Associate Stone, Pigman, Walther, Wittmann, L.L.C. 909 Poydras Street, Suite 3150 New Orleans, LA 70112 (504) 593-0922 [email protected]
Introduction
In many ways, 2021 marked a return to a semblance of normalcy in the sporting world. The proliferation of vaccines enabled crowds to return to sporting events, and tent-pole events postponed from 2020 (most notably the Summer Olympics) were able to proceed. In terms of sports-related commercial litigation and disputes, however, the year was anything but “normal.” From a landmark Supreme Court decision regarding amateurism to a stunning (and quickly foiled) European soccer conspiracy to lingering litigation resulting from the COVID-19 pandemic and resultant shutdowns, the year featured a bevy of sports-related suits and incidents that could shape the business of sports for years and decades to come. Below is a brief summary of a few of the cases that occurred or were resolved in 2021.
Part I – NCAA
§ 1.1. NCAA v. Alston, 141 S. Ct. 2141 (June 21, 2021)
Directly addressing the antitrust legality of the NCAA’s student-athlete compensation limits for the first time, the Supreme Court unanimously affirmed the lower courts’ holding that the NCAA’s restrictions on “education-related” compensation to Division I athletes were unlawful.[1]
The plaintiffs in Alston were current and former student-athletes in men’s Division I FBS football and men’s and women’s Division I basketball players. Their initial suit challenged, on antitrust grounds, the NCAA rules capping the amount of “grant-in-aid” scholarship a Division I college or university can offer to a scholarship athlete at roughly the “cost of attendance” of the institution. The players argued that, by conspiring to arbitrarily “fix” the compensation student-athletes could otherwise earn in a free market for their services, NCAA member schools violate Section 1 of the Sherman Act under a “Rule of Reason” analysis.[2] In response, the NCAA argued that its interest in preserving “amateurism” justified its grant-in-aid rules and that the Supreme Court recognized that its compensation rules were presumptively legal in its 1984 decision in NCAA v. Board of Regents.[3]
Applying the full “Rule of Reason” analysis, the district court found that the NCAA’s restrictions on grant-in-aid were anticompetitive and not justified by the NCAA’s ever-shifting concept of “amateurism.”[4] However, the court did find that the NCAA had a procompetitive interest in restricting payments to athletes that were “unrelated to education,” so as to distinguish student-athletes from their professional counterparts.[5] The district court thus enjoined the NCAA from enforcing rules that limited athletes’ “educational” compensation, such as laptops and lab equipment for studies, payments for tutoring, and post-eligibility internships.[6] In addition, the court increased the limit of cash award for athletic achievement to $5,980, the maximum a high-achieving football player could earn in additional cash benefits.[7] The Ninth Circuit affirmed the district court in full, prompting the NCAA to petition for certiorari.[8] The plaintiffs opted against appealing the portion of the judgment preserving the NCAA’s ability to limit compensation “unrelated to education.”[9]
Writing for a unanimous court, Justice Gorsuch first addressed whether the NCAA’s rules were subject to a full Rule of Reason antitrust analysis or were afforded a deferential “quick look” standard. Justice Gorsuch explained that while a “quick look” will often be enough to approve the restraints “necessary to produce a game”—such as rules about the length of a game, the frequency of games, and the number of players on the field or court—a fuller review may be appropriate for other restraints. The Court found that the NCAA’s compensation rules fell on the “far side of this line,” emphasizing that “Division I basketball and FBS football can proceed (and have proceeded) without the education-related compensation restrictions the district court enjoined; the games go on.”[10] The court also clarified that language in dicta from the Board of Regents decision indicating that student-athletes “must not be paid” did not make the NCAA’s compensation restrictions presumptively legal, particularly given the explosion of NCAA athletic revenues in the past 37 years.[11] Finally, the court rejected the notion that the NCAA deserves more deference because it is not a “commercial enterprise,” highlighting the many commercial aspects of top-level NCAA competition.[12]
Justice Gorsuch then turned to the district court’s application of the facts under the Rule of Reason. Spurning the “parade of horribles” that the NCAA warned would arise from allowing “in-kind” academic compensation and limited cash awards, the Supreme Court held that the lower courts’ remedy of enjoining certain limits on “education-related” compensation was both judicious and reasonable under the facts.[13]
A concurrence from Justice Kavanaugh also garnered considerable media interest. After lambasting the NCAA during oral arguments, Justice Kavanaugh used his concurrence to take the NCAA to task for its “business model of using unpaid student athletes to generate billions of dollars in revenue for the colleges raises serious questions under the antitrust laws.”[14] Justice Kavanaugh indicated that he would be open to striking all of the NCAA’s compensation rules as illegal under the Sherman Act.[15]
The Alston decision headlined a watershed year in the law pertaining to collegiate athlete compensation. In addition to the passage of laws in several states authorizing student-athletes to earn “Name, Image and Likeness” (NIL) compensation (and the NCAA’s temporary suspension of its rules prohibiting such compensation), a federal court in Pennsylvania cited Alston in denying a motion to dismiss labor-related claims against NCAA members.[16] The National Labor Relations Board’s general counsel, Jennifer Abruzzo, later released a memorandum opining that student-athletes qualified as employees under the Fair Labor Standards Act.[17]
§ 1.2. Oklahoma, Texas Bolt for SEC, Spark Wave of Conference Realignment
On July 30, 2021, the Universities of Oklahoma and Texas announced that their respective boards of regents had unanimously voted to accept invitations to join the Southeastern Conference.[18] The move followed weeks of speculation that the two longtime Big 12 stalwarts would join the SEC and came a day after the SEC’s 14 current members unanimously voted to extend invitations to the universities.[19]
The Big 12 has neither initiated nor threatened any legal action against Oklahoma or Texas. However, Big 12 Commissioner Bob Bowlsby did send a cease and desist letter to ESPN, in which it accused the sports network of inducing Big 12 members to leave the conference.[20] Bowlsby alleged that, in addition to aiding Oklahoma and Texas’s efforts to leave for the SEC, ESPN was “actively engaged in discussions with at least one other conference” to which to funnel other Big 12 members.[21] ESPN characterized the allegations as “unsubstantiated speculation,”[22] and neither the ESPN nor the Big 12 have taken further action.
Both Oklahoma and Texas pledged to remain in the Big 12 through June 30, 2025, when the Big 12’s current media rights contract ends.[23] Should either or both attempt to leave the conference sooner, the universities would be potentially subject to a penalty of at least $75 million apiece.
The defection of Oklahoma and Texas from the Big 12 triggered an onslaught of conference realignment. On September 10, 2021, the Big 12 formally announced that Brigham Young University, the University of Central Florida, the University of Cincinnati, and the University of Houston would become members no later than the 2024-25 season.[24] The American Athletic Conference responded by swiping six member schools from Conference USA, with the Mid-American Conference and Sun Belt Conference also adding new members.[25] The fluctuating state of Division I conference membership is likely to stoke additional legal conflict between institutions and conferences. The Colonial Athletic Association, for instance, has already banned James Madison University from postseason participation until its departure for the Sun Belt Conference.[26]
§ 1.3. Case No. D2021-2418, WIPO Arbitration and Mediation Center, National Collegiate Athletic Association v. Jules Richard IV, Bachi Graphics LLC
An arbitrator with the World Intellectual Property Organization (WIPO) ordered the owner of domain name “finalfourneworleans.com” to the NCAA, months before the organization was slated to host its 2022 Men’s Basketball Tournament Final Four in New Orleans.[27]
Between 1981 and 2005, the NCAA registered several trademarks related to the Final Four, including “FINAL FOUR,” “THE FINAL FOUR,” “FINAL 4” and others. In 2008, Jules Richard IV registered the domain name “finalfourneworleans.com” Go Daddy, but did not use the domain name to host an active website.
Under the Uniform Domain Name Dispute Resolution Policy, a party seeking to obtain a disputed domain name from another must establish three elements: (i) the disputed domain name is identical or confusingly similar to a trademark or service mark in which Complainant has rights; (ii) Respondent has no rights or legitimate interests in respect of the disputed domain name; and (iii) the disputed domain name was registered and is being used in bad faith.
The NCAA filed its complaint with WIPO’s Arbitration and Mediation Center on July 23, 2021, asserting that it enjoys “strong rights in the FINAL FOUR” mark given its longtime use of the phrase and the various registered trademarks. The NCAA further maintained that the domain name finalfourneworleans.com was “identical and confusingly similar” to its mark, since it incorporated the non-distinctive geographic location (New Orleans) where the NCAA happens to be hosting the 2022 national semifinals and finals of its men’s tournament. According to the NCAA’s complaint, Richard had no legitimate interest in holding the domain, as he had no affiliation with the NCAA and had never made use of the domain name. The NCAA further accused Richard of acting in bad faith by “squatting” on the domain name while knowing of the NCAA’s interest in the Final Four mark. Richard did not respond to the NCAA’s complaint.
Arbitrator Georges Nahitchevansky accepted the NCAA’s arguments. First, Nahitchevansky held, the domain was “confusingly similar” to the NCAA’s final four mark, even with the addition of the geographic name “New Orleans.” Second, Nahitchevansky found that the evidence indicated that Richard, who appeared to be based in New Orleans, “registered the disputed domain name on the basis that the FINAL FOUR tournament might again be played in New Orleans and did so for [his own] benefit.” As a result, the arbitrator concluded that Richard lacked a right or legitimate interest in the domain name. Finally, relying on similar reasoning, Nahitchevansky found that Richard “opportunistically registered the disputed domain name to somehow profit from its association with Complainant” and thus was acting in bad faith.
§ 1.4. Westwood One Radio Networks, LLC v. National Collegiate Athletic Association, 172 N.E.3d 293 (Ct. App. Ind. May 26, 2021)
The Court of Appeals of Indiana affirmed the dismissal of an action brought by Westwood One Radio Networks against the NCAA that, if successful, would have prevented the NCAA from voiding its agreement with Westwood One.[28]
In 2011, Westwood One entered an agreement to serve as the exclusive radio broadcaster of NCAA championship events.[29] The contract obligated Westwood One to pay the NCAA an “annual rights fee” in two installments to preserve Westwood One’s exclusive broadcast rights.[30] When the COVID-19 pandemic forced the NCAA to cancel the remainder of its competitions for the 2019-20 athletic season, including the 2020 men’s basketball tournament, Westwood One forewent payment of its second installment for 2020, relying on the contract’s “Force Majeure” provision to relieve Westwood One of its financial obligation.[31] In response, the NCAA terminated the agreement.[32] Westwood One thereafter filed suit to enjoin the NCAA from terminating the contract, arguing that “it would be virtually impossible to determine or accurately estimate the losses Westwood One would incur over the next four years if the NCAA were to terminate the Radio Agreement.”[33] The trial court denied Westwood One’s request for preliminary injunction, holding that Westwood One had failed to demonstrate the requisite “irreparable harm.”[34]
On appeal, Westwood One argued that it required an injunction because the termination of the contract would damage its future goodwill in a manner that was impossible to ascertain.[35] For instance, Westwood One argued, the end of its relationship with the NCAA could impair Westwood One’s relationships with organizations such as the NFL, with which Westwood One also has a broadcasting agreement.[36] The court, to the contrary, found that the trial court had not erred in finding that Westwood One’s damages due to loss of goodwill and reputation were readily quantifiable.[37] Accordingly, the court affirmed the trial court’s denial of the preliminary injunction. The parties later settled Westwood One’s remaining claims for damages.[38]
§ 1.5. Bielema v. The Razorback Foundation, Inc., No. 5:20-CV-05104 (W.D. Ark.)
The Razorback Foundation agreed to pay former University of Arkansas coach Bret Bielema a portion of the amount owed on his buyout, effectively settling the parties’ claims against each other stemming from Bielema’s efforts to obtain other employment after Arkansas had fired him at the end of the 2017 season.[39]
The Razorback Foundation initially agreed to pay Bielema to $11.94 million to buy out his contract. As part of the buyout agreement, however, Bielema agreed to use his “best efforts” to obtain new employment and earn a reasonable salary. Bielema agreed to become an outside consultant for the New England Patriots in 2018 in exchange for a $125,000 salary. Taking the position that the Patriots position did not constitute Bielema’s “best efforts” to find employment at a “reasonable salary,” the Foundation ceased making payments to Bielema in January 2019, with Bielema still owed about $7 million of the buyout amount. Bielema sued to collect the remainder of his buyout, and the Foundation filed a counterclaim. In answer to the Foundation’s counterclaim, Bielema alleged that Patriots coach Bill Belichick had significantly overpaid Bielema.
The Foundation ultimately agreed to pay Bielema $3.53 million to resolve the dispute between the parties.
§ 1.6. Hobart-Mayfield, Inc. v. National Operating Committee on Standards for Athletic Equipment, — F. Supp. 3d —-, 2021 WL 1575297 (E.D. Mich. April 22, 2021)
A federal court in Michigan dismissed an antitrust suit alleging that the National Operating Committee on Standards for Athletic Equipment (NOCSAE) illegally conspires with football helmet manufactures to control the market for football helmets and helmet accessories.[40]
Plaintiff Hobart-Mayfield, Inc. markets and sells football helmet shock absorbers called “S.A.F.E. Clips.”[41] The NOCSAE, meanwhile, a nonprofit that develops and establishes test and performance standards for athletic equipment, including helmets at the high school, collegiate, and professional levels.[42] NOCSAE has also entered licensing agreements with football helmet manufacturers such as Riddell, Schutt Sports, and Zenith, whom Hobart-Mayfield alleged comprised nearly 100 percent of the football helmet and helmet “add-on” market.[43] Per NOCSAE’s policy, the addition of an add-on product such as the S.A.F.E. Clip to a previously-approved helmet “creates a new untested model” and allows the helmet manufacturer to declare the certification of the helmet with the add-on “void.[44] As a result, Hobart-Mayfield contended, NOCSAE and the helmet manufacturers had effectively colluded to exclude add-on manufacturers such as Hobart-Mayfield from the market, in violation of the Sherman Act and Michigan antitrust law.[45]
The court disagreed. Because NOCSAE’s did not require that add-on manufacturers such as Hobart-Mayfield be excluded from the market, the plaintiff failed to demonstrate “either an explicit agreement to restrain trade, or ‘sufficient circumstantial evidence tending to exclude the possibility of independent conduct.’”[46] The court similarly held that Hobart-Mayfield had failed to allege a conspiracy between NOCSAE and the manufacturers or intentionally interfered with the plaintiff’s business.[47] Accordingly, the court dismissed the suit for failure to state a claim.
Hobart-Mayfield appealed the ruling to the U.S. Court of Appeals for the Sixth Circuit.
Part II – PROFESSIONAL SOCCER
§ 2.1. Rise, Collapse of European Super League Sparks Legal Disputes
Following the announcement and immediate, backlash-fueled collapse of plans for a so-called European “Super League” (“ESL”) in April, the three clubs who have thus far refused to abandon the Super League project—FC Barcelona, Real Madrid, and Juventus—look set to challenge UEFA and FIFA’s legal authority to block or otherwise impair the institution of a competing league.
In April, citing a desire to “improv[e] the quality and intensity of existing European competitions throughout each season,” 12 of European football’s biggest clubs announced plans to form a new Super League that would consist of 15 permanent members and five rotating spots for other high-achieving European clubs.[48] The 12 ESL founders included six teams from England (Arsenal, Chelsea, Liverpool, Manchester City, Manchester United, and Tottenham Hotspur); three teams from Spain (Barcelona, Real Madrid, and Atletico Madrid); and three teams from Italy (Juventus, AC Milan and Inter Milan).[49] The announcement triggered an uproar among UEFA, national football associations, and fans, particularly in England.[50] In response, nine of the 12 “founding” clubs abandoned their plans to join the ESL.[51]
The remaining three ESL clubs, by contrast, are continuing to mount legal challenges they hope will pave the way for a Super League to come to fruition. In essence, Barcelona, Real Madrid, and Juventus argue that governing bodies such as UEFA and FIFA participate as both regulators who can sanction clubs and commercial competitors, in violation of European competition law.[52] Rather than protecting the game or the sanctity of European competition, these clubs argued, UEFA and FIFA were seeking to protect their own financial interests by using their regulatory power to snuff out a potential competing league.[53] The ESL clubs earned an early victory on this front, with a court in Madrid ordering that UEFA could not discipline or levy “fines” against the ESL clubs for their roles in planning the league, prompting UEFA to suspend its disciplinary actions against the clubs.[54] That court referred the matter to the European Court of Justice (“ECJ”), which may ultimately decide whether UEFA and FIFA can continue to act as regulators in accordance with European competition law, given their status as competitors.[55]
§ 2.2. Spanish Clubs Challenge CVC Investment in La Liga
Although a majority of the league’s members have already approved the transaction, FC Barcelona, Real Madrid, and Athletic Bilbao are challenging a venture capitalist’s investment in La Liga’s media rights under Spanish law.[56]
In August, a majority of La Liga’s teams approved CVC Capital’s $117.3 million investment in the league’s media rights. Under the agreement, CVC is entitled to 11 percent of La Liga’s media revenue for the next 50 years. The deal also obligates CVC to provide $2.9 billion in interest-free loans to league clubs.[57] However, according to Barcelona, Real Madrid, and Athletic Bilbao, the agreement violates a number of Spanish laws.[58] The teams claim that the deal was “adopted as part of an highly irregular and disrespectful process toward with the minimum guarantees required.”[59]
§ 2.3. Major League Soccer, L.L.C. v. F.C. Internazionale Milano S.p.A (U.S. Trademark Trial and Appeal Board, Dec. 9, 2020)
The U.S. Trademark Trial and Appeal Board (“TTAB”) recently issued a ruling favorable to FC Internazionale Milano (“Inter Milan”), dismissing a claim brought by Major League Soccer (“MLS”) that Inter Milan’s registration of the trademark “INTER” would cause a likelihood of confusion with Club Internacional de Fútbol Miami (“Inter Miami”) and other third-party soccer organizations with “inter” in their names.[60]
Inter Milan first applied for a trademark registration in the United States in 2014.[61] The MLS opposed the registration, arguing that the mark was merely “descriptive” in violation of Section 12(e)(1) of the Trademark Act (15 U.S.C. § 1052(e)(1)); and at risk of causing confusion with Inter Miami’s alleged mark in violation of Section 12(d) (15 U.S.C. § 1052(d)).[62] Inter Milan moved to dismiss the Section 12(d) claim.[63]
At first, the MLS cited its “intent-to-use” application for a registration on behalf of Inter Miami in asserting that the Milanese club’s registration posed a likelihood of confusion.[64] Eventually, the MLS pivoted its argument to focus on the use of “inter” by other soccer clubs and organizations in the United States, including a number of youth clubs.[65] The MLS stressed that it was “deeply involved” in youth leagues and lower tiers professional leagues and thus had an interest in averting confusion between Inter Milan and youth and lower tier organizations that used the word “Inter” in their title.[66] In turn, Inter Milan denied that MLS had established the requisite “direct and substantive connection” with these third parties to state a Section 12(d) claim.[67]
A three-judge panel of the TTAB agreed with Inter Milan that the MLS had “not sufficiently pleaded a ‘legitimate interest’ in avoiding a likelihood of confusion between Applicant’s mark and the pleaded third-party marks.”[68] Characterizing the MLS’s relationship to the various organizations and leagues with Inter in their names as “at best, tangential,” the TTAB held that even if the MLS’s allegations were accepted as true, MLS could not show it would be detrimentally affected by any “likelihood of confusion” between the marks.[69]
As of December 2021, the parties were in settlement discussions regarding the MLS’s remaining claim under Section 12(e)(1).[70]
§ 2.4. O.M. by and through Moultrie v. National Women’s Soccer League, LLC, No. 3:21-cv-00683-IM, 2021 WL 2478439 (D. Ore. June 17, 2021)
Teenage star Olivia Moultrie won a preliminary injunction against the National Women’s Soccer League (“NWSL”) that prohibited the league from enforcing its minimum age rule, leading to a settlement that cleared the way for Moultrie to continue playing for the Portland Thorns.[71]
In May 2021, 15-year old phenom Moultrie filed suit against the NWSL seeking a temporary restraining order and injunction precluding the NWSL from enforcing a requirement that players be at least 18 years of age before participating.[72] Moultrie argued that, while she would have to abide by a collectively bargained age limit, the NWSL’s rule—which the league’s teams had unilaterally implemented—violated the Sherman Act.[73] Moultrie emphasized both that the NWSL was the “only option for women to play professional soccer in the United States” and that there were no comparable age limits in male professional soccer leagues.[74] Enforcement of the age rule, Moultrie maintained, would “continually slow her development, delay her improvement, and more generally impede her career as a soccer player.”[75]
After granting the temporary restraining order and holding an evidentiary hearing, District Judge Karin Immergut held that Moultrie had satisfied the requirements for a preliminary injunction.[76] Judge Immergut determined that Moultrie was likely to succeed on the merits of her ultimate claim. The court specifically found that the NWSL teams wielded market power and had engaged in a concerted action to prohibit players under 18 from participating, thereby having an anticompetitive effect on Moultrie’s ability to participate in the market for professional women’s soccer.[77] The court rejected the NWSL’s arguments that the age rule’s alleged effect on cost reduction amounted to a procompetitive justification, or that the non-statutory labor exception to the Sherman Act applied, since the age rule had not been collectively bargained.[78] In addition, Judge Immergut found that Moultrie would suffer irreparable harm if she were prohibited from plying her trade in the NWSL for up to three more years.[79] Finally, the court held that the balance of equities and public interest favored Moultrie, particularly given the lack of an age limit or rule in the MLS or other men’s professional leagues.
The parties settled soon after, allowing Moultrie to continue her professional career.[80]
Part III – NFL
§ 3.1. St. Louis Regional Conv. et al. v. National Football League et al., 1722-CC00976 (Mo. 22nd Jud. Ct.)
The NFL and Los Angeles Rams owner Stan Kroenke agreed to pay $790 million in settlement of a years-long lawsuit stemming from the relocation of the Rams franchise from St. Louis to Los Angeles.[81]
In 2016, a majority of the NFL’s 32 owners approved Kroenke’s bid to move the Rams to Inglewood, California. The City of St. Louis, St. Louis County, and St. Louis Regional Convention and Sports Complex Authority filed suit a year later, alleging that Kroenke and others had fraudulently concealed their intention to move the team for years before the relocation; that the league had violated its own relocation policy in approving the deal; and the Kroenke and the NFL had cost St. Louis millions.[82]
The court had denied the defendants’ for motion for summary judgment dismissal in September 2021.[83] The NFL and Kroenke argued that the NFL’s relocation policy did not constitute a binding contract and that, regardless of whether it did, the St. Louis plaintiffs were not third-party beneficiaries with standing to enforce the policy.[84] Citing evidence that NFL owners considered it “their duty to enforce the Relocation Policy,” the court held that the relocation policy was enforceable.[85] The court further found that “many provisions of the Relocation Policy were intended for the benefit of a club’s home territory,” rendering the St. Louis plaintiffs intended third-party beneficiaries.[86] The court also held that questions of material fact as to whether the NFL and Kroenke knew that they would be moving the team but represented the contrary to the plaintiffs precluded summary judgment on the plaintiffs’ fraud claims.[87]
The litigation engendered strife among the league’s 32 owners. Much to their consternation, several owners have had to turn over extensive phone records and documents during the discovery process.[88] In October 2021, Kroenke reportedly signaled to his fellow owners that he was planning to challenge an indemnification agreement that Kroenke had signed prior to the relocation and pursuant to which Kroenke had previously been paying legal costs for the league’s defense.[89]
§ 3.2. Snyder v. Moag & Co., LLC, No. ELH-20-2705, 2021 WL 3190493 (D. Md. July 28, 2021)
In Snyder v. Moag & Co., LLC, the U.S. District Court for the District of Maryland tossed out a claim by Washington Football Team (“WFT”) owner Daniel Snyder alleging that John Moag, whose company had helped Snyder sell minority interests in the team, had spoliated evidence relating to a separate defamation claim brought by Snyder against an Indian publication.[90]
Snyder had filed suit against an “obscure website” in India that had published a story about a rumored connection between Snyder and Jeffrey Epstein.[91] According to Snyder, Moag deliberately deleted text messages and emails from his phone relevant to the India litigation.[92]
Although the court recognized that Moag had a duty to preserve potential evidence, the court held that Snyder had failed to meet the remaining two elements of a spoliation claim: a “culpable state of mind” and the relevance of the alleged information.[93] Snyder, per the court, “presented no real evidence” that Moag had deleted text messages or emails from his phone “with the express purpose of depriving [Snyder] of the evidence in this litigation.”[94] Further, finding the record devoid of evidence that Moag intentionally deleted materials relevant to the India litigation or had even been aware of it, the court found that Moag had not deleted relevant evidence.[95] Snyder, the court concluded, had merely been “fishing” for relevant evidence from Moag.[96]
§ 3.3. PSSI Stadium LLC v. City of Pittsburgh Zoning Board of Adjustment, No. 600 C.D. 2020, 2021 WL 3355011 (Pa. Comm. Ct. Aug. 3, 2021)
The Commonwealth Court of Pennsylvania determined that the proposal to spell out “HEINZ FIELD” in section of seating in Heinz Field does not violate a Pittsburgh zoning ordinance prohibiting “exterior” advertising signage, finding instead that the painted seats would constitute permitted interior signage.[97]
Heinz Field is a nearly 70,000 seat stadium the primary home of the Pittsburgh Steelers and the University of Pittsburgh football team. PSSI Stadium LLC, the stadium’s main tenant, applied for approval from the Pittsburgh Zoning Board of Adjustment (“ZBA”) to paint a section of Heinz Field’s seats.[98] The proposed signage, PSSI argued, would be a “permitted interior sign under Section 919.03.A of the City of Pittsburgh’s Zoning Code.”[99] The ZBA rejected the request, however, reasoning that because the “HEINZ FIELD” seat painting would be visible from above the stadium and from a number of buildings and locations in downtown Pittsburgh, the proposed signage was “analogous to a roof sign.”[100]
The trial court reversed the ZBA’s decision, and the Commonwealth Court affirmed the trial court. As an initial matter, the court held, the ZBA had erred in diverging from a prior decision in which a soccer stadium was allowed to paint its seats to spell out “HOUNDS” on the basis that the seats comprised an “interior” sign.[101] As in that case, the court held, the proposed Heinz Field painting was “plainly not an exterior sign.”[102] Instead, the seat signage was “tantamount to a logo on or near the playing field” and thus qualified as permitted interior signage under Section 919.03.A.[103]
Part IV – MAJOR LEAGUE BASEBALL
§ 4.1. Chattanooga Professional Baseball LLC v. National Casualty Company, No. 20-17422, 2021 WL 4493920 (9th Cir. Oct. 1, 2021)
The U.S. Circuit Court of Appeals for the Ninth Circuit affirmed the dismissal of a claim brought by several minor league baseball teams against their insurers for rejecting their claims for business interruption losses arising from the COVID-19 shutdown.[104]
Each of the teams’ insurance policies contained an exclusion for coverage from “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”[105] However, the teams argued that “other causes,” including “the attendant disease, resulting pandemic, governmental responses to the pandemic, and Major League Baseball (MLB) not supplying players,” were responsible for the interruption of business and resultant losses.[106] Accordingly, the Ninth Circuit’s analysis hinged on the determination of “causation” in each of the ten states in which the teams resided.[107]
Eight of the ten states (California, Oregon, West Virginia, Idaho, Indiana, Maryland, Tennessee, and South Carolina) employ the “efficient proximate cause” analysis, under which the legal cause is that which “sets the other causes in motion” without being too remote.[108] Because the Ninth Circuit identified the COVID-19 virus as the domino that set the other causes in motion, the court held that the teams in these states properly had their claims dismissed.[109] The court also rejected the claims brought under Texas law, which requires the claimant to establish that a concurrent, covered “peril” caused the alleged loss.[110] The Texas teams could not establish a cause “concurrent” to the spread of the virus.[111] The Ninth Circuit also held that the teams had not established a “efficient intervening cause” that “broke the causal chain” from the COVID-19 virus, as required to recover under Virginia law.[112] Finally, the court rejected the teams’ equitable arguments for deeming the insurance policies’ virus exclusions unenforceable.[113]
§ 4.2. Sports Technology Applications, Inc. v. MLB Advanced Media, L.P., No. 0652609/2014 (Sup. Ct. N.Y.)
Sports Technology Applications, Inc. (“STA”) won a $2 million verdict against MLB Advanced Media, L.P. (“MLBAM”) from a Supreme Court of New York jury in New York City.[114]
STA, an app developer and software company, entered a licensing deal with MLBAM in 2012 in which STA agreed to develop an app, which would allow users to predict plays in-game and challenge fellow users for the chance to win “virtual” prizes.[115] In exchange for the MLBAM’s promotion of the app, STA agreed to make a series of payments to MLBAM totaling millions.[116] The parties’ relationship quickly soured, however, and STA sued MLBAM in 2014.[117]
According to STA, MLBAM failed to adequately promote the app or disclose that it was a significant shareholder of PrePlay, a competitor to STA. While admitting that it did not promote the app to the extent required by the parties’ agreement, MLBAM blamed the lack of promotion on the app’s delayed launch and alleged myriad technological problems. MLBAM further denied that it had any obligation to disclose its relationship with PrePlay to STA.[118]
The jury sided with STA after a trial in 2021. The court later denied MLBAM’s motion for judgment as a matter of law or new trial.[119]
§ 4.3. Landis v. Washington State Major League Baseball Stadium Public Facilities District, 11 F.4th 1101 (9th Cir. Sep. 1, 2021)
In Landis v. Washington State Major League Baseball Stadium Public Facilities District, the Ninth Circuit remanded a suit to the trial to the trial court for a determination of whether T-Mobile Park, home of the Seattle Mariners, provides adequate sightlines of the playing field for its handicap-accessible seating in accordance with the Americans with Disabilities Act (“ADA”).[120]
The ADA requires “full and equal enjoyment of places of public accommodation by individuals with disabilities.”[121] In 1996, the U.S. Department of Justice (“DOJ”) published its Accessible Stadiums guidelines, in which the DOJ interpreted the ADA to mandate that “all or substantially all of the wheelchair seating locations must provide a line of sight over standing spectators.”[122] The guidance requires that wheelchair users be able to see the field “between the heads and over the shoulders of the persons standing in the row immediately in front and over the heads of the persons standing two rows in front.”[123]
Plaintiffs, all of whom use wheelchairs, alleged that the sightlines did not comply with the Accessible Stadiums requirements.[124] According to plaintiffs’ expert, “the sightlines of spectators using wheelchairs were nearly always more obstructed than the sightlines of spectators not using wheelchairs.”[125] Defendants’ expert disagreed, concluding that wheelchair-using spectators could see over the shoulders and between the heads of people in both of the first two rows in front of the seating.[126] The trial court sided with the defendants in finding that the wheelchair-accessible seats had “comparable,” if not greater, visibility than non-accessible seating.[127]
On appeal, the Ninth Circuit held that while the trial court analyzed the “first requirement” of the Accessible Stadiums standard—that wheelchair-using spectators be able to see over the shoulders of the row in front of them—the lower court had failed to assess whether spectators could see over the second row in front of them.[128] In the Ninth Circuit’s view, the trial court had failed to address evidence and testimony submitted by the plaintiffs regarding spectators two rows in front of wheelchair-accessible seats.[129] Accordingly, “not satisfied that the district court analyzed the second Accessible Stadiums requirement” but not expressing any opinion as to whether T-Mobile Court was in compliance with the ADA, the Ninth Circuit remanded the case to the trial court for a proper application of Accessible Stadiums.[130]
Judge Patrick Bumatay concurred in the result, but disagreed with the majority’s application of the Accessible Stadiums guidance as an “authoritative” document.[131]
§ 4.4. In Re: Houston Astros, LLC, No. 14-20-00769-CV, 2021 WL 2965268 (Ct. App. Tx. July 15, 2021)
On a writ of mandamus, the Court of Appeals of Texas in Houston dismissed a class action brought by a class of Houston Astros season ticket holders arising out of the revelation that Astros illegally stole signs from 2016 to 2019.[132]
In January 2020, MLB Commissioner Rob Manfred issued a report in which he concluded that the Astros had illicitly stole opposing teams’ pitching signs, including during their World Series-winning 2017 season and American League-winning 2019 season.[133] The plaintiffs alleged that the Astros “knowingly, intentionally, and deceptively selling season tickets with full knowledge that Astros employees and representatives were surreptitiously engaged in a sign stealing scheme in violation of MLB rules.”[134] If they had known the Astros were cheating, these season ticket holders averred, they would have never purchased season tickets.[135] The Astros moved to dismiss the complaint, asserting that the plaintiffs’ “disappointment” over the team’s indiscretions.[136] The trial court denied the motion, prompting the Astros to petition for a writ of mandamus.[137]
In reviewing whether the plaintiffs had stated legally cognizable causes of action, the Court of Appeals analyzed Mayer v. Belichick, 605 F.3d 223 (3d Cir. 2020).[138] The plaintiff in Mayer was a New York Jets season ticket holder who sued the New England Patriots and Bill Belichick for their alleged role in the “Spygate” videotaping scandal. The Third Circuit held that the plaintiff did not have a legally protected right “to see an ‘honest’ game played in compliance with the fundamental rules of the NFL” and thus had not suffered a cognizable injury.[139] The Texas court determined that the Astros’ ticketholders claim likewise stemmed from the “embarrassment, disappointment, shame, and disgrace” of the sign-stealing scandal, rather than any misrepresentation by the Astros or their representatives.[140] The ticket itself merely guaranteed entry to the game – not that the home team would play the game honestly or fairly.[141] The court thus dismissed the suit.[142]
The Cleveland Guardians (of the MLB) settled a trademark infringement suit brought by the Cleveland Guardians (roller derby team), allowing both teams to continue using the name.[143]
Cleveland’s baseball team changed its name from “Indians” to “Guardians” in July 2021. The Guardians roller derby team, however, had formed in 2013 and registered the “Cleveland Guardians” name with the Ohio Secretary of State in 2017.[144] The roller derby filed suit in October, alleging “There cannot be two ‘Cleveland Guardians’ teams in Cleveland, and, to be blunt, Plaintiff was here first.'”[145]
The settlement clears the way for the baseball team to begin the 2022 season as the Cleveland Guardians.
PART V – NBA
§ 5.1. Easter Unlimited, Inc. v. Rozier, No. 18-CV-06637 (KAM), 2021 WL 4409729 (E.D.N.Y. Sept. 27, 2021)
Charlotte Hornets guard Terry Rozier successfully moved for summary judgment dismissal of several claims arising out of his “Scary Terry” line of clothing and merchandise and its alleged similarity to the “Ghost Face” mask popularized in the Scream horror film series.[146]
Plaintiff Easter Unlimited (d/b/a Fun World) is a costumer and novelty item business that has held copyright and trademark registrations for the “Ghost Face” mask since the early 1990’s.[147] Fun World granted Dimension Films a license to use the mask for Scream.[148] In 2018, while Rozier was playing for and excelling with the Boston Celtics, fans and media began referring to him endearingly as “Scary Terry.”[149] Hoping to capitalize on this new moniker, Rozier began selling “Scary Terry” clothing that featured a cartoon caricature of Rozier wearing what he referred to as the “Scream mask.”[150] Plaintiff thereafter filed a variety of claims for copyright and trademark infringement.[151]
The court found that Rozier’s use of the “Ghost Face” copyright constituted fair use.[152] Among other things, the court determined that Rozier’s use of the mask in his merchandise: (1) was, to some extent, transformative; (2) parodic to the extent it constituted a “humorous and whimsical reimagination of the Ghost Face Mask”; and (3) satirical insofar as it was “a means of satirizing and ridiculing the perception of ruthless, high-scoring athletes in the NBA, as well as underscoring the humor in the Scary Terry moniker.”[153] In the court’s view, the risk of the “Scary Terry” moniker “usurping” the Ghost Face mask’s position in the market for novelty wear was low.[154]
The court similarly rejected the plaintiff’s trademark related claims.[155] In addition to deeming the “Ghost Face” mark descriptive and therefore “weak,” the court found that a dearth of evidence that the Scary Terry designs were similar or would cause consumer confusion.[156]
§ 5.2. Bertuccelli v. Universal City Studios LLC, No. 19-1304 (E.D. La.)
After several years of litigation and having already had a summary judgment motion denied, Universal Studios and other defendants settled a suit brought by the creators of the New Orleans Pelicans’ “King Cake Baby” mascot asserting that the movie studio stole his idea to create a character for the Happy Death Day film series.[157]
A mask featuring a “cartoonish baby face” figures prominently in both 2017’s Happy Death Day and 2019’s Happy Death Day 2 U.[158] Plaintiffs alleged that the mask infringes the copyright of the King Cake Baby, which plaintiffs created in 2009.[159] In support of their motion for summary judgment, the defendants argued that the plaintiffs could not establish “substantial similarity” between the masks.[160] But the court disagreed, concluding that a fact finder could find that the masks were “substantially similar.”[161]
The original mezzanine UCC foreclosure sale that was scheduled for May 1, 2020 was temporarily enjoined by the New York Supreme Court on April 30, 2020 on the grounds that the terms of the foreclosure sale were not commercially reasonable in light of the coronavirus pandemic and that Executive Order 202.8’s prohibition on foreclosures extends to UCC foreclosures of mezzanine debt. The court then issued a final decision in 1248 Assoc Mezz II LLC on May 18, 2020, vacating its prior temporary restraining order and ruling that the scheduled UCC foreclosure could move forward, as it was not prohibited by Executive Order 202.8.[162] The court reached this conclusion by noting that, “had the Executive Order intended to prohibit sales of collateralized assets…governed by the UCC, such prohibition would have been explicitly provided for within that Executive Order.”[163] The court then went on to concur with the mezzanine lender’s argument that the foreclosure of a mortgage is “a judicial proceeding, whereas the proposed (and Noticed) sale addresses a disposition of collateral pursuant to Article 9 of the UCC, a non-judicial proceeding,”[164] ultimately concluding that Executive Order 202.8 “addresses enforcement of a judicially ordered foreclosure,”[165] which does not cover foreclosures conducted under the UCC.
National Collegiate Athletic Assn. v. Alston, 141 S. Ct. 2141 (June 21, 2021) ↑
See Docket, Case No. 49D01-2009-CT-033968, Ind. Sup. Ct., Westwood One Radio Networks, LLC, f/k/a Westwood One Radio Networks, Inc. v. The National Collegiate Athletic Association, NIT, LLC. ↑
Bielema v. The Razorback Foundation, Inc., No. 5:20-CV-05104 (W.D. Ark.) ↑
Hobart-Mayfield, Inc. v. National Operating Committee on Standards for Athletic Equipment, — F. Supp. 3d —-, 2021 WL 1575297 (E.D. Mich. April 22, 2021). ↑
See Leading European Football Clubs Announce New Super League Competition, The Super League, https://thesuperleague.com/press.html (last accessed November 22, 2021). ↑
See note 48, supra. Although FC Bayern Munich and Borussia Dortmund in Germany and Paris St. Germain in France were also tabbed as “permanent” members, those clubs did not join in the initial Super League announcement. ↑
A Special Purpose Acquisition Company (“SPAC”) is a publicly traded blank check company created to take a private company public through a merger. At its core, a SPAC is a form of regulatory arbitrage in which market participants capitalize on the varying liability exposure of taking a company public. A SPAC typically has two years to identify a target company and complete the business combination, often referred to as a “de-SPAC” transaction, or liquidate and return the proceeds from the IPO to the shareholders. When a SPAC proposes a merger, the shareholders have the option to participate in the merger or redeem their shares at the initial IPO price with accrued interest. Typically, SPAC sponsors receive a “promote”—founder shares in the form of 20% convertible securities of the SPAC’s equity for a nominal price as compensation.
Increased private litigation, enhanced regulatory scrutiny, and changing market dynamics have called into question the utility of SPACs. Critics argue that SPACs are rife with conflicts of interest, erode investor protection, and are incredibly dilutive. Conversely, proponents aver that the investment vehicle improves market efficiency, helps reverse the trend of technology companies remaining private, and allows retail investors to participate in the upside of early-stage high growth companies. To the extent SPACs continue to provide financial incentives to market participants, and enjoy less liability exposure than conventional IPOs, SPACs will remain a relevant component of our capital markets. As such, market participants most adroit at navigating the evolving landscape will obtain a competitive advantage in the marketplace.
PRIVATE LITIGATION DEVELOPMENTS:
Private litigation against SPACs has increased and is expected to escalate. Lawsuits have targeted each step of the SPAC lifecycle, from the IPO process, to proxy solicitation, to the post–de-SPAC transaction. Of particular interest, on March 25, 2021, plaintiffs filed a class-action lawsuit against Multiplan Corp., the surviving entity from a de-SPAC transaction in the Delaware Court of Chancery (“DCC”).
