of the state of Missouri[.]” The court found that the language was “broad enough to encompass Pemco’s misappropriation-of-trade-secrets claim,” noting that the parties intended Missouri law to govern the sort of misappropriation-of-trade-secrets claim that arose from “the exchange of proprietary information in connection with the parties’ teaming arrangement.” The court also performed the analysis under Alabama’s choice-of-law regime and reached the same conclusion based on a finding that Pemco suffered its trade secrets injury in Missouri. The court refused to apply Boeing’s preferred financial harm test, stating that it had no application under Alabama law, which distinguishes the concept of injury from the concept of damages.

§ 1.6.13. D.C. Circuit

Iron Vine Sec., LLC v. Cygnacom Sols., Inc., 274 A.3d 328 (D.C. 2022) (applying Virginia law). Appellant Iron Vine, a Virginia corporation, obtained a 10-year contract with the State Department in 2011. Per the State Department’s request, Iron Vine was to subcontract specific work from the State Department contract to Cygnacom, also a Virginia corporation. Iron Vine and Cygnacom entered into an agreement, stipulating to a mutual nonsolicitation agreement. Additionally, Cygnacom had noncompetition provisions with its own employees. One of those employees, Shanley, left Cygnacom and started his own company, Second Factor, with Cygnacom’s consent. Second Factor also subcontracted to work on the State Department contract. In late 2015, Iron Vine informed Cygnacom that it was not renewing the subcontract. On the same day, Iron Vine and Second Factor posted job advertisements matching those of Cygnacom employees. Together, the two companies hired six employees away from Cygnacom. Cygnacom sued Iron Vine, Second Factor, and Shanley with claims stemming from alleged breaches or interferences with the nonsolicitation and noncompetition agreements. At trial, the jury returned a verdict in favor of Cygnacom. On appeal, Iron Vine contends that the verdicts cannot stand because the nonsolicitation provision and noncompetition provisions are unenforceable under Virginia law. The court disagreed, finding the nonsolicitation provision enforceable because it was mutually accepted and the noncompetition provision narrowly drawn. Finally, Second Factor argued that the tortious interference award of compensatory damages is duplicative of the breach-of-contract award. The court held that Cygnacom cannot recover compensatory damages above its lost profits from the State Department contract unless they offer evidence of additional harm. Cygnacom argued that it lost business opportunities yet offered no evidence. As such, the court was not persuaded and ordered the trial court to reassess the compensatory damages.

§ 1.6.14. State Cases

There were no qualifying decisions within the State Cases.

1. See Section 1.4.5 for a summary of the court’s ruling on the issue of customer and employee nonsolicitation agreements. ↑

2. See Section 1.4.6 for a summary of the court’s ruling on the issue of customer and employee nonsolicitation agreements. ↑

3. See Section 1.3.5 for a summary of the court’s ruling on the issue of restrictive convents: covenants not to compete. ↑

4. See Section 1.3.6 for a summary of the court’s ruling on the issue of restrictive covenants: covenants not to compete. ↑

5. See Section 1.6.11 for a summary of the court’s ruling on the issue of damages. ↑

6. See Section 1.4.11 for a summary of the court’s ruling on the issue of customer and employee nonsolicitation agreements. ↑

Editors

§ 1.1. Introduction

This chapter summarizes the significant case law developments from state and federal courts across the country in 2021–22 concerning directors’ and officers’ liability insurance coverage claims. Noteworthy decisions included the following:

• First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 274 A.3d 1006 (Del. 2022). The Delaware Supreme Court held that the insurance policy language dictates whether a claim relates back to an earlier claim under a claims-made liability policy, not the “fundamentally identical” standard.
• Verizon Communications Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2022 WL 14437414 (Del. Super. Oct. 18, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement in a fraudulent transfer suit brought by a bankruptcy trustee for FairPoint Communications against Verizon Communications Inc. was covered under Verizon’s directors and officers liability policy.
• CUMIS Specialty Ins. Co., Inc. v. Kaufman, 2022 WL 10640903 (S.D.N.Y 2022). The United States District Court for the Southern District of New York denied the former Melrose Credit Union CEO’s motion to reconsider its ruling that CUMIS Specialty Insurance Company was not obligated to cover Kaufman’s legal costs in appealing his bribery conviction. The court held further that CUMIS was entitled further to recoup Kaufman’s post-sentencing expenses that the insurance company already paid. 

§ 1.2. Claim

First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 274 A.3d 1006 (Del. 2022). The Delaware Supreme Court held that the insurance policy language dictates whether a claim relates back to an earlier claim under a claims-made liability policy, not the “fundamentally identical” standard.

In March 2014, First Solar Inc.’s (“First Solar”) stockholders filed a class action lawsuit against the company, alleging that it violated federal securities laws by making false or misleading public disclosures (“Smilovits Action”). First Solar’s primary insurer, National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), provided coverage for the Smilovits Action under a 2011–2012 $10 million “claims made” directors and officers insurance policy (“D&O policy”). While the Smilovits Action was pending, on June 23, 2015, First Solar stockholders who opted out of the Smilovits Action filed a class action lawsuit, referred to as the Maverick Action, alleging violations of the same federal securities laws as the Smilovits Action, in addition to violations of Arizona statutes and claims for fraud and negligent misrepresentation.

When the Maverick Action was filed, First Solar had a $10 million “claims made” policy with National Union for 2014–2015 (the “Primary Policy”) and a $10 million layer of excess coverage with XL Specialty Insurance Company (the “Excess Policy”). After First Solar sought insurance coverage under the Primary Policy and Excess Policy for the Maverick Action, the insurers denied coverage under a “Related Claims” exclusion, which provided that a Related Claim is “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were . . . alleged in a Claim made against an Insured.” The insurers argued that the Maverick Action was a “related claim” to the Smilovits Action. Thereafter, First Solar brought the instant insurance coverage action against the insurers, asserting claims for breach of contract and declaratory judgment. The insurers moved to dismiss the complaint and First Solar filed a cross motion for partial summary judgment as to relatedness.

In considering whether the two claims were related, the Superior Court of Delaware’s Complex Commercial Litigation Division applied a “fundamentally identical” standard, ultimately finding that the exclusion applied. The court reasoned that the Smilovits and Maverick actions had “substantial similarities,” and were “fundamentally identical” because the lawsuits stemmed from the same original suit, were against “identical defendants,” overlapped in relevant time periods, alleged the same securities law violations, relied on the same specific disclosures, and pertained to the same underlying wrongful conduct—allegedly inflating First Solar’s stock price by misrepresenting cost-per-watt metrics and falsifying financial reports.

On appeal, the Delaware Supreme Court affirmed the Superior Court’s holding, but rejected the application of the “fundamentally identical” standard. The Supreme Court instead held that whether a claim relates back to an earlier claim is decided by the language of the policy, not the generic “fundamentally identical” standard. Applying the policy language at issue, the Supreme Court reasoned that the primary policy’s Related Claim provision was broad and the question on appeal was therefore whether the Maverick Action raised Claims that “aris[e] out of, [are] based upon or attributable to any facts or Wrongful Acts that are the same as or related to” the Smilovits Action. The Supreme Court held that the Maverick Action was a Related Claim under the Primary Policy because both actions were based on the same alleged misconduct—First Solar’s misrepresentations about the cost-per-watt of its solar power. Accordingly, there was no coverage for the Maverick Action.

Smartsheet, Inc. v. Federal Insurance Co., Case No. C22-315 MJP (W.D. Wash. Aug. 8, 2022). The United States District Court for the Western District of Washington denied the insurers’ motion to dismiss Smartsheet’s claim for coverage, holding that the underlying actions were not related. In 2018, the wife of Smartsheet’s founder, Brett Frei, filed an arbitration demand alleging that Frei induced her into selling her Smartsheet shares ahead of a tender offer at a much lower price as part of their divorce settlement. In 2019, Smartsheet investors who had sold Smartsheet shares in the tender offer brought a class action against Smartsheet, alleging that it failed to disclose plans of an initial public offering to induce investors to sell Smartsheet shares in the tender offer at a reduced price.

Smartsheet held insurance policies for 2018 and 2019 and submitted both claims to its insurers. The insurers claimed that the actions were interrelated and constituted a single claim dated on the first of the claims, 2018. Thus, the insurers determined, only the 2018 policy, and not the 2019 policy applied. Smartsheet sought declaratory relief that the two claims were not interrelated and that the later claim triggered the 2019 policy.

The court held that the two claims shared “only limited overlap and several key distinctions” and thus were unrelated and distinct claims within the relevant policy definitions. In particular, the 2018 demand concerned alleged misrepresentations by Frei to his wife regarding the tender offer, while the 2019 class action concerned omissions by Smartsheet to investors regarding the IPO. The court held that the two distinct claims lacked sufficient overlap to make the claims related.

§ 1.3. Loss

Federal Insurance Company v. Healthcare Information and Management Systems Society, Inc., 567 F.Supp.3d 893 (N.D. Ill. 2021). In this case, the defendant-insured was a non-profit corporation in the health information systems sector which was responsible for organizing one of the largest annual conferences in the U.S. The 2020 conference was cancelled due to the pandemic. Two exhibitors to this conference filed actions against the insured seeking breach of contract damages for failing to return fees paid and damages incurred from preparing for and travelling to the conference. One of the exhibitors filed a class action which was resolved via settlement.

Plaintiff-insurer filed a declaratory action seeking a declaration that, under the insurance policy it issued to the insured, it had no duty to defend or indemnify defendant-insured in these underlying actions. The insured counterclaimed, asserting that the policy did provide coverage and that the insurer breached the contract. The United States District Court for the Northern District of Illinois denied in part the insurer’s motion to dismiss the counterclaim, holding that the underlying claims constituted a loss under the policy and that the two exceptions to the policy’s coverage for loss were inapplicable.

The insurance policy at issue was titled “ForeFront Portfolio Not-For-Profit Organizations Policy.” The Directors and Officers section of this policy covered losses that the insured became legally obligated to pay on account of any claim made against it during the policy period. This section contained a “Professional Services Exclusion” and a “Contract Exclusion.” The Professional Services Exclusion provided no coverage for loss resulting from an actual or alleged failure to render any professional services. The Contract Exclusion provided that the insurer was not liable for loss on account of any claim arising from liability under any written or oral contract.

The court found that the claims constituted a loss under the policy because the settlement resolved all of the exhibitors’ claims, not only those that were restitutionary in nature. The Professional Services Exclusion did not apply because the underlying claims were not entirely based on the insured’s negligent provision of professional services, but instead sought reimbursement for damages resulting from the inability to sublet floor space at the conference. The court found that subleasing floor space was not necessarily a professional service and that the underlying complaints did not allege the insured exercised poor professional judgment when cancelling the conference. The Contract Exclusion did not apply because the underlying complaints sought more than contract damages and the settlement agreement settled all of the exhibitors’ claims, not just the contract claims. The court dismissed the insured’s counterclaim for a statutory penalty for bad faith denial of coverage because it had an insufficient factual basis and because the insurer’s complaint established a bona fide dispute about coverage.

G-New, Inc. dba Godiva Chocolatier, Inc. v. Endurance American Insurance Co., 2022 WL 4128608 (Del. Super. Sept. 12, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a class action settlement was covered under Godiva’s directors and officers liability policy. Plaintiffs brought a class action suit against Godiva, alleging consumer protection violations based on the “Belgium 1926” label that appeared on Godiva’s products. The class action settled, and Godiva sought coverage under its insurance policies for the settlement. The insurers denied the coverage claims, asserting that the settlement was not a covered loss because Godiva’s unlawful conduct was intentional, and that the policy excludes from coverage unfair trade practices and fines or penalties imposed by law.

The court, however, held that the policy language contemplated settlements as covered losses and the insurers had not provided evidence that Godiva’s violation of law was knowing or willful. The Court noted further that the policy did not define “unfair trade practices” and insurers could not show that unfair trade practices were the equivalent of consumer fraud. Lastly, the court, relying on Delaware precedent, agreed that a settlement, which is meant to compensate plaintiffs, does not equate to a penalty imposed by law, which is meant to punish defendants.

§ 1.4. Securities Claim

Stillwater Mining Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2021 WL 6068046 (Del. Super. Ct. Dec. 22, 2021). After approximately two years and much procedural wrangling, the Superior Court of Delaware’s Complex Commercial Litigation Division dismissed a Delaware policyholder’s amended complaint with prejudice for failure to state a claim on which relief could be granted. After Stillwater sought D&O coverage for an appraisal action, both the insurers and Stillwater filed complaints in Delaware regarding insurers’ obligation to pay defense costs and indemnify Stillwater for its settlement payment and interest resulting from the appraisal action. At the time both sides filed their actions, the Delaware Supreme Court was considering whether appraisal claims fell within the definition of a “securities claim” under D&O insurance in another case, In re Solera Insurance Coverage Appeals (“Solera II”). In its initial complaint, Stillwater argued that Delaware law governed its D&O policies.

The Superior Court stayed Stillwater’s case until the resolution of the Solera II appeal. After Solera II was resolved in insurers’ favor and the Superior Court lifted the stay, however, Stillwater sought to dismiss its case in favor of a coverage action it had filed in Montana, where its headquarters was located. In its Montana action, Stillwater already had moved for summary judgment on its D&O policies, arguing that Montana law applied. In the alternative, Stillwater asked the Delaware court to allow it to amend its complaint to add Montana-law claims. The insurers opposed Stillwater’s motion to stay and moved to dismiss its amended complaint.

According to the Superior Court, the “decision as to whether Delaware or Montana law applies is dispositive to the case. If Delaware law applies . . . the Delaware Supreme Court’s Solera II decision bars Stillwater from receiving coverage for the Appraisal Action, effectively deciding the instant action.” To determine the governing law, the court first considered whether an actual conflict existed between Montana and Delaware law. The parties disagreed on this question, with Stillwater arguing that Montana law imposed a higher burden on insurers for refusing to defend and insurers arguing that the relevant standards were materially identical. The court assumed a conflict of law existed and proceeded to analyze which state had the “most significant relationship” to the action, using the factor test set forth in the Restatement (Second) Conflict of Laws. The court explained that “Delaware precedent holds that the state of incorporation is the ‘center of gravity’ for D&O policies” and that Stillwater was incorporated in Delaware. The court gave little weight to the fact that Stillwater was headquartered in Montana or that the D&O policy contained Montana endorsements, noting that “a company’s principal place of business generally will not outweigh its state of incorporation in determining coverage for a D&O policy.” The court also found that Stillwater’s previous statements about the application of Delaware law to its policy and its failure to raise its Montana claims in its initial complaint underscored the conclusion that Delaware law applied.

Finally, the Superior Court addressed the doctrine of depecage, in which different states’ laws are applied to different aspects of a contractual relationship, noting that the doctrine is “disfavored generally, including in Delaware.” The court found that Stillwater had not articulated any compelling basis to apply the doctrine, which the court believed contradicted the Delaware Supreme Court’s emphasis on applying a single body of law to national and multi-national insurance programs.

Because Stillwater’s policy covered Stillwater only for “securities claims,” and the Appraisal Action was not a “securities claim” under Delaware law, the Superior Court dismissed Stillwater’s amended complaint with prejudice.

Verizon Communications Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2022 WL 14437414 (Del. Super. Oct. 18, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement in a fraudulent transfer suit brought by a bankruptcy trustee for FairPoint Communications against Verizon Communications Inc. was covered under Verizon’s directors and officers liability policy. The court held that the suit was a securities claim brought derivatively on behalf of Northern New England Spinco Inc., an entity that Verizon created for the transfer of landline assets and merged into FairPoint Communications. The Court held further that the trustee that brought the claim qualified as a security holder of Spinco, as a result of the merger between Spinco and FairPoint. The Court reasoned that because FairPoint held Spinco liabilities, such as payment on Spinco Notes, anyone holding the Spinco Notes were holders of Spinco debt securities. Thus, the trustee brought the fraudulent transfer suit as a Spinco security holder.

The policy defined a Securities Claim to include a claim “brought derivatively on the behalf of an Organization by a security holder of such Organization.” The policy defined “Organization” to include any for-profit entity Verizon controlled on or before the effective date of the policy. Holding that the suit constituted a securities claim, the Court determined that the settlement for the suit was covered under the insurance policy.

§ 1.5. Wrongful Act

The Options Clearing Corporation v. U.S. Specialty Ins. Co., 2021 WL 5577251 (Del. Super. Ct. Nov. 30, 2021). Plaintiff-insured, Options Clearing Corporation (“OCC”), moved for partial summary judgment on its D&O insurers’ obligation to cover defense costs arising out of two federal enforcement actions against it. Its insurers opposed, arguing that the actions were related to previous federal investigations and therefore barred by related claims exclusions. The Delaware Superior Court’s Complex Commercial Litigation Division granted summary judgment in OCC’s favor, finding that the current enforcement actions were not meaningfully linked to the earlier investigations to trigger the exclusions.

OCC’s policy contained an “event exclusion” precluding coverage for specified federal investigations and “Interrelated Wrongful Acts.” Three letters and responses relating to proceedings by a compliance division of the SEC (the “2012-14 Letters”) were identified as non-covered events in the event exclusion. The policy also contained a prior notice exclusion that barred coverage for Loss in connection with a Claim arising out of Wrongful Acts alleged or contained in “any claim which has been reported, or with respect to any notice has been given, under any policy of which this Policy is a renewal or replacement or which it may succeed in time.” OCC sought coverage for two enforcement actions (“Enforcement Actions”) brought by the Securities and Exchange Commission and the Commodity Futures Trading Commission in 2017 and 2018, respectively.

In opposing summary judgment, insurers argued that fact discovery was necessary to determine the exact scope and circumstances of the Enforcement Actions, and that the event exclusion was broad enough to exclude coverage for the Enforcement Actions as related to the 2012-14 Letters. Reviewing the policy language, the court determined that the relevant terms were clear and unambiguous, such that the terms “arising out of,” “based upon,” and “attributed to” meant “originating from or sharing some meaningful linkage.” Accordingly, the court concluded that to invoke either exclusion, the insurers had the burden to demonstrate a “meaningful link” between the Enforcement Actions and the 2012-14 Letters.

The Superior Court then compared the two types of claims. It found that merely having some facts in common was insufficient to establish a meaningful link; “there is bound to be some surface-level overlap” between the claims, and the insurers “did not bargain for the inclusion of any Claim that has ‘any fact in common’ with the [2012-14 Letters] or any Claim involving an SEC office.” Key differences existed between the claims, including the type of investigation, the investigation time periods, the regulations allegedly violated, the type of conduct alleged, and the nature of the relief sought. Those differences led the Court to conclude that the exclusions did not apply. The Superior Court also denied the insurers’ request for discovery, noting that “the Court takes no issue with the timing of [OCC’s] motion.” The policy terms were unambiguous, and discovery beyond the pleadings was unnecessary to the analysis. Thus, the court granted partial summary judgment in favor of OCC on the applicability of the exclusions.

Jarden, LLC v. ACE Am. Ins. Co., 2021 WL 3280495 (Del. Super. Ct. July 30, 2021), aff’d, 273 A.3d 752 (Del. 2022). The Delaware Superior Court’s Complex Commercial Litigation Division granted the insurers’ motion to dismiss, finding that an appraisal proceeding did not constitute a claim “for a Wrongful Act” as required by the D&O policies.

After the insured underwent a merger, several stockholders who voted against the merger filed appraisal petitions in the Delaware Court of Chancery under 8 Del. C. § 262, requesting that the Court of Chancery determine the fair value of the company’s shares at the time of the merger (the “Appraisal Action”). After trial, the Court of Chancery ordered the insured to pay a judgment of $177,406,216.48, consisting of the fair value of the petitioners’ shares plus interest. The insured then filed a complaint in the Superior Court seeking insurance coverage for the interest award and defense costs that it incurred in the Appraisal Action. In its original complaint, the insured claimed the Appraisal Action was a “Securities Claim” under the D&O Policies, relying in part on the Superior Court’s decision in Solera Holdings, Inc. v. XL Specialty Insurance Co. (“Solera I”), which at that time was on appeal to the Delaware Supreme Court. The parties moved to stay the proceedings pending resolution of the Solera I appeal.

Thereafter, the Delaware Supreme Court reversed Solera I, holding that an appraisal action was not “for a violation of law” and therefore did not fit the definition of a “securities claim” under the policy at issue in that case (“Solera II”). After Solera II was resolved, the insured filed an Amended Complaint in this action, which included claims for declaratory judgment and breach of contract relating to the insurers’ refusal to cover the defense costs and interest award incurred in the Appraisal Action. The insurers moved to dismiss the Amended Complaint, arguing that although the Appraisal Action was a “securities claim,” it was not made “for a Wrongful Act.”

First, the Superior Court accepted the position advocated by the insurers, and which the insured did not squarely dispute, that the D&O policies’ requirement that a claim be made “for” a “Wrongful Act” meant that it must “seek redress in response to, or as requital of,” that act. The Superior Court reasoned that this conclusion is the logical extension of the Supreme Court’s decision in Solera II because an appraisal claim purely is a creature of statute and does not involve any inquiry into claims of wrongdoing. Instead, an appraisal proceeding is “neutral in nature” and requires the Court of the Chancery to determine the fair value of the dissenting stockholder’s shares. Accordingly, the Superior Court concluded that an appraisal action is a statutory proceeding that does not seek redress in response to any corporate act. Finally, the Superior Court held that even if the Appraisal Action was a claim “for a Wrongful Act,” it did not arise out of an act committed before the Run-Off Date. The Superior Court reasoned as to appraisal actions, the act at issue is the merger’s effectuation, which did not occur before the Run-Off Date.

Liberty Insurance Underwriters, Inc. v. Cocrystal Pharma, Inc., 2022 WL 1624363 (D. Del. May 23, 2022). The United States District Court for the District of Delaware granted plaintiff-insurer’s request for a declaratory judgment and held that the defendant-insured’s insurance policy did not provide coverage for an SEC investigation or action, or derivative actions, and that the insurer did not engage in bad faith conduct when denying insured’s claim for coverage.

The insured, Cocrystal Pharma Inc., was formed in 2014 following a reverse merger of Biozone Pharmaceuticals, Inc. and Cocrystal Discovery, Inc. The insurers sold the insureds an insurance policy in 2015. In the policy, Cocrystal Pharma Inc. was the insured organization and Cocrystal’s directors and officers were the insured persons. The insured’s policy provided coverage for claims arising from the wrongful acts of the insured’s directors and officers. “Wrongful Act” was defined as “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or alleged[ly] committed or attempted by the Insured Persons in their capacities as such . . . .” The policy provided that, in the event the insurer advanced defense costs and later litigation determined that any such costs were not covered by the policy, the insureds agreed to repay the insurer the amount that was not covered.

After the SEC initiated investigation of the insured, the insured provided notice to the insurer who ultimately agreed to reimburse the insured for expenses incurred in the investigation. The SEC subsequently filed suit against the insured alleging violation of the Securities and Exchange acts of 1933 and 1934. The insured made a claim against its policy based on this action, which the insurer denied asserting that the allegations in the SEC’s complaint occurred in 2013, prior to the policy’s start date. For this reason, the insurers also advised that it was seeking a recoupment of the advanced defense costs related to the investigation of the litigation.

The court found that the policy did not provide coverage for the SEC investigation or action because the conduct alleged in the SEC’s complaint did not constitute a wrongful act. The SEC alleged that the directors and officers engaged in conduct that occurred before Cocrystal Pharma Inc. was formed, when they were the directors and officers of Biozone. The court ordered the insured to repay its defense costs because the policy did not cover the wrongful conduct that the SEC had investigated. The insurer did not waive the right to recoup these funds by electing to not issue an updated reservation of rights letter because, under Delaware law, “the doctrine of waiver does not operate to expand or create coverage that the Parties did not negotiate and for which the Policy does not provide.”

The court also found that the policy did not cover derivative actions filed by the insured’s shareholders, which alleged violations of the Exchange Act, because these claims were not made until after the policy expired. As the conduct in the SEC litigation did not qualify as a wrongful act, the derivative actions also did not fall under the policy’s relation-back provision because there was nothing to which the derivative actions could relate back.

CVR Refining, LP, v. XL Specialty Insurance Co., 2021 WL 5492671 (Del. Super. Nov. 23, 2021). The Delaware Superior Court’ Complex Commercial Litigation Division granted the insured’s motion for partial summary judgment that alleged the insurer anticipatorily breached the insurance policy by denying coverage for defense costs associated with two putative class action lawsuits. The class actions contended that the insured improperly used a call right in the limited partnership agreement to buy out its public common unit holders and that CVR Refining manipulated the price of its stock to enable CVR Energy to call common units at an artificially depressed price. The insurer had indicated that it would not cover defense costs related to pending litigation against insured.

The section of the insurance policy relevant to the underlying claim, Endorsement No. 23, provided for a $2.5 million retention limit “with respect to any Claim . . . involving any: (a) acquisition, assumption, merger, consolidation or otherwise of any entity, asset, Subsidiary or liability described in Section VI General Conditions (D)(1) and (2). . . .” Section VI General Conditions (D)(1) and (2) covered any loss involving a claim for a Wrongful Act occurring after the acquisition of “any entity by merger, consolidation or otherwise such that the entity become a Subsidiary[,]” including acquisitions where the insured acquired assets or liabilities exceeding 40% of the insured’s total assets or liabilities.

The court found that that this section of the policy was unambiguous and that the purpose was to increase the deductible where the insured’s increased risk by acquiring entities, assets, or liabilities. The court held that the increase in retention required by Endorsement No. 23 did not apply to the underlying claims because they challenged a transaction that did not involve acquisition of a subsidiary or a buyback where assets or liabilities were acquired. The insured, therefore, was entitled to summary judgment that the insurer was obligated advance defense costs.

§ 1.6. Other Coverage Issues

J.P. Morgan Securities, Inc. v. Vigilant Insurance Company, 37 N.Y.3d 552 (2021). The New York Court of Appeals held that the insured’s disgorgement of funds as part of a settlement with the SEC was not excluded from insurance coverage as a “penalty imposed by law” under the insured’s insurance policy. The policy provided coverage for “loss” as a result of any claim that insured became liable to pay for “any civil proceeding or governmental investigation—for any wrongful act, which encompassed any actual or alleged act, error, omission, misstatement, neglect, or breach of duty. . . .” “Loss” included compensatory and punitive damages and excluded “fines or penalties imposed by law.” The SEC investigated and commenced an action against the insured which resolved in a settlement whereby the insured agreed to a disgorgement and civil money penalties, the latter of which it was required to treat as a penalty for tax purposes. The administrative settlement order stated the insured “facilitated late trading” and the “deceptive market timing activity” of certain clients.

The court found that a reasonable insured purchasing the policy at the time this policy was purchased would have understood the phrase “penalties imposed by law” to include coverage for the disgorgement payment. The court found that “penalty” was commonly understood to mean a monetary sanction exceeding actual damages that is designed to address a public wrong and aimed at deterrence and punishment. The court reasoned that “where a sanction has both compensatory and punitive components, it should not be characterized as punitive in the context of interpreting insurance policies.” The court found there was no genuine issue of material fact that the disgorgement payment served a compensatory goal and was estimated from the insured’s customers’ gains and the corresponding injury suffered by investors. The court further reasoned that when the insured purchased the policy, the SEC itself viewed disgorgement payments as an equitable remedy rather than a monetary penalty. The court reasoned that Kokesh v. SEC, 581 U.S. 455 (2017) did not control the disposition of this case because the meaning of “penalty” varies between contexts and the Supreme Court in that case was not interpreting the term “penalty” in an insurance contract. Moreover, Kokesh could not have informed the parties’ understanding of the meaning of this term because it was decided two decades after the parties executed the policy.

CUMIS Specialty Ins. Co., Inc. v. Kaufman, 2022 WL 10640903 (S.D.N.Y 2022). The United States District Court for the Southern District of New York denied the former Melrose Credit Union CEO’s, Alan Kaufman, motion to reconsider its ruling that CUMIS Specialty Insurance Company was not obligated to cover Kaufman’s legal costs in appealing his bribery conviction. The court held further that CUMIS is entitled further to recoup Kaufman’s post-sentencing expenses that the insurance company already paid.

After being convicted of bribery, Kaufman sought to appeal his conviction and requested an advancement of legal fees from CUMIS. CUMIS argued that legal fees for the appeal of Kaufman’s felony conviction were excluded under the policy’s dishonest or willful acts exclusion and remuneration exclusion. The court held that “New York law considers a criminal trial to be finally adjudicated upon conviction, and therefore held that the policy’s exclusions precluded coverage of Kaufman’s appeal costs.” Thus, Kaufman’s conviction constituted a final adjudication, releasing CUMIS from its obligation to pay Kaufman’s legal fees post-sentencing, including his appeal.

Infinity Q Capital Mgmt., LLC v. Travelers Casualty and Surety Co., 2022 WL 3902803 (Del. Super. Aug. 15, 2022). The Superior Court of Delaware’s Complex Commercial Litigation Division held that there was no genuine issue of fact as to whether warranty letters provided to insurers barred coverage and that the insurers were entitled to judgment as a matter of law. Upon procuring excess insurance coverage, Infinity Q provided the insurers with warranty letters representing that Infinity Q did not have “any knowledge or information of any act, error, omission, fact or circumstance that may give rise to a claim under the proposed insurance,” and that “any claim for, based upon, arising from, or in any way related to any act, error, omission, fact or circumstance of which any such person or entity has any knowledge or information shall be excluded from coverage under the proposed insurance.”

At the time, the Court found, Infinity Q executives were aware of an ongoing SEC investigation but did not disclose it to the insurers. Thus, the clear and unambiguous language of the prior knowledge exclusion in the warranty letters precluded defense and indemnity coverage for investigations, enforcements actions, and litigation arising out of the SEC’s inquiry into Infinity Q.

Editor

Contributors

§ 1.1. Introduction

As in past years, laws and regulations relating to cannabis and the cannabis industry are evolving at a dizzying pace. In order to put current developments in context, it is important to understand the current state of the law regarding marijuana.

The starting point is the Controlled Substances Act, 21 U.S.C. § 801 et. seq. (“CSA”), passed in 1970 to regulate the manufacture, use, and distribution of certain controlled substances for medical, scientific and industrial purposes and to prevent these substances from being used for illegal purposes. The CSA classified various drugs and chemicals into five categories, or schedules. Marijuana, along with heroin, cocaine, LSD and other substances, was placed on the most restrictive schedule, Schedule 1. The CSA prohibits the manufacture, distribution, sale possession or use of marijuana. Also, the CSA operates to prohibit the transportation of marijuana across state lines, even between states that have passed laws legalizing marijuana, as well as international borders.

Despite the existence of the CSA, as of today, thirty-nine states plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have laws legalizing marijuana for medical use, and twenty-one of those states, plus D.C. and Guam a have legalized marijuana for recreational use, as well. Legislation to legalize marijuana is currently expected to work its way through other state legislatures. Since the CSA is the law of the land, the question remains as to how states can “legalize” marijuana consistent with the preemption doctrine.

The laws relating to marijuana and hemp became very complicated at the end of 2018, with the passage of the Agricultural Improvement Act of 2018, the Farm Bill. It is important to understand that both hemp and marijuana come from the same species of plant, Cannabis sativa L., and both were included in the definition of marijuana in the CSA. Both marijuana and hemp contain a number of chemical compounds, the two most known of which are THC (the psychoactive compound) and CBD. The legal difference is that hemp contains less than 3% THC. Part of the confusion revolves around the other chemical compound, CBD, which is extremely popular and ubiquitous in the market place. CBD comes from both hemp and marijuana. Further complicating the situation is that there is no standard for measuring THC content in a cannabis plant, so what might be classified as hemp by one state might be classified as marijuana by a different state.

While hemp is technically legal under federal law, the Food and Drug Administration maintains jurisdiction over hemp (and therefore CBD) to the extent it is marketed as a food or dietary supplement or as a drug. Also, the state statutory and regulatory framework for hemp and CBD derived from hemp remains very confusing and is rapidly evolving.

This section will focus on recent case law developments in cannabis.

§ 1.2. Contracts

Praetorian Global Inc. v. Eel River Organics LLC, A164245 (Court of Appeal of the State of California, First Appellate District)

Date: October 10, 2022

Facts: In January 2019, the parties entered a contract under which Plaintiff licensed portions of its intellectual property to Defendant. In exchange, Defendant was to pay a monthly royalty, with a minimum total of $1 million due for the first year and $2 million due for the second year. The contract contained an arbitration clause under which the parties agreed to submit disputes to binding arbitration in Colorado. After Defendant failed to pay over $2 million owed under the contract, Plaintiff filed a demand for arbitration seeking damages for breach of contract. In August 2021, the arbitrator found for Plaintiff and rejected Defendant’s claim that the contract was illegal under former California Code of Regulations title 16, division 42, section 5032 (former section 5032), which prohibited entities licensed to conduct commercial cannabis activity from conducting such activity “on behalf of, at the request of, or pursuant to a contract with” an unlicensed entity. After the arbitrator entered the final award, Plaintiff filed a petition to confirm the award in the trial court. Defendant opposed on the ground that the arbitrator exceeded her powers by issuing an award enforcing an illegal contract. The court granted the petition in a summary order. A judgment confirming the award was entered on October 13, 2021.

Held: Affirmed.

Reasoning: The Court of Appeals of California, First District, Division One upheld the decision confirming the arbitration award even if the contract violated former section 5032. The Court concluded that the contract was enforceable because: (i) even if the contract was illegal, it was not void, because the statutory scheme does not contemplate unenforceability as a penalty; (ii) Defendant, as a cannabis business, not a consumer or member of the public, is not part of the group primarily in need of protection; and (iii) Defendant is the party more at fault and would be unjustly enriched if the contract was not enforced.

Brewfab LLC v. George Russo, 22-11003 (U.S. Court of Appeals for the Eleventh Circuit)

Date: October 13, 2022

Facts: Defendant appealed from the district court’s order granting summary judgment in favor of Plaintiff. In 2018, 3 Delta, Inc. (Delta) hired Plaintiff to build a machine for extracting cannabidiol oil. Delta and Plaintiff did not have a written contract. Instead, Delta and Plaintiff proceeded under an oral agreement whereby Plaintiff sent Delta invoices for the work it performed, and Delta paid those invoices. In December 2019, Delta stopped paying Plaintiff’s invoices. In turn, Plaintiff stopped shipping equipment to Delta and stopped working on the extraction machine. On January 30, 2020, Defendant, the president of Delta, had a conference call with Plaintiff’s owners to discuss the outstanding invoices and the work stoppage. After the conference call, Defendant sent the following text message to Rick Cureton, one of Plaintiff’s owners: “As per our conversation on Jan 30th 2020 I George Russo from 3 Delta do promise to pay brew fab in full all outstanding bills as of this date and all agreed upon work done for 3 delta future forward. I thank you for your patience.” Thereafter, Plaintiff resumed work and shipped additional equipment to Delta. But neither Delta nor Defendant paid the past due invoices and, on February 12, 2020, Delta instructed Plaintiff to stop all work. In August 2020, Plaintiff filed suit to recover the unpaid invoices and, among other claims, asserted claims against Defendant for breach of his personal guaranty—i.e., the text message. Defendant asserted that his text message was not a personal guaranty and that he sent the text message in his capacity as an officer of Delta. Defendant also asserted that the text message did not satisfy Florida’s statute of frauds and that it was not supported by consideration. The district court held that Defendant’s text message was a personal guaranty because its plain language acknowledged that “Defendant would personally finance Delta’s past and future invoices.” The district court further held that Defendant’s text message was an unambiguous and enforceable personal guaranty that satisfied Florida’s statute of frauds because: (1) the language “I george Defendant from 3 Delta” was an electronic signature under Florida law; (2) that language indicated that Defendant signed the text message in his personal capacity; and (3) the text message was supported by consideration, i.e., “Plaintiff’s voluntary return to work and delivery of equipment.”

Held: Affirmed.

Reasoning: The Court determined that: (i) the language of the text message was unambiguous; (ii) the language “I george Russo from 3 Delta” did not contain any descriptio personae for Defendant, and merely identified Defendant as an individual generally affiliated with Delta and not as an officer; (iii) the language “I george Russo from 3 Delta” constitutes an electronic signature under Florida law; and (iv) Defendant’s promise was a unilateral contract that covered future indebtedness for future work because Defendant’s promise became a binding guaranty agreement when Plaintiff accepted Defendant’s promise by resuming work and sending Delta additional equipment, after Defendant sent the text message.

§ 1.3. Insurance

Kinsale Ins. Co. v. JDBC Holdings, 3:20-cv-00008 (U.S. District Court for the Northern District of West Virginia)

Date: November 29, 2022

Facts: On October 31, 2019, a fire occurred at Defendant’s facility. On January 13, 2020, Plaintiff filed a civil action against defendant for rescission and declaratory relief. On October 28, 2022, a jury awarded Defendant $6,450,000.00, plus prejudgment interest for its insurance contract claim under the policy. Defendant then moved for the Court to declare that it substantially prevailed against Plaintiff, thereby entitling it to recover reasonable attorneys’ fees and costs.

Held: Defendant’s Motion for Judgment as a Matter of Law that it substantially prevailed was granted.

Reasoning: Defendant substantially prevailed because: (i) the Court previously ruled on summary judgment that Plaintiff had a duty to accept and pay the underlying insurance claim; and (ii) Plaintiff offered Defendant nothing on its claim prior to filing suit, and Defendant ultimately recovered the approximate amount demanded by Defendant prior to Plaintiff’s initiation of suit. The Court cited Thomas v. State Farm Auto. Ins. Co., 181 W.Va. 604, 383 S.E.2d 786 (1989), stating “[a]n insured ‘substantially prevails’…against his or her insurer when the action is settled for an amount equal to or approximating the amount claimed by the insured immediately prior to commencement of the action, as well as when the action is concluded by a jury verdict for such an amount.”

Admiral Insurance Company v. Just Brands LLC, 0:22-cv-60550-AHS (U.S. District Court for the Southern District of Florida)

Date: October 27, 2022

Facts: Erin Gilbert alleged she sustained serious and life-threatening injuries by using an e-cigarette manufactured, marketed, or distributed by Defendant. Defendant demanded a defense to the claim by its insurer (Plaintiff). Plaintiff filed suit arguing that the claim was barred by Defendant’s insurance policy.

Held: Joint stipulation filed in the Southern District of Florida dismissing the suit with prejudice.

Reasoning: No details about the settlement were provided, but Plaintiff was defending Defendant “subject to a reservation of rights.” Plaintiff stated in the Complaint that it was “uncertain of its rights and obligations under the policy,” and had asked the Court to issue a Declaration of Rights under the policy. Before the Court could issue such a Declaration, the parties settled.