The plaintiffs allege that the board of directors and the SPAC sponsor breached their fiduciary duty during the de-SPAC merger. The claims stem from a director’s duty to act loyally and disclose material information when seeking shareholder action. Specifically, the plaintiffs claim the defendants failed, disloyally, to disclose information necessary for plaintiffs to exercise their redemption rights knowledgeably. On January 3, 2022, the DCC denied the defendants’ motion to dismiss, allowing the plaintiffs’ case to move forward except for two named defendants.
In re Multiplan Corp. Stockholder Litigation (“In Re Multiplan Corp.”) is likely to have broad-reaching implications, as it is the first time a Delaware court has had an opportunity to apply Delaware corporate law to SPACs’ unique characteristics. Of note, Vice Chancellor Lori W. Will opined, given the mechanics of a SPAC, plaintiffs’ claims are direct, not derivative, and “[t]he entire fairness standard of review applies due to inherent conflicts between the SPAC’s fiduciaries and public stockholders in the context of a value-decreasing transaction.”[1]
Momentously, barring an appeal, In re Multiplan Corp. establishes that features common in SPACs are enough to rebut the presumptive protection of the business judgment rule and trigger an entire fairness review in Delaware court. Specifically, a sponsor’s promote in the form of founder shares at a nominal price creates a unique benefit to the sponsors that competes with the interest of public stockholders. The windfall founder shares’ beneficiaries would receive even in a value-decreasing transaction is misaligned with public stockholders’ interest to redeem their shares unless the value of the post-merger entity is greater than the full value of their investment with interest. Stated succinctly, the potential conflict between the SPAC sponsors and public stockholders resulting from their different incentives in a bad deal versus no deal is sufficient to rebut the business judgment rule.
In re Multiplan Corp. provides guidance for lawyers to structure SPACs in a manner that helps fiduciaries meet their standard of conduct under Delaware law and maintain the protection of the business judgment rule as a standard of review. Presumably, SPACs that structure their sponsors’ promote to align the financial incentives of SPAC sponsors with that of public stockholders will help mitigate conflicts of interest in de-SPAC transactions and maintain the protection of the business judgment rule in the pleading stages of litigation. Additionally, as Vice Chancellor Will points out, “one can imagine a different outcome if the defendants provided public stockholders all material information about the target.” Consequently, one can expect much more robust disclosure in de-SPAC transactions.
REGULATORY DEVELOPMENTS:
Along with an increase in private litigation, the Securities and Exchange Commission (“SEC”) has shown a keen interest in the proliferation of SPACs in the capital markets. On December 22, 2020, the Division of Corporation Finance of the SEC released a Disclosure Guidance for SPACs. The SEC staff emphasized that a SPAC preparing to conduct an IPO or present a de-SPAC transaction to shareholders “should consider carefully its disclosure obligations under the federal securities laws as they relate to conflicts of interest, potentially differing economic interests of the SPAC sponsors, directors, officers and affiliates and the interests of other shareholders and other compensation-related matters.”[2] Additionally, on April 8, 2021, Acting Director of the Division of Corporation Finance of the SEC John Coates opined that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor for forward-looking statements might not apply to de-SPAC transactions.[3] Of note, the PSLRA safe harbor and associated reduced §§ 11, 12 liability exposure in private litigation are the primary source of regulatory arbitrage opportunity of SPACs over conventional IPOs.
Subsequently, on April 12, 2021, the SEC published a joint statement by Acting Director Coates, and Acting Chief Accountant of the SEC Paul Munter, on Accounting and Reporting Considerations for Warrants Issued by SPACs (“Statement”).[4] The Statement indicates that certain warrants commonly issued by SPACs contain terms that should be classified as a liability rather than equity under U.S. GAAP. The Statement had a chilling effect on the SPAC market, as numerous registrants had to restate or amend their filings.
As anticipated, the SEC is starting to crack down on perceived abuse in the SPAC market with enforcement actions. On July 13, 2021, the SEC announced charges against Stable Road Acquisition Company (“SRAC”), its sponsor, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich. All parties have settled with the SEC except Kokorich, against whom the SEC has filed a separate complaint. Under the terms of the settled order, the settling parties agreed to pay more than $8 million in aggregate, tailored investor protection undertakings, and forfeiture of the promote the sponsors would have received if the merger were ultimately approved.[5]
According to the settled order, Momentus’s multi-billion-dollar revenue projections were premised on misleading statements about Momentus’s development of commercially viable space propulsion technology. Additionally, the order asserts SRAC “engaged in negligent misconduct by repeating and disseminating Momentus’s misrepresentations in Commission fillings” and to investors without proper due diligence. In a statement, SEC Chair Gary Gensler stated in part, “[T]his case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors…the fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders.” The case imposes gatekeeper-related obligations on SPAC sponsors and signifies a significant escalation in the SEC’s activity in the SPAC market.
In a speech on December 9, 2021, Gensler reiterated his trepidation of the proliferation of SPACs in the capital markets and touted his regulatory philosophy that like activities should be treated alike. He expressed his concerns that SPAC investors are not benefiting from the protection they would otherwise get from securities laws in traditional IPOs. Accordingly, he has asked the staff for rule proposals for the Commission’s consideration to mitigate information asymmetry, conflicts, and fraud in SPAC transactions.[6]
Undoubtedly, the SEC will have a tremendous impact on the evolution of SPACs, especially if Gensler’s public comments materialize in the form of SEC rules on disclosure, marketing practices, and gatekeeper obligations. As the SEC develops its approach to regulating SPACs, the Commission will have to balance policy goals and underpinning principles with an evolving financial market–for instance, finding the proper balance between investor protection, democratizing finance, and maintaining an efficient market.
MARKET DEVELOPMENTS:
Litigation risk, regulatory activities, and market dynamics have curtailed SPAC market activity. However, as SPAC market participants obtain regulatory clarity, process litigation risks, and calibrate market dynamics, SPACs are likely to evolve with innovative deal structures. On November 24, 2021, Pershing Square Capital Management filed a registration statement with the SEC for the subscription warrants of its special purpose acquisition rights company (“SPARC”).[7] A SPARC has features similar to a SPAC; however, amongst other things, a SPARC has an opt-in rather than an opt-out financing structure. A SPARC does not raise capital in its IPO, but instead issues warrants exercisable into the common stock of the SPARC if the SPARC enters into a binding agreement for an initial business combination transaction. Proponents of SPARCs maintain that SPARC features are more protective of investors than those of SPACs, by minimizing conflicts and aligning the interests of the sponsors with those of the general investing public.
Of particular note, a SPARC eliminates the opportunity cost for investors as their funds from a conventional SPAC IPO sit idle in a trust account while a SPAC seeks a target company. Additionally, a SPARC mitigates the time pressure associated with conventional de-SPAC transactions, often a source of leverage against a SPAC during merger negotiations and a liability hotbed. A central claim in litigations against SPACs often includes allegations that the SPAC sponsors were pressured to accept any deal within the two-year time limit to avoid liquidating the SPAC and forfeiting the sponsor’s promote. It remains to be seen if the SEC will declare the PSTH SPARC registration statement effective, or if the SEC will approve the NYSE proposed rule change to allow PSTH SPARC warrants to trade on the NYSE. Nonetheless, SPACs are becoming increasingly adaptive and provide transactional lawyers tremendous flexibility to structure deals, as market-driven SPAC structures are helping to shape the evolution of the SPAC market.
CONCLUSION:
Accessing the public market through a SPAC or a variation thereof is fraught with litigation, regulatory, and market risks. As SPACs continue to evolve to mitigate their associated risks while capitalizing on their benefits, a convergence of conventional and innovative deal structures will ensue with corresponding pros and cons. For instance, a SPARC opt-in feature is analogous to a conventional Independent Sponsor Model (IDM) in which a sponsor identifies a target company then seeks investors to finance the deal. Like an IDM and a conventional private equity deal, a SPARC will have a higher level of uncertainty that the sponsor will be able to raise the funds and close the deal than would a conventional SPAC. However, like an IDM, a SPARC helps eliminate the opportunity cost of idle capital. Understanding the trend lines and parallel structure between conventional and emerging investment vehicles will be very helpful to navigate the evolving landscape.
Interestingly, the legal system, regulators, and market forces are converging to address the drawbacks of SPACs—particularly, conflicts of interests and information asymmetry. As SPACs continue to evolve, policymakers should consider who ought to be at the forefront driving these changes. As the complexities of the evolution of SPACs continue to unfold, transactional attorneys will need a deep understanding of the policy priorities of key regulators, litigation trends, market dynamics, deal structures, and economic drivers to best serve the needs of their clients. Not to mention, ingenuity and forethought will be at a premium.
Snell & Wilmer L.L.P. One Arizona Center 400 E. Van Buren Phoenix, AZ 85004-2202 (602) 382-6388 [email protected] www.swlaw.com
§ 1.1. Tribal Litigation & The Third Sovereign
We have been writing this annual update of cases relevant to tribal litigation for years. Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citations to most relevant circuit and even district court cases in every volume. This resulted in a chapter that had grown to almost seventy pages in length and had increasingly made it difficult for the reader to identify the most recent cases.
Beginning with the 2019 Edition, we decided to change the format of this chapter to both be more consistent with the other chapters in this volume, and to focus on the cases decided in the last year. This chapter continues with that format and focuses on cases decided between Oct. 1, 2020, and Oct. 1, 2021. While other chapters have arranged themselves by circuit, we begin with a Supreme Court overview and then structure this chapter’s subsections around sovereigns: Indian Tribes, the United States, and the fifty sister States. Within each subsection we provide a concise overview with more limited and deliberate citation, followed by longer and more intentional discussion of recent cases. We hope the reader appreciates the change in format, and we welcome comments via email to any of the chapter authors.
Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.[1] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.[2] Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the U.S. president or a state’s governor), and a tribal council or senate (the legislative body). Tribal courts adjudicate most matters arising from the reservation or under tribal law.[3]
Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.[4] Thus, state laws generally “have no force” in Indian Country.[5] While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”[6]
This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty. Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,[7] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.
§ 1.2. Indian Law & The Supreme Court
§ 1.2.1. The 2020–2021 Term
The Supreme Court hears an average of between two and three new Indian law cases every year.[8] During the 2020–2021 term, the Court decided two Indian law cases.[9]
United States v. Cooley, 141 S. Ct. 1638 (2021).[10] The U.S. Supreme Court declared unanimously that tribal police officers have the authority to temporarily detain and search non-Natives on public rights-of-way through Indian lands if they are suspected of violating federal or state law.[11] This ruling is significant for Indian Country as it solidifies rights by tribes to exercise their sovereignty while removing previous limitations.
The Court’s decision reversed the Ninth Circuit Court of Appeals’ ruling that tribal safety patrol officers lacked the power to detain and search the defendant, Joshua James Cooley because he was a non-Native.[12] Cooley was initially arrested on tribal lands after an officer searched his vehicle, where evidence was found leading to a federal drug and firearms possession charge.[13] Cooley moved to suppress the evidence found in the search, arguing the tribal police officer lacked the authority to investigate and detain him because he is a non-Native. The Ninth Circuit agreed and ruled in favor of Cooley.
In overturning the Ninth Circuit, the Supreme Court based its decision on the long-standing Federal Indian Law precedent of United States v. Montana,[14] stating that tribes do not have jurisdiction over non-Natives on reservations unless their behavior “threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.”[15] The Court ruled that the power of tribal officers to detain and investigate non-Natives on highways running through tribal lands is an exercise of sovereign authority necessary to protect tribal communities against threats to their health and welfare. Justice Stephen Breyer wrote the opinion and stated that ruling otherwise “would make it difficult for tribes to protect themselves against ongoing threats” such as “non-Native drunk drivers, transporters of contraband, or other criminal offenders operating on roads within the boundaries of a tribal reservation.”[16]
Arguably, the most significant piece of Justice Breyer’s opinion is that the charges Cooley faced were not tribal allegations, but arose under “state and federal laws that apply whether an individual is outside a reservation or on a state or federal highway within it.”[17] This means there is now precedent in place authorizing tribal police officers to investigate and temporarily detain non-Native motorists if there is suspicion of state and federal crimes—and not simply alleged violations of tribal law.
Justice Alito wrote a one-paragraph concurrence clarifying when tribal police officers have authority on public rights-of-way. Essentially, he wrote tribal officers have the power to stop non-Natives if: (1) the officer has a “reasonable suspicion that the motorist may violate or has violated federal or state law;” (2) the search was necessary to protect themselves or others; and (3) the officer has probable cause to detain the motorist until a non-tribal officer arrives on the scene.
The Cooley decision is important for tribes to continue acting in a sovereign capacity to protect their tribal lands and those who live and travel within their boundaries.
Yellen v. Confederated Tribes of the Chehalis Rsrv., 141 S. Ct. 2434 (2021).[18]In a 6-3 decision, the Supreme Court held that Alaska Native Corporations (“ANCs”) are entitled to COVID-19 relief funds, solidifying that ANCs qualify as Indian tribes under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. In this ruling, SCOTUS reversed a unanimous Washington D.C. Circuit panel that initially sided with the Plaintiff tribes and against ANCs.[19]
Justice Sotomayor, writing for the majority, indicated ANCs qualify for funding under the CARES Act because in the Indian Self-Determination and Education Assistance Act (“ISDEAA”), which created a federal legal definition of “tribe,” ANCs were included. The opinion states: “under the plain meaning of ISDEAA, ANCs are Indian tribes regardless of whether they are also federally recognized ‘tribes’ or not.” Specifically, the ISDEAA defines an Indian tribe as “any Indian tribe, band, nation or other organized group or community, including any Alaska Native village or regional or village corporation as defined in or established under the Alaska Native Claims Settlement Act (“ANCSA”), which is recognized as eligible for the special programs and services provided by the United States to the Indians because of their status as Indians.” Therefore, since the ISDEAA includes ANCs in the definition of an Indian tribe, and the CARES Act is also a federal statute using the term Indian tribe for eligibility purposes, the Supreme Court held ANCs are eligible for CARES Act funds.
The Plaintiff tribes argued this decision would potentially open doors for other non-federally recognized Indian groups to be reorganized under the ISDEAA. However, the Court disagreed and stated that ANCs are “entities created by federal statute and granted an enormous amount of special federal benefits as part of a legislative experiment tailored to the unique circumstances of Alaska and recreated nowhere else.” Justice Sotomayor further indicated that the “[C]ourt’s decision today does not vest ANCs with new and untold tribal powers, as respondents fear,” but “[i]t merely confirms the powers Congress expressly afforded ANCs and that the executive branch has long understood ANCs to possess.” Based on this ruling, ANCs are unambiguously “Indian tribes” under the ISDEAA.
Justice Gorsuch, joining with Justices Thomas and Kagan, writing for the dissent, indicated the “recognized as eligible” clause in the ISDEAA refers to the “government-to-government recognition that triggers eligibility for the panoply of benefits and services the federal government provides to Indians” and ANCs are not eligible for CARES Act funding. The dissent argued the plain meaning of the definition is far from clear and said “[e]ven if we could somehow set aside everything we know about how the term is used in Indian law and the CARES Act itself, it’s far from clear what plain meaning the court alludes to or how ANCs might fall within it.”
§ 1.2.2. Preview of the 2021–2022 Term
As of October 20, 2021, the Supreme Court has granted certiorari in two Indian law cases for the 2021–2022 term: Denezpi v. United States and Ysleta del Sur Pueblo v. Texas.[20] In Denezpi v. United States, the case presents the following question: “Is the Court of Indian Offenses of Ute Mountain Ute Agency a federal agency such that Merle Denezpi’s conviction in that court barred his subsequent prosecution in a United States District Court for a crime arising out of the same incident?” In Ysleta del Sur Pueblo v. Texas, the case presents the following question: “Whether the Restoration Act provides the Pueblo with sovereign authority to regulate non-prohibited gaming activities on its lands (including bingo), as set forth in the plain language of Section 107(b), the Act’s legislative history, and this Court’s holding in California v. Cabazon Band of Mission Indians,[21] or whether the Fifth Circuit’s decision affirming Ysleta I correctly subjects the Pueblo to all Texas gaming regulations.” If any new cases are granted and decided, they will be included in next year’s volume.
§ 1.3. The Tribal Sovereign
§ 1.3.1. Tribal Courts
More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands. Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority. As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.
While tribal courts are similar in structure to other courts in the United States, the approximately 275 Indian courts currently functioning throughout the country are unique in many significant ways.[22] It cannot be overemphasized that every tribal court is different and distinct from the next.[23] For example, the qualifications of tribal court judges vary widely depending on the court.[24] Some tribes require tribal judges to be members of the tribe or to possess law degrees, while others do not.[25] Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.
Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court. While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another. For example, the Navajo tribe has its own bar exam that tests knowledge of Navajo tribal law.[26]
Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing. If counsel has never appeared before a particular tribal court, it would be wise to solicit common court practices from persons who regularly appear before the court.
Tribal court jurisdiction depends largely on: (1) whether the defendant is a tribal member;[27] and (2) whether the dispute occurred in Indian Country,[28] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member, or fee lands within the boundaries of an Indian reservation.[29] These two highly complex issues should be analyzed first in any tribal business dispute.
In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian). Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.[30] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.[31] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.[32]
In the “path-making” decision of Montana v. United States,[33] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”[34] To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”[35]
These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.[36] The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”[37] These exceptions have, oddly, become known as the “Montana rule.”
There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions. This section highlights a couple of the most relevant.[38]
Smith v. Landrum, 334 Mich.App. 511, 965 N.W.2d 253 (Mich. Ct. App. Oct. 29, 2020). Plaintiffs, who were not American Indians, brought quiet title action seeking a prescriptive easement over land located on the L’Anse Indian Reservation and owned by a non-Indian Defendant. Previous owners in the chain of title were tribal members, but the land was transferred to non-Indians in 2012. At the time of the dispute, the land was not held in trust for the tribe or any tribal member. At the trial level, Defendant argued on his motion for summary disposition that the state court lacked subject-matter jurisdiction to impose the easement, even when the current landowner and parties were non-Indians. In contrast, Plaintiffs argued that the state court had subject-matter jurisdiction because “the land [was] owned in fee simply by Defendant, and [was] not held in trust by the United States government for an Indian person.” The trial court opined that either tribal court, or a federal district court, had jurisdiction over the dispute, however, the Michigan Court of Appeals disagreed.
On appeal, the court addressed whether a state court had subject-matter jurisdiction to decide such an easement dispute when Plaintiffs and Defendant were non-Indians and the land was located on an Indian reservation. In deciding this issue, the court relied on the Williams test[39] and the Montana rule. Williams and its progeny provide that a state may assert jurisdiction over a dispute involving a non-Indian and arising within an Indian reservation if: “(1) the state’s exercise of authority is not preempted by incompatible federal law; and (2) the state’s exercise of authority does not infringe on the right of reservation Indians to make their own laws and be ruled by them.”[40] With neither party raising any issues of federal preemption, the court turned to the second Montana exception in addressing the second Williams prong. The court concluded that “the exercise of state jurisdiction over this easement dispute would in no way interfere with the tribe’s power to control and govern its members and internal affairs.”[41] Neither party was an Indian, and the land was neither land held in trust for the tribe nor owned by an Indian. Accordingly, the court held that the presumption was against tribal jurisdiction, and the state court had jurisdiction to decide the easement dispute.
Ute Indian Tribe of the Uintah & Ouray Rsrv. v. McKee, 482 F. Supp. 3d 1190 (D. Utah 2020). The Ute Indian Tribe of the Uintah and Ouray Indian Reservation sued Gregory McKee and associated companies, who owned land on the reservation that was not owned or held by the Tribe, to enforce the Tribal Court’s judgment. The Tribal Court found that Mr. McKee and the associated companies had failed to prove their right to use water the United States owned in trust for the Tribe, awarding the Tribe $142,718 in damages for water misappropriation. Both parties moved for summary judgment. The district court denied the Tribe’s motion and granted the non-members’ motion. In concluding that it had jurisdiction over the suit, the district court relied on MacArthur v. San Juan County[42] for the proposition that enforcing a tribal court order rests on the Tribe’s regulatory and adjudicatory authority, which is “a matter of federal law giving rise to subject matter jurisdiction.”[43]
Moving on, the court determined that the Tribal Court lacked jurisdiction to decide the water misappropriation dispute. Mr. McKee was not a member of the Tribe, and the tribal resources were on land held in fee by non-members. Accordingly, the Tribe would have authority to regulate non-members’ conduct only pursuant to the Montana exceptions. The land in question was conveyed by the United States to Mr. McKee’s predecessors in interest, including an easement binding him and the associated companies at the time of the dispute. Additionally, Mr. McKee leased a separate parcel of land from the Tribe, consenting to Tribal jurisdiction over his use of the leased property. However, the court concluded that neither Montana exception supports jurisdiction in this case.
Focusing on Montana’s first exception, the court disagreed with the Tribe’s argument that the existing easement created a consensual relationship between Mr. McKee and the Tribe. Neither Mr. McKee nor the Tribe were parties to the conveyance, and the record showed no evidence that the parties ever entered into an agreement relating to the easement. Additionally, the court could not construe the existing lease to confer Tribal jurisdiction over conduct “wholly unrelated to the lease.”[44] The Tribe presented no evidence that Mr. McKee used the disputed water on the leased land. Turning to the second exception, the court reasoned that the diversion of a total of $142,718 worth of water over sixteen years did not meet the threshold of “catastrophic for tribal self-government.”[45] In summary, the Tribe failed to prove that either Montana exception applied. Because the Tribe lacked authority to regulate the disputed water diversion, the district court found that the Tribal Court lacked jurisdiction over the dispute in the first instance. Accordingly, the court granted Mr. McKee’s motion for summary judgment.
McCormick, Inc. v. Fredericks, 946 N.W.2d 728 (N.D. 2020). In 2010, McCormick and Fredericks created Native Energy Construction wherein Fredericks was the majority owner. Fredericks also served as Native Energy’s President, while McCormick and Northern Improvement provided management services to Native Energy for a 5% management fee. In 2014, the parties executed a purchase agreement for Fredericks’s purchase of McCormick’s interest in Native Energy. However, Fredericks could not complete the purchase and the business was involuntarily dissolved in May 2015. In 2016, McCormick, individually and derivatively on behalf of the entities, brought an action against Fredericks, alleging breach of contractual and fiduciary duties, conversion, and other claims. Fredericks filed counterclaims for similar allegations and requested a judicially supervised winding up of Native Energy. A three-day trial followed in 2018, where the jury found Fredericks breached his fiduciary duties and awarded McCormick damages. However, Fredericks argued that the district court lacked jurisdiction to decide his counterclaim related to the management fee.
Regarding his counterclaim, Fredericks asserted that the Three Affiliated Tribes of the Fort Berthold Reservation had jurisdiction because “the management fee agreement was a contract made on the reservation between [] McCormick, a non-Indian, and Fredericks, a tribal member.” The Supreme Court of North Dakota disagreed, finding that Fredericks failed to show how the Montana exception applied. In relevant part, the Court found that Fredericks had not claimed that the management fee involved “a consensual relationship with the tribe.” Instead, Fredericks’ claims arose from his ownership interest in Native Energy, a North Dakota LLC. Accordingly, the district court had jurisdiction to decide the parties’ claims, and the Court had jurisdiction to decide the appeal.
Big Horn Cty. Elec. Coop., Inc. v. Big Man, 526 F.Supp.3d 756 (D. Mont. Feb. 26, 2021). Big Horn County Electric Cooperative (“BHCEC”) filed an action against Big Man and several Judges and Justices of the Crow Tribal Health Board (“Tribal Defendants”). BHCEC sought declaratory and injunctive relief in response to a civil action brought against BHCEC in Crow Tribal Court. BHCEC provided electrical service to Big Man, an enrolled member of the Crow Tribe, but terminated that service in January 2012. Big Man sued BHCEC in Tribal Court, alleging that BHCEC’s actions violated the Crow Law and Order Code, which prohibited such termination during certain winter months. BHCEC filed suit in the district court, asserting that the Crow Tribal Court lacked jurisdiction over BHCEC, a non-Indian entity. Magistrate Judge Cavan found that the land was tribal trust land and subject to tribal jurisdiction, and that, even if the land was alienated to non-tribal members, Montana exceptions allowed the Tribe to exercise jurisdiction. BHCEC timely objected, but after examining the issues, the district court adopted Judge Cavan’s recommendations in full.
The district court agreed with Judge Cavan’s conclusion that Big Man’s homesite was properly considered tribal land, rejecting BHCEC’s objections on this issue. The homesite was “designated tribal trust land owned by the Tribe and held in trust by the United States.”[46] Accordingly, the Tribe had the right to condition BHCEC’s conduct therein. However, the district court also stated that even if the land was alienated from the Tribe’s control, the Tribe had jurisdiction to adjudicate the dispute under both Montana exceptions. Pursuant to the first exception, the court concluded that BHCEC “[had] chosen to avail itself of the Tribe’s customer base and in doing so created a consensual relationship.”[47] Similarly, the court found that termination of electric service during the winter months “had a direct effect on the health and welfare of the Tribe and therefore satisfie[d] the second Montana exception.”[48] Termination of electric service during the cold winter months would “clearly imperil[] the health and welfare of any Tribal member who obtain[ed] the service from BHCEC—a class of approximately 1,700 members —and therefore the Tribe itself.”[49] The court granted Tribal Defendants’ motion for summary judgment, but BHCEC filed an appeal with the Ninth Circuit, which remains unresolved at the time of this writing.
§ 1.3.2. Exhaustion of Tribal Court Review
The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts. If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually[50] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.[51] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss[52] or stay[53] the case.
Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.[54] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.[55] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.[56] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”[57] And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”[58]
After the tribal court has ruled on the merits of the case[59] and all appellate options have been exhausted,[60] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.[61] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.[62] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.[63]
There are several exceptions to the exhaustion doctrine. First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”[64] Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”[65] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.[66]
Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated. Several of these cases were decided in the last year.[67]
Cross v. Fox, 497 F. Supp. 3d 432 (D.N.D. 2020). Plaintiffs were members of the Mandan, Hidatsa, and Arikara Native American Tribes (“MHA”) and have diagnosed health problems that limit their mobility. Plaintiffs brought action against tribal officials in federal district court asserting that the rule requiring non-residents of the tribal reservation to return to the reservation to vote, while permitting residents of the reservation to vote by absentee ballot, impermissibly burdened their ability to vote, in violation of the Indian Civil Rights Act (“ICRA”) and the Voting Rights Act (“VRA”).
The Defendants filed a Motion to Dismiss for lack of subject matter jurisdiction and a failure to exhaust tribal remedies. Plaintiffs argued that because the federal district court has jurisdiction over their federal statutorily-based VRA claims, they should be relieved of tribal exhaustion requirements for the ICRA claims. Plaintiffs argued that the district court should excuse tribal exhaustion on the basis that the MHA Tribal Court is not an adequate judicial forum to hear their claims.
In its analysis, the district court outlined the principles underlying the tribal court exhaustion requirement and highlighted that “even where a federal question exists, due to considerations of comity, federal court jurisdiction does not properly arise until available remedies in the tribal court system have been exhausted.”[68] This is to ensure certain interests of both tribal and federal courts are advanced including: “(1) supporting tribal self-government and self-determination; (2) promoting the orderly administration of justice in the federal court by allowing a full record to be developed in the Tribal Court; and, (3) providing other courts with the benefit of the tribal courts’ expertise in their own jurisdiction.”[69] Thus, the District Court declined to waive exhaustion, holding that this was purely an intra-tribal dispute into which it would not interject itself.
United States v. Hump, No. 3:19-CV-03020-RAL, 2021 WL 274436 (D.S.D. Jan. 27, 2021). The United States moved for summary judgment in a lawsuit that it brought against Defendants David and Karen Hump (“the Humps”). In 1974, Congress authorized the creation of the Indian Loan Guarantee and Insurance Program (“ILGP”), which allowed the Secretary of Interior to guarantee up to ninety percent of the unpaid principal and interest due on loans made by lenders to qualified Indian borrowers. If a borrower defaults on a loan guaranteed by the ILGP, the lender can submit a claim for loss to the Department of Interior (“DOI”).
In 2004, Farmers State Bank of Faith, South Dakota (“the Bank”) sought loan guarantees from the DOI under the ILGP for loan funds issued to the Humps to acquire interests in Indian trust land.[70] The DOI issued loan guarantees in February 2004, and the Bank consolidated the Humps’ earlier notes. The Humps filed for Chapter 12 bankruptcy in October 2005. Id. The Bank submitted a claim for a loss for $1,411,362.25 to the DOI, and in 2007, the DOI paid the Bank’s claim. Once their Chapter 12 Reorganization Plan was confirmed in 2007, the Humps executed and delivered a promissory note to the United States to repay the loan by September 2034. The promissory note allowed for acceleration of the entire debt in the event of default.
The Humps defaulted on their Promissory note, making their final payment in December 2014. In 2018, the DOI accelerated and declared the remaining debt ($1,211,782.16) immediately due. After all other efforts to collect failed, the United States brought this action to foreclose the mortgage, sell the property, and collect any remaining deficiency.
The Humps challenged this action, in part, claiming that the United States had not fulfilled its requirement to first exhaust tribal court remedies. The Court disagreed, stating that exhaustion of tribal court remedies was not necessary in the current case. The Court held that the United States was not required to exhaust its remedies in tribal court because tribal self-government and self-determination were not implicated in this matter. Rather, this was a dispute between the United States and individuals who have defaulted on a loan guaranteed by the federal government under a federal program. Although the Indian trust land was located within Cheyenne River Sioux Indian Reservation, the Tribe was not involved in this action in any capacity.
JW Gaming Dev., LLC v. James, No. 3:18-CV-02669-WHO, 2021 WL 2531087 (N.D. Cal. June 21, 2021). Plaintiff JW Gaming Development, LLC (“JW Gaming”) previously obtained a judgment that defendant Pinoleville Pomo Nation (“PPN”), a federally recognized tribe, was liable for breaching a loan agreement by failing to pay.[71] Shortly after judgment was entered, PPN constituted its Tribal Court for the first time. PPN filed a civil complaint in the Tribal Court that sought to: “(1) declare the judgment issued in this case invalid; (2) limit and control—indeed, vitiate—the scope of enforcement of that judgment; and (3) impose roughly eleven million dollars in liability on JW Gaming for alleged fraud stemming from the same loan agreement here.”[72] PPN argued that the Tribal Court did not have authority to issue any injunction.
Before consideration of the motions filed by JW Gaming, the district court needed to address whether JW Gaming needed to exhaust its tribal court remedies as PPN claimed. The Court stated that the requirement of tribal court exhaustion is not absolute and that there are several exceptions under which the movant need not exhaust tribal court remedies before seeking or obtaining injunctive relief in federal court.[73]
Here, the Promissory Note in the dispute included a waiver of tribal court exhaustion, and the Court asked two questions: “Can exhaustion be waived in this case? And if it can be, has it been waived here?” The Court concluded that the answer to both was “yes.”
To answer the first question, the Court relied on the Supreme Court ruling in Merrion v. Jicarilla Apache Tribe,[74] which established that a tribe, as a sovereign, can waive its rights to exercise one of its sovereign powers. However, PPN did not contest that exhaustion could be waived, but instead argued that no waiver occurred. To address this second question of waiver, the Court deferred to the Supreme Court and Ninth Circuit which have both uniformly laid out the standard for waiver of sovereign powers as requiring the power be “expressly waived in unmistakable terms within the contract” at issue.[75] The district court held that the Promissory Note provision was an express, clear, and unequivocal waiver and therefore, exhaustion of tribal court remedies had been waived and was not required in this case.
Fettig v. Fox, No. 1:19-CV-096, 2020 WL 9848691, (D.N.D. Nov. 16, 2020), report and recommendation adopted, No. 1:19-CV-00096, 2020 WL 9848706 (D.N.D. Dec. 3, 2020). Plaintiffs are members of the Mandan, Hidatsa, and Arikara Native American Tribes (“MHA”) who own a beneficial interest in land Allotments 1110A and 1111A held in trust by the United States and located within the exterior boundaries of the Fort Berthold Indian Reservation (“Fort Berthold”). Defendants include the MHA Nation’s Section 17 Corporation and tribal office holders. Plaintiffs’ primary complaint was that Defendants in 2013 installed an underground water pipeline (the “2013 Pipeline”) across Allotments 1110A and 1111A without first securing an easement from the United States acting in its trust capacity through the Department of the Interior’s (“DOI”) Bureau of Indian Affairs (“BIA”). Plaintiffs allege that the 2013 Pipeline is a trespass. Plaintiffs also allege that defendants temporarily ran an aboveground pipeline across their allotments without first obtaining an easement.
Defendants argued in their brief that this was a purely tribal dispute and the action should be dismissed for failure to exhaust tribal court remedies. However, Defendants also claimed in their brief that the United States owned the 2013 Pipeline. The district court therefore analyzed the question of the necessity of tribal exhaustion through both lenses—if the United States owned it and if the Tribe or one of its entities owned it.
If the United States did own the pipeline, the court stated that this would be straight forward. It would not be a purely tribal dispute and there would be no tribal remedies to exhaust with respect to Plaintiffs’ request for injunctive relief. After all, the United States did not consent to be sued in tribal court.
If the 2013 Pipeline was owned by the Tribe or one of its entities, the court contends that an argument can be made that tribal court exhaustion is not required. Specifically the court states that, “federal law has left no room for tribal court adjudication when it comes to a request for injunctive relief in a situation where an allottee’s land is being used for right-of-way purposes without the requisite grant of right-of-way—either by an easement granted by the United States or a federal court condemnation judgment. And, if that is the case, tribal-court exhaustion arguably would not be required due to the tribal court’s lack of power to adjudicate the dispute and requiring exhaustion would serve no purpose other than delay.”[76]
Despite this analysis, the Court ultimately withheld a decision on the question of tribal-court exhaustion on the basis that the tribal defendants committed on the record to the court that if it required BIA exhaustion, they would not make the argument for tribal-court exhaustion and would allow the BIA’s consideration of the issues to play out.[77]
Loonsfoot v. Brogan, No. 2:21-CV-89, 2021 WL 1940400 (W.D. Mich. May 14, 2021). This was a habeas corpus action brought by two pretrial detainees under 25 U.S.C. § 1303. Petitioners were detained by Respondent Baraga County Sheriff Joseph Brogan pursuant to orders from the Keweenaw Bay Indian Community Tribal Court and are enrolled tribal members of the Keweenaw Bay Indian Community Ojibwa tribe of Michigan.
While the Court acknowledged that it considers habeas petitions filed by persons under the custody of a state or the United States, the Keweenaw Bay Indian Community was neither. Petitioners asked the Court to order their release from pretrial detention and argued that their attempts to exhaust their remedies in tribal courts were futile.
The Court found that Petitioners had not given the tribal trial court, nor the tribal appellate court, an opportunity to resolve the constitutional issues they raised in their habeas petition. Further, Petitioners did not allege any facts to support the inference that exhaustion would be futile. On this basis, the Court dismissed the petition without prejudice.
Ledford v. Ledford, No. 1:20-CV-00170-MR-DSC, 2021 WL 2014871 (W.D.N.C. May 19, 2021). Plaintiff, who was not tribally affiliated, brought action against her stepson and his sons, who are all members of the Eastern Band of Cherokee Indians (EBCI). Plaintiff’s deceased husband (Defendants’ father and grandfather and EBCI member) attempted to leave Plaintiff a life estate in the home they shared. The home is a part of the EBCI reserve, and in subsequent judicial proceedings the Tribal Council of the EBCI invalidated the life estate provision of the will and evicted Plaintiff. Plaintiff alleged that Defendants provided false testimony that contributed to the Tribal Council’s decision and brought this action in Federal Court alleging subject matter jurisdiction based upon diversity of citizenship. Defendants moved to dismiss for several reasons including Plaintiff’s failure to exhaust tribal remedies.
The district court held that Plaintiff had not shown that the court’s exercise of jurisdiction would be proper in part due to her failure to exhaust tribal remedies. Specifically, Plaintiff had the opportunity to challenge Tribal Council’s decision on her husband’s will under Cherokee Code § 117-40 and failed to properly do so. She also had the opportunity to appeal her eviction order from the Tribal Court to the Cherokee Supreme Court under Cherokee Code § 7-2(e) and again failed to properly do so. Thus, Defendants’ Motion to Dismiss was granted and the Complaint dismissed with prejudice.
Becker v. Ute Indian Tribe of Uintah & Ouray Rsrv., 11 F.4th 1140 (10th Cir. 2021). The dispute involved a former land division manager for the Ute Indian Tribe, asserting that the Ute courts have the authority to decide whether the tribe’s employment agreement with him was valid. The Tenth Circuit panel overturned a Utah federal judge’s ruling that the tribe had waived the requirement that Plaintiff had to exhaust tribal remedies for his claims that the tribe breached his contract by failing to pay him monthly compensation after his employment was terminated. The Tenth Circuit concluded that the questions the tribe had raised regarding the validity of the agreement, as well as the threshold question of whether the tribal court has jurisdiction over the parties’ dispute, must be resolved in the first instance by the tribal court itself.
The court further held that the waiver provision in the agreement would only have been applicable if the agreement was determined to be valid; however, the tribe asserted nonfrivolous challenges to the validity of the agreement. The court ruled that tribal exhaustion did not apply to Plaintiff’s claims and noted that although there are some exceptions to the exhaustion rule, Plaintiff had not shown that they should apply in this case. The court remanded the case to be dismissed.
§ 1.3.3. Tribal Sovereignty & Sovereign Immunity
An axiom in Indian law is that Indian tribes are considered domestic sovereigns.[78] Like other sovereigns, tribes enjoy sovereign immunity.[79] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.[80] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”[81] Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”[82]
Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad. With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”[83]
Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,[84] whether in tribal, state, or federal court.[85] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.[86]
Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.[87] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.[88] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”[89]
Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.[90] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma[91] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.[92] In C & L Enterprises, the tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.[93] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.[94]
Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”[95] Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract. If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal. Below are summaries from some of the most relevant sovereign immunity cases of the last year.[96]
**Immunity may be asserted by tribal corporations, as well as tribal governments. Some recent sovereign immunity cases dealing with tribal corporations are collected and discussed in § 8.3.4.
Engasser v. Tetra Tech, Inc., No. 219CV07973ODWPLAX, 2021 WL 911887 (C.D. Cal. Feb. 9, 2021). The court held that when a tribe enters into a Professional Services Agreement (“PSA”) that includes a Dispute Resolution provision, this does not act as a waiver of tribal sovereign immunity. In previous cases, courts have come to this conclusion where “the dispute resolution procedure was not binding, the tribe did not unequivocally submit to a court’s jurisdiction, or the tribe expressly retained its sovereign immunity.”[97] Here, the PSA clearly stated that nothing in the PSA acts as a waiver of sovereign immunity. Additionally, the provision did not contemplate binding arbitration, nor did it “reflect an unequivocal intent to submit to the jurisdiction of a particular court.”[98] Accordingly, because the PSA did not act as a clear and unequivocal waiver of tribal sovereign immunity, the tribal entity was immune from suit for lack of jurisdiction.
Muscogee (Creek) Nation v. Poarch Band of Creek Indians, 525 F.Supp.3d 1359 (M.D. Ala. Mar. 15, 2021). Here, the court considered a tort-of-outrage claim where Defendants knowingly excavated Plaintiffs’ sacred burial grounds after Defendants came to own the land containing such burials. Both sides of the suit included tribal entities. Defendants included tribal officials named in their official capacity. Because precedent is silent regarding whether sovereign immunity applies when tribal entities exist on both sides of a lawsuit, the district court held that sovereign immunity is still applicable unless waived by either side. With no explicit waiver present, both tribes could still assert sovereign immunity. To determine whether such immunity also applied to the individual tribal officials, the court looked to Idaho v. Coeur d’Alene Tribe.[99]Idaho v. Coeur d’Alene Tribe explains that certain suits may be subject to tribal sovereign immunity, regardless of whether they are brought against the sovereign or its officials, so long as they invoke “special sovereignty interests.”[100] Where the relief sought would effectively result in the tribe’s loss of title for lands it has long held as its own, such special sovereignty interests bar the claim.
Here, Plaintiffs asked the court “to order [Defendants] to cease the activities [they] currently carr[y] out [on the property], alter the site drastically at the [P]laintiffs’ direction to transform it back into the condition in which they desire it to remain, and then leave the land alone.”[101] In light of this, the court found that the conditions in this case were sufficiently similar to those in Coeur d’Alene, thus invoking special sovereignty interests. Accordingly, the claims against Defendants were dismissed on tribal sovereign immunity grounds.
Weaver v. Gregory, No. 3:20-CV-0783-HZ, 2021 WL 1010947 (D. Or. Mar. 16, 2021). Eric Weaver (“Plaintiff”) filed suit against Ron Gregory (“Defendant”) alleging that he was subjected to retaliation after reporting harassment and discrimination during his time as a tribal police officer. Plaintiff sued Defendant individually, not in his official capacity as a member of the Warm Springs Tribe. While Plaintiff contended that the tribe waived its sovereign immunity under Chapter 390 of the Warm Springs Tribal Code, the court found that such chapter is only applicable to “activities by the Warm Springs law enforcement personnel conducted under SB 412—i.e., the enforcement of criminal and traffic laws of the State of Oregon.”[102]
Here, Plaintiffs’ alleged harassment on the job did not implicate such laws. Additionally, the court refused Plaintiffs’ interpretation of precedent that the location of the tortious actions, whether on or off tribal land, makes a difference. However, to the extent Plaintiff’s claims were made against Defendant in his individual capacity, those were not protected under tribal sovereign immunity. Because recovery against Defendant for his individual actions does not “disturb the sovereign’s property,” those claims could proceed.[103] The claims against Defendant in his official capacity as a tribal authority, though, were barred under tribal sovereign immunity.
Jensen v. Budreau, No. 20-CV-997-BBC, 2021 WL 1546055 (W.D. Wis. Apr. 20, 2021). Defendants were the tribal entity Red Cliff Band of Lake Superior Chippewa and a patrol officer who works for the tribe’s police department. Plaintiff contended that Defendants violated her Fourth and Fifth Amendment rights by failing to give her medical care or allow her to rinse her eyes after being sprayed with pepper spray. Plaintiff pointed out that pursuant to Wis. Stat. §§ 165.92(3), “unless otherwise provided in a joint program plan under § 165.90(2)” or an agreement between the tribe and state, “a tribe is liable for all acts and omissions of its law enforcement officers while they are acting within the scope of their employment.” Additionally, under § 165.92(3m)(a), where a tribal law enforcement officer enforces laws of the state, the tribe must: “waive sovereign immunity ‘to the extent necessary to allow the enforcement in the courts of this state of its liability’ . . . or maintain adequate liability insurance that provides that the insurer will waive the sovereign immunity defense up to the limits of the insurance policy.” Accordingly, two actions were relevant. First, the tribe had an agreement with the state that did not modify the tribe’s liability. Second, Defendants’ attorney submitted a claim to the tribe’s insurance company, thus suggesting that the tribe may have waived its immunity at least in part. The court found that neither of these actions were compelling. Because a waiver must be expressly given, the court held that the circumstances were not sufficient to overcome tribal sovereign immunity, and the claims were barred.
Self v. Cher-Ae Heights Indian Cmty. of Trinidad Rancheria, 274 Cal. Rptr. 3d 255 (2021), review denied (Apr. 28, 2021). Plaintiffs were two individuals who commonly used a parcel of coastal land for recreational and business purposes. Plaintiffs brought this suit after Defendant Cher-Ae Heights Indian Community of the Trinidad Rancheria (“Cher-Ae”) acquired such parcel of land in fee absolute. During the process of entering the land into trust, Plaintiffs initiated a quiet title suit to a public easement for vehicle access and parking on the property. Plaintiffs asserted that the “immovable land” exception should apply here to bar a tribal sovereign immunity defense, but the court disagreed. The Supreme Court explained the immovable land exception in State of Georgia v. City of Chattanooga,[104] describing that “when a state purchases real property in another state, it is not immune to suit over rights to the property.” However, the Supreme Court has never extended this exception to tribes.
Here, the court offered three reasons why it should be deferential to Congress to determine whether immunity is available under these circumstances. First, it has been the Supreme Court’s standard practice to defer to Congress regarding tribal immunity. Second, Congress has long been deeply entrenched in the public policy of supporting tribal land acquisition. Finally, the facts here operate as a “poor vehicle for extending the immovable property rule to tribes” because Plaintiffs do not claim any ownership interest in the property; they are mainly pursuing an easement.[105] Accordingly, the court found that tribal sovereign immunity “bars a quiet title action to establish a public easement for coastal access on property owned by an Indian tribe,” and Plaintiffs’ claims failed for lack of merit.[106]
Dutchover v. Moapa Band of Paiute Indians, No. 219CV01905KJDBNW, 2021 WL 1738869 (D. Nev. May 3, 2021). In this case, Plaintiff alleged that he was wrongfully harassed and retaliated against while working as a police officer for the Moapa Tribal Police Department. Dismissing the Plaintiff’s complaint, the court held that the tribe did not expressly waive its sovereign immunity, and so the suit was barred. Furthermore, the court reasoned that simply entering into a federal contract and “enacting, promoting, and adhering to federal law, including Title VII” does not in itself waive immunity.[107] Here, Defendants funded Plaintiff’s employment with a federal grant and had policies in place offering protection “similar to those offered by Title VII.”[108] Ultimately, these actions, considered together, were not sufficient to waive sovereign immunity.
Great Plains Lending, LLC v. Dep’t of Banking, No. 20340, 2021 WL 2021823 (Conn. May 20, 2021). Great Plains Lending (“GPL”) and Clear Creek were created by the Otoe-Missouria Tribe of Indians (“Tribe”) to offer lending services. After an investigation, the Department of Banking allegedly found that loans offered by the entities violated Connecticut’s usury and banking laws. Accordingly, the Department’s commissioner issued temporary cease and desist orders, orders for restitution to Connecticut residents, and a notice of intent for permanent cease and desist letters, as well as to impose civil penalties. To determine whether such actions could proceed against the tribal entities, this case contemplated three primary questions concerning tribal sovereign immunity under the arm of the tribe doctrine. First, which party bears the burden of proof to establish that the entity is an arm of the tribe? Second, what legal standard governs that inquiry? Lastly, to what extent does a tribal officer share the tribe’s immunity for his actions connected to the business entity?
Considering the first inquiry, the court found that the burden rests on the party seeking immunity under the arm of the tribe doctrine. A tribe itself does not share in this burden when establishing its own sovereign immunity, but entities seeking immunity by extension bear the burden of “demonstrating the existence of that relationship and the entity’s ultimate entitlement to share in tribal sovereign immunity.”[109] The court reasoned this approach by noting that the entity seeking immunity will have the best access to evidence for proving the relationship.
Next, the court turns its attention to determining which test is proper for an arm of the tribe inquiry. Ultimately, the multi-pronged test in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort,[110] is found to be the most fitting. This test called courts to consider several factors when determining if a sufficient relationship exists between the entity and the tribe: (1) method of creation; (2) purpose; (3) control; (4) tribal intent; and (5) financial relationship. The court slightly altered the test, explaining that the sixth factor, tribal policy, should color the consideration of the remaining five factors.
Ultimately, the court found that all five factors weigh in favor of extending tribal sovereign immunity to Great Plains: the entity was created under tribal law for the purpose of generating revenue for the Tribe, the entity’s officers are appointed by the tribal council and the entity is ultimately controlled by tribal officials, the Tribe unequivocally voiced its intent to extend immunity to the entity, and the Tribe wholly owns and acts as primary beneficiary of the entity. Overall, the entity promotes tribal self-governance and economic development, and denying sovereign immunity would directly interfere with the policies of the Tribe. On the other hand, there was much less evidence detailing a relationship between Clear Creek and the Tribe. Accordingly, tribal sovereign immunity extended to Great Plains, but may not necessarily extend to Clear Creek.
In light of this determination, the court chose to extend partial immunity to John R. Shotton as chairman of the Tribe. The court stated that such immunity extends where the Tribe is the real party in interest, which is the case here, and the individual was acting in his capacity as a tribal official. There was no evidence in the record that Shotton’s activities went beyond the scope of his tribal authority, so he was afforded immunity from the civil penalties sought against him. However, tribal sovereign immunity does not protect against injunctive relief ordered by the Department, so he may be enjoined from “violating Connecticut usury and banking laws in connection with his duties for the [T]ribe and the entities.”[111] Moreover, the judgment was reversed insofar as it required further proceedings to determine whether Great Plains was an arm of the Tribe, but the judgment is granted insofar as it requires further proceedings to make such a determination for Clear Creek and Shotton’s involvement with the latter entity.
Cayuga Indian Nation of New York v. Seneca Cty., New York, 978 F.3d 829 (2d Cir. 2020), cert. denied, No. 20-1210, 2021 WL 2301979 (U.S. June 7, 2021). In this case, Appellees are a tribe (“Cayuga”) who refused to pay taxes on acquired parcels of land located in Seneca County. Appellants (“Seneca County”) pursue two main arguments: (1) that Cayuga was subject to such taxes under the “immovable property exception” to tribal sovereign immunity; and (2) that the U.S. Supreme Court case City of Sherril v. Oneida Indian Nation of New York,[112] ended immunity for tax foreclosure actions, like the one here.
To the first argument, the court noted that the issue here is beyond the scope of the exception. The exception has been interpreted in the past to solely apply where there are “competing claims to a right or interest in real property.”[113] Here, the main claim involved money, not property, and the remedy sought for such financial debt merely implicated property. Additionally, a plain reading of the Restatement (Second) of Foreign Relations Law of the United States also denies application of the exception; no case since the Restatement’s inception has applied the exception where a foreign sovereign’s nonpayment of taxes was at issue.
Turning to Seneca County’s second argument, the court agreed with past courts’ interpretation that “Sherrill does not strip tribes of their immunity from suit in tax foreclosure proceedings.”[114] Because the right to impose taxes on tribes for acquired land and a tribe’s right to immunity from suit are distinct, a party may demand compliance with state laws while also facing limitations in the ways that it may enforce such laws. Here, satisfactory avenues existed that Seneca County may pursue to collect the taxes, aside from the remedy of foreclosure. Seneca County may “enter into an agreement with the tribe ‘to adopt a mutually satisfactory regime for the collection of this sort of tax’” or Seneca County may seek legislation. Accordingly, because such alternatives existed and are feasible, Seneca County is barred from seeking foreclosure for Cayuga’s nonpayment of taxes under tribal sovereign immunity, and the district court’s judgment to that effect is affirmed.
Dotson v. Tunica-Biloxi Gaming Comm’n, 835 F. App’x 710 (5th Cir. 2020), cert. denied, No. 20-7721, 2021 WL 2405253 (U.S. June 14, 2021). Here, the court held that the Tunica-Biloxi Gaming Commission was an arm of the Tunica-Biloxi Tribe of Louisiana. As such, the Commission was sheltered from suit regarding alleged violations of gaming regulations and laws, fabricating evidence, falsifying documents, defaming Plaintiff, lying under oath, and falsifying error codes on a slot machine. While Plaintiff contended that the suit could move forward because he sued a casino employee, a specific official, this argument was not persuasive to the court. Here, the court refused to consider whether a suit may be brought solely against a tribal official, instead focusing on the person’s immunity under the arm of the tribe doctrine. Because tribal sovereign immunity extended to the Gaming Commission, and accordingly to its employees, the suit could not move forward against an employee in his/her official capacity with the Commission. Accordingly, the district court’s dismissal of Plaintiff’s claims was affirmed.
Ledford v. E. Band of Cherokee Indians, No. 1:20-CV-00005-MR-WCM, 2020 WL 6693133 (W.D.N.C. Nov. 12, 2020), aff’d as modified, 845 F. App’x 260 (4th Cir. 2021). April Ledford (“Plaintiff”) filed suit against the Eastern Band of Cherokee Indians (“Defendant”) under the Indian Civil Rights Act of 1968 (“ICRA”), alleging that Defendant violated her due process rights by terminating a life estate she held in Cherokee, North Carolina. Considering Defendant’s Motion to Dismiss for lack of subject-matter jurisdiction and Plaintiff’s amended complaint, the court held that Defendant did not expressly waive sovereign immunity. First, the court stated Defendant did not waive its tribal sovereign immunity simply by breaking its own laws, “acting beyond the scope of its authority, or acting in bad faith.” Additionally, contrary to Plaintiff’s interpretation, it was not Congress’s intention to pass the ICRA as a vessel for such claims. Because both arguments failed, Defendant’s motion was granted, and Plaintiff’s complaint was dismissed.
State ex rel. Workforce Safety & Ins. v. Cherokee Servs. Grp., LLC, 955 N.W.2d 67 (N.D. 2021). In this case, Workforce Safety and Insurance (“WSI”) sent a cease and desist letter to Hudson Insurance to stop writing workers’ compensation coverage in North Dakota. Hudson Insurance provides such coverage to the Cherokee Nation and several Cherokee entities. Additionally, WSI brought action against several Cherokee entities and Steven Bilby (the executive manager of the entities), alleging that they were liable for unpaid workers’ compensation premiums. While the Cherokee Nation owns no sovereign land in North Dakota, tribal sovereign immunity may still extend if the arm of the tribe doctrine applies. To make such determination, the court adopted the six-prong test laid out in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino and Resort.[115]
Initially, the court established that the Cherokee Nation made no waiver of its immunity. Turning back to the test, the court stated that the following non-exhaustive factors should be analyzed to decide whether the Cherokee Nation’s immunity extends to the Cherokee entities, and accordingly, Hudson Insurance and Bilby: (1) how the economic entities are created; (2) their purpose; (3) their structure, ownership, and management, including the extent of tribal control; (4) the tribe’s intent to share its immunity; (5) the financial relationship between the tribe and entities; and (6) the policy behind tribal sovereign immunity, and whether recognizing immunity in this case would further such policy. Ultimately, the court did not itself employ the test, instead reversing the lower judgment and remanding the issue of whether immunity extends under the arm of the tribe doctrine to the administrative law judge.
§ 1.3.4. Tribal Corporations
A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).[116] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.[117] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.[118]
Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.[119] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.[120] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.[121]
An Indian corporation may also be organized under tribal or state law.[122] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).[123] Under federal common law, the corporation likely enjoys immunity from suit.[124] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.[125]
Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.
There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit. In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act. Below find a discussion of recent cases dealing with tribal corporations.[126]
** Some cases Dealing with Tribal Corporations are discussed in 8.3.3 because they deal with whether a Tribal Corporation may assert their tribe’s sovereign immunity.
Jim v. Shiprock Associated Sch., Inc., 833 F. App’x 749 (10th Cir. 2020). Plaintiff (Ms. Kim Jim) sued her employer (Shiprock Associated Schools, Inc.), a private corporation that served the Navajo Nation, for discrimination under Title VII. The employer-corporation moved for summary judgment, claiming the protection of Title VII’s “exception for Indian tribes.”[127] The district court determined that the employer was an Indian tribe, granting summary judgment based on the Title VII exception.[128] Plaintiff appealed the district court’s decision, the Tenth Circuit affirmed.
The central issue of the case was whether the district court properly characterized the corporation as an Indian tribe. The Tenth Circuit reviewed the district court’s determination de novo, explaining that “[w]hether an entity is a tribal entity depends on the context in which the question is addressed.”[129] Although the Tenth Circuit had not previously addressed tribal characterization in the context of Title VII, it found that “courts elsewhere have considered an entity an ‘Indian tribe’ under Title VII when a tribe created and controlled the enterprise” in question.
On appellate review, the Court first found that the corporation was created by the Navajo Nation. The Court cited the Navajo Nation’s statutes which empower the tribe to establish local school boards.[130] Under this authority, the Court reasoned, “the Navajo Nation’s Board of Education empowered the corporation to operate educational programs.”[131] The Court further noted that the corporation must operate such educational programs “under the Tribally Controlled Schools Act [(25 U.S.C. §§ 2501–11)].”[132]
Due to the corporation’s educational purpose, the Court explained that it “acts through a local school board whose members are elected under the Navajo Election Code,” which requires each board member to be “enrolled in the Navajo Nation.”[133] In addition to the board members, the Navajo Nation, the Court noted, “comprise[d] over 98% of the students and roughly 80% of the school employees.”[134]
Despite what the Court categorized as “the heavy involvement of tribal members,” Plaintiff argued that the corporation was not a tribal entity because: (1) “some students and employees [were] not members of an Indian tribe”; and (2) “the corporation was formed under state law.” The Court, however, concluded that each of “these observations do little to diminish the role of the Navajo Nation.”
The Court then found that the corporation “operate[d] under tribal oversight” because the school board, which was under the control of the corporation, remained ultimately “accountable to the Navajo Nation for educational performance.”[135]
Accordingly, the Court affirmed the district court’s determination that the corporation was “an ‘Indian tribe’ under Title VII” because the corporation served the Navajo community, obtained its governing board from the Navajo Nation, followed Navajo law, and oversaw schools populated by Navajo students and staffed by Navajo employees.
Nguyen v. Cache Creek Casino Resort, No. 2:20-cv-1748-TLN-KJN PS, 2021 WL 22434 (E.D. Cal. Jan 4, 2021), adopted in full, No. 2:20-cv-01748-TLN-KJN, 2021 WL 568212 (E.D. Cal. Feb. 16, 2021) (appeal filed). Plaintiff (Hung M. Nguyen) sued defendant Cache Creek Casino Resort, an enterprise controlled by the Yocha Dehe Wintun Nation (“the Tribe”), regarding Plaintiff’s detainment and ejection from the Casino’s premises. Cache Creek entered a special appearance to contest the court’s subject matter jurisdiction, arguing that “as an enterprise wholly owned by a sovereign tribal entity, the court has no power to rule on [Plaintiff’s] claims.”[136] The central issue before the Court was “whether a tribal entity can be sued in federal court,” which “involves examining whether: (A) the enterprise ‘functions as an arm of the tribe;’ and (B) the tribe has waived its immunity.”[137]
The Court first explained that, in the Ninth Circuit, courts “consider five factors when ‘determining whether an entity is entitled to sovereign immunity as an arm of the tribe: (1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; and (5) the financial relationship between the tribe and the entities.’”[138] Applying the five factors to this case, the Court determined that Cache Creek Casino was an arm of the Yocha Dehe Wintun Nation. The Court came to this conclusion because the Cache Creek Casino was wholly owned and operated by the Tribe, governed by a tribal council, and generated revenue for the benefit of the Tribe.
The Court then determined that Plaintiff had failed to provide “evidence that the Tribe [had] ‘unequivocally expressed’ an intent to waive its immunity to suit in a federal court.”[139] Consequently, the Tribe’s immunity remained intact, the court lacked subject-matter jurisdiction, and Plaintiff’s claims had to be dismissed.
Dutchover v. Moapa Band of Paiute Indians, No. 219CV01905KJDBNW, 2021 WL 1738869 (D. Nev. May 3, 2021). Plaintiff (Eddie Dutchover) sued the Moapa Band of Paiute Indians (“the Tribe”), eight individual Tribe members, the Moapa Tribal Council, and Moapa Tribal Enterprises for the hostile work environment Plaintiff endured as a police officer with the Moapa Tribal Police Department.
Plaintiff recounted various incidents of derogatory name-calling and disparate treatment, arguing that the Tribe member’s hostility occurred because of his “Caucasian/Hispanic” race. Due to the racial nature of the allegations, Plaintiff brought several claims alleging violations of Title VII, Equal Protection, and the Civil Rights Act of 1871. The Tribe, claiming sovereign immunity, moved to dismiss the case.
In response, Plaintiff argued “that there is a corporate entity created by the Tribe that runs the police department, is the actual employer, and does not enjoy sovereign immunity.”[140] The Tribe argued “that there is no corporate entity that runs the police department, but if there were, it would be an arm of the Tribe and enjoy sovereign immunity.”[141] The Court agreed with the Tribe.
The Court explained that “certain factors” are considered “[t]o determine if an entity is an arm of a tribe that enjoys sovereign immunity”; specifically, “courts consider: (1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; and (5) the financial relationship between the tribe and the entities.”[142] Applying these factors to the case, the Court concluded that “whatever corporation may exist to manage the police department would be an arm of the Tribe that enjoys sovereign immunity.”[143]
The Court reached its conclusion because there was no evidence that the Tribe intended to create a corporate entity that would not share in the Tribe’s immunity and “[m]any of the defendants s[a]t on the Tribe’s governing board, indicating that the Tribe ha[d] involvement and control over any such corporate entity.”[144] Consequently, the claims against the Tribe and the corporate entity Plaintiff alleged to have controlled the police department were dismissed.
State ex rel. Workforce Safety & Ins. v. Cherokee Servs. Grp., LLC, 955 N.W.2d 67 (N.D. 2021). Workforce Safety Insurance (“WSI”) initiated an administrative proceeding against Cherokee Services Group, LLC; Cherokee Nation Government Solutions, LLC; Cherokee Medical Services, LLC; Cherokee Nation Technologies, LLC (collectively referred to as the “Cherokee Entities”); Steven Bilby, the executive general manager of the Cherokee Entities; and Hudson Insurance Company (“Hudson”) for unpaid workers’ compensation premiums under North Dakota’s workers’ compensation laws. WSI ordered the Cherokee Entities to pay the unpaid premium and determined that Bilby was personally liable for any balance that remained unpaid. WSI also ordered Hudson to cease and desist from writing workers’ compensation coverage in North Dakota.
Following WSI’s issued order, the Cherokee Entities, Bilby, and Hudson requested an administrative hearing. During the hearing, WSI’s collections supervisor did not dispute that the Cherokee Entities wholly owned by the Cherokee Nation acted as an arm of the tribe. Consequently, the administrative law judge (“ALJ”) reversed WSI’s decision, concluding the Cherokee Entities and Bilby are protected by tribal sovereign immunity. Additionally, the ALJ found that WSI had no authority to issue cease and desist orders to insurance companies like Hudson. WSI appealed the ALJ’s order to the district court. The district court concluded that the Cherokee Entities and Bilby were not entitled to sovereign immunity. The district court also held that WSI has authority to issue a cease and desist order to Hudson. The Cherokee Entities, Bilby, and Hudson appealed the district court judgment.
On appeal, the Cherokee Entities argued that the Cherokee Nation is entitled to tribal sovereign immunity and the sovereign immunity extends to the Cherokee Entities as arms of the tribe. Tribal sovereign immunity, the Cherokee Entities claimed, would preclude WSI from enforcing workers’ compensation laws against them. The Supreme Court of North Dakota first noted that it has “previously concluded [that] state charted corporations and business owned by tribal members are not arms of the tribe”; however, because “the Cherokee Entities are organized under the laws of the Cherokee Nation,” an analysis “to determine whether an entity qualifies as an arm of the tribe” may proceed.[145]
The Supreme Court of North Dakota adopted the Tenth Circuit’s “non-exhaustive six-part test to determine whether a tribal entity qualifies as an arm of the tribe.”[146] Specifically, “[t]he test examines: (1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; (5) the financial relationship between the tribe and the entities; and (6) the policies underlying tribal sovereign immunity and its connection to tribal economic development, and whether these policies are served by granting immunity to the economic entities.”[147] Looking to these factors, the Court concluded that the ALJ found that the Cherokee Entities are wholly owned by the Cherokee Nation, which only addressed the first step of the test. Consequently, the Court remanded to the ALJ to make further findings, consider all the factors given in the test, and determine whether the Cherokee Entities qualify as an arm of the Cherokee Nation entitled to sovereign immunity.
Manzano v. S. Indian Health Council, Inc., No. 20-CV-02130-BAS-BGS, 2021 WL 2826072 (S.D. Cal. July 7, 2021). Plaintiff (Carolina Manzano) sued her former employer, South Indian Health Council, Inc. (“SHIC”), alleging harassment and wrongful termination. SHIC was formed by seven tribes—the Barona Band of Mission Indians, the Campo Band of Mission Indians, the Ewiiaapaayp Band of Kumeyaay Indians, the Jamul Indian Village of California, the La Pasta Band of Mission Indians, the Manzanita Band of the Kumeyaay Nation, and the Viejas Band of Kumeyaay Indians—to provide health care to the Native and non-Native residents of its service area.
SHIC initially began as a satellite operation of the Indian Health Council in Pauma Valley, operating out of trailers on the Sycuan reservation. In 1982, SHIC incorporated as a nonprofit corporation and moved to the Barona Reservation. In 1987, SHIC’s Board of Directors acquired land in Alpine, California, which was placed into federal trust and remained the entity’s permanent location. SHIC’s health services were provided under self-determination contracts with the Indian Health Services, a federal agency within the Department of Health and Human Services, which recognized SIHC as a tribally-operated service unit. In response to Plaintiff’s suit, SHIC moved to dismiss, claiming entitlement to tribal sovereign immunity.
The central issue before the Court was whether SICH, as a tribal organization but not a tribe itself, was entitled to sovereign immunity. First, the Court noted that “[t]ribal sovereign immunity ‘extends to business activities of the tribe, not merely to governmental activities.’”[148] The Court then explained that when a tribe does establish “an entity to conduct certain activities,” the entity is entitled to immunity only “if it functions as an arm of the tribe.”[149]
To determine whether an entity is considered an arm of the tribe, the Court explained that the following factors are relevant: “(1) the method of creation of the entity; (2) its purpose; (3) its structure, ownership, and management, including the amount of control the tribe has over the entity; (4) the tribe’s intent with respect to the sharing of its sovereign immunity; and (5) the financial relationship between the tribe and the entity.”[150] Applying these factors to the case, the Court concluded that SIHC is an arm of the tribe and entitled to tribal sovereign immunity.
With regards to SIHC’s method of creation, the Plaintiff argued “that SIHC’s articles of incorporation do not describe SIHC as a tribal corporation or specify any tribal status or affiliation,” and, therefore, should not be viewed favorably for purposes of the five-factor analysis.[151] The Court disagreed, concluding that “articles of incorporation that are silent regarding sovereign immunity are not dispositive of an entity’s claim to sovereignty.”[152] Additionally, the Court addressed Plaintiff’s argument “that SICH’s incorporation solely under state law defeats a favorable finding on [the first] factor,” explaining that the “case law is indeterminate on this point.”[153] Specifically, the Court noted that some “[c]ourts have held that an entity’s state incorporation does not preclude tribal status [] where the entity is also incorporated under tribal law,” whereas other courts, outside the context of sovereign immunity, “have held that incorporation does not change an entity’s tribal status.”[154] Consequently, the Court found that “[b]ecause the majority of case law does not consider state incorporation detrimental to tribal status,” SIHC’s state incorporation did not weigh against its claim of immunity.[155]
Big Sandy Rancheria Enterprises v. Bonta, 1 F.4th 710 (9th Cir. 2021). In July 2018, Big Sandy Rancheria Enterprises (“Big Sandy”), a federally charted tribal corporation wholly owned and controlled by the Big Sandy Rancheria of Western Mono Indians (“the Tribe”), sued the Attorney General of California (“Attorney General”) and the Director of the California Department of Tax and Fee Administration (“the Director”), seeking declaratory and injunctive relief. Specifically, Big Sandy, a wholesale cigarette distributor, challenged California’s cigarette excise tax as applied to its distribution business, arguing that tribal sovereignty preempted the law. Big Sandy was chartered under section 17 of the Indian Reorganization Act (“IRA”) and its controlling Tribe was federally recognized.
The Director and Attorney General moved to dismiss Big Sandy’s tax claim on jurisdictional grounds under the Tax Injunction Act.[156] This Act prohibits district courts from “enjoining, suspending or restraining the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”[157] Although the Director and Attorney General acknowledged the existence of an exemption to the Tax Injunction Act available to Indian Tribes, each asserted that Big Sandy was not itself an Indian tribe or band and, therefore, could not invoke the federal courts’ jurisdiction under 28 U.S.C. § 1362. In response, Big Sandy argued that it was a federally recognized Indian tribe, rather than merely a federally-chartered corporation wholly owned by a federally recognized Indian tribe. The district court agreed with the Director and Attorney General, dismissing Big Sandy’s tax claim for lack of jurisdiction. Big Sandy appealed.
The central issue before the Ninth Circuit with regards to Big Sandy’s tax claim was whether Big Sandy’s status “as [an] ‘incorporated tribe’ under section 17 of the [IRA]” equated to being considered “an ‘Indian tribe or band’ for jurisdictional purposes.”[158] The Ninth Circuit, considering the relevant statutory language, legislative history, and circuit precedent narrowly construing § 1362, concluded that Big Sandy was “not an ‘Indian tribe or band’ within the meaning of § 1362.”[159] Specifically, while reviewing numerous authorities, the Court found support for “the district court’s construction of ‘Indian tribe or band’ as [being] limited to ‘the Tribe in its constitutional form,’ as distinct from its corporate form.’”[160] The Court also noted that “the Tribe, not [Big Sandy], appears on the Federally Recognized Indian Tribes List,” and that Big Sandy failed to “allege that the federal government, in issuing the Tribe a section 17 charter, recognized [Big Sandy] as a distinct political entity or government.”[161] Instead, the Court determined that section 17’s “incorporated tribe” language merely “suggests that the entity is an arm of the tribe.”[162] Consequently, the district court was found to have properly dismissed Big Sandy’s claim.
Great Plains Lending, LLC v. Dep’t of Banking, No. 20340, 2021 WL 2021823 (Conn. May 20, 2021). On May 4, 2011, the Otoe-Missouria Tribe of Indians (“the Tribe”), through the Tribal Council, adopted the Otoe-Missouria Tribe of Indians Limited Liability Company Act (“the LLC Act”) and the Otoe-Missouria Tribe of Indians Corporations Act (“the Corporations Act”). The Tribe created Great Plains Lending LLC (“Great Plains”) and American Web Loan, Inc., doing business as Clear Creek Lending (“Clear Creek”) (collectively, “Tribal Entities”), pursuant to the LLC Act and the Corporations Act, respectively. John R. Shotton, chairman of the Tribe served as secretary and treasurer of both Tribal Entities.
Following an investigation by the Department of Banking (“Department”), the Commissioner of Banking (“Commissioner”) found that the Tribal Entities “had violated Connecticut’s banking and usury laws by making small consumer loans to Connecticut residents via the Internet without a license to do so.”[163] On October 24, 2014, the Commissioner issued temporary cease and desist orders to the Tribal Entities and Shotton (collectively, “Plaintiffs”), orders that restitution be made to the Connecticut residents, and a notice of intent to issue permanent cease and desist orders, as well as impose civil penalties. Plaintiffs responded by filing a motion to dismiss the administrative proceedings for a lack of jurisdiction. The Commissioner denied the motion to dismiss. On administrative appeal, the trial court determined that the Tribal Entities possessed sovereign immunity in the administrative proceeding and remanded the case back to the Commissioner. The Commissioner, however, once again denied Plaintiff’s motion to dismiss, concluding that the entities had failed to demonstrate they were arms of the Tribe. Plaintiffs appealed.
On appeal, the trial court rendered judgment sustaining the appeal and remanded the case to the Commissioner for further proceedings regarding Plaintiff’s entitlement to tribal sovereign immunity. Plaintiffs appealed, claiming that the trial court should have rendered judgment in their favor as a matter of law. The Commissioner and Department (collectively, “Defendants”), cross appealed, challenging the legal standard adopted by the trial court and its decision to remand the case for further administrative proceedings. The Supreme Court of Connecticut granted review to address three significant issues of first impression with respect to whether a business entity shares an Indian tribe’s sovereign immunity as an arm of the tribe. Specifically, the Court “consider[ed]: (1) which party bears the burden of proving the entity’s status as an arm of the tribe; (2) the legal standard governing that inquiry; and (3) the extent to which a tribal officer shares in that immunity for his or her actions in connection with the business entity.”[164]
With respect to the second consideration, the Court adopted the first five Breakthrough factors, which included: “(1) the method of creation of the economic entities, (2) the purpose of those entities; (3) the structure, ownership, and management of the entities, including the amount of control the tribe has over them; (4) the tribe’s intent with respect to sharing its sovereign immunity; [and] (5) ‘the financial relationship between the tribe and the entities.’”[165] Under the first factor, the Court focused on the law under which the Tribal Entities were formed, finding that “[b]ecause both entities were created under tribal law on the [T]ribe’s own initiative,” the factor weighed heavily in favor of arm of the tribe status.[166] Applying the remaining four factors, the Court found “that Great Plains [was] an arm of the tribe entitled to tribal immunity” but that, with regards to Clear Creek, a remand for further proceedings was necessary because the record was “insufficient to support a similar conclusion.”[167]
Yellen v. Confederated Tribes of the Chehalis Rsrv., 141 S. Ct. 2434 (2021). On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), allocating eight billion dollars “of monetary relief to ‘Tribal governments.’”[168] Under the CARES Act, the term “Tribal government” was defined as “the ‘recognized governing body of an Indian tribe.’” “Indian tribe,” in turn, was defined under the CARES Act by reference to its definition in the Indian Self-Determination and Education Assistance Act (“ISDA”).[169] ISDA defined “Indian tribe” as “any Indian tribe, band, nation, or other organized group or community, including any Alaska Native village or regional or village corporation as defined in or established pursuant to the Alaska Native Claims Settlement Act, which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians.”[170]
On April 23, 2020, the Treasury Department determined that Alaska Native corporations (“ANCs”), while not federally recognized tribes, were eligible for CARES Act relief and set aside more than five-hundred million dollars for them. Despite ISDA’s express inclusion of ANCs in the definition of “Indian tribe,” several federally recognized Indian tribes challenged the Treasury Department’s determination, “arguing that only federally recognized tribes are Indian tribes under ISDA” and, thus, “under the CARES Act.”[171] The district court disagreed, “ultimately enter[ing] summary judgment for the Treasury Department and the ANCs.” The court of appeals reversed, concluding that “the recognized-as-eligible clause is a term of art requiring any Indian tribe to be a federally recognized tribe.” The Supreme Court of the United States granted certiorari to “determine whether ANCs are eligible for the CARES Act funding set aside by the Treasury Department.”
The central question before the Court was whether ANCs satisfy ISDA’s definition of Indian tribe. Justice Sotomayor, writing for the majority, concluded that “[u]nder the plain meaning of ISDA, ANCs are Indian tribes, regardless of whether they are also federally recognized tribes.”[172] Consequently, the court of appeals was reversed, and the ANCs were found to be entitled to CARES Act funding.
§ 1.4. The Federal Sovereign
§ 1.4.1. Indian Country & Land Into Trust
The IRA authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.[173] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.[174]Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.[175] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.
Despite the Carcieri ruling, Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.[176] Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.[177] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.[178]
In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”[179] The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.[180] The second prong examines whether this jurisdictional status remained intact in 1934.[181] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld Interior’s application of the two-part test outlined in M-37029.[182] M-37029 appears to be a non-statutory Carcieri fix.
As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.[183] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming. Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust. Rather, Patchak brought an action under the APA[184] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe. The remedy Patchak sought was for the issuance of an injunction prohibiting the Interior from taking the land into trust. The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri. Both the federal government and the tribe argued that only the Quiet Title Act (QTA)[185] could grant the waiver of sovereign immunity. Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.
The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.[186] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.
The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit. This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.[187]
The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.[188] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final agency determination” subject immediately to judicial review.[189] If a BIA official issues the decision, however, the decision is subject to administrative exhaustion requirements[190] before it becomes a “final agency action.”[191] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.[192] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.” In October 2017, the Trump Administration’s Interior Department announced a consultation regarding a rulemaking that would reverse the “Patchak Patch,” and impose a much newer criteria for off-reservation land-into-trust applications. Assuming that rulemaking results in new Part 151 regulations, litigation will certainly follow.
A brief discussion of several of the year’s most prominent cases involving the diminishment of an Indian reservation and/or the taking of land into trust follow:[193]
Little Traverse Bay Bands of Odawa Indians v. Whitmer,998 F.3d 269 (6th Cir. 2021): In 2015, the Little Traverse Bay Bands of Odawa Indians (the “Band”) filed a lawsuit seeking a declaration that the Treaty of 1855 created a permanent reservation. To fully understand this case, a brief history of the Band’s interactions with the federal government is necessary.
Prior to the colonization of the Americas, the Band inhabited a section of land that is now considered northern Michigan. As settlers moved to this land, the Band contacted President Andrew Jackson seeking to sell some of their land and, in return, be allowed to stay in Michigan. In 1835, the government agreed, and the Band ceded around fourteen million acres to the United States, retaining 100,000 acres for themselves. In 1855, seeking a more permanent arrangement, the Band began negotiations with the federal government to purchase hundreds of individual tracts of land in Michigan. This finalized agreement was called the Treaty of 1855.
Under federal law, Indian Country is land set apart for the use of Indians under the superintendence of the government. In this case, the Court held that as the treaty provided for individually owned allotments of land, it did not create a collective Indian reservation. The Court looked to the Treaty’s text and the accompanying negotiations to determine that both the Band and the federal government intended to provide tribal members with individual titles to non-federally governed land instead of a communal title—which would have been more indicative of a reservation.
Eastern Band of Cherokee Indians v. U.S. Dep’t of Interior, No. CV 20-757 (JEB), 2021 WL 1518379 (D.D.C. Apr. 16, 2021): In 2018, the Catawba asked the Bureau of Indian Affairs (“BIA”) to take a 16-acre parcel of land in North Carolina—the Kings Mountain Site—into trust so that they could build a casino on it. After the BIA agreed, the Eastern Band of Cherokee Indians (“EBCI”), who have their own North Carolina casinos, filed an action under the Administrative Procedure Act (“APA”) stating that the casino construction could destroy Cherokee artifacts or remains. While the Catawba are headquartered in South Carolina, around 253 members reside in North Carolina. As such, they are governed by both the South Carolinian specific Settlement Act (“Settlement Act”) and the Indian Gaming Regulatory Act (“IGRA”). EBCI claims that (1) the Settlement Act categorically bars the Catawba from operating a casino under IGRA; (2) the Settlement Act precludes the Catawba from having land taken into trust under the Indian Reorganization Act (“IRA”); and (3) the Kings Mountain Site is not eligible for gaming activities under IGRA. The Court disagreed on all three counts.
Looking to the text of the Settlement Act, the Court determined that it was only intended to apply to the Catawba’s actions in South Carolina. Under this interpretation, the Court found that IGRA governs the Catawba in North Carolina. Therefore, the Kings Mountain Site was properly taken into trust under the IRA and the Catawba may operate a casino on its land under IGRA. Having resolved claims one and two in the Catawba’s favor, the Court held that the Kings Mountain Site fits under the “restored lands” exception to the general rule that lands taken into trust after October 17, 1988, may not be used for gaming. Rejecting many of EBCI’s arguments, the Court determined that the Kings Mountain Site undoubtably meets the definition of “restored lands,” and affirmed that gaming could take place on the land.
Kalispel Tribe of Indians v. U.S. Dep’t of Interior, 999 F.3d 683 (9th Cir. 2021): In 2001, the Department of Interior (“DOI”) took a 145-acre parcel of land into trust for the Spokane Tribe. The Spokane Tribe immediately began the process to request a new gaming establishment, but the administrative process took over ten years to complete. During this process, the Kalispel Tribe of Indians objected multiple times asserting that the new gaming facility—proposed to be located two miles from a Kalispel casino—would cause them significant economic harm and render them unable to meet existing debt obligations. After undertaking an objective analysis of Kalispel’s financial projections, the Secretary concluded that if the new casino were permitted to open, Kalispel would be able to fulfill its loan obligations. Therefore, the Secretary found that the proposed gaming facility would be in the Spokane Tribe’s best interest and would not be detrimental to the surrounding community—meeting the requirements put forth under IGRA. In 2017, Kalispel sued the Secretary in federal district court alleging that the Secretary’s determination violated IGRA. The district court held that the determination complied with IGRA, was supported by substantial evidence, and was neither arbitrary nor capricious—a ruling Kalispel appealed.
The Ninth Circuit agreed with the district court and affirmed. Under IGRA, off-reservation gaming must be: (1) in the best interest of the Indian Tribe; and (2) not be detrimental to the surrounding community. Here, Kalispel argued that as the additional gaming would cause any detriment to a nearly Indian tribe, it should not be allowed—regardless of the net impact on the surrounding community. Using the principals of statutory interpretation, the Court interpreted “surrounding community” to include “local governments and nearby Indian Tribes located within a 25-mile radius of the site of the proposed gaming establishment.”[194] While the Court agreed that Kalispel is undoubtably part of the surrounding community, they disagreed with the argument that any detriment to Kalispel is an overall detriment to the surrounding community. Holding that IGRA requires the Secretary to weigh the many adverse interests of the surrounding community when deciding if there is a net detrimental effect, the Court rejected Kalispel’s argument that any detriment to Kalispel precluded the Secretary from authorizing the gaming facility. Kalispel’s argument that the Secretary’s determination was arbitrary and capricious because it failed to fully consider the economic detriments to Kalispel was also rejected. Looking to the administrative record, the Court found that there was ample evidence that the Secretary properly considered and weighed the detriments with the benefits when making the determination. The Court thus held that the Secretary’s decision was neither arbitrary nor capricious.