§ 1.4. Real Estate

§ 1.4.1. Access to Leased Cannabis Property

Yan Hong Zeng v. Casimir-Shelton, LLC, No. 56396-7-II (Wash. Ct. App. Oct. 18, 2022)

Facts: Appellant, Casimir-Shelton, LLC (“Casimir”), appealed the trial court’s grant of summary judgment and order of specific performance of a purchase and sale agreement (“PSA”) in favor of Respondent, Yan Hong Zeng (“Zeng”).

Casimir owns a property in Shelton, Washington, which was leased to CM1, LLC (“CM1”) for use as a cannabis production facility. The lease included a provision stating that Casimir may not enter the premises without notice and escort by CM1 or their employee or agent at any time. In November 2020, Casimir entered into a PSA to sell the property to Zeng. The PSA included a feasibility contingency which allowed Zeng to conduct inspections of the property and required Casimir to permit access to the property “at reasonable times subject to the rights of and after legal notice to tenants.” On December 7, a few days before the feasibility period expired, Zeng’s broker requested access to the property for an inspection on December 9, but was told that the tenant, CM1, was not available until December 19. Zeng’s broker asked about extending the feasibility period, but Casimir refused unless some of the earnest money would become non-refundable or if additional earnest money was provided. Zeng refused and the feasibility period expired without waiver of the contingency by Zeng. Accordingly, the PSA terminated by its terms. Zeng filed a lawsuit against Casimir for specific performance of the PSA. The trial court granted Zeng’s motion for summary judgment and ordered specific performance of the PSA.

Held: Court of Appeals of Washington, Division 2, affirmed the trial court’s order granting summary judgment and specific performance in favor of Zeng and the award of Zeng’s attorney fees.

Reasoning: According to the PSA, Casimir was required to allow Zeng to inspect the property, as long as the rights of the tenant were respected. However, CM1 did not have the right under the lease to specify that only Cheung could serve as the escort for inspections or to require more than four days’ notice before allowing access. Therefore, Casimir should have ensured that CM1 allowed entry for the inspection during the feasibility period, even if Cheung was not available. Casimir’s failure to do so constituted a breach of the PSA.

§ 1.4.2. Breach of Contract and Fraud

1240 S. Bannock, LLC., v. Dennis Siem, et al., Case No. 2:21-cv-00183 (W.D. Mich. May 27, 2022)

Facts: The United States District Court, W.D. Michigan, Northern Division, addressed two motions to dismiss that were filed by defendants in a lawsuit brought by 1240 S. Bannock LLC (“Bannock”) against defendants Coldwell Banker Real Estate Group, Coldwell real estate agent Dennis Siem, and property owners Donald J. Nerat and Steven A. Nerat. Bannock’s amended complaint alleges claims of breach of contract (Count 1), fraud and silent fraud (Count 2) against the Nerats, and a claim of fraud and silent fraud (Count 3) against Siem and Coldwell.

The dispute arises from Bannock’s offer to purchase a strip mall located in Menominee, Michigan, which was owned by the Nerats. Bannock January 2021 written offer included an expiration date for acceptance, and the Nerats only accepted the offer several days after the expiration date, after which Bannock make an earnest money deposit and began inspecting the property However, in March 2021, the Nerats agreed to sell the property to another buyer without disclosing the latter agreement to Bannock. Subsequently, Bannock and the Nerats executed an amendment to the original purchase contract in April 2021, which made the sale and purchase of the property contingent on a third-party business first obtaining a retail marijuana license to operate a marijuana establishment at the property and to extend the closing date to July 1, 2021. Then, when preparing for closing, Bannock was informed that the Nerats had already sold the property to the third-party purchaser.

Held: The Court granted the defendants’ motions to dismiss because the plaintiff’s factual allegations fail to state a claim upon which relief may be granted as a matter of law.

Reasoning: The Court concluded that Bannock’s claims against the defendants failed to state a claim upon which relief could be granted under Federal Law because (i) the initial proposed agreement had expired prior to acceptance, and (ii) the subsequent amendment to the agreement was premised on a contingency that is illegal under federal law and, therefore, unenforceable.

§ 1.4.3. Leasing

Prime Care, Inc. v. Nguyen Phat Real Estate Inv., No. B304910 (Cal. Ct. App. Jan. 19, 2022)

Facts: In January 2019, the plaintiff, as tenant, entered into a commercial lease with the defendant, Nguyen Phat, as landlord, for an industrial building in Montebello, California, which stated that the premises would be used for “commercial cannabis distribution, manufacturing, cultivation, and retail delivery in accordance with all state and local licenses and laws.” The lease provided that the tenant was responsible for determining the suitability of the premises for their intended use and had been advised to satisfy themselves with respect to the size, condition, and compliance with applicable requirements of the premises. The lease also stated that the plaintiff had made the necessary investigations and assumed responsibility for their use of the premises. The tenant paid $150,000 to landlord after signing the lease, which included a deposit, advance rent, and other charges. However, before the tenant began operations, the City of Montebello determined that the property was not suitable for cannabis distribution due to its proximity to a residential area.

In this case, the tenant filed a complaint alleging five causes of action against the defendants, Nguyen Phat and Sam Ho (who was landlord’s manager): (i) negligence, (ii) fraud, (iii) negligent misrepresentation, (iv) rescission based on fraud, and (v) rescission based on unilateral mistake. The defendants demurred to the complaint, arguing that the plaintiff had assumed responsibility for determining the suitability of the premises for their intended use under the express terms of the lease and therefore could not prove negligence or any of the other claims. The trial court sustained the demurrer to the first cause of action for negligence and the remaining four causes of action with leave to amend. The plaintiff then filed an amended complaint, including its original negligence claim, as well as amended claims for fraud and negligent misrepresentation. The defendants again demurred, arguing that the amended complaint still did not sufficiently allege the necessary elements for these claims. The trial court sustained the demurrer without leave to amend and entered judgment of dismissal in favor of the defendants. The plaintiff appealed.

Held: The Court of Appeal, Second District, Division 5, affirmed the decisions of the trial court, with costs for the defendants.

Reasoning: In connection with the plaintiff’s claim for negligence (the first cause of action arguing that plaintiff’s argument that the defendants owed them a general duty of care, which was breached through their listing, advertising, leasing, and representations about the property), the Court found that the allocation of duties in the written agreement between the parties clearly stated that the plaintiff was responsible for determining the suitability of the property for their intended use and that the defendants had no such duty. Further, the Court found, with respect to the second and third causes of action, that the plaintiff did not adequately allege that they relied on the defendants’ false statements in order to establish their claims for fraud and negligent misrepresentation. Finally, in connection with the trial court’s denial of the plaintiff’s request for leave to amend actions one through four, the plaintiff failed to provide an explanation of how they would amend their allegations to adequately allege each element of their causes of action, and therefore did not demonstrate that an amendment would cure the defective pleadings. As a result, the Court upheld the trial court’s decision to sustain the demurrers to the plaintiff’s negligence claim.

§ 1.5. State Law

Northeast Patients Group et al. v. United Cannabis Patients and Caregivers of Maine, and Northeast Patients Group dba Wellness Connection of Maine et al. v. Kirsten Figueroa et al., case numbers 21-1719 and 21-1759 (1st Cir.)

Date: August 17, 2022

Facts: Northeast Patients Group is a corporation wholly owned by three Maine residents and that owns and operates three of Maine’s seven licensed dispensaries as a for-profit corporation. High Street Capital is a Delaware corporation that is owned exclusively by non-Maine residents and that wanted to acquire Northeast Patients Group. If the deal between the two companies proceeded, then the resulting company would violate the Maine Medical Marijuana Act’s residency requirement, because the “officers or directors” of that new company would not be only Maine residents. The Court struck down Maryland’s residency requirement for cannabis business owners, saying it was a clear violation of the constitutional doctrine that limits states’ power over interstate commerce.

Held: Affirmed.

Reasoning: The Court rejected Defendant’s argument that the residency requirement does not run afoul of the dormant Commerce Clause because “it is impossible for there to be an interstate market in any good that, under federal law, is contraband throughout the country.” The Court noted that Maine’s prohibition “reflects the reality that the market continues to operate,” and that, “the market is so robust that, absent the Medical Marijuana Act’s residency requirement, it would be likely to attract entrants far and wide.” The Court also pointed to Congress’s enactment of the Rohrabacher-Farr Amendment (which prohibits the U.S. Department of Justice from targeting companies that are acting in accordance with state cannabis regulations) stating that the amendment “hardly reflects a congressional understanding that the Controlled Substances Act succeeded in eradicating the interstate market in medical marijuana.” The Court goes on to add, “…whatever the circumstances may be with respect to other goods that Congress has deemed contraband, this is not a case in which Congress may be understood to have criminalized a national market with no expectation that an interstate market would continue to operate. Quite the opposite. Congress has taken affirmative steps to thwart efforts by federal law enforcement to shut down that very market, through the annual enactment of the Rohrabacher-Farr Amendment. And it has taken those steps, presumably, with an awareness of the beneficial consequences that those steps will have for consumers who seek to obtain medical marijuana.”

Variscite Inc. et al. v. City of Los Angeles et al., 2:22-cv-08685, (U.S. District Court for the Central District of California)

Date: December 8, 2022

Facts: Los Angeles created a licensing program for commercial cannabis related businesses that includes a social equity component, referred to as the “Social Equity Program.” Pursuant to the Social Equity Program, the storefront retail, delivery, and cultivation application processes are exclusively available until January 1, 2025, to individuals who have been verified by Los Angeles as a Social Equity Individual Applicant (“SEIA”). To be verified as a SEIA, an individual must submit evidence of two of the following three criteria: (a) a qualifying California cannabis arrest or conviction prior to November 8, 2016; and (b)(1) 10 years of residency in a disproportionately impacted area, or (b)(2) low income in the 2020 or 2021 calendar year. Plaintiff lived in Michigan and applied to be verified as a SEIA for the Lottery. Plaintiff’s application was ultimately rejected for failing to satisfy any of the verification criteria.

Held: Application for Temporary Restraining Order denied.

Reasoning: Plaintiff could not show how allowing the lottery to go ahead as planned would irreparably harm them. The Court noted that “Plaintiffs’ argument that they will suffer irreparable harm are based on their speculation that they would be able to successfully enter the commercial retail cannabis market, establish a loyal customer base, and make a profit…Plaintiffs’ monetary losses associated with the challenged provisions are purely speculative and insufficient to demonstrate irreparable harm.”

§ 1.6. Trademarks

§ 1.6.1. Trademark Protection for Delta-8 Marks

AK Futures LLC v. Boyd Street Distro, LLC, 35 F.4th 682 (9th Cir. 2022)

Facts: Appellant, Boyd Street Distro, LLC (“Boyd Street”), appealed the district court’s grant of a preliminary injunction in favor of Appellee, AK Futures, LLC (“AK Futures”).

AK manufactures the CAKE brand of e-cigarette and vaping products, including Delta-9 cannabis products. Boyd Street sold CAKE unauthorized products with virtually identical logos and branding at its downtown Los Angeles retail store. AK Futures hired a private investigator who purchased the counterfeit products and confirmed they were not authentic.

Boyd Street alleges it received a first batch of CAKE products from an unidentified “someone” selling the goods on consignment, and a second batch from an unidentified person holding himself out to be an authorized distributor of CAKE products.

Held: The Ninth Circuit Court of Appeals affirmed the district court’s order granting a preliminary injunction.

Reasoning: The Ninth Circuit reviewed the district court’s preliminary injunction analysis and agreed AK Futures was likely to succeed on the merits and had suffered irreparable harm. Boyd Street relied heavily on its argument that AK Futures could not own valid rights to its marks because AK Futures was not using the marks lawfully in commerce through its sale of Delta-8 products. AK Futures asserted its Delta-8 products were lawfully sold because the 2018 Agriculture Improvement Act (the “Farm Act”) legalized Delta-8. The Ninth Circuit ultimately sided with AK Futures and agreed the Farm Bill legalized Delta-8 products.

The Ninth Circuit focused extensively on the text of the Farm Bill including its definition of “Hemp.” This definition removed from schedule I and therefore legalized “the plant Cannabis Sativa L…with a delta-9 [THC] concentration of not more than 0.3 percent on a dry weight basis.” The Ninth Circuit noted AK Futures’ Delta-8 products included less than 0.3 percent THC and were therefore lawfully sold according to the Farm Act. Because the products were lawfully sold, AK Futures owned common law trademark rights in the marks used with the products and those rights were infringed by Boyd Street’s counterfeit sales of CAKE-branded products.

Editor

Contributors

§ 1.1. Introduction

The term “business divorce” includes disputes that cause business partners to end their partnership, situations that require owners to separate, or circumstances where a business partner wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2021, to September 30, 2022 from mostly nine states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 1.2. Access to Books and Records

§ 1.2.1. California

Fowler v. Golden Pac. Bancorp Inc., 80 Cal.App.5th 205, 295 Cal.Rptr.3d 501 (2022). A trial court granted a director plaintiff’s petition for a writ of mandate against a corporation to enforce his statutory and absolute right to inspect corporate books and records as a director under Cal. Corporations Code § 1602. The corporation appealed, then moved to dismiss the appeal as moot due to another company acquiring the corporation and eliminating the plaintiff as a board member during the pendency of the appeal. The court agreed that the primary issue on appeal is moot because plaintiff is no longer a member of the corporation’s board of directors and, therefore, has no director’s inspection rights. But the court exercised its discretion to reach the merits because it presented an issue of substantial and continuing public interest: whether a director’s “absolute” right of inspection under § 1602 may be curtailed because the director and corporation are involved in litigation and there is a possibility the documents could be used to harm the corporation. The court concluded that the mere possibility that information could be used adverse to the corporation is not by itself sufficient to defeat a director’s inspection rights. Rather, any exception to the general rule favoring unfettered access must be limited to extreme cases, where enforcing an “absolute” right of inspection would produce an absurd result, such as when the evidence establishes the director’s clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation.

Grove v. Juul Labs, Inc., 77 Cal.App.5th 1081, 293 Cal.Rptr.3d 202 (2022). This case addresses, among other things, the demand of a former California employee who is a shareholder (through post-employment, exercised options), to inspect the books and records of his former employer, a Delaware company, headquartered in San Francisco, that operated under a corporate charter that required the shareholder to pursue his claims in Delaware. The company responded to the shareholder’s inspection demand letter by filing an action for declaratory and injunctive relief in Delaware, to seek a judgment to establish that the shareholder’s inspection rights are governed by Delaware law and that the shareholder contractually waived his inspection rights, and that he is prohibited from asserting an inspection right under California law. The shareholder then sued the company in California to enforce his shareholder inspection rights, under Cal. Corporations Code § 1601, but that action was stayed due to the Delaware action. The Delaware court first ruled that the shareholder had not surrendered by contract his right to inspect documents under California law because the parties’ agreements addressing inspection rights pertain specifically and exclusively to inspection rights under California law, § 1601. But under the internal affairs doctrine, the Delaware court determined the shareholder’s inspection rights were not dictated by California law, but under Delaware law, because Delaware was the state of incorporation and the corporate charter contains a forum selection clause making the Delaware Chancery Court the sole and exclusive forum for any shareholder to bring an action related to any provision of Delaware corporate law or asserting a claim against the company governed by the internal affairs doctrine. The shareholder then tried to restart the stayed California action in an attempt to have the California court void the forum selection clause. Ultimately, the California trial court determined that the shareholder’s inspection request had been adjudicated in the Delaware Court of Chancery, whose decision is entitled to full faith and credit in California. The appellate court affirmed this decision under the principles of collateral estoppel and full faith and credit. The shareholder was precluded from relitigating a dispute in California that was already adjudicated in the Delaware action.

§ 1.2.2. New York

O’Donnell v. Fleetwood Park Corp., 203 A.D.3d 1048 (NY App. Div. 2022). The court affirmed the trial court’s order compelling a corporation to provide books and records to a petitioning shareholder. A shareholder of a corporative corporation sought to be provided with an unredacted list of the corporation’s current shareholders so that he could communicate with the shareholders as he campaigned for a position on the corporation’s board of directors. The corporation allowed the shareholder to view at its offices an outdated list of shareholders in which the names and addresses of some of the shareholders had been redacted. The shareholder filed a petition to compel the corporation to provide him with an updated, unreacted shareholder list. The trial court granted that petition, finding that the shareholder had established a proper purpose for his request by asserting that he requested the list to campaign for a position on the corporation’s board of directors. The appellate court affirmed, observing that, “Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose”. As the shareholder had established a proper purpose, the corporation was required to provide him with an updated, unredacted list of shareholders.

§ 1.3. Business Judgment Rule

§ 1.3.1. Nevada

In re Newport Corporation Shareholder Litigation, 507 P.3d 182 (Nev. Mar. 30, 2022). Shareholders brought action against the former board members of Newport for breach of fiduciary duties in their approval of a merger. The court affirmed the district court’s summary judgment ruling, finding that Newport’s CEO’s alleged self-interests in the merger were not actionable conflicts: the evidence did not show that he sought the merger out of fear of being fired or to achieve a more lucrative severance package. Moreover, the CEO’s alleged self-interest in the merger, alone, was insufficient to rebut the business judgment rule. Shareholders did not carry their burden to demonstrate that the CEO concealing his alleged self-interests from the Board impacted the Board’s overall independence. The evidence showed that the Board knew of the activist shareholders’ pressure on the CEO’s job performance, and knew of the CEO’s change-of-control severance package. Lastly, the court found that even if the shareholders could defeat the business judgment rule, they did not show an actionable injury; i.e., that the Board breached their fiduciary duties and that those breaches involved intentional misconduct, a knowing violation of law, or fraud.

§ 1.3.2. New York

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director of a corporation brought suit against the other two directors alleging breach of fiduciary duty among other claims. As set forth in the motion court’s decision, the amended complaint alleged that the directors undertook a series of decisions that deviated from the corporation’s previous business model. The trial court held that these decisions were protected by the business judgment rule and dismissed the complaint. The appellate court affirmed, observing that, the complaint merely alleged that a course of action other than that pursued by the board of directors would have been more advantageous.

§ 1.4. Dissolution

§ 1.4.1. Arizona

IMH Special Asset NT 168 LLC v. Beck, 2022 WL 1580864 (Ariz. Ct. App., Div. 1 May 19, 2022). RNMA I was a New Mexico limited partnership that, pursuant to the terms of its Partnership Agreement, was set to dissolve in December 2015. Pursuant to the Partnership Agreement, the dissolution would follow “a liquidation period not to exceed 12 months.” None of its limited partners took any action to extend the dissolution date prior to its passing. A year later, in December 2016, more than 75% of the limited partners gave notice that they were “retroactively” extending the term of the limited partnership. Subsequently, in January 2017 RNMA I made a capital call on the limited partners and, also, in July 2017 took out a loan.

IMH Special Asset NT 161, LLC and IMH Special Asset NT 168, LLC (collectively “IMH”) obtained an interest in RNMA I through a post-foreclosure deficiency action. Although the underlying litigation and arguments are complex, the superior court held that the receiver IMH had appointed did not have authority to manage RNMA I and could not make capital calls and IMH appealed. Initially, the court of appeals concluded that the limited partners’ “retroactive” attempt to extend RNMA I’s term was invalid as it had occurred after the dissolution date and liquidation period and remanded the case so the superior court could determine the effect of RNMA I’s failure to wind up by the date set by the Partnership Agreement. On remand, the superior court held that the January 2017 capital call and the July 2017 loan agreement were ultra vires and not proper winding-down acts. Again, IMH appealed. On the second appeal, the court of appeals confirmed the superior court’s ruling and held that RNMA I was in a wind-up period and, thus, continued to have a legal existence as a limited partnership during that wind-up period but that the capital call and loan were ultra vires as they were not proper winding down acts.

§ 1.4.2. California

Guttman v. Guttman, 72 Cal.App.5th 396, 287 Cal.Rptr.3d 296 (2021). In this case, a plaintiff-partner-plaintiff sued to dissolve a limited partnership. In response, the remining defendant-partners initiated a statutory procedure to buyout plaintiff’s interest in the partnership. Pursuant to this procedure, court-appointed appraisers submitted to the court their valuations of the partnership’s properties. Plaintiff, believing the appraisals undervalued the properties, dismissed his complaint without prejudice. The court then granted defendants’ motion to vacate the dismissal. On appeal, which was treated as a writ of mandate, the court of appeals denied the petition. The court explained that Plaintiff’s dismissal of the dissolution action would frustrate the statutory scheme for permitting buyout of any partner moving to dissolve a limited partnership. Under Cal. Corporations Code § 15908.02, once the buyout procedure has been ordered, a plaintiff’s dissolution action is stayed, and the buyout procedure goes forward in its place. Since the order granting the buyout motion effectively disposed of the dissolution action, such disposition, together with the policy considerations of discouraging tactics of repeatedly filing and dismissing dissolutions until an appraisal acceptable to a plaintiff is issued, deprived the plaintiff in this case of his right to dismiss his dissolution action after the buyout motion was granted.

Friend of Camden, Inc. v. Brandt, 81 Cal.App.5th 1054, 297 Cal.Rptr.3d 732 (2022). Plaintiff, a 1% membership owner of an LLC initiated a judicial dissolution of the LLC under Cal. Corporations Code § 17707.03. Defendants, the other members of the LLC who held 50% of the membership interests, filed a motion to avoid the dissolution by purchasing plaintiff’s 1% interest, under § 17707.03(c). Then, the plaintiff with other members owning 49% membership interest—for a total of 50% of the membership interests in the LLC—voted to voluntarily dissolve the LLC pursuant to § 17707.01(b). The issue on appeal was whether the vote of 50% of the membership to dissolve the LLC extinguished the right defendants otherwise would have had to purchase plaintiff’s 1% interest and avoid dissolution of the LLC. An issue on appeal was whether § 17707.03(c)(6) supports defendants’ contention that plaintiff cannot prevent a buyout, even though plaintiff never dismissed the dissolution action, and the buyout procedure did not commence, before the other 50% of the membership voted to dissolve the LLC. The court ruled that based on the plain language of § 17707.01, the vote of 50% of the LLC membership interests to dissolve the LLC must be given effect and the trial court must dismiss the buyout proceeding as moot and direct the members to wind up the activities of the LLC because the LLC was dissolved in accordance with the vote before a buyout could be implemented, and § 17707.01 says an LLC is dissolved by the “happening of the first to occur,” either “the vote of 50 percent” or “[e]ntry of a decree” of judicial dissolution.

§ 1.4.3. Delaware

In re Doehler Dry Ingredient Solutions, LLC, 2022 WL 4281841 (Del. Ch. Sept. 15, 2022). The Court of Chancery dismissed a petition for dissolution of a limited liability company, finding that the petitioner minority member had failed to plead facts that could reasonably support an inference that the company was deadlocked or could no longer fulfill its defined purposes. The company is owned by two 25% Members, including Russell Davis (“Davis”), and one 50% Member. Following disputes with Davis, the other two Members together executed a written consent removing Davis as a Manager. Davis subsequently accused the other Members of various wrongdoing, including breaches of fiduciary duty and the operating agreement. After a lawsuit was initiated in federal court to force Davis’s compliance with a buyback provision in the operating agreement, Davis petitioned the Court of Chancery for dissolution arguing, among other things, that Davis would “decline to approve ‘nine actions critical to the LLC’ for which unanimous consent is required under the LLC Agreement” thus creating deadlock.

The Court of Chancery dismissed the petition, holding that prospective deadlock was insufficient under the statute to prove actual deadlock. The Court further held that, even if Davis carried out his plan, deadlock could not exist because the operating agreement contained a mechanism by which to resolve potential deadlock in the form of a buyout provision in the operating agreement. The Court additionally noted the existence of a contractual provision for dissolution that could be invoked in the event of deadlock.

§ 1.4.4. New York

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (N.Y. App. Div. 2022). After Stile, a shareholder of the defendant corporation, signed a settlement agreement, the personal representative of Stile’s estate sued the corporation and its other shareholders for withholding distributions and for minority shareholder oppression, among other claims. After holding that the personal representative was bound by the settlement agreement signed by Stile and thus was not entitled to distributions or to seek dissolution of the company per the terms of the agreement, the court agreed with the personal representative that Stile “did not cease being a shareholder by virtue of the settlement.” Rather, the agreement merely required Stile to not “assert any of his rights as a shareholder,” so long as the payments provided for in the settlement are made to him. While the settlement also provided that if Stile transferred any of his shares, the settlement would be terminated, the court determined that “it [was] unclear if ‘transfer’ includes . . . the transfer to Stile’s estate when he died.” Thus, Stile’s estate remained a shareholder of the corporation.

As to the oppression claim, the court dismissed the claim to the extent it was based on the corporation’s refusal to allow the personal representative to examine the corporation’s books and records, as Stile had relinquished that right in the settlement agreement. However, “to the extent the claim is based on the defendants’ refusal to recognize the plaintiff as a shareholder, it was properly permitted to continue.”

Hoffman v. S.T.H.M. Realty Corp., 207 A.D.3d 722 (N.Y. App. Div. 2022). A 25 percent shareholder, who had inherited her shares, filed a petition for dissolution under Business Corporation Law § 1104-a, in which she alleged shareholder oppression. The day-to-day operations of the corporation were managed by the petitioning shareholder’s brother and cousin, each of whom also owned 25 percent of the shares. After a bench trial, the trial court denied the shareholder’s petition for dissolution holding that she had not established shareholder oppression. The appellate court affirmed, noting that, “Oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” As the trial evidence demonstrated that, after inheriting her stock, the petitioning shareholder did not seek employment or responsibilities in the day-to-day management of the corporation, or express an interest in shareholders’ meetings, but, rather, remained, for many years, a passive shareholder, acquiescing in the exercise of control by her brother and cousin, the trial court’s decision that the petitioning shareholder had not established shareholder oppression was supported by the evidence.

Fernandes v. Matrix Model Staffing, Inc., 2022 WL 1172487 (N.Y. Sup. Ct. Apr. 20, 2022). The plaintiff shareholder in a closely held corporation pursued dissolution after discovering that the corporation, through its director, failed to pay the corporation’s tax liabilities and then improperly informed the IRS that the plaintiff was the party responsible for accounting and employee tax withholding, resulting in $200,000 in tax penalties levied on the plaintiff. Reciting the standard under New York law for judicial dissolution of a company, the court stated that “[f]ailing to pay tax liabilities is corporate mismanagement which defeats a petitioner’s reasonable expectations sufficient to constitute oppression.” Further, the court stated that “[i]t is beyond argument that a shareholder, who is not responsible for payroll and accounting, has an objectively reasonable expectation that the corporation will not designate the shareholder as the responsible party for payroll withholdings in IRS filings.” Such conduct on the part of the defendant “is oppressive, if not fraudulent or criminal behavior.” Therefore, “the petition alleg[ed] a demonstrated risk to petitioner’s rights—chiefly continued future tax and other financial liabilities arising from respondent’s oppressive conduct.” However, recognizing dissolution as an extraordinary remedy, and because the defendant “questioned the need for dissolution,” the court referred the matter to a referee to establish the underlying facts and report on the issue of dissolution.

Epstein v. Cantor, No. 506730/19, 2022 WL 3597646 (N.Y. Sup. Ct. Aug. 19, 2022). In a law firm partnership dispute, after the court initially held that the firm was not a partnership and that, even if it were a partnership, the plaintiff was not a partner, the plaintiff moved for re-argument to resolve an apparent conflict between Steinbeck, a 1958 partnership case and Congel, a case decided in 2018. After 14 years in a law partnership with the defendant, Epstein, the plaintiff, sued Cantor, alleging that Cantor formed his own firm without his consent and transferred all the firm’s clients to the new firm. Cantor moved to dismiss, arguing that Cantor was the firm’s sole principal, that the firm was not a partnership, and that the plaintiff was not a partner.

In its first decision, the court applied Steinbeck’s rule that “an indispensable essential of a contract of partnership . . . both under common law and statutory law, is a mutual promise or undertaking of the parties to share in the business and submit to the burden of making good the losses” and dismissed Epstein’s claims. While there was an agreement naming the firm a partnership and naming Epstein as a partner, the agreement allocated profits and losses solely to Cantor. Therefore, the firm could not have been a partnership as a matter of law.

However, citing the 2018 Congel decision holding that partners “as between themselves, may include in the partnership articles any agreement they wish concerning the sharing of profits and losses,” the court granted Epstein’s motion to reargue the case. Ultimately, as to which line of cases controlled, the court sided with the defendants, stating that “it is unclear that Congel controls when the very issue is whether a partnership was formed or whether a partnership agreement can include that no profits and losses would be shared.” (emphasis in original). Nevertheless, applying the indicia of partnership formation outlined in Steinbeck, the court held that “issues of fact abound sufficient to warrant reinstating the claims against the Cantor Defendants.”

Chen v. 697 Dekalb LLC, No. 527902/2021, 2022 WL 2870138 (N.Y. Sup. Ct. Jul. 18, 2022). Alleging multiple violations of the LLC’s operating agreement and that his $300,000 contribution to the LLC was mismanaged by the defendant, the plaintiff sued for dissolution and requested a return of his investment. The defendants argued that the plaintiff was required to provide additional capital contributions to the business and that the standard for judicial dissolution had not been triggered.

Despite the operating agreement provision dealing with capital contributions among members not expressly requiring the consent of all members to make additional contributions to the company, the court interpreted the agreement to require unanimity and held that, contrary to the defendants’ argument, “there can be no reasonable reading of [the operating agreement] that limits the number of members that may impose a capital contribution.”

§ 1.4.5. Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50% membership in the LLC. The court noted that while she would be compensated for her 50% membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50% member of the LLC.

§ 1.5. Jurisdiction, Venue, and Standing

§ 1.5.1. California

Sirott v. Superior Court of Contra Costa County, 78 Cal.App.5th 371, 293 Cal.Rptr.3d 408 (2022). The court of appeals granted a petition for a writ of mandate to instruct a trial court to reverse its refusal to dismiss an LLC member’s derivative action for lack of standing. Defendants, members of the LLC, demurred on the ground that plaintiff-member lacked standing under Cal. Corporations Code § 17709.02 to pursue them, because during the litigation, plaintiff relinquished its interest in and was no longer a member of the LLC. In overruling the demurrer, the trial court determined that it had statutory discretion to allow the plaintiff-member to maintain the derivative claims even though it was no longer a member of the LLC. On appeal, the appellate court based its decision on § 17709.02, which requires both “contemporaneous” membership—meaning the party seeking to bring a derivative claim was a member in the LLC at the time of the challenged transaction (or became a member by gaining an interest from a party who was a member at the time of the transaction)—and “continuous” membership—meaning the party was a member throughout the litigation of a derivative claim. It was uncontested that the plaintiff-member met the contemporaneous membership requirement under § 17709.02, but did not meet the continuous membership requirement because plaintiff relinquished its membership interest in the LLC during litigation. As the appellate court explained, § 17709.02(a)(1) grants a trial court discretion to permit a derivative action by any “member” who does not meet these requirements but does not include such discretion to confer standing on a plaintiff, who is not a member. The plaintiff was no longer a member of the LLC. Thus, it could not satisfy the requirement for continuous membership and the trial court erred in not sustaining the demurrer for lack of standing.

§ 1.5.2. Illinois

Staisz v. Resurrection Physicians Provider Group, Inc., 2022 IL App (1st) 201316, 2022 WL 1446843 (Ill. App. May 9, 2022). In this case, the court held that a former shareholder lacked standing to bring a claim for shareholder oppression under Section 12.56 of the Illinois Business Corporation Act because shareholder status was needed at the commencement of the lawsuit and not, as the plaintiff argued, at the time of the alleged oppressive conduct. The plaintiff also lacked standing to bring a claim for breach of fiduciary duty because the alleged injuries of lost dividends and diversion of corporate funds were common to all shareholders and the claim was derivate, which requires active status as a shareholder.

Smith v. Lucas, 2022 IL App (1st) 210960-U, 2022 WL 4233767 (Ill. App. Sep 14, 2022). In this case , the court held that a plaintiff lacked a membership interest in a limited liability company because she received her rights as a transferee in an inheritance and did not receive the unanimous consent of the non-transferring members to admit a new member as required by the operating agreement. The court reversed the entry of summary judgment on a claim for a forced buy-out under the operating agreement, holding that there was issues of fact whether the accountant had the qualifications to properly value mineral rights and whether he changed portions of his valuation to favor the company.

§ 1.5.3. New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father, his son, and two daughters jointly owned several LLCs, most of which involved the ownership and management of real estate. Over the course of years, the family formed several additional LLCs. The father filed an action against the son alleging breach of fiduciary duty, unjust enrichment, and seeking an accounting for several of the companies. However, with regard to certain of the companies, the operating agreements for those companies established that the father was not actually a member. The son moved to dismiss the father’s derivative claims on behalf of the companies for which the operating agreements established that the father was not a member. The trial court denied the son’s motion; however, the appellate court modified that order and dismissed the claims related to the companies for which the operating agreements established that the father was not a member. The court explained that, in order to maintain a derivative action on behalf of an LLC, one must be a member of the company. Because the operating agreements established that the father was not a member of certain of the companies at issue, his derivative claims relating to those companies should have been dismissed for lack of standing.

Sajust, LLC v. Mendelow, 198 A.D.3d 582, (NY App. Div. 2021). The court affirmed the dismissal of the direct claim of an LLC member, which had alleged that the value of its capital account was reduced through the diversion of a company asset, as the claim was a derivative rather than direct claim. The court explained that the determination of whether a claim is direct or derivative hinges on whether the company or the suing members individually suffered the harm and whether the company or the suing members individually would receive the benefit of a recovery. The court further explained that the lost value of an investment in a company is a quintessential derivative claim. Because the company was allegedly injured by the diversion of the company asset, the claim was derivative rather than direct. Accordingly, the member’s complaint was dismissed for lack of standing.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). The court affirmed the denial of a motion to dismiss the direct claim brought by a shareholder of a closely-held family business against his father, the other shareholder, arising out of the father’s misappropriation from the corporation and having caused the corporation to fail to pay certain state and federal taxes. The son had alleged that the father’s having caused the corporation to fail to pay state and federal taxes subjected the son to potential civil and criminal liability. The court held that the son’s potential civil and criminal liability was an individual harm that was separate and distinct from the loss to the corporation, which was the subject of a separate derivative claim. Additionally, because the father and son were family members, the father owed the son an independent fiduciary duty that was separate from the duty that the father owed to the corporation. Therefore, the trial court properly denied the motion to dismiss the son’s direct claim as it was not duplicative of his derivative claim.

Mohinani v. Charney, 208 A.D.3d 404 (NY App. Div. 2022). Two minority members of an LLC sued the estate of the company’s majority member and manager alleging breach of fiduciary duty. The claims arose out of a special distribution that the majority member received, the majority member’s personal receipt of an acquisition fee that the minority members alleged should have been provided to the LLC, and a management fee paid by two other companies to a management company owned by the majority member that the minority members alleged should have been paid to the company owned jointly by the parties. The minority members brought their claims as direct rather than derivative claims. The case proceeded to a bench trial, after which the court dismissed the minority members’ claims, finding that the claims were derivative rather than direct.

The appellate court affirmed, holding that damages are an essential element of a breach of fiduciary duty claim and that the individual members had failed to establish any personal damages as all of the damages that they had alleged were losses to the company than the individual minority members. The fact that the minority members were the only other members of the company did not change this analysis.

The court rejected the minority members’ argument that the majority member’s personal representative waived this defense by failing to plead lack of standing in his answer or through a motion to dismiss. The court further noted that the minority members had never sought leave to amend their complaint to seek recovery derivatively on behalf of the LLC despite numerous opportunities to do so.

Roche Cyrulnik Freedman LLP v. Cyrulnik, 582 F. Supp. 3d 180 (S.D. N.Y. 2022). A law firm limited liability partnership brought an action for declaratory relief and for breach of fiduciary duty against a former partner in federal court in New York. The defendant partner moved to dismiss the action for lack of subject matter jurisdiction and, in the alternative, called on the court to abstain from hearing the case in favor of a stayed action in Florida state court.

In response to Cyrulnik’s abusive behavior and other misconduct, the firm voted to oust him from the partnership. A fight ensued over the firm’s right to remove Cyrulnik and the amount the firm was obligated to pay him. After the firm filed the suit in federal court, Cyrulnik sued the firm in Florida state court. The firm argued that the court had diversity jurisdiction, as Cyrulnik was no longer a member of the firm. However, the court held that the relevant time for determining diversity of citizenship was the time of the filing of the original complaint, not any amended complaint.

Citing the “intertwining rule,” which provides that “where jurisdiction is so intertwined with the merits that its resolution depends on the resolution of the merits, the court should use the standard applicable to a motion for summary judgment and dismiss only where no triable issues of fact exist,” the court denied the defendant’s motion to dismiss for lack of subject matter jurisdiction. Instead, the court held that “[t]he determination of the firm’s citizenship . . . cannot be separated from [the firm’s] claim that Cyrulnik was properly dissociated from the firm.”

§ 1.5.4. Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50% membership in the LLC. The court noted that while she would be compensated for her 50% membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50% member of the LLC.

§ 1.6. Miscellaneous Claims and Issues in Business Divorce Cases

§ 1.6.1. Accounting

§ 1.6.1.1. New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father was a member of an LLC managed by his son. The father filed a complaint, inter alia, demanding an accounting. The son filed a motion to dismiss, which the trial court denied. However, the appellate court modified that portion of the trial court’s order denying the motion to dismiss the accounting claim as the father’s complaint did not allege that he had made a demand for an accounting that had been refused. The court explained that, to prevail on a cause of action for an accounting, an LLC member must show that a demand for an accounting had been made, which was refused. Additionally, the company’s operating agreement provided that members were entitled to inspect the company’s books and records for the immediately preceding three-year period upon 10 days written notice. Because the complaint did not allege that the father had made a demand to inspect the books and records or that such a demand had been refused, the court held that the accounting claim should have been dismissed.

Grgurev v. Licul, 203 A.D.3d 624 (N.Y. App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered the forced buyout of their shares by the petitioning shareholders. However, the trial court denied the petitioning shareholders’ request for an accounting. The appellate court modified the order to provide that the non-petitioning shareholders were required to provide an accounting. While the non-petitioning shareholders had produced extensive books and records that had been reviewed by a special referee, an accounting was still warranted as the bookkeeping was described as inadequate and sometimes nonexistent, and there was evidence that key financial data had been destroyed during the litigation.

§ 1.6.2. Alternative Entities

§ 1.6.2.1. Delaware

Freeman v. Qualizza, 2022 WL 3330377 (Del. Ch. Aug. 12, 2022). In an action seeking a declaration as to the proper manager of a Delaware limited liability company, the Delaware Court of Chancery determined that the manager of the owner of 99.99% of the membership interest of the subject entity had the power to cause the 99.99% owner to replace the manager of the subject entity because the removal was properly within the manager’s duties as manager under the operating agreement. On a cautionary procedural point, practitioners should take note that the Court initially granted a motion to expedite the action and a status quo order but ultimately vacated both due to a failure to proceed with alacrity on the part of both parties.

The subject entity, UDF, was formed in Delaware. Its membership interests were owned 99.99% by Aries Community Capital, LLC (“ACC”) and .01% by Michael Qualizza (“Qualizza”). Qualizza was designated Manager of UDF. ACC was owned 46% by Aries Capital, LLC, which was, in turn, owned by Neil Freeman (“Freeman”). QSG owned another 46% of ACC and was, in turn, itself owned by Qualiza. The remaining 8% of ACC was owned by Edward Keledjian. Aries Capital was designated Manager of ACC, and its sole duties were to control ACC and manage its sole asset, UDF. After a falling-out among the three business partners, Freeman caused Aries Capital to cause ACC as 99.99% Member of UDF to replace Qualizza with Freeman as Manager of UDF. Qualizza challenged the action as outside the scope of Aries Capital’s duties as Manager of ACC. The Court, however, found that because Aries Capital’s duties as Manager of ACC were solely to cause ACC to manage its sole asset, UDF, the written consent was valid, and Freeman was the proper Manager of UDF.

Avgiris Bros., LLC v. Bouikidis, 2022 WL 4672075 (Del. Ch. Sept. 30, 2022). In an action to determine the proper Managers of an LLC pursuant to 6 Del. C. § 18-110, the Court held that the majority Members of the LLC properly removed the Managers appointed by the minority Members. The Court further held that Plaintiff’s attempts to compel the return of company property were outside the scope of an 18-110 action and declined to enter such relief.

In this case, Plaintiff owned a 65% Membership interest, while defendants owned a 35% Membership interest. The Court declined to entertain any of defendants’ arguments by which they contended that Plaintiff’s Membership interest should be reduced to below a control threshold via reallocation or any other theory. The Court additionally declined to enter an order in favor of plaintiff compelling the defendants to return company property, including passwords and surveillance equipment, because the defendants are no longer Managers. Rather the Court held that “Section 18-110 grants this court jurisdiction ‘to determine who validly holds office as a manager of a Delaware limited liability company.’ It does not address the retention of property by removed managers. … It does not contemplate that the court will bar former managers from the premises of company property. That ancillary relief is beyond the scope of this particular proceeding.”

§ 1.6.2.2. Minnesota

Johnson v. Wright, No. 27-CV-20-2012, 2021 WL 7630246 (Minn. Dist. Ct. Oct. 13, 2021). In an action for employment-based oppression and breach of contract arising out of Johnson’s alleged membership interest in associated corporate entities, the Minnesota district court held that the employment agreement between the parties did not grant Johnson a membership interest but was merely “an agreement to agree.”

Two members of LLCs operating memory care facilities asked Johnson to serve as president of the entities due to her experience in the industry. According to the complaint, the two defendants instructed the attorney drafting the employment contract to include that Johnson would receive a 5% interest in all current and future companies related to the memory care business and real estate holding companies. After Johnson signed the agreement, the defendants then represented to their creditors that the plaintiff had a 5% interest in all related entities. However, two years after executing the employment agreement, Johnson’s employment was terminated. When Johnson requested access to financial records, she was informed that she had no ownership interest in any of the associated LLCs.

Responding to Johnson’s claims arising out of her alleged membership interest, the court held that the employment agreement was an unenforceable “agreement to agree,” and thus did not grant Johnson a membership interest, for two reasons. First, the contested provision “contain[ed] several instances of prospective language that unambiguously contemplate future documentation and memorialization.” Second, the employment agreement, in referencing Johnson’s membership interests, did not specify in which entities Johnson would be a member. Rather, the agreement failed to mention any of the then-existing LLCs and merely anticipated that “Johnson could have membership interests in entities yet to be formed.” Therefore, because Johnson failed to establish that she possessed a membership interest in any of the LLCs, the court awarded the defendants summary judgment on Johnson’s claims for breach of contract and equitable relief.

§ 1.6.3. Breach of Fiduciary Duty

§ 1.6.3.1. Arizona

Zambezi Holdings, LLC v. Proforma Health, PLLC, 2022 WL 3098020 (Ariz. Ct. App. Div. 1, Aug. 2, 2022). Proforma Health, PLLC (“Proforma”) was formed to do business as Munderloh Chiropractic. Munderloh Holdings, LLC and Zambezi Holdings, LLC (“Zambezi”) were simultaneously created with Munderloh Holdings owning 75% of Munderloh Chiropractic and Zambezi owning the remaining 25%. Timothy Munderloh (“Tim”), a chiropractor, and his wife, Siobahn, owned Munderloh Holdings and Mark Love (Siobahn’s brother), an entrepreneur, owned Zambezi. The parties later formed a new holding company, Timark, Inc., to own and operate a Massage Envy franchise in Flagstaff, Arizona. A dispute arose when Mark wanted to open a Massage Envy franchise in Prescott, Arizona. Mark wanted to own the Prescott franchise 75/25 and Tim wanted the ownership split to be 50/50. After much discussion and negotiation, Tim declined the opportunity to participate in the Prescott franchise. Mark obtained the Massage Envy Prescott franchise and opened for business. Tim responded by freezing Mark/Zambezi out of Proforma by cutting off the twice-monthly cash distributions they had been receiving from Proforma. Mark filed suit against Tim, Proforma and Munderloh Holdings alleging breach of contract for failure to pay cash distributions and, also, sought judicial dissolution of Proforma. Tim filed counterclaims against Mark alleging that Mark had breached his duties to Tim by usurping the corporate opportunity of the Prescott franchise.

After a jury trial, the superior court granted judgment as a matter of law in favor of Tim on the corporate opportunity claim and Mark appealed. The jury issued a verdict in favor of Mark on the breach of contract claim. Tim moved for a new trial on Mark’s breach of contract claim. The motion was denied and Tim appealed.

On appeal, the court reversed the judgment as a matter of law in Tim’s favor on the corporate opportunity claim. In doing so, the court of appeals focused on the issue of who had an expectation regarding the corporate opportunity of the Prescott franchise. The court focused on the fact that the Flagstaff franchise was owned by Timark and that Timark (a) was not a party to the litigation; and (b) due to language in the Flagstaff franchise agreement, Timark had no expectation that it would own anything other than the Flagstaff franchise. The court also found that even if Tim, as a 50% owner of Timark, had an individual expectation of the Prescott franchise opportunity, the undisputed facts made clear that judgment as a matter of law should have been granted in Mark’s favor, and not Tim’s, because the Prescott franchise was never a corporate opportunity belonging to Tim. The court based this finding on evidence that Massage Envy was not interested in granting the franchise to Tim without Mark because: (a) Tim’s chiropractic business conflicted in part with Massage Envy’s business; and (b) Tim could not devote full-time efforts to the Prescott Massage Envy. Finally, the court held that even if Tim did have an individual expectation in the opportunity, Tim could have no such expectancy after he had previously rejected the opportunity. Specifically, it was inequitable for Tim to decline the opportunity, let Mark open the franchise and take all the risk, wait for almost three years after declining the offer and almost two years after the Prescott franchise opened, and then claim that Mark had usurped a corporate opportunity.

The court affirmed the jury verdict in Mark’s favor on the breach of contract claim and upheld the denial of Tim’s motion for a new trial. The court of appeals found that the instruction given the jury on the issue of the distributions that had been made to Mark by Proforma mirrored the language of former A.R.S. § 29-703(B) and (C)(1) which provided that in the absence of distribution instructions in the Proforma operating agreement, that Proforma had been making distributions to Tim and Mark in proportion to the value of their capital contributions and Proforma should have continued making such distributions to Mark until “each member has been repaid his capital contribution.”

§ 1.6.3.2. Colorado

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership’s investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB–5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

§ 1.6.3.3. Delaware

Manti Holdings, LLC v. Carlyle Group Inc., 2022 WL 444272 (Del. Ch. Feb. 14, 2022). The Delaware Court of Chancery held that the terms of a “drag along” provision in a stockholders agreement was not sufficient to cause a waiver of the right of minority stockholders to challenge the sale of the subject company by minority stockholders based on a breach of fiduciary duties. Notably, the Court did not reach the question of the general waiverability of fiduciary duties in this opinion.

The stockholders agreement provided that: “In the event that … a Company Sale is approved by the Board and … the holders of at least fifty percent (50%) of the then-outstanding Shares …, each Other Holder shall consent to and raise no objections against such transaction ….” The Court held that the provision did not rise to the level of a waiver of bringing a claim for breach of fiduciary duties because “a waiver must be clear and unequivocal” while the provision in question never mentioned the waiver of fiduciary duties. The Court noted that the provision did specify certain other actions stockholders agreed not to take when being “dragged along,” including voting against the transaction, asserting appraisal rights, and refusing to execute certain transaction documents.

§ 1.6.3.4. New York

Miami Firefighters’ Relief & Pension Fund v. Icahn, 199 A.D.3d 524 (N.Y. App. Div. 2021). Shareholders of Xerox Holdings Corporation (Xerox) filed a derivative action against Carl Icahn, Xerox’s largest single shareholder, without filing a demand on Xerox’s board of directors to initiate the litigation. The trial court dismissed the action finding that the shareholders had not sufficiently pled that a demand would have been futile. However, the appellate court reversed, holding that the shareholders had sufficiently pled demand futility as four of the seven members of the board of directors lacked sufficient independence from Icahn to impartially decide whether to bring suit against him. Icahn at least tacitly conceded that he controlled two of the board members. Another board member, who served as the corporation’s CEO, received a level of compensation that called into question his independence as he would be putting his employment at risk if he voted to bring suit against Icahn. A fourth board member had served as a managing director of another company owned by Icahn and had served as Icahn’s representative on at least ten other boards.

The case arose out of Icahn and two partnerships that he controlled allegedly using Xerox’s confidential information regarding its planned acquisition of HP, Inc. (“HP”) to purchase HP shares before news of the sale became public. In addition to dismissing the case based on the shareholders’ failure to make a demand, the court trial court also found that the shareholders had not sufficiently pled a cause of action for breach of fiduciary duty as they had not pled that Xerox had been damaged by Icahn’s actions. However, the appellate court reversed this decision as well, holding that damages are not an essential element of a breach of fiduciary duty claim. The court explained that the function of a breach of fiduciary duty action is not just to compensate the plaintiff but to prevent breaches of fiduciary duty by removing any temptation on the part of fiduciaries to breach their duty.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). A shareholder in a closely-held, family corporation sued his father, the other shareholder, alleging breach of fiduciary duty and other claims. The son’s allegations arose out of the father’s alleged misappropriation of corporate assets and causing the company to fail to pay state and federal taxes. The trial court denied the father’s motion to dismiss. The appellate court affirmed, holding that, because the father and son were family members in a closely-held corporation, the father owed a fiduciary duty to the son that was independent of the fiduciary duty that the father owed to the corporation.

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director sued the other two directors for breach of fiduciary duty among other claims. The motion court dismissed the shareholder-director’s breach of fiduciary duty claims finding that they were barred by both the business judgment rule and by an exculpatory provision in the corporation’s certificate of incorporation. As set forth in the trial court’s decision (2021 WL 2416518), the exculpatory provision in the certificate of incorporation tracked the language of New York Business Corporation Law § 402(b) and limited the liability of directors for breach of fiduciary duty subject to certain exceptions. Those exceptions include bad faith and intentional misconduct. The appellate court affirmed the trial court’s holding that the plaintiff shareholder-director’s allegations of bad faith and intentional misconduct were conclusory and, therefore, did not overcome the protections provided to the directors by the exculpation language of the certificate of incorporation.

Salansky v. Empric, 208 A.D.3d 983 (N.Y. App. Div. 2022). Plaintiff minority shareholder sued the corporation’s other two shareholders for breach of fiduciary duty and breach of the shareholder agreement after the defendants made additional capital contributions to the corporation in exchange for shares, diluting the plaintiff’s interest from 45% to less than 3%. The shareholder agreement required the written agreement of all shareholders to amend the certificate of incorporation (“CI”), but the defendants had raised the number of authorized shares by a mere majority vote. The defendants argued that the shareholder agreement violated BCL § 803(a), which states that a CI may be amended by a simple majority vote. However, the court held that § 803 does not prohibit parties from entering into a separate agreement that requires unanimity among the shareholders to amend a CI.

Troffa v. Troffa, No. 6095102016, 2022 WL 3140457 (N.Y. Sup. Ct. Aug. 02, 2022). Son and 50% shareholder sued his father, also a 50% shareholder, alleging that his father breached his fiduciary duties by usurping corporate opportunities in purchasing land in his own name and then wasting corporate assets in making rent payments to a third-party entity with no ownership interest over the property. The plaintiff claimed that in 1999 his father told him their corporation would be leasing a compost yard but did not tell him that the rent would be applied to pay down the purchase price on the property. The father also allegedly failed to mention that he was the actual party leasing the property and charging rent to the corporation. The father argued his lease to purchase the compost yard was a prudent business decision conferring tax advantages on the corporation and that the son was informed of the arrangement. Further, a third-party entity belonging to the father was receiving the corporation’s rent payments. Ultimately, the court held that the son demonstrated his prima facie entitlement to judgment as a matter of law that his father breached his fiduciary duties to the corporation by wasting corporate assets in the payment of rent to the third-party corporation, which had no ownership interest in the compost yard. However, the father raised “a triable issue of fact” regarding whether his son consented to the arrangement.

§ 1.6.4. Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing

§ 1.6.4.1. Delaware

In re Morrow Park Holding LLC, 2022 WL 3025780 (Del. Ch. Aug. 16, 2022). In a cautionary tale, the Court of Chancery denied both parties’ claims of breach of contract against the other in connection with their attempts to wind up their mutual business affairs. The parties were real estate developers and, after deciding they could no longer work together, “established limited liability companies with operating agreements governing the continued operation and subsequent division of their jointly owned assets.” The process, however, was derailed by impatience coupled with “mutual animus” that resulted in actions that could only be characterized as “spiteful retribution.” Ultimately, after a six day trial, during which the parties submitted 931 joint exhibits and called 12 witnesses, the Court found that, even if there were breaches of contract, no damages had been suffered. Accordingly, the Court “leaves the parties as they are.”

§ 1.6.4.2. Minnesota

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). One of three brothers and shareholders in two closely held corporations sued in 2005 for a fair value buyout from both companies. That action resulted in a 2006 settlement agreement which required the sale of one of the companies and the provision of successive rounds of bonus distributions to the brothers. However, a 2012 IRS audit scrutinizing the tax deductibility of the bonus payments made to the brothers resulted in the two defendants suspending the payments, and the plaintiff sued for breach of the 2006 settlement. The court found that the use of the word “bonus” as opposed to “dividend” in the 2006 settlement agreement left open the question of whether tax deductibility was an essential feature of the payments to be made under the settlement. In answering the question whether the settlement agreement required bonuses to be made regardless of whether they were tax deductible as employee compensation, the jury sided with the plaintiff and awarded him $12,000,000.

§ 1.6.5. Fraud

§ 1.6.5.1. Arizona

AOW Management LLC v. Scythian Solutions LLC, 2022 WL 2813523 (Ariz. Ct. App. Div. 1, July 19, 2022). Demitri Downing (“Demitri”) was a board member of a not-for-profit marijuana dispensary and entered into an oral agreement with Alex Lane (“Lane”) to transfer his board seat to Lane purportedly to hide the board seat (and its resultant income) from Demitri’s wife in a pending divorce. Demitri contended that, despite his official resignation, Lane agreed that Demitri would maintain a 50% interest in the board seat. The superior court granted summary judgment in Lane’s favor on Demitri’s claim for rescission of his transfer of the board seat to Lane. The appellate court reversed that decision and held that if Demitri could establish he surrendered his seat on the board to Alex due to fraud, then rescission or avoidance may be the appropriate remedy.

§ 1.6.6. Equitable/Statutory Relief

§ 1.6.6.1. California

Siry Invest. L.P. v. Farkhondehpour, 13 Cal.5th 333, 513 P.3d 166, 296 Cal.Rptr.3d 1 (2022). In an action involving alleged improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation and breach of fiduciary duty, the California Supreme Court addressed whether Cal. Penal Code § 496(c)’s treble damages and attorney fees were available as civil remedies to address partnership distribution disputes. Under § 496(c), any person who has been injured by the crime of receiving stolen property “may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.” A person commits the crime of receiving stolen property, under § 496(a), when that person “buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained.” The Supreme Court noted that § 496(c) is unambiguous, and when read together with other sections of the Penal Code, § 496(c) must be understood to mean that a plaintiff may recover treble damages and attorney’s fees under § 496(c) when property has been obtained in any manner constituting theft. The fraudulent diversion of partnership funds in the case at issue was deemed to be within criminal definition of theft because the defendants received property (the diverted partnership funds) belonging to plaintiff, having obtained the diverted funds in a manner constituting theft. The court also found that defendants concealed or withheld those funds from plaintiff. Defendant did all of this knowing the diverted funds were so obtained.

§ 1.6.6.2. Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). In a shareholder oppression claim based on alleged wrongful withholding of dividends, the Minnesota court of appeals affirmed the district court’s ruling that the decision to delay payments to the plaintiff was made in good faith and in the best interest of the corporation. The plaintiff, a physician and shareholder in an association of entities operating eye clinics, brought a shareholder oppression claim under Minnesota Statute § 302A.751 based on the clinic’s alleged denying of his governance rights, giving him inadequate meeting notice and accommodations, withholding his distributions, and frustrating his reasonable expectations in valuing his shares. As to the delayed distribution theory, the trial court merged its shareholder oppression analysis under § 302A.751 with the standard for breach of fiduciary duty. On appeal, Steffen argued the court erred in not “separately analyzing the legal requirements of a claim of unfairly prejudicial conduct” under § 302A.751 from that of a breach of fiduciary duty claim.

While the court of appeals agreed with Steffen that the trial court “relied on its breach-of-fiduciary-duty analysis,” the court affirmed the trial court’s analysis and holding, stating that “it identified legitimate reasons that justified the delay, including advice of counsel . . . and the parties’ disagreement regarding the proration date.” The court continued that “the determination that respondents did not breach their fiduciary duty is plainly relevant to the question of whether [Steffen’s] reasonable expectations were frustrated . . . . [H]ere, no breach occurred, and the conduct was reasonable under the circumstances . . . .”

Dualeh v. Abdulle, No. A21-1615, 2022 WL 3581812 (Minn. Ct. App. Aug. 22, 2022), review denied (Nov. 15, 2022). In a dispute over ownership of a business providing non-emergency medical transportation services, the court of appeals affirmed both the district court’s summary judgment ruling that the plaintiff owned a 50% interest in the LLC and the eventual court ordered buyout of the defendant’s 50% interest. In 2017, Abdulle, the defendant, began negotiations to buy Byro Consulting LLC (“Byro”). In March 2018, Abdulle and Dualeh signed an operating agreement identifying them as the two members and stating that each would provide $60,000 for the purchase of the business. Dualeh, a part-owner of a competing business, was to join Abdulle in buying Byro, as she had experience in the industry. However, the purchase agreement with the previous owner was signed only by Abdulle and identified only Abdulle as the purchaser. In December, Dualeh sued Abdulle seeking control of Byro and a buyout of Abdulle’s interest, and Abdulle counterclaimed, arguing that Dualeh did not hold any interest in Byro at all.

On Abdulle’s motion for summary judgment, the district court ruled in Dualeh’s favor on the question of whether she held an interest, determining that she was a 50% owner. Relying on contract principles, the court reasoned that the operating agreement was enforceable, as between Abdulle and Dualeh, after the previous owner transferred his 100% interest to Abdulle, based on their joint payment of the purchase price. Additionally, Abdulle represented to the IRS and a business partner that he and Dualeh were co-owners. In support of this argument, the court also cited to Minnesota Statute § 322C.0401, subd. 4(1)–(3), which provides for the addition of members to an existing LLC “as provided in the operating agreement” or by consent of all members.

§ 1.6.6.3. New York

Grgurev v. Licul, 203 A.D.3d 624 (NY App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered equitable dissolution of the corporation through the forced buyout of their shares by the petitioning shareholders. The court also ordered a money judgment in favor of the petitioning shareholders against the non-petitioning shareholders personally. The value of the shares that the non-petitioning shareholders were forced to sell was offset against the money judgment. The appellate court affirmed this decision based on the closely held nature of the corporation, the non-petitioning shareholders’ exclusive control over its finances, and the breach of fiduciary duty findings.

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (NY App. Div. 2022). The court held that a settlement agreement in which a 33 percent shareholder agreed not to: seek dissolution of the company, seek dividends from the company, commence any derivative actions on behalf of the company, or seek to inspect the company’s books and records was binding on the personal representative of the shareholder’s estate. Although the settlement agreement did not explicitly reference whether or not the agreement would be binding on the shareholder’s personal representative, the presumption is that a contract is binding on the personal representative of the estate of a party to the contract unless the contract involves a personal quality of the testator or explicitly excludes the personal representative of the party’s estate from coverage. Therefore, the appellate court affirmed the dismissal of the personal representative’s claims for relief that the shareholder had agreed not to seek including a books and records inspection, issuance of distributions, recovery of corporate assets that had allegedly been misappropriated, and dissolution of the company.

The corporation had claimed that the estate never became a shareholder. The personal representative also alleged a shareholder oppression claim based on the refusal to recognize the personal representative as a shareholder. The court affirmed the trial court’s refusal to dismiss this claim and allowed this claim for dissolution based on shareholder oppression to proceed.

§ 1.6.7. Tax Estoppel

§ 1.6.7.1. New York

Tradesman Program Managers, LLC v. Doyle, 202 A.D.3d 456, 457 (NY App Div. 2022. An LLC sought judgment declaring that a corporation that claimed to be a member of the LLC was not a member. The corporation claiming to be a member asserted that the LLC was estopped from claiming that it was not a member because the LLC had distributed a Schedule K-1 that identified the corporation as having a profit and loss share and a capital share. The court discussed the doctrine of tax estoppel, which provides that a party may not contradict factual statements as to a company’s ownership contained in its tax returns, proved that the party signed the tax returns and has failed to assert any basis for not crediting the statements contained in them. The court held that that tax estoppel did not apply because the company had not signed the K-1 in question. The court further held that tax estoppel did not apply because the company had offered a reasonable explanation as to why the K-1 contradicted the actual ownership, namely the affidavit of one of its managers stating that it paid distributions to the corporation based on the misrepresentations of one of its members. As tax estoppel did not apply, the appellate court affirmed the trial court’s grant of summary judgment in favor of the company declaring that the corporation was not a member.

§ 1.7. Valuation and Damages

§ 1.7.1. California

Crane v. R.R. Crane Investment Corp., Inc., 82 Cal.App.5th 748, 298 Cal.Rptr.3d 759 (2022). Shareholder brought action for involuntary dissolution of family-owned investment corporation, after which his brother, who was the other 50% shareholder, and corporation invoked statutory appraisal and buy-out provisions, Cal. Corporations Code § 2000. After the appraisal process, the trial court confirmed the fair value of the shares as of the date the shareholder filed for dissolution but refused to award prejudgment interest on the valuation of his shares. On appeal, the shareholder argues he was entitled to interest at a rate of 10 percent per annum from the date he first sought dissolution until the eventual purchase of his shares more than three years later. The shareholder predicated his arguments on Cal. Civil Code § 3287(a) and § 3288. Section 3287(a) governs damages in civil cases. Since the option to exercise a buyback of shares is not considered damages, § 3287(a) was deemed inapplicable. Similarly, since § 3288 grants a jury the discretion to award interest in cases of oppression, fraud, or malice, interest could not be awarded to the shareholder because the shares were bought-out pursuant to a statutory appraisal and buy-out provisions of the Corporations Code. Finally, the court noted that the shareholder should have, but failed to, seek a deferred valuation date under Corporations Code § 2000(f).

§ 1.7.2. Delaware

In re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, 2022 WL 698112 (Del. Ch. March 9, 2022). This case involves a dispute regarding the valuation of minority owners’ interests in freeze-out transactions in several partnerships which held licenses to provide cellular telephone services in specified geographic areas. The court determined that the defendant failed to prove that the freeze-outs were entirely fair to the minority partners, did not employ sufficient procedures that assured fairness to the minority partners, and instead sought to capture the future value for itself. In addition, the court considered that the valuation firm had a long relationship with the defendant and found that improperly influenced the outcome of the valuations.

§ 1.7.3. Louisiana

Shop Rite, Inc. v. Gardiner, 333 So. 3d 506, 2021 La. App. LEXIS 2081, 21-371 (La. App. 3rd Cir. December 29, 2021). This case addresses the fair value of the minority interests of a dissenting shareholder who was withdrawing their shares in two corporations: a 3.8 percent interest in a grocery and convenience store business and a 3.95 percent interest in a tobacco and alcoholic beverage store business. The trial court accepted the adjusted net asset method of valuation which was selected by experts for both parties because the corporations owned large amounts of real estate, and also allowed a discount for “trapped” capital gains taxes that would be owed in the event the underlying real estate was sold. The appellate court rejected the discount for capital gains taxes, stating that there must be a factual basis for a discount to be taken and that a sale of the underlying real estate assets was an unknown future event.

§ 1.7.4. Michigan

Pitsch v. Pitsch Holding Co., 2022 Mich. App. LEXIS 2730, 2022 WL 1508774 (Mich. App. 2022). This case pertains to challenges to the valuation quantification recommended by a special master and accepted by the trial court in a forced stock sale in a shareholder deadlock case. The special master had determined that a sale of shares from one shareholder to the other would yield more value than if the company was dissolved. In this matter, the special master determined a “modified liquidation value” which approximated the middle of the range between liquidation value and fair market value. The appellate court considered that all parties initially expressed a willingness to sell their stock for the amount determined by the special master, that the appellants do not explain why the company would net a higher value, and that the appellants had recommended the particular special master. As a result, the appellate court rejected the appellant’s claims and affirmed the trial court’s decision.

§ 1.7.5. Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). When Steffen was a shareholder-physician with the clinic, four other shareholders were bought out using a valuation method that diverged from the valuation method provided in the shareholder agreements. Strict adherence to the terms of the agreements would provide for a lesser buyout, and, upon discovering that these previous buyouts were not in compliance with the valuation method provided in the agreements, the remaining shareholders agreed that future buyouts would be valued according to the agreements’ actual terms.

Then, Steffen announced his departure from the clinic. When the clinic offered to purchase his shares in accordance with the terms of the agreements—and not the terms of the repurchase of the shares of previous departing doctors—Steffen declined. He commenced a shareholder oppression claim under Minnesota Statute § 302A.751 arguing the clinic frustrated his reasonable expectations in valuing his shares.

The trial court ruled that Steffen’s “expectation upon signing the Agreements was that his buyout would be calculated as set forth in the Agreements.” In reaching this determination, the court relied on the fact that neither Steffen nor the other shareholders were aware that the previous valuations were not in compliance with the agreements and that, after the shareholders discovered the error, Steffen was aware of the decision to bring the buyback program into compliance and had an opportunity to voice his objection but failed to do so. The court of appeals affirmed, citing the fact that Steffen attended board meetings where the issue was discussed and agreed to use the formulas set forth in the agreements to calculate future buyouts. Therefore, Steffen “had no reasonable expectation for his shares to be valued contrary to the Agreements.”

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). In this shareholder dispute among three brothers of two closely held corporations, a battle of valuation experts eventually resulted in the largest reported fair value buyout in Minnesota state history, with the court siding with the plaintiff’s expert “[o]n almost every issue.” The plaintiff brother brought both breach of contract claims and equitable claims for breach of fiduciary duty and unfairly prejudicial conduct under Minnesota Statute § 302A.751 against his two brothers. After a jury verdict for the plaintiff on his breach of contract and breach of the duty of good faith and fair dealing claims (awarding him $12,000,000), the parties stipulated that a buyout should occur but could not agree as to the valuation of the plaintiff’s interest in the two companies, which was tried to the court as a bench trial.

While both experts considered the firms’ income, their respective markets, and their assets in arriving at their valuations, the weight the experts gave to the three approaches differed significantly; therefore, they arrived at wildly divergent estimations of the value of the plaintiff’s interest. Ultimately, the court found that “[the plaintiff’s expert’s] primary reliance on the income and market approaches is more credible than [the defendants’] primary reliance on the asset approach.” Because the two corporations were “strong, solid enterprises” with no expectation of being liquidated or dismantled, the court determined that “a buyer for these companies is more likely to be interested in the income they have the potential to earn than in the liquidation value for their assets.” Therefore, because the plaintiff’s expert’s fair value opinions were “more reasonable, better supported, and closer to a proper valuation” of the plaintiff’s interest in the two firms, the court awarded the plaintiff a total of $58,501,760 based on his expert’s valuation of the two companies. Plaintiff was also awarded his fees and costs incurred in the action.

§ 1.7.6. Nebraska

Bohac v. Benes Serv. Co., 310 Neb. 722, 969 N.W.2d 103 (Neb. 2022). This case encompasses an election to make a purchase in lieu of judicial dissolution of a minority ownership interest in the shares of a corporation which operates an agricultural equipment dealership. The appellate court determined that the trial court did not use the correct definition of “fair value” pursuant to the Nebraska statute and, consequently, it should not have subjected the value of the shares to minority or lack of marketability discounts.

§ 1.7.7. New Jersey

Robertson v. Hyde Park Mall, 2022 N.J. Super. Unpub. LEXIS 848, 2022 WL 1572600 (N.J. Super. Ct. App. Div. May 19, 2022). In this partnership dispute case, the appellants assert that the trial court erred by not applying discounts to the fair value of the dissociated partners’ ownership interests for lack of control and marketability. The partnership owns and operates a major shopping mall. The appellate court determined that the trial court “appropriately considered the equities of the case when it decided not to apply discounts for lack of control and marketability, and its findings and conclusions are supported by the record and applicable law.”

Sipko v. Koger, Inc., 251 N.J. 162, 276 A.3d 160 (N.J. 2022). This case involves a shareholder dispute regarding computer design services businesses and whether a marketability discount should be applied to a shareholder’s interest in the two businesses. On the second appeal, the Supreme Court of New Jersey determined that no marketability discount should be allowed. The appellate court made this determination based upon findings that the comprehensive accounting ordered by the trial court showed that the defendants had attempted to render the corporation worthless to thwart the plaintiff and to create false evidence of the plaintiff giving up one of their ownership interests.

§ 1.7.8. New York

Collins v. Tabs Motors of Valley Stream Corp., 2021 N.Y. Misc. LEXIS 6058, 2021 NY Slip Op 32438(U) (Sup. Ct. N.Y. Cnty. Nov. 23, 2021). This case addresses whether a Shareholder Agreement is determinative in a dissolution to determine the value of a 25 percent ownership interest in a corporation that operates an automotive repair business. In this case, the buy-sell sections of the Shareholder Agreement state, “if any shareholder files a petition to dissolve the Corporation; … the Corporation firstly, and then the other Shareholders shall have the option to purchase all, but not part of the shares owned by such Shareholder,” and an accompanying schedule executed contemporaneously with the Shareholder Agreement stipulates the value per share is a specific dollar amount. The court determined that the Shareholder Agreement and the stipulated value in the accompanying schedule were enforceable.

Ng v. Ng, 2022 N.Y. Misc. LEXIS 3755, 2022 NY Slip Op 31750(U) (Sup. Ct. N.Y. Cnty. May 27, 2022). This case considers a valuation dispute regarding the “separation of a number of businesses previously owned by two brothers and former partners” pursuant to a dissolution agreement which the court considered “a global business divorce between the two brothers.” The valuation dispute arises from the assertion by one brother that “the entire interest” defined in the dissolution agreement only includes the shares of the stock but not the company’s goodwill. The court noted that although the dissolution agreement does not have a restriction on competition, it is well established in case law that there is an “important distinction between the duty to refrain from soliciting former customers which arise from the sale of good will of an established business.” The court determined that the sale terms do include the goodwill and consequently limited preliminary injunctive relief to only apply to the extent of the implied duty to not engage in solicitation impairing the company’s goodwill.

§ 1.7.9. North Dakota

Sproule v. Johnson, 2022 ND 51, 971 N.W.2d 854 (N.D. 2022). This case arises from a valuation dispute in a partnership dissolution of a family farm business. The appellants assert that taxes should have been deducted from the value which the trial court determined for the buyout of the plaintiff’s ownership interest. The appellate court found that there was no intention to currently liquidate, that the proffered tax analysis of what would happen if a liquidation would occur is hypothetical, and that the agreements in principle negotiated by the parties regarding the valuation methods were consistent to valuations without discounts for taxes. Ultimately, it concluded that such a taxes discount would be speculative.

§ 1.7.10. Tennessee

Boesch v. Holeman, 2022 Tenn. App. LEXIS 335, 2022 WL 3695977 (Tenn. Ct. App. Aug. 26, 2022). This is a dispute case regarding the buyout price for a disaffiliated partner in a three-partner business that distilled flavored moonshine. In the initial appeal, the appellate court determined that a “discount for lack of control by the minority partnership is inappropriate because the statute calls for determining value based on a sale of the entire business as a going concern” and remanded the case to the trial court to adjust the valuation accordingly. In this second appeal, the court rejected the appellant’s new challenge to the business valuation, which claims that the income-based method of business valuation was not properly applied. Ultimately, the appellate court determined that under the Tennessee Code, the buyout price after disassociation is measured as “the amount that would have been distributable to the disassociated partner on the day of disassociation if the assets of the business had been sold that day,” that the appellant’s request to include the revenue from stores which opened after the dissociation date should be rejected because it is not consistent with the requirements of the Tennessee Code and that the expert witness for the defendant partner “provided the court with a fully supported and properly calculated method of business valuation in conformity with the court’s previous instructions.”

Buckley v. Carlock, 652 S.W.3d 432 (Tenn. Ct. App. 2022). In this minority shareholder oppression case, the appellate court evaluated the appellant’s challenge to the valuation methodology accepted by the trial court to determine the fair value of the minority owner’s interest in a luxury automobile dealership. The appellate court considered that “The trial court accepted a valuation methodology… that is considered acceptable in the financial community. Authoritative automotive publications endorse the blue-sky approach. And it is used in the ‘great majority’ of ultra-high-end dealership transactions. The [trial] court also found the blue-sky method admissible and reliable.” Furthermore, the appellate court considered that “The method was based on fair value, not fair market value.” Consequently, the appellate court concluded that the valuation method was appropriate.

§ 1.7.11. Utah

Diversified Stripping Systems Inc. v. Kraus, 516 P.3d 306 (Utah Ct. App. Jul. 21, 2022). In an appeal from a complex business dispute involving a joint venture, the court of appeals found that the district court’s damages awards were unsupported. The joint venture, a construction business, was owned by two parties with 80% and 20% equity share. The parties’ agreement to form the joint venture was memorialized in a series of documents, including an asset purchase agreement and a profit advance agreement. In the asset purchase agreement, a third entity, owned the majority owner of the joint venture, purchased all the construction equipment from the minority owner, which would then lease this equipment to the joint venture. In the profit advance agreement, the joint venture agreed to pay the minority owner $70,000 per year for two years as an advance on profits, not a salary. And the minority owner agreed that if his 20% share of the joint venture’s profits fell below $70,000 per year, he would repay the joint venture for any overage. Shortly after the joint ventures’ inception, the parties’ relationship deteriorated, and the majority owner pushed the minority owner out of the joint venture. The majority owner later shut down the joint ventures’ operations and caused his equipment entity to sell all the equipment. The parties brought suit, and the district court found that the majority owner breached its fiduciary and contractual duties.

For damages, the district court awarded the minority owner its lost profits of $227,500 by determining that, based on the profit advance agreement, all parties to the joint venture envisioned that the joint venture’s profits for the first two years would by $350,000. The court extrapolated that estimate over five years, awarding the minority owner 20% of that estimated profit, less certain payments he had already received. The district court also awarded the minority owner 20% of the proceeds of the equipment sale after the joint venture was discontinued.

The majority owner appealed the damages award, arguing that the district court’s lost profit award was unsupported by evidence and that the minority owner was not entitled to the proceeds of the equipment sale. The court of appeals agreed, finding that the district court relied solely on profit advance agreement to calculate the lost profits, making its lost profit calculation speculative and unreliable as it was not based on reasonable assumptions or projections. There was no evidence that the $70,000 figure in the profit advance agreement was based on any projections, profitability analysis, or reasonable expectations of the joint venture’s profitability. The court of appeals also remanded the minority owner’s award of the portion of the equipment sales proceeds because the equipment was owned by an entity wholly owned by the majority owner, not by the joint venture.

Editors

§ 1.1. Tribal Litigation & The Third Sovereign

We have been writing this annual update of cases relevant to tribal litigation for many years. Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citation to most relevant circuit and even district court cases in every volume. To target primarily those cases decided within the last year, this chapter will focus on cases decided between October 1, 2021 – October 1, 2022. The chapter begins with a Supreme Court overview and then is structured around sovereigns—Indian Tribes, the United States, and the fifty sister States.

Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.^[1] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.^[2] Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the United States’ president or a state’s governor) and a tribal council or senate (the legislative body). Tribal courts adjudicate most matters arising from their reservations or under tribal law.^[3]

Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.^[4] Thus, state laws generally “have no force” in Indian Country.^[5] While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”^[6]

This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty. Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,^[7] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.

§ 1.2. Indian Law & The Supreme Court 

§ 1.2.1. The 2021–2022 Term

The Supreme Court hears an average of between two and three new Indian law cases every year.^[8] During the 2021–2022 term, the Court decided three Indian law cases.

Oklahoma v. Castro-Huerta, 142 S. Ct. 2486 (2022). The U.S. Supreme Court held that the federal government and state governments have concurrent jurisdiction to prosecute crime committed by non-Indians against Indians in Indian country.

Victor Manel Castro-Huerta was convicted in Oklahoma state court for child neglect. Castro-Huerta appealed the conviction, and while the state-court appeal was pending, the U.S. Supreme Court decided McGirt v. Oklahoma.^[9] McGirt held that the Creek Nation’s reservation in eastern Oklahoma had never been properly disestablished and therefore remained “Indian country.” This area of eastern Oklahoma included the city of Tulsa, where Castro-Huerta was accused of committing child neglect. The Oklahoma appellate court vacated Castro-Huerta’s conviction as a result of McGirt and held that the federal government, not the State of Oklahoma, had jurisdiction to prosecute him. The Supreme Court granted certiorari, and in a 5-4 decision, the Court reversed and remanded, holding that both the federal and state government had jurisdiction to prosecute the crime.