Hardwick v. United States, No. 79-cv-01710-EMC, 2020 WL 6700466 (N.D. Cal. Nov. 13, 2020): The Buena Vista Rancheria of Me-Wuk Indians (the “Tribe”) filed this suit seeking an order requiring the BIA to take restored Rancheria lands into trust under the 1983 Stipulated Judgment (the “Judgment”). The Judgment restored the reservation status of seventeen Rancherias and provided a mandatory trust election provision wherein class members could restore the enumerated rancherias to trust status. In both 1996 and 2010, the Tribe requested that the BIA take the Rancheria into trust. The BIA denied these requests stating that the Rancheria was ineligible to be brought into trust under the mandatory trust provisions of the Judgment as the Tribe did not meet the requirements of a class member, or successor in interest. The Court disagreed.
As the Judgment’s text did not define either term, the court relied on the plain meaning from Black’s Law Dictionary and held that status as a class member or successor in interest does not turn on the legal form of entity and, as such, is not restricted to individuals. The Tribe thus was a valid class member under the Judgment and could properly invoke the mandatory trust election provision.
Stand Up for Cal.! v. State of Cal., 64 Cal. App. 5th 197 (2021). In 2005, the North Fork Tribe submitted an application requesting that the BIA take a 305-acre parcel of land into trust for the purpose of gaming. In 2011, the Secretary authorized the land for gaming and in 2012, the Governor concurred, fulfilling an IGRA requirement. In 2014, California voters rejected Proposition 48—the statute ratifying the tribal-state compact—and therefore rejected the ratification of the North Fork gaming project. The issue before the Court was if the voter rejection of Proposition 48 invalidated the Governor’s concurrence. The Court found that legislative changes could restrict or eliminate the Governor’s concurrence.[195] From this, the Court held that the voter’s rejection of the compact-ratifying statute was an expression of their intent to reject gaming on the 305-acre parcel and therefore impliedly expressed their will to annul the Governor’s concurrence. Reversing and remanding for further proceedings, the Court instructed the trial court to overrule North Fork’s demurrers.
Stand Up for Cal.! v. U.S. Dep’t of Interior, 994 F.3d 616 (D.C. Cir. 2021). In 2013, the California based Wilton Rancheria tribe petitioned the Department of the Interior (“DOI”) to take a plot of land into trust for gaming use. In 2017, the Department agreed and acquired title to a 30-acre parcel known as Elk Grove. Subsequently, a group of plaintiffs including Stand Up for California! (“Stand Up”) brought suit against DOI claiming that the Department: (1) incorrectly delegated the authority to acquire land to an official who could not wield the authority; (2) was barred from acquiring land on behalf of Wilton members as the Tribe was distributed assets under the Rancheria Act; and (3) failed to adhere to National Environmental Protection Act (“NEPA”) obligations when selecting the Elk Grove location. The court dismissed all three claims.
With respect to claim one, the court interpreted the relevant statues and regulations—most importantly 25 C.F.R. § 151.12—to mean any BIA official can decide to take land into trust for DOI as long as they are subject to administrative review. Therefore, the court held that DOI properly delegated the decision-making authority, affirming the district court. Stand Up’s second claim—that the Rancheria Act precludes DOI from taking land into trust on behalf of Wilton members—was similarly dismissed. The court stated that a court-approved settlement to restore recognition of a tribe and Indian status for members can invalidate the limitations of the Rancheria Act. Further, the court held that as the Rancheria Act has no impact on DOI with regards to the Wilton Rancheria, it was irrelevant that some members may have received assets. Finally, with respect to the third claim, the court held that DOI met their responsibilities under NEPA when preparing the required Environmental Impact Study (“EIS”). An EIS must simply adequately consider and disclose the environmental impact of the proposed action. The court determined that DOI undertook a thorough analysis of potential issues, properly notified the public of their plans to select the Elk Grove location and provided adequate time for public comment—as evidenced by the active participation of Stand Up during the comment period. Finding all arguments to be without merit, the Court dismissed claim three.
§ 1.4.2. Federal Approval for Reservation Activity
Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight. The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.[196] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”[197] Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”[198]
Per Section 81’s year 2000 revisions, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.[199] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.[200] Failure to secure secretarial approval could render the agreement null and void.[201] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.[202] Regardless of whether Secretary approval is necessary, all parties should be careful how they draft agreements which may encumber the land.[203] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (NIGC) for approval pursuant to the Indian Gaming Regulatory Act (IGRA).[204] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.[205] The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.
Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the BIA and/or a tribal business license to properly do business with a tribe.[206] Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors. Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.[207]
With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.[208] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415 every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.[209] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land. The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior. Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).
There are some caveats, though. First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval). Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects. The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process. HEARTH Act implementing regulations went into effect in 2013.[210] As of October 2018, the BIA lists twenty-six tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.[211] The following highlights one case decided in the last year.[212]
Texas v. Alabama Coushatta Tribe of Texas, No. 9:01-CV-299, 2021 WL 3884172 (E.D. Tex. Aug. 31, 2021): In 2016, the Alabama Coushatta Tribe of Texas (the “Tribe”) sought guidance from the National Indian Gaming Commission (the “NIGC”) regarding whether the Tribe’s lands were eligible for gaming. The NIGC determined that the Indian Gaming Regulatory Act of 1988 (“IGRA”) applied to the Tribe. Accordingly, the NIGC determined that the Restoration Act, which bars gaming that violates Texas law, did not apply. As a result, the Tribe opened a facility offering electronic bingo gambling games. The State of Texas sought to enjoin these operations, arguing that the Restoration Act applies to the Tribe. The Fifth Circuit subsequently found that the Restoration Act and the Texas law it invokes, and not the IGRA, governs the permissibility of gaming operations on the Tribe’s lands.
On remand, the State of Texas sought to hold the Tribe in contempt for continuing the gaming operations. The Eastern District Court of Texas once again held that the Restoration Act does not apply to the Tribe. The court stated that the Restoration Act has been interpreted by the Fifth Circuit as prohibiting tribes from engaging in any gaming activity prohibited by Texas law. Under Texas’s Bingo Enabling Act, bingo is a permissible gaming activity so long as the act’s requirements are complied with, such as receiving a license. As a result, the court found that because Texas regulates bingo gaming, that gaming activity is not prohibited by the laws of the State of Texas within the meaning of Section 207(a) of the Restoration Act. The court concluded that the Tribe’s bingo gaming is not subject to the laws of Texas, including the Restoration Act, unless and until the state prohibits that gaming activity outright.
§ 1.4.3. Labor and Employment Law & Indian Tribes
When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers. For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.[213] Moreover, tribal employers may not be subject to certain federal labor and employment laws.[214]
Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964[215] and the Americans with Disabilities Act[216] expressly exclude Indian tribes,[217] and state anti-discrimination laws usually do not apply to tribal employers.[218] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.[219]
The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers. The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),[220] the Employee Retirement Income Security Act (ERISA),[221] the Fair Labor Standards Act (FLSA),[222] the National Labor Relations Act (NLRA),[223] and the Age Discrimination in Employment Act (ADEA),[224] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.[225]
Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.[226] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.[227] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.[228] Following this reasoning, the Department of Labor has stated that the FMLA[229] applies to tribal employers.[230] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.[231] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.[232]
Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities. For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.[233]
In the last year, federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers. More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns. Several of the most prominent cases from the last year are discussed below:[234]
Scalia v. Red Lake Nation Fisheries, Inc., 982 F.3d 533 (8th Cir. 2020): Red Lake Fisheries, Inc. (the “Fishery”) is a fishery operating on the Red Lake Indian Reservation in Minnesota, a corporation organized under tribal law and comprised solely of tribal members.[235] The Fishery received two citations under the Occupational Safety and Health Act (OSHA) after a boat capsized on a reservation lake and two employees drowned.[236] OSHA proposed a penalty of $15,521. The Fishery contested both the citations and the penalty. An administrative law judge (“ALJ”) granted the Fishery’s motion to dismiss. The Secretary of Labor argued that OSHA applied to tribal businesses unless Congress stated otherwise and thus, the ALJ erred in granting the motion. The Eighth Circuit Court of Appeals (1) found that OSHA enforcement would dilute the principles of tribal sovereignty; (2) noted that OSHA completely omits mention of Indian commerce when defining “employer;” and (3) observed that the Red Lake Reservation had “preserved for the [Red Lake] Band [of Chippewa Indians] an independence not experienced on other reservations.” Thus, the Court held that even if OSHA were to apply to Indian activities in other circumstances, it did not apply here where the corporation was organized under tribal law and was comprised exclusively of enrolled Tribe members.
Miller v. United States, 992 F.3d 878 (9th Cir. 2021): Plaintiff was a police officer with The Reno-Sparks Indian Colony (The “Tribe”).[237] Pursuant to a self-determination contract with the Bureau of Indian Affairs, the Tribe’s employees were deemed to be federal government employees for the purpose of Federal Tort Claims Act coverage. The Tribe terminated Plaintiff’s employment, alleging that Plaintiff had fraudulently filed an unemployment claim. Plaintiff denied the allegation and stated he was the victim of identity theft, but the termination was upheld. Plaintiff filed an administrative wrongful termination claim with the Department of Interior claiming that he was the victim of “continuous employment harassment” and the termination was retaliation for the workplace harassment complaint that Plaintiff filed with the Tribe. He also claimed he was denied a proper investigation as guaranteed by department policy. The Department of Interior denied Plaintiff’s claim and informed him of his right to sue in federal court. Plaintiff filed suit against the United States alleging the same facts as he did in the administrative claim. In addition, Plaintiff found out that the Tribe knew that he was the victim of identity theft before they upheld the termination,[238] so he amended his complaint to add claims of negligent and grossly negligent termination.
To determine whether the discretionary function exception barred Plaintiff’s claims, the court considered if “(1) the act or omission on which the claim is based ‘involves an element of judgment or choice’; and (2) ‘that judgment is of the kind that the discretionary function exception was designed to shield.’”[239] Because the Tribe was not bound to act in a particular way, the decision to terminate an employee was a discretionary choice, satisfying the first prong of the test. In evaluating the second prong, the court noted that the inquiry about whether the judgment was intended to be shielded was an objective one: whether the employer’s actions were susceptible to policy analysis and not whether the subjective intent was actually based on policy considerations. The court stated that hiring employees is the type of policy judgment that Congress intended the discretionary function exception to shield. Because terminating employees is just the flip side of hiring, termination decisions are equally shielded.[240] Thus, the claims rooted in retaliation were covered by the discretionary function exception.[241]
However, Plaintiff’s second claim, alleging a lack of investigation pursuant to policy, was based upon a violation of procedural rules whereas the other claims were based upon retaliation. The procedural violation could not satisfy the first prong of the test, whether there was an element of choice in the act, because the Tribe’s policy documents created a mandatory duty to investigate. Accordingly, the exception could not apply. Similarly, the claim for negligent and grossly negligent termination was not covered under the exception because the BIA handbook mandated that Tribal employees could not be disciplined for exonerated allegations; thus, the Tribe lacked discretion to fire Plaintiff on grounds that it knew to be false and unsubstantiated. On these final claims, the court remanded the case.
Chicken Ranch Rancheria of Me-Wuk Indians v. Newsom, 1:19-CV-0024 AWI SKO, 2021 WL 1212712 (E.D. Cal. Mar. 31, 2021):[242] California (the “State”) entered into class III gaming compacts with a number of Indian Tribes that were set to end on December 31, 2020, with an automatic extension to June 30, 2022.[243] The Tribal Plaintiffs[244] negotiated with the State to come up with a new agreement to replace the 1999 compacts. However, the Tribal Plaintiffs alleged that the State negotiated in bad faith by exceeding the scope of the permissible subjects of negotiation pursuant to Section 2710(d)(3)(C) of the Indian Gaming Regulatory Act (“IGRA”), which limits the subjects of negotiation to topics related to gaming and those consistent with the IGRA’s purpose.[245]
The Tribal Plaintiffs first objected to provisions about employment standards. The anti-discrimination provision precluded employers from engaging in discrimination of persons in protected groups seeking to work or working for the gaming operation or gaming facility. The minimum wage provision required compliance with the State’s minimum wage law and the federal minimum wage laws under the Fair Labor Standards Act. The final employment standard provision required the Tribal Compact to enact a Tribal Labor Relations Ordinance in order for gaming activities to continue. The court held that the catch-all provision of Section 2710(d)(3)(C)(vii) (“any other subjects that are directly related to the operation of gaming activities”) covered all three employment standards provisions because without the operation of gaming activities, the jobs would not exist and without the jobs, the operation of gaming activities could not exist. However, because of the indirect connection to gaming activities, the State needed to provide meaningful concessions in exchange for making demands to these topics. The State argued that their negotiations represented meaningful concessions and the court held that this holistic bundled approach was disapproved of.[246] Instead, a specific concession should have been made for each topic—a quid pro quo.
The Tribal Plaintiffs also objected to a provision which required the enactment of an ordinance that granted the tribal court jurisdiction and authority to recognize and enforce tribal or state earnings withholding orders, such as spousal and child support, entered against any person employed at the gaming operation or gaming facility. The court agreed with the Tribe’s argument that this topic was beyond the permitted scope and not related to the operation of gaming activities because of spousal and child support obligations, though affected by employment, would exist even in the absence of the gaming job.
Because the State could not show that it had offered meaningful concessions in regard to the employment provisions nor that the earnings withholding provision, neither was a permissible topic under Section 2710(d)(3)(C) and the court adjudicated that the State did not negotiate in good faith.
Ohlsen v. United States, 998 F.3d 1143 (10th Cir. 2021): The United States Forest Service entered into an agreement, under the authority of the Cooperative Funds and Deposits Act (“CFDA”), with the Isleta Pueblo for a forest protection project involving the cutting and masticating of trees. The agreement established the Pueblo employees were not federal employees for any purposes, including the Federal Tort Claims Act (“FTCA”). The Forest Service directed the Pueblo to masticate wood that had already been slashed and left on the forest floor to decrease the risk of wildfire in a high priority treatment area. The wood on the floor had reached levels well beyond the agreed-upon limit by that time. While doing so, the masticator struck a rock, caused a spark, and ignited the surrounding bush. The fire continued for three months, burning 17,912 acres, and destroying property.
Insurance companies and owners of destroyed property filed suit against the U.S. government based upon the negligence of Pueblo crewmembers. The government asserted that the claim was barred because the Pueblo crewmembers were independent contractors, an exception under the FTCA. Plaintiffs argued that the CFDA required the Pueblo workers to be considered federal employees. The court disagreed and interpreted the statutory language to mean that the CFDA excludes cooperators from being deemed federal employees outside the FTCA or Federal Employees Compensation Act rather than automatically including them in either instance.
Having decided that the CFDA did not automatically render the Pueblo workers as federal employees, the court applied the Lilly test[247] to determine whether the workers were independent contractors. First, court noted that the intent between the parties was clear because the agreement unequivocally stated that the Pueblo workers “shall not be deemed to be Federal employees for any purposes. . . .”[248] Second, the government’s control over specifications, safety, and precise performance requirements encompasses general supervisory authority rather than control over day-to-day operations—a power retained by the Pueblo. The other Lilly factors were not disputed and thus the court considered these two to be dispositive. Thus, the Pueblo were independent contractors and the U.S. government could not be subject to tort liability for the Pueblo’s negligence under the FTCA.
Dutchover v. Moapa Band of Paiute Indians, 219CV01905KJDBNW, 2021 WL 1738869 (D. Nev. May 3, 2021): Plaintiff worked as a police officer for the Moapa Band of Paiute Indians (the “Tribe”) where he was allegedly the victim of harassment and a hostile work environment. Plaintiff alleged that the Tribe had waived sovereign immunity by entering into a federal contract and by enacting, promoting, and adhering to federal law, including Title VII. Plaintiff alleged that the policies and training that the Tribe offered, including an anti-discrimination training offered by a federal employee, signaled an adoption of Title VII and thus a waiver of sovereign immunity. The court disagreed because a waiver of sovereign immunity must be express and cannot be implied through behaviors such as the training Plaintiff described. Because the Tribe had not waived sovereign immunity, Plaintiff’s claims arising out of the workplace conduct, including a § 1983 claim and Title VII claim, were dismissed.
Plaintiff also argued that there was a corporate entity created by the Tribe that ran the police department and, as the actual employer, did not enjoy sovereign immunity. The Tribe denied the existence of such an entity and argued that even if such an entity did exist, it would be an arm of the Tribe covered by sovereign immunity. The court agreed because there was no indication that the Tribe intended to create a corporation that didn’t share sovereign immunity, especially where many of the defendants sat on the Tribe’s governing board indicating the Tribe’s involvement and control over any such corporate entity. The court held that a waiver of a tribe’s sovereign immunity cannot be implied through behavior such as workplace training; it must be express. Where a tribe is involved with and maintains control over a corporate entity, the entity, even as an actual employer, is an arm of the tribe that enjoys sovereign immunity.
Butler v. Leech Lake Band of Ojibwe, CV 20-2332(DSD/KMM), 2021 WL 2651981 (D. Minn. June 28, 2021): Plaintiff, employed as a Director with the Leech Lake Band of Ojibwe (the “Band”), brought suit against the Band and two managers of the Band for age discrimination under the Age Discrimination in Employment Act of 1967 (“ADEA”); violation of the Equal Pay Act (EPA); retaliation, harassment, intimidation, and wrongful demotion and termination, all under Title VII of the Civil Rights Act of 1964 (“Title VII”); and violations of state law.
The court held that it did not have jurisdiction over the claims because the ADEA, EPA, and Title VII, all specifically exempt tribal employers from this suit. Without an explicit waiver of sovereign immunity, those claims could not proceed. The individually named managers, also employees of the Band, could not be sued in an individual capacity because Title VII and the ADEA did not provide for such liability. While the EPA does not prohibit individual liability, the court reasoned that since the Plaintiff could not bring the EPA claim against the Band, she also could not bring the EPA claim against individual officers of the Band. With all the federal law claims dismissed, the court declined to extend pendent jurisdiction over the remaining state law claims. The court held that without an explicit waiver, a tribal employer retains sovereign immunity and cannot be sued under the Age Discrimination in Employment Act of 1967, Equal Pay Act, nor Title VII.
Great Plains Lending, LLC v. Dep’t of Banking, No. 20340, 2021 WL 2021823 (Conn. May 20, 2021): The Plaintiffs, Great Plains Lending, LLC, American Web Loans, Inc. (doing business as Clear Creek Lending), and John R. Shotton (chairman of the Otoe-Missouria Tribe of Indians (the “Tribe”), were investigated by the Defendants, the Commissioner of Banking (“Commissioner”) and the Department of Banking. The investigation found that the Plaintiff companies were violating Connecticut’s banking and usury laws by making small consumer loans with excessive interest rates to state residents via the internet without a license to do so. The Commissioner ordered the Plaintiff companies to cease and desist, pay restitution to the state residents, and pay civil penalties. The Plaintiffs filed a motion to dismiss the administrative proceedings for a lack of jurisdiction alleging that the companies were arms of the tribe and Shotton was entitled to sovereign immunity because he was acting within his official capacity as an employee of the Tribe. The motion was dismissed and this appeal followed.
First, the court found that the companies did indeed enjoy sovereign immunity as arms of the Tribe. Next, the court stated that two conditions needed to be met for sovereign immunity to extend to a Tribe’s employee or officer: (1) the Tribe, not the individual, is the real party in interest; and (2) the Tribal official acted within the scope of his/her/their authority. In evaluating the first prong of the test, the court observed that the Defendant “department is seeking relief from Shotton nominally because of his official policy-making capacity as a high ranking officer of the Tribe and an officer of the entities, rather than as a result of his personal actions taken within the scope of his official capacity.”[249] Because Shotton was targeted for his ranking and status rather than his personal actions, the court determined the Tribe was the real party in interest.
Turning to the second prong, the court noted that it was not enough to allege that Shotton’s actions were a violation of state law to establish that his actions were outside his capacity as a corporate official. Because the Defendants failed to allege or prove that any actions were taken to further Shotton’s personal interests, as distinct from the tribe’s interests, the court found that Shotton was acting within his official capacity. Putting together the two prongs, the court held that the Tribe’s sovereign immunity extended to Shotton as an official of the Tribe.
The court ultimately held that the burden of proving that a company or entity is an arm of the Tribe entitled to sovereign immunity falls on the company or entity claiming the entitlement. Two conditions must be met for sovereign immunity to extend to a Tribe’s employee or officer: (1) the Tribe, not the individual, must be the real party in interest; and (2) the Tribal official must have acted within the scope of his/her/their authority.
Manzano v. S. Indian Health Council, Inc., 20-CV-02130-BAS-BGS, 2021 WL 2826072 (S.D. Cal. July 7, 2021): Plaintiff brought claims of harassment and wrongful termination against her former employer, Defendant Southern Indian Health Council, Inc. (“SIHC”). Pursuant to Title V of the Indian Self-Determination and Education Assistance Act (“ISDEAA”), SIHC entered into a compact with the Indian Health Service (“IHS”) in which the IHS transferred authority to SIHC to make decisions about the federal funding and execution of federal programs, services, functions, and activities for the benefit of American Indians. Defendant moved to dismiss the case based on Tribal sovereign immunity.
Plaintiff made evidentiary objections to the Compact agreement. Plaintiff stated that the Compact agreement was untimely, not relevant, and not properly authenticated. Because these evidentiary issues concerned facts essential to the issue of sovereign immunity, the court first resolved them, in favor of the Defendants, before using a five-step analysis to determine whether SIHC was entitled to Tribal sovereign immunity.
First, the method of creation weighed toward sovereign immunity because SIHC operated on Tribal land, provided health care to tribal communities, was comprised of federally recognized tribes, all of which were passed resolutions authorizing SIHC to assume authority from the government for the services provided. The fact that SIHC was incorporated under state law did not defeat a favorable finding on this factor. SIHC’s purpose was to provide healthcare to Tribal communities and the Compact agreement was to promote the autonomy of member tribes in healthcare. The second factor also weighed in favor of SIHC. Third, the structure, ownership, and management weighed in favor of SIHC because SIHC was fully managed by member tribes through their representatives on the managing board who were enrolled members of each Tribe. Fourth, while not explicit in the Compact agreement, there were indications that there was Tribal intent for SIHC to share in sovereign immunity. Specifically, (1) the transfer of power between IHS and SIHC document stated that it was for the benefit of the tribes because it would “allow SIHC to better assert its sovereign status and that of its Members by assuming greater funding for and control over its operations;” (2) SIHC entered into the Compact “to carry out the services provided by the SIHC in a manner consistent with the Compact and SIHC’s self-governance” (emphasis added); and (3) the ISDEAA stated that when an Indian tribe authorizes an inter-tribal consortium, such as the SIHC, the consortium has the same rights and responsibilities as a Tribe, including Tribal sovereign immunity.[250] Last, the financial relationship between SIHC and the Tribes supports findings of sovereign immunity because SIHC would have been unable to receive funding without the involvement of Tribes. Altogether, the court found SIHC was entitled to Tribal sovereign immunity as an arm of the Tribe.
The court then considered whether the Uniformed Services Employment and Reemployment Rights Act (“USERRA”) abrogated SIHC’s Tribal immunity. USERRA’s definition of an employer does not include Tribes or Tribal organizations and had no unequivocal expression of abrogation. Looking to the legislative history, the Court noted that a House Report stated that an explicit statement to include tribes was necessary as to avoid confusion about interpretation; however, the recommendation was not adopted and so the court was unable to find that Congress unambiguously sought to override Tribal sovereign immunity and apply USERRA to Tribal employers.
Finally, the court rejected Plaintiff’s argument that Defendant waived sovereign immunity by failing to raise it in bylaws or corporate filings because waivers of sovereign immunity must be express rather than implied. The case was dismissed for lack of subject matter jurisdiction.
Jim v. Shiprock Associated Sch., Inc., 833 Fed. Appx. 749 (10th Cir. 2020): Plaintiff sued her employer, Shiprock Associated Schools, Inc., (the “corporation”) a private corporation that served the Navajo Nation, for discrimination under Title VII. To decide whether to characterize the corporation as an Indian tribe for the purposes of Title VII, the court considered whether the Tribe created and controlled the enterprise. The court determined that here, the corporation was created under the auspices of the Navajo Nation and the Nation’s statutes authorized chapters to establish local school boards. The Navajo Nation Board of Education, in turn, empowered the corporation to operate educational programs. Every board member was required to be an enrolled member and most students and employees were also members. Further, the corporation operated under tribal oversight. Though the school received funding from the U.S. Bureau of Indian Education, it was tribally controlled. Ergo, the private corporation constituted an Indian Tribe and was held to be exempt from Title VII.
Beetus v. United States, 4:19-CV-00044-SLG, 2021 WL 1093617 (D. Alaska Mar. 22, 2021): Plaintiff alleged that she was sexually assaulted by an employee of the Native Village of Tanana’s Culture Camp while she attended the camp as a minor. The camp was organized, managed, and funded pursuant to an ISDEAA contract between the United States and the Tanana Tribal Council (“TTC”) and/or the Tanana Chiefs Conference (“TCC”). Plaintiff brought various tort claims claiming that the assault committed against her was proximately caused by TCC/TTC’s failure to adequately safeguard minors and Plaintiff asserted that since TTC/TCC were carrying out their ISDEAA contractual duties at the time of the incident, the United States was instead liable for the tort of the tribal employee pursuant to Section 314 of the Federal Tort Claims Act.[251] The U.S. government moved to dismiss for lack of subject matter jurisdiction.
To determine whether the act of the Tribal employee fell within Section 314, the court employed the Ninth Circuit’s Shirk[252] test in which the court first determines whether the alleged activity is encompassed by the ISDEAA contract and then decides whether the tortious action falls within the scope of the tortfeasor’s employment, as defined by the contract, under state law.[253]
Though the U.S. tried to argue that TTC was an independent contractor not covered under the Federal Torts Claim Act, the court found that: (1) TCC’s funding agreement with the U.S. extended coverage to TTC;[254] (2) the funding agreement between TCC and the U.S. authorized TCC to carry out functions pertaining to health and safety at the camp; and (3) because TCC’s funding agreement extended to TTC, TTC employees were authorized to carry out functions pertaining to health and safety at the camp. Accordingly, the first prong was met—the tortious action, negligent supervision and failure to train, was encompassed by the ISDEAA contract.
The court declined to determine whether the second prong was met—i.e., whether the tortfeasor’s actions fell within the scope of employment—because the U.S. only argued that an assault cannot be within the scope of employment and the Plaintiff also pleaded claims of negligent hiring and supervision, both of which are facially within the scope of employment. In light of the findings, the court denied the U.S.’s motion to dismiss.
Unite Here Local 30 v. Sycuan Band of the Kumeyaay Nation, 20-CV-01006 W (DEB), 2020 WL 7260672 (S.D. Cal. Dec. 10, 2020): Plaintiff, a labor union seeking to represent Sycuan Casino Resorts, filed a motion to dismiss Defendant Sycuan Band of Kumeyaay Nation’s (the “Tribe”) counterclaim for declaratory relief. The Tribe owned the Casino Resort and, pursuant to the Indian Gaming and Regulatory Act, entered into a compact with the State of California. California required the Tribe to adopt an ordinance which set out procedures for organizing casino employees into a union. The ordinance required the Tribe to enter into a contract if the union offered a writing stated it would comply with the terms of Section 7 of the ordinance. The Union alleged that it offered such a writing by delivering a letter to the Tribe’s top elected official and thus the Tribe automatically accepted the offer under the ordinance terms. The Tribe in turn denied that it entered a contract and alleged that federal law, the National Labor Relations Act, preempted and invalidated the ordinance.
The Union sought to compel arbitration pursuant to the ordinance; the Tribe filed a counterclaim seeking a declaratory judgment stating that federal law preempted and invalidated California’s requirement that the Tribe enter into a contract with the Union. Because all the facts were admitted, the court found that a contract was formed. Further, the ordinance clearly had an arbitration agreement which included a limited waiver of sovereign immunity for the purpose of arbitration. Though it did not explicitly state that the Tribe agreed to arbitrate issues of preemption, the court found that it was broad enough to apply to the present issue. Ergo, the counterclaim was dismissed as to not interfere with the arbitrator’s rightful authority.
Engasser v. Tetra Tech, Inc., 519 F.Supp.3d 703 (C.D. Cal. 2021): Tetra Tech, Inc. entered into an agreement with the California Department of Resources Recycling and Recovery to clean up after the Camp Fire which burned a significant amount of the ancestral land of the Mechoopda Indian Tribe of Chico Rancheria, California. Tetra Tech entered into an agreement with the Mechoopda Cultural Resource Preservation Enterprise (“Mechoopda”) to provide Tribal monitoring of the cleanup. Mechoopda was a wholly owned and unincorporated entity of the Tribe and thus immune from suit, pursuant to sovereign immunity, absent a waiver. The agreement between Tetra Tech and Mechoopda called for the parties to indemnify and defend one another against losses and claims caused by the other’s misconduct or omissions and to resolve disputes arising out of or related to the agreement prior to commencing litigation. The agreement stated that “[a]ny court with competent jurisdiction shall have the authority to enforce this provision and to determine if the meet and confer process has been satisfied,” but also stated that “[n]othing herein shall be construed as a waiver of sovereign immunity.”[255]
A Mechoopda Tribal monitor filed suit against Tetra Tech for wage-and-hour violations under the Fair Labor Standards Act and California law. Tetra Tech demanded Mechoopda to defend and indemnify Tetra Tech; Mechoopda did not, and Tetra Tech filed a third-party complaint. The court found that Mechoopda did not waive sovereign immunity where the contract expressly stated it was not waived and the consent to jurisdiction was not clear and unequivocal. Thus, the court dismissed Tetra Tech’s complaint against Mechoopda.
Reed v. Hyatt, 1:19-CV-00122-MR, 2020 WL 5899100 (W.D.N.C. Oct. 5, 2020): Plaintiff alleged that he was unlawfully detained by the Defendants, police officers employed by the Cherokee Police Department. Plaintiff alleges that the officers struck him and aggressively pressed on his neck causing him to spit. Plaintiff alleged that the office interpreted the spitting as voluntary and struck him in the face. The Plaintiff, while detained during pretrial, filed a § 1983 suit against the officers. However, the court reaffirmed prior case law by holding that Tribal employees are not state employees and thus cannot be state actors for the purposes of § 1983. Thus, the court dismissed the suit.
Soloniewicz v. Sugar Factory, LLC, HHBCV196118245S, 2020 WL 9074514 (Conn. Super. Ct. Dec. 30, 2020): A restaurant, Sugar Factory, operated in a Connecticut Tribal casino. A wage dispute arose between the restaurant and a server. The Tribe had no wage laws and so the claim was filed under state law. Sugar Factory argued that the court had no jurisdiction over the case because the restaurant was located on a Tribal reservation. The court rejected this contention because sovereign immunity strips a court of jurisdiction when the dispute directly affects the Tribe, its members, employees, or their agents—none of which were relevant here. The motion to dismiss was denied.
Mendenhall v. United States, 3:20-CV-00312 SLG, 2021 WL 2004780 (D. Alaska May 19, 2021): Plaintiff was assaulted by a security guard, Mr. Ireton, employed by the Alaska Native Tribal Health Consortium (“ANTHC”). ANTHC employees are deemed federal employees for the purposes of the Federal Tort Claims Act (“FTCA”), so Plaintiff sued the United States pursuant to the FTCA alleging: (1) Mr. Ireton and another the security guard acted negligently during the encounter; (2) ANTHC managers and/or supervisors failed to train or monitor Mr. Ireton; and (3) Mr. Ireton and another security guard violated Plaintiff’s civil and constitutional rights during the encounter.
The United States asserted that Plaintiff could not bring the negligence claim under the FTCA because intentional torts are an exception to the FTCA’s waiver of sovereign immunity. Plaintiff responded that his complaint asserted the employee’s negligence, not an intentional tort. The court disagreed because “without the intentional tortious actions of the security guards, Plaintiff would have no claim for relief.”[256] The complaint, though couched in terms of negligence, arose from an intentional tort and so the court held it was barred.
Regarding the Plaintiff’s claims for negligent training and supervision, the United States asserted that the claim was barred either because Plaintiff did not properly exhaust his administrative remedies or because the discretionary function exception applied. The court disagreed with the United States about the administrative remedies because the Plaintiff provided information in the administrative claim form about the location and date of the incident, the nature and extent of his injury, and a description of how the incident occurred. This was sufficient to give notice to the Department of Health and Human Services to commence an investigation. However, the court did agree that the claim was barred by the discretionary function exception because the statutory chapter that the Plaintiff asserted mandated training for licensed security guards also stated that an employer is not required to seek licensure for employees providing unarmed security on the employer’s premises. Because the guards in question were providing unarmed security on ANTHC’s premises, the statutory scheme did not mandate training nor licensure. Last, the court dismissed the civil and constitutional rights claims because the security guards were not state actors and were federal actors only for the purposes of the FTCA.
§ 1.4.4. Federal Court Jurisdiction
Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction. Such cases may involve a federal question[257] or claims that are brought involving diversity of citizenship.[258] Litigation that arises from a deal with a federally recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,[259] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.[260] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.[261] However, courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.[262] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.
The following highlights several of the more relevant cases decided in the last year.[263]
Big Sandy Rancheria Enterprises v. Becerra, 1 F.4th 710 (9th Cir. 2021). Big Sandy Rancheria Enterprises (“BSRE”), a tribal corporation wholly owned by the Big Sandy Rancheria of Western Mono Indians (“the Tribe”), sought declaratory and injunctive relief against the Attorney General of California and the Director of the California Department of Tax and Fee Administration, claiming it was exempt from California cigarette tax regulations on inter-tribal sales of tobacco. The district court granted Defendants’ motion to dismiss for lack of jurisdiction. BSRE appealed.
The Ninth Circuit affirmed. The Tax Injunction Act (“TIA”) prohibits district courts from enjoining the assessment of any state tax where a plain and speedy remedy is available in State court. Federally recognized Indian tribes, however, are exempt from the TIA because federal law “confers federal jurisdiction over claims ‘brought by any Indian tribe.’”[264] But here, the claims were brought by BSRE—not the Tribe. The BSRE is a tribal corporation, which the Ninth Circuit determined not to be a “Indian tribe or band” within the meaning of § 1362. In other words, the court held that the language of § 1362 is limited to tribes in their constitutional—not corporate—form. In support of its conclusion, the court noted that section 17 of the Indian Reorganization Act allows tribal corporations to waive sovereign immunity for economic purposes and that “it would be odd to allow a section 17 corporation to selectively claim the benefits of sovereignty in order to challenge a tax.”[265] Accordingly, the court held that the TIA’s jurisdictional bar applied to BSRE and affirmed the district court’s dismissal of BSRE’s claim for lack of jurisdiction.
Cole v. Alaska Island Cmty. Servs., 834 Fed. App’x 366 (9th Cir. 2021). Plaintiff Cole brought an antitrust action against Southeast Alaska Regional Health Consortium (“SEARHC”) and Alaska Island Community Services (“AICS”). SEARHC is a consortium of federally recognized Alaska tribes, and AICS merged into SEARHC before this action and does not exist as a separate entity. The district court denied Cole’s claims for lack of subject matter jurisdiction due to SEARHC’s tribal sovereign immunity. On appeal, the Ninth Circuit affirmed, briefly noting that SEARHC satisfied the “arm of the tribe” test and was thus entitled to sovereign immunity. Because Cole did not meet his burden of proving the existence of subject matter jurisdiction, the Ninth Circuit affirmed the district court’s dismissal of his claims.
Holtz v. Oneida Airport Hotel Corp., 826 Fed. App’x 573 (7th Cir. 2020). Plaintiff Holtz sued her former employer Oneida Airport Hotel Corporation (“the Hotel”), an Oneida Nation-owned hotel, for wrongfully terminating her under the Indian Civil Rights Act. Holtz asserted various federal, state, and tribal law claims. Defendants removed the case to federal court, after which the district court dismissed the suit based on the doctrine of tribal sovereign immunity and, alternatively, Holtz’s failure to state a claim upon which relief could be granted. Holtz appealed.
The Seventh Circuit affirmed the dismissal, but only on the alternative basis that Holtz failed to state a claim. The court declined to apply the “arm of the tribe” test to determine whether the Hotel was entitled to sovereign immunity because the record was too thin to make a determination. But making such a determination was unnecessary since the Court had an alternative basis for affirming the dismissal. Since Holtz’s allegations only “amount[ed] to a conspiracy to wrongfully terminate her employment,” she did not state a claim upon which relief could be granted.[266] Accordingly, the Fifth Circuit affirmed the district court’s dismissal without addressing the jurisdictional issues raised by the Hotel’s potential entitlement to sovereign immunity.
Mitchell v. Bailey, 982 F.3d 937 (5th Cir. 2020). Plaintiff Mitchell, a Texas resident, asserted state-law claims in federal court against both the Hoopa Valley Tribe and one of its members, Bailey, in his official capacity. Asserting both federal-question and diversity jurisdiction, Mitchell sought to recover damages for an injury he sustained allegedly due to the Tribe’s and Bailey’s negligence while participating in the Tribe’s disaster-relief efforts in Wimberley, Texas, following severe flooding in the area. The district court granted Defendants’ motion to dismiss on the grounds that Mitchell’s claims were barred by the doctrine of tribal sovereign immunity as enunciated in Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc.[267] Mitchell appealed.
The Fifth Circuit vacated the district court’s judgment but affirmed the dismissal on the grounds that the district court lacked original jurisdiction. First, since Mitchell did not assert any federal claims, there was no federal question which might support federal-question jurisdiction. The court noted that “[t]he prospect of a tribal sovereign immunity defense does not, in and of itself, ‘convert a suit otherwise arising under federal law into one which, in the statutory sense, arises under federal law.’”[268] The court in effect reaffirmed the principle that “[u]nder the well-pleaded complaint rule, an anticipatory federal defense is insufficient for federal jurisdiction.”[269]
Second, the Fifth Circuit found that the district court had no diversity jurisdiction over the case. The Fifth Circuit held for the first time that “Indian tribes are not citizens of any state for the purpose of diversity jurisdiction.”[270] In other words, tribes are “‘stateless entities’ for the purpose of diversity jurisdiction.” And since “the presence of a single stateless entity as a party to a suit destroys complete diversity,” the Fifth Circuit found that district court lacked diversity jurisdiction.[271] Accordingly, the Fifth Circuit vacated the district court’s judgment and affirmed the order of dismissal.
Oneida Indian Nation v. Phillips, 981 F.3d 157 (2d Cir. 2020). The Oneida Nation of New York (“the Nation”) sued Phillips, a member of the Nation and the purported owner of a parcel of tribal land. The Nation sought declaratory and injunctive relief arising out of Phillips’ assertion of rights over the land. In granting judgment for the Nation, the district court found that there were no issues of material fact because Phillips conceded that the parcel of land was located within the Nation’s reservation as recognized by the governing treaty. Crucially, the district court dismissed Phillips’s counterclaim as barred by sovereign immunity. Phillips appealed.
The Second Circuit affirmed. In justifying its exercise of jurisdiction over the case, the court held that “tribal sovereign immunity . . . is not synonymous with subject matter jurisdiction” because: (1) “[t]ribal sovereign immunity can be waived” whereas a lack of subject matter jurisdiction cannot; (2) “tribal sovereign immunity operates essentially as a . . . defense” whereas subject matter jurisdiction is “fundamentally preliminary” and an “absolute stricture” on the court; and (3) “a waiver of sovereign immunity cannot, on its own, extend a court’s subject matter jurisdiction.”[272] The court then highlighted “the divergence of opinion as to the precise nature of tribal sovereign immunity” but found no need to address or resolve it in this case.[273]
Judge Menashi concurred in the judgment, but he concluded that the court’s dicta regarding sovereign immunity were “misguided.” Menashi disagreed with the court’s speculation that “tribal sovereign immunity should perhaps be reconceptualized as belonging to some category of jurisdiction” that is not synonymous with subject matter jurisdiction. In Judge Menashi’s view, Circuit precedent is clear that “tribal sovereign immunity deprives a court of subject-matter jurisdiction over a lawsuit” and that “tribal sovereign immunity is coextensive with federal sovereign immunity.” Thus, Judge Menashi elected not to deviate from precedent which holds that tribal sovereign immunity is “a limit on a court’s subject-matter jurisdiction.” But because he believed Phillips’s counterclaim failed on the merits, he concurred in the judgment.
Engasser v. Tetra Tech, Inc., No. 2:19-CV-07973-ODW, 2021 WL 911887 (C.D. Cal. Feb. 9, 2021) (appeal filed). Defendant Tetra Tech entered into a Professional Services Agreement (“PSA”) with Mechoopda Cultural Resource Preservation Enterprise (“MCRPE”), an unincorporated entity wholly owned by the Mechoopda Indian Tribe of Chico Rancheria (“the Tribe”). The purpose of the PSA was for Tetra Tech to employ tribal monitors to supervise cleanup after a fire that burned some of the Tribe’s ancestral land. Plaintiff Engasser, a tribal monitor employed by Tetra Tech, sued Tetra Tech for wage-and-hour violations under the Fair Labor Standards Act and California law on behalf of himself and a putative class of other tribal monitors. Tetra Tech filed a third-party complaint against MCRPE seeking indemnification pursuant to a provision in the PSA. MCRPE moved to dismiss Tetra Tech’s complaint on the grounds that MCRPE had not waived its tribal sovereign immunity.
The district court granted the motion noting that the sovereign immunity of a tribe extends to its economic and governmental activities, so long as the acting entity functions as an arm of the tribe. The court found that MCRPE was an “arm of the tribe” and was thus entitled to sovereign immunity. Although entities like MCRPE sometimes waive sovereign immunity in agreements like the PSA at issue in this case, MCRPE expressly preserved its sovereign immunity in the PSA and did not include in the PSA any provisions that often amount to a waiver of sovereign immunity. Accordingly, the court held that MCRPE was entitled to sovereign immunity and granted its motion to dismiss.
Stalnaker v. Bonnell as Tr. of United States of Am. & Totonaca Tribe of Mexico Irrevocable Tr., No. 4:20-CV-3100, 2021 WL 37534 (D. Neb. Jan. 5, 2021). Plaintiff sued Defendants under the Nebraska Uniform Fraudulent Transfer Act in state court. Defendants removed to federal court, asserting both federal question and diversity jurisdiction. Defendants partially based their assertions of diversity and federal question jurisdiction on the presence of the (apparently fictitious) Totonaca Tribe of Mexico in the suit. Plaintiff moved to strike Defendants’ Notice of Removal, and the magistrate judge recommended that the case be remanded to state court.
The district court accepted the recommendation. It questioned whether the tribe was truly present in the case and noted that, even if it were present, “an Indian tribe is not a citizen of any state and cannot sue or be sued in federal court under diversity jurisdiction.”[274] The court also rejected Defendants’ assertion of federal question jurisdiction, citing Peabody Coal Co. v. Navajo Nation,[275] for the principle that “the presence of a tribal sovereign as a party is not by itself sufficient to raise a federal question.” Accordingly, the case was remanded to state court.
Nguyen v. Cache Creek Casino Resort, No. 2:20-cv-1748-TLN-KJN PS, 2021 WL 22434 (E.D. Cal. Jan 4, 2021), adopted in full, No. 2:20-cv-01748-TLN-KJN, 2021 WL 568212 (E.D. Cal. Feb. 16, 2021) (appeal filed). Plaintiff Nguyen sued the Cache Creek Casino Resort (“the Casino”), asserting various state- and federal-law claims arising from Nguyen’s detention on the Casino’s premises. The Casino, owned by the Yocha Dehe Wintun Nation (“the Tribe”), moved to dismiss, arguing that it was an “arm of the tribe” and that it had not waived sovereign immunity.
The magistrate judge agreed that the Casino was an arm of the tribe because: 1) the Casino, which was formed as a tribal business, is wholly owned and operated by the Tribe; 2) the Casino is governed by a tribal council; and 3) revenues generated by the Casino are for the benefit of the Tribe. The magistrate judge also agreed that the Resort had not waived its sovereign immunity: “Without an unequivocal waiver of sovereign immunity from a tribe or an authorization from Congress, federal courts lack the requisite subject-matter jurisdiction to rule on matters involving tribes.” Here, on a tribal–state compact and the Tribe’s adoption of the accompanying Tort Claims Ordinance, the magistrate judge concluded that the Tribe’s express waiver regarding tort claims applied only to its administrative process, where a three-member commission would review any such claims. The Ordinance did not evince intent to waive its immunity to suit in federal court. Accordingly, the magistrate judge found that the Casino had a valid sovereign immunity defense.
Grondal v. United States, 513 F.Supp.3d 1262, (E.D. Wash. 2021). In a complex dispute arising out of a lease, Defendant Wapato Heritage asserted a crossclaim against its codefendants, the Colville Tribes. Wapato Heritage argued that when the Colville Tribal Enterprise Corporation (“CTEC”), an instrumentality of the Colville Tribes, waived sovereign immunity in a lease agreement, it also waived the Tribes’ sovereign immunity. Applying a provision of the Colville Tribal Code that prohibits tribal corporations from waiving the Tribes’ sovereign immunity, the district court found that CTEC had not waived the Tribes’ sovereign immunity. Wapato Heritage also asserted an alternative argument that the Colville Tribes waived sovereign immunity through their litigation conduct in this case. Although “[c]ertain litigation conduct may constitute a waiver,” the court found that the Tribes’ participation in the litigation did not amount to “sufficiently clear litigation conduct” constituting a waiver of sovereign immunity.[276] Indeed, the Tribes had been asserting sovereign immunity from the outset of litigation.
Separately, Wapato Heritage asserted a claim against the U.S. government, citing 28 U.S.C. § 1353 for the proposition that federal district courts have jurisdiction over any “civil action involving the right of any person, in whole or in part of Indian blood or descent, to any allotment of land under any Act of Congress or Treaty.” Because Wapato Heritage is an LLC and not a “person . . . of Indian blood or descent,” the court found it could not exercise jurisdiction over its claims against the government.[277] Thus, the district court rejected all of Wapato Heritages jurisdictional arguments and dismissed the claims premised on them.
Loring v. Daly, No. CV 19-05133-PHX-JAT (JFM), 2021 WL 2105571 (D. Ariz. May 25, 2021). Plaintiff Loring, who was previously confined in the Salt River Pima Maricopa Indian Community’s Department of Corrections (“Salt River DOC”), brought a civil rights action against Salt River DOC’s director and lieutenant director under 42 U.S.C. § 1983 and the Religious Land Use and Incarcerated Persons Act. Defendants moved to dismiss, arguing that the court did not have subject matter jurisdiction due to tribal sovereign immunity.
The court granted Defendants’ motion. Although sovereign immunity does not bar suits for damages against tribal officials in their individual capacities, the court found that Loring’s individual-capacity claims were masked official-capacity claims. This is because his alleged injuries “arise from a policy, practice, or custom of the Salt River DOC, over which Defendants have policymaking authority, at the direction of the Community Council, which is an official-capacity claim.”[278] Additionally, Loring’s claims were primarily aimed at changing Salt River DOC policy. Accordingly, Defendants had a valid sovereign-immunity defense, and the Court dismissed Plaintiff’s claims.
Debraska v. Oneida Bus. Comm., No. 20-C-1321, 2020 WL 6204320 (E.D. Wis. Oct. 22, 2020). Plaintiffs, members of the Oneida Nation, sued Defendants Oneida Business Committee, Oneida Election Board, and Oneida Tribe of Indians of Wisconsin for actions they took in relation to the 2020 Oneida Nation Primary Election. Defendants filed a motion to dismiss, to which Plaintiffs failed to reply. The district court granted the motion based on Plaintiffs’ failure to respond and based on the substantive arguments in Defendants’ motion that the court lacked jurisdiction over all of Plaintiffs’ claims.
First, the court agreed with Defendants that the First and Fourteenth Amendments of the U.S. Constitution are not applicable to Indian Nations as separate sovereigns pre-existing the Constitution. Second, the court agreed that the Indian Civil Rights Act does not create a private right of action to secure the rights contained therein and thus does not provide a basis for federal question jurisdiction. Third, the court agreed that a 42 U.S.C. § 1983 action is unavailable to persons alleging deprivation of constitutional rights under color of tribal law and thus did not provide a basis for federal jurisdiction. Finally, the court agreed that it lacked jurisdiction over Plaintiffs’ claims arising under tribal law. Accordingly, the court granted Defendants’ motion to dismiss.
Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin v. Evers, No. 18-CV-992-JDP, 2021 WL 1341819 (W.D. Wis. Apr. 9, 2021) (appeal filed). Plaintiffs, four Ojibwe Tribes, believed that the State of Wisconsin and several of its municipalities improperly taxed certain reservation properties allotted to the them by an 1854 Treaty. Accordingly, the tribes sought declaratory and injunctive relief from various officers of the State of Wisconsin as well as several Wisconsin townships and their assessors. As this was a civil matter, brought by federally recognized Indian tribes, arising under the laws and treaties of the United States, the court held that it had subject-matter jurisdiction under 28 U.S.C. § 1331 and § 1362.
Mille Lacs Band of Ojibwe v. Cty. of Mille Lacs, 508 F. Supp. 3d 486 (D. Minn. 2020). Plaintiffs, including the Mille Lacs Band of Ojibwe (“the Tribe”), brought action against County of Mille Lacs and certain County officials, seeking declaratory judgment that the Tribe possessed inherent tribal authority to establish a police department with authority to investigate violations of federal, state, and tribal law within its reservation. Defendants contended that there was no basis under federal law for the court to exercise federal question subject matter jurisdiction over Plaintiffs’ claims.
The court rejected Defendants’ arguments, holding that “questions of federal common law can serve as a basis for the exercise of federal question subject matter jurisdiction” and that “[f]ederal courts have often treated the scope of a tribe’s inherent sovereign authority as a matter of federal common law.”[279] Since Plaintiffs raised issues of federal common law—i.e., issues of tribal sovereignty—on the face of their well-pleaded complaint, the court held that it had subject matter jurisdiction over their claims.
Newtok Vill. v. Patrick, No. 4:15-cv-00009 RRB, 2021 WL 735644 (D. Alaska Feb. 25, 2021). Plaintiffs, including Newtok Village (“the Tribe”), brought a number of claims against a group of former members of the Tribe who claimed to comprise the true Newtok Village tribe. The Defendants argued that the court lacked subject matter jurisdiction because Plaintiffs failed to present a federal question in their complaint. The court disagreed, noting that “a suit against Defendants allegedly impersonating a recognized tribal governing body potentially falls under a variety of federal statutes, particularly in light of the fact that such misrepresentation interferes with federal government contracts [made pursuant to the Indian Self-Determination Act].”[280] Accordingly, the court found that Plaintiffs’ complaint was adequate to establish federal question jurisdiction.
South Dakota v. Frazier, No. 4:20-cv-03018-RAL, 2020 WL 6262103 (D.S.D. Oct. 23, 2020). The State of South Dakota filed a lawsuit against the Cheyenne River Sioux Tribe (“the Tribe”) and the Tribe’s Chairman Harold Frazier (“the Chairman”) in both his individual and official capacity because he directed the Tribe to post signs purporting to lower the speed limit on a federal highway without notifying the State. The Tribe argued that the court lacked subject matter jurisdiction and that sovereign immunity barred the suit against both the Tribe and the Chairman.
The court disagreed with the Tribe’s jurisdictional arguments but partially agreed with its sovereign-immunity arguments. Regarding jurisdiction, the court noted that “federal law controls which party has the authority to determine the speed limit on a federal highway located within an Indian reservation.”[281] Thus, the court held that it had subject matter jurisdiction. The court, however, held that sovereign immunity prevented suit against the Tribe—but not against the Chairman in his official capacity to the extent injunctive relief was sought. As the court explained, tribal immunity does not bar a suit for injunctive relief against individuals, including tribal officers, responsible for unlawful conduct. Accordingly, the court dismissed the State’s claims against the Tribe but enjoined the Chairman from altering highway signage.
§ 1.5. The State Sovereign
With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties. These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.[282]
Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”[283] Within Indian Country, on the other hand, “the initial and frequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”[284] When the legal incidence falls on tribes, tribal members, or tribal corporations,[285] “[s]tates are categorically barred” from implementing the tax.[286]
When the legal incidence falls on non-Indians, however, a more nuanced analysis applies. Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.[287] Because Congress does not often explicitly preempt state law,[288] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.[289] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.[290]
In New Mexico v. Mescalero Apache Tribe,[291] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”[292] In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.[293]
When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands.
The issues of preemption and infringement are regularly litigated in the federal courts. The following highlights several of the more relevant cases decided in the last year.[294]
Big Sandy Rancheria Enterprises v. Bonta, No. 19-16777, 2021 WL 2448226 (9th Cir. June 16, 2021). The US Court of Appeals for the Ninth Circuit evaluated whether California cigarette tax regulations apply to intertribal cigarette sales by a federally chartered tribal corporation. Big Sandy Rancheria Enterprises (“Big Sandy”), a cigarette distributor owned by a federally recognized Indian tribe, challenged California’s imposition of a cigarette excise tax (“Cigarette Tax”) on its intertribal transactions. Big Sandy also claimed that California’s cigarette distribution regulations, as well as the licensing, recordkeeping, and reporting requirements, were preempted by federal law and tribal sovereignty.
The district court dismissed Big Sandy’s claim that the Cigarette Tax should not apply to its distribution of cigarettes to other Indian tribes. Dismissing for lack of subject matter jurisdiction, the district court noted that the Tax Injunction Act prohibits district courts from enjoining, suspending, or restraining the collection of any tax under state law where a remedy may be had in state court. This jurisdictional bar extends to both injunctive and declaratory relief to limit the ability of a federal district court to interfere with taxes, which are a local concern.
Despite this jurisdictional barrier, Big Sandy pointed out an exception to the Tax Injunction Act under 28 U.S.C. § 1362, which grants district courts jurisdiction over actions brought by Indian tribes. The Ninth Circuit nevertheless affirmed the decision below, finding that Big Sandy was not an Indian tribe within the meaning of § 1362. Rather, Big Sandy was classified as a federally chartered corporation under the Indian Reorganization Act. Accordingly, in forming the corporation, Big Sandy waived tribal sovereign immunity and therefore could not invoke the exception under § 1362. Thus, the Ninth Circuit affirmed dismissal of the tax claim.
The district court also dismissed Big Sandy’s challenge to California’s regulations governing cigarette distributions, as well as the licensing, reporting, and recordkeeping requirements. The Ninth Circuit affirmed this decision, finding that application of the challenged regulations did not violate principles of tribal self-governance. The Court further reasoned that federal regulation under the Indian Trader Statutes did not preempt the challenged regulations. The Ninth Circuit joined the Tenth Circuit and the Oklahoma Supreme Court in treating intertribal sales made outside of the tribal enterprise’s reservation as “off reservation” activity.[295] As such, tribal sovereignty principles did not preclude California from regulating Big Sandy’s intertribal cigarette sales under the challenged regulations.
Rogers Cty. Bd. of Tax Roll Corr. v. Video Gaming Techs., Inc., 141 S. Ct. 24 (2020). The Supreme Court denied the petition for a writ of certiorari over a 2019 Oklahoma Supreme Court case.[296] In that case, a non-Indian owner of electronic gaming equipment (“Gaming Company”) leased the equipment to a business entity of the Cherokee Nation. The Gaming Company sued the Rogers County Board of Tax Roll Corrections (“County Board”), seeking review of the assessment of ad valorem taxes on the leased equipment. The Gaming Company argued that because the equipment was leased exclusively to the Cherokee Nation for gaming, it was preempted from taxation under federal law. Applying the Bracker test, the Supreme Court of Oklahoma ultimately found the ad valorem taxation of leased gaming equipment to a tribe’s business entity preempted by the Indian Gaming Regulatory Act.
Justice Thomas dissented from the Supreme Court’s denial of certiorari, arguing that disagreement among courts on the issue merited review.[297] Justice Thomas also highlighted the opportunity to clarify the application of preemption principles among federal, state, and tribal law. Ultimately, Justice Thomas emphasized that this denial of certiorari would lead to amorphous preemption law and “geographical happenstance” with respect to a state’s ability to raise revenues.
Pickerel Lake Outlet Ass’n v. Day Cty., 953 N.W.2d 82 (S.D. 2020). The Pickerel Lake Outlet Association (“Lake Association”) and non-Indian owners of permanent improvements around the lake (collectively “Plaintiffs”) challenged ad valorem property taxes assessed against them by Day County. The Plaintiffs claimed that federal law preempted taxation because their structures were located on land held in trust for the Sisseton-Wahpeton Oyate Indians (“Tribe”). The circuit court upheld the disputed taxes and the Plaintiffs timely appealed. Id.
The Lake Association leased the trust land surrounding the lake from the Bureau of Indian Affairs (“BIA”). As a result, the Tribe collected ad valorem property taxes from the Plaintiffs for their structures. However, Day County also assessed taxes against the Plaintiffs for the same structures. Here, the Plaintiffs objected to the assessment of taxes by Day County, theorizing that federal law expressly or implicitly prohibits the taxing of permanent improvements located on trust land without regard to ownership. The Plaintiffs based this objection on a provision of the Indian Reorganization Act of 1934 (“IRA”), which exempts land acquired pursuant to its requirements from state and local taxes.
First, the Supreme Court of South Dakota assessed whether 25 U.S.C. § 5108, a statute within the IRA, expressly preempted Day County from taxing the structures.[298] Given that the terms of § 5108 were inapplicable to this case, the Plaintiff’s argument that § 5108 preempted taxation was conditioned upon the requirement that the Tribe’s land was acquired under the IRA. Because the Court was unable to find any support to indicate that the land was ever transferred by way of fee-to-trust under the IRA, the preemption argument under § 5108 failed.
Next, the Court evaluated whether a provision of Article XXII of the South Dakota Constitution (“Provision”) expressly preempted the taxes. The Provision requires that states provide a disclaimer of title and jurisdiction over Indian lands within the state. However, because the language of the Provision contemplated land held by Indians, not structures owned by non-Indians, Day County was not expressly preempted from assessing ad valorem taxes on the structures.
Lastly, the Court evaluated the legislative scheme to determine whether Day County was impliedly preempted from assessing the taxes. The principal question, then, was whether the federal government intended to control, regulate, and manage taxation of structures owned by non-Indians on trust land and prohibit state regulation of the same area. Based on the express language and congressional intent, the Court found that Day County’s taxation did not implicate Indians, and thereby did not implicate federal law. Thus, the Court affirmed, finding that federal law did not preempt the assessment of ad valorem property taxes on structures owned by non-Indians on trust land.
Warehouse Mkt. Inc. v. State ex. Rel. Oklahoma Tax Comm’n, 481 P.3d 250, 252 (Okla. 2021). The sublessee of a commercial building located on federally restricted tribal land brought an interpleader action in district court. The sublessee sought determination of whether sales tax was owed to the Oklahoma Tax Commission (“OTC”) or the Muscogee (Creek) Nation (“Tribe”). The sublessee sought to interplead the sales tax to the court to determine who was entitled to the taxes, as well as whether the OTC could tax the sublessee at all. The district court dismissed the Tribe on sovereign immunity grounds and further held that the OTC could not collect the sales tax until the dispute between the OTC and the Tribe was resolved in another forum.
Upon review, the Supreme Court of Oklahoma determined that the sublessee’s action constituted a tax protest, not an interpleader action. As such, the exhaustion of administrative remedies was a jurisdictional prerequisite to seeking relief in the trial court. The Court reasoned that once the trial court dismissed the Tribe on sovereign immunity grounds, it was without authority to take further action, shifting the cause from interpleader to a tax protest. The Court further explained that the Oklahoma Legislature mandated a specific procedure for taxpayers to follow when challenging tax assessments, which requires an administrative process that cannot be bypassed. Therefore, because administrative remedies with respect to both the OTC and the Tribe had not been exhausted, the Oklahoma Supreme Court reversed and remanded with instructions to dismiss.
S. Point Energy Ctr. LLC v. Arizona Dep’t of Revenue, No. 1 CA-TX 20-0004, 2021 WL 1623343 (Ariz. Ct. App. Apr. 27, 2021). In this case, the Arizona Court of Appeals consolidated five lawsuits brought by taxpayers challenging the State’s power to tax property located on tribal land. South Point Energy Center LLC, a non-Indian taxpayer (“Taxpayer”), owned and operated an electrical generating plant (“Plant”) on land leased from the Fort Mojave Indian Tribe (“Tribe”). The Taxpayer sued to recover property taxes paid on the Plant. The tax court granted summary judgment to the Arizona Department of Revenue (“ADOR”), finding that tribal sovereignty did not preempt taxation of the Plant. On appeal, the Taxpayer argued that the tax court erred on several grounds. These grounds included rejecting the notion that 25 U.S.C. § 5108 preempts state property taxes on tribal land, failing to categorize the Plant as a permanent improvement, and erroneously applying the Bracker balancing test.
Upon review, the Court found that the tax court erred in failing to classify the Plant as tax exempt permanent improvement under § 5108, which preempts taxation of land held in trust by the United States for an Indian tribe. The Court cited several federal cases[299] applying the text of § 5108 and concluded that taxes of permanent improvements on trust land are exempt regardless of ownership. Accordingly, the Court vacated the grant of summary judgment and held that § 5108 established a categorical exemption for permanent improvements on Indian land held in trust by the United States.
The Court highlighted failure of the tax court to recognize that federal law, rather than state law, governs whether property is a permanent tax-exempt improvement under § 5108. The Court noted that despite a Lease provision requiring the Taxpayer to remove all improvements at the end of the term, both parties preliminarily agreed that the Plant contained both personal property and permanent improvements. Hence, the Court determined that the factors set out in Whiteco Industries should be used to evaluate the classification of Plant assets.[300] The Court remanded the case to determine which of the Plant assets constitute permanent improvements under Whiteco, as well as whether property taxes on the non-permanent improvement assets are preempted under Bracker.
Flandreau Santee Sioux Tribe v. Terwilliger, 496 F. Supp. 3d 1307, 1309 (D.S.D. 2020). The Flandreau Santee Sioux Tribe (“Tribe”) sought a declaration that federal law preempted a statewide excise tax on gross receipts (“Tax”) against a non-Indian contractor for casino renovations performed on the reservation. In 2018, the district court granted summary judgment on the Tribe’s federal preemption claim under the Indian Gaming Regulatory Act (“IGRA”). Because the district court found for the Tribe under both prongs of the Bracker test, the court did not reach the Tribe’s claim that the Tax was also preempted under the Indian Trader Statutes. The defendants subsequently appealed to the Eighth Circuit Court of Appeals, which reversed the district court’s holding that imposition of the Tax was preempted under IGRA. Accordingly, the Tribe now seeks a declaration prohibiting imposition of the Tax on the contractor and a refund for amounts paid.
On remand, the Court held that the Tax was preempted by both IGRA and the Indian Trader Statutes. With respect to the Indian Trader Statutes, the Court explained that the term “trade” includes the sale of construction materials and services to Indians on reservation land, thereby expressly preempting the Tax. However, even if the Indian Trader Statutes did not expressly preempt the Tax, the Court noted that the Tax would nevertheless be preempted under the Bracker test. Thus, the Court found the Tax preempted by the Indian Trader Statutes.
With respect to IGRA, the Court held that the Tax was not expressly preempted by federal law. However, because preemption is not limited to cases of express preemption, the Court applied the Bracker balancing test to assess the federal, tribal, and state interests.
Federal Interests: With respect to tribal sovereignty, the Court noted the federal policy in favor of tribal self-sufficiency, particularly as it relates to tribal gaming. The Court pointed to ample evidence demonstrating the extensive regulations IGRA places on Indian gaming. Given the federal involvement in ensuring the quality of gaming and protecting tribal self-sufficiency, the Court concluded that the federal government has a strong interest in the regulation of Indian gaming facilities. Accordingly, this federal interest weighed against the imposition of the Tax. Additionally, the Court noted that the Tax undermined the Tribe’s ability to generate revenue from gaming and reduced demand for casino activities. Because casino renovations are directly tied to increased gaming revenue, the Tribe’s ability to generate revenue was hindered in direct contradiction to the federal goals set forth under IGRA. The Court highlighted that gaming revenues are used by the Tribe to fund programs such as social services, transportation, and housing. Based on this evidence, the Court held that the federal interests weighed against imposition of the Tax.
Tribal Interests: After weighing the federal interests, the Court turned to an evaluation of the tribal interests at stake. Because the Tribe reimbursed the contractor for the full amount of the Tax, the economic burden of the Tax ultimately fell on the Tribe, weighing against the imposition of the Tax. Additionally, the Tax hindered principles of tribal sovereignty by impeding the Tribe’s ability to fully realize gaming revenue and allocate funds appropriately. Similarly, the Tax interfered with the Tribe’s ability to make its own laws and be governed by them, frustrating notions of tribal sovereignty and self-determination. Thus, overall tribal interests also weighed against imposition of the Tax.
State Interests: Lastly, in assessing the State’s interests and justifications for imposing the Tax, the Court noted the requirement that South Dakota demonstrate a clear nexus between the taxed activity and the government function provided. The Court found that the sporadic, indirect, and de minimis State contributions provided to the Tribe, contractor, and project demonstrated a lack of state interest. This, coupled with the minimal impact of the Tax on the State’s general fund, ultimately weighed against the Tax. Applying the Bracker test, the Court held that South Dakota’s interest in imposing the Tax did not outweigh the federal and tribal interests. Therefore, the Tax was preempted by federal law under IGRA and the Indian Trader Statutes. Accordingly, the Court ordered judgment in favor of the Tribe.
Town of Ledyard v. WMS Gaming, Inc., No. 20418, 2021 WL 1567671 (Conn. Apr. 21, 2021). This case stems from a state court suit in which the Mashantucket Pequot Tribal Nation (“Tribal Nation”) challenged the authority of the State of Connecticut and the Town of Ledyard (“Town”) to impose property taxes on slot machines owned by a gaming company and leased to the Tribal Nation. The state action was stayed pending the outcome of a federal court action filed by the Tribal Nation. In the federal action, the Tribal Nation alleged that the Town lacked the authority to impose the property tax because it was preempted by federal regulation and infringed upon the Tribal Nation’s sovereignty. In the present action, the Town sought attorney’s fees pursuant to General Statutes § 12-161a. This statute allows a trial court to award attorney’s fees to a municipality if the fees were incurred as a result of proceedings to collect delinquent personal property taxes.
In 2012, the federal court proceeding concluded when the district court determined that federal law preempted the Town’s authority to impose the taxes. Thereafter, the parties executed a stipulation agreeing that the Town was entitled to reasonable attorney’s fees incurred in the underlying state action. However, the parties disagreed regarding the collection of attorney’s fees in connection to the Tribal Nation’s federal action. The trial court concluded that the gaming company was also liable for the attorney’s fees in connection with the federal action pursuant to § 12-161a. On remand, the Appellate Court disagreed, concluding that the statutory language required a more restrictive nexus to the collection proceeding in which the attorney’s fees were requested. On appeal, the Town claimed that the Appellate Court improperly construed § 12-161a to limit collection of attorney’s fees to only those incurred in the state court action.
Here, the Court agreed with the Town, finding the Appellate Court’s interpretation of § 12-161a too constrained. The Court followed general rules of statutory interpretation to determine the meaning of “as a result of and directly related to” within the context of § 12-161a. Finding the phrase ambiguous, the Court turned to extratextual sources and concluded that the legislature did not intend for a municipality to only be entitled to fees incurred in the state court action of delinquent personal property taxes. Instead, the legislature avoided using such specific language in order to attain a broader reach. Therefore, because the Tribal Nation and the gaming company coordinated to bring the federal lawsuit, the fact that the gaming company was not a formal party to the action did not bar the Town’s entitlement to attorney’s fees. Accordingly, a municipality may be entitled to attorney’s fees incurred in a related federal action that is “a result of and directly related to” a state tax collection proceeding. The court noted, however, that the holding was limited to the breadth of § 12-161a as applied to this specific case.
Aquinnah/Gay Head Cmty. Ass’n. Inc. v. Wampanoag Tribe of Gay Head (Aquinnah), 989 F.3d 72, 75 (1st Cir. 2021). The Commonwealth of Massachusetts sought declaratory judgment that the Indian Land Claims Settlement Act of 1987 (“Settlement Act”) allowed it to prohibit the Wampanoag Tribe of Gay Head (“Tribe”) from conducting gaming on settlement lands. This action arose after the Tribe planned to build a gaming facility on the Tribe’s trust lands. After removal of the case, the Town of Aquinnah (“Town”) and the Aquinnah/Gay Head Community Association (“Community Association”) intervened. The district court entered a preliminary injunction prohibiting the Tribe from continuing casino construction. The Court of Appeals reversed in part and remanded for entry of final judgment. On remand, the district court entered partial judgment for the Tribe. The Tribe subsequently appealed.
In part, the Settlement Act provided that settlement lands shall be subject to the laws, ordinances, and jurisdiction of the Commonwealth. Soon after, however, Congress enacted the Indian Gaming Regulatory Act (“IGRA”) to regulate gaming on Indian land. Here, the Tribe sought to partake in Class II gaming. The Commonwealth sued, arguing that the Tribe needed a gaming license from the Massachusetts Gaming Commission. Conversely, the Tribe claimed it did not need a license because IGRA impliedly repealed the Settlement Act provisions subjecting gaming activity to the laws of the Commonwealth. The Tribe also maintained that IGRA repealed the provision mandating compliance with permitting. The district court entered a final judgment for the Tribe on the gaming issue, but against the Tribe on the permitting issue, reasoning that the Tribe had not appealed the permitting issue and thus found the issue waived.
On this appeal, the Court evaluated whether a party that could have raised an issue in a first appeal, but failed to do so, may raise the issue on a successive appeal. The Tribe argued that IGRA undid the Tribe’s waiver of sovereign immunity with respect to suits arising out of gaming activities. The Court disagreed, noting that historically, a congressional enactment cannot override a tribe’s voluntary waiver of tribal sovereign immunity. Therefore, the Court found that the Tribe could not raise the issue of sovereign immunity in a district court, disregard it on appeal, and then seek to employ it again in a later appeal. Additionally, because the Court did not find the present case an “exceptional circumstance,” the Court declined to overlook the Tribe’s waiver of the permitting issue. Hence, the Court found that the Tribe waived the permitting issue and tribal sovereign immunity through its litigation conduct. Accordingly, the Court held that the district court’s ruling was not so erroneous as to preclude the application of law of the case doctrine.
Brackeen v. Haaland, 994 F.3d 249, 265 (5th Cir. 2021). In a 325-page decision, the Fifth Circuit Court of Appeals upheld the constitutionality of the Indian Child Welfare Act (“ICWA”). The Court found that certain ICWA provisions validly preempted contrary state law and did not commandeer states. However, the Court held that the provisions commanding state agency action were not valid preemption provisions and therefore not preempted by ICWA. The district court ruled that 25 U.S.C. §§ 1901–23 and §§ 1951–52 exceeded congressional powers by violating the anticommandeering doctrine and therefore did not preempt conflicting state law. Notwithstanding, because state law is naturally preempted to the extent of conflict with federal law, the Court found no precedent to support the district court’s limit on federal preemption. Thus, the Supremacy Clause requires state judges to follow ICWA to the extent that the rights set forth under ICWA conflict with state laws.
§ 1.6. Conclusion
Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities. Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country. As a result, these transactions have prompted increased litigation in tribal and nontribal forums. Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.
To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties. Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion. As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.
* Ryan D. Dreveskracht is an attorney with Galanda Broadman, PLLC. Ryan practices out of the firm’s Seattle office, focusing on representing businesses and tribal governments in complex litigation. He is also devoted to defending individuals’ constitutional rights and handles civil rights and intentional tort cases.
† Heidi McNeil Staudenmaier is the Partner Coordinator of Native American Law & Gaming Law Services for Snell & Wilmer, L.L.P., where she is based in the firm’s Phoenix, Arizona office. Heidi is the past Chair of the State Bar of Arizona Indian Law Section, past President of the Maricopa County Bar Association, a member of the Executive Council for the ABA Business Law Section, past Chair of the Business and Corporate Litigation Committee, and has held numerous other leadership positions within the Section. She is also a Lifetime Honorary Director for the Iowa College of Law Foundation Board.
‡ Paloma Diaz is an attorney in the Commercial Litigation Group at Snell & Wilmer, L.L.P. Paloma has assisted in the representation of a variety of clients across multiple industries, including matters involving breach of contract, intellectual property disputes, gaming, and financial services litigation. Special thanks to Snell & Wilmer, L.L.P. Commercial Litigation attorney Christian Fernandez for his assistance in drafting this chapter.
[1] The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 Tulsa L.J. 1 (1997).
[2] Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 560 (2001). See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11-12 (1997).
[3] Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997).
[4]Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832).
[9]Wilson v. Oklahoma, 141 S. Ct. 224, 208 L. Ed. 2d 1 (2020), was initially granted certiorari but was later vacated and remanded considering McGirt v. Oklahoma, 140 S. Ct. 2452 (2020). Essentially, a citizen of the Cherokee Nation alleged crime was committed within the treaty-set boundaries of the Cherokee Nation, but the State of Oklahoma claimed they had jurisdiction. Wilson, 335 F. App’x at 784. McGirt offered much-needed clarity on criminal cases within Indian territory regarding Oklahoma tribes.
[10] Kelsey Haake helped to collect and summarize the cases in this section. Kelsey is a second-year law student at University of Pennsylvania Carey Law School and expects to graduate in May 2023.
[11]United States v. Cooley, 141 S. Ct. 1638, 1639 (2021).
[18]Alaska Native Vill. Corp. Ass’n, Inc. v. Confederated Tribes of Chehalis Rsrv., 141 S. Ct. 976, 208 L. Ed. 2d 510 (2021), was initially granted certiorari but was later consolidated with Yellen v. Confederated Tribes of the Chehalis Reservation because it addressed the same issue on Alaska Native Corporations receiving Title V funds of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
[20]SeeUnited States v. Denezpi, 979 F.3d 777 (10th Cir. 2020); State of Texas v. Ysleta del Sur Pueblo, 955 F.3d 408 (5th Cir. 2020).
[24] B.J. Jones, Role of Indian Tribal Courts in the Justice System, Native American Monograph Series, 7, (Mar. 2000), http://www.nrc4tribes.org/files/Role%20of%20Indian%20Tribal%20Courts-BJ%20Jones.pdf.
[25]Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. Rev. 297, 306 (2004).
[26] Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 Fordham L. Rev. 3085, 3159 (2013).
[27]SeeMontana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations.” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation).
[28] Indian Country includes: (1) all land within the limits of any Indian reservation, (2) “dependent Indian communities” within the borders of the United States, and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000). “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction.” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998).
[29] “The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members]. It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added).
[30]Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quoting United States v. Mazurie, 419 U.S. 544, 557 (1975)).
[31]Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, 259 F. Supp. 3d 713, 716 (W.D. Mich. 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority. The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.). jurisdictional
[32]Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands). Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members. Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right of way granted to a state for the purposes of the construction and use of a state highway. Strate v. A-1 Contractors, 520 U.S. 438 (1997).
[35]Plains Commerce, 554 U.S. 316 (2008). Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries, 450 U.S. at 564, the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178-79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007). More recently, however, the Ninth Circuit has indicated a reversion to its original rule. SeeWater Wheel, 642 F.3d 802.
[37]Id. It appears, however, that courts have become more sympathetic to the second exception as of late. See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017).
[38] Roman Buss helped to research and summarize the cases in this section. Roman is a third-year law student at Sandra Day O’Connor College of Law at Arizona State University and expects to graduate in May 2022.
[39] The Williams test refers to the rule generated by Williams v. Lee, 358 U.S. 217 (1959).
[50] Exhaustion is not always required. SeeNat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n.21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”).
[51]Id. at 857 (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (“Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands. To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction. But this is a question that must be answered first by the tribal courts of the Navajo Nation.”).
[52]Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4–*5 (N.D. Nov. 28, 2007). The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012).
[53]SeeRincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but seeProgressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same).
[55]Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”).
[56]SeeFord Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce, 128 S. Ct. at 2726. It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling. In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659. However, the Drumm court found that exhaustion was not required in the absence of a pending action in tribal court. Id. at 684.
[57]Nat’l Farmers Union, 471 U.S. at 857; see, e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies).
[58]See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996).
[60]See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see alsoWhitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies).
[61]See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”).
[63]Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”). A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue. See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903-904 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert.denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); United States ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012).
[65]Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n.14 (1997).
[66]El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999).
[67] Streator Bates helped to collect and summarize the cases in this section. Streator is a third-year law student at the Georgetown University Law Center. He expects to graduate in May 2022.
[68]Fox, 497 F. Supp. 3d at 436 (citing Auto-Owners Ins. Co. v. Tribal Court of Spirit Lake Indian Reservation, 495 F.3d 1017, 1021 (8th Cir. 2007)).
[69]Id. (citing Hengle v. Asner, 433 F. Supp. 3d 825, 860 (E.D. Va. 2020), motion to certify appeal granted, No. 3:19CV250 (DJN), 2020 WL 855970 (E.D. Va. Feb. 20, 2020)).
[73]Id. at 5 (citing Nat’l Farmers Union Ins. Companies v. Crow Tribe of Indians, 471 U.S. 845, 856 (1985); Grand Canyon Skywalk Dev., LLC v. ‘Sa’ Nyu Wa Inc., 715 F.3d 1196, 1200 (9th Cir. 2013)).
[74]Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 148 (1982).
[75]James, 2021 WL 2531087, at *6 (citing Grand Canyon, 715 F.3d at 1205; accord Merrion, 455 U.S. at 148).
[79]SeeSanta Clara Pueblo v. Martinez, 436 U.S. 49, 57–58 (1978).
[80] Tribal immunity can be abolished via federal statute. Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015–16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”). Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755–56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359–60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license).
[81]Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008).
[83]Kiowa Tribe v. Mfg. Tech., Inc., 523 U.S. 751, 760 (1998) (Constitution provides a basis for suits to enforce state election and campaign finance laws). The U.S. Supreme Court has yet to take a position on this matter.
[84]Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978).
[85]Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998).
[86]Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (even evidence of vexatious and bad faith litigation did not amount to a waiver of immunity, and “even where the results are deeply troubling, unjust, unfair, and inequitable”).
[87]In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”). See alsoDemontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the tribe).
[88]Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (Indian tribe’s removal of action to federal court did not waive its sovereign immunity). But seeGuidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that by raising the issue of attorney’s fees was sufficient to constitute a waiver its right to claim sovereign immunity on the issue of attorney’s fees when defendant subsequently claimed for fees against the tribe).
[89]Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see alsoGilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity).
[90]E.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth., 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf.Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court).
[91]C & L Enter., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411 (2001).
[92]Id. at 418; seeTrump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super. LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract).
[95]Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that chairman of tribal business committee did not have authority to waive immunity); see alsoSandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286–87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity). But seeRush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent).
[96] Hanna Reinke helped to research and summarize the cases in this section. Hanna is a third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2022.
[124]Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity). C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena).
[125]SeeSeaport Loan Products et al. v. Lower Brule Community Development Enterprise LLC, 981 N.Y.S.2d 638 (N.Y. Sup. Ct. 2013) (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction).
[126] Reid Edwards helped to research and summarize the cases in this section. He is a third-year law student at the University of Notre Dame Law School and expects to graduate in May 2022.
[127]Jim, 833 F. App’x at 749; see 42 U.S.C. § 2000e(b).
[173] 25 U.S.C. § 463 (2000) (transferred to 25 U.S.C. § 5103); seeTOMAC v. Norton, 433 F.3d 852, 866–67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5).
[176] Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), https://www.standupca.org/off-reservation-gaming/Cowlitz%20Record%20of%20Decision%2012-17-2010.pdf/at_download/file. The Cowlitz Indian Tribe was not federally recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time. Id. The D.C. District Court upheld the BIA’s Record of Decision. Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014). The D.C. Circuit upheld the District Court. Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), https://www.bia.gov/sites/bia.gov/files/assets/public/oig/pdf/idc1-031724.pdf. Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues. However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior. Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016).
[178]See, e.g., Stand Up for California! v. U.S. Dep’t of the Interior, 204 F. Supp. 3d 212 (D.D.C. 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally recognized tribe under jurisdiction” in 1934 as required under Carcieri).
[179] Memorandum from Hilary C. Tompkins, U.S. Dep’t of the Interior, Office of the Solicitor, to Sally Jewell, Secretary of the Interior, U.S. Dep’t of the Interior (Mar. 12, 2014) https://www.doi.gov/sites/doi.opengov.ibmcloud.com/files/uploads/M-37029.pdf (hereinafter “M-37029 Memorandum”).
[182]Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 850 F.3d 552 (D.C. Cir. 2016); see alsoStand Up for California!, 204 F. Supp. 3d at 212; Citizens for a Better Way v. U.S. Dep’t of the Interior, No. 12-3021, ECF No. 168 (E.D. Cal. Sept. 24, 2015); No Casino in Plymouth v. Jewell, No. 12-1748, ECF No. 100 (E.D. Cal. Sept. 30, 2015); Cnty. of Amador v. Dep’t of Interior, No. 12-1710, ECF No. 95 (E.D. Cal. Sept. 30, 2015).
[183]Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak, 132 S.Ct. 2199 (2012).
[186] The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013).
[187] The statute of limitations under the APA is six years. See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”).
[188] Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151).
[193] Alexandra Nathe helped to research and summarize the cases in this section. Alexandra is a third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2022.