Justice Kavanaugh, writing for the majority, began the analysis with the premise that Indian country is a part of a state’s territory and that, unless preempted, states have jurisdiction over crimes committed in Indian Country. For example, the Court has previously held that states have jurisdiction to prosecute crimes committed by non-Indians against non-Indians in Indian country.^[10] A state’s jurisdiction in Indian country may be preempted by federal law under ordinary principles of federal preemption, or when the exercise of state jurisdiction would unlawfully infringe on tribal self-government.

The Court held that the state’s jurisdiction was not preempted in this case. Specifically, the Court rejected Castro-Huerta’s argument that the General Crimes Act and Public Law 280 preempted Oklahoma’s authority to prosecute crimes committed by non-Indians against Indians in Indian country. The General Crimes Act merely extends federal laws that apply on federal enclaves to Indian country, but does not state that Indian country is equivalent to a federal enclave for jurisdictional purposes, that federal jurisdiction is exclusive in Indian country, or that state jurisdiction is preempted in Indian country. Therefore, the General Crimes Act does not preempt state jurisdiction to prosecute crimes committed by non-Indians against Indians in Indian country. Nor does Public Law 280 preempt state jurisdiction under such circumstances. Public Law 280 grants states jurisdiction to prosecute state-law offenses committed by or against Indians in Indian country, but contains no language preempting state jurisdiction.

The Court also held that the test articulated in White Mountain Apache Tribe v. Bracker^[11] does not bar a state from prosecuting crimes committed by non-Indians against Indians in Indian country. In Bracker, the Court held that even when federal law does not preempt state jurisdiction under ordinary preemption analysis, preemption may still occur if the exercise of state jurisdiction would unlawfully infringe upon tribal self-government.

Here, the Court determined the exercise of state jurisdiction does not infringe on tribal self-government. First, state prosecution would not deprive the tribe of any of its prosecutorial authority since Indian tribes lack criminal jurisdiction to prosecute crimes committed by non-Indians. Second, a state prosecution of a non-Indian would not harm the federal interest in protecting Indian victims because state prosecution would supplement federal authority, not supplant federal authority. Third, states have a strong sovereign interest in ensuring public safety and criminal justice within their territory, and in protecting all crime victims.

Justice Gorsuch, writing for the dissent, viewed the majority’s decision as a step back from the foundational rule that Native American Tribes retain their sovereignty unless and until Congress ordains otherwise.

Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929 (2022). This case represents the latest conflict between Texas gaming officials and the Ysleta del Sur Pueblo Indian Tribe. The Attorney General, on behalf of the State of Texas (the “State”), sought to enjoin the Ysleta del Sur Pueblo (the “Tribe”), a federally-recognized Indian tribe, from offering bingo within its entertainment center located on Tribe’s reservation. In 1968, Congress recognized the Ysleta del Sur Pueblo as an Indian tribe and assigned its trust responsibilities for the Tribe to Texas. In 1983, Texas renounced its trust responsibilities because they were inconsistent with the State’s constitution. The State also expressed opposition to any new federal trust legislation that did not permit the State to apply its own gaming laws on tribal lands.

Congress restored the Tribe’s federal trust status in 1987 when it adopted the Ysleta del Sur and Alabama and Coushatta Indian Tribes of Texas Restoration Act (“Restoration Act”). The Restoration act prohibited “[a]ll gaming activities which are prohibited by the laws of the State of Texas.” Shortly thereafter, Congress adopted its own comprehensive Indian gaming legislation: the Indian Gaming Regulatory Act (“IGRA”). IGRA established the rules for separate classes of games. IGRA permitted Tribes to offer Class II games—like bingo—in States that “permi[t] such gaming for any purpose by any person, organization or entity.” 25 U.S.C. § 2710(b)(1)(A). Class III games—like blackjack and baccarat—were only allowed pursuant to negotiated tribal/state compacts.

After losing a legal battle (“Ysleta I”) to offer Class III games,^[12] the Tribe began to offer bingo, including “electronic bingo” machines.^[13] The State sought to shut down the Tribe’s bingo operations. Bound by Ysleta I, the district court enjoined the Tribe’s bingo operations, but stayed the injunction pending appeal. The Fifth Circuit reaffirmed Ysleta I and held that the Tribe’s bingo operations were impermissible because they did not conform to Texas’s bingo regulations.^[14] Certiorari was granted.

Section 107 of the Restoration Act directly addresses gaming on the lands of the Ysleta del Sur Pueblo. It provides that “gaming activities which are prohibited by [Texas law] are hereby prohibited on the reservation and on lands of the tribe” and does not grant Texas “civil or criminal regulatory jurisdiction” with respect to matters covered by § 107 (contained in subsection (b)). The State’s interpretation of the Act subjected the Tribe to the entire body of Texas gaming laws and regulations. The Tribe understood the Act to bar offering State-prohibited gaming activities—State-regulated gaming such as bingo would therefore be subjected only to federal law, not state law, limitations.

The Supreme Court stated that in Texas’s view, laws regulating gaming activities become laws prohibiting gaming activities—an interpretation that violates the rule against “ascribing to one word a meaning so broad” that it assumes the same meaning as another statutory term. Gustafson v. Alloyd Co., 513 U.S. 561, 575 (1995). The Court further explained that indeterminacy aside, the State’s interpretation would leave subsection (b)—denying the State regulatory jurisdiction—with no work to perform. As a result, Texas’s interpretation also defies another canon of statutory construction—the rule that courts must normally seek to construe Congress’s work “so that effect is given to all provisions.” Corley v. United States, 556 U.S. 303, 314 (2009) (internal quotation marks omitted).

Seeking to give subsection (b) real work to perform, Texas submitted that the provision served to deny its state courts and gaming commission “jurisdiction” to punish violations of subsection (a) by sending such disputes to federal court instead. However, that interpretation only serves to render subsection (c), which grants federal courts “exclusive” jurisdiction over subsection (a) violations, a nullity. A full look at the statute’s structure suggests a set of simple and coherent commands; Texas’s competing interpretation renders individual statutory terms duplicative and leaves whole provisions without work to perform.

The Supreme Court also looked at Congress’s intent when they passed the Restoration Act just six months after the Supreme Court handed down its decision in California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987). There, the Court interpreted Public Law 280—a statute Congress had adopted in 1953 to allow a handful of States to enforce some of their criminal laws on certain tribal lands—to mean that only “prohibitory” state gaming laws could be applied on the Indian lands in question, not state “regulatory” gaming laws. The Cabazon Court held that California’s bingo laws—materially identical to Texas’s laws here—fell on the regulatory side of the ledger. In Cabazon’s immediate aftermath, Congress also adopted other laws governing tribal gaming that appeared to reference and employ in different ways Cabazon’s distinction between prohibition and regulation. In doing so, Congress demonstrated that it clearly understood how to grant a State regulatory jurisdiction over a Tribe’s gaming activities when it wished to do so.

Accordingly, the Supreme Court held that the Restoration Act bans, as a matter of federal law on tribal lands, only those gaming activities also banned in Texas.

Denezpi v. United States, 142 S. Ct. 1838 (2022). In a 6-3 decision, the United States Supreme Court held that a Native American defendant previously prosecuted in a special federal administrative tribal court can be charged in a federal court for a separate offense arising from the same act without violating the Double Jeopardy Clause.

The case involved Merle Denezpi, a Navajo Nation member, who was charged by an officer with the Bureau of Indian Affairs for assault and battery, terroristic threats, and false imprisonment. These crimes were alleged to have occurred on the Ute Mountain Reservation. Denezpi was tried in the Court of Indian Offenses—a court established by the United States Department of the Interior in 1883 to administer justice for Indian tribes in certain parts of Indian country where tribal courts have not been established. Here, the Court of Indian Offenses sentenced Denezpi to 140 days in jail. Six months later, a federal grand jury indicted Denezpi on one count of aggravated sexual abuse in Indian country, an offense covered by the federal Major Crimes Act. Denezpi moved to dismiss the indictment, arguing that the Double Jeopardy Clause barred the consecutive prosecution. The District Court denied Denezpi’s motion. Denezpi was convicted and sentenced to 360 months’ imprisonment. The Tenth Circuit affirmed. Certiorari was granted.

Justice Amy Coney Barrett, writing for the majority, held that the Double Jeopardy Clause does not bar successive prosecutions of distinct offenses arising from a single act, even if a single sovereign prosecutes them. The Court reasoned that the Double Jeopardy Clause does not prohibit putting a person twice in jeopardy “for the same conduct or actions,” but rather focuses on whether successive prosecutions are for the same “offense.” Relying on the dual-sovereignty doctrine, the Court stated that because the sovereign source of a law is an inherent and distinctive feature of the law itself, an offense defined by one sovereign is necessarily a different offense from that of another sovereign.

Denezpi’s single act transgressed two laws: the Ute Mountain Ute Code’s assault and battery ordinance and the United States Code’s proscription of aggravated sexual abuse in Indian country. The two laws—defined by separate sovereigns—proscribe separate offenses, so Denezpi’s second prosecution did not place him in jeopardy again “for the same offence.”

Denezpi attempted to argue that this reasoning is only applied when the offenses are enacted and enforced by separate sovereigns. Because prosecutors in the Court of Indian Offenses exercise federal authority, Denezpi argued that he was prosecuted twice by the United States. The Court did not credit this argument, holding instead that the Double Jeopardy Clause does not prohibit successive prosecutions by the same sovereign; rather, it prohibits successive prosecutions “for the same offense.” Thus, even if Denezpi was right that the federal government prosecuted his tribal offense, the Double Jeopardy Clause did not bar the federal government from prosecuting him under the Major Crimes Act as well.

The dissent, led by Justice Neil Gorsuch, and joined by Justices Sonia Sotomayor and Elena Kagan, wholly disagreed with the majority. The dissent argued that this was the “same defendant, same crime, [and] same prosecuting authority” and further argued that the dual-sovereignty “doctrine is at odds with the text and meaning of the Constitution” and “cannot sustain the Court’s conclusion.”

Justice Gorsuch emphasized that the Court of Indian Offenses truly belonged to the United States through the Department of the Interior instead of being a tribal court. On this basis, the majority ruling could allow prosecutors to rehearse their trial in one jurisdiction to prepare for the subsequent trial in another. Furthermore, Gorsuch believed the majority’s ruling undermines tribal sovereign authority.

§ 1.2.2. Preview of the 2022–2023 Term

As of October 1, 2022, the Supreme Court granted certiorari in one Indian law case for the 2022–2023 term, with twelve more petitions for certiorari pending. If any new cases are granted and decided, they will be included in next year’s volume.

§ 1.3. The Tribal Sovereign

§ 1.3.1. Tribal Courts

More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands. Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority. As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.

While tribal courts are similar in structure to other courts in the United States, the approximately 400 Indian courts and justice systems currently functioning throughout the country are unique in many significant ways.^[15] It cannot be overemphasized that every tribal court is different and distinct from the next.^[16] For example, the qualifications of tribal court judges vary widely depending on the court.^[17] Some tribes require tribal judges to be members of the tribe and to possess law degrees, while others do not.^[18] Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.

Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court. While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another. For example, the Navajo Nation has its own bar exam that tests knowledge of Navajo tribal law as well as other requirements.^[19]

Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing. If counsel has never appeared before a particular tribal court, it would be wise to solicit common court practices from persons who regularly appear before the court.

Tribal court jurisdiction depends largely on: (1) whether the defendant is a tribal member;^[20] and (2) whether the dispute occurred in Indian Country,^[21] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member or fee lands within the boundaries of an Indian reservation.^[22] These two highly complex issues should be analyzed first in any tribal business dispute.

In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian). Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.^[23] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.^[24] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.^[25]

In the “path-making” decision of Montana v. United States,^[26] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”^[27] To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”^[28]

These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.^[29] The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”^[30] These exceptions have become known as the “Montana rule.”

There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions. This section highlights those most relevant.^[31]

Ute Indian Tribe of the Uintah & Ouray Rsrv. v. Lawrence, 22 F.4th 892 (10th Cir. 2022), cert denied, 143 S.Ct. 273 (2022). Lynn Becker, a non-native, former employee of the Ute Indian Tribe of the Uintah & Ouray Reservation (the “Tribe”) filed suit in Utah State Court for breach of an employment contract. The Tribe filed a motion to dismiss on the ground that the state court lacked jurisdiction, which the state court denied. The Tribe then filed suit against Becker in federal district court seeking to enjoin the state court action on the ground that the state court lacked subject matter jurisdiction. The district court denied the requested injunction to enjoin the state court action. The district court found that, even though Becker’s claims involve events that occurred on the reservation, a federal statute, 25 U.S.C. § 1322, authorizes state-court jurisdiction of the claims.

The Tenth Circuit reversed the district court’s decision and ruled that the Tribe is entitled to injunctive relief enjoining the state court action. A state court can only exercise jurisdiction over the dispute with “clear congressional authorization.” The Tenth Circuit held that the district court erred when it determined that 25 U.S.C. § 1322 supplied the state court with authorization. 25 U.S.C. § 1322 allows states to acquire jurisdiction over civil causes of action arising within Indian country and involving Indian parties. But state-court jurisdiction under § 1322 requires certain prelitigation action, such as tribal consent. Specifically, 25 U.S.C. § 1326 provides that a state acquires jurisdiction pursuant to § 1322 only when a tribe votes by a special election to accept such jurisdiction. The Tribe argued that it never consented by special election to Utah courts exercising jurisdiction under § 1322. The Tenth Circuit agreed.

The Tenth Circuit rejected the district court’s interpretation of § 1322, which was that although a tribe must conduct a special election before it can consent to “permanently authorize the state to assume global jurisdiction over [it],” it need not hold a special election before it can “selectively consent”—in a contract like the at issue employment agreement, for example—”to a state’s exercise of . . . jurisdiction” over a specific legal action. The Tenth Circuit disagreed, holding that such an interpretation is inconsistent with the explicit statutory text. Because the Tribe never held a special election granting the state court jurisdiction, § 1322 is inapplicable, the state court lacked jurisdiction, and the state court action should have been enjoined. The United States Supreme Court subsequently denied certiorari in October 2022.

Ute Indian Tribe of Uintah & Ouray Rsrv. v. McKee, 32 F.4th 1003 (10th Cir. 2022). The Tenth Circuit held that a tribal court lacks jurisdiction over a dispute with a non-tribal member arising off Indian lands. In this case, the defendant, a non-tribal member, owned land that was once a part of the Ute Reservation. However, two Uintah Indian Irrigation Project (UIIP) canals still crossed through the defendant’s property. In 2012, UIIP was notified that the defendant was diverting water from the canals to irrigate his property. After an investigation, UIIP determined that the defendant was “unlawfully misappropriating tribal waters in violation of the Cedarview Decree.”

The Ute Tribe sued the defendant in Ute Tribal Court, where the defendant moved to dismiss for lack of subject matter jurisdiction. The Ute Tribe claimed they had subject matter jurisdiction pursuant to the Montana rule, which states that a “tribe can regulate activities of all non-Indians who enter a consensual relationship with the Tribe or whose conduct imperils the Tribe’s political integrity, economic security, or health and welfare.” The defendant chose not to participate in the Ute tribal court action, and the tribal court entered judgment against him. Subsequently, the Ute Tribe petitioned the district court to enforce the tribal court’s judgment. The district court denied the Ute Tribe’s motion, holding that “the tribal-court judgment was unenforceable because the tribal court lacked subject-matter jurisdiction.” The Ute Tribe appealed.

The Tenth Circuit affirmed the district court’s decision. There are only two circumstances when a tribe or tribal entity may regulate non-tribal members and their activities: when a non-tribal member enters a consensual relationship with a tribe or tribal entity or when the non-tribal member’s “activity threatens [the tribe’s] political integrity, economic security, or health and welfare.” The Ute Tribe argued these exceptions did not need to be addressed as the action dealt with the exclusive rights to water from the reservation lands. The Ute Tribe explained that they have the authority to exclude people from their lands and thus have the power to exclude people from using their water.

The Tenth Circuit disagreed. The Ute Tribe did not provide any precedent to support the assertion that a tribe could regulate the usage of “natural resources outside of the tribe’s territory.” The Tenth Circuit held that because the defendant only used the water on non-Indian land, the “tribal court did not have jurisdiction arising from the Tribe’s authority to exclude nonmembers from its territory.”

Furthermore, the Tenth Circuit held that the defendant’s water use is a matter of the Ute Tribe’s external relations, not tribal self-government. The Court explained that because of the external nature of the matter, the parties must have had a contractual relationship where the defendant agreed to tribal court jurisdiction. Additionally, the Court noted that the Ute Tribe did not show how the use of the water would be harmful—the defendant had been using the water for over thirteen years without the Ute Tribe noticing. Ultimately, the Tenth Circuit held that the tribal court lacked jurisdiction over the water dispute.

Big Horn Cnty. Elec. Coop., Inc. v. Big Man, No. 21-35223, 2022 WL 738623 (9th Cir. Mar. 11, 2022). Big Horn County Electric Cooperative (“BHCEC”) provides electrical services to members of the Crow Tribe on the Crow Reservation. BHCEC notified a member of the Crow Tribe, Big Man, who lived on the Reservation, that his account was delinquent and would be terminated if non-payment continued. Big Man failed to pay, and his services were disconnected. Big Man sued BHCEC in Crow Tribal Court alleging that BHCEC’s termination violated Title 20, Chapter 1 of the Crow Law and Order Code, which provides that “no termination of residential service shall occur between November 1 and April 1 without specific prior approval of the Crow Tribal Health Board.” BHCEC filed suit in district court seeking to enjoin the tribal court action for lack of jurisdiction.

The district court granted summary judgment in favor of Big Man. First, the district court held that BHCEC did not show that Congress had intended to divest the Crow Tribe of its tribal jurisdiction over BHCEC’s action on the Tribe’s land. In the alternative, the district court concluded that both Montana v. United States^[32] exceptions apply, which grant a tribal court jurisdiction over a non-tribal member: “1) BHCEC formed a consensual relationship with the Tribe and there is a sufficient nexus between the regulation and that relationship, and 2) BHCEC’s conduct has a direct effect on the health and welfare of a tribal member.” BHCEC appealed the district court’s ruling.

The Ninth Circuit concluded that the first Montana exception was sufficiently met to sustain tribal jurisdiction over the dispute. BHCEC’s voluntary provision of electrical services on the Tribe’s reservation and its contracts with tribal members to provide electrical services created a consensual relationship within the meaning of Montana. Additionally, the Ninth Circuit held that the at-issue tribal regulation had a nexus to the activity that is the subject of the consensual relationship between BHCEC and the Tribe. The Ninth Circuit affirmed the district court’s decision.

§ 1.3.2. Exhaustion of Tribal Court Review

The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts. If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually^[33] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.^[34] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss^[35] or stay^[36] the case.

Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.^[37] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.^[38] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.^[39] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”^[40] And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”^[41]

After the tribal court has ruled on the merits of the case^[42] and all appellate options have been exhausted,^[43] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.^[44] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.^[45] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.^[46]

There are several exceptions to the exhaustion doctrine. First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”^[47] Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”^[48] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.^[49]

Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated. Several of these cases were decided in the last year.^[50]

Chegup v. Ute Indian Tribe of Uintah & Ouray Rsrv., 28 F.4th 1051, 1053 (10th Cir. 2022). The Ute Indian Tribe of the Uintah and Ouray Reservation (“Tribe”) temporarily banished four members (“Banished Members). Rather than challenging their banishment in tribal court, the Banished Members sought relief in federal court by filing a petition for habeas corpus. The Banished Members claimed that, as a result of their temporary banishment, they were detained within the meaning of the Indian Civil Rights Act of 1968 (“ICRA”). The district court dismissed the suit, finding that temporary banishment did not constitute detention for the purposes of ICRA. Because the district court first analyzed whether tribal banishment amounted to detention under ICRA, it failed to address the Tribe’s alternative position that the Banished Members failed to exhaust their tribal remedies. The Banished Members appealed.

On appeal, the Tenth Circuit concluded that the district court should have started its analysis by addressing tribal exhaustion. “Only then, assuming that exhaustion was not an obstacle to this suit, should it have considered whether temporary or permanent banishment is cognizable as detention under ICRA’s habeas provision.” The Tenth Circuit declined to address the Banished Members’ argument that tribal exhaustion should be excused. Rather, the Tenth Circuit noted three reasons for finding the district court erred by not first addressing tribal exhaustion: (1) whether banishment constitutes detention under ICRA presented a significant, complex, and contentious issue; (2) tribal exhaustion was not obviously excused; and (3) the strong comity and sovereignty concerns underlying the tribal exhaustion doctrine. Accordingly, the Tenth Circuit reversed with instructions to resolve the exhaustion issue before turning to the substance of the claim.

In a dissenting opinion, Judge Lucero maintained that the district court was “unequivocally correct in dismissing the case.” Judge Lucero explained that “[a]bsent any authority requiring an exhaustion determination before jurisdiction, the complexity of the exhaustion issue in this case is yet another reason to defer to the district court’s discretion to first decide the bounds of its jurisdiction.”

Monster Tech. Grp., LLC v. Eller, No. CIV-21-879-J, 2021 WL 5395788 (W.D. Okla. Oct. 14, 2021). In September 2021, the United States District Court for the Western District of Oklahoma dismissed the Plaintiff’s suit for failure to exhaust tribal court remedies (“Order”). Plaintiff subsequently filed a motion for reconsideration, arguing the Order was erroneous. Plaintiff maintained that although it filed an appeal with the Supreme Court of the Iowa Tribe (“Tribal Supreme Court”) six months prior, it anticipated further delay because the Tribal Supreme Court consisted of only one judge. The court rejected this argument and denied a motion for reconsideration because the Tribal Supreme Court’s review was not complete.

The district court noted that a delay in the pending appeal did not negate the requirement that federal courts should generally abstain from hearing cases until tribal court remedies are fully exhausted. The court further explained that “[a] delay of less than six months coupled with some indefinite amount of anticipated additional delay does not qualify as ‘exceptional circumstances,’” nor does it result in a denial of justice. Accordingly, the district court dismissed Plaintiff’s action without prejudice, permitting the Plaintiff to reassert its claims in the future should the delay of tribal review extend for such a time that it becomes an extraordinary circumstance.

Adams v. Dodge, No. 21-35490, 2022 WL 458394 (9th Cir. Feb. 15, 2022). Adams filed a habeas petition under 25 U.S.C. § 1303 seeking relief from a Nooksack Tribal Court (“Tribal Court”) warrant. The United States District Court for the Western District of Washington denied Adams’ habeas petition for failure to exhaust tribal remedies. Adams appealed the district court’s decision, but the Ninth Circuit affirmed dismissal, explaining that “prior to turning to federal court, habeas petitioners must exhaust the remedies available to them in tribal court.”

The Ninth Circuit rejected Adams’ argument that she was not required to exhaust her tribal court remedies because the Tribal Court acted in bad faith. The Ninth Circuit similarly rejected Adams’ argument that she was not required to exhaust her tribal remedies because she was arrested off-reservation and the Tribal Court therefore lacked criminal jurisdiction to arrest her.

In her final argument, Adams claimed that under Congress’ passage of Public Law 280 in 1953, Washington State assumed exclusive criminal jurisdiction over tribal lands. The Ninth Circuit disagreed with this argument, reasoning that Adams failed to show Washington State’s jurisdiction was exclusive. The court noted that “the Washington Supreme Court has stated in dicta that tribal and state courts generally have concurrent jurisdiction over criminal cases.” Ultimately, because Public Law 280 was designed to supplement tribal institutions rather than supplant them, Adams failed to show the Tribal Court lacked jurisdiction. Because Adams failed to demonstrate that she was not first required to exhaust tribal remedies, the Ninth Circuit affirmed dismissal of her habeas petition.

Allstate Indem. Co. v. Cornelson, No. 21-5831 RJB, 2022 WL 856863 (W.D. Wash. Mar. 23, 2022). This case stems from a complaint filed by Joaquin Ortega Carrillo (“Carrillo”) alleging that Joshua Cornelson (“Cornelson”) assaulted and battered him. The assault and battery allegedly occurred at Cornelson’s home, which is located on the lands of the Lower Elwha Klallam Tribe. Because Cornelson’s home was covered by an Allstate insurance policy, Carrillo sent a letter to Allstate demanding over $500,000 in damages. Accordingly, Allstate sought a declaratory judgment in federal court that it had no obligation to provide coverage or a defense to Cornelson in connection with Carrillo’s claims. Allstate also sought a declaration that it did not owe Carrillo money pursuant to the coverages allowed under Cornelson’s policy.

On February 11, 2022, Cornelson and his wife filed a complaint in the Lower Elwha Klallam Tribal Court (“Tribal Court”) “seeking a declaration that the Tribal Court ha[d] jurisdiction and that Allstate [wa]s under a duty to defend and indemnify them” in the dispute with Carrillo. The Cornelsons then filed a motion to dismiss for lack of tribal court exhaustion, arguing that the United States District Court for the Western District of Washington should dismiss or stay the case to give the Tribal Court an opportunity to rule on whether it had jurisdiction. Allstate opposed the motion, claiming “the Tribal Court plainly lack[ed] jurisdiction over Allstate . . . and exhaustion [wa]s therefore not required.”

The court rejected Allstate’s argument that tribes lack civil authority over the conduct of nonmembers on non-Indian land within a reservation. Because the present case involved activities on Indian trust land, such an argument was inapplicable. The district court therefore concluded that the case should be stayed until the Tribal Court had an opportunity to determine whether it had jurisdiction over the dispute. The district court explained that the “case should be stayed, not dismissed, because exhaustion of tribal court remedies is a matter of comity, not of jurisdiction.” As such, the Tribal Court should first be permitted to consider whether it is the appropriate forum before the district court considers the issue.

Cross v. Fox, 23 F.4th 797, 799 (8th Cir. 2022). Plaintiffs, members of the Three Affiliated Tribes of the Fort Berthold Indian Reservation (“Tribe”), challenged provisions in the tribal constitution requiring nonresidents to return to the reservation to vote in tribal elections and prohibiting nonresidents from holding tribal office. Plaintiffs sued Tribe officials in tribal court. While the case was pending in tribal court, Plaintiffs also filed a lawsuit against the Tribe in federal court. Plaintiffs alleged that the return-to-reservation requirement and the eligibility requirement for holding public office violated the Voting Rights Act (“VRA”) and the Indian Civil Rights Act (“ICRA”). The Tribe moved to dismiss the case for lack of subject-matter jurisdiction, which the district court granted. The district court explained that Plaintiffs “inexcusably failed to exhaust tribal remedies for their ICRA claims and the court lacked federal-question jurisdiction over the VRA claims.”

On appeal, the Eighth Circuit assessed the district court’s dismissal of the ICRA claims as a result of Plaintiffs’ failure to exhaust tribal remedies. The Eighth Circuit affirmed dismissal of Plaintiffs’ ICRA claims on the separate ground that “ICRA does not contain a private right of action to seek injunctive or declaratory relief in federal court, and therefore, the district court lacked subject-matter jurisdiction . . . .” The court pointed out that a writ of habeas corpus is the only federal remedy for ICRA violations authorized by Congress. Because the plaintiffs did not seek a writ of habeas corpus, but rather declaratory and injunctive relief, the action required resolution through tribal forums. In other words, because there was no private right of action to enforce the ICRA in federal court, there could be no jurisdiction.

Stanko v. Ogala Sioux Tribe Pub. Safety Div. of the Ogala Sioux Tribe, No. CIV. 21-5085-JLV, 2022 WL 220088 (D.S.D. Jan. 25, 2022). On November 30, 2021, Stanko, a non-Indian man, filed a pro se complaint against the Ogala Sioux Tribe (“Tribe”) and various tribal officers. The complaint alleged that, while traveling on a federally maintained highway located on reservation land in South Dakota, tribal officers unlawfully arrested and detained him in violation of his constitutional rights. The complaint further alleged that the tribal officers assaulted, battered, and stole from him. Accordingly, Stanko brought claims under the Civil Rights Act, the Indian Civil Rights Act, as well as the common law torts of assault, battery, and theft. With the complaint, Stanko filed an objection and supporting affidavit seeking to avoid dismissal of his claims for failure to exhaust tribal remedies.

The United States District Court for the District of South Dakota rejected this argument, finding Stanko’s allegation that tribal officers violated his civil rights on reservation land squarely within the tribal court’s jurisdiction. Ultimately, the district court noted that “[w]hether Mr. Stanko approves of that jurisdiction or believes he cannot get a fair trial in tribal court is not relevant to the court’s evaluation of the issues before it.” The court further reasoned that federal policy supporting tribal self-government requires federal courts to first give tribal courts an opportunity to determine their own jurisdiction. Accordingly, Stanko’s claims were dismissed without prejudice.

On May 12, 2022, following de novo review, the Eighth Circuit affirmed the district court’s dismissal of Stanko’s claims.^[51]

Rincon Mushroom Corp. of Am. v. Mazzetti, No. 3:09-cv-02330-WQH-JLB, 2022 WL 1043451 (S.D. Cal. Mar. 15, 2022). In 2009, the Rincon Mushroom Corporation of America (“RMCA”) filed a complaint in federal court against Defendants in their personal and official capacities as representatives of the Rincon Band of Luiseño Indians (“Tribe”). RMCA alleged that Defendants and the Tribe conspired to regulate activity on RMCA’s land (“Land”) to lower the value so the Tribe could purchase the Land at a discount. On September 21, 2010, the district court granted Defendants’ motion to dismiss, explaining that RMCA failed to exhaust tribal remedies.

In 2015, RMCA filed a complaint in the Rincon Tribal Court (“Tribal Court”) challenging the Tribe’s regulatory jurisdiction over RMCA’s activities on the Land. Following a bifurcated trial, the Tribal Court held it had adjudicatory jurisdiction over the dispute, and entered judgment in favor of Defendants, granting several forms of relief (“Judgment”). The Judgment included an injunction requiring RMCA to receive Tribe approval prior to any future development or use of the Land, as well as to provide the Tribe with access to the Land to assess contamination. On appeal, the Rincon Appellate Court reversed and remanded the injunction on the grounds that it was overbroad. The Tribal Court subsequently entered an Amended Judgment modifying the scope of the injunction, which was not appealed within the tribal court system.

On April 22, 2020, RMCA filed a motion to reopen case in federal court on the basis that it had exhausted its tribal remedies. The district court granted the motion, and RMCA subsequently filed a motion for summary judgment contending that the Amended Judgment of the Tribal Court should not be recognized or enforced. Following oral argument on the matter, the district court held that RMCA had “not exhausted tribal remedies with respect to the injunctive relief contained in the Amended Judgment because they ha[d] not appealed the injunction to the Rincon Appellate Court.” Accordingly, RMCA’s failure to exhaust tribal remedies with respect to the injunction precluded federal court review of the injunction.

Brown v. Haaland, No. 3:21-cv-00344-MMD-CLB, 2022 WL 1692934 (D. Nev. May 26, 2022). Plaintiffs are ten individuals whose families have resided on the Winnemucca Indian Colony (“Colony”) for many generations. After more than thirty-five years of disputes over Colony leadership, the Rojo Council was recognized as the Colony’s permanent council. In June 2019, the Rojo Council filed trespass actions against the plaintiffs in the Bureau of Indian Affair’s Court of Indian Offenses (“BIA Court”) seeking to evict and remove them from the Colony. Shortly after, the Rojo Council began demolishing homes, and the plaintiffs moved for an emergency mandatory injunction in federal court. This prompted the Colony to request permission to intervene in opposition (“Intervenor”).

After the district court denied the emergency motion, the plaintiffs successfully moved to amend their complaint. Intervenor then filed a countermotion to dismiss, arguing that the plaintiffs “ha[d] not exhausted their tribal court remedies before challenging their evictions in federal court.” The district court rejected this argument, explaining that Intervenor’s arguments related to tribal court exhaustion were predicated on claims in the original complaint. The district court reasoned that “[b]ecause the claims in the [Amended Complaint] arise from different law and challenge different actions, the Court finds that Intervenor’s tribal exhaustion arguments are not responsive to the claims asserted in the [Amended Complaint].”

Cayuga Nation by & through Cayuga Nation Council v. Parker, No. 522-cv-00128 (BKS/ATB), 2022 WL 1813882 (N.D.N.Y. June 2, 2022). The Cayuga Nation (“Nation”) sued numerous parties (“Defendants”) for allegedly conducting an unlawful scheme involving the illegal sale of untaxed and unstamped cigarettes, marijuana, and other merchandise on the reservation. Defendants sold such untaxed goods through a small convenience store (“Pipekeepers”) and aimed to open another Pipekeepers store in Montezuma, New York. Under the Cayuga Nation’s Amended and Restated Business License and Regulation Ordinance (“Ordinance”), business cannot be conducted on Nation land without a business license issued by the Nation. Moreover, licenses may not be issued to businesses that compete with business conducted by the Nation.

On December 2, 2021, the Nation obtained an order from the Cayuga Nation Civil Court (“Tribal Court”) enjoining Pipekeepers from operating and imposing a fine. In February 2022, the Nation filed an amended Tribal Court complaint alleging that Defendants continued to violate the Ordinance. The Tribal Court therefore issued an order temporarily enjoining Defendants from operating Pipekeepers. After Defendants failed to file any opposition, the Tribal Court issued an order permanently enjoining Defendants.

Defendants filed motions to dismiss in the District Court for the Northern District of New York, arguing the court should abstain until all Tribal Court remedies were exhausted. The Nation maintained the position that tribal exhaustion was not applicable because there had been no federal action challenging tribal court jurisdiction and there were no further tribal court proceedings to exhaust. The court rejected this argument, holding there were remedies left to exhaust in the Tribal Court. The court pointed to various circumstances, including the presence of a proceeding in Tribal Court and concern about the Tribal Court’s authority to enforce the injunction as factors favoring application of the tribal exhaustion rule. Accordingly, the district court stayed the action pending exhaustion of Tribal Court proceedings, explaining it would be premature to act until the Tribal Court action was exhausted.

City of Seattle v. Sauk-Suiattle Tribal Ct., No. 2:22-CV-142, 2022 WL 2440076 (W.D. Wash. July 5, 2022). The Sauk-Suiattle Indian Tribe (“Tribe”) filed a complaint against the City of Seattle (“City”) in the Sauk-Suiattle Tribal Court (“Tribal Court”). The Tribe claimed Seattle City Light, which is owned by the City, infringed on the Tribe’s rights by constructing and operating three dams on the Skagit River. These dams blocked the passage of salmon, thereby threatening the Tribe’s livelihood. The dams are not located on Tribal land, but rather upstream.

The City moved to dismiss the action in Tribal Court. Subsequently, the City sought a preliminary injunction in federal court to prevent the Tribal Court from exercising jurisdiction over it. The Tribe then filed a motion to dismiss, arguing the district court should first require the City to exhaust its tribal remedies. In opposition, the City argued that one of the four exceptions to the exhaustion requirement should apply. Specifically, the City argued that tribal court jurisdiction was so plainly lacking that requiring the City to exhaust tribal remedies would serve no purpose other than to delay. While courts have not precisely articulated how plain the issue of tribal court jurisdiction must be before exhaustion can be waived, some courts require that tribal exhaustion only be waived if the assertion of tribal court jurisdiction is frivolous or clearly invalid.

The district court noted that while the powers of an Indian tribe generally do not extend to the activities of nonmembers of the tribe, a “tribe may also retain inherent power to exercise civil authority over the conduct of non-Indians on fee lands within its reservation when that conduct threatens or has some direct effect on the political integrity, economic security, or the health or welfare of the tribe.” To this point, the Tribe argued the City’s upstream activities had a direct impact on the health of the salmon population downstream.

The district court acknowledged that depending on how the facts of the case developed, the argument may be attenuated. But, the court could not definitively find the argument frivolous. In addition, the district court explained that because the lawsuit was based on interpretation of tribal law and Indian treaty rights, the case would benefit from the Tribal Court’s expertise. Accordingly, the district court found the complex legal issues well-suited for review by the Tribal Court. The Defendants’ motion to dismiss was denied and the case stayed until the Tribal Court had a full opportunity to determine its own jurisdiction.

McKinsey & Co., Inc. v. Boyd, No. 22-CV-155-WMC, 2022 WL 1978735 (W.D. Wis. June 6, 2022). McKinsey is a management consulting firm that provided marketing advice to pharmaceutical clients that sold opioids. The Red Cliff Band of Lake Superior Chippewa Indians (“Red Cliff”), a federally recognized tribe in Wisconsin, sued McKinsey in the Red Cliff Tribal Court (“Tribal Court”). Red Cliff sought to hold McKinsey accountable for its consulting work with opioid companies and the resulting devastation to the Red Cliff Reservation caused by the opioid epidemic. McKinsey moved for a preliminary injunction against the tribal action, arguing the Tribal Court lacked jurisdiction given its purported lack of contacts to the Red Cliff Reservation and Wisconsin.

Defendants argued the tribal court exhaustion rule barred McKinsey from raising jurisdictional arguments. While the district court noted the general principle favoring tribal court exhaustion, it recognized that tribal exhaustion is unnecessary when “it is plain that no federal grant provides for governance of nonmembers’ conduct.”^[52] Because the court could find no legal basis for the assertion of tribal court jurisdiction over McKinsey, McKinsey’s likelihood of success on the merits of its claim was a “near certainty.” Accordingly, the district court enjoined Red Cliff from proceeding with its case in Tribal Court.

Clausen v. Eastern Shoshone Tribe Health Care Plan, et al., No. 2:20-cv-00242-NDF (D. Wyo. July 1, 2022). The plaintiff, Clausen, a non-Indian, was a registered nurse and worked as an employee of the Eastern ShoShone Tribe and Eastern Shoshone Tribe Health Care Plan (collectively, the “Tribe”) at the Morning Star Care Center (“Morning Star”)—a nursing home licensed by the State of Wyoming and operated by the Tribe. During her employment, Clausen experienced a series of ailments, and the resulting medical bills were submitted for payment under the tribal health care plan, but ultimately not paid. Clausen filed suit in Wind River Tribal Court against Defendants for failure to provide coverage under the tribal health care plan.

The action in the Tribal Court was stayed by stipulation of the parties, and ultimately was voluntarily dismissed without prejudice. Clausen then filed suit in district court seeking payment of benefits, a declaratory judgment that the tribal health care plan is not a governmental plan as defined in 29 U.S.C. § 1002(32), and damages for breach of fiduciary duties. The Tribe filed a motion to dismiss, arguing, among other things, that the action must be dismissed because Clausen failed to exhaust tribal court remedies. Clausen argued that she was not required to exhaust tribal court remedies given the preemptive nature of ERISA, which she claimed expresses a clear preference for a federal forum.