[202] The approval process for alternative energy projects on tribal lands has been particularly burdensome. See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 Indian L. Newsl. 3 (2011). For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 Am. Indian L. Rev. 527 (2011).
[203]Outsource Servs. Mgmt., LLC. v. Nooksack Bus. Corp., 198 Wash. App. 1032 (2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino. When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation. The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. § 81. The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself. Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”).
[204] 25 U.S.C. §§ 2701–21 (1988). The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions. In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations. SeeColo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006); Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006. This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing).
[205] 25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006).
[206] 25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140–41 (1996). “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984). For an example of tribal business license requirements, see NAVAJO NATION CODE, 5 N.N.C. § 401, et seq. (2005).
[207]See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, No. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)). The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’” However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity.
[209] Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits. See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013).
[211] United States Department of Interior, HEARTH ACT of 2012, https://www.bia.gov/bia/ots/hearth (last visited Oct. 28, 2018).
[212] Kelsey Haake helped to collect and summarize the cases in this section. Kelsey is a second-year law student at University of Pennsylvania Carey Law School and expects to graduate in May 2023.
[213]See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114–15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generallyNew Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332–33 (1983) (discussing applicability of state laws to tribes).
[214]Seegenerally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 Ariz. Att’y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but seeState ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State ex rel. Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253–54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the Act and submitting to the jurisdiction of the Workers’ Compensation Administration).
[215] 42 U.S.C. §§ 2000e–2000e-17 (1991). Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (finding Title VII expressly does not authorize suits against tribes because the term employer does not include an Indian tribe).
[217]Id. §§ 2000e(b)(1), 12111(5). Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination. See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act). See alsoMorton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge).
[218]See, e.g., Ariz. Rev. Stat. Ann. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws). Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect. SeeSanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see alsoAroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67-68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer).
[219]SeeHardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity).
[221]Id. §§ 1001–61. Congress amended ERISA in 2006 to apply Indian tribal commercial enterprises, but tribal governments remain exempt. 29 U.S.C. §§ 1002(32) (as amended by Pension Protection Act of 2006, 29 U.S.C. § 1002(32)).
[225]N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”).
[226]Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116-17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see alsoReich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA).
[227]SeeReich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493-94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434-35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights).
[228]Reich, 4 F.3d at 493–94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see alsoMashantucket Sand & Gravel, 95 F.3d at 174.
[233]Cf.Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes).
[234] Martyna Sawicka helped to research and summarize the cases in this section. Martyna is a third-year law student at the James E. Rogers College of Law, University of Arizona, and expects to graduate in May 2022.
[235] All employees are members of the Red Lake Band of Chippewa Indians. Only members of the Tribe own shares in the Fishery.
[236] The citations were for (1) failure to require use of personal flotation devices; (2) failure to report death of an employee within eight hours.
[237] “[P]ursuant § 102 of the Indian Self-Determination Act, 25 U.S.C. § 5321, the Tribe entered into a “self-determination contract” with the BIA governing tribal law-enforcement services. Such contracts under the ISDA allow a tribe to perform tasks that would otherwise have been carried out by the Federal Government and to do so using ‘money that the Government would have otherwise spent on the program.’”
[238] Plaintiff’s claim of identity theft was confirmed by a letter from the Nevada Department of Employment, Training & Rehabilitation.
[239] Berkovitz v. United States, 486 U.S. 531, 536 (1988); see also United States v. Gaubert, 499 U.S. 315, 322–23 (1991).
[240] Plaintiff attempted to argue that there was a policy basis for a carve out for the bad faith and intentional tort claims. However, the court rejected this argument because this argument was based on Nevada law, which relied on subjective intent, and federal law, applicable here, relies on an objective analysis.
[241] To defeat the discretionary function exception as to retaliation-based claims, the Plaintiff must point to some applicable federal statute, regulation, or policy that specifically proscribes such a retaliatory action; the Plaintiff here did not do so.
[242] In addition to the employment issues described, this case also addresses whether the following are within the permitted scope of Section 2710(d)(3)(C) of the Indian Gaming Regulatory Act: 1) allocation of tort liability and jurisdiction over tort claims of casino patrons 2) environmental protection 2) contribution to funds that off-set the negative effects of gaming and allocate money to Indian tribes in California that do not operate gaming facilities. Because these portions did not discuss labor and employment issues, they are not detailed here.
[243] Class III gambling consists of Nevada-style gambling (whereas classes I and II consist of social games, bingo, and non-card games). In order for an Indian tribe to conduct class III gaming it must enter into a compact with the state in which they are located.
[244] Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria.
[245] One purpose is to prevent a state from seeking to wrongfully inhibit an Indian tribe from engaging in class III gaming activity.
[246] “To establish that meaningful concessions were made, the State Defendants need to argue specifically what concessions were offered in exchange for what topics: ‘the State argues that the value of its offers during compact negotiations should be analyzed as a whole, not piecemeal …. we disagree that the State makes ‘meaningful concessions’ whenever it offers a bundle of rights more valuable than the status quo…’” (quoting Rincon Band of Luiseno Mission Indians of Rincon Reservation v. Schwarzenegger, 602 F.3d 1019, 1040 (9th Cir. 2010)).
[247]Lilly v. Fieldstone, 876 F.2d 857 (10th Cir. 1989).
[251] The section states, “[A]n Indian tribe, tribal organization or Indian contractor is deemed hereafter to be part of the Bureau of Indian Affairs in the Department of the Interior or the Indian Health Service in the Department of Health and Human Services while carrying out any such contract or agreement and its employees are deemed employees of the Bureau or Service while acting within the scope of their employment in carrying out the contract or agreement … [A]ny civil action or proceeding involving such claims brought hereafter against any tribe, tribal organization, Indian contractor or tribal employee covered by this provision shall be deemed to be an action against the United States and will be … afforded the full protection and coverage of the Federal Tort Claims Act.”
[252]Shirk v. U.S. ex rel. Dept. of Interior, 773 F.3d 999 (9th Cir. 2014).
[253] Both prongs must be met for the tribal employee’s actions to be covered under the Federal Tort Claims Act.
[254] The provision stated: “Funds provided under this Agreement may be allocated to and expended by an Alaska Native Village (“Village”) which is a party to this Agreement in accordance with the terms of the Compact, this Agreement, and a Memorandum of Agreement (“MOA”) approved by TCC and the Village. The Federal Tort Claims Act will apply to [programs, services, functions, and activities] carried out by the Village under such MOA and to the village and its employees to the same extent as if they had been carried out directly by TCC … TCC will be responsible for assuring compliance by the Village with the Compact, this Funding Agreement, and the MOA.”
[257] 28 U.S.C. § 1331 (“The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”).
[258]Id. § 1332 (“The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between . . . citizens of different states.”).
[259]SeePeabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accordTTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714–15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See alsoBurlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal).
[260]SeeYsleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”).
[261]SeePayne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726–27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728–29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040–41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329–30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898–99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But seeCook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf.R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602–03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”).
[262]See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split).
[263] Owen Toepfer helped research and summarize the cases in this section. Owen is a third-year law student at Notre Dame Law School and expects to graduate in May 2022.
[264]Big Sandy Rancheria Enterprises, 1 F.4th at 719.
[282]White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980).
[283]Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694–95 (9th Cir. 2004).
[284]Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005).
[285] There has been some question as to what exactly constitutes a tribally owned corporation. The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe. It is then actually a part of the tribe per se” and is nontaxable. Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted). Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.” Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999).
[286]Wagnon, 546 U.S. at 101; see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”). See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345–46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted).
[287]SeeMcClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172-73 (1973).
[288]Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”). See alsoCalifornia v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”).
[290]Id. at 144; see alsoAroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9–11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws).
[294] Miranda Martinez helped to research and summarize the cases in this section. Miranda is a second-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2023.
[295] In Big Sandy, the Ninth Circuit noted that the district court properly declined to balance federal, state, and tribal interests under the Bracker balancing test. The court explained that Bracker is only applicable where a tribe challenges a state’s regulation of transactions between the tribe and nonmembers on the tribe’s land. Given the significant geographic component to tribal sovereignty, the court properly declined to apply the Bracker test to cigarette sales outside the Rancheria.
[296]Video Gaming Techs., Inc. v. Rogers Cty. Bd. of Tax Roll Corr., 475 P.3d 824, 826, cert. denied, 141 S. Ct. 24 (2020).
[298] Because both parties agreed that the Bracker balancing test did not apply to the present case, the court instead applied a standard preemption analysis. Day Cty., 953 N.W.2d at 86.
[299] The Court cited United States v. Rickert, which established that a state may not tax land held in trust by the United States. This case further explains that every reason to show that the land was not subject to local taxation also applies to permanent improvements. 188 U.S. 432, 442 (1903). Notably, Congress enacted § 5108 to codify the holding of Rickert. Additionally, the Court cited Mescalero Apache Tribe v. Jones, under which the Supreme Court held that permanent improvements owned by an Indian entity on trust land were immune from a state ad valorem property tax. 411 U.S. 145, 158 (1973). The Mescalero Court noted that because permanent improvements are so intimately connected with the use of the land itself, a provision relieving the land of state tax burdens must be construed to encompass permanent improvements as well. Id. Lastly, the Court noted a 2013 Ninth Circuit case, which held that § 5108 categorically bars a state tax on permanent improvements on trust land regardless of whether the improvements are Indian owned. Confederated Tribes of the Chehalis Rsrv. v. Thurston Cty. Bd. of Equalization, 724 F.3d 1153, 1158 (9th Cir. 2013).
[300] The six Whiteco factors include: (1) If the property is capable of being moved and if it has been moved; (2) Whether the property is designed or constructed to remain permanently in place; (3) Whether there are circumstances that tend to show the expected or intended length of affixation (4) How substantial and time-consuming it would be to remove the property; (5) How much damage the property will sustain upon removal; and (6) The manner of affixation of the property to the land. Whiteco Indus. Inc. v. Comm’r of Internal Revenue, 65 T.C. 664, 672 (1975).
Snell & Wilmer L.L.P. 1200 17th Street, Suite 1900 Denver, CO 80202 303.635.2085 [email protected]
Byeongsook Seo is a member of the Snell & Wilmer L.L.P.’s commercial litigation practice. He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors. Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation. His honors include Colorado Super Lawyers and The Best Lawyers in America. Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.
Contributors
Melissa Donimirski
Heyman Enerio Gattuso & Hirzel LLP 300 Delaware Avenue, Suite 200 Wilmington, DE 19801 302.472.7314 [email protected]
Melissa N. Donimirski is an attorney with Heyman Enerio Gattuso & Hirzel LLP in Wilmington, Delaware. She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court. Melissa is Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University. Melissa has also co-edited and co-authored a treatise on business divorce, which is published by Bloomberg BNA.
Janel M. Dressen
Anthony Ostlund Louwagie Dressen & Boylan P.A. 90 South 7th Street 3600 Wells Fargo Center Minneapolis, MN 55402 612.492.8245 [email protected]
Janel Dressen is a lawyer and shareholder with the litigation boutique firm Anthony Ostlund Baer & Louwagie P.A., located in Minneapolis, Minnesota. Janel has 19 years of experience as a trial lawyer and problem solver. She assists her clients to avoid and prepare for business and employment-related disputes in and outside of the courtroom. Janel spends a significant amount of her time resolving family-owned and privately held business disputes for owners that are in need of a business divorce. In 2019, Janel was selected by her peers to the Top 50 Women Minnesota Super Lawyers list by Super Lawyers. In 2017, Janel was honored as one of Minnesota’s Attorneys of the Year.
Ankura One North Wacker Dr. Suite 1950 Chicago, IL 60606 312.252.9533 [email protected]
John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, CFLC, CIRA, MBA, JD, is a Senior Managing Director in the disputes and economics practice of Ankura, a global business advisory and expert services firm. He serves as a business valuation, forensic accounting and damages expert witness, arbitrator, and advisor. John is frequently consulted regarding business disputes, shareholder disputes and post-acquisition transaction disputes. In addition, he is the current Chair of the Dispute Resolution Committee of the Business Law Section and a Member at Large of the Standing Committee on Audit of the American Bar Association.
Neschis & Tolitano, LLC 311 West Superior Street Suite 314 Chicago, Illinois 60654 (312) 600-9797 [email protected]
Samuel Neschis is a member of Neschis & Tolitano, LLC in Chicago, Illinois. He concentrates his practice in business and commercial litigation and regularly represents parties in complex litigation including shareholder disputes, disputes involving claims of unfair competition, and contractual disputes. He is the former chair and current co-newsletter editor of the Illinois State Bar Association’s Business and Securities Law Section Council.
John C. Sciaccotta
Aronberg Goldgehn 330 N. Wabash Ave. Suite 1700 Chicago, IL 60611 312.755.3180 [email protected]
John C. Sciaccotta is a Member at Aronberg Goldgehn. He focuses his practice on litigation, arbitration and business counseling matters with a special emphasis on complex civil trial and appellate cases brought in federal and state courts throughout the United States. John has also been appointed by the American Arbitration Association as an Arbitrator and Lawyer Neutral to adjudicate various claims and disputes in arbitration. For many years he has advised public and privately held businesses, lenders, employers and individuals in business transactions and disputes. He is experienced in dealing with numerous industries and business activities and has a specialty focus on representing entities in business divorce and complex ownership dispute resolution. John is highly active in professional associations and within his community. Among his activities, he is Co-Founder and current Chair of the Chicago Bar Association’s Business Divorce and Complex Ownership Disputes Committee. He served on the CBA’s Board of Managers from 2017 to 2019.
§ 1.1. Introduction
This chapter provides summaries of developments related to business divorce matters that arose from October 1, 2020, to September 30, 2021, from mostly nine states. Each contributor used his or her best judgment in selecting cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive. The reader should be mindful of how any case in this chapter is cited. Some jurisdictions have rules that prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. We hope this chapter assists the reader in understanding recent developments in business divorces.
§ 1.2. Access to Books and Records
§ 1.2.1. California
Ramirez v. Gilead Sciences, Inc., 66 Cal.App.5th 218 (Jul. 2, 2021). Beneficial owner of corporation’s shares filed a petition for a writ of mandate seeking to compel corporation to allow him to inspect its books and records. The petition was denied. A registered owner or record holder holds shares directly with the company. A beneficial owner holds shares indirectly, through a bank or broker-dealer. The appellate court affirmed the petition’s denial because only the record owner of the shares or holders of voting trust certificates have standing to inspect a corporation’s books and records under the plain language of Corporate Code section 1601.
§ 1.3. Business Judgment Rule
§ 1.3.1. Colorado
Walker v. Women’s Prof. rodeo Ass’n, Inc., 2021 COA 105M (Sep. 9, 2021). Members brought action against women’s professional rodeo association and rodeo company for breach of fiduciary duty, breach of contract, declaratory judgment, and injunctive relief against the association. The complaint was dismissed as failing to assert plausible claims for relief, considering the business judgment rule. The members’ claims were based on allegations that the association misapplied certain of its internal rules related to how members are compensated for participating in rodeo events. The court noted that fraud, self-dealing, unconscionability, and similar conduct are exceptions to the business judgment rule, which shields the actions of directors who engage in reasonable and honest exercise of their judgment and duties. Since the members had not alleged that the association engaged in fraudulent or similar wrongful conduct, the appellate court affirmed dismissal and chose not to override the association’s interpretation and application of its rules.
§ 1.4. Dissolution
§ 1.4.1. California
Cheng v. Coastal L.B. Assocs., LLC, 69 Cal.App.5th 112 (Sep. 1, 2021). This action involved the purchase of minority interests in an LLC that was equally owned by several siblings, pursuant to Corporations Code 17707.03, subd. (c)(1). Section 17707.03, subd. (c)(1), allows members of an LLC to respond to an application for judicial dissolution by purchasing the interests of the applicant members for fair market value of their interests. The applicant members in this action appealed the trial court’s order confirming the consensus valuation of three appraisers. The applicant members asserted on appeal that the trial court’s order instructing three disinterested appraisers to (a) review each other’s initial valuation reports, (b) confer with each other, and (c) try to reach a consensus valuation violated to Section 17707.03. The appellate court disagreed because there was no statutory language that prohibited or restricted a trial court’s authority to instruct the appraisers as it did.
§ 1.4.2. Delaware
Mehra v. Teller, 2021 WL 300352 (Del. Ch. Jan. 29, 2021). The Delaware Court of Chancery ordered dissolution of a two-member, two-manager LLC due to deadlock, despite also finding that the circumstances giving rise to the deadlock were contrived. In this action, the subject LLC had two members – Mehra and Teller. Teller held a greater membership interest, but Mehra was responsible for the company’s day-to-day management. Accordingly, the two agreed that the LLC would be managed by a two-person board, consisting of Mehra and Teller, and that board action required unanimity. The LLC agreement further provided that, if Teller and Mehra deadlocked, the company would be automatically dissolved.
After facing a series of business setbacks, Teller became critical of Mehra’s management and wished to exit the business partnership. Teller thus devised a plan in which he called a meeting of the board, and proposed a resolution that would remove Mehra from his role as CEO. When Mehra refused to vote on the resolution, Teller declared deadlock and sought to dissolve the company. The Court held that Teller proved that the parties have an irreconcilable disagreement concerning Mehra’s continuing management of Holdco and was sufficient to result in dissolution of the company. In so holding, the Court noted that, where unanimity is the voting threshold, either an abstention or a “no” vote may result in deadlock.
§ 1.4.3. New York
Garcia v. Garcia, 187 A.D.3d 859 (N.Y. App. Div. 2020). As part of a judicial dissolution proceeding, an LLC member appealed a special referee’s finding that he was lawfully expelled. The Appellate Division affirmed the Supreme Court’s interpretation of the operating agreement to allow for expulsion even without a listed mechanism for expulsion in the operating agreement. The court found that expulsion was valid using the general action procedure in the operating agreement, which was a majority vote of members.
§ 1.5. Jurisdiction, Venue, and Standing
§ 1.5.1. Delaware
Lone Pine Res., LP v. Dickey., 2021 WL 3211954 (Del. Ch. Jun. 7, 2021). In an action alleging breach of fiduciary duty for usurpation of corporate opportunities, theft of trade secrets and unjust enrichment, the Delaware Court of Chancery held that it did not have jurisdiction over defendant w entities under the conspiracy theory of jurisdiction where the only jurisdictional hook in Delaware was the formation of plaintiff Delaware entities, which action the Court held was not related to the conspiracy the Complaint sought to rectify relating to the Colorado entities.
In this action, plaintiff entities together operate a crude oil purchasing business. Together, they brought an action alleging that one of their co-founders leveraged his insider positions and the parties’ established structure to operate a secret side business, operated through Colorado entities formed by defendant Dickey, which he fed with the plaintiffs’ business opportunities and property. While the Court held that it had jurisdiction over Dickey for certain claims, it determined that it had no basis to exercise conspiracy theory jurisdiction over the Colorado entities, who had no well-pled contacts with Delaware. The Court held that Dickey’s actions forming Plaintiffs in Delaware was not reasonably related to the conspiracy by which the Colorado defendants were allegedly usurping business opportunities belonging to Plaintiffs. The Court additionally held that it did not have jurisdiction over Dickey for claims related to breaches of fiduciary duty to an LLC for which Dickey was not a manager.
United Food & Commercial Workers Union & Participating Food Indus. Emp’rs Tri-State Pension Fund v. Zuckerberg, 2021 WL 4344361 (Del. Sept. 23, 2021). The Delaware Supreme Court streamlined the standard for determining whether demand upon a board of directors is excused. The Court determined, as an initial matter, that exculpated care claims cannot establish that demand is futile. The Court further adopted the Court of Chancery’s three-part test for determining, on a director-by-director basis, whether demand should be excused as futile:
whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
§ 1.5.2. Florida
Rappaport v. Scherr, 322 So. 3d 138 (Fla. Dist. Ct. App. 2021). In a dispute between a minority shareholder and a majority shareholder arising out of the majority’s shareholder’s self-interested conduct during negotiations for the sale of the business to a third party, the court addressed the requirement that a shareholder make a demand to institute litigation on the corporation’s board of directors prior to filing a derivative action. The Florida District Court of Appeal reversed a judgment entered in favor of the minority shareholder in his derivative action because the minority shareholder had not made a pre-suit demand to institute litigation on the board of directors.
The minority shareholder alleged that the majority shareholder breached his fiduciary duty during the sale of the business by concealing information from the minority shareholders and negotiating with the buyer of the business in a manner that furthered his own interests at the expense of the other shareholders. The defendant moved to dismiss the complaint as the plaintiff had not alleged that he had made a demand on the board of directors to institute the action as required by section 607.07401(2) of the Florida Business Corporation Act, which was in effect in 2017 when the complaint was filed. The trial court denied the motion to dismiss and subsequently entered judgment in favor of the plaintiff after a bench trial. However, the appellate court reversed, holding that, as it was undisputed that the plaintiff had not filed a pre-suit demand, the complaint should have been dismissed. The court noted that the plaintiff had made a demand after the filing of the suit but held that this post-filing demand did not comply with the statutory requirement.
The court also rejected the plaintiff’s argument that his failure to make a demand was excused because the demand would have been futile. The court noted that some jurisdictions do provide for a futility exception to the demand requirement. However, in 2017, when the complaint was filed, section 607.07401(2) of the Florida Business Corporation Act was in effect and governed the requirements for the filing of derivative actions by shareholders of corporations. That section did not contain a futility exception to the demand requirement making Florida, at that time, a “universal-demand” jurisdiction.
The court did note that, in 2019, the Florida legislature amended the statute, (now renumbered as section 607.0742). The amended statute, which became effective January 1, 2020, does contain a futility exception to the demand requirement.
Yarger v. Convergence Aviation Ltd., 310 So. 3d 1276, 1281 (Fla. Dist. Ct. App. 2021). In a suit brought by a corporation against a non-resident director, the court examined the issue of whether Florida’s long arm statute provides a court with personal jurisdiction over a non-resident director of a Florida corporation or non-resident manager of a Florida limited liability company for actions that the director or manager took within Florida on behalf of the corporation or LLC.
Orval Yarger, a resident of Illinois, was a director of Convergence Aviation, Ltd. (“Convergence”), a Florida corporation, as well as a manager of Convergence Aviation & Communications, LLC (CACL), a Florida limited liability company that Convergence had formed to purchase and manage property that would be used to house aircrafts that Convergence owned. Yarger was involved in an airplane accident involving an airplane owned by Convergence. The accident occurred in Kentucky while Yarger was returning to Illinois. Yarger kept certain parts that he purchased for the airplane and Convergence sued him for conversion in Florida state court. Yarger moved to dismiss the complaint for lack of personal jurisdiction. The trial court denied the motion to dismiss and Yarger appealed.
Convergence argued that Florida courts had jurisdiction over Yarger pursuant to Florida’s long arm statute (Fl. Stat. § 48.193(1)(a)), which provides, in pertinent part, that a person submits to the jurisdiction of Florida courts for any cause of action arising out of the person’s operating, conducing, engaging in, or carrying on a business or business venture in Florida or having an office or agency in the state. Convergence argued that Yarger was subject to personal jurisdiction under the long arm statute as he carried on activities on behalf of Convergence and CACL in Florida and as the conversion claim arose out of those actions. However, the appellate court held that, because Yarger’s actions within Florida were conducted as an agent of Convergence and CACL rather than for his personal benefit, the long arm statute did not provide a basis for Florida courts to exercise jurisdiction over him personally.
§ 1.5.3. Illinois
Tufo v. Tufo, 2021 IL. App. 192521 (1st Dist. March 24, 2021). This was a business divorce case between two brothers who operated the very successful Discount Fence Co. The Appellate Court affirmed the Circuit Court’s decision finding that the Plaintiff lacked standing under Illinois law to bring a derivative action because of his personal animosity toward the Defendant, and that therefore, he was not qualified to serve in a fiduciary capacity as a representative of the class of shareholders whose interests rests on the fair and impartial prosecution of the action. The Court recognized a conflict between the Plaintiff’s interests and the interests of the parties he purported to represent. The Court also disqualified the Plaintiff for lack of standing based upon the fact that the Plaintiff knew of the wrongdoing before he became a shareholder.
The Court, although having found that the Plaintiff proved the Defendant’s breaches of fiduciary duty by usurping corporate opportunities, also rendered that the Plaintiff failed to present clear and convincing evidence that the Plaintiff’s breach caused any damages.
§ 1.5.4. Massachusetts
Mullins v. Corcoran, 488 Mass. 275, 172 N.E.3d 759, 763 (2021). In a dispute between owners of a real estate development business, the court addressed the issue of whether the doctrine of issue preclusion bars a party from litigating the same issue in separate actions, where the party filed one action individually and the other action derivatively on behalf of an entity.
The case arose out of a dispute between Joseph Mullins, Joseph Corcoran and Gary Jennison, who jointly owned Corcoran, Mullins, Jennison, Inc. and indirectly owned Cobble Hill Center, LLC. Both entities engaged in real estate development and management. The parties’ dispute centered around plans that Corcoran and Jennison had generated for the development of a property known as the Cobble Hill Center site. Mullins initially consented to the plans, but then withdrew his consent. In 2014, Mullins sued Corcoran and Jennison for breach of an agreement that parties had entered into governing the operation of their business and for breach of fiduciary duty for proceeding with the development of the property after his withdrawal of consent (the “2014 Action”). Corcoran and Jennison counterclaimed against Mullins for breach of the agreement and breach of fiduciary duty for initially consenting to the development plans but then withdrawing consent. At the trial, Mullins introduced alternate plans for the development of the site as evidence that Corcoran and Jennison could have mitigated the damages on their counterclaim. The trial court entered judgment against Mullins on both his complaint and on the counterclaim but found that Corcoran and Jennison could have mitigated their damages through one of the alternate plans introduced by Mullins, and, therefore, reduced the damages awarded to them on the counterclaim.
In 2017, while the 2014 Action was still pending, Mullins filed a separate action in which he alleged breaches of the agreement and breaches of fiduciary duty that he alleged occurred after the filing of the 2014 complaint (the “2017 Action”). In the 2017 Action, Mullins also asserted derivative claims on behalf of Cobble Hill Center, LLC. The allegations in the 2017 action centered on Corcoran and Jennison’s refusal to proceed with any of the alternate plans for the Cobble Hill Center site presented by Mullins. Corcoran and Jennison moved for judgment on the pleadings based on the doctrine of issue preclusion. The trial court stayed the case until after the judgment in the 2014 Action had been entered, at which point, the motion for judgment on the pleadings was granted. Mullins appealed that decision and the Massachusetts Supreme Court then transferred the case to itself on its own motion.
The court observed that “[t]he doctrine of issue preclusion provides that when an issue has been actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties whether on the same or different claim.” With regard to Mullins’ individual claims, the court held that they were barred by issue preclusion because he had been presented about the alternate plans for development of the property at the trial in the 2014 Action.
However, the more complicated issue was whether issue preclusion barred Mullins’ derivative claims on behalf of Cobble Hill Center, LLC as, in order for issue preclusion to a bar a claim, the party against whom preclusion is asserted must have been a party or in privity with a party to the prior adjudication. The 2014 Action had been filed by Mullins individually not derivatively on behalf of the LLC. The court observed that, because corporations are treated as distinct from their shareholders, ordinarily the parties to direct actions by shareholders and derivative actions filed by shareholders on behalf of their corporations are not considered to be the same. Therefore, ordinarily, a direct action by a shareholder should not be preclusive of a separate derivative action brought by a shareholder on behalf of the corporation. However, the court recognized an exception to that rule for closely held entities where ownership and management are in the same hands. Because Cobble Hill Center, LLC had only three members, all of whom participated in the 2014 Action, the Court held that the LLC’s interests were adequately represented in the 2014 Action. Therefore, the court held that issue preclusion barred Mullins from asserting the same claims in the 2017 Action derivatively on behalf of the LLC that he had asserted individually in the 2014 Action.
§ 1.5.5. New York
Durst Buildings Corp. v Edelman Family Co., No. 652036/2021, 2021 WL 2910316 (N.Y. Sup. Ct. Jul. 8, 2021). An equal member of a Delaware LLC sought judicial dissolution in New York pursuant to a jurisdiction and venue clause selecting New York County in the LLC operating agreement. The Supreme Court dismissed the claim for lack of subject matter jurisdiction, citing that New York courts do not have the subject matter jurisdiction over judicial dissolutions of foreign entities.
§ 1.5.6. Minnesota
Poultry Borderless Co., LLC v. Froemming, No. 20-CV-1054 (WMW/LIB), 2021 WL 354087 (D. Minn. Feb. 2, 2021). The plaintiff, a Texas LLC, sued one of its co-owners, a Minnesota LLC, and its members in federal court invoking 28 U.S.C. § 1332 diversity jurisdiction. The plaintiff and defendant LLCs are both equal owners of TFC Poultry LLC. The court determined that the company, TFC Poultry, was an indispensable party because the plaintiff LLC’s claims were derivative claims alleged on TFC Poultry’s behalf. The plaintiff argued that the claims were direct, not derivative because the board’s composition directly injured the plaintiff. The court concluded that LLC members only have derivative standing when an alleged wrongdoer controls an entity, making TFC poultry an indispensable party. Once the court found TFC Poultry to be an indispensable party, the court dismissed the case for lack of subject-matter jurisdiction because TFC Poultry is a corporate citizen of both Mexico and Minnesota and therefore, there was not proper diversity jurisdiction.
Ross v. Dianne’s Custom Candles, LLC, No. A20-1543, 2021 WL 3852272 (Minn. Ct. App. Aug. 30, 2021). Plaintiff, a member of a Minnesota LLC, brought an action for oppressive conduct seeking judicial dissolution or buyout under Minn. Stat. § 322C.0701 against the LLC and its majority member. Alternatively, the plaintiff sought damages from the defendants for the breach of the duty of good faith and fair dealing. The plaintiff argued that he uniquely suffered losses from not receiving any salary or distribution to offset his tax liability from his ownership interest. As alleged, this injury was partly due to the LLC’s excessive compensation to the majority member. The Court of Appeals agreed with the district court that the claims were derivative, not direct, claims because improper use of corporate funds injures the corporation directly, not the member. The injury is the improper diversion of corporate funds, which requires a derivative action to remedy.
§ 1.5.7. Texas
Cooke v. Karlseng, 615 S.W.3d 911 (Tex. 2021). The Texas Supreme Court reversed and remanded the judgment of the Texas Court of Appeals that Texas courts lack jurisdiction to hear derivative claim asserted directly. In this case, a limited partner sued his business partners for looting the partnership of which he was a member by moving partnership assets to new business entities with which he was not associated without compensating him. The Texas Court of Appeals held that the claim for damages properly belonged to the partnership, not to plaintiff, and that, because the claim was not pleaded derivatively, the court lacked jurisdiction to decide the matter. Citing to Pike v. Texas EMC Mgmt., LLC, 610 S.W.3d 763 (Tex. 2020), the Texas Supreme Court reversed, holding that the authority of a partner to recover for injury to his partnership interest is not a matter of constitutional standing that implicates subject-matter jurisdiction. The Court additionally noted that statutory provisions “define and limit a partner’s ability to recover certain damages.” However, those provisions go to the merits of the claim and do not strip a court of subject-matter jurisdiction to render a judgment in such a case.
§ 1.6. Claims and Issues in Business Divorce Cases
§ 1.6.1. Accounting
§ 1.6.1.1. Colorado
Sensoria, LLC v. Kaweske, 2021 WL 2823080 (D. Colo. Jul. 7, 2021). Investor in a holding company for various cannabis-related entities, on its own behalf and derivatively on behalf of holding company, brought action seeking to recover its investment in holding company against holding company, its subsidiaries, its owner, its managers, its law firm, and other, separate entities that were in competition with holding company allegedly created by holding company’s owner and manager to siphon off assets and cash of holding company. The cannabis-related businesses were legal under Colorado state law. However, Defendants moved to dismiss all claims because the underlying illegality of the business under federal law (Controlled Substances Act, 21 U.S.C. §§ 802, et seq. (“CSA”)), which prevented the federal court from granting any relief that would endorse or require illegal activity or that would impose a remedy paid from assets derived from criminal activity. Since many of the forms of the sought-after remedy would require the court endorsing or implementing criminality, the court dismissed several of the investor’s claims. But one of the few claims that did survive was a claim for accounting. The court determined that the accounting claim was not subject to an illegality defense.
§ 1.6.2. Alternative Entities
§ 1.6.2.1. Delaware
Pearl City Elevator, Inc. v. Gieseke, 2021 WL 1099230 (Del. Ch. Mar. 23, 2021). The Delaware Court of Chancery construed limitations on the transfer of membership interests the subject LLC Agreement in deciding a Section 18-110 action to determine the proper makeup of the company’s Board of Governors. The Court determined that plaintiff Pearl City had complied with the requirements of the LLC Agreement and had acquired sufficient equity to change the composition of the Board. The LLC in question was owned 50% by plaintiff Pearl City and 50% by a disaggregated group of “General Members.” Both Pearl City and the General Members were each entitled to appoint three members to the LLC’s Board of Governors. The LLC Agreement permitted either party to appoint an additional member to the Board of Governors upon accumulation of more than 56% of the LLC’s units.
Pearl City subsequently initiated a campaign to cross the 56% threshold, doing so by engaging in private purchases of membership interests from disaggregated General Members. Members of the Board of Governors elected by the General Members refused to acknowledge such acquisition for purposes of appointing an additional board member, arguing that Pearl City failed to comply with the terms of the LLC Agreement when obtaining additional membership units. In construing the LLC Agreement, the Court held that the Agreement requires Board approval for membership transfers only where the transfer is to a non-Member. The Court further held that the Board may require a legal opinion relating to certain considerations set forth in the LLC Agreement and may defer recognition of any transfer until such opinion is obtained, and that advance notice of a transfer is not required before effectuation of a transfer of membership interests, but that the LLC Agreement provided that notice to the Board was required before such transfer would be deemed effective. The Court found that Pearl City complied with the foregoing requirements and was entitled to add an additional board member to the Board of Governors, thereby obtaining control of the company.
§ 1.6.2.2. New York
Eikenberry v. Lamson, No. 516653/20, 2021 WL 722837 (N.Y. Sup. Ct. Feb. 19, 2021). The plaintiff sued her alleged partner and various limited liability companies, claiming that the partnership oversaw the entities. The Supreme Court held that a plaintiff could demonstrate that a partnership operated a limited liability entity, but only if the plaintiff alleged facts showing that the partnership intended to survive the creation of the entity and that the entity was created to serve a specific purpose. The plaintiff did not meet that factual burden, and the Supreme Court dismissed all the plaintiff’s claims related to alleged corporate activity.
Farro v. Schochet, 190 A.D.3d 689 (N.Y. App. Div. 2021). The plaintiff, previously a 50% LLC member, commenced direct and derivative claims against the LLC, the other 50% LLC member, and a lender after a cash-out merger eliminated his interest. The Appellate Division found that appraisal is the exclusive remedy under New York’s Limited Liability Company Law § 1005. The plaintiff also could not seek recission of the merger on the grounds of fraud under § 1005, repeating that appraisal was a member’s sole and exclusive remedy under New York’s LLC Law. The plaintiff also could not maintain a derivative action for breach of fiduciary duty, removal of a manager, or equitable request for accounting because he lacked a membership interest, and his only remedy was appraisal.
Compare to Johnson v. Asberry, 190 A.D.3d 491 (N.Y. App. Div. 2021). The defendant LLC member appealed the denial of their motion to dismiss. The Appellate Division affirmed the denial because the plaintiff LLC member properly alleged fraud by omission that resulted in a freeze-out merger. The Appellate Division found that equitable relief would be an available remedy for the alleged fraud, citing New York’s Business Corporation Law § 623[k].
§ 1.6.3. Breach of Fiduciary Duty
§ 1.6.3.1. Florida
Taubenfeld v. Lasko, 324 So. 3d 529 (Fla. Dist. Ct. App. 2021). In a case arising out of a dispute between two fifty percent shareholders of a corporation, the court addressed the pleading requirements for claims of breach of fiduciary duty and aiding and abetting breach of fiduciary duty. The plaintiff, who had been the president of the corporation, alleged that the defendant usurped the position of president and assumed sole control over the company. The plaintiff further alleged that the mother of the defendant then established a separate limited liability company that provided the same services as the corporation. The defendant, with the assistance of his mother, father, and brother, transferred assets of the corporation including its business relationships, customer list, and vehicles to the new company. The plaintiff filed a derivative action on behalf of the corporation alleging that the defendant had breached his fiduciary duties of loyalty and care by wasting the corporation’s assets through causing them to be transferred to the new company. The plaintiff’s complaint also included claims of aiding and abetting breach of fiduciary duty against the defendant’s mother, father, and brother.
The trial court dismissed the complaint finding that the allegations lacked sufficient factual support regarding the specific duty that the plaintiff was alleging that the defendant owed and because the nexus between the defendant’s conduct and the damage to the corporation was unclear and speculative. However, the appellate court reversed, holding that the allegations that the defendant had mounted a takeover of the company, diverted the corporation’s relationships and revenues to the new company, and executed documents to transfer the corporation’s assets to a competitor were sufficient to state a claim that the defendant had breached his fiduciary duties as an officer of the corporation. The court further held that the plaintiff had stated claims for aiding and abetting breach of fiduciary duty against the defendant’s mother, father, and brother as he had alleged that each of these family members knew of the defendant’s breaches and assisted those breaches by, among other things, helping him divert assets to the new company.
§ 1.6.3.2. Minnesota
Clintsman v. Gervais, No. 62-CV-19-8677, 2021 WL 3417833 (Minn. Dist. Ct. Mar. 23, 2021). Two sibling plaintiffs commenced an action against their five siblings involving their family real estate business, which consisted of various Minnesota limited liability companies. Plaintiffs’ claims included oppression, breach of the duty of good faith and fair dealing, and breach of statutory and common law fiduciary duties. The district court granted summary judgment for the plaintiffs on their claims of oppression, breach of the duty of good faith and fair dealing and breach of fiduciary duties. The court found that undisputed evidence of multitudes of derogatory comments made by the defendants along with intentional exclusion from material communications and secret recordings supported finding that the defendants were liable for at least one act of unfairly prejudicial conduct constituting oppression and breach of fiduciary duties. The court then granted the plaintiffs’ motion for a fair value buyout from the family LLCs.
§ 1.6.3.3. Texas
Straehla v. AL Glob. Servs., LLC, 619 S.W.3d 795 (Tex. App. 2020). The Court of Appeals of Texas held that Plaintiff AL Global Services established a prima facie case that defendant Jorrie breached his fiduciary duty of loyalty and duty not to usurp corporate opportunities. In so holding, the Court noted that, while the Texas Business Organizations Code does not directly address the duties a manager or member owes to their LLC, the Court of Appeals has previously held that the Code “presume[s] the existence of fiduciary duties.” In this case, defendant Jorrie, a member and manager of AL Global diverted opportunities owned by the company to his own business, which had originally served as a subcontractor to AL Global. Among other things, Jorrie encouraged and exploited a personal relationship between his business partner and one of AL Global’s clients to move related business opportunities into his own, competing business. The Court additionally held that a prima facie case had been plead for knowing participation in breach of fiduciary duties against employees of the client, one of whom was engaged in the personal relationship with Jorrie’s business partner.
§ 1.6.3.4. New York
John v. Varughese, 194 A.D.3d 799 (N.Y. App. Div. 2021). The plaintiff brought a derivative breach of fiduciary duty claim against the managing member of the LLC. The Supreme Court entered judgment after a nonjury trial in favor of the managing member because of the operating agreement’s exculpatory clause, which exculpated the managing member from breach of fiduciary duty liability, except for actions or omissions that were “in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.” Id. at 801. The Appellate Division reversed the Supreme Court as to one act and found that the managing member intentionally breached a fiduciary duty by transferring $50,000 from the LLC to an unrelated entity that he then used for his personal attorney’s fees not authorized by the LLC’s operating agreement. The court entered judgment in favor of the plaintiff on that claim.
Celauro v. 4C Foods Corp., 187 A.D.3d 836 (N.Y. App. Div. 2020). Celauro, a minority shareholder of a family-owned, closely held corporation, 4C Foods Corp., filed suit against the majority shareholders for breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. The Supreme Court awarded summary judgment for the defendants regarding these claims. The Appellate Division affirmed, finding that the defendants did not breach a fiduciary duty or an implied covenant of good faith and fair dealing by following a valid stock transfer restriction that required majority consent for any transfer of shares. The defendants acted appropriately to avoid disrupting the corporation’s operations. The transfer of shares would have given the plaintiff more than 20% of voting shares, allowing the plaintiff to pursue a judicial dissolution proceeding under N.Y. Bus. Corp. Law § 1104-a. The Appellate Court also found that the plaintiff did not suffer damages by increasing the authorized amount of non-voting shares and issuing a non-voting share dividend because the defendants adopted an amendment to the shareholder agreement that appraised the non-transferable shares at pre-dilution value.
Shilpa Saketh Realty, Inc. v. Vidiyala, 191 A.D.3d 512 (N.Y. App. Div. 2021). A minority shareholder sued the other shareholders of a pharmaceutical corporation for fraud, breach of fiduciary duty, and unjust enrichment in connection with the sale of the corporation. The plaintiff alleged that it relied on the defendants to negotiate on its behalf. Before the sale, a stock purchase agreement reduced only the plaintiff’s percentage of shares, which the plaintiff alleged was misrepresented by the defendants. The plaintiff signed the stock purchase agreement, which included a general release of claims against the corporation and its equity holders. The Supreme court dismissed the plaintiff’s claims as barred by the release as a matter of law. The Appellate Division reversed, finding that plaintiff’s claims were not barred as a matter of law by the release because the plaintiff may have reasonably relied on the defendants to act on its behalf. The court noted the plaintiff alleged a united relationship at the time of negotiations. The court also excused the plaintiff from reading the agreements, though the court did not explain its reasoning.
CIP GP 2018, LLC v. Koplewicz, 194 A.D.3d 639 (N.Y. App. Div. 2021). An investment company sued its business partners from a cannabis laboratory venture for breach of contract, promissory estoppel, unjust enrichment, breach of fiduciary duty, minority oppression, and misappropriation of trade secrets. The plaintiff appealed the Supreme Court’s dismissal of its claims of promissory estoppel, unjust enrichment, breach of fiduciary duty, minority oppression, and misappropriation of trade secrets. The Appellate Division found that the plaintiff adequately alleged an oral partnership and then reversed the Supreme Court’s dismissal of the plaintiff’s unjust enrichment and promissory estoppel claims. The court found these claims not to be duplicative because a plaintiff may pursue both quasi-contract theories and breach of contract. The Appellate Division affirmed the dismissal of the breach of fiduciary duty and minority oppression claims as duplicates of the breach of contract claim. The court further affirmed the dismissal of the misappropriation of trade secrets claim because the plaintiff failed to allege that business methods it shared willingly were trade secrets.
§ 1.6.4. Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing
§ 1.6.4.1. Delaware
In re Cellular Telephone P’ship Litig., 2021 WL 4438046 (Del. Ch. Sept. 28, 2021). The Delaware Court of Chancery held that a majority partner did not breach the subject partnership agreement by “manag[ing] the Partnership however it wished” because a Management Agreement executed by the Partnership delegated broad authority to manage the business and affairs of the Partnership to AT&T, despite the efforts of the minority partner to demonstrate that AT&T exceeded the scope of authority delegated in the Management Agreement. The Court noted that, because the Management Agreement was between AT&T and the Partnership, a derivative claim for breach of the Management Agreement might have succeeded. This was because AT&T’s failure to comply with the provisions of the Management Agreement would give rise to a breach that is cognizable only derivatively, while Plaintiffs’ direct claim was focused on AT&T exceeding the scope of its delegated authority.
The action involved a general partnership between AT&T, which held 98.119% of the partnership interest, and the minority partners, who collectively owned the remaining 1.881% partnership interest. The partnership agreement provided that governance of the partnership was delegated to an Executive Committee. The Partnership Agreement provided for a three-member Executive Committee, with two representatives appointed by the majority partner and one by the minority partners. In practice, however, AT&T only acted through the Executive Committee on formal matters, such as authorizing a distribution to the partners, and generally ran the business of the Partnership as it pleased.
Plaintiffs sought to prove a direct claim for breach of the Partnership Agreement under Section 15-405(b)(1) of the Delaware Partnership Act by demonstrating that AT&T exceeded its delegated authority under the Management Agreement. The Court held that the delegation of authority was expansive and ruled in favor of AT&T on the direct claim. The Court noted, however, that AT&T’s failure to comply with its contractual commitments regarding how AT&T would exercise its delegated authority could support a claim for breach of the Management Agreement, a claim that could only be brought derivatively. Because plaintiffs failed to assert such a claim, the Court ruled in favor of AT&T.
§ 1.6.4.2. Florida
Triton Stone Holdings, L.L.C. v. Magna Business, L.L.C., 308 So. 3d 1002, 1005 (Fla. Dist. Ct. App. 2020). In a case arising out of negotiations between the members of a struggling limited liability company for the sale of some of the members’ interests to another member, the court addressed the requirements for enforceability of an agreement for the transfer of membership interests. After a two-day meeting between the representatives of the four members of Lotus, a Florida limited liability company, the parties handwrote a document containing certain agreed upon terms for the sale by three of the members to the fourth member. The agreed upon terms memorialized in the handwritten document included the purchase price, term, governing law, identity of personal guarantors, and costs and fees in the event of default. The handwritten document referenced future contracts and promissory notes to be drafted; however, no future contracts or promissory notes were ever drafted. The purchasing member made some of the payments identified in the handwritten document but failed to make all of the payments. The selling members filed suit to enforce the handwritten document, which they alleged constituted an enforceable agreement for the sale of their membership interests. The purchasing member argued that the handwritten document was not enforceable because it lacked essential terms.
The trial court found that the handwritten document was enforceable and entered judgment for the selling members. However, the appellate court reversed, holding that the handwritten document was unenforceable as it lacked essential terms. The court looked to the company’s operating agreement, which provided that no transfer shall be valid unless the transferee signs the operating agreement as appropriately amended to take account of the terms of the transfer. The court further held that, while certain terms were contained in the handwritten document, essential terms regarding the transfer of the interests were not included. Among the missing material terms were a closing date, provisions for the issuance and transfer of certificates, releases, indemnification provisions, and any provision for mandatory execution of the operating agreement or amendment. As the handwritten document lacked essential terms and as the parties had failed to follow the mandatory procedure for a transfer of membership interests set forth in the operating agreement, the court held that the handwritten document was not enforceable.
§ 1.6.4.3. Texas
Adam v. Marcos, 620 S.W.3d 488 (Tex. App. 2021). The Court of Appeals of Texas upheld the trial court’s refusal to find breach of an oral partnership agreement where the agreement was between an attorney and his client. Plaintiff Adam – a businessman – and defendant Marcos – had a long-standing attorney/client relationship by which Marcos provided legal services for Adam’s various business ventures. The two subsequently orally agreed to form a partnership for future joint ventures, sharing costs and profits evenly. Marcos would provide legal services, while Adam would run the day-to-day operations. The agreement was purportedly seal with a celebratory “fist bump,” but no agreement was ever reduced to writing. Marcos provided Adam with startup funds in the amount of $250,000 and subsequently provided all legal services free of charge. Adam denied the existence of such an agreement, instead claiming that Marcos provided funds for Adams to invest in his companies, and that the legal services were provided in barter for other de minimis services.
While the Court credited Marcos’ testimony that that an oral agreement to form a partnership existed, the Court held that such arrangement was invalid because of the attorney/client relationship between the two parties. The Court held that a presumption of unfairness or invalidity attaches to contracts between attorneys and their clients due to the fiduciary nature of the relationship. The Court further held that Marcos failed to carry his burden to prove the fairness and reasonableness of the agreement, including the burden to establish that Adam was informed of all material facts relating to the agreement, particularly where Marcos, Adam’s attorney, allowed him to agree to a “fist bump” deal without any formal writing.
§ 1.6.5. Fraud
§ 1.6.5.1. Colorado
McWhinney Centerra Lifestyle Center LLC v. Poag And McEwen Lifestyle Centers-Centerra LLC, 2021 COA 2 (Jan. 14, 2021). Financing member of LLC filed suit against managing member of LLC after a failed joint venture to build and operate a shopping center. Financing member asserted breach of fiduciary duty and breach of contract claims under an operating agreement requiring the application of Delaware law, as well as common law fraudulent concealment, intentional interference with contractual obligations, civil conspiracy, and intentional inducement of breach of contract. Following a bench trial, the court concluded managing member breached both its fiduciary duties and contractual obligations under the agreement and awarded $42,006,032.50 to financing member in damages plus interest but dismissed most of financing member’s intentional tort claims under the economic loss rule. The court of appeals first noted that the operating agreement’s choice of law provision did not govern related tort claims. Then, the appellate court reversed the dismissal of the intentional tort claims due to recent developments in Colorado precedent that ruled that the economic loss rule cannot bar statutory tort claims even if they are related to the operating agreement. The appellate court extended the precedent’s rationale to apply to common law intentional tort claims. However, the dismissal of the civil conspiracy claim was affirmed because the claim was based on an alleged conspiracy to breach the operating agreement and, thus, remained subject to the economic loss rule.
§ 1.6.6. Interference
§ 1.6.6.1. Florida
Bridge Financial, Inc. v. J. Fischer & Associates, Inc., 310 So. 3d 45, 49 (Fla. Dist. Ct. App. 2020). In a case involving a shareholder-employee’s copying of customer information for the use by a competing business, the court addressed the issue of whether a shareholder of a corporation can tortiously interfere with the corporation’s business relationships. Three former employees of J. F. Fischer & Associates, Inc. (“JFA”), a corporation that provides tax preparation services, copied and appropriated the customer list and then resigned to form a competing company. One of those employees, Adam Palas (“Palas”), was a five percent shareholder of JFA. The employees used the customer list to solicit JFA’s clients for their new business. JFA sued for violation of the Florida’s Uniform Trade Secrets Act (“FUTSA”) and tortious interference with a business relationship. A jury found for JFA. The defendants moved for a new trial, arguing that the customer list did not constitute a trade secret. The trial court denied the motion and the defendants appealed. The appellate court affirmed the denial of the motion for a new trial holding that the customer list did constitute a trade secret under the FUTSA because the JFA had spent a significant amount of time, effort, and money developing the client list, which was kept on a password protected server and was not publicly available.
However, with regard to the tortious interference claim, the trial court had entered judgment on the pleadings in favor of Palas because he was a five percent shareholder of the corporation. JFA filed a cross-appeal of this judgment. The appellate court affirmed the trial court’s entry of judgment on the pleadings, explaining that a tortious interference claim must be directed to a third party that interferes with a business relationship. Therefore, as Palas was an owner of the corporation, he was a party to the corporation’s business relationships with its clients and “could not interfere with a business relationship with himself”.
§ 1.6.7. Equitable/Statutory Relief
§ 1.6.7.1. Colorado
Sensoria, LLC v. Kaweske, 2021 WL 2823080 (D. Colo. Jul. 7, 2021). Investor in a holding company for various cannabis-related entities, on its own behalf and derivatively on behalf of holding company, brought action seeking to recover its investment in holding company against holding company, its subsidiaries, its owner, its managers, its law firm, and other, separate entities that were in competition with holding company allegedly created by holding company’s owner and manager to siphon off assets and cash of holding company. The cannabis-related businesses were legal under Colorado state law. However, Defendants moved to dismiss all claims because the underlying illegality of the business under federal law (Controlled Substances Act, 21 U.S.C. §§ 802, et seq. (“CSA”)), which prevented the federal court from granting any relief that would endorse or require illegal activity or that would impose a remedy paid from assets derived from criminal activity. Since many of the forms of the sought-after remedy would require the court endorsing or implementing criminality, the court dismissed several of the investor’s claims, including theft, fraud, negligent misrepresentation, breach of fiduciary, aiding and abetting breach of fiduciary duty, civil conspiracy, unjust enrichment/constructive trust, mandatory injunction, RICO, and securities law-based claims.
However, the court did not dismiss certain other claims because they did not directly implicate the CSA in any way. The Court permitted an accounting and recission claim to survive but dismissed all aspects of the investor’s equitable claims that would have the practical effect of transferring cannabis-related assets to the investor. As for the investor’s derivative claims on behalf of the holding company against its law firm, the Court permitted a malpractice claim to proceed because the allegations raised issues of disloyalty and conflict of interest.
§ 1.6.7.2. Minnesota
Gerring Properties Inc. v. Gerring, No. A20-0032, 2020 WL 7490729 (Minn. Ct. App. Dec. 21, 2020), review denied (Mar. 16, 2021). The parties in Gerring Properties Inc. are two equal shareholder factions of brothers and their children that reached a shareholder deadlock regarding two family corporations. One brother was terminated from the corporation and brought a claim seeking equitable relief under Minn. Stat. § 302A.751, subd. 1(b)(4). The Court of Appeals affirmed the district court’s finding that the brother reasonably expected to be continually employed by the companies. The court further supported the district court’s finding that his termination violated that reasonable expectation even with evidence of the brother’s misconduct after weighing that misconduct against evidence that the termination was meant to force the brother and his wife to transfer shares and become less than 50% shareholders. This conduct and the admitted shareholder deadlock supported the need for an equitable remedy of a buyout. After the district court evaluated equitable remedies by a special master’s report, the Court of Appeals did not find that the district court abused its discretion by not applying a marketability discount to the buyout value or ordering a dissolution after the buyout failed. The district court did not abuse its discretion by adopting the special master’s valuation or awarding attorney fees under Minn. Stat. § 302A.751 because of specific findings that the opposing faction of shareholders acted “arbitrarily, vexatiously, and in bad faith,” which included failure to hold shareholder meetings, comply with court-ordered disclosure of financial records, and unfair use of bank loan proceeds.
§ 1.6.7.3. New York
ALP, Inc. v. Moskowitz, No. 652326/2019, 2021 WL 2416509 (N.Y. Sup. Ct. June 11, 2021). As part of a history of family business conflict and litigation between the children of artist Peter Max, the plaintiff corporation and its CEO, the daughter of Peter Max, sought a preliminary injunction to enjoin a special shareholder meeting pursuant to New York’s Business Corporation Law §§ 706(d), removal of directors, and 716(c), removal of officers. The plaintiffs alleged that the son and the father’s guardian entered into an improper shareholder voting agreement. The agreement promised the guardian’s vote to re-elect the son and oust the daughter as CEO and board chair in exchange for the son’s promise to return the artwork and intellectual property currently owned by the corporation to the father. The plaintiffs provided evidence that the guardian previously supported the daughter as an officer and director of the corporation and that the son breached his fiduciary duties by improperly diverting corporate assets. The Supreme Court found that the plaintiffs demonstrated a likelihood of success on the claims and would suffer irreparable harm if the vote were allowed to take place, resulting in the significant diversion of the corporation’s assets.
§ 1.7. Valuation and Damages
§ 1.7.1. California
Cheng v. Coastal L.B. Assocs., LLC, 69 Cal.App.5th 112 (Sep. 1, 2021). In an appeal regarding the value of the plaintiff’s membership interest in a judicial dissolution action regarding a Limited Liability Company (“LLC”), the California Appellate Court concluded that the standard of value under the statute for corporate shares do not apply to membership interests in Limited Liability Companies. The Appellate Court affirmed the Trial Court decision, which relied on a majority appraisal by the panel of three appraisers it had appointed in which the appraisers used a fair market value standard of value and considered discounts. The Appellate Court considered that the parties had stipulated to an order that the standard of value is fair market value, and commented, “Fair market value includes discounts reflected in the market… had the Legislature intended to apply a ‘fair value’ standard to purchase of membership interests… it would have done so expressly in the statutory language.” Furthermore, the Appellate Court considered that the definition of “fair market value” from Internal Revenue Service, Revenue Ruling 59-60 has largely been adopted in California, “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”
Furthermore, the Appellate Court concluded that the Trial Court was not required to de novo determine the value when the appointed appraisers panel did not unanimously agree because the Trial Court found no error in the appraisers’ separate appraisals and acted in its authority to order the appraisers to confer to explore for a consensus on valuation.
§ 1.7.2. Delaware
In re Cellular Telephone P’ship Litig., 2021 WL 4438046 (Del. Ch. Sept. 28, 2021). In an action where the Delaware Court of Chancery found breach of a partnership agreement, the Court declined to award a dissociation remedy under the subject partnership agreement, which would have required the sale of the majority partner’s partnership interest to the minority partner, finding that such a remedy would “be unconscionably disproportionate.” Instead, to remedy the breach of the partnership agreement, the Court ordered the majority partner to pay compensatory damages equal to the pro rata value that the minority partner would have received had the partnership agreement not been breached. The Court noted that, “[i]f the plaintiffs had shown that AT&T had committed a breach that deprived the minority partners of meaningful value, and particularly if AT&T’s breach was willful or persistent, then dissociation damages could be warranted. The damages awarded were nominal.
§ 1.7.3. Illinois
Payroll Servs. by Extra Help v. Haag, 2021 IL App (5th) 200036-U. In an appeal regarding the value of the defendant’s 25 percent shareholder interest in a privately-owned corporation pursuant to the parties’ shareholder agreement, the Illinois Appellate Court affirmed the Trial Court’s decision to determine that the fair market value is the average of the valuations prepared by the plaintiff’s and defendant’s respective experts.
At trial, the Court determined that the analysis prepared by the defendant’s expert was not a “valuation” within the meaning of the shareholders agreement, and instead a “calculation analysis.” The Court considered that the defendant’s expert “’explained that a calculation analysis does not include all of the valuation procedures required for a valuation analysis,’ and that if a valuation analysis had been performed, ‘the results may have been different, and the difference may have been significant.” The defendant’s expert testified at trial that the expert and client “agreed on a calculation engagement because of a lack of reliable financial data and an inability to gain cooperation from” the company.
Regarding the shareholders agreement, the Court noted that the purchase price “shall be equal to the sum of the fair market value… determined by the Fair Market Value Determination, as hereinafter defined… Fair Market Value Deter determination shall be defined by the valuation of the Corporation by a mutually agreed upon business valuation company…. If there cannot be a mutually agreed upon business valuation company then such valuation shall be the average of two valuations (one chose by the Corporation and one chosen by the Shareholder whose shares are being sold).”
The Court considered “that the parties did not agree on the meaning of the term ‘valuation’ as used in the Agreement.” Ultimately, the Court “determined that the term ‘valuation’ should be defined in accordance with the definition of ‘valuation’ in the business valuation industry, and that the calculation analysis submitted by… [defendant’s] expert was not a sufficient ‘valuation’ under the terms of the Agreement.”
Furthermore, the Court noted that the… [defendant’s expert’s] testimony and correspondence indicated that… [defendant’s expert] was aware of ‘valuation’ in the business valuation industry. During its analysis, the Court considered that both experts were CPAs and that AICPA valuation standards contain definitions, which it quoted as stating “There are two types of engagements to estimate value – a valuation engagement and a calculation engagement. The valuation engagement requires more procedures than the calculation engagement.”
During the second round of summary judgment motions, the defendant’s supporting memorandum for the motion was accompanied by a “’Full’ Valuation” prepared by defendant’s expert which came to the same valuation quantum conclusion as the original “calculation analysis.” Defendant’s expert “stated that she conducted additional research and inquiries… conducted a comparative analysis of the company over time … and performed the valuation engagement and reached a conclusion in compliance with the AICPA Statement on Standards for Valuation Services;” that “Every piece of evidence obtained through the more in-depth review and examination of… [the company] affirmed her earlier opinion that a guideline company valuation method was the most appropriate… and that the consideration of… [the company’s recent acquisition of payroll companies supported” her conclusion and that “She uncovered nothing in the review that changed her initial opinion.”
Ultimately, the Court concluded that the “Full” Valuation “met the definition of ‘valuation’ under the terms of the Agreement” and declared “That the fair market value… was the average of the valuations” by the plaintiff’s and defendant’s respective experts.
On appeal, the plaintiff’s claimed that the defendant’s expert’s “Full” Valuation was a not a “valuation” within the meaning of the shareholders agreement. The plaintiff’s contended that the defendant’s expert did not ever perform a “valuation,” “But instead offered the same ‘calculation analysis’ and renamed it a business valuation.”
The Appellate Court noted that “’valuation is not defined in the Agreement. The Agreement does not specify the type of engagement required to estimate value,” and that “The plaintiffs, as drafters of the Agreement, could have included provisions requiring… using only a valuation engagement that complied with the standards of the AICPA, but that was not done here.” The Appellate Court found “error in the trial court’s determination that ‘valuation’ should be defined in accordance with the definition of ‘valuation’ in the ‘business valuation industry.” In absence of a definition in the Agreement, the word ‘valuation’ should be assigned its plain and ordinary meaning.”
Further, the Appellate Court considered definitions of “valuation” from popular dictionary and a legal dictionary. Nevertheless, the Appellate Court concluded that “Even if the meaning of ‘valuation,’ as defined in the [AICPA] Statement on Standards, was applicable, it would not alter the outcome of this case… it recognizes ‘two types of engagements to estimate [the] value [of a business] – a valuation engagement and a calculation engagement.” In reaching this conclusion, the Appellate Court noted that “The plaintiffs presented no evidence to rebut… [defendant’s expert’s] testimony that she complied with her obligations to perform a valuation engagement.”
§ 1.7.4. Indiana
Hartman v. BigInch Fabricators & Constr. Holding Co., 161 N.E.3d 1218 (Ind. 2021). In an appeal from a Court of Appeals decision which found that valuation discounts did not apply in a closed-market compulsory buy-back sale of shares of a minority interest, the Indiana Supreme Court determined that there is no universal rule prohibiting discounts in these situations and where the shareholders agreement suggests fair market value as the standard that discounts may be particularly applicable. The Supreme Court reversed the Court of Appeals.
The shareholders agreement specified that the company would buy the interest at “appraised market value,” determined by an independent valuator in according with generally accepted accounting principles. In this case, the independent valuator applied discounts for both lack of control and lack of marketability.
At trial, the plaintiff contended that discounts did not apply because this is a compulsory closed-market sale and that the agreement does not specify fair market value as the valuation standard. Plaintiff did not exercise his contractual right to obtain an additional third-party valuation.
The Trial Court found that as used in the agreement, the “adjective” of “appraised” modified the term “market value” and that “appraised market value” meant fair market value. However, the Appellate Court found that in a compulsory sale that discounts are not applicable and reversed the Trial Court.
As stated by the Supreme Court in its decision on this appeal, “we hold that the parties’ freedom to contract may permit these discounts, even for shares in a closed-market transaction,” and “under the plain language of this shareholder agreement – which calls for the ‘appraised market value’ of the shares – the discounts apply.”
Furthermore, the Supreme Court found that case law regarding statutory buyouts “doesn’t control” because “the valuation terms come not from a statute but from a contract.” The Supreme Court also commented that the parties’ freedom to contract may permit discounts and that the plaintiff had provided no evidence to show that the independent appraiser had not correctly quantify fair market value.
§ 1.7.5. Iowa
Guge v. Kassel Enters., 962 N.W.2d 764 (Iowa 2021). The Iowa Supreme Court ruled that in a buyout under Iowa’s election-to-purchase-in-lieu-of-dissolution statute, where both parties’ experts included transaction costs as a reduction to the value of a minority interest of stock in a corporation under a net asset value approach, that it was error for the Trial Court to not reduce value for the transaction costs on the enterprise level. However, where there was no evidence of intention to liquidate that an adjustment for built-in gains tax is not warranted. The Supreme Court reversed the Trial Court regarding the transaction costs and remanded the case.
This was the first time that the Supreme Court addressed a “fair value” determination under Iowa’s election-to-purchase-in-lieu-of-dissolution statute. The family-owned corporation held farmland which did not generate any income from operations. During its analysis, the Supreme Court considered that, in its view, the weight of authority leans towards courts not discounting values for tax consequences absent contemplation of liquidation triggering built-in gain tax consequents.
§ 1.7.6. Kentucky
Kenneth D. Parrish, DMD, Ph.D., P.S.C. v. Schroering, 2021 WL 1431604 (Ky. Ct. App. Apr. 16, 2021). In an appeal of a jury’s decision to determine its own buyout price of a professional practice partnership 50 percent ownership interest instead of an appraisal under the terms of the partnership agreement, the Kentucky Appeals Court considered that there was no evidence that the appraisers used the wrong valuation approach under the agreement. The Appeals Court reversed and remanded the case back to the Trial Court.
In this case, the agreement stated that the buyout price under the partnership agreement was to be the average of the closest of two of the three appraisal experts. The two closest appraisals when averaged resulted in a negative value. Those two appraisals were based on the net asset value approach. The appraiser retained by the partner being bought out concluded a substantially higher, positive value, than either of the other two appraisers. That appraiser used an income approach. The jury decided to make its own value determination because it believed that a demonstrable mistake of fact underlies the two closest appraisals.
On appeal, the plaintiff contended that it was improper for review of the appraisals to go to the jury. The Appeals Court considered that there was no indication that the two appraisers misinterpreted the partnership agreement’s provision regarding value and that they chose the asset approach because they deemed the partnership to have insufficient cash flow to justify use of the income approach. Consequently, the Appeals Court concluded that the two appraisers’ rationale for applying the asset approach was not a demonstrable mistake of fact and the standard that would allow a jury to review an appraisal had not been met.
§ 1.7.7. Minnesota
Ionlake, LLC v. Girard, No. CV 20-640 (SRN/BRT), 2021 WL 632605 (D. Minn. Feb. 18, 2021). Third-party defendant, Derrick Girard, is a founding member of the plaintiff, Ionlake, LLC. The third-party defendant moved to amend his counterclaim to claim punitive damages pursuant to Minn. Stat. § 549.20 against his uncle and co-founder of Ionlake, LLC, Wade Girard. Section 549.20 requires that the claimant show by “clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others,” which is statutorily defined as meaning that “the defendant has knowledge of facts or intentionally disregards facts that create a high probability of injury to the rights or safety of others.” The District Court of Minnesota found that Derrick sufficiently alleged facts to support a punitive damages claim by alleging that his uncle falsely filed a copyright application as the sole owner of a software program owned by the LLC, created a competing company to sell licenses for the software program, threatened to suspend the LLC’s access to the software, and then fulfilled that threat by terminating the LLC’s access to the software.
Mork & Assocs., Inc. v. Willow Run Partners, No. A19-1914, 2021 WL 771693 (Minn. Ct. App. Mar. 1, 2021). Willow Run Partners (WRP) was a limited partnership with the sole purpose of developing and operating a low-income residential apartment building. After initiating claims revolving around the embezzlement of WRP funds, limited partners and the managing general partner, Mork, agreed to submit the dispute to a receiver. The district court disagreed with the receiver regarding the interpretation of distribution under the Limited Partnership Agreement (LPA) and distributed funds equally between general and limited partners by rendering the repayment priority moot. According to the district court, the repayment priority was moot because the sale proceeds exceeded the initial contributions made by the general and limited partners. The Court of Appeals reversed the district court’s interpretation of the LPA that disregarded repayment, finding that the LPA required the repayment priority. The first step of the LPA repayment unambiguously referred to past distributions, not future distributions. The LPA also lists the steps in numerical order, and each step refers to the balance from the previous step. Without this priority plan, the general partners received more than they would have under the plan. Considering the language and effect of the repayment priority plan, the Court of Appeals reversed the district court’s interpretation of the LPA.
§ 1.7.8. Nebraska
Wayne L. Ryan Revocable Tr. v. Ryan, 308 Neb. 851, 957 N.W.2d 481 (2021). In this appeal, the Nebraska Supreme Court upheld all the Trial Court’s findings in a family-owned business buyout dispute regarding the value of the shares of the founder’s majority ownership interest in the corporation.
On appeal, the company contented that the Trial Court had failed to independently review all the relevant evidence because in its decision it adopted all the plaintiff’s proposed valuation findings, the plaintiff’s expert’s proposed valuation “improperly assumed synergies,” and disregarded Letters of Intent from potential buyers during an attempt to solicit bids for acquisition of the company. The Supreme Court said a Trial Court may consider a variety of material valuation factors because the “real objective is to ascertain the actual worth of what the [shareholder] loses” and listed a variety of examples of commonly considered business valuation factors. Furthermore, the Supreme Court undertook its own de novo review of the record and found that the determination of the Trial Court regarding value was based on fact, principle and reasonableness.
The Supreme Court pointed out that there was no evidence that synergies were incorporated into the valuation and that the Trial Court considered that two of the Letter of Intent bids were near the concluded value by the plaintiff’s expert which the Trial Court adopted. In addition, the Supreme Court noted that since there was not a completed or nearly completed transaction upon which to extract pricing evidence and that the attempt to solicit to solicit bids for acquisition of the company was defective, that the attempt “did not reliably reflect the market’s view regarding… [the company’s] value.”
Ultimately, the Supreme Court found that the Trial Court reviewed “each area of disagreement between the valuation expert and found [plaintiff’s expert’s] valuation to be reasonable and supported by the evidence” and that “each part of [defendant’s expert’s] analysis… reflected a downward bias which rendered his conclusions unreliable.”
§ 1.7.9. New York
Derderian v. Nissan Lift of New York, Inc., 192 A.D.3d 1021 (N.Y. App. Div. 2021). A 50% shareholder sought the judicial dissolution of the closely held corporation. The corporation elected to purchase the plaintiff’s shares, but after a valuation hearing, the Supreme Court determined that the shares had no fair market value. The Appellate Division affirmed this finding because the corporation’s valuation expert properly considered the threat of creditor judgments of more than $3 million, and the plaintiff sold inventory out of trust. Further, the plaintiff did not come forward with credible evidence to invalidate the expert’s testimony.
Derderian v. Nissan Lift of New York, Inc., 192 A.D.3d 1021 (N.Y. App. Div. 2021). A 50 percent shareholder in a corporation in a judicial dissolution of a closely-held corporation case appealed the Trial Court’s decision that the value of his shares is zero. The Supreme Court of New York, Appellate Division affirmed the Trial Court’s decision because “The determination of a factfinder as to the value of a business, if it’s within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” and that the Trial Court’s “determination that the fair value… was zero is supported by the evidence.”
The Appellate Division Court noted “The corporation’s expert testified that the petitioner’s stock shares had no value due to his having sold inventory out of trust, and the resulting impact upon the corporation’s assets of the petitioner having done so… [and] he factored into his valuation that at least two creditors had commenced separate actions against the corporation seeking judgments in excess of more than $3 million.” In addition, the Appellate Division Court noted “Although the petitioner’s expert prepared a report in which she opined that the value of the corporation exceeded $6 million, when cross-examined, her testimony revealed that the valuation set forth in her report was flawed since it neither accounted for the actions commenced against the corporation nor for the inventory that had been sold out of trust by the petitioner.”
§ 1.7.10. North Carolina
Finkel v. Palm Park, Inc., 2020 NCBC LEXIS 137. In a breach of fiduciary and constructive fraud dispute among members of a Limited Liability Company, the North Carolina Superior Court entered a judgment for judicial dissolution. The parties sought to avoid dissolution of the company by agreeing to purchase the interest of the plaintiff’s minority member interest at fair value and agreed that the Limited Liability Company, which held real estate, should be valued under the net asset value approach without discounts. A dispute arose regarding the valuation.
The Court issued an Amended Final Judgment allowing the majority owner to elect to purchase the minority owner’s interest. The majority owner made the election. The Court appointed “a receiver solely for the purpose of managing the operations and business… until the sale of… [plaintiff’s] membership interest to… [the majority owner defendants] is completed.” The parties jointly retained a real estate appraiser to value the real estate properties and who undertook a net asset value calculation.
The majority owner defendants objected to the jointly retained real estate appraiser’s report and a Court hearing occurred. The parties disagreed over whether the company was a real estate holding company, as the plaintiff asserted, or an investment holding company, as defendants asserted. The defendants retained an accredited business valuation expert who testified at the hearing and based his valuation an orderly liquidation premise. The plaintiff asserted that an orderly liquidation premise is not appropriate because the purpose of the buyout was to avoid a dissolution liquidation.
The Court noted that under the relevant statute, “The buyout of the ‘complaining member’ was to occur ‘at its fair value in accordance with any procedures the court may provide’… There exists no case law on the standards for applying this statute.” Furthermore, the Court noted that relevant case law exists that a court has flexibility in determining fair value, cited valuation factors cited in the case law, and agreed with the parties that U.S. Internal Revenue Ruling 59-60 provides useful guidance for valuation of closely-held companies such as the subject company. The Court decided that fair market value, under Revenue Ruling 59-60, was informative and quoted that definition of fair market value. In addition, the Court commented that fair market value is not focused on the specific participants in a specific transaction, rather it assumes a sale between a hypothetical buyer and hypothetical seller. It continued that according to relevant case law, “market value is not the sole determinant of fair value but is a factor to be given heavy weight. It is the starting point for any valuation.”
Regarding the real estate appraiser’s report, the Court agreed with the defendants that the report was “suspect” considering that the appraiser corrected “significant errors” in his original report, but “for some reason, was attempting to justify the values reached in the [original] Reports. However, he did so without providing a sound basis for the changes in his assumptions and methodology.” The Court accepted the real estate appraiser’s overall methodology considering that he was “highly experienced and respected” and that his methodology was generally accepted in commercial real estate appraisal. The defendant’s business valuation expert used aspects of the real estate appraiser’s values and methodology, but deducted liquidation costs, capital gains taxes and profit participation payment, under an orderly liquidation premise.
The Court used the defendant’s business valuation expert’s report as a starting point and considered that the parties agreed that discounts were not appropriate. Furthermore, it considered that, pursuant to Revenue Ruling 59-60, “there is no dispute that the orderly liquidation premise is an accepted method for determining the fair market value of holding companies.”
Ultimately, the Court decided that it could and would consider the fact of an actual dissolution would not occur in this case, but that the evidence showed that the company faced considerable business challenges and declining market conditions, and the business provided a livelihood for the defendants. The Court concluded by rejecting the subtraction of capital gains taxes, and noting that, under fair value “this does not necessarily consider the specific circumstances involved in this case in assessing the equities” and “the statue provides that flexibility.” Therefore, the Court used the orderly liquidation valuation, based upon the defendants’ business valuation expert’s valuation but with correction for subtraction of capital gains taxes.
§ 1.7.11. Utah
Armstrong v. Sabin, 2021 WL 3473256 (D. Utah Aug. 6, 2021). In this case, the defendant elected to purchase the member interests of the other two owners in a Limited Liability Company in lieu of dissolution. The defendant owned 40 percent, and the other two members, the plaintiffs, each owned 30 percent. According to the U.S. District Court for the District of Utah, “The parties were unable to agree on the value of the Plaintiff’s interests, so the court must determine the value under” the Utah statute and held a hearing “to determine the fair market value of the applicant member’s interest in the limited liability company as of the day before the petition under” the Utah statute “was filed or as of any other date the district court determines to be appropriate under the circumstances and based on the factors the district court deems appropriate.”
The Court noted that the Utah statute requires “the Court must determine (A) the appropriate valuation date” and “(B) the fair market value of Plaintiff’s 30% interests on that date.” In determining the appropriate valuation date, the Court considered that defendant had “acted in ways that devalued” the company, “but cannot ignore the Plaintiff’s part… Both of these actions subsequently lowered” the company’s “value.” It noted, “Plaintiff’s proposed valuation date would allow Plaintiff’s to avoid the consequences of their own actions would not be equitable.” Considering the date stated in the Utah statute, the Court selected the date it deemed “the most equitable valuation date… because it captures the fruits of both parties’ actions.”
In beginning its analysis of fair market value, the Court considered that the relevant section of the Utah statue did not define fair market value but noted that the definition in the International Glossary of Business Valuation Terms is consistent the with the definition in other portions of the Utah Code. It concluded therefore that the Court would use the fair market value definition from the International Glossary of Business Valuation Terms.
Next, the Court considered that the differences in the asserted valuations “are the result of differences in (1) the projections used and (2) the discounts applied.” Both parties’ experts used the discounted cash flow method to determine the value of the income of the company and the Court found that to be an appropriate methodology because the company could have rehired employees and continued operating as of the selected valuation date.
Regarding projections, the Court considered and compared the experts’ respective projections and internal company evidence regarding projections, such as sales plans and budgets. In selecting among the projections of growth, it deemed appropriate the projection which “would have been known or knowable as of the valuation date.” Furthermore, the Court considered that evidence existed “that the liquid herbal supplement industry is expected to grow more rapidly in the coming years because of an aging population and the general focus on health…. [and] enjoyed unusual growth during the COVID-19 pandemic, which was ongoing as the time of the valuation date.” It concluded, “Because of these opposing factors, the Court will rely upon the averages of the expert’s projected growth.”
Furthermore, the Court resolved the different assertions regarding projected gross profit by relying upon actual product costs applied to historical financial statements with a similar customer base, which “relies on data that was known or knowable as of the valuation date.” In resolving differences among asserted projected operating expenses, the Court selected the use of historical operating expense, which “excluded all of the disputed expenses and nonessential expenses from the calculations” and “separately calculated salaries for employees with fixed salaries and employees with variable salaries like commissions. However, the Court adjusted “for the lower revenue projected by the Court,” selected the “average of the experts’ projected depreciation and amortization,” and subtracted income taxes.
In determining terminal value beyond the forecasted period in the valuation, the Court noted “the parties had very similar capitalization rates” and the Court applied the last projected future year’s cash flow and capitalization rate.
Regarding discounts, the Court rejected the plaintiffs’ contention that their individual 30% interests should be valued as one 60% interest. The Court stated “the fair market value standard requires the Court to consider what separate hypothetical buyers would pay for each Plaintiff’s interest. To conclude otherwise would implement a different standard such as investment value, which considers who is buying the interests and the value to that specific person.” It also found that there was not oppressive conduct, that the two 30% owners could together exercise voting control, and that even if there hypothetically was oppressive conduct that both sides were similarly engaged in misconduct. The Court therefore concluded “there is not basis – legal or equitable – to exclude the discounts typical of a fair market value analysis.” Ultimately, the Court relied upon and applied the percentage discounts for lack of control and lack of marketability from the only expert’s report which had quantified such discounts.
§ 1.7.12. Virginia
Jones v. A Town Smoke House & Catering Inc., 106 Va. Cir. 168 (2020). This matter was before the Circuit Court of the City of Waynesboro, Virginia, to establish the value for the purchase in lieu of dissolution of the plaintiff’s one-third ownership interest in the shares of stock of a private corporation.
Both parties’ experts used income approaches. The plaintiff’s expert primarily used a capitalization of income method because he deemed the current income level stabilized and the defendant’s expert used, with a 100% weight, a discounted cash flow approach because he deemed that future cash flows will vary as a result of the then recently passed Tax Cuts and Jobs Act of 2017 which changed the way depreciation is calculated for income tax purposes. Each expert also considered other methodologies.
On a more detailed basis, the Court found that the plaintiff’s expert’s view that the income level was stabilized was inconsistent with his testimony that in applying the market-based approach, which was his secondary-weighted methodology, he considered that the company experienced “operational inefficiencies.” The Court viewed this inconsistency as a failure by the plaintiff’s expert to adjust in his income approach for those inefficiencies.
Regarding the market-based approach, the Court deemed it a less reliable methodology because of the lack of similarity in qualitative and quantitative characteristics of potentially comparable companies or transactions, lack of information regarding the motivation of the buyers and sellers of potentially comparable transactions, and whether the terms of potentially comparable transactions were all in cash. Furthermore, the Court considered that “income methods are utilized to value stock in a corporation as a going concern.”
In its analysis, the Court reviewed pertinent sections of the Virginia Code regarding fair value and determined that “Application of minority or marketability discounts in a corporate dissolution are therefore discretionary after consideration of all relevant facts and circumstances of the case.” Regarding minority discounts, the Court noted that “all three corporate shareholders own equal shares therefore, there is not a controlling interest by any one shareholder” and therefore a minority position discount is not applicable. The Court also found that “discounted cash flow calculations inherently incorporate the applicable discount for lack of control and all three shareholders own a minority position.” The Court did not apply a minority discount, in distinction from the discount for lack of control which it had mentioned.
Regarding marketability discounts, the Court stated, “Virginia does not follow the majority rule and instead requires the application of the marketability discount unless doing so would be unjust or inequitable.” The Court also considered that the plaintiff’s “stock is a restricted stock given the limitations imposed by the bylaws…. [the] stock is a minority interest in a corporation. No dividend has been paid on the stock, there was no pending prospects of a public offering or sale of business, and there were no prospective buyers of the stock.” In addition, the Court reviewed the parties’ contentions regarding whether oppressive conduct occurred. It found that oppressive conduct had been established and commented “Abrupt removal of a minority shareholder from positions of employment and management can be a devastatingly effective squeeze-out technique.” As a result, the Court deemed this a “squeeze-out” of a minority owner case. Accordingly, “the Court finds that application of the marketability discount would be unjust and inequitable in this case.”
The collection and use of data by digitally focused businesses can create different competition issues depending on the type of data in question and the relevance of data to the practice under scrutiny. Where the data in question relate to personal information, particular questions arise surrounding the interplay among privacy, data protection, and competition law. The global trend in the data-driven digital economy is that of moving toward greater privacy and data protection rules, led by the European Union’s General Data Protection Regulation, among others. In developed countries, in particular, policymakers and enforcers are faced with the important and thorny question of whether privacy or data protection considerations should inform the competitive assessment of conduct adopted by digital businesses, given that data and its use are integral to the business models of many economic actors in the digital economy, not least the large online platforms.