The district court explained that simply because Clausen alleged that ERISA applies to the tribal health care plan, does not mean that the sovereign immunity issue is somehow less important to tribal self-government and self-determination, or that a tribal court should for some reason lack the opportunity to first evaluate the factual and legal bases for resolution of this issue. In addition, the Tribal Court is particularly well suited to undertake the fact-specific analysis of the tribal health care plan at issue. For these reasons, the district court granted the Tribe’s motion to dismiss.

§ 1.3.3. Tribal Sovereignty & Sovereign Immunity

An axiom in Indian law is that Indian tribes are considered domestic sovereigns.^[53] Like other sovereigns, tribes enjoy sovereign immunity.^[54] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.^[55] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”^[56] Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”^[57]

Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad. With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”^[58]

Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,^[59] whether in tribal, state, or federal court.^[60] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.^[61]

Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.^[62] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.^[63] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”^[64]

Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.^[65] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma^[66] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.^[67] In C & L Enterprises, the Tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.^[68] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.^[69]

Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”^[70] Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract. If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal. Below are summaries from some of the most relevant sovereign immunity cases of the last year.^[71]

**Immunity may be asserted by tribal corporations, as well as tribal governments. Some recent sovereign immunity cases dealing with tribal corporations are collected and discussed in § 1.3.4.

Treasure v. United States, No. CV-20-75-GF-BMM, 2021 WL 4820255 (D. Mont. Oct. 15, 2021). Plaintiffs’ land was destroyed and damaged when a fire spread from the nearby Fort Peck Indian Reservation (FPIR) onto their property. The Assiniboine and Sioux Tribes (“Tribes”) established and cultivated buffalo entirely on land located within the FPIR. The Tribes supplemented the buffalo’s food source through a scheme that involved a crop sharing arrangement with Defendants Dale and Doug Grandchamp. On August 31, 2018, while Defendants and a third crop-sharer were swathing fields for hay, a fire broke out. The fire ignited in Roosevelt County, which had a burn ban in effect due to the high risk of wildland fires.

Authorities, including the Bureau of Indian Affairs (BIA) Fire Services, responded to the blaze, reassuring the concerned Plaintiffs at a later point in time that the blaze was either extinguished or under control. However, on September 1, 2018, the fire spread to Plaintiffs’ land and consumed 3,100 acres, destroying another 700 acres from collateral fire impacts. Plaintiffs filed suit in United States District Court for the District of Montana regarding the damaged or lost property against the BIA, Doug and Dale Grandchamp, and several individuals suspected of involvement in the fire (Defendants). Defendants moved to dismiss for lack of subject matter jurisdiction based on the principle of tribal sovereign immunity. Defendants argued that tribal sovereign immunity shielded both the Tribes and Grandchamp, in his capacity as a tribal employee. Though Plaintiffs agreed that tribal sovereign immunity would shield the Tribes in the absence of a waiver, they argued the Tribes waived their immunity. Plaintiffs asserted that tribal sovereign immunity did not apply to Grandchamp because he was sued in an individual capacity. The court bifurcated its analysis, discussing separately the application of tribal sovereign immunity to the Tribes and to Grandchamp.

The Tribes argued that tribal sovereign immunity shielded them from suit in federal court absent a waiver or abrogation, “neither of which existed in the case.” However, Plaintiffs argued that the Tribes waived tribal sovereign immunity “by virtue of their relationship with the BIA” while they were fighting the fire. The Court cited Alvarado v. Table Mountain Rancheria^[72] for the premise that Indian tribes have sovereign immunity from lawsuits in state and federal court unless immunity is waived by the tribe or abrogated by Congress. The Court also cited Fletcher v. United States^[73] for the principle that a waiver cannot be implied, “but rather must be unequivocally expressed.”

The Tribes argued that they did not waive their tribal sovereign immunity, and that the Federal Torts Claims Act (FTCA), upon which Plaintiffs pursued their claims, did not abrogate their immunity. Plaintiffs requested more time for discovery, but the district court reminded Plaintiffs that (1) “the burden for the party seeking jurisdictional discovery remains particularly high where the party seeks to disprove the applicability of an immunity-derived bar to suit,” and (2) “immunity serves to shield a defendant from the burdens of defending the suit, including the burdens of discovery.”^[74] The district court agreed with Defendants that no evidence existed that the Tribes waived tribal sovereign immunity, and Plaintiffs failed to explain how additional discovery time would have uncovered applicable evidence. In support, the district court reminded Plaintiffs that courts strongly presume that tribal sovereign immunity has not been waived.

Although Plaintiffs argued the Tribes waived tribal sovereign immunity by operating as an instrument of the BIA, the FTCA only applies when “non-government defendants are acting as either an instrumentality or agency of the United States.”^[75] The Federal Government must “supervise day-to-day operations of an instrumentality in order for the FTCA to apply.”^[76] No evidence existed to show that the Tribes were involved in the daily operations supervised by the BIA. Therefore, the district court held the Tribes were not an instrumentality of the BIA and the FTCA had not waived tribal sovereign immunity. Additionally, the court ruled the Tribes were entitled to tribal sovereign immunity and thus immune from suit under the FTCA and related claims. The claims against the Tribes were dismissed pursuant to Rule 12(b)(1).

Next, the district court turned to Doug Grandchamp. As for Dale Grandchamp, he failed to appear, plead, or otherwise defend himself, so default was entered against him on July 9, 2021.

Defendants asserted that Doug Grandchamp was acting in an official capacity during the events alleged in the Complaint. Plaintiffs countered that even if that was true, they sued him in his individual capacity. The Court stated that tribal sovereign immunity does not bar individual capacity suits against tribal employees when the Plaintiffs seek damages from the individual personally. The exception applies even if the plaintiff’s claims involve actions that employees allegedly took in their official capacities and within their employment authority. This exception relies on a “remedy-focused” analysis to determine if tribal employees should have tribal sovereign immunity when sued in their induvial capacity. Sovereign immunity shields a tribal employee when recovery against the individual, in reality, would run against the tribe. Plaintiffs may not circumvent tribal sovereign immunity by identifying individual defendants when the tribe remains the real intended party of interest.

Though Plaintiffs claimed that they sued Grandchamp in an individual capacity, he was never identified individually; all allegations lumped him in with the Tribes. The Court stated that a court assumes that an employee has been sued in their official capacity where plaintiffs articulate only generalized allegations that fail to differentiate the alleged conduct of the individual defendants from a tribe. The Court agreed that Plaintiffs failed to distinguish Grandchamp in an individual capacity and thus sued him in his official capacity. Therefore, Grandchamp was entitled to tribal sovereign immunity, and the complaints against him were dismissed under Rule 12(b)(1).

Acres Bonusing, Inc v. Marston, 17 F.4th 901 (9th Cir. 2021). Blue Lake Rancheria, a federally-recognized Tribal Nation, sued Acres Bonusing, Inc. (ABI) and James Acres, ABI’s owner, in Blue Lake Tribal Court, but lost. Unsatisfied with the Tribal Court win, ABI sued in federal court, and included the tribal court judge, the judge’s law clerks, the clerk of the Tribal Court, tribal officials, and outside law firms and lawyers that represented the Tribe. However, ABI did not sue the Blue Lake Tribe. The district court concluded that tribal sovereign immunity shielded Defendants from suit because they were acting within the scope of their tribal authority, i.e., within the scope of their representation of Blue Lake Casino. The district court held that tribal sovereign immunity applied because adjudicating this dispute would require the court to interfere with the tribe’s internal governance. The main question on appeal was whether tribal sovereign immunity did in fact shield Defendants from suit. The Court held for the following reasons that the district court erred in that respect.

Reversing in part, the Ninth Circuit followed the framework laid out in Lewis v. Clarke^[77] and held tribal sovereign immunity did not apply because ABI sought money damages from Defendants in their individual capacities, and the Tribe therefore was not the real party in interest. The U.S. Supreme Court held in Lewis that “the protection offered by tribal sovereign immunity is no broader than the protection offered by state and federal sovereign immunity.”^[78] In situations where a suit is brought against a governmental official but might actually be brought against a sovereign entity, the courts look to whether the sovereign is the real party in interest to determine whether sovereign immunity bars the suit. Tribal sovereign immunity does not apply where the judgment will not operate against the Tribe. The Court relied on the Lewis framework, with support from additional on point cases in the Ninth Circuit, to conclude that tribal sovereign immunity did not bar ABI’s suit against Defendants. The Ninth Circuit reasoned that Plaintiffs sought money damages against Defendants in an induvial capacity, and any relief ordered by the district court would not require Blue Lake to do or pay anything. Thus, the Blue Lake Tribe is not the real party in interest and tribal sovereign immunity does not apply to bar the suit against applicable Defendants. In addition, the Ninth Circuit rejected the argument that Lewis and other case law were distinguishable in this case because the alleged tortuous conduct occurred in the Tribal Court, which is part of the Tribe’s inherently sovereign authority. The Court of Appeals reasoned that the district court misapplied several cases that did not comport with Lewis and other prior cases.

The Ninth Circuit concluded, among other matters, that tribal sovereign immunity did not bar the suit and the case was remanded back to the district court for further proceedings.

Grondal v. United States, 37 F.4th 610 (9th Cir. 2022). In the culmination of a series of appeals regarding a business lease which Defendant-Appellant Wapato Heritage, LLC once held on waterfront land held in trust for the Colville Indian Reservation and certain allottees, the Ninth Circuit Court of Appeals affirmed the district court’s decision (1) dismissing Wapato Heritage’s cross claims against the Confederated Tribes of the Colville Reservation (the Tribes) and the Bureau of Indian Affairs (BIA). The Court also affirmed the lower court’s decision to deny Wapato Heritage’s motion to intervene in a trespass damages trial between the BIA and other parties.

Regarding a specific piece of land on Lake Chelan, Washington, Wapato Heritage accused the Tribes and the BIA, the beneficial owners of the land, of misconduct related to the land’s lease. The Ninth Circuit Court of Appeals already determined Wapato Heritage’s business lease ended in 2009, and “the land at issue was still Indian land held in trust by the United States.” The lower court dismissed Wapato’s crossclaims against the Tribes and the BIA, in part, because of tribal sovereign immunity.

The Court analyzed five lower court holdings, focusing first on the tribal sovereign immunity issue. Wapato Heritage claimed that the Tribes waived tribal sovereign immunity by generally participating in this case. The Ninth Circuit rejected the argument, reasoning that an instance where participation in litigation will constitute waiver of tribal sovereign immunity must be viewed as a very limited exception to the rule that upholds tribal sovereign immunity. The Court of Appeals stated that a tribe’s participation in litigation does not constitute consent to counterclaims asserted by defendants in those actions. Nor does a tribe’s invocation of tribal sovereign immunity in a motion to dismiss for lack of jurisdiction waive that very defense to the relevant claims. Thus, the Tribes retained their tribal sovereign immunity to the crossclaims, and the lower court did not need to rule on the claims’ merits. The Ninth Circuit also held (1) the district court lacked subject matter jurisdiction over lessee’s claims against BIA; (2) lessee was not entitled to writ of mandamus compelling BIA to recoup overpayments; and (3) lessee was not entitled to intervene as of right in BIA trespass damages trial against members.

Sipp v. Buffalo Thunder, Inc., 505 P.3d 897 (N.M. App. 2021), cert. granted (Feb. 8, 2022) (No. S-1-SC-39169). Jeremiah Sipp, an employee of a casino’s lighting vendor, Dial Electric, and Sipp’s wife sued a casino owned by the Pueblo Tribe in state district court to recover damages for injuries allegedly sustained by hitting his head on one of the casino’s garage doors. Sipp hit his head and was knocked out while acting in his capacity as an employee delivering lights to the casino. The District Court of Santa Fe County granted the casino’s motion to dismiss for lack of subject matter jurisdiction. The state district court held that Plaintiffs’ allegations did not fall within the limited immunity waiver contained in Section 8(A) of the Pueblo Tribe’s Tribal-State Class III Gaming Compact. Plaintiffs appealed.

On appeal, Plaintiffs argued that the state district court erred in granting Defendants’ motion to dismiss because Section 8(A) of the Compact expressly waives sovereign immunity and provides for state court jurisdiction over Plaintiffs’ claims. In contrast, Defendants contended that Section 8(A) does not permit the district court to exercise jurisdiction in this case for two reasons. First, the termination clause at the end of Section 8(A) was triggered by two federal court decisions, Pueblo of Santa Ana v. Nash, 972 F. Supp. 2d 1254 (D.N.M. 2013), and Navajo Nation v. Dalley, 896 F.3d 1196 (10th Cir. 2018), such that Section 8(A) no longer provides for state court jurisdiction. Second, Sipp does not qualify as a visitor to a gaming facility under Section 8(A) because (a) he had a business purpose for visiting Buffalo Thunder and not a gaming purpose, and (b) he was not injured in a “gaming facility.”

The Court of Appeals of New Mexico held that the termination clause had not been triggered and applied New Mexico case law interpreting Section 8(A) to find that Plaintiffs’ complaint sufficiently pleaded claims that fall within the Compact’s waiver of sovereign immunity for visitors to a gaming facility. The key question regarding tribal sovereign immunity being whether the employee sufficiently alleged claims that fall within the Compact’s immunity-waiver for visitors to a gaming facility. Defendants argued that Sipp’s visit to Buffalo Thunder was for business, and that the immunity-waiver only applied to casino patrons and not persons on the premises for other purposes. Also, Defendants asserted that the waiver was inapplicable because Sipp was not injured in a gaming facility. The Court of Appeals concluded that Sipp’s status as a visitor was sufficiently pleaded.

The Court of Appeals also rejected Defendants’ argument that cited the policy rationale that businesses like Dial Electric can negotiate the terms under which they enter the gaming facility and suggest that employees of the business should be treated in the same manner as the business itself for purposes of the waiver of tribal sovereign immunity. The Court of Appeals agreed that a person capable of suffering a physical injury is simply not analogous to that of a business entity for purposes of the waiver. The court also concluded that Plaintiffs’ amended complaint sufficiently alleged that he was on the premises with the permission of Defendants, and that his status as a visitor should have withheld the motion for dismissal.

The Court of Appeals also determined that Defendants failed to provide any authority for the interpretation that there is no waiver of sovereign immunity for injuries that occur outside of the gaming facility, and both the plain language of the Compact and New Mexico precedent are to the contrary. For these reasons, and several other unrelated to sovereign immunity, the Court of Appeals held that Plaintiffs plausibly alleged that Sipp was a visitor to the facility for purposes of the limited waiver of sovereign immunity in tribal-state gaming compact. The state district court’s dismissal of Plaintiffs’ lawsuit was reversed and remanded for further proceedings consistent with the opinion.

In re Coughlin, 33 F.4th 600 (1st Cir. 2022). A Chapter 13 debtor, Coughlin, filed a motion to recover for alleged violations of an automatic stay during his bankruptcy proceedings, and the creditors, an Indian Tribe, moved to dismiss the order based on the principle of tribal sovereign immunity. The United State Bankruptcy Court for the District of Massachusetts granted the motion, Coughlin appealed, and the First Circuit Court of Appeals permitted the direct appeal. The First Circuit ultimately held that the Bankruptcy Code unequivocally abrogates tribal sovereign immunity, even though it never expressly mentions Indian tribes.

In this case, Coughlin took out a loan from Lendgreen, a subsidiary of the Niiwan Tribe. Soon after, Coughlin filed for bankruptcy and per the Bankruptcy Code (BC), an automatic stay was issued enjoining debt-collection efforts outside the umbrella of the bankruptcy case. However, Lendgreen allegedly continued to contact Coughlin via phone and email seeking repayment of the loan despite reminders of the automatic stay prohibiting such conduct. At a later point, Coughlin attempted suicide. He claimed the decision was in part driven by the belief that his mental and financial agony would never end, and much of that agony was due to Lendgreen’s regular and incessant telephone calls, emails, and voicemails. To stop the alleged harassment, Coughlin brought an action to enforce the automatic stay and sought an order prohibiting Lendgreen from further attempts to recover their money, along with damages, attorney’s fees, and expenses. Lendgreen, wholly owned by an Indian Tribe successfully asserted tribal sovereign immunity by the lower court in those proceedings.

The First Circuit ruled that Section 106(a) of the Bankruptcy Code abrogated sovereign immunity for Indian Tribes. The Court believed that Native American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy, holding the Bankruptcy Code unequivocally strips tribes of their [tribal sovereign] immunity. The Court provided that Section 106(a) states that sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to dozens of provisions in the Bankruptcy Code, including Section 362. A “governmental unit” is defined in Section 101(27) to mean:

United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States, (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.^[79]

The question then shifted to whether “domestic government” included Indian tribes. The Court concluded that there is no real disagreement that a tribe is a government, and it is also clear that tribes are domestic, rather than foreign, thus, a tribe is a domestic government and therefore a government unit. The First Circuit took note that Section 106 was amended in the late 1990s because the prior version was ambiguous regarding the abrogation of tribal sovereign immunity. The Court explained that when Congress enacted Section 101(27) and 106, it understood tribes to be domestic governments, and when it abrogated the sovereign immunity of domestic governments in § 106, it unmistakably abrogated the sovereign immunity of tribes. The First Circuit rejected the argument that the BC does not abrogate tribal sovereign immunity because it never uses the word “tribe,” and because the Supreme Court previously ruled that “magic words” are not required to waive immunity. Finally, the Court rejected the Tribe’s argument that the legislative history led to ambiguity, because legislative history cannot introduce ambiguity into an unambiguous statute. The First Court reversed the lower court’s decision dismissing Coughlin’s motion to enforce the automatic stay and remanded the case for further proceedings.

Unite Here Loc. 30 v. Sycuan Band of the Kumeyaay Nation, 35 F.4th 695 (9th Cir. 2022). A labor union brought an action against Sycuan Band of the Kumeyaay Nation, a federally-recognized Indian Tribe, alleging the tribe violated the labor provisions of a contract between the two parties with respect to operation of a casino on Tribe’s reservation, and seeking to compel arbitration of that dispute pursuant to an arbitration clause contained in the contract. The Tribe counterclaimed and the lower court granted the labor union’s motion for judgment to compel arbitration and dismissed the Tribe’s counterclaim for declaratory relief. The Tribe appealed, and during those proceedings the issue of tribal sovereign immunity arose.

The Tribe entered a compact with the State of California that included the requirement that the Tribe adopt and maintain a Tribal Labor Relations Ordinance (TLRO). Section 13 of the TLRO “provides for arbitration as the dispute resolution procedure for all issues arising under the TLRO,” and section 13(e) required the Tribe to waive its tribal sovereign immunity “against suits brought in state or federal court seeking to compel arbitration.” The Tribe contended that they did not waive tribal sovereign immunity. The Tribe argued that tribal sovereign immunity cannot be implied but must be unequivocally expressed. The Tribe admitted to waiving tribal sovereign immunity under the TLRO but denied waving it under the National Labor Relation Act (NLRA) because such a waiver was not clear and unequivocal. Essentially, the Tribe asserted that the NLRA preemption is a threshold issue that the district court should consider before sending the underlying claims to arbitration because if the NLRA preempts the TLRO, then the waiver of tribal sovereign immunity may also be preempted and arbitrating sovereign immunity is contrary to the principles of sovereign immunity. The Court rejected that argument, concluding instead that the Tribe expressly waived tribal sovereign immunity in section 13(e) of the TLRO, and when a tribe agrees to judicial enforcement of an arbitration agreement it waives its immunity concerning that agreement. The Court commented that the Tribe cited no law in support of its argument that the arbitration agreement must expressly list all issues to which the Tribe waives sovereign immunity. Thus, there was no tribal sovereign immunity to arbitration because a party is only obligated to arbitrate when that party agreed to arbitrate, as the Tribe did.

Seneca v. Great Lakes Inter-Tribal Council, Inc., No. 21-CV-304-WMC, 2022 WL 1618758 (W.D. Wis. May 23, 2022). This case arose after Plaintiff, Dean Seneca, claimed that Defendant, Great Lake Inter-Tribal Council, Inc. (GLITC) fired him as Director of Epidemiology because of his race, color, national origin, age, and sex. Plaintiff also alleged Defendant retaliated against him for engaging in protected activity, in violation of Title VII of the Civil Rights Act of 1964 (Title VII), the Americans with Disabilities Act of 1990 (“ADA”), the Age Discrimination in Employment Act of 1967 (ADEA), and the Genetic Information Nondiscrimination Act of 2008 (GINA). The lawsuit was Plaintiff’s third action challenging his termination. He filed two earlier cases in state court where GLITC asserted, as they did here, that the action should be dismissed based on tribal sovereign immunity. The district court agreed that tribal sovereign immunity as it was applied in state court applied in federal court too. Accordingly, Defendant’s motion to dismiss was granted.

The district court stated that federally-recognized Indian tribes are immune from suit in both state and federal courts unless Congress abrogates a tribe’s sovereign immunity, or the tribe waives its right to invoke sovereign immunity. More importantly, because the GLITC is an arm of the Great Lake Tribe, business entities owned and operated as arms of a federally-recognized Indian tribe may assert the same immunity as the tribe itself. The district court concluded that because of GLITC’s composition, the fact that it was operated solely by a recognized tribe, and that its purpose is to support its member tribes through service and assistance, it was entitled to tribal sovereign immunity as an arm of the Great Lakes Tribe. The district court granted Defendant’s motion to dismiss.

§ 1.3.4. Tribal Corporations

A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).^[80] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.^[81] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.^[82]

Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.^[83] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.^[84] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.^[85]

An Indian corporation may also be organized under tribal or state law.^[86] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).^[87] Under federal common law, the corporation likely enjoys immunity from suit.^[88] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.^[89]

Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.

There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit. In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act. Below find a discussion of recent cases dealing with tribal corporations.^[90]

** Some cases dealing with Tribal Corporations are discussed in § 1.3.3 because they deal with whether a Tribal Corporation may assert their tribe’s sovereign immunity.

A+ Gov’t Sols., LLC v. Comptroller of Md., 272 A.3d 882 (Md. Ct. Spec. App. 2022). The Oklahoma Indian Welfare Act (“OIWA”), 25 U.S.C. §§ 5201–10, is a parallel provision to section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. §§ 5101–44. Chickasaw Nation Industries, Inc. (“CNI”) was a federally chartered corporation created and incorporated in 1996 under the OIWA. CNI owned CNI Government, LLC (“CNI Government”), which wholly owned CNI Subsidiaries, a collection of six limited liability companies—the appellants in this case. CNI Subsidiaries derived all, or substantially all, of their income from the performance of service contracts with the federal government.

In 2014, after concluding that CNI Subsidiaries were required to pay pass-through entity income tax (“PTE income tax”), the Comptroller of the Treasury issued notices of tax assessment for tax year 2012 against each of the CNI Subsidiaries. CNI Subsidiaries challenged these tax assessments, but two lower courts affirmed the Comptroller’s assessment.

The Court in this case, as relevant here, considered whether the Tax Court erred in assessing PTE income tax against CNI Subsidiaries even though CNI Government is owned by CNI, a federally chartered tribal corporation. The Court explained that PTE income tax is not imposed on a pass-through entity like CNI Subsidiaries and CNI Government. Rather, it is treated as a tax imposed on the nonresident owner of the pass-through entity, here, CNI. As such, central to determining whether the Comptroller could collect PTE income tax from CNI Subsidiaries turned on whether CNI’s income was taxable under Maryland law.

The Court held that the Tax Court erred in concluding that CNI Subsidiaries was subject to PTE income tax. The court explained that Section 17 corporations like CNI “are not recognized as separate entities for federal tax purposes,” and the corporations therefore receive the same federal tax treatment as the tribes that own them.^[91] Because Native American tribes are not subject to federal income tax, neither are federally chartered tribal corporations like CNI. Given CNI’s income was not taxable under federal law, and Maryland had elected to rely on the federal calculation of taxable income, the Court held that none of CNI’s income was taxable under Maryland law—and thus, it was error to require CNI subsidiaries to pay PTE income tax.

Cully Corp. v. United States, 160 Fed. Cl. 360 (Fed. Cl. 2022). In 2005, the defendant, the United States acting through the Air Force, purportedly transferred by donation three buildings to the plaintiff, Cully Corporation (“Cully”), an Alaska Native village corporation (“ANC”). Several years later, the Air Force attempted to reclaim the property by arguing that the buildings were never effectively transferred to Cully because the transaction violated federal regulations. An Alaskan state court found that Cully did not hold a present possessory interest in the buildings, a finding binding this United States Court of Federal Claims. Thus, the following claims remained: Cully sued the United States, asserting a Fifth Amendment takings claim and a quantum meruit claim. In this Court, Cully moved for summary judgment on its takings claim and the United States cross-moved for summary judgment on both of Cully’s claims.

According to the Code of Federal Regulations (“C.F.R.”) § 102-75.990, federal agencies may “[d]onate to public bodies any Government-owned real property (land and/or improvements and related personal property), or interests therein.”^[92] Thus, for the takings claim, the issue was whether Cully was a “public body for purposes of the Federal Regulations governing the transfer or donation of real property” such that the building transfer was valid—to the extent a revisionary interest was transferred.^[93]

A “public body” as it relates to the transfer of real property is “any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, or any political subdivision, agency, or instrumentality of the foregoing.”^[94] Cully, as an ANC, was distinct from Indian tribes throughout the rest of the United States; ANCs operate as corporations in form but appear as local governments on their face. For this reason, the Court determined that Cully, as an ANC, qualified as a “political subdivision” for purposes of 41 C.F.R. § 102-71.20, and thus was a public body as contemplated under 41 C.F.R. § 102-75.990.

The Court granted in part Cully’s motion for summary judgment on the takings claim, concluding that Cully held a reversionary property interest in the buildings which was temporarily taken by the United States, and reserved the issue of whether the taking was compensable for trial. The Court, however, denied summary judgment on the quantum meruit claim, reasoning that Cully’s recoverability in quantum meruit was “limited to the extent Cully believed it was performing remediation to receive a possessory interest and what interest the parties believed were being transferred,” such questions of fact further necessitating trial on these issues.^[95]

Evans Energy Partners, LLC v. Seminole Tribe of Fla., Inc., No. 21-13493, 2022 WL 2784604 (11th Cir. July 15, 2022). This case concerned whether the agreement between Seminole Tribe of Florida (the “Tribe”) and Evans Energy Partners (“Evans”) contained a clear waiver of tribal immunity. The Eleventh Circuit held that the agreement did not contain a waiver of the Tribe’s sovereign immunity.

The agreement included two relevant provisions: a limited arbitration clause and a waiver of tribal immunity. The arbitration clause explained that, though disputes arising out of the agreement would normally be settled in the Tribe’s courts, Evans retained the right “to initiate a binding arbitration proceeding . . . for the sole and exclusive purpose of terminating the Management Agreement and compelling the payment of the Termination Fee . . . .” But this right did not extend to a proceeding against the Tribe, as the parties agreed that “in no event shall the Seminole Tribe of Florida, Inc., or any of its other affiliated entities be named a party in any arbitration . . . .” Instead, Evans’s rights were “restricted to compelling Seminole Energy to participate in an arbitration proceeding for the express purpose set forth herein.” Seminole Energy is a third entity that is mentioned several times throughout the agreement, but whose identity is never clearly defined. The agreement also included a clause waiving tribal immunity. That clause stated that “[T]he Company through its parent company the Seminole Tribe of Florida, Inc., agrees to a limited waiver of sovereign immunity in order to allow Evans Energy” to exercise its rights under the arbitration clause.

After the agreement was terminated, the Tribe filed an action in tribal court against Evans, which resulted in a default judgment of $2.5 million. Before the final judgment was issued in the tribal court, Evans served the Tribe with a demand for arbitration for breach of contract. The arbitration panel found that they lacked jurisdiction to decide the gateway question of who decides the arbitrability of the dispute. Evans then sued in federal court seeking to enforce the agreement’s arbitration clause under the Federal Arbitration Act. The district court held that the agreement did not clearly waive the Tribe’s immunity and dismissed the complaint for lack of jurisdiction.

The Eleventh Circuit stated that the issue of tribal immunity depends on whether the agreement clearly waived the Tribe’s immunity from suit. Although a tribe may waive its immunity by contract, such waivers must be clear to be enforceable. Here, the agreement did not expressly waive sovereign immunity. Although the agreement typically refers to the Tribe as “the Company” and the purported waiver expressly states that “the Company” waives its sovereign immunity, the Eleventh Circuit could not read “the Company” as “the Tribe” in the waiver without creating an absurdity. If “the Company” was read as “the Tribe” in the waiver clause, the new waiver and arbitration provision would read: “[The Seminole Tribe of Florida, Inc.], through its parent company the Seminole Tribe of Florida, Inc., agrees to a limited waiver of sovereign immunity in order to allow Evans Energy to initiate a binding arbitration proceeding . . . for the sole and exclusive purpose of terminating the Management Agreement and compelling the payment of the Termination Fee . . . .” Because the Tribe cannot be its own parent company, Evans’s proposed construction is facially absurd. Instead, in the context of the waiver provision, “the Company” is best read to refer to Seminole Energy. 

Regardless, this ambiguity prevents the waiver language from containing the requisite clarity that is needed for the Tribe to waive its immunity.

§ 1.4. The Federal Sovereign

§ 1.4.1. Indian Country & Land Into Trust

The IRA authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.^[96] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.^[97] Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.^[98] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.

Despite the Carcieri ruling, Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.^[99] Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.^[100] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.^[101]

In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”^[102] The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.^[103] The second prong examines whether this jurisdictional status remained intact in 1934.^[104] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld Interior’s application of the two-part test outlined in M-37029.^[105] M-37029 appears to be a non-statutory Carcieri fix.

As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.^[106] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming. Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust. Rather, Patchak brought an action under the APA^[107] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe. The remedy Patchak sought was for the issuance of an injunction prohibiting the Interior from taking the land into trust. The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri. Both the federal government and the tribe argued that only the Quiet Title Act (QTA)^[108] could grant the waiver of sovereign immunity. Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.

The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.^[109] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.

The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit. This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.^[110]

The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.^[111] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final agency determination” subject immediately to judicial review.^[112] If a BIA official issues the decision, however, the decision is subject to administrative exhaustion requirements^[113] before it becomes a “final agency action.”^[114] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.^[115] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.” In October 2017, the Trump Administration’s Interior Department announced a consultation regarding a rulemaking that would reverse the “Patchak Patch,” and impose a much newer criteria for off-reservation land-into-trust applications. Assuming that rulemaking results in new Part 151 regulations, litigation will certainly follow.

A brief discussion of several of the year’s most prominent cases involving the diminishment of an Indian reservation and/or the taking of land into trust follow.^[116]

No Casino in Plymouth v. Nat’l Indian Gaming Comm’n, No. 2:18-cv-01398-TLN-CKD, 2022 U.S. Dist. LEXIS 87000 (E.D. Cal. May 11, 2022). In 2018, Plaintiffs filed a complaint for declaratory and injunctive relief against the Defendants following the Department of Interior’s (the “DOI”) Record of Decision (the “ROD”), announcing (1) its taking of nearly 230 acres of land in Amador County into trust for the Ione Band of Miwok Indians (the “Tribe”) and (2) approval of the Tribe’s gaming ordinance—wherein the ROD permitted the Tribe to construct a casino complex and conduct gaming once the land was taken into trust.

More specifically, the Plaintiffs challenged: (1) the Tribe’s gaming ordinance; (2) the then-Acting Assistant Secretary of Indian Affairs’ authority to approve the ROD under the Appointment Clause of the U.S. Constitution; (3) the Tribe’s federally recognized status under the Indian Reorganization Act (“IRA”); and (4) the Tribe’s federal recognition under 25 C.F.R. Part 83. Plaintiffs also claimed (5) Defendants violated Plaintiffs’ Equal Protection rights by favoring the Tribe, a race-based group, through approval of the ROD and (6) Defendants’ actions ran afoul of federalism protections. In June 2020, the Defendants filed a motion on the pleadings, which Plaintiffs opposed. And the Tribe successfully moved to intervene in this action.

Relying on Cnty. of Amador v. United States DOI, 872 F.3d 1012 (9th Cir. 2017), the Court granted the Defendants’ motion for judgment on the pleadings as to claims one through four. In Cnty. of Amador, the Ninth Circuit Court confirmed the Tribe’s status as a federally-recognized tribe and its under-federal-jurisdiction status in 1934 under the IRA.^[117] The Ninth Circuit Court further determined that the Tribe was qualified to have land taken into trust under the IRA, the Tribe could conduct gaming operations on the at-issue parcels under the Indian Gaming Regulatory Act (“IGRA”), and the then-Acting Assistant Secretary of Indian Affairs had the authority to take parcels into trust.^[118] As such, the Court found that the Ninth Circuit Court’s prior determinations in Cnty. of Amador disposed of Defendants’ claims one through four.

The Court also granted the Defendants’ motion for judgment on the pleadings as to claims five and six. As to claim five, the Court rejected Plaintiffs’ Equal Protection claim because approval of the ROD did not rest on the racial status of the Tribe but rather consideration of their status as members of a quasi-sovereign tribal entity. As to claim six, the Court rejected Plaintiffs’ argument concerning the Defendants’ alleged violation of federalism protections. The Court relied on Congress’ authority to grant IRA and IGRA benefits to tribes that have been federally recognized.

Berry v. United States, 159 Fed. Cl. 844 (Fed. Cl. 2022). Plaintiff, a landowner in Oklahoma, unsuccessfully brought a Fifth Amendment takings claim related to a gaming facility built by the Cherokee Nation (the “Nation”) on land held in trust by Defendant, the United States. The trust land was located next to Plaintiff’s property and Plaintiff alleged that development the gaming facility caused repeated flooding, erosion, and impoundment of water on her property. Plaintiff also asserted that the Nation removed vegetation and soil and dug a drainage ditch without her permission. Plaintiff alleged this activity constituted a taking pursuant to the Fifth Amendment because the United States, holder of the land in trust, failed to act in halting damage caused by the Nation.

The Court, in dismissing the Plaintiff’s action for failure to state a claim, explained that a taking necessarily involves governmental action. And here, Plaintiff failed to allege any governmental action that caused the alleged injuries in her takings claim. Beyond conclusory assertions of liability, her amended complaint only alleged, without more, that Defendant acquired and held the land in trust, not that Defendant itself developed the land and therefore caused flooding on her property. Rather, it was the Nation who developed and operated the gaming facility on the trust land, not Defendant. To be sure, the Court noted that Plaintiff’s claim still failed even under Plaintiff’s assertion that the government acted, for purposes of a takings claim, by approving the Nation’s application for Defendant to acquire the land in trust and thereafter acquiring the trust land. In other words, development of the gaming facility would not have occurred—and thus no damages to her property would have ensued—if Defendant had not initially approved of the Nation’s application and acquired the land in trust. The Court clarified that what Plaintiff asserted was not direct governmental action effecting a taking but rather agency-decision making that permitted the Nation’s action, which may have given rise to a claim in federal district court under the Administrative Procedure Act but not in the Ninth Circuit as a taking under the Fifth Amendment.

In further support of her takings claim, the Court also rejected Plaintiff’s argument that Defendant owed her an actionable fiduciary duty. The Court explained that the Indian Gaming Regulatory Act does not create an enhanced duty of trust with respect to the land held in trust by Defendant, and, Plaintiff, who was not a beneficiary of the trust land, could not enforce such a duty.

Birdbear v. United States, No. 16-75L, 2022 WL 4295326 (Fed. Cl. Sep. 9, 2022). Plaintiffs, members of the Three Affiliated Tribes of the Fort Berthold Indian Reservation (the “Reservation”), were beneficial owners of allotted land on the Reservation held in trust by Defendant, the United States. Portions of the Plaintiffs’ allotted lands were subject to oil and gas leases the Secretary of Interior (the “Secretary”) approved and managed pursuant to federal statutes and regulations. Plaintiffs claimed that these statutes and regulations imposed fiduciary obligations on the Defendant concerning the approval and management of mineral leases on their allotted lands and that Defendant breached those obligations. Plaintiffs sought an award of compensatory damages for the millions of dollars in losses they allegedly suffered because of those breaches.

Plaintiffs’ complaint contained various counts, and various motions for partial summary judgment were before the Court in this matter. In pertinent part, however, as to counts three and eight, Defendant asserted it was entitled to summary judgment because the Court lacked jurisdiction as to these counts—that is, they did not fall within the waiver of sovereign immunity contained in the Indian Tucker Act (“ITA”), 28 U.S.C. § 1505. The Court explained that to establish the Court’s jurisdiction under the ITA, “a tribal plaintiff must invoke a rights-creating source of substantive law that can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained.”^[119] To determine whether a claim by a tribal plaintiff alleging a breach of trust has met these requirements, the Supreme Court has established a two-prong test.^[120] For prong one, “the plaintiff must persuade the Court that the source of law on which the claim is based imposes ‘specific fiduciary or other duties’ on the government.”^[121] For prong two, “if a statute or regulation imposes a specific fiduciary or other duties on the United States, the Court must determine whether the statute or regulation also ‘can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained.’”^[122]

The Court here found that Plaintiffs’ counts three and eight, as relevant, satisfied the aforementioned prongs. For context, in count three, Plaintiffs claimed the government breached its fiduciary duty “to properly manage, administer and supervise Plaintiffs’ lands to prevent the avoidable loss of oil and gas through drainage.”^[123] The Court concluded “that the government ha[d] a specific fiduciary obligation to protect Plaintiffs against the uncompensated drainage of oil and gas held in trust for them”—satisfying prong one of the test for determining jurisdiction under the ITA.^[124] In count eight, Plaintiffs claimed the Secretary breached its duty “to ensure the timely drilling of oil and gas wells on Plaintiffs’ leased land.”^[125] The Court ultimately concluded “that the United States ha[d] a specific fiduciary obligation to ensure that lessees exhibit reasonable diligence in their development of mineral resources”—also satisfying prong one of the test for determining jurisdiction under the ITA.^[126] Concerning the second prong for both counts, the Court concluded that “the money-mandating nature of the [specific fiduciary] obligations [could] be inferred from the government’s comprehensive control over the development of oil and gas on Plaintiffs’ land”—satisfying the requirement that the these specific fiduciary obligations set out in the at-issue statutes and regulations relied upon by Plaintiffs for its claims could be fairly interpreted as mandating compensation by the Federal government for the damages allegedly sustained by Plaintiffs.

§ 1.4.2. Federal Approval for Reservation Activity

Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight. The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.^[127] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”^[128] Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”^[129]

Per revisions to Section 81 in 2000, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.^[130] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.^[131] Failure to secure secretarial approval could render the agreement null and void.^[132] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.^[133] Regardless of whether Secretary approval is necessary, all parties should be careful as to how they draft agreements which may encumber the land.^[134] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (NIGC) for approval pursuant to the Indian Gaming Regulatory Act (IGRA).^[135] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.^[136] The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.

Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the BIA and/or a tribal business license to properly do business with a tribe.^[137] Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors. Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.^[138]

With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.^[139] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415 every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.^[140] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land. The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior. Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).

There are some caveats, though. First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval). Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects. The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process. HEARTH Act implementing regulations went into effect in 2013.^[141] As of November 3, 2022, the BIA lists 79 tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.^[142]

The following highlights several of the more relevant cases decided in the last year.^[143]

Kiowa Tribe v. United States Dep’t of the Interior, No. CIV-22-425-G, 2022 WL1913436 (W.D. Okla. June 3, 2022). The Kiowa tribe and Comanche Nation (“Plaintiffs”) filed an action on May 25, 2022, raising three claims “to prevent an illegal casino from conducting unlawful gaming within Plaintiff’s reservation:” (1) a declaration under the Administrative Procedure Act (“APA”) that the Tsalote Allotment (“Apache Wye”) is not owned by FSAT;^[144] (2) “a declaration that [Fort Sill Apache Tribe (“FSAT”)] may not conduct gaming on the Tsalote Allotment” because such gaming would violate the Indian Gaming Regulatory Act (“IGRA”);^[145] and (3) a declaration that gaming on the Tsalote Allotment by FSAT will violate the Racketeer Influenced and Corrupt Organization Act (“RICO”).^[146]

Plaintiffs contended that the FSA Defendants’ opening of the Casino would violate IGRA in several ways. IGRA prescribes that a tribe may engage in Class III gaming “on Indian lands of the Indian tribe” only if such activities are “authorized by an ordinance or resolution that” is adopted by a tribe “having jurisdiction over such lands.”^[147] This matter was before this Court on the Motion for Temporary Restraining Order.

At the hearing, the Federal Defendants argued Plaintiffs’ IGRA claim was improperly pled because any claim of an IGRA violation must be raised as a request for judicial review pursuant to the APA. Relatedly, the FSA Defendants argued that IGRA does not give Plaintiffs the right or authority to sue them based upon violation of that statute, emphasizing that Congress in passing the IGRA set out the NIGC as the agency tasked to regulate gaming pursuant to that statutory scheme.

The Court found that Plaintiffs did not present a claim that is reviewable by this Court pursuant to 25 U.S.C. § 2714. Plaintiffs also alleged in passing that FSAT’s Class III gaming operations on the Tsalote Allotment will violate FSAT’s gaming compact with Oklahoma, which recites that the tribe may conduct Class III gaming only on its own Indian lands.

While 25 U.S.C. § 2710(d)(7)(A) does provide a “[cause] of action in favor of tribes” to enjoin Class III gaming “located on Indian lands and conducted in violation of any Tribal-State compact,” Plaintiffs’ nominal argument, unsupported by any discussion of the statutory provision or citation to relevant authority, was insufficient to show a substantial likelihood of success on such a claim at this stage of proceedings. Because Plaintiffs did not satisfy their burden to show that they are substantially likely to succeed on the merits of any of their legal claims, the Court did not discuss the other three elements necessary for a Temporary Restraining Order. The Motion for Temporary Restraining Order filed by Plaintiffs was Denied. Id.

No Casino In Plymouth v. Nat’l Indian Gaming Comm’n, No. 218CV01398TLNCKD, 2022 WL 1489498 (E.D. Cal. May 11, 2022). On May 22, 2018, Plaintiffs filed a Complaint for declaratory and injunctive relief asserting seven causes of action against Defendants, National Indian Gaming Commission (“NIGC”) and others (collectively, “Defendants”). This lawsuit primarily presented a challenge to the Record of Decision (“ROD”) issued by the Department of the Interior’s (“DOI”) then-Acting Assistant Secretary of Indian Affairs, Donald Laverdure (“Laverdure”). The ROD announced the DOI’s taking of 228.04 acres of land in Amador County into trust for the Ione Band of Miwok Indians (“Tribe” or “Band”). It also allowed the Band to construct a casino complex and conduct gaming once the land was taken into trust. Pursuant to IGRA, 25 U.S.C. § 2702(1), NIGC Chairman Jonodev Chaudhuri approved the Tribe’s gaming ordinance on March 6, 2018.

Plaintiffs’ claims challenged various determinations as follows: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to approve the ROD under the Appointment Clause of the U.S. Constitution; (3) the Tribe’s federally-recognized status under the Indian Reorganization Act (“IRA”); (4) the Tribe’s federal recognition under 25 C.F.R. Part 83; (5) Defendants’ violation of Plaintiffs’ Equal Protection rights by favoring the Tribe, a race-based group, through approval of the ROD and gaming ordinance; and (6) Defendants’ violation of federalism protection. Defendants moved for judgment on the pleadings, arguing Plaintiffs cannot challenge the federal agency action because: (1) the Ninth Circuit has affirmed both the Tribe’s status as federally recognized and Laverdure’s authority to issue the 2012 ROD as Acting Assistant Secretary of Indian Affairs; and (2) the Complaint fails to state claims for which relief can be granted.

Defendants argued the Ninth Circuit in County of Amador^[148] issued dispositive rulings on Claims One through Four in the instant matter, including: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to issue the ROD; (3) the Tribe’s federally recognized status. In opposition, Plaintiffs argued the 2018 gaming ordinance was not at issue in County of Amador, and that the court did not conclusively decide Laverdure had authority to take land into trust for the Tribe. Plaintiffs also contended the Tribe lacked Part 83 recognition to be eligible for IRA and IGRA benefits. Plaintiffs argued the Tribe’s inclusion on the administrative list of “Indian Entities” eligible to receive service for the Bureau of Indian Affairs did not mean that the Tribe is federally recognized.

The “law of the circuit doctrine” mandates that a published decision of a Ninth Circuit court constitutes finding authority which must be followed unless and until overruled by a body competent to do so. Thus, the Ninth Circuit’s decision on the Tribe’s federally recognized status and the Tribe’s status in 1934 under the IRA are binding on this Court.^[149] Further, the Ninth Circuit clearly found Laverdure’s actions within his powers.

The Court found County of Amador disposed of Plaintiffs’ Claims One through Four on the following issues: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to issue the ROD; and (3) the Tribe’s federally recognized status under the IRA and Part 83. Accordingly, the Court granted Defendants’ motion for judgment on the pleadings on Claims One through Four. Plaintiffs’ remaining claims were Claims Five (equal protection) and Six (federalism protection). Defendants argued Plaintiffs’ equal protection claim fails because provision of benefits to federally recognized tribes on the basis of their status as tribes does not offend equal protection principles. Further, Defendants argued Plaintiffs’ federalism claim, which alleges that the Tribe receives exemptions from state and local law, is inaccurate. Plaintiffs did not respond to these arguments in any meaningful way. Thus, Plaintiffs’ failure to respond to Defendants’ arguments was a concession of those arguments. Accordingly, the Court did not consider the arguments and granted Defendants’ motion for judgment on the pleadings on Claims Five and Six.

W. Flagler Assocs. Ltd. v. DeSantis, No. 4:21-CV-270-AW-MJF, 2021 WL 5768481 (N.D. Fla. Oct. 18, 2021), appeal dismissed sub nom. W. Flagler Assocs., Ltd. v. Governor of Fla., No. 21-14141-AA, 2021 WL 7209340 (11th Cir. Dec. 20, 2021). The Seminole Tribe of Florida (“Tribe”) has offered casino gambling on its tribal lands and recently entered a Compact that allows a new form of sports betting on (or through) the Tribe’s reservation. Parimutuel Operators (the “Plaintiffs”), also in the gaming business, sued Florida’s Governor and the Secretary of Florida’s Department of Business and Professional Regulation (the “State Officials”) seeking a declaration that the Compact’s sports betting provision violates federal law, and seeking an injunction precluding its enforcement. State Officials moved to dismiss for lack of standing, the Tribe moved to intervene, and Plaintiffs moved to expedite, and for summary judgment or a preliminary injunction.

The Plaintiffs alleged that the Compact violated several federal gambling laws, plus the Fourteenth Amendment. They sought a declaratory judgment that the Compact violated the Indian Gaming Regulatory Act, 25 U.S.C. § 2710(d) (permitting certain gambling activities “on Indian lands”); the Wire Act, 18 U.S.C. § 1084(a) (prohibiting certain interstate wire communications related to sports gambling); and the Unlawful Internet Gambling Enforcement Act, 31 U.S.C. § 5362(10) (defining internet betting on tribal lands as “unlawful internet gambling” if it is illegal under applicable state or federal law). They also sought a declaratory judgment that permitting Floridians to engage in online sports betting with the Tribe when not physically present on tribal land, while still prohibiting all other forms of sports betting in the state,^[150] violates Equal Protection.

The Court reviewed whether the Plaintiffs had standing, and held that: (1) Plaintiffs failed to state a claim that their alleged injury-in-in fact of lost business from Compact was traceable to Florida’s governor; (2) Plaintiffs failed to state a claim that their alleged injury-in fact of lost business from Compact was traceable to the Secretary of Florida’s Department of Business and Professional Regulation; (3) a declaration that would be entered against Florida officials and that would declare that Compact violated federal law would not address Plaintiffs’ alleged injury of lost business due to the compact; (4) an injunction precluding Florida’s governor from implementing the Compact would not redress Florida Plaintiffs’ alleged injury of lost business; and (5) an injunction precluding Secretary of Florida’s Department of Business and Professional Regulation from implementing sports-betting statute relevant to Compact would not redress Plaintiffs’ alleged injury of lost business. Accordingly, the Court granted the State Officials motion to dismiss because Plaintiffs lacked standing since the State Officials actions were not fairly traceable to any alleged harm and the requested declaratory and injunctive relief would provide no legal or practical redress for the Plaintiffs’ injuries.

Cal-Pac Rancho Cordova, LLC v. United States Dep’t of the Interior, No. 2:16-CV-02982-TLN-AC, 2021 WL 5826776 (E.D. Cal. Dec. 8, 2021). Cal-Pac Rancho Cordova LLC, Capital Casino, Inc., Lodi Cardroom, Inc., and Rogelio’s Inc.’s (collectively, “Plaintiffs”) filed this action seeking injunctive relief and declaratory relief based on: (1) violation of the Indian Gaming Regulatory Act’s (“IGRA”) jurisdiction requirement; (2) the unconstitutionality of the Indian Reorganization Act (“IRA”); (3) violation of IGRA due to inconsistency of Secretarial Procedures with state law; (4) and erroneous interpretation of IGRA. Plaintiffs are four state-licensed card clubs located within the same area as the proposed casino site.

Plaintiffs argued they would be at a competitive disadvantage if the Tribe opened a Nevada-style casino and operated casino-style games in the area because Plaintiffs are more limited in the gaming they can offer. Plaintiffs made two main arguments: (1) the Secretarial Procedures were issued in violation of IGRA, as the Tribe purportedly never acquired jurisdiction or exercised governmental power over the Yuba Parcel;^[151] and (2) assuming the Tribe acquired jurisdiction and exercised governmental power, IRA violates the Tenth Amendment by reducing the State’s jurisdiction over land within its territory without its agreement.

The Defendants notified the Court that the Ninth Circuit had already made a decision on a similar case, Club One Casino, Inc. v. Bernhardt^[152] (“Club One II”), where it held that “because Congress has plenary authority to regulate Indians affairs, . . . IRA does not offend the Tenth Amendment.” Because Club One II was binding on this Court, the Court did not address the arguments and granted summary judgment to Defendants as to Plaintiffs’ first two arguments.

Plaintiffs raised two alternative arguments. First, the Governor’s concurrence in the Secretary’s two-part determination as to gaming eligibility on the Yuba Parcel was negated by the California legislature’s refusal to ratify the Class III gaming compact. The Court agreed with Defendants that the IGRA does not require the Governor’s concurrence in Secretarial Procedures, nor does it require the Secretary to determine the validity of the Governor’s concurrence in the Secretary’s two-part determination. Second, Plaintiffs argued the Secretarial Procedures were inconsistent with California law requiring a Compact for Class III gaming. However, the Club One I court rejected this exact argument. That court further explained, “The issuance of Secretarial Procedures is the part of the remedial process that gives it teeth. If gaming pursuant to Secretarial Procedures was not contemplated, the purpose of the remedial process—restoring leverage to tribes to sue recalcitrant states and thereby force them into a compact—would be wholly eroded.”^[153] This Court agreed to decline to read the IGRA to have created (or the State of California to have waived immunity as to) an empty remedial process.

Accordingly, the Court held that the Secretary’s issuance of Secretarial Procedures was not arbitrary, capricious, or otherwise not in accordance with law for any of the reasons identified by Plaintiffs. Based on the foregoing reasons, the Court denied Plaintiffs’ motion for summary judgment and granted the Defendants’ motion for summary judgment.

W. Flagler Assocs. v. Haaland, No. 21-CV-2192 (DLF), 2021 WL 5492996 (D.D.C. Nov. 22, 2021). In August 2021, the Secretary of Interior approved a gaming Compact between the State of Florida and the Seminole Tribe of Florida (the “Tribe”). The Compact authorized the Tribe to offer online sports betting throughout the State, including the bettors located off tribal lands. Plaintiffs, West Flagler Associates and Bonita-Fort Myer’s Corporation (collectively, the “West Flagler Plaintiffs”) brought a civil action and argued that the Compact violated the Indian Gaming Regulatory Act, the Unlawful Internal Gambling Enforcement Act, the Wire Act, and the Equal Protection Clause. Accordingly, they asked the Court to “set aside” the Secretary’s approval of the Compact pursuant to the Administrative Procedure Act (“ACA”).

Before the Compact took effect, Florida law prohibited wagering on “any trial or contest of skill, speed[,] power or endurance.”^[154] Although that prohibition contained a narrow exception for horse racing, dog racing, and jai alai, it barred betting on all major sports, including football, baseball, and basketball. The Florida Constitution also limited the conditions in which the State could expand sports betting going forward. Specifically, it provided that the State could only expand such betting through a “citizens’ initiative,” with the caveat that this did not limit the ability of the state or Native American tribes to negotiate gaming compacts under IGRA.

The Compact in this case expanded the Tribe’s ability to host sports betting throughout the State. In relevant part, the Compact defines “sports betting” to mean “wagering on any past or future professional sport or athletic event, competition or contest;” classifies “sports betting” as a “covered game;” authorizes the Tribe “to operate Covered Games on its Indian lands, as defined in [IGRA].” The Compact also provides that all in-state wagers on sporting events “shall be deemed . . . to be exclusively conducted by the Tribe at its Facilities where the sports book(s) . . . are located,” even those that are made “using an electronic device” “by a Patron physically located in the State but not on Indian lands.” In this manner, the Compact authorizes online sports betting throughout the State. Because the State has not entered a similar agreement with any other entity, the Compact grants the Tribe a monopoly over both all online betting and all wagers on major sporting events.

On June 21, 2021, the Secretary of the Interior received a copy of the Compact. Because the Secretary took no action on it within forty-five days, the Compact was “deemed approved” on August 5. The next day, the Secretary explained her no-action decision in a letter to the Tribe. The letter reasoned that IGRA allows the Tribe to offer online sports betting to persons who are not physically located on its tribal lands. To support that conclusion, the letter noted that IGRA allows states and tribes to negotiate the “allocation of criminal and civil jurisdiction,” emphasized that Florida consented to the Compact, and argued that “IGRA should not be an impediment to tribes that seek to modernize their gaming offerings.” At the same time, the letter insisted that Florida residents could not place sports bets while “physically located on another Tribe’s Indian lands.” To do so would violate IGRA’s instruction that gaming is “lawful on Indian lands” only if such gaming is authorized by the “Indian tribe having jurisdiction over such lands.” On August 11, the Secretary published notice of the Compact in the Federal Register. At that point, the Compact took effect and acquired the force of law.

The West Flagler Plaintiffs’ civil action challenged the Secretary’s approval of the Compact. Both entities own brick-and-mortar casinos in Florida. To establish Article III standing, they alleged that the Compact’s allowance for online betting will divert business from their facilities. On the merits, they argued that the Compact’s authorization of online betting violated IGRA, the Unlawful Internet Gambling Enforcement Act (“UIGEA”), the Wire Act, and the Equal Protection Clause. Their leading argument was that the Compact violated IGRA because it authorizes Class III gambling outside of “Indian lands.” The Tribe moved to intervene for the limited purpose of filing a motion to dismiss. The Tribe argues that it may intervene as of right because it has an economic interest in the Compact and because the Secretary will not adequately protect that interest.

On September 27, 2021, other Plaintiffs, Monterra MF, LLC and its co-plaintiffs (collectively, the “Monterra Plaintiffs”) filed a separate challenge to the Secretary’s approval. All but one of these co-plaintiffs lived, worked, or owned property near Florida casinos. The remaining Plaintiff, No Casinos, is a nonprofit organization that opposed the expansion of gambling in Florida. To establish Article III standing, the Monterra Plaintiffs alleged that the expansion of gambling in Florida will increase neighborhood traffic, increase criminal activity, and reduce their property values. On the merits, they joined the West Flagler Plaintiffs in arguing that the Compact’s online gambling rules violated IGRA, UIGEA, and the Wire Act. They also argued that the Compact’s expansion of in-person gambling violates both the Florida Constitution and a separate provision of IGRA, which conditions the lawfulness of Class III gaming on whether the state “permits such gaming for any purpose by any person, organization, or entity.”

The West Flagler Plaintiffs moved for summary judgment on September 21, 2021. The Monterra Plaintiffs followed suit on October 15, 2021. The Secretary then moved to dismiss both cases for lack of standing. The Secretary also argued that the Plaintiffs failed to state a claim under IGRA, that IGRA does not require her to consider questions of state law, and that West Flagler’s constitutional argument fails. The Secretary did not, however, address whether the online gaming contemplated by the Compact occurs on or off “Indian lands.”

The Court found that West Flagler Plaintiffs had adequately established a competitive injury that was both caused by the conduct challenged in this action and redressable by a favorable decision on the merits. On that first point, the Court stated there is a “causal connection” between West Flagler’s Plaintiffs injury and the Secretary’s approval of the gaming Compact, without which the Tribe could not offer online sports betting. Setting aside the Secretary’s approval would prevent the Tribe from offering such betting, at least under the current Compact because that result would fully redress West Flagler’s Plaintiff’s injury, West Flagler has Article III standing. The Court did not address whether the other Plaintiffs in these actions had standing because as a general matter, “the presence of one party with standing is sufficient to satisfy Article III’s case-or controversy requirement.”

The Court found that “equity and good conscience” permitted this action to continue in the Tribe’s absence. The Court stated that because the Tribe moved to intervene solely to move for dismissal, because the Tribe seeks dismissal on the sole ground that it is indispensable and the Tribe is not indispensable, the Tribe’s motion for limited intervention was denied as moot.

On the merits, it is well-settled that IGRA authorizes sports betting only on Indian lands. Altogether, over a dozen provisions in IGRA regulate gaming on “Indian lands,” and none regulate gaming in another location. The Supreme Court has emphasized that “[e]verything—literally everything—in IGRA affords tools . . . to regulate gaming on Indian lands, and nowhere else.”^[155] The instant Compact attempts to authorize sports betting both on and off Indian lands. Accordingly, because the Compact allows patrons to wager throughout Florida, including at locations that are not Indian lands, the Compact violates IGRA’s “Indian lands” requirement. Therefore, the Secretary had an affirmative duty to reject it. The Court granted West Flagler Plaintiffs’ motion for summary judgment as to this claim.

The last issue in this case was the Plaintiffs’ remedy. The issue is governed by § 706 of the APA, which directs courts to “hold unlawful and set aside agency action” that is “not in accordance with law.”^[156] The “agency action” under review is the Secretary’s default approval of the Compact. Vacating the Secretary’s approval was appropriate because it would fully redress the West Flagler Plaintiffs’ injury. For those reasons, the Court concluded that the appropriate remedy was to set aside the Secretary’s default approval of the Compact. The remedy also resolved the Monterra Plaintiffs’ action.

It was the Court’s understanding that the practical effect of this remedy is to reinstate the Tribe’s prior gaming compact, and restore the legal status of Class III gaming in Florida to where it was on August 4, 2021—one day before the Secretary approved the new compact by inaction. Because the more recent Compact is no longer in effect, continuing to offer online sports betting would violate federal law.^[157] The Court clarified that this decision does not foreclose other avenues for authorizing online sports betting in Florida. The State and the Tribe may agree to a new Compact, with the Secretary’s approval, that allows online gaming solely on Indian lands. Alternatively, Florida citizens may authorize such betting across their State through a citizens’ initiative. What the Secretary may not do, however, is approve future Compacts that authorize conduct outside IGRA’s scope.

The West Flagler Plaintiffs’ motion for summary judgment was granted, the Monterra Plaintiffs’ motion for summary judgment was denied as moot, the Tribes’ motions to intervene was denied, and the Secretary’s motions to dismiss was denied. The matter is being appealed to the D.C. Court of Appeals.

Chicken Ranch Rancheria of Me-Wuk Indians v. California, 42 F.4th 1024 (9th Cir. 2022). California (“Defendant”) engaged in negotiations with the Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria (collectively, “Plaintiffs”) to enter into a compact.^[158] Under the Indian Gaming Regulatory Act (“IGRA”), topics of negotiation are limited to those directly related to the operation of gaming activities. These protections are in place to prevent states from using their compact approval authority to force regulations on tribes that the states would otherwise be powerless to enact.

During several years of negotiations, California demanded that the Tribes agree to compact provisions relating to family law, environmental regulation, and tort law that were unrelated to the operation of gaming activities and far outside the bounds of permissible negotiation under IGRA.

The Court held that in doing so, California did not act in good faith. To reach this conclusion, the Court held that the list^[159] enumerated in the IGRA is exhaustive. The Court noted the connection between gaming and topic of negotiation must be direct; this is a meaningful limitation on negotiations. None were.

The family support ordinances only tangentially touched gaming as they were applicable to gaming facility employees. The environmental provisions were far afield of the actual operation of gaming activities and the mitigation of organized crime and unfair gaming practices that were at the heart of IGRA’s limited extension of regulatory authority to the states. The tort provisions were similarly indirect and would require tribes to commit to adopting and applying an entire body of state law as tribal law, waive sovereign immunity, and create claims commissions for injuries that are merely “connected with” or “relating to” a casino gaming facility.

Having found that these were outside the IGRA’s permissible topics, the Court then considered whether a state could negotiate well outside the enumerated topics while simultaneously acting in good faith. The Court looked to the plain meaning and structure of the statute to conclude that a state could not. The good faith requirement exists because Congress anticipated that states might abuse their authority over compact negotiations to force tribes to accept burdens on their sovereignty in order to obtain gaming opportunities.

§ 1.4.3. Labor and Employment Law & Indian Tribes

When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers. For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.^[160] Moreover, tribal employers may not be subject to certain federal labor and employment laws.^[161]

Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964^[162] and the Americans with Disabilities Act^[163] expressly exclude Indian tribes,^[164] and state anti-discrimination laws usually do not apply to tribal employers.^[165] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.^[166]

The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers. The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),^[167] the Employee Retirement Income Security Act (ERISA),^[168] the Fair Labor Standards Act (FLSA),^[169] the National Labor Relations Act (NLRA),^[170] and the Age Discrimination in Employment Act (ADEA),^[171] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.^[172]

Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.^[173] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.^[174] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.^[175] Following this reasoning, the Department of Labor has stated that the FMLA^[176] applies to tribal employers.^[177] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.^[178] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.^[179]

Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities. For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.^[180]

In the last year, federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers. More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns. A noteworthy case from the last year is discussed below:^[181]

Mashantucket Pequot Tribal Nation v. Davis, MPTC-CV-AA-2019-126, 2021 WL 5013894 (Mash. Pequot Tribal Ct. Oct. 7, 2021). Carrie-Ann Davis (“Ms. Davis”), was employed as a surveillance officer in the Surveillance Department of the Mashantucket Pequot Tribe (the “Tribe”). Ms. Davis was responsible for monitoring security cameras. Ms. Davis began having health problems and was observed asleep at her workstation on three different occasions. After the first two instances she was given a performance improvement notice dated September 5, 2017. This notice constituted a final warning. Ms. Davis provided a written statement regarding these two incidents explaining that her “condition is not falling asleep,” but instead is “due to some medical issue” where she would slur her speech, lose consciousness, and then become coherent again as if nothing had occurred. Ms. Davis noted that she had informed management about her medical issue and that she was seeing two doctors to address her medical issue. Ms. Davis’s medical issue continued and on May 26, 2018, the surveillance shift manager observed her asleep at her workstation in the surveillance monitor room for eight minutes. As a result, Ms. Davis was suspended on June 12, 2018, pending further investigation. On July 2, 2018, the Tribe terminated her employment. The charging document further stated that the Tribe terminated Ms. Davis’s employment because she violated the Tribe’s Standards of Conduct Section IV Subsection 4, which prohibits sleeping on the job. After her termination, Ms. Davis received a correct diagnosis of severe sleep apnea.

Ms. Davis appealed her termination. On March 13, 2019, the Board of Review (the “Board”) issued a decision returning Ms. Davis to work on a final warning with three months’ back pay because Ms. Davis had an “undiagnosed medical condition” at the time of her termination which was a mitigating circumstance that influenced the Board’s decision since she was actively seeking treatment and under doctors’ care. The Tribe appealed the Board’s decision arguing that there was no reasonable basis for the Board to have reversed Ms. Davis’s termination and ordered back pay.

The central issue in this case is the Board’s finding and application of mitigating circumstances. Title 8 of the Employee Review Code (the “Code”) is comprised of five factors to be considered when determining whether the Board’s decision was appropriate. Those factors ask whether: (1) There was a reasonable basis for the Board’s consideration that the employee did or did not violate the policies and/or procedures established by the employer for the position held by the employee; (2) There was a reasonable basis to find that the employer did or did not substantially comply with the policies and/or procedures regarding discipline; (3) The employee was given a description of the offense or conduct that was the basis for the disciplinary action and both parties were afforded a reasonable opportunity to present and refute evidence regarding the offense or conduct and/or evidence of aggravating or mitigating circumstances relating thereto; (4) There was a reasonable basis for the Board’s decision as to whether the form of discipline was or was not appropriate for the offense or conduct; and (5) The Board’s decision is in violation of tribal laws or exceeds the Board’s authority under tribal law.

Focusing on the issue at hand, the Code states that “mitigating circumstances are those that ‘do not constitute a justification or excuse of the offense in question, but which, in fairness and mercy, may be considered as extenuating or reducing the degree of moral culpability.’”^[182] The Board found that Ms. Davis’s undiagnosed medical condition at the time of termination was a mitigating circumstance which influenced their final decision since she was receiving treatment.

In accordance with the Code, the Tribal Court found that Ms. Davis’s medical condition, severe sleep apnea, was a mitigating circumstance which caused and was directly related to her violation of the Tribe’s prohibition against sleeping on the job. Therefore, the Board properly relied upon Ms. Davis’s medical condition, severe sleep apnea, as a mitigating circumstance.

§ 1.4.4. Federal Court Jurisdiction

Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction. Such cases may involve a federal question^[183] or claims that are brought involving diversity of citizenship.^[184] Litigation that arises from a deal with a federally-recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,^[185] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.^[186] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.^[187] However courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.^[188] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.

The following highlights several of the more relevant cases decided in the last year.^[189]

Big Sandy Rancheria Enterprises v. Bonta, 1 F.4th 710 (9th Cir. 2021), cert. denied, 142 S. Ct. 1110, 212 L. Ed. 2d 8 (2022). Big Sandy Rancheria of Western Mono Indians (the “Corporation”) is a federally chartered tribal corporation engaged in tobacco distribution and was wholly owned by a federally recognized Native American tribe. The Corporation brought an action against the Attorney General for the state of California and the director of the California Department of Tax and Fee Administration seeking a declaration that California’s Complementary Statute, Licensing Act, and Cigarette Tax Law are preempted by federal law and tribal sovereignty under the Indian Reorganization Act (“IRA”). The United States District Court for the Eastern District of California granted California’s motion to dismiss for lack of subject matter jurisdiction.^[190] In the motion, California argued that the Corporation is a company and not a “tribe” within the meaning of 28 U.S.C. § 1362.

28 U.S.C. § 1362 confers federal jurisdiction over claims “brought by any Indian tribe or band with a governing body duly recognized by the Secretary of the Interior.” Congress enacted the IRA to enable tribes “to revitalize their self-government through the adoption of constitutions and bylaws . . . through the creation of chartered corporations, with the power to conduct the business and economic affairs of the tribe.” 25 U.S.C. § 5126.

The court ruled that based on the relevant statutory language, legislative history, and circuit precedent narrowly construing § 1362, the Corporation was not an “Indian tribe or band,” and that the Corporation may not invoke § 1362 to avoid the Tax Injunction Act’s jurisdictional bar. The court further noted that its conclusions align with Congress’s purpose in enacting 25 U.S.C. § 5126: “giving tribes the power to incorporate . . . enabl[ing] tribes to waive sovereign immunity, thereby facilitating business transactions.” The court further reasoned that in light of this purpose, it would be odd to allow a 25 U.S.C. § 5126 corporation to selectively claim the benefits of sovereignty in order to challenge a tax.

The U.S. Supreme Court denied the Plaintiff’s petition for writ of certiorari on February 22, 2022.

Brown v. Haaland, No. 321CV00344MMDCLB, 2022 WL 1692934 (D. Nev. May 26, 2022). This case arises in the context of a longer dispute about the living conditions on and rightful governance of the Winnemucca Indian Colony. The ten individual Plaintiffs resided on the Winnemucca Indian Colony and alleged civil rights abuses by the Bureau of Indian Affairs (“BIA”) and the Department of Interior (“DOI”) arising out of their self-determination contract with the BIA. The Plaintiffs brought this action in the U.S. District Court for the District of Nevada under the Indian Self-Determination and Education Assistance Act (“ISDEAA”). 25 U.S.C.A. § 5331(a). The BIA filed a motion to dismiss for lack of subject matter jurisdiction alleging that ISDEAA only confers federal court jurisdiction over claims involving federally-recognized tribes or tribal organizations.

ISDEAA directs the Secretary of the Interior to enter into contracts with willing tribes to provide services such as education and law enforcement that otherwise would have been provided by the federal government. Section 1330 of ISDEAA provides that:

Each contract . . . shall provide that in any case where the appropriate Secretary determines that the tribal organization’s performance under such contract … involves (1) the violation of the rights or endangerment of the health, safety, or welfare of any persons; or (2) gross negligence or mismanagement in the handling use of funds provided to the tribal organization pursuant to such contract … Such Secretary may, under regulations prescribed by [them] and after providing notice and a hearing on the record to such tribal organization, rescind such contract in whole or in part, and assume or resume control or operation of the program, activity or service involved if [they] determine that the tribal organization has not taken corrective action as prescribed by the Secretary to remedy the contract deficiency, except that the appropriate Secretary may, upon written notice to a tribal organization, and the tribe served by the tribal organization, immediately rescind a contract if the Secretary finds that (i) there is an immediate threat of imminent harm to the safety of any person, or imminent substantial and irreparable harm to trust funds, trust lands, or interests in such lands, and (ii) such threat arises from the failure of the contractor to fulfill the requirements of the contract.

The court held that ISDEAA does confer jurisdiction on federal district courts to hear disputes regarding self-determination contracts through § 5331(a). The court further ruled that § 5331(a) applies only to suits by Indian tribes or tribal organizations against the United States. This means that only tribes or tribal organizations can be parties to a self-determination contract. Because § 5331(a) does not waive sovereign immunity for claims brought by nonparties to the self-determination contract, the statute does not create jurisdiction for claims arising under ISDEAA except in the limited context of a tribe suing the federal government. The Court therefore found that it lacks jurisdiction over plaintiffs’ ISDEAA statutory claims given that the plaintiffs are individuals rather than a federally recognized tribe.

Newtok Village v. Patrick, 21 F.4th 608 (2021). Members of a village council for a federally recognized Alaskan Native tribe asserted state-law claims and sought injunctive and mandamus relief to prohibit former members from representing themselves as the tribe’s governing body to federal and state entities. The action was brought in the U.S. District Court for the District of Alaska under the Indian Self-Determination and Education Assistance Act (“ISDEAA”). 25 U.S.C.A. § 5331(a).

The court ruled that ISDEAA only authorized suits against United States, which was not a defendant in this case. Additionally, the claims did not assert any wrongful receipt of federal funds but rather rested on contractual obligations within the meaning of the ISDEAA. Accordingly, the claim did not present a substantial question of federal law that could support exercise of federal jurisdiction over the action despite the complaint’s reference to the tribe’s contracting with the Bureau of Indian Affairs. The court further noted that “[i]ntratribal disputes are generally nonjusticiable in federal courts . . . . While Congress has broad authority over Indian matters, the role of courts in adjusting relations between and among tribes and their members is correspondingly restrained.”

Kewadin Casinos Gaming Authority v. Draganchuk, 2022 WL 1715207 (W.D. Mich. Feb. 8, 2022). In 2011, the gaming and casino operation department of the Sault St. Marie Tribe of Chippewa Indians, a federally recognized Indian tribe (“Plaintiffs”), entered into separate contracts with developers (“Defendants”) for the purpose of developing two tribal casinos on two parcels of land in Michigan’s Lower Peninsula. In March of 2020, Plaintiffs brought state law claims against Defendants in the U.S. District Court for the Western District of Michigan. Defendants moved to dismiss based on tribal sovereign immunity. The court dismissed the case for lack of subject matter jurisdiction without deciding the issue of sovereign immunity. Defendants refiled the case in state court the next day. Plaintiffs then brought an action in the district court against the state court and Defendants seeking a temporary restraining order and preliminary injunction to enjoin state court proceedings until the district court ruled on whether there was a waiver of sovereign immunity such that the state court could hear Defendants’ claims against Plaintiffs.

The Rooker-Feldman Doctrine, as discussed in Rooker v. Fidelity Trust Co., 263 U.S. 413, 415–16 (1923), addresses a party’s ability to challenge a state court judgment in federal court. In Rooker, the Supreme Court held that no matter how wrongful a state court decision concerning compliance with the Constitution may have been, a federal district court has no jurisdiction to reverse or modify the decision and must dismiss such claims for lack of subject matter jurisdiction. The Anti-Injunction Act (“AIA”) provides that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”^[191] The Non-Intercourse Act (“NIA”) provides that “[n]o purchase, grant, lease, or other conveyance of lands, or of any title or claim thereto, from any Indian nation or tribe of Indians, shall be of any validity in law or equity, unless the same be made by treaty or convention entered into pursuant to the Constitution.”^[192]

Applying the Rooker-Feldman Doctrine, the district court ruled that it lacked subject matter jurisdiction to decide question of whether there was a waiver of sovereign immunity in the contract between the developers and the gaming and casino operation. The court further ruled that neither the specific grant of jurisdiction to district courts over civil actions brought by an Indian tribe nor NIA contained statutory language permitting federal courts to issue injunctions in state court proceedings. Accordingly, absent some other explanation, the injunction requested by Plaintiffs to enjoin state court proceedings did not fall within the “expressly authorized” exception to the AIA. However, the temporary restraining order was granted because there was a potential for irreparable harm if the sovereign immunity of Plaintiffs was violated.

§ 1.5. The State Sovereign

With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties. These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.^[193]

Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”^[194] Within Indian Country, on the other hand, “the initial and frequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”^[195] When the legal incidence falls on tribes, tribal members, or tribal corporations,^[196] “[s]tates are categorically barred” from implementing the tax.^[197]

When the legal incidence falls on non-Indians, however, a more nuanced analysis applies. Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.^[198] Because Congress does not often explicitly preempt state law,^[199] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.^[200] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.^[201]

In New Mexico v. Mescalero Apache Tribe,^[202] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”^[203] In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.^[204]

When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands.

The issues of preemption and infringement are regularly litigated in the federal courts. The following highlights several of the more relevant cases decided in the last year.

S. Point Energy Ctr. LLC v. Arizona Dep’t of Revenue, 253 Ariz. 30 (2022). The Arizona Supreme Court examined whether the Indian Reorganization Act of 1934 (the “Act”) preempts a county ad valorem property tax on a power plant where the power plant is owned by non-Indian lessees of land, and the land is held in trust for the benefit of an Indian tribe. The Court held that the tax is not preempted.

South Point Energy Center LLC (“South Point”), a non-Indian entity, leases land from the Fort Mojave Indian Tribe (the “Tribe”), upon which South Point owns and operates a power plant. The power plant does not supply any energy to the Tribe or persons located on the reservation. Since the power plant was put into operation, Mohave County assessed ad valorem property taxes against the power plant. South Point initiated a lawsuit seeking a refund of payments for property taxes imposed from 2010 to 2018 and argued that Section 5 of the Act expressly preempts states from imposing property taxes on any real property improvements located on land held in trust by the federal government for the benefit of Indian tribes or individual Indians.

A federal law, such as the Act, may preempt application of state law by express terms, which is known as “express preemption.” The relevant part of the Act states that land held in trust for an Indian tribe “shall be exempt from State and local taxation.”^[205] Interpreting this statute, the Court reasoned that to fall under this tax exemption, the power plant must be an “interest in lands, water rights, or surface rights to lands.”^[206] The Court ruled that the power plant does not satisfy this definition because the land held in trust for the Tribe does not include the actual power plant. In addition, the Tribe has no ownership interest in the power plant and derives no benefit from the power plant. Therefore, taxation of the power plant does not infringe upon or burden the Tribe’s use of the land. In sum, the Court held that while Section 5 of the Act preempts state and local taxes imposed on land held in trust for Indian tribes, such preemption does not extend to permanent improvements affixed to that land when the lessee is non-Indian and the Indian tribe and lessee agree that the lessee owns the improvements.

The Court remanded the case to the court of appeals to determine whether the power plant is impliedly exempt from taxation under the balancing test stated in White Mountain Apache Tribe v. Bracker which requires a review of the “nature of the state, federal, and tribal interests at stake . . . to determine whether, in the specific context, the exercise of state authority would violate federal law.”^[207]

Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin v. Evers, 46 F.4th 552 (7th Cir. 2022). The Seventh Circuit held that tribal land owned by tribe members is exempt from state property tax even though the land was previously sold to non-Indians before coming back into tribal ownership.

Tribal members living within four Ojibwe Indian reservations brought an action challenging whether the State of Wisconsin could assess property taxes on land within the reservation. Unlike the traditional makeup of such a lawsuit, the parcels of land in question are fully alienable, meaning that the current owners of the at-issue land can sell the land at will. Furthermore, although the at-issue land is currently owned by Ojibwe tribal members, the land had previously been sold by tribal members to non-Indians before being sold back to tribal members. The State argues that the sale of the land to non-Indians before being sold back to tribal members eliminates the land’s tax immunity for all time.