The different responses to the role of privacy and data protection in competition assessments have created a divide between those who view privacy as a non-economic matter better dealt with under other policies than competition and those who view privacy and other data policies as an integral part of the economic bargain struck between providers of digital services and users. There are touchpoints between these separate-but-related areas of policy that policymakers and enforcers have to consider in their approach. From a substantive outcome perspective, these policies do not always give the same answer to the same question, as they pursue different aims.
For example, complex and voluminous data protection obligations can affect competition adversely, if such obligations present disproportionate compliance costs and barriers for small- and medium-sized enterprises. Yet, a right to data portability provided under data protection rules can have potentially procompetitive effects by enabling multi-homing and lowering barriers to entry/expansion for rivals. Yet again, a competition law remedy that requires access to data by an undertaking’s rivals can infringe privacy rules, while a merger that combines unique datasets can potentially hamper the development of existing or potential competition and simultaneously have privacy-distorting effects depending on what the merged entity does with the datasets.
Ideally, policy responses and enforcement on the touchpoints among privacy, data protection, and competition should aim at advancing each of these interests without unnecessarily impinging on the others. Achieving that requires cooperation between the relevant enforcers and regulators, but that cooperation may be difficult to realize while the normative questions remain unanswered about whether privacy or data protection concerns should be part of the competitive assessment at all.
In some jurisdictions around the world, regulators and enforcers appear to be answering the question of whether data protection and privacy concerns are relevant to an assessment under competition law in the affirmative, particularly when it comes to the practices of “Big Tech.” Jurisdictions that have been particularly active in this space where competition law and data protection intersect from a policy and/or enforcement practice point of view include the United Kingdom, Germany, France, Australia, and the European Union. In these jurisdictions, a growing list of ongoing investigations and decisions in the areas of, in particular, merger control and abuse of dominance, directly engages with issues that arise at the intersection of data protection and privacy and the competition law analysis.
In the United States, antitrust regulators historically have not regarded privacy issues alone as a proper basis for merger or conduct enforcement, citing concerns about the limitations of existing U.S. antitrust doctrine and the possibility that enforcement centered on privacy could deter procompetitive innovation. Instead, in the United States, privacy concerns and issues relating to the alleged misuse of data by platform and other businesses have been squarely within the province of consumer protection regulation, which addresses distinct harms and vindicates different rights than antitrust law.
That historical outlook may be ripe for change, however, with the appointment of new enforcers whose writings and public statements have strongly suggested the need to consider privacy issues in the context of antitrust enforcement and the possible passage of new legislation that would mandate that concerns about privacy be analyzed in determining whether a particular transaction or type of behavior violates the Sherman Act. Most immediately, the question of whether privacy plays a role in antitrust analysis will be addressed in the government’s cases against Google and Facebook.
In Europe, the most prominent abuse of dominance case is the ongoing procedure against Facebook in Germany for allegedly exploitative data processing. Also, the Autorité de la concurrence (French competition authority) is currently investigating the impact of Apple’s recent changes to its privacy policy on third-party app providers. Merger control cases on a European Union level where privacy considerations were taken into account in the commission’s assessment include the Microsoft/LinkedIn, Facebook/WhatsApp, and Google/Fitbit mergers. On the level of new legislation, there have been competition law–related developments in the European Union (draft Digital Markets Act) and in Germany (recent amendment to the German Act against Restraints of Competition). These pieces of legislation mainly contain ex ante regulations and target large online platforms qualifying as so-called gatekeepers. The obligations imposed on these companies concern, inter alia, access to data and data portability.
In Canada, until recently at least, the Competition Bureau has been clear that its mandate is limited to conduct that harms competition and does not extend to privacy (or data security) concerns unrelated to competition and that Canadian competition policy does not, and should not, assume that “big is bad.” Despite the bureau’s historically “separatist perspective” (i.e., that privacy law and competition law address different harms and vindicate different rights), based on past enforcement action, policy documents, and statements by bureau officials, there appeared to be several areas of actual or potential privacy/competition law convergence in Canada; namely, misleading advertising/deceptive marketing practices (where the bureau has already taken enforcement action in respect of misleading claims about how firms collect, use, store, and discard consumer data) and, possibly, merger review and abuse of dominance. However, a speech by the Commissioner of Competition (the head of the Competition Bureau) in October 2021 calling for a comprehensive review and “moderniz[ation]” of the Canadian Competition Act to more effectively address potential competition issues in the digital economy portends a potentially fundamental shift in the bureau’s position on the question of whether privacy is a competition law issue.
Although enforcers have thus far focused most of their attention on Big Tech, the privacy- and data-related conduct of non-Big Tech companies can and is likely to attract the attention of competition authorities. In the United States, for example, many traditional brick and mortar retailers and e-commerce firms are looking to launch marketplaces, and there are several specialty e-commerce retailers that have amassed significant data that could be perceived as giving rise to the same competitive concerns as those identified in the investigations and lawsuits filed against so-called Big Tech. Moreover, there are several precedents already that suggest that the U.S. Federal Trade Commission is prepared to litigate against non-Big Tech firms, relying in part on claims that they misused certain large data sets. This indicates that the theories that have made headlines in the United States in connection with enforcement actions directed to Big Tech are potentially transferable to other data-centric businesses. Based on experience in other areas, it appears safe to anticipate that the Canadian Competition Bureau will follow the lead of its U.S. counterpart, and possibly sooner rather than later.
In Europe, as the protection of personal data may be an element of quality of a certain product or service, agreements or exchanges of information among competitors on privacy policies and the level of data protection are at risk of falling afoul of competition legislation such as Article 101 TFEU. Also, smaller firms may arguably be in a dominant position in a given market due, for example, to their possession of essential data that is needed by other companies to compete in that market. Even below the threshold of market dominance, recent legislation in some European countries in the area of so-called relative market power may extend privacy and data protection concerns to the conduct of companies in relation to companies that are dependent on them.
Finally, in Japan, information and competition laws have received much attention, especially in the context of platform business. Among other things, in 2019, the Japan Fair Trade Commission issued guidelines on the “superior bargaining position… between digital platform operators and consumers” and made clear that undue acquisition and utilization of consumers’ information by online platforms can be deemed as “abuse of superior bargaining position.” These guidelines are of note for both Big Tech and non-Big Tech firms alike, as a dominant position is not required; rather, relative superiority between parties is sufficient for demonstrating superior position.
DISCLAIMER: The views and opinions expressed in this article are entirely those of the authors and do not represent any policies or positions of any firm or other organization.
This article is based on the abstract prepared by the authors for a program of the same name sponsored by the Antitrust Law Committee and presented on September 22, 2021, at the ABA Business Law Section’s 2021 Virtual Annual Meeting.
The 2022 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.[1] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-five states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; (24) Wisconsin and (25) Wyoming.[2] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.[3] The California and Connecticut programs are expressly not business court programs as such.[4]
§ 1.2. Recent Developments
§ 1.2.1. Business Court Resources
American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.[5] The ACBCJ’s Sixteenth Annual Meeting took place in Jackson, Mississippi from October 27, 2021 to October 29, 2021.[6] Among other topics, the meeting addressed intellectual property rights, “The Cost of Truth,” artificial intelligence, shareholder wealth and corporate purpose, and private practice and regulatory authority post-COVID. In 2021, the ACBCJ sponsored two additional clerkship positions in the ABA Section of Business Law’s Diversity Clerkship Program.[7]
Section, Committee, and Subcommittee Resources.The ABA Section of Business Law provides a Diversity Clerkship Program that sponsors second year law students of diverse backgrounds in summer clerkships with business and complex court judges.[8] In 2021, two additional clerkship positions were added through the ACBCJ’s sponsorship. The Section of Business Law has created a pamphlet, Establishing Business Courts in Your State.[9] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides 150 documents and/or hyperlinks to business court resources.[10] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Section of Business Law meetings. The Section’s Judges Initiative Committee also provides links to business court resources, such as judicial opinions published by various business courts, and standardized forms used in business and complex litigation courts.[11] The Section also has established a Business Courts Representatives (BCR) program,[12] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.
Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts have developed an innovative training curriculum[13] and faculty guide[14] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”[15] The Business Courts Blog[16] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years,[17] as well as recent developments in business courts. In 2021, there were articles and reports addressing some aspects of business courts.[18] There are also various legal blogs addressing business courts in particular states.[19]
§ 1.2.2. Developments in Existing Business Courts
Cook County, Illinois Circuit Court Law Division Commercial Calendar
In 2021, the mandatory arbitration rule governing Illinois’ Cook County Circuit Court’s Commercial Calendar Section was amended to state: “Mandatory Arbitration will be held in those commercial … cases assigned to the Law Division … with damages of less than $50,000 and no retained expert witness as defined in Supreme Court Rule 213(f)(3).”[20] Cases coming within the Commercial Calendar’s jurisdiction include claims “for, among other things, breach of contract (including breach of loan agreements or guarantees, construction contracts, breach of warranty), employment disputes, employment discrimination, qui tam claims, civil and/or commercial fraud, conspiracy, interference with business relationships, or shareholder disputes.”[21] The Cook County Circuit Court’s Chancery Division hears business disputes in equity, separately from the Commercial Calendar Section.[22] Commercial Calendars were first established by administrative order in 1992, and became operational in 1993, making this one of the oldest modern business courts in the United States.[23] There are currently eight judges assigned to the Commercial Calendar Section,[24] with Uniform Standing Orders applicable to all of these judges,[25] though the individual judges may have forms or practices unique to their individual calendars.
Florida’s Complex Business Litigation Courts
As it was last year, Florida is lucky enough to have six circuit court divisions dedicated to resolving complex business litigation (“CBL”). Florida’s six CBL judges are spread across Orange County (Ninth Judicial Circuit), Miami-Dade County (Eleventh Judicial Circuit), Hillsborough County (Thirteenth Judicial Circuit), and Broward County (Seventeenth Judicial Circuit). The judges currently assigned to hear CBL cases are: Judge John E. Jordan (Division 2-43) in Orlando,[26] Judges Michael A. Hanzman (Division 43) and William Thomas (Division 44) in Miami,[27] Chief Judge Jack Tuter (Division 07) and Judge Patti Englander Henning (Division 26) in Fort Lauderdale,[28] and Judge Darren D. Farfante (Division L) in Tampa.[29] Judges Hanzman and Farfante were each newly-assigned to CBL divisions in 2021, and an upcoming change to the CBL courts will likely include a new assignment in Miami upon the anticipated completion of Judge Thomas’ CBL term in December 2021.
In an effort to address a growing backlog due to the ongoing pandemic, in April of 2021, the Florida Supreme Court issued Administrative Order AOSC20-23, which, among other things, created new case management requirements for civil cases and required the chief judge of each judicial circuit to implement specific case management deadlines according to the complexity of each case. In the circuits with CBL divisions, the resulting orders varied slightly. In the Ninth, Thirteenth, and Seventeenth Judicial Circuits, Chief Judges Donald A. Myers, Jr., Ronald N. Ficarrotta, and Jack Tuter issued orders providing that CBL matters should continue to proceed in accordance with previously established rules, but setting new requirements for cases on the general and streamlined tracks.[30] In the Eleventh Judicial Circuit, Chief Judge Bertila Soto issued Administrative Order 21-09, which required litigants in existing cases to file case management reports providing a “comprehensive inventory of the current status of the case,” and for judges presiding over newly-filed cases to issue a case management order not later than 120 days from the filing of the complaint.[31]
Cases may be directly filed or reassigned/transferred to a complex business division based on a number of factors, including: the nature of the case; complexity of the issues; complexity of discovery; number of parties in the case; and specific criteria enumerated by each circuit.
State-wide Business Court in Georgia
Georgia’s State-wide Business Court has been adjudicating business disputes for just over a year since it first began accepting cases on August 1, 2020. During much of its first year, the State-wide Business Court operated under proposed rules pending final approval of permanent rules. On May 13, 2021, the Supreme Court of Georgia approved the Rules of the Georgia State-wide Business Court. Those rules then took effect on August 1, 2021. The rules are a comprehensive resource for proceedings in the State-wide Business Court, and set out many of the responsibilities of the parties, judge, and clerk.[32] The State-wide Business Court may recommend to the Supreme Court changes and additions to these rules in the future. The State-wide Business Court has also created forms to be used in connection with its cases.[33]
In its first year, the State-wide Business Court handled 43 disputes and issued more than 100 substantive and procedural orders. Notably, of the 43 disputes before the State-wide Business Court, 14 were rejected due to the requirement that parties consent to its jurisdiction.[34] The mutual-consent requirement limits the State-wide Business Court’s jurisdiction in two primary ways. First, if a case is filed directly in the State-wide Business Court, within 30 days, a defendant may file an objection to jurisdiction, with a proposed order, requesting transfer of the case to a venue-appropriate court, and that request must be granted.[35] Second, for cases already pending in a Georgia state or superior court, within 60 days after service of the lawsuit on all defendants, a party may unilaterally petition to transfer the action to the State-wide Business Court; a party opposing transfer may object within 30 days of the filing of the petition to transfer, and a timely objection will be dispositive, precluding transfer to the State-wide Business Court.[36]
Indiana Commercial Courts
In January 2021, the Indiana Supreme Court introduced two new changes to the Commercial Courts. First, the Indiana Commercial Court was expanded to include dockets in Hamilton, Madison, St. Joseph, and Vigo counties, with the Court now covering a total of 10 counties (dockets already existed in Allen, Elkhart, Floyd, Lake, Marion, and Vanderburgh).[37]
Additionally, the Indiana Supreme Court adopted a new rule regarding the appointment process for new Commercial Court judges.[38] The rule provides that the Commercial Court Committee, or a designated subcommittee, will accept and review applications when an open position occurs. The Committee will then provide the Supreme Court with a list of up to three recommended nominees.
This new rule has already been exercised by the Supreme Court, which in June appointed Judge Thomas Massey to the Vanderburgh County Commercial Court after the retirement of Judge Richard D’Amour in April.[39]The Court will receive another appointment opportunity following the retirement of St. Joseph County Judge Steven Hostetler in September.[40]
Iowa Business Specialty Court
The goal of the Iowa Business Specialty Court (“Iowa Business Court”) is to provide litigants with an expeditious and cost-effective court system where parties and their attorneys can have their cases heard before one of five Iowa District Court judges with business litigation experience.[41] The Iowa Business Court became a component of the Iowa court system in 2016.[42]
A case is eligible for the Iowa Business Court if it meets or exceeds $200,000 in compensatory damages or the claim primarily seeks injunctive or declaratory relief.[43] The case must also meet one of nine dispute types, including but not limited to business disputes involving breach of contract, fraud, or misrepresentations and tort claims between or among business entities.[44] Cases may be transferred to the Iowa Business Court by motion or joint consent.[45] Cases transferred to the Iowa Business Court will remain in the county the case was originally filed and venued.[46]
Starting January 1, 2022, the State Court Administrator is expected to report findings from annual reviews and make recommendations for the Iowa Business Court’s improvement to the Iowa Supreme Court.[47]
Maine Business and Consumer Court
In November 2020, eFiling in all Maine Business and Consumer Court (also known as the Business and Consumer Docket, or “BCD”) cases statewide became mandatory, and the BCD Procedural Rules, which are part of the Maine Rules of Civil Procedure, were amended to operate consistent with the Odyssey Electronic Filing System (EFS).[48]
Michigan Business Courts
In May 2020, the administrative agency of the Michigan Supreme Court, the State Court Administrative Office, formed a committee to investigate and report on the experiences and best practices of Michigan courts as the courts struggled to grapple with the myriad of new challenges brought by the COVID-19 pandemic. Aptly named the Lessons Learned Committee, this group of judges and attorneys issued a preliminary report of their findings in late June 2021. Although this report is not limited to business court cases, it could certainly affect how business court proceedings are conducted.
Not surprisingly, the report focused heavily on the use of videoconferencing to facilitate remote participation in court proceedings, with Zoom as the primary technology employed. By April 2021, Michigan trial courts had conducted over 3 million hours of court proceedings over Zoom. Overall, the Committee found Zoom to be an effective platform for conducting most hearings. Remote proceedings are more efficient and reduce the costs of litigation by reducing the hours attorneys bill for travel and time spent waiting in court. Hearings conducted via Zoom provide attorneys with greater flexibility to manage their calendars and plan their workdays.
The Committee also uncovered anecdotal evidence of unexpected benefits from using Zoom. Clients were less intimidated by remote hearings than in-person proceedings, without losing respect for the judicial process. Additionally, minors appearing via Zoom appeared less anxious and more engaged with the proceedings.
However, no change comes without a price. At times, Zoom proceedings suffered from frozen screens and garbled sound due to unstable internet connections. Some judges prohibited litigants and attorneys from participating remotely from their car, perhaps without realizing that for some, the car provided the quietest environment for remote participation. Moreover, trial courts did not find Zoom preferable to in-person proceedings for lengthy evidentiary hearings and trials. However, even in those proceedings, Zoom provides some advantages, such as greater flexibility in coordinating the appearance of expert witnesses.
The Committee surveyed nearly 1,500 attorneys. Eighty-two percent wanted hearings conducted via Zoom indefinitely. The top choices among attorneys for Zoom hearings were non-evidentiary hearings, such as status and scheduling conferences, pretrial hearings, and hearings on motions. This was followed by hearings on traffic violations, civil infractions, summary proceedings, guardianships/conservatorships, criminal pleas, and sentencing, in that order.
Based on its findings, the Committee recommended new rules and practices related to remote participation in court proceedings to improve the efficiency and effectiveness of the courts and promote access to justice. Judges should be encouraged to replace courtrooms full of waiting attorneys with an approach to hearings that assigns specific times to each proceeding. Judicial officers should be permitted to conduct court hearings and other business from sites other than the courthouse. The courts should experiment with the practice of engaging visiting judges remotely by assigning judges with a lighter docket to hear cases in other, backlogged counties via Zoom.
Looking to judicial practices more broadly, the Committee recommended a planning committee at the state level to review and improve court operations, technology, and judicial procedures on an on-going basis. Michigan’s judicial system should modernize and develop a unified case management and electronic filing system. The Committee also recommended a recurring technology symposium to enable all county IT departments and court administrators across the state to collaborate on court technology and software applications.[49]
Additionally, a training program could assist county courts in developing stronger, more collaborative working relationships with their funding units. In some counties, the courts’ funding source did not recognize the need for courts to continue operations during the pandemic. Emergency and essential hearings were delayed as courts struggled to educate decision-makers and advocate for the courts’ status as an essential service. Another barrier to justice the Committee discovered was that large areas of Michigan lack sufficient internet connectivity to participate remotely in court proceedings. The Committee encouraged the judiciary to proactively advocate for legislation to modernize the state’s technology infrastructure. Finally, case management takes a toll on a judge’s health that should not be ignored. The administration of justice would benefit from a five-year program addressing stress management and self-care of judicial officers.
Pandemic-Driven Changes to Michigan’s Court Rules. Faced with the lingering pandemic, in July 2021 the Michigan Supreme Court adopted a series of changes to the Michigan Court Rules. Most significant was the addition of section G to Michigan Court Rule 2.407, which governs the use of videoconferencing in court proceedings. The new rule requires trial courts to use remote participation technology, either videoconferencing or telephone conferencing, “to the greatest extent possible,” even if only some participants are able to participate remotely. Mich. Ct. R. 2.407(G), (G)(2).
In doing so, courts must uphold Constitutional rights and ensure that critical judicial procedures are followed. For example, remote proceedings must allow confidential communications between a party and his or her counsel; grant the public access to proceedings in real time or through a video recording, except in closed proceedings; and must be conducted in a manner that enables a transcript to be produced later. Mich. Ct. R. 2.407(G)(3)-(5). To promote fairness and to maximize access to justice, courts are also instructed to verify participants’ ability to participate remotely, provide reasonable notice of such hearings, and waive any related court fees. Mich. Ct. R. 2.407(G)(1), (7).
Going forward, virtual proceedings in business courts will continue to be the rule, except for evidentiary hearings and trials. As courts, counsel, and litigants become more comfortable with virtual court proceedings, evidentiary hearings and bench trials by Zoom may become more common in business (and other civil) cases. However, remote jury trials will likely continue to be fairly uncommon in business and other civil cases, for at least the near future.
New York Commercial Division
New York Courts Modify Rule 3(a) To Provide For Additional Neutrals.On December 20, 2021, a new rule will go into effect in the New York State court system providing for alternative dispute resolution before mediators and neutral evaluators.[50] In the past, neutrals were limited to court-appointed mediators, who are required to undergo 40-hours of training. Neutral evaluators only require 6 hours of training. The purpose of the modification is to expand the diversity of individuals serving as neutrals.
New York Courts Adopt Rule 36 For Virtual Evidentiary Hearings and Non-Jury Trials. On December 13, 2021, a new rule will go into effect in New York State courts regarding virtual evidentiary hearings and non-jury trials.[51]The new rule provides for evidentiary hearings and non-jury trials, as well as virtual examinations of individual witnesses, via video technology, so long as the parties consent and the requirements of the rule are met. The rule requires that the video technology enable: (1) “a party and the party’s counsel to communicate clearly;” (20 “documents, photos and other things that are delivered to the court to be delivered to remote participants;” (3) “interpretation for a person of limited English proficiency;” (4) “a verbatim record of trial;” and (5) “public access to remote proceedings.” The rule does not address instances where both parties do not consent.
Commercial Division Gets a New Corporate Disclosure Rule.On December 1, 2021, a new Commercial Division rule will go into effect, requiring corporate entities litigating or seeking to intervene in cases to submit statements disclosing any corporate parent or publicly held companies that are sufficiently invested in the party or proposed intervenor.[52]
Rule 35 requires a non-governmental corporate party and a non-governmental corporation that seeks to intervene in a case to “file a disclosure statement that: (1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or (2) states that there is no such corporation.” The new rule also provides that such disclosure statements must be filed with a party or intervenor’s “first appearance, pleading, petition, motion, response, or other request addressed to the court” and that a supplemental statement must be filed if any required information changes.
Commercial Division Rules Expanded to General Civil Practice. Administrative Order 270/2020—which adopts certain Commercial Division Rules into the Uniform Civil Rules for the Supreme Court in New York—went into effect on February 1, 2021.[53] In signing this order, Chief Judge Marks described the Commercial Division as “an efficient, sophisticated, up-to-date court, dealing with challenging commercial cases” that “has had as its primary goal the cost-effective, predictable and fair adjudication of complex commercial cases[.]” Further, he acknowledged the Commercial Division’s role in dealing with the “unique problems of commercial practice,” and praised its “function[] as an incubator, becoming a recognized leader in court system innovation, and demonstrating an unparalleled creativity and flexibility in development of rules and practices[.]”
Judge Marks’s order comes after the Administrative Board of the Courts requested public comment on the advisability of adopting Commercial Division Rules into general civil practice, and after review of those public comments. Notably, the order specifically refers to the “unique opportunit[y]” created by the COVID-19 pandemic to institute new reforms.
Many of the new rules include changes to discovery practices in the general part. For example:
Rule 202.20 limits parties to 25 interrogatories (including sub-parts). Similarly, unless otherwise stipulated by the parties or ordered by the court, Rule 202.20-b limits parties to 10 depositions each, with each deposition limited to 7-hours in length.
Rule 202.20-e(a) requires parties to “strictly comply with discovery obligations by the dates set forth in all case scheduling orders . . . [n]on-compliance with such an order may result in the imposition of an appropriate sanction against that party pursuant to CPLR 3126.” Moreover, Rule 202.20-e(b) provides that “[i]f a party seeks documents from an adverse party as a condition precedent to a deposition of such party and the documents are not produced by the date fixed, the party seeking disclosure may ask the court to preclude the non-producing party from introducing such demanded documents at trial.”
Rule 202.20-a now requires parties to meet and confer regarding privilege logs and review. Such meet and confers should include a discussion of the use of categorical privilege logs.
The new rules also incorporate additional motion practice and filing requirements including:
Rule 202.8-b replaces the inconsistent page limits in place in the individual practices of non-Commercial Parts with standard word counts for all filings. Specifically, “affidavits, affirmations, briefs and memoranda of law in chief” are limited to 7,000 words each and “reply affidavits, affirmations, and memoranda” are limited to 4,200 words. Attorneys are further required to certify the word count of all filings.
Rule 202.8-g adopts the Commercial Division and federal practice requirement that parties seeking summary judgment submit a “short and concise statement, in numbered paragraphs, of the material facts as to which the moving party contends there is no genuine issue to be tried.”
Rule 202.8-e requires parties seeking emergency injunctive relief to give notice of the date, time, and place and manner of any such motion to their adversaries. Applications for temporary injunctive relief must be accompanied by a statement either that (1) such notice has been given, (2) notice could not be given despite a good faith effort to do so; or (3) providing such notice would cause significant prejudice to the moving party. The moving party must also provide the opposing party with copies of all supporting papers for the motion.
Finally, the new rules implement changes to increase efficiency for court appearances, such as:
Rule 202.1 adopts the Commercial Division requirement that counsel appearing at any conference must “be familiar with the case in regard to which they appear and be fully prepared and authorized to discuss and resolve the issues which are scheduled to be the subject of the appearance.”
Rule 202.23 eliminates the “cattle call” calendar and now requires “[s]taggered court appearances[,]” including for oral argument on motions, which must be assigned a “set time” or “time interval” for when the court expects to hear oral argument.
Proposed Rules on Proportionality, Reasonableness, and Early Case Assessment Disclosures. On September 14, 2021, the New York State Unified Court system published a request for comment on proposed modifications to Rule 11 to include a preamble about proportionality and reasonableness and to add provisions allowing the Court to direct early case assessment disclosures and analysis prior to and after the preliminary conference.[54]
The modified rule would provide that: “The court may direct plaintiff to produce a document stating clearly and concisely the issues in the case prior to the preliminary conference. If there are counterclaims, the court may direct the party asserting such counterclaims to produce a document stating clearly and concisely the issues asserted in the counterclaims. The court may also direct plaintiff and counterclaim plaintiff to each produce a document stating each of the elements in the causes of action at issue and the facts needed to establish their case.”
The modified rule also would provide that: “The court may further direct, if a defendant filed a motion to dismiss and the court dismissed some but not all of the causes of action, plaintiff and counterclaim plaintiff to revisit the documents to again state, clearly and concisely, the issues remaining in the case, the elements of each cause of action and the facts needed to establish their case.”
According to the announcement, “[t]he goal of these recommendations is to streamline the discovery process so that discovery is aligned with the needs of a case and not a search for each and every possible fact in the case.”
Proposed Rules on Electronically Stored Information. On September 7, 2021, the New York State Unified Court System published a request for comment on proposed additional rules and guidelines for Electronically Stored Information (“ESI”).[55] According to the proposal, “[t]he goal of the revisions is to address e-discovery in a more consolidated way, modify the rules for clarity and consistency, expand the rules to address important ESI topics consistent with the CPLR and caselaw, and to provide further detail in Appendix A – Proposed ESI Guidelines than is practical in the Commercial Division Rules.”
The first modification proposal contains significant additions to Rule 11. Specifically, the modified rule would provide that parties are to confer regarding electronic discovery prior to the initial conference and specifically indicates that electronic discovery will be discussed at any initial conference. The proposed modifications to the rule also address efficiency and cost with respect to electronic discovery. The modified rule would provide that “[t]he costs and burdens of ESI shall not be disproportionate to its benefits” and adopts a cost-benefit analysis similar to the standard in Federal Court. The modified rule also encourages the parties to use technology-assisted review when appropriate. Lastly, the modified rule adds a claw-back provision for inadvertently produced ESI that is subject to either attorney-client privilege or the work product doctrine.
The second major proposed modification is to Appendix A to Commercial Division Rule 11-c—which currently addresses only non-party ESI. The modifications to Appendix A would replace the non-party guidelines “with new guidelines to cover all aspects of ESI, from parties and non-parties alike.” The drafters of the proposal developed these guidelines based on “rules and practices set forth in the ESI guidelines of several federal district and state courts, federal and New York decisional law, and commentaries published by The Sedona Conference.” The newly proposed ESI guidelines (1) encourage early discussion of ESI; (2) limit discovery requests to what is proportional to the needs of the case; (3) encourage informal resolution of disputes regarding ESI; and (4) provide that the requesting party should defray non-parties reasonable production costs. The modifications also include general guidance on a number of specific ESI issues, including: (1) the importance of technical competence in e-discovery; (2) the obligation of counsel to actively assist in preservation, collection, search, review, and production of ESI; (3) defensible preservation and collection of sources of ESI; (4) processes for determining if ESI is “not reasonably assessable”; (5) processes for determining acceptable formats for ESI production; and (6) a claw-back provision for inadvertently produced documents. The remainder of the proposed modifications serve to streamline the rules and correct references based on the proposed modifications.
North Carolina Business Court
The Honorable James L. Gale retired from the North Carolina Business Court in September 2021. After a lengthy career as a business litigator, Judge Gale joined the Business Court in 2011. His decade of service included serving for three years as Chief Business Court Judge. Held in high esteem by all, Judge Gale authored more than 200 opinions and served in the American College of Business Court Judges, the ABA’s Business Law section, the Sedona Conference, and the North Carolina Conference of Superior Court Judges. Governor Roy Cooper appointed the Honorable Julianna Theall Earp to serve as the first woman judge of the Business Court. Following a lengthy career with Fox Rothschild LLP, Judge Earp was sworn in by Judge Gale in May 2021. Governor Cooper also appointed the Honorable Mark A. Davis to serve as a Business Court judge. Judge Davis previously served as an associate justice on the Supreme Court of North Carolina and an associate judge on the North Carolina Court of Appeals. The Honorable Gregory P. McGuire completed nearly seven years of service as a Business Court judge and has returned to private practice.
West Virginia Business Court Division
In the past year, twenty-two motions to refer cases to the West Virginia Business Court Division were filed. Of these, thirteen were granted, six were denied, and four were pending as of year’s end. Since the Court’s inception, there have been 201 motions to refer filed, with a total of 116 of those motions granted. The Business Court Division has resolved ninety-one of these. At the end of 2020, there were 25 cases pending before the Business Court Division with an average age of 688 days.[56] The average age of the 5 cases disposed of in 2020 was 828 days.
As in numerous courts across the country, the COVID-19 pandemic caused delays in holding trials and mediations in the business court. But business court judges had been using video or teleconferencing technology for several years before the pandemic, making adapting to the pandemic easier than it otherwise would have been.
The business court also adopted protocols allowing for both bench and jury trials. The court followed the protocols that the West Virginia Supreme Court of Appeals adopted for resuming operations. Before jury selection in the jury trial discussed in the summaries of cases below, the judge sent out a questionnaire to prospective jurors regarding COVID-19 and medical reasons for jury service excusal. This ensured that the fifty jurors who appeared for in-person jury selection were able to serve. For both the jury and bench trials, attorneys or witnesses coming from “red” or “hot spot” areas, as defined on the website used by the West Virginia Supreme Court, were required to arrive early and self-quarantine for fourteen days or obtain a negative COVID-19 test result before appearing in court.
In both trials, the accommodations worked smoothly and were very well-received by the litigants, courthouse staff, and parties. The judge, parties, attorneys, and jurors were all ready and willing to be flexible, cooperative, and follow accommodations and safety protocols to ensure everyone’s safety while permitting in-person trials to continue.
Wisconsin Commercial Docket Pilot Project
Last year, the Wisconsin Supreme Court extended Wisconsin’s Commercial Docket Pilot Project for an additional two years. The Court originally approved the Project in 2017. After the additional two-year extension ends in 2022, the Court will determine whether it should proceed to a permanent, statewide program. Since its inception, the Project has expanded from eight to twenty-six participating counties—Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn. The state’s largest county—Milwaukee—has yet to adopt the Project but that could, of course, change when the Court reviews the Project in 2022.
§ 1.2.3. Other Developments
Wyoming Chancery Court
In March 2019, the Wyoming Legislature set out to create a court that would resolve commercial, business, and trust cases on an accelerated schedule.[57] Now, nearly three years later, the Wyoming Chancery Court is open for business. In the time between the enabling legislation’s enactment and opening day, the Wyoming Supreme Court laid the administrative groundwork by developing and adopting rules for the new court.[58] These rules reflect the Chancery Court’s legislatively defined characteristics, including specialized jurisdiction, expedited discovery and resolution, and non-jury trials.
The Wyoming Chancery Court has jurisdiction over actions seeking equitable or declaratory relief and actions seeking monetary relief over $50,000 exclusive of punitive or exemplary damages, interest, and costs and attorney fees.[59] The underlying cause of action must fall within a list of 20 case types.[60] This list covers a wide swath of subjects, including breach of contract, environmental and commercial insurance coverage, Uniform Trust Code, Uniform Commercial Code, internal business affairs and agreements, and securities.[61] Practitioners should note that the monetary threshold does not apply to four listed case types—shareholder derivative actions, dissolutions, certain arbitration issues, and trademarks disputes.[62] Also worth noting is the Chancery Court’s new authority to exercise “supplemental ancillary jurisdiction over any cause of action not listed” among the 20 case types.[63]
Any outline of the new court’s jurisdictional contours is incomplete without addressing party consent. Unique among most modern business courts, Wyoming’s Chancery Court is a full-party consent jurisdiction. Any defendant may object to proceeding in Chancery Court by the day its first pleading is due.[64] If the objection is timely filed, the Chancery Court must dismiss the case without prejudice.[65] But if untimely, the objection is waived.[66] Conversely, parties may remove an eligible case from Wyoming District Court to Wyoming Chancery Court by consenting in writing within 20 days of service on the last defendant and filing a notice of removal.[67]
While parties have the choice to opt-out, they have reason to opt-in. By statutory design, the Chancery Court offers parties a streamlined forum for the “expeditious resolution of disputes.”[68] The court aims to resolve most actions within 150 days.[69] To facilitate such rapid resolutions, the enabling statute grants the Chancery Court “broad authority to shape and expedite discovery”[70] and rules direct the court to “be active in the management of the docketed cases.”[71] In further efforts to streamline cases, the rules mandate electronic filing and service[72]—a first for a Wyoming state trial court—and require parties to receive judicial approval before filing a written discovery motion.[73]
Recognizing that bench trials are generally more expedient than jury trials, the rules provide that all Chancery Court trials will be heard by judge, not jury.[74] Three sitting Wyoming District Court judges experienced in business litigation—Judges John G. Fenn, Richard L. Lavery, and Steven K. Sharpe—will handle Chancery Court cases until a full-time Chancery Court judge is installed by March 2023.[75]
With an operational Chancery Court, the Equality State fully joins the modern business court movement with its unique twist on a commercial court: A court with jurisdiction over both law and equity matters that will operate on an accelerated schedule without juries but with full-party consent.
§ 1.3. 2021 Cases
§ 1.3.1. Arizona Commercial Court
Grein v. Walbar Acquisition Co., LLC[76] (Declining to stay litigation in light of related litigation in foreign state). In this case, the plaintiff was terminated from his position as president of the defendants’ company for allegedly violating the terms of a Confidentiality Agreement. In addition, one of the defendants exercised its option to repurchase the company’s stock that had previously been awarded to the plaintiff pursuant to two separate agreements. The defendants filed suit against the plaintiff in Delaware for breaching the Confidentiality Agreement. Shortly after that case was filed, the plaintiff filed suit in Arizona seeking, among other things, to recover the stock he was allegedly entitled to despite his termination. The defendants sought to dismiss the Arizona case by arguing that the Confidentiality Agreement contained a forum selection clause that governed all disputes between the parties. In the alternative, the defendants sought to stay the Arizona case because of the previously filed pending litigation in Delaware. The defendants argued that such a stay would “result in lower costs, avoid piecemeal litigation and avoid inconsistent results” and would be appropriate because Delaware law governs and the matter involves the internal affairs of a Delaware entity.
The court declined to dismiss the action because the forum selection clause in the Confidentiality Agreement was not an exclusive clause. The court found that the clause did not require that all suits be brought in Delaware, but rather the plaintiff simply consented to jurisdiction in Delaware. The court granted the motion to stay in part. The court stayed issues relating to the Confidentiality Agreement because it was governed by Delaware law, the plaintiff consented to jurisdiction in Delaware, and the Delaware suit was filed first. However, the court found that there was no reason why the plaintiff should not be allowed to pursue the claims under the additional agreements in Arizona. The plaintiff was entitled to his choice of forum. Therefore, the motion to stay was denied in this respect. The court reasoned that there was no forum selection clause in the additional agreements, the plaintiff’s claims under these agreements did not concern “internal affairs” of a Delaware company because the plaintiff was no longer an employee, and the fact that the agreements were governed by Delaware law was not a valid reason to stay the plaintiff’s claims. Thus, the plaintiff could continue to litigate his claims under the additional agreements.
Maricopa County v. Fann[77] (Examining the validity of legislative subpoenas). The plaintiffs, Maricopa County and the Maricopa County Board of Supervisors, filed suit asking the court to declare that two legislative subpoenas requiring the production of materials and documents related to the November 2020 presidential election were illegal and unenforceable. The defendants, the two senators who issued the subpoenas, counterclaimed asking the court to declare the subpoenas valid. The court began by noting it was “hesitant to enter the fray of political disputes between two other branches of government.” The court expressly stated that it was not enforcing the subpoenas and had concerns whether it would have jurisdiction to do so. Rather, the court’s ruling decided the narrow legal issues of “whether the Subpoenas are valid” and “whether the Subpoenas violate separation of powers.”
A.R.S. § 41-1151 authorizes “the presiding officer of either house or the chairman of any committee” to issue a subpoena. First, the court found that the statutory requirements of A.R.S. § 41-1151 were met because the senate president and a committee chair had the statutory power to issue the subpoenas. The court also found that the subpoenas were issued for the proper legislative purpose of assessing the integrity of the election process with the possibility of introducing possible reform proposals. Second, the court held that there was no violation of separation of powers because the entire electoral infrastructure is a legislative creation, and, therefore, the legislature has the power to investigate modifying or improving those delegated powers. Finally, the court held that the subpoenas requesting election materials and documents do not threaten the “right to a secret ballot” nor do they violate state statutes concerning confidentiality. In conclusion, the court found the subpoenas to be valid, but the ruling did nothing to enforce the subpoenas.
Vestar DRM-OPCO, LLC v. Mac Acquisition, LLC[78] (Discussing the applicability of the frustration of purpose doctrine to business leases during the pandemic). In this case, the landlord (Vestar) leased a property to Brinker. In addition, Brinker signed a “Guaranty of Lease Agreement,” under which Brinker agreed to perform any obligation imposed upon the tenant under the lease. Brinker then assigned the lease to Mac Acquisition. The property was to be used as a Macaroni Grill restaurant. The three parties signed a consent to assignment agreement, which stated that Brinker was not released or discharged by the assignment. As a result of the pandemic, Mac Acquisition failed to pay rent every month beginning in April 2020, and Vestar filed suit against Mac Acquisition and Brinker to collect the amount owed. The court found Brinker liable as a result of the guaranty agreement that it signed.
Mac Acquisition argued that the pandemic excused its obligation to pay rent because the purpose of the lease was frustrated. Specifically, Mac Acquisition argued that the purpose of the lease was a sit-down restaurant in a retail center, and the pandemic made the business unsustainable. The court examined the force majeure clause in the lease, which extended the time for performance as a result of acts of God and government regulations or requirements that are not within the control of any party. The court acknowledge that the pandemic qualified under this clause. However, the clause specifically excludes its application to the payment of rent. As a result, the court held that the force majeure clause did not relieve Mac Acquisition of its obligation to pay rent. Next, the court found that the frustration of purpose doctrine was not applicable. Although the lease stated that the tenant intended to initially open a Macaroni Grill restaurant, it went on to state that the premises could be used for any other lawful retail purpose. There was no language that stated a sit-down restaurant was an essential purpose to the lease. The fact that operations became more challenging and less profitable did not justify applying the doctrine of frustration of purpose. In conclusion, Mac Acquisition was liable for the unpaid rent.
§ 1.3.2. Delaware Superior Court Complex Commercial Litigation Division
Unbound Partners Ltd. P’ship v. Invoy Holdings Inc.[79] (Motions for partial dismissal under Delaware Superior Court Civil Rule 12(b) toll the period for answering the entire complaint). In Unbound Partners, the plaintiff brought a breach of promissory note action against the defendant pursuant to 10 Del. C. § 3901, which requires defendants in note actions to answer by affidavit. The plaintiff’s complaint set forth two counts alleging that the defendant breached a promissory note by not making a single payment towards a $2 million loan. The first count asserted that the defendant owed $4 million plus interest under the “Double Principal Option” contained in the note. The second count alternatively pled that the defendant owed $2.3 million plus interest based on the interest rate set forth in the note. The defendant did not file an answer but moved to dismiss the first count under Rule