The Court rejected this argument. Rather than performing the traditional analysis under the Bracker balancing test, which involves weighing “tribal interests, federal interests, and state interests,”^[208] the Court analyzed the issue of state taxation of Indians living in Indian country under a categorical approach. Under this categorical approach, “absent cession of jurisdiction or other federal statutes permitting it, . . . a State is without power to tax reservation lands and reservation Indians.”^[209] The categorical approach begins with the threshold question of “who bears the legal incidence of the tax.”^[210] If the tax falls on non-Indians, the tax will be upheld so long as “the balance of federal, state, and tribal interests favors the State, and federal law is not to the contrary.”^[211] If the tax falls on Indians on Indian land, it is presumptively invalid unless Congress has authorized it in “unmistakably clear” terms. Here, the parties agreed that no act of Congress authorized the taxation of these lands.

Nonetheless, the State argued that the fact of non-Indian ownership in the chain of title supports its authority to tax reservation lands held by Ojibwe tribal members. However, the Court again highlighted the fact that the at-issue land did not become alienable because of a Congressional act, but rather as a result of a treaty. The at-issue land became freely alienable under the 1854 Treaty, which is not a legislative act. Rather, a treaty is in its nature a contract between nations. Therefore, the at-issue land became freely alienable under the 1854 Treaty by mutual assent of the contracting parties—the Ojibwe tribes and the President of the United States—without Congress’ input.^[212] Because the land did not become alienable by an act of Congress, the categorical rule that a tax falling on Indians on Indian land is presumptively invalid applies.

Oklahoma v. United States Dep’t of the Interior, 577 F. Supp. 3d 1266, 1269 (W.D. Okla. 2021). In this case, the Court indicates that the U.S. Supreme Court’s decision in McGirt v. Oklahoma^[213] may have far-reaching implications. In McGirt, the Supreme Court held that the Muscogee (Creek) Nation’s reservation in eastern Oklahoma had not been disestablished and continued to be reservation land. The McGirt decision led to the Department of the Interior and the Office of Surface Mining and Enforcement stripping Oklahoma of its ability to regulate surface mining on the Creek Nation’s Reservation. Contending that McGirt’s impact is limited to federal criminal jurisdiction under the Major Crimes Act, Oklahoma filed this action challenging defendants’ actions. Pending before the Court in this action is Oklahoma’s motion for preliminary injunction to enjoin the Department of Interior from enforcing their decision to strip Oklahoma of its regulatory authority over surface mining on the Creek Reservation.

The Court held that Oklahoma did not show a likelihood of success on the merits of its claims. The Court emphasized that this case turns on the narrow issue of the interpretation and application of federal statute, not whether inhabitants of the newly-confirmed Creek Reservation should enjoy immunity from local regulation or whether McGirt’s holding should apply generally in the civil context.

The relevant statute in this matter is the Surface Mining Control and Reclamation Act (the “Act”). The Court stated that the language of the Act is clear in that a State does not have authority to regulate Indian land. Because the land at issue qualifies as reservation land for the purposes of the Major Crime Act, as decided in McGirt, it also qualifies as “Federal Indian reservation” for the purposes of the Act. Therefore, Oklahoma failed to show a likelihood of success on the merits. This case is one which the McGirt court suggested could be triggered by the finding that the Creek Reservation persists today, and demonstrates how a state’s ability to regulate is diminished on Indian land.

State v. On-Auk-Mor Trade Ctr., LLC, No. 1 CA-TX 21-0005, 2022 WL 1256617 (Ariz. Ct. App. Apr. 28, 2022). This case examines whether a limited liability company duly organized under Arizona law, but owned and operated by a tribal member solely on tribal land, is subject to Arizona’s unemployment insurance tax. The Court held that such a company is subject to Arizona’s unemployment insurance tax.

On-Auk-Mor Trade Center, LLC (“OAM”) is an LLC organized under Arizona law. OAM’s sole member is a trust whose sole trustee and manager, David Montiel, is a member of the Salt River Pima-Maricopa Indian Community (the “Community”). OAM argues that it is not subject to Arizona’s unemployment insurance tax because it is an excise tax on a member of the Community doing business entirely on Tribal land.

The dispositive question is who bears the legal incidence of the tax. Where the “legal incidence of an excise tax rests on a tribe or on tribal members for sales made inside Indian country, the tax cannot be enforced absent clear congressional authorization.”^[214] When the legal incidence of the tax rests on non-Indians, “no categorical bar prevents enforcement of the tax; if the balance of federal, state, and tribal interests favors the State, and federal law is not to the contrary, the State may impose its levy.”^[215]

Here, the parties agree that the legal incidence of the tax falls on employers. The question is whether the tax rests on OAM as an LLC or on Montiel as the sole manager of OAM. The Court reasoned that LLCs exist by virtue of state law, and, under Arizona law, an LLC is an entity distinct from its owners. Furthermore, the Community’s constitution provides that only natural persons are considered enrolled members of the Community. As an LLC, OAM is not a member of the Community, and the State is not categorically barred from enforcing the tax. Therefore, the legal incidence of the tax falls upon OAM and not Montiel. OAM also waived any arguments as to whether the balancing of federal, state, and tribal interests favor barring the tax because OAM did not raise this issue with the lower court. In conclusion, because OAM is an LLC organized under Arizona law, is taxed as a corporation for unemployment insurance tax purposes, and is not an enrolled member of the Community, it is subject to Arizona’s unemployment insurance tax.

§ 1.6. Conclusion

Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities. Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country. As a result, these transactions have prompted increased litigation in tribal and nontribal forums. Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.

To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties. Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion. As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.

* Ryan D. Dreveskracht is an attorney with Galanda Broadman, PLLC. Ryan practices out of the firm’s Seattle office, focusing on representing businesses and tribal governments in complex litigation. He is also devoted to defending individuals’ constitutional rights and handles civil rights and intentional tort cases.

† Heidi McNeil Staudenmaier is the Partner Coordinator of Native American Law & Gaming Law Services for Snell & Wilmer, L.L.P., where she is based in the firm’s Phoenix, Arizona office. Heidi is the past Chair of the State Bar of Arizona Indian Law Section, past President of the Maricopa County Bar Association, a member of the Executive Council for the ABA Business Law Section, past Chair of the Business and Corporate Litigation Committee, and has held numerous other leadership positions within the Section. She is also a Lifetime Honorary Director for the Iowa College of Law Foundation Board.

‡ Paloma Diaz is an attorney in the Commercial Litigation Group at Snell & Wilmer, L.L.P. Paloma has assisted in the representation of a variety of clients across multiple industries, including matters involving breach of contract, intellectual property disputes, gaming, and financial services litigation. Special thanks to Snell & Wilmer, L.L.P. Commercial Litigation attorney Christian Fernandez for his assistance in drafting this chapter.

1. The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 TULSA L.J. 1 (1997). ↑

2. Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 TULSA L. REV. 557, 560 (2001). See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11–12 (1997). ↑

3. Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997). ↑

4. Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832). ↑

5. Id. ↑

6. United States v. Kagama, 118 U.S. 375, 381–82 (1886). ↑

7. Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑

8. Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑

9. 140 S. Ct. 2452 (2020). ↑

10. United States v. McBratney, 104 U.S. 621, 623–624 (1882). ↑

11. 448 U.S. 136 (1980). ↑

12. See Ysleta Del Sur Pueblo v. State of Tex., 852 F. Supp. 587 (W.D. Tex. 1993), rev’d, 36 F.3d 1325 (5th Cir. 1994). ↑

13. The Tribe’s view was that state permission was not necessary, pursuant to IGRA’s classification of bingo as a Class II game, so long as the State permitted the game to be played on some terms by some persons. ↑

14. Ysleta del Sur Pueblo, 36 F.3d 1325 (holding that the Restoration Act’s gaming provision, rather than IGRA, governed whether the Tribe’s proposed gaming activities were allowed under Texas law and thus Texas’s law would apply to the Tribe’s gaming operations), abrogated by Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929 (2022). ↑

15. Tribal Court Systems, U.S. Department of Interior, Indian Affairs, https://www.bia.gov/CFRCourts/tribal-justice-support-directorate (last visited Nov. 3, 2022). ↑

16. Justice Systems of Indian Nations, Tribal Court Clearinghouse, http://www.tribal-institute.org/lists/justice.htm (last visited Nov. 3, 2022). ↑

17. B.J. Jones, Role of Indian Tribal Courts in the Justice System, Native American Monograph Series, 7 (Mar. 2000), http://www.nrc4tribes.org/files/Role%20of%20Indian%20Tribal%20Courts-BJ%20Jones.pdf. ↑

18. Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. REV. 297, 306 (2004). ↑

19. Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 Fordham L. Rev. 3085, 3159 (2013). ↑

20. See Montana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations . . . .” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation). ↑

21. Indian Country includes: (1) all land within the limits of any Indian reservation; (2) “dependent Indian communities” within the borders of the United States; and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000). “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction. . . .” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998). ↑

22. “The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members]. It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added). ↑

23. Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quoting United States v. Mazurie, 419 U.S. 544, 557 (1975)). ↑

24. Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, 259 F. Supp. 3d 713, 716 (W.D. Mich. 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority. The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.). ↑

25. Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands). Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members. Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right-of-way granted to a state for the purposes of the construction and use of a state highway, Strate v. A-1 Contractors, 520 U.S. 438 (1997). ↑

26. 450 U.S. 544 (1981). ↑

27. Id. ↑

28. Plains Commerce, 554 U.S. 316 (2008). Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries (450 U.S. at 564), the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178-79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007). More recently, however, the Ninth Circuit has indicated a reversion to its original rule. See Water Wheel, 642 F.3d 802. ↑

29. Plains Commerce, 554 U.S. at 340. ↑

30. Id. It appears, however, that courts have become more sympathetic to the second exception as of late. See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017). ↑

31. Kelsey Haake helped research and summarize the cases in this section. Kelsey is a rising third-year law student at the University of Pennsylvania Carey Law School and expects to graduate in May 2023. ↑

32. 450 U.S. 544 (1981). ↑

33. Exhaustion is not always required. See Nat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n. 21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”). ↑

34. Id. at 857. (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (“Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands. To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction. But this is a question that must be answered first by the tribal courts of the Navajo Nation.”). ↑

35. Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4–5 (N.D. Nov. 28, 2007). The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012). ↑

36. See Rincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but see Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same). ↑

37. Nat’l Farmers Union, 471 U.S. at 852. ↑

38. Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”). ↑

39. See Ford Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce Bank, 128 S. Ct. at 2726. It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling. In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659. However, the Drumm Court found that exhaustion was not required in the absence of a pending action in tribal court. Id. at 684. ↑

40. Nat’l Farmers Union, 471 U.S. at 857; see, e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies). ↑

41. See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996). ↑

42. Iowa Mutual, 480 U.S. at 16. ↑

43. See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see also Whitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies). ↑

44. See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”). ↑

45. Iowa Mutual, 480 U.S. at 19. ↑

46. Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”). A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue. See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903–04 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert. denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); U.S. ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012). ↑

47. Nat’l Farmers Union, 471 U.S. at 857 n. 21. ↑

48. Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n. 14 (1997). ↑

49. El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999). ↑

50. Miranda Martinez helped to research and summarize the cases in this section. Miranda is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2023. ↑

51. Stanko v. Ogala Sioux Tribe, No. 22-1266, 2022 WL 1499817, at *1 (8th Cir. May 12, 2022). ↑

52. Id. (quoting Strate v. A-1 Contractors, 520 U.S. 438, 459 (1997)). ↑

53. 25 U.S.C. § 450 (2000). ↑

54. See Santa Clara Pueblo v. Martinez, 436 U.S. 49, 57–58 (1978). ↑

55. Tribal immunity can be abolished via federal statute. Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015–16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”). Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755–56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359-60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license). ↑

56. Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008). ↑

57. Id. ↑

58. Kiowa Tribe, 523 U.S. at 760. The U.S. Constitution provides a basis for suits to enforce state election and campaign finance laws. The U.S. Supreme Court has yet to take a position on this matter. ↑

59. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978). ↑

60. Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998). ↑

61. Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (holding that evidence of vexatious and bad faith litigation did not amount to a waiver of immunity “even where the results are deeply troubling, unjust, unfair, and inequitable”). ↑

62. In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”). See also Demontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the Tribe). ↑

63. Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (holding Indian tribe’s removal of action to federal court did not waive its sovereign immunity). But see Guidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that raising the issue of attorneys’ fees in the first instance was sufficient to constitute a waiver of the Tribe’s right to claim sovereign immunity when defendant subsequently claimed for fees against the tribe). ↑

64. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see also Gilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (holding language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity). ↑

65. See, e.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth, 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf. Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court). ↑

66. 532 U.S. 411 (2001). ↑

67. Id. at 418; see Trump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super. LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract). ↑

68. C & L Enterprises, 532 U.S. at 415–16. ↑

69. Id. at 423. ↑

70. Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that the chairman of the tribal business committee did not have authority to waive immunity); see also Sandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286–87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity). But see Rush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent). ↑

71. Maxwell Herath helped to research and summarize the cases in this section. Maxwell is a

    rising third-year law student at Moritz College of Law, The Ohio State University, and expects to graduate in May 2023. ↑

72. 509 F.3d 1008, 1015–16 (9th Cir. 2007). ↑

73. 116 F.3d 1315, 1324 (10th Cir. 1997). ↑

74. Davila v. United States, 713 F.3d 248, 264 (5th Cir. 2013). ↑

75. See 28 U.S.C. § 2671. ↑

76. Id. ↑

77. Lewis v. Clarke, 137 S. Ct. 1285, 1292 (2017). ↑

78. Id. ↑

79. 11 U.S.C. § 101(27) (emphasis added). ↑

80. 25 U.S.C. §§ 461–79 (2000). ↑

81. Id. § 476. ↑

82. Id. § 477. ↑

83. Id. ↑

84. Id. ↑

85. See Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 562–63 (2001). ↑

86. Id. at 563. ↑

87. Id. ↑

88. Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity). C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena). ↑

89. See Seaport Loan Products v. Lower Brule Community Development Enterprise LLC, 2013 NY slip op. 651492/12 [Sup Ct. NY County 2013] (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction). ↑

90. Savannah Wix helped to research and summarize the cases in this section. Savannah is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2023. ↑

91. Uniband, Inc. v. Comm’r of Internal Revenue, 140 T.C. 230, 262–63 (T.C. 2013). ↑

92. Cully Corp. v. United States, 160 Fed. Cl. 360, 376 (Fed. Cl. 2022) (quoting 41 C.F.R. § 102-75.990). ↑

93. Id. at 375 (internal quotation marks omitted). ↑

94. Id. at 376–77 (quoting 41 C.F.R. § 102-71.20) (internal quotation marks omitted). ↑

95. Id. at 383. ↑

96. 25 U.S.C. § 463 (2000) (transferred to 25 U.S.C. § 5103); see TOMAC v. Norton, 433 F.3d 852, 866–67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5). ↑

97. Carcieri v. Salazar, 555 U.S. 379 (2009). ↑

98. Id. at 386. ↑

99. Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), https://www.standupca.org/off-reservation-gaming/Cowlitz%20Record%20of%20Decision%2012-17-2010.pdf/at_download/file. The Cowlitz Indian Tribe was not federally-recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time. Id. The D.C. District Court upheld the BIA’s Record of Decision, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014) and the D.C. Circuit upheld the District Court, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), https://www.bia.gov/sites/bia.gov/files/assets/public/oig/pdf/idc1-031724.pdf. Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues. However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior. Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016). ↑

100. BIA Weighs Land-Into-Trust after Supreme Court Ruling, (Mar. 26, 2009) https://www.indianz.com/News/2009/03/26/bia_weighs_landintotrust_after.asp (last visited Nov. 3, 2022). ↑

101. See, e.g., Stand Up for California! v. U.S. Dep’t of the Interior, 204 F. Supp. 3d 212 (D.D.C. 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally-recognized tribe under jurisdiction” in 1934 as required under Carcieri). ↑

102. Memorandum from Hilary C. Tompkins, U.S. Dep’t of the Interior, Office of the Solicitor, to Sally Jewell, Secretary of the Interior, U.S. Dep’t of the Interior (Mar. 12, 2014) https://www.doi.gov/sites/doi.opengov.ibmcloud.com/files/uploads/M-37029.pdf (hereinafter “M-37029 Memorandum”). ↑

103. Id. ↑

104. Id. ↑

105. 850 F.3d 552 (D.C. Cir. 2016). ↑

106. \132 S.Ct. 2199 (2012). ↑

107. 5 U.S.C. §§ 551–59. ↑

108. 28 U.S.C. § 2409a. ↑

109. The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013). ↑

110. The statute of limitations under the APA is six years. See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”). ↑

111. Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151). ↑

112. See 25 C.F.R. § 2.6(c). ↑

113. See 25 C.F.R. Part 2. ↑

114. Id. ↑

115. See 25 C.F.R. § 2.9. ↑

116. Courtney Moore helped to research and summarize the cases in this section. Courtney is a rising second-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑

117. Cnty. of Amador, 872 F.3d at 1020–31. ↑

118. Id. at n.5. ↑

119. Birdbear, No. 16-75L at *4 (quoting United States v. Navajo Nation (“Navajo I”), 537 U.S. 488, 506 (2003)) (internal quotation marks omitted). ↑

120. Id. (citing United States v. Navajo Nation (“Navajo II”), 556 U.S. 287, 290–91 (2009)). ↑

121. Id. (quoting Navajo I, 537 U.S. at 506). ↑

122. Id. (quoting U.S. v. Mitchell, 463 U.S. 206, 218 (1983)). ↑

123. Id. at *8 (internal quotation marks omitted). ↑

124. Id. at *3–9. ↑

125. Id. at *9. ↑

126. Id. at *3–6, *9–10. ↑

127. 25 U.S.C. § 81 (2000) (Section 81). For a list of contracts that are exempt from secretarial approval, see 25 C.F.R. § 84.004 (2008). ↑

128. 25 C.F.R. § 84.004. ↑

129. Id. ↑

130. 25 U.S.C. § 81. ↑

131. Id. § 415. ↑

132. Id. § 81. ↑

133. The approval process for alternative energy projects on tribal lands has been particularly burdensome. See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 Indian L. Newsl. 3 (2011). For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 Am. Indian L. Rev. 527 (2011). ↑

134. Outsource Servs. Mgmt., LLC. v. Nooksack Bus. Corp., 198 Wash. App. 1032 (2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino. When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation. The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. 81. The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself. Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”). ↑

135. 25 U.S.C. §§ 2701–21 (1988). The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions. In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations. See Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006); Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006. This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing). ↑

136. 25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006). ↑

137. 25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140–41 (1996). “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984). For an example of tribal business license requirements, see Navajo Nation Code, 5 N.N.C. § 401, et seq. (2005). ↑

138. See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, NO. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)). The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’” However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity. ↑

139. Pub. L. No. 112-151 (2012). ↑

140. Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits. See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013). ↑

141. 25 C.F.R. § 162. ↑

142. United States Department of Interior, Approved Hearth Act Regulation, https://www.bia.gov/service/HEARTH-Act/approved-regulations (last visited Nov. 3, 2022). ↑

143. Cynthia Murrieta helped to research and summarize the cases in this section. Cynthia is a rising second year law student at the William S. Boyd School of Law, University of Nevada – Las Vegas, and expects to graduate in May 2024. ↑

144. Against the Federal Defendants: United States Department of the Interior (“DOI”); Bryan Newland, in his official capacity as Assistant Secretary—Indian Affairs; and Darryl LaCounte, in his official capacity as Director of the Bureau of Indian Affairs (“BIA”). Kiowa Tribe v. United States Dep’t of the Interior, No. CIV-22-425-G, 2022 WL 1913436, at *1 (W.D. Okla. June 3, 2022). ↑

145. Against the FSA Defendants who are each sued in both their individual and official capacities: Lori Gooday Ware, Fort Sill Apache Tribe (“FSAT”) Chairwoman; Pamela Eagleshield, FSAT Vice-Chairman; James Dempsey, FSAT Secretary-Treasurer; FSAT Committee Members Jeanette Mann, Jennifer Heminokeky, and Dolly Loretta Buckner; Philip Koszarek, FSAGC (“Fort Sill Apache Gaming Commission”) Chairman; Naomi Harford, FSAGC Vice-Chairman; and FSAGC Commissioners Michael Crump, Lauren Pinola, and Debbie Baker. Kiowa, 2022 WL 1913436, at *1. ↑

146. Against FSA Defendants. ↑

147. 25 U.S.C. § 2710(d)(1)(A)(i), (d)(2)(A); see also id. §§ 2710(b)(2), (d)(1)(A)(ii). ↑

148. Cnty. of Amador v. United States Dep’t of the Interior, 872 F.3d 1012 (9th Cir. 2017). ↑

149. In County of Amador, the Ninth Circuit considered two challenges to the same 2012 ROD at issue in the present case, based on whether: (1) the Tribe qualified to have land taken into trust for its benefit under the IRA; and (2) the Tribe may conduct gaming on the parcels pursuant to IGRA. Id. As a preliminary matter, the court affirmed Laverdure “was empowered to take the Plymouth Parcels into trust” and therefore had the authority to approve the ROD. Id. Then, the Ninth Circuit held “the Band is a recognized Indian tribe that was ‘under Federal jurisdiction’ in 1934, and [DOI] did not err in concluding that the Band is eligible to have land taken into trust on its behalf under 25 U.S.C. § 5108.” Id. With respect to recognition under 25 C.F.R. Part 83, the court stated, “the Band was effectively recognized without having to go through the Part 83 process” because “a tribe could be ‘restored’ to Federal recognition outside the Part 83 process.” Id. Thus, as a federally recognized Tribe, the court held DOI “did not err in allowing the Band to conduct gaming operations on the Plymouth Parcels” in accordance with IGRA. Id. ↑

150. Fla. Stat. § 849.14. ↑

151. In August 2002, the Estom Yumeka Tribe of the Enterprise Rancheria (“Tribe”) applied to the Department of Interior (the “Department”) to have the Yuba Parcel taken into trust for the purposes of constructing a casino, hotel, and related infrastructure pursuant to the IRA. They were successful in their application and the Yuba Parcel was taken into federal trust for the Tribe on May 14, 2013. The California legislature took no action toward ratifying the gaming compact during 2013 or early 2014, and the compact became ineligible for legislative ratification by its own terms on July 1, 2014. The Tribe then filed suit under 25 U.S.C. § 2710(d)(7)(A)(i) of the IGRA’s remedial scheme.

     In that action, this Court ordered the State and the Tribe to proceed under 25 U.S.C. § 2710(d)(7)(B)(iii) to conclude a gaming Compact within 60 days. The parties failed to do so, which triggered IGRA’s requirement that the parties submit to a court-appointed mediator. The mediator found the Tribes’ proposed Compact best comported with IGRA and forwarded it to the State for its consent. The State failed to consent within the IGRA-mandated 60 days, and the Tribe’s Compact was then submitted to the Secretary. On August 12, 2016, the Secretary issued Secretarial Procedures prescribing the parameters under which the Tribe may conduct Class III gaming activities on the Yuba Parcel. ↑

152. 959 F.3d 1142, 1145 (9th Cir. 2020), cert. denied, sub nom. Club One Casino, Inc. v. Haaland, 141 S. Ct. 2792 (2021). ↑

153. Id. ↑

154. Fl. Stat. § 849.14 (2020). ↑

155. Michigan v. Bay Mills Indian Cmty., 572 U.S. 782, 795 (2014). ↑

156. 5 U.S.C. § 706(2)(A). ↑

157. See 25 U.S.C. § 2710(d)(1)(C) (providing that “[c]lass III gaming activities shall be lawful on Indian lands only if . . . [they are] conducted in conformance with a Tribal-State compact . . . that is in effect”). ↑

158. Under the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. § 2701 et seq., Indian tribes must enter a compact with the state in order to conduct high-stakes Las Vegas-style casino gambling, known as Class III gaming. ↑

159. The list includes: “(i) the application of the criminal and civil laws and regulations of the Indian tribe or the State that are directly related to, and necessary for, the licensing and regulation of such activity; (ii) the allocation of criminal and civil jurisdiction between the State and the Indian tribe necessary for the enforcement of such laws and regulations; (iii) the assessment by the State of such activities in such amounts as are necessary to defray the costs of regulating such activity; (iv) taxation by the Indian tribe of such activity in amounts comparable to amounts assessed by the State for comparable activities; (v) remedies for breach of contract; (vi) standards for the operation of such activity and maintenance of the gaming facility, including licensing; and (vii) any other subjects that are directly related to the operation of gaming activities.” 25 U.S.C. § 2710(d)(3)(C). ↑

160. See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114–15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generally New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332-33 (1983) (discussing applicability of state laws to tribes). ↑

161. See generally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 Ariz. Att’y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but see State ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State i Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253–54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the act and submitting to the jurisdiction of the Workers’ Compensation Administration). ↑

162. 42 U.S.C. §§ 2000e–2000e-17 (1991). Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (“Title VII expressly does not authorize suits against tribes; “the term employer . . . does not include . . . an Indian tribe . . . .”). ↑

163. Id. §§ 12101–17 (1990). ↑

164. Id. §§ 2000e(b)(1), 12111(5). Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination. See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act). See also Morton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge). ↑

165. See, e.g., ARIZ. REV. STAT. ANN. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws). Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect. See Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see also Aroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67–68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer). ↑

166. See Hardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity). ↑

167. 29 U.S.C. §§ 651–78 (1998). ↑

168. Id. §§ 1001-61. Congress amended ERISA in 2006 to apply Indian tribal commercial enterprises, but tribal governments remain exempt. 29 U.S.C. §§ 1002(32) (as amended by Pension Protection Act of 2006, 29 U.S.C. § 1002(32)). ↑

169. Id. §§ 201–19. ↑

170. Id. §§ 151–69. ↑

171. Id. §§ 621–34. ↑

172. N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”). ↑

173. Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116-17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see also Reich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA). ↑

174. See, Reich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493-94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434-35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights). ↑

175. Reich, 4 F.3d at 493-94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see also Mashantucket Sand & Gravel, 95 F.3d at 174. ↑

176. 29 U.S.C. §§ 2601–54 (1993). ↑

177. The Family and Medical Leave Act of 1993, 60 Fed. Reg. 2180 (Jan. 6, 1995). ↑

178. Casino Pauma v. NLRB, 888 F.3d 1066 (9th Cir. 2018). ↑

179. Chayoon v. Chao, 355 F.3d 141, 142-43 (2d Cir. 2004); Garcia v. Akwesasne Hous. Auth., 268 F.3d 76, 84–86 (2d Cir. 2001). ↑

180. Cf. Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes). ↑

181. Lucinda Iheaso helped to research and summarize the cases in this section. Lucinda is a rising third-year law student at Southern University Law Center in Baton Rouge, Louisiana, and expects to graduate in May 2023. ↑

182. Mashantucket Pequot Gaming Enter. v. Scheller, CV-AA-2013-109, 2014 WL 465814, at *3 (Mash. Pequot Tribal Ct. Jan. 28, 2014) (quoting Mashantucket Pequot Gaming Enterprise v. Christison, 6 Mash.Rep. 41, 46 (2013). ↑

183. 28 U.S.C. § 1331 (“Federal Question: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”). ↑

184. Id. § 1332 (“Diversity of Citizenship: The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—(1) citizens of different states . . . .”). ↑

185. See Peabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accord, TTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714–15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See also Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal). ↑

186. See Ysleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”). ↑

187. See Payne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726-27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728–29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040–41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329-30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898-99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But see Cook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf. R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602–03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”). ↑

188. See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split). ↑

189. Sean Howard helped to research and summarize the cases in Section 8.4.4. Sean is a rising third-year law student at the University of Illinois Chicago School of Law and expects to graduate in May 2023. ↑

190. Pursuant to 28 U.S.C. § 1362. ↑

191. 28 U.S.C. § 2283. ↑

192. 25 U.S.C.A. § 177. ↑

193. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980). ↑

194. Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694–95 (9th Cir. 2004). ↑

195. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005). ↑

196. There has been some question as to what exactly constitutes a tribally-owned corporation. The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe. It is then actually a part of the tribe per se” and is nontaxable. Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted). Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.” Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999). ↑

197. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005); see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”). See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345–46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted). ↑

198. See McClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172-–73 (1973). ↑

199. Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”). See also California v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”). ↑

200. Bracker, 448 U.S. at 143. ↑

201. Id. at 144; see also Aroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9–11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws). ↑

202. New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983). ↑

203. Id. at 334. ↑

204. Id. at 344. ↑

205. 25 U.S.C. § 5108. ↑

206. Id. ↑

207. 448 U.S. 136, 144–45 (1980). ↑

208. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 145 (1980). ↑

209. Cnty. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation, 502 U.S. 251, 257 (1992). ↑

210. Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 458 (1995). ↑

211. Id. at 459. ↑

212. Keweenaw Bay Indian Cmty. v. Naftaly, 452 F.3d 514, 530 (6th Cir. 2006) (concluding that “[a] treaty is not a federal statute or an act of Congress” for purposes of the Cnty. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation analysis). ↑

213. 140 S.Ct. 2452 (2020). ↑

214. Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 457 (1995). ↑

215. Id. ↑

Editor Emeritus and Editor

Contributors

§ 1.1. Introduction

The 2023 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.^[2] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-five states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; (24) Wisconsin; and (25) Wyoming.^[3] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.^[4] The California and Connecticut programs are expressly not business court programs as such.^[5]

§ 1.2. Recent Developments

§ 1.2.1. Business Court Resources

American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.^[6] The ACBCJ’s Seventeenth Annual Meeting took place in Glen Cove, New York from October 26, 2021, to October 28, 2022.^[7] Among other topics, the meeting addressed economic analysis for lawyers, discovery proportionality and cost allocation issues, bankruptcy law and mass tort litigation, the American Law Institute’s Restatement of the Law, Corporate Governance, scientific methodology and the admissibility of expert testimony, public nuisance litigation, and the management of ADR, expert witnesses and special masters in complex litigation.

Section, Committee, and Subcommittee Resources. The ABA Business Law Section provides a Diversity Clerkship Program that sponsors second year law students of diverse backgrounds in summer clerkships with business and complex court judges.^[8] The Section of Business Law Section has created a pamphlet, Establishing Business Courts in Your State, which is available among other resources in the online library for the Business and Corporate Litigation Committee’s community web page.^[9] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides documents and/or hyperlinks to business court resources.^[10] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Section of Business Law meetings. The Section’s Judges Initiative Committee also provides links to business court resources, such as annual meeting materials, articles relating to business court initiatives in various states, and other selected resources.^[11] The Section also has established a Business Courts Representatives (BCR) program,^[12] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Judge Elizabeth Hazlitt Emerson of the Supreme Court of the State of New York Commercial Division and Judge John E. Jordan of Florida’s Ninth Judicial Circuit will serve as BCRs for the 2021-2023 term, and Judge Julianna Theall Earp of the North Carolina Business Court and Judge Anne C. Martin of the Chancery Court of Davidson County, Tennessee will serve as BCRs for the 2022-2024 term.^[13] Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.

Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts have developed an innovative training curriculum^[14] and faculty guide^[15] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”^[16] The Business Courts Blog^[17] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years,^[18] as well as recent developments in business courts. In 2022, there were articles and reports addressing some aspects of business courts.^[19] There are also various legal blogs with content relating to business courts in particular states.^[20]

§ 1.2.2. Developments in Existing Business Courts

§ 1.2.2.1. Cook County, Illinois Circuit Court Law Division Commercial Calendar

The Chicago business court, the Commercial Calendar Section of the Circuit Court of Cook County, issued an updated Uniform Standing Order, effective August 29, 2022.^[21] Among other items, the Uniform Standing Order covers scheduling, zoom appearances, motion procedures, requirements for briefs and citations, and a list of materials required to be exchanged before trial and then submitted to the court.

§ 1.2.2.2. Florida’s Complex Business Litigation Courts

As it was last year, Florida is lucky enough to have six circuit court divisions dedicated to resolving complex business litigation (“CBL”). Florida’s six CBL judges are spread across Orange County (Ninth Judicial Circuit), Miami-Dade County (Eleventh Judicial Circuit), Hillsborough County (Thirteenth Judicial Circuit), and Broward County (Seventeenth Judicial Circuit). The judges currently assigned to hear CBL cases are: Judge John E. Jordan (Division 2-43) in Orlando,^[22] Judges Michael A. Hanzman (Division 43) and Alan Fine (Division 44) in Miami,^[23] Chief Judge Jack Tuter (Division 07) and Judge Patti Englander Henning (Division 26) in Fort Lauderdale,^[24] and Judge Darren D. Farfante (Division L) in Tampa.^[25] Judge Fine was newly-assigned to a CBL division in 2022.

There are two upcoming changes to the Ninth Circuit’s CBL court, which it refers to as the “Business Court.” First, the Business Court is expanding to include an additional division in Osceola County, Florida, to complement the existing division in Orange County, Florida. This will bring Florida up to a total of seven circuit court divisions dedicated to CBL matters. Judge Jordan will preside over the new division initially. Second, the Business Court will likely see a new face next year upon the anticipated completion of Judge Jordan’s CBL term in 2023.^[26]

Cases may be directly filed or reassigned/transferred to a complex business division based on a number of factors, including: the nature of the case, complexity of the issues; complexity of discovery; number of parties in the case; and specific criteria enumerated by each circuit.

§ 1.2.2.3. State-wide Business Court in Georgia

Georgia’s inaugural judge for the State-wide Business Court, Judge Walter W. Davis, returns to private practice. After nearly three years of service, Judge Walter W. Davis, the first judge to serve on Georgia’s State-wide Business Court, resigned in June 2022.^[27] Nominated by Governor Brian P. Kemp in July 2019, Judge Davis was unanimously confirmed by the Judiciary Committees of both houses of the General Assembly.^[28] His initial term was set to last for five years.^[29]

The Georgia State-wide Business Court began accepting cases in August 2020, and at the time of Judge Davis’s resignation, 72 cases had been directly filed in, or transferred to, the Court. ^[30] Judge Davis explained that “[t]he vast majority (87%) of those cases involve[d] disputes between and among small businesses from 22 different counties across the State[.]”^[31] Judge Davis authored more than 130 substantive opinions during his time on the Bench.^[32] Judge Davis has now returned to private practice as a partner at the Atlanta office of Jones Day.^[33]

In August 2022, Governor Kemp appointed Judge William “Bill” Hamrick III to succeed Judge Davis at the Georgia State-wide Business Court.^[34] Judge Hamrick, who previously served on the Superior Court for the Coweta Judicial Circuit since 2012, was sworn into office on September 26, 2022.^[35]

§ 1.2.2.4. Iowa Business Specialty Court

Iowa Business Specialty Court will soon be evaluated by state court administration every two years. Starting in 2023, the Iowa Business Specialty Court will be evaluated by state court administration every two years.^[36] The evaluation is expected to ensure the court continues to accomplish its mission and to identify opportunities to improve its operations.^[37] The first report, which will be prepared in July 2023, will evaluate the court for calendar years 2021 and 2022.^[38] Subsequent reports will be prepared by the state court administration every two years.^[39]

§ 1.2.2.5. Maryland Business and Technology Court

Maryland revises General Corporation Law to codify method of ratification for defective corporate acts. On October 1, 2022, a new subtitle to the Maryland General Corporation Law (“MGCL”) became effective that sets forth a procedure by which corporations can retroactively ratify corporate acts that were defective at the time such acts were enacted. See Md. Code Ann., Corps. & Ass’ns §§ 2-701–707. This ratification subtitle applies to corporate acts that would have been in the corporation’s power to execute had there not been a defective aspect of the act’s adoption. Id. at § 701(d). These defective acts include, but are not limited to, the unauthorized issuance of stock, failure to adopt board resolutions approving a corporate action, and failure to file a required charter document with the State Department of Assessments and Taxation (“SDAT”). In order to ratify the defective act, the corporation’s board of directors must adopt a resolution that states: (1) what the defective corporate act is and whether it involved the issuance of putative stock; (2) the date of the defective act, as best determined under Section 2-701(c); (3) the nature of the failure to authorize the defective act; and (4) whether the act would have required authorization of just the board of directors or of the stockholders, and that the board of directors and/or the stockholders will be ratifying the action, as applicable. Id. at § 2-702(a).

In order to ratify the defective corporate act, the MGCL requires the affirmative vote under either the requirements for approval of the corporate act at the time of the ratification or the requirements for approval of the corporate act on the date of the defective act, whichever portion of votes is greater. Id. at § 2.702(c). Holders of putative stock on the record date that determines which stockholders are entitled to vote on ratification are not entitled to cast a vote in consideration of ratification. Id. If the defective corporate act that requires ratification involves filing a charter document with SDAT, the corporation must file articles of validation in place of the charter document that should have been filed. Id. at § 2-705. These articles of validation must include: (1) the title and date of filing of the charter document to be corrected; (2) a description of the defective corporate act; (3) the date of the defective act; (4) a statement that the defective act was properly ratified; (5) the time the ratification became or becomes effective; and (6) a statement that either (i) a charter document was previously filed regarding the defective corporate act that requires no change, (ii) a charter document was previously filed regarding the defective corporate act and does require changes, or (iii) no charter document was previously filed regarding the defective corporate act. Id. While this new MGCL subtitle outlines a procedure to ensure valid ratification of a defective corporate act, it specifies that this is a nonexclusive remedy, and a defective corporate act can be otherwise lawfully ratified by a corporation. Id. at § 2-707.

Maryland simplifies limited liability company and partnership ownership transfers upon death. Also effective as of October 1, 2022, the Maryland legislature made a series of amendments to existing code provisions that declare that transfers of an equity interest in either a limited liability company or a partnership upon death of the equity holder that are made pursuant to the business’s governing documents are not testamentary transfers. See Md. Code Ann., Est. & Trusts § 1-401(c). These amendments were a direct response to a 2021 Maryland appellate court opinion holding that such equity transfers upon death were subject to estate and probate laws. See Potter v. Potter, 250 Md. App. 569 (2021). Under these modifications, an holder of an interest in a limited liability company or partnership may transfer a membership interest, an economic interest, a noneconomic interest, or a partnership interest, as applicable, to another person upon the interest holder’s death, even if the transferee does not have their own interest in the business at the time of the interest holder’s death. Md. Code Ann., Corps. & Ass’ns §§ 4A-402(a)(9), 9A-503(g). Such transfers will not be treated as testamentary transfers so long as these transfers are consistent with the business’s governing documents and/or agreements. Id. at §§ 4A-402(a), 10-702(d).

§ 1.2.2.6. Massachusetts Business Litigation Session (BLS)

On March 2, 2022, the Massachusetts Business Litigation Session (“BLS”) issued Formal Guidance of BLS Regarding Hearings, Trials, and Electronic Filings (“Guidance”). In the Guidance, the BLS explained that it will continue to hold remote hearings when appropriate, noting that counsel can request that a hearing be conducted remotely. At the same time, the BLS explained that it has a “strong preference” for conducting trials and evidentiary hearings in person. Regarding electronic filings, the BLS explained that an attorney electronically filing an item that needs immediate court attention should alert the session clerk of the filing. If the filing exceeds 20 pages, a courtesy hard copy should be provided to the court. More generally, the BLS also encouraged counsel to provide digital courtesy copies of “complex filings” by a thumb drive or disc, with each document or exhibit included as a separate PDF. Finally, the BLS affirmed its commitment to encouraging the participation of less senior attorneys in all court proceedings. To this end, the BLS explained that it will allow two or more attorneys to handle different parts of a hearing. When a less senior attorney is arguing a motion, the BLS will also allow the less senior attorney to confer with a senior attorney during the hearing and the senior attorney can make additional points when the less senior attorney finishes arguing the motion.

In April 2022, the BLS also published BLS Bench Notes, MBA Complex Commercial Litigation Section, Business Litigation Session Practice Guide (“Bench Notes”). The Bench Notes describe each BLS judges’ practices and preferences regarding case management, discovery, motion practice, and trial.

§ 1.2.2.7. Michigan Business Courts

Michigan Business Courts’ 10-Year Anniversary. October 16, 2022, marked the 10th anniversary of then-Governor Rick Snyder’s signing of Michigan’s business court legislation, which took effect on January 1, 2013. Since their inception, Michigan’s business courts have held an important place in the state’s jurisprudence and have established numerous protocols that circuit courts throughout Michigan have adopted (e.g., early case management conferences and early mediation). Attorneys throughout the state hold the business courts in high regard, finding that the business courts are responsive, efficient, and fulfill their legislatively prescribed purpose of enhancing “the accuracy, consistency, and predictability of decisions in business and commercial cases.”^[40] 

2022 Business Court Appointments. The makeup of Michigan’s business court bench changed significantly in 2022 as Judge Christopher P. Yates (formerly a business court judge in Kent County) was appointed to the Michigan Court of Appeals and several judges were newly appointed to the business courts. The new appointees are Judges Annette J. Berry (Wayne County), Curt A. Benson (Kent County), Timothy P. Connors (Washtenaw County), Kenneth S. Hoopes (Muskegon County), and Victoria A. Valentine (Oakland County). These new appointees will all serve for a term expiring April 1, 2025. 

Michigan’s New Videoconferencing Court Rules. In July 2021, the Michigan Supreme Court responded to the lingering impacts of the COVID–19 pandemic by adopting interim court rules relating to remote proceedings that, inter alia, required trial courts to employ videoconferencing or telephone conferencing “to the greatest extent possible.” Mich. Ct. R. 2.407(G). The court invited public comment on the efficacy of the interim rules and ultimately received 41 written comments and heard feedback from 49 individuals at a public hearing on March 16, 2022. Thereafter, on September 9, 2022, the court issued a new order making the interim rules permanent, thereby solidifying videoconferencing as an important tool available to Michigan courts to increase efficiency, lower costs, and promote access to the judicial system. The most pertinent modification in the 2022 order affecting business court litigants is the court’s adoption of a new rule: Mich. Ct. R. 2.408.^[41]

Under Mich. Ct. R. 2.408, “the use of videoconferencing technology shall be presumed” for virtually all civil proceedings besides evidentiary hearings and trials. Nevertheless, courts have discretion to determine the manner and extent to which videoconferencing technology is used. Indeed, even where the presumption applies, the court may require the proceeding to be conducted in person if it determines that the “case is not suited for videoconferencing.”^[42] In making this determination, the court must consider twelve factors, including the technological capabilities of the court and the parties, whether “specific articulable prejudice” would occur, and the potential to increase access to courts through the use of videoconferencing.^[43] On the other hand, the court generally can also require participants to attend proceedings remotely.^[44] An exception to this grant of authority lies in Mich. Ct. R. 2.407(B)(4), which provides that a participant can request to appear in person for any proceeding. If the participant so requests, the participant’s attorney and the presiding judge must appear in person with the participant; however, the court must allow the other participants to participate remotely using videoconferencing technology if they so choose, assuming the court determines that the case is well-suited for videoconferencing.^[45]

Beyond the new presumption in favor of videoconferencing for most civil proceedings, the Michigan Supreme Court’s 2022 order instituted numerous additional procedural rules related to remote participation. Among these new rules are the requirements that courts must provide participants with reasonable notice of the time and mode of proceedings, permit parties and their counsel to engage in confidential communications during a videoconferencing proceeding (including, for example, through the use of a virtual “break-out room”), and generally make videoconferencing proceedings accessible to the public.^[46] Counsel litigating in Michigan’s business courts should familiarize themselves with the changes made in the 2022 order, which is available on the Michigan One Court of Justice website.^[47]

§ 1.2.2.8. New York Commercial Division

Commercial Division promulgates new rule regarding mandatory settlement conferences. On January 7, 2022, the Commercial Division amended Rule 30 of section 202.70(g) of the Rules of the Commercial Division of the Supreme Court. Rule 30 is titled “Settlement and Pretrial Conferences,” and the amendment, effective as of February 1, 2022, adds a new provision to the rule that provides for mandatory settlement conferences in Commercial Division cases following the filing of a Note of Issue. The new provision, which will become Rule 30(b), greatly expands the scope of Commercial Division cases for which settlement conferences will be held. The amendment is aimed at recognizing: “a) the need to respect the authority and discretion of the justice assigned to each case; (b) the benefit of allowing the parties and counsel to provide input to the assigned justice as to which settlement conference procedure they think will be best suited to their particular matter; and (c) [Office of Court Administration] budget constraints that preclude the hiring of additional settlement neutrals.” See Memorandum from Subcommittee on Procedural Rules, entitled “Proposal to amend Commercial Division Rule 30 to provide for a mandatory settlement conference,” dated September 25, 2020.

New York State Unified Court System adopts new rules and guidelines for e-discovery. On April 11, 2022, the New York State Unified Court System adopted additional rules and guidelines for Electronically Stored Information (“ESI”). Under the amended Rule 11-c, parties are required to confer regarding electronic discovery prior to the initial conference. The rule further provides that any topics upon which the parties cannot reach agreement are to be addressed with the Court at the preliminary conference.

The amended Rule 11-c also adopts a cost-benefit analysis similar to the standard in federal court and requires that “[t]he costs and burdens of ESI shall not be disproportionate to its benefits.” To that end, the parties are required to consider “the nature of the dispute, the amount in controversy, and the importance of the materials requested to resolve the dispute.” The amended rule also encourages the parties to use technology-assisted review when appropriate, and the parties are required to confer regarding “technology-assisted review mechanisms” throughout the discovery period. Lastly, the amended rule adds a claw-back provision for inadvertently produced ESI that is subject to either attorney-client privilege or the work product doctrine.

§ 1.2.2.9. West Virginia Business Court Division

In the past year, eighteen motions to refer cases to the West Virginia Business Court Division were filed, and there were three pending motions to refer from 2020. Of these, eleven were granted, nine were denied, and one was pending as of year’s end. Since the Court’s inception in 2012, there have been 219 motions to refer filed, with a total of 127 of those motions granted. The Business Court Division has resolved 101 of these. At the end of 2021, there were twenty-six cases pending before the Business Court Division with an average age of 397 days. The average age of the ten cases disposed of in 2020 was 675 days.

The past year has also been a period of transition for the West Virginia Business Court Division. New judges have been appointed to the Division and the method of assigning judges has been tweaked to reflect the focus of much of the Division’s work. Judge Michael Lorensen of the 23^rd Judicial Circuit was reappointed as Chair of the Business Court Division by Chief Justice John Hutchison of the Supreme Court of Appeals. The Administrative Offices of the Division continues to be in Martinsburg, Berkeley County, West Virginia, with law clerk support for each of the Division’s judges located in Martinsburg as well. The current judges assigned to the Business Court Division are:

1. Judge Michael D. Lorensen (Chair), 23^rd Judicial Circuit
2. Senior Status Judge Christopher C. Wilkes (former Chair)
3. Judge Paul T. Farrell, 6^th Judicial Circuit
4. Judge Joseph K. Reeder, 29^th Judicial Circuit
5. Judge Shawn D. Nines, 19^th Judicial Circuit
6. Judge Maryclaire Akers, 13^th Judicial Circuit
7. Judge David M. Hammer, 23^rd Judicial Circuit

When originally formed, the Business Court Division divided the judge’s assignments up geographically, with each judge representing a region of a certain number of counties. Experience has shown that the cases assigned to the Business Court Division are not necessarily spread across the state. The north-central part of West Virginia, with a burgeoning energy industry, has been the focus of a number of Business Court Division cases. As a result, the Division is less focused on geographic assignments and more on matching the case with the best judge who can handle the matter.

It is also important for practitioners who might be handling a matter before the Business Court Division to understand that the judges appointed to the Division by the Supreme Court of Appeals are not only trained in handling these complex, commercial disputes, but also that they have a full docket in their home circuits of criminal, civil, and abuse and neglect cases. Unlike in some states, assignment to the West Virginia Business Court Division is an additional part of the judge’s workload, which they voluntarily take on to better serve the judicial needs of parties in complex commercial matters.

§ 1.2.2.10. Wisconsin Commercial Docket Pilot Project

In 2022, the Wisconsin Supreme Court extended Wisconsin’s Commercial Docket Pilot Project for another two years, with a new end date of July 30, 2024. The Court originally approved the Project in 2017. The Court also ordered that, on or before July 1, 2023, the Business Court Advisory Committee must file a formal rule petition asking the Court to adopt a permanent business court or advise the Court that it recommends the Court permit the Project to expire. The Court also amended the Interim Commercial Court Rule related to the mechanism for selecting judges to participate in the Project to reflect existing practice. Under the amended Rule, the Chief Justice of the Wisconsin Supreme Court assigns judges to the Project after considering the recommendation of the chief judge in the relevant Judicial Administrative District. Currently, twenty-six counties in Wisconsin participate in the program: Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn. The state’s largest county—Milwaukee—has not yet been added to the Project.

§ 1.2.2.11. Wyoming Chancery Court

December 1, 2022, marked the Wyoming Chancery Court’s first anniversary. Born of legislation enacted in 2019, the Wyoming Chancery Court resolves commercial, business, and trust cases on an accelerated schedule using active case management practices, expedited discovery, and bench trials.^[48] The Court has jurisdiction over actions seeking equitable or declaratory relief and actions seeking monetary relief over $50,000 exclusive of punitive or exemplary damages, interest, and costs and attorney fees.^[49] The underlying cause of action must fall within a list of 20 case types involving business and trust subjects.^[50] And the court must seek to resolve the cases as expeditiously as possible, within 150 days in most cases.^[51]

During its first year, the Chancery Court saw 15 new cases filed. These 15 cases involved 36 different parties, 29 unique attorneys, and six primary case types—breach of contract, internal business affairs, trust code, business agreements, breach of fiduciary duty, and business transactions involving financial institutions.^[52] Two Wyoming district court judges experienced in business litigation—Judges Richard Lavery and Steven Sharpe—handled these cases and will continue to handle cases until a full-time Chancery Court judge is appointed.^[53] Wyoming statute requires a full-time judge to be appointed by January 2024.^[54] On two occasions, however, the Wyoming Legislature has extended this deadline.^[55] It may do so again.

§ 1.2.3. Other Developments

§ 1.2.3.1. Texas Judicial Council’s Civil Justice Committee

The Texas Judicial Council’s Civil Justice Committee issued its 2022 Report and Recommendations,^[56] which included a recommendation that the Supreme Court create a pilot business court program. The recommendation included the following subparts:

• The Supreme Court should establish a pilot business court program to permit consideration of implementation details prior to statewide implementation.
• This pilot business court should be a part of or parallel to the existing court structure, and the Supreme Court should establish qualifications to determine who can be designated as a business court judge.
• The business court should hold proceedings regionally to ensure that parties throughout the state with complex litigation have access to the court.
• Parties to complex litigation should be given the opportunity to opt-in to the business court.
• The business court should be provided sufficient resources to handle the complex litigation, including technology and staff attorneys.

§ 1.3. 2022 Cases

§ 1.3.1. Arizona Commercial Court

State v. Google L.L.C.^[57] (Examining the scope of the Arizona Consumer Fraud Act). The State of Arizona filed suit against Google alleging that Google misled consumers about how and when Google collects location information from the devices it sells. Specifically, the State of Arizona alleged that the Android devices marketed and sold by Google are sold pre-loaded with functions and applications that collect and store a user’s location information. The State of Arizona argued that Google violated the Arizona Consumer Fraud Act (“ACFA”) because, for example, before selling its devices Google programed them with the ability to track a user’s location and did not disclose to the user at the time of sale that the tracking settings could not be completely disabled. Google moved for summary judgment, arguing that any alleged fraud or deceit was not made in connection with the sale or advertisement of merchandise, a requirement under the ACFA. For example, Google argued that the subsequent act of setting up an account and/or using an app, which would be when location tracking begins, cannot be characterized as being “in connection” with the sale of a previously purchased device.

The ACFA specifically addresses deceptive or unfair practices employed “in connection with” the sale or advertisement of merchandise. The commercial court acknowledged that the scope of “in connection with” under the ACFA is unclear, but after examining authority from varying sources the commercial court concluded that “in connection with” is not limited solely to specific actions taken at or before the purchase or sale of merchandise. Rather, a deceptive or unfair practice occurring after a sale may still be considered “in connection with” the sale. Whether an alleged deception is in connection with the sale of merchandise is ultimately a question of fact to be decided at trial. Here, there were issues of fact to be determined by the trier of fact, such as whether the alleged post-sale deceit involving location information had some connection with the sale of the devices such that Google violated the ACFA.

World Egg Bank Inc v. Weiss^[58] (Examining whether the sale of a company is consummated merely by the execution of a sales contract). In this case, the majority shareholder of a company sought to sell the company over the minority shareholder’s objection. In addition to objecting, the minority shareholder subsequently disputed the fair market value of the company. The issue before the commercial court was the determination of the fair market value of the company, which required the commercial court to determine when, if ever, the sale of the company actually occurred.

The commercial court explained that the consummation or effectuation of the sale of a company is triggered by the occurrence of the sale, not by the entry of a contract for sale. Here, the majority shareholder argued that the sale was consummated on April 17, 2015, which was the effective date identified in the contract for the sale of the company. The commercial court rejected this argument, finding that there was no evidence that the sale of the company was actually consummated at that time, or at any time thereafter, because the majority shareholder did not provide evidence that the transaction ever closed or was completed. For example, the commercial court determined that the company’s share price for purposes of the sale was not even finalized until November 2015. Therefore, the sale could not have been consummated as of April 17, 2015. The court granted the minority shareholder’s motion for summary judgment holding the majority shareholder failed to carry its burden of establishing the consummation of the transaction.

Beazer Homes Holdings LLC v. DCOH Development LLC^[59] (Examining whether a condition under a contract occurred such that duty to perform was triggered). In this case, Defendant filed a motion for partial summary judgment on the issue of whether a condition under a purchase agreement occurred such that the Defendant’s obligation to sell real property to Plaintiffs arose. Defendant entered into a written purchase agreement with Plaintiffs to sell real property to Plaintiffs. The purchase agreement contained a provision titled “Determination of Buyer’s Estimated Improvement Costs and Schedule,” under which the parties were required to agree in writing upon the final amount of Estimated Improvement Costs (“EICs”) prior to closing. Defendant argued that this provision was an express condition that never occurred because any EICs Defendant provided to Plaintiffs were not based on “fixed/guaranteed prices and actual bids,” and, therefore, were not final. As a result, Defendant argued that its obligation to sell the property to Plaintiffs never arose.

In response, Plaintiffs raised several arguments. First, Plaintiffs argued that Defendant sent Plaintiffs proposed EICs that Plaintiffs accepted, thereby satisfying requirement in the purchase agreement. Second, Plaintiffs argued that if the proposed EICs did not satisfy the requirement in the purchase agreement, the failure to satisfy the requirement was caused by Defendant’s failure to provide “final” EICs acceptable to defendant that Plaintiffs could then accept. Third, Plaintiffs argued that Defendant anticipatorily repudiated the purchase agreement because by failing to provide EICs that Defendant deemed acceptable, Defendant clearly indicated that it would not perform under the purchase agreement. Finally, Plaintiffs argued that Defendant breached the implied covenant of good faith and fair dealing because Defendant’s purported terminations of the purchase agreement were shams intended to secure a higher price for the property.

The commercial court started off by acknowledging that the purchase agreement contained ambiguities. While the EIC provision did refer to “actual bids” and “fixed/guaranteed” amounts, the very item at issue— EIC —contains the word “estimated.” Therefore, the nature of the EICs themselves are estimates and not fixed or guaranteed prices. The commercial court doubted that the parties intended to enter into a purchase agreement defining EICs in such a manner that they could never complete. Next, the commercial court indicated that questions of fact remained as to whether the EICs that Defendant proposed to Plaintiffs were accepted such that Plaintiffs could accept them. In addition, the commercial court noted that Defendant’s argument ignored the fact that it was its obligation to provide proposed EICs to Plaintiffs. Therefore, questions of fact remained as to whether Defendant itself prevented the fulfillment of the condition or if Defendant intended to never perform. The commercial court denied the partial motion for summary judgment.

§ 1.3.2. Delaware Superior Court Complex Commercial Litigation Division

Diamond Fortress Techs., Inc. v. Everid, Inc.^[60] (Cryptocurrency assets are treated as a security when evaluating contract damages). Pursuant to a licensing agreement and an advisor agreement, Plaintiffs contracted to provide Defendant with patented identification software and as-needed assistance with the integration of the software. Defendant developed a block-chain based identity and financial platform which needed Plaintiffs’ identification software to verify and confirm its users’ identities. The agreements provided that the Plaintiffs would be paid in cryptocurrency token distributions when Defendant eventually held its Initial Coin Offering (“ICO”) (the cryptocurrency equivalent of an initial public offering) and at subsequent Token Distribution Events (“TDEs”). The ICO and several TDEs occurred but Defendant never paid Plaintiffs as agreed. Plaintiffs sued Defendant for breach of the agreements and moved for default judgment based on Defendant’s failure to defend itself in the lawsuit.

In deciding the damages to award Plaintiffs for the Defendant’s breach, the court recognized that the classification and valuation of cryptocurrency, along with the calculation of damages resulting from the breach of a cryptocurrency-paid contract, are novel matters to Delaware. First, the court held that it would rely on CoinMarketCap as a reliable cryptocurrency valuation tool for determining the USD value of cryptocurrency tokens. Then, the court ascertained the proper method for calculating damages such that it would place Plaintiffs in the same position they would have been had the agreements been fully performed. The court held that, because cryptocurrency constitutes a security, it would follow the “New York Rule” previously adopted by Delaware courts to calculate damages in wrongful stock conversion litigation. Accordingly, the court calculated the damages by multiplying the total tokens awarded under the agreements by the tokens’ highest intermediate value within three months of the discovery of Defendant’s breach.

Greentech Consultancy Co., WLL v. Hilco IP Servs., LLC^[61] (Preliminary agreements to agree are binding and enforceable contracts). In Greentech Consultancy Company, WLL, the parties agreed to enter into a joint venture to develop and commercialize intellectual property owned by Plaintiff. Their agreement was set forth in a term sheet which indicated that there would be a subsequent agreement “setting forth the specific terms and conditions of the proposed transaction in more detail.” Defendant ultimately backed out of the joint venture before closing and Plaintiff sought to recover damages for Defendant’s failure to meet its obligations pursuant to the term sheet.

Although the term sheet did not expressly state that the parties would exercise “good faith” in negotiating the open issues, the court held that the term sheet nevertheless contained an implied obligation to negotiate in good faith. The court further clarified that preliminary agreements in which the parties agree on certain major terms, but leave other terms open for further negotiation are in fact binding and enforceable contracts. The difference between such preliminary agreements and normal contracts is simply which obligations bind the parties. The court held that Defendant was obligated to negotiate with Plaintiff in good faith in an effort to reach final agreement within the scope that had been settled in the term sheet. Ultimately, the court denied the parties’ motions for summary judgment on the issue of whether Defendant satisfied its obligation to negotiate the open issues under the term sheet in good faith because reasonable minds could differ as to whether Defendant’s conduct amounted to bad faith.

Simon Prop. Grp., L.P. v. Regal Ent. Grp.^[62] (Enforcing a broad force majeure provision between sophisticated parties). In Simon Property Group, L.P., the parties entered into several leasing agreements for commercial properties. The leasing agreements contained clauses in which Defendants guaranteed performance by the tenants of all agreements, covenants, and obligations, including guaranteeing the full and prompt payment of rent. Each of the leasing agreements also contained a force majeure provision, obligating the tenants to pay rent in full despite the occurrence of a force majeure event. Due to COVID-19, the tenants were required to adhere to their respective state’s restrictions and began to default on their rent obligations in April 2020. Plaintiff sought more than $5.5 million in unpaid rent and other charges, and moved for partial summary judgment on the counts for breach of the guaranties.

The court rejected Defendants’ argument that they were excused by the COVID-19 pandemic and related governmental restrictions. Specifically, it held that the leasing agreements contained broad force majeure provisions which allocated the risk of impossibility and impracticability to the tenants. Based on the great weight of authority in Delaware and other jurisdictions, the court held that Plaintiff was entitled to partial summary judgment on liability. Acknowledging that the ruling may be considered harsh, the court noted that the leasing agreements involved sophisticated parties which freely contracted and allocated risk to the tenants. Moreover, it recognized that the COVID-19 pandemic was neither unprecedented nor unforeseeable noting the Spanish Flu pandemic and the 1988 film industry strike.

§ 1.3.3. State-wide Business Court in Georgia

Insight Global, LLC v. Marriott Intern., Inc.^[63] (Contract termination under force majeure provisions). This contract dispute arose from an event cancellation due to the COVID-19 pandemic. Under a 2019 contract, Defendant Marriott International, Inc. agreed to host an annual sales conference in January 2021 for Plaintiff Insight Global, LLC at one of Marriott’s Florida hotels. Insight paid Marriott a $40,000 deposit. In June 2020, as the COVID-19 pandemic unfolded, Florida state and county officials issued short-term executive orders limiting, among others, restaurant capacity and encouraging the public to avoid large gatherings. In July 2020, Insight sent Marriott a “termination notice” and requested the return of its deposit, stating that it was ending the agreement under the contract’s “Impossibility Provision.” Insight argued that the executive orders under the pandemic rendered the agreement impossible. Marriott disputed this contention, however, and demanded $695,000 under the contract’s liquidated damages, which provided damages at varying percentages based on the date of termination. Soon after Insight sent the termination email, new executive orders were issued that allowed business to reopen and only required face coverings. Insight’s counsel then asked Marriott to provide a plan for performance, but Marriott did not respond. After the performance dates passed, Insight sued seeking (1) a declaration that it properly terminated the agreement because of the pandemic; (2) a declaration that Marriott failed to provide reasonable assurances; (3) a declaration that the liquidated damages provision was unenforceable; and (4) relief under two Florida statutes. Marriott counterclaimed for breach of contract and failure to pay liquidated damages. Insight moved for summary judgment on the counterclaim, and Marriott cross-moved for summary judgment on all claims, including its own counterclaim.

The court granted Marriott’s motion. First, because the contract contained no choice of law provision, the court conducted a choice of law analysis, holding that Georgia’s “traditional rule” for contracts involving out-of-state performance requires application of Georgia law to common law claims and state-of-performance law to statutory claims. Second, the court held that, although the Impossibility Provision contemplated situations like the COVID-19 pandemic and pandemic-related government regulations, Insight did not prove that the pandemic ultimately made its performance impossible or illegal. The court rejected Insights’ argument that impossibility should be measured at the time of termination; impossibility must be determined instead at the time of performance. Third, the court held that, although case law is unclear on the availability of demands for “adequate assurances” under service contracts, Insight’s communications did not even constitute demands because its requests for a “plan of performance” merely sought information and came after repudiation of the contract. As a result, Insight breached the agreement. Fourth, the court rejected Insight’s argument that even if it breached the agreement, its breach was excused because Marriott could not perform. The court concluded that, unlike Florida law, Georgia does not require non-repudiating parties to prove they were “ready, willing and able” to perform after an anticipatory repudiation. Finally, the court held that as the non-breaching party Marriott is entitled to liquidated damages because (a) Marriott’s lost profits are difficult to predict, (b) the contract contained language stating that liquidated damages (which are common in the industry) are not intended to be a penalty, and (c) the sums provided are reasonable and not arbitrarily set.

Elavon, Inc. v. People’s United Bank, Nat. Ass’n^[64] (Personal jurisdiction of out-of-state defendants). This action involves an out-of-state successor in interest’s attempted termination of a referral agreement. Plaintiff Elavon, Inc. is a Georgia corporation that provides global processing services for merchants in credit card and other transactions. In 2018, Elavon entered into a five-year referral agreement with United Bank, N.A. (“United”), a Connecticut corporation. Defendant People’s United Bank (“People’s United”) became United’s successor in interest after a stock-purchase merger in 2019. Upon completion of the merger, People’s United transmitted a letter to Elavon purporting to terminate the referral agreement. Elavon sued, claiming People United’s letter amounted to a wrongful anticipatory repudiation and failure to perform under the contract. People’s United then moved to transfer the case from the State-wide Business Court. While that petition was pending, People’s United filed its answer and moved to dismiss for lack of personal jurisdiction. Although the parties’ agreement included a jurisdictional provision that required disputes to be pursued “exclusively in the state courts located in Fulton County, State of Georgia,” People’s United insisted that because the jurisdiction provision also contained an impermissible jury-waiver clause, the entire provision was unenforceable. Elavon responded that the inclusion of a severability provision in the contract made the jurisdictional clause enforceable despite its jury-waiver language.

The court held that, under Georgia precedent, the entire jurisdiction provision was unenforceable. While the severability provision allowed an unenforceable provision to be severed from the agreement, the jury waiver and forum selection language, though separate clauses, were part of a single provision. Next, the court determined that an independent basis of personal jurisdiction over People’s United was just as unavailable. Under Georgia law, a court has jurisdiction over nonresident defendants if the defendants purposefully act or transact business in the state, the cause of action arises out of those transactions, and the exercise of jurisdiction is reasonable. By itself, signing a contract cannot support the court’s exercise of personal jurisdiction. The court noted that preliminary negotiations did not take place in Georgia, and the record did not reveal that People’s United performed any services in Georgia. Thus, under Georgia law, it was clear that unilateral acts by Elavon did not confer jurisdiction, and the mere transmittal of the termination letter did not subject People’s United to personal jurisdiction.

§ 1.3.4. Indiana Commercial Court

deGorter v. Devlin II et al.^[65] (Approving the Commercial Court Master’s Recommendations regarding Plaintiff’s Motion to Compel). Indiana’s Commercial Court Rules outline the process for appointment of a commercial court master in a specific case, as well as the requirements that a commercial court master must follow.^[66] DeGorter is a prime example of the use of masters in Indiana’s commercial courts. On November 1, 2021, Plaintiff filed a motion to compel production of documents, which Defendants opposed. Following additional briefing and a hearing, the Court issued an order on June 23, 2022, finding that there was insufficient information to determine whether any privilege applied to the documents at issue without conducting a full review of the documents, and recommending that the matter be resolved by a commercial court master. After both parties consented, the Court issued an order on July 18, 2022, appointing a commercial court master to review the withheld/redacted documents, determine when the parties became adverse, and prepare a written report and recommendation on the motion to compel for the Court’s review. On August 15, 2022, the Court issued a subsequent order clarifying the scope of its prior order to note that certain categories of documents were not covered by the master’s review.

Shortly thereafter, the commercial court master submitted an initial report, providing his recommendations on seven different categories of documents based on their varying characteristics. On September 23, 2022, the Court accepted all the master’s recommendations, granting in part and denying in part Plaintiff’s motion to compel. Three of the determinations adopted by the Court are particularly noteworthy:

• First, the commercial court master determined that Plaintiff was entitled to privileged documents that were created during his tenure on Defendant’s board, as former directors or board members of corporations are entitled to privileged documents created during their tenure as they are individuals within the mantel of privilege. As such disclosure of those documents to the former directors does not eliminate the privilege.
• Second, the commercial court master determined that Plaintiff was entitled to documents that were part of his application before a government entity, as the common interest principle applied due to the same attorney acting as counsel for both Plaintiff and Defendants during the application process. The master also determined that the lack of clear boundaries explaining the scope of the attorney’s representation of the parties further supported the application of the common interest exception to privilege.
• Third, the commercial court master noted that non-privileged attachments to privileged communications should generally be treated as privileged, but only when they are attached to communications with counsel. Other copies of the same non-privilege attachment do not share that privilege and are discoverable.

Parkview Health Sys. Inc. v. Am. Guar. And Liab. Ins. Co.^[67] (Denying Defendant’s motion to dismiss). In Parkview Health, Plaintiff, a health care system, purchased an insurance policy from Defendant which contained an Interruption by Communicable Disease Coverage (ICD Coverage). The ICD Coverage provided that Defendant would pay for losses sustained by Plaintiff resulting from suspension of business activities at covered locations due to any government orders regulating communicable diseases. Plaintiff alleged that a series of executive orders issued by Indiana’s Governor during the COVID-19 pandemic, impacted Plaintiff’s ability to provide access at its locations, thus requiring payment under the policy. Defendant argued that the complaint should be dismissed because it failed to sufficiently plead facts that satisfied the requirements to establish coverage, in that the executive orders did not prevent access to Plaintiff’s locations, and that admissions of coverage in other cases was irrelevant. In response, Plaintiff argued that discovery was necessary to under the effect of the executive orders.

While the Indiana Trial Rules (specifically Rules 8(A) and 12(B)(6)) generally mirror their federal counterparts, Indiana’s motion-to-dismiss procedure is different than federal practice. Rather than adopting the “plausibility standard” as found in federal case law, Indiana is a notice-pleading state. As such, a complaint filed in Indiana state court is not required to state all the elements of a cause of action but it must inform a defendant of the claim’s operative facts so the defendant can prepare to meet it. The intention of this practice is to “discourage battles over mere form of statement.”

The Court found that there was no clear Indiana appellate case law that provided specific guidance on this rare type of policy. The Court also noted that any ambiguities in the policy must be read in a light most favorable to the non-moving party, Plaintiff. The Court held that the motion to dismiss was premature and that the case should proceed as (1) Plaintiff had met the notice pleading requirements regarding the issue of whether the executive orders impacted the policy, and (2) discovery should be conducted on the issue of whether Defendant had admitted coverage in other cases. The Court noted that it might consider those issues upon summary judgment motions at an appropriate time.

Indianapolis Power & Light Co. (d/b/a AES Indiana) v. American States Insurance Co., et al.^[68] (Granting Defendant’s motion to dismiss). In Indianapolis Power & Light Co., AES Indiana brought an action against the Home Insurance Company (“Home”) related to insurance coverage for AES Indiana’s alleged actual and potential liability for claims arising from coal combustion residuals or ash. AES Indiana asserted that Home has a duty to defend and/or reimburse AES Indiana for ongoing costs related to these claims. AES Indiana brought claims for (1) breach of contract; (2) declaratory judgment; and (3) unfair claims practices and breach of the duty of good faith. Home moved to dismiss under Indiana Trial Rules 12(b)(1), (2), and (6). Home also moved to transfer venue under Indiana T.R. 12(B)(3). AES Indiana did not contest Home’s motion to dismiss the breach of contract or unfair claims practices claim, and thus the claims were dismissed. The Court addressed the motion to dismiss as to the declaratory judgment claim.

Here, Home contended that AES Indiana’s claims should be dismissed because Home was declared insolvent and ordered liquidated by a New Hampshire Superior Court in 2003. The New Hampshire Order also directed that all actions and proceedings against Home, whether in New Hampshire or elsewhere, should be abated. Home argued that the New Hampshire Court’s Order must be honored under fundamental principles of full faith and credit and comity. Indiana Code § 27-9-3-12(b) requires Indiana courts to “give full faith and credit to injunctions against the liquidator or the company or the continuation of existing actions against the liquidator or the company, when those injunctions are included in an order to liquidate an insurer issued under similar provisions in other states.” Indiana has also codified the concept of full faith and credit at Ind. Code § 34-39-4-3(b). The Court found that the concept of full faith and credit is central to the system of jurisprudence. Similarly, Indiana courts have described comity, while not a constitutional requirement, as representing a willingness to grant a privilege out of deference and goodwill. Under principles of comity, as the Court notes, Indiana courts may respect final decisions of sister courts as well as proceedings pending in those courts. Factors considered in addressing comity questions include (1) whether the first filed suit has been proceeding normally, without delay, and (2) whether there is a danger the parties may be subjected to multiple or inconsistent judgments. Where an action concerning the same parties and the same subject has been commenced in another jurisdiction capable of granting prompt and complete justice, comity ordinarily should require staying or dismissal of a subsequent action filed in a different jurisdiction, in the absence of special circumstances. Here, the Court found that denying Home’s Motion to Dismiss would cause inconsistency throughout the lawsuits. Because this principle of preventing inconsistency is the reason that comity exists, the Court granted Home’s Motion to Dismiss in its entirety.

New Era Constr., LLC v. Brendonshire Cts. Ass’n, Inc.^[69] (Denying Plaintiff’s motion for award of expenses). On April 19, 2021, Plaintiff served discovery requests on Defendant, simultaneously with its Complaint and summons. On September 17, 2021, Plaintiff filed a Motion to Compel due to Defendant’s failure to respond to the discovery requests, despite Defendant’s attorney having filed an appearance and an Answer. After Defendant’s attorney withdrew from the case and Defendant failed to respond to Plaintiff’s motion, the Court granted the Motion to Compel on October 12, 2021. On October 27, 2021, Defendant filed a letter, which the Court construed as a Motion to Reconsider and Motion for Protective Order. Plaintiff filed a response, and the Court denied Defendant’s motion to reconsider and for protective order.

Plaintiff then filed a Motion for Award of Expenses seeking $1,140.00 in attorneys’ fees for its response to Defendant’s Motion to Reconsider and Motion for Protective order, which Plaintiff argued was not substantially justified and was meritless. Defendant argued that he filed the motion in good faith on limited issues and that the motion was not meritless. Trial courts have wide discretion in resolving discovery disputes between parties, and any decision by trial court will only be overturned on appeal if the appealing party can show that the trial court abused its discretion. Such an abuse of discretion is only found where the result reached by the trial court is clearly against the logic and effect of the facts and circumstances before the court. Ind. T.R. 37(A)(4) states:

(A) Motion for order compelling discovery. A party, upon reasonable notice to other parties and all persons affected thereby, may apply for an order compelling discovery as follows:

***

(4) Award of expenses of motion…If the motion is denied, the court shall, after opportunity for hearing, require the moving party or the attorney advising the motion or both of them to pay to the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorneys’ fees’, unless the court finds that making of the motion was substantially justified or that other circumstances make an award of expenses unjust.

Here, the Court found that there was at least one question over whether Defendant had the documents sought in discovery or if he was obligated to turn them over. Thus, the Motion to Reconsider and Motion for Protective Order was substantially justified, and the Motion for Award of Expenses was denied, accordingly.

Midwest Service & Supply, Inc., et al. v. Auto-Owners Insurance Co.^[70] (Granting in part and denying in part Defendant’s motions to strike and the parties’ cross-motions for partial summary judgment). In Midwest Service, the parties filed partial cross-motions for partial summary judgment to determine whether Plaintiffs had demonstrated their entitlement to additional insurance coverage within the policy issued by Defendant after a fire occurred at a commercial warehouse building. Defendant also filed motions to strike portions of testimony for two of Plaintiffs’ witnesses, including an expert.

In determining that the declaration of Plaintiff’s expert was admissible, the Court explained the intersection between Indiana Rule of Evidence 702 and the federal Daubert factors. “In Indiana, there is no specific test or set of prongs which must be considered [to] satisfy Indiana Evidence Rule 702.” While Indiana courts consider the federal Daubert factors to be helpful, they are not considered controlling. “Rather, a witness qualifies as expert under Rule 702 if two elements are met: (1) the subject matter is distinctly related to some scientific field, business or profession beyond the knowledge of the average lay person; and (2) the witness is shown to have sufficient skill, knowledge, or experience in that area so that the opinion will aid the trier of fact.”

In determining the parties’ cross-motions for summary judgment regarding Plaintiff’s declaratory judgment claim, the Court explained Indiana’s standard for the interpretation of insurance policies. An insurance policy should be construed to further the policy’s basic purpose of indemnity. If there is an ambiguity, an insurance contract is construed strictly against the insurer, and the language of the policy is viewed from the insured’s perspective. While a division between courts as to the meaning of the language in an insurance contract is evidence of ambiguity, it does not establish that a particular clause is ambiguous and Indiana courts are not obliged to agree that other courts have construed the policy correctly. A policyholder need not prove that its interpretation of a policy term is the only reasonable interpretation—only that it is a reasonable interpretation. For those reasons, the Court found that the policy at issue should be construed in favor of providing coverage, as “an ordinary policyholder of average intelligence-the standard for interpreting policy terms in Indiana-… would reasonably expect coverage for any lost income or extra expense suffered because of the fire.”

§ 1.3.5. Iowa Business Specialty Court

RSS COMM2015-CCRE27-DE WMC, LLC v. WC MRP Des Moines Center, LLC, et al.^[71] (Discharge of receivership). Plaintiff filed a lawsuit to foreclose on two mortgages it held over rental properties owned by mortgagors WC MRP Des Moines Center, LLC and WC MRP Waterloo Plaza, LLC (together “the WC MRP Defendants”). In addition to the petition, Plaintiff also filed an emergency application for the appointment of a receiver over properties located in Des Moines, Iowa (“Des Moines property”) and Waterloo, Iowa (“Waterloo property”), claiming that one of the properties needed a receiver to avoid imminent harm. Plaintiff specifically argued the WC MRP Defendants were instructed by a fire department to immediately repair a broken fire suppression system, which constituted a fire hazard, or cease all business operations. Plaintiff also asserted that a lack of adequate lighting resulted in increased vandalism on the Des Moines property and conditions on the property were so inadequate that a tenant sued the WC MRP Defendants over said conditions. The Court ultimately granted the application for receiver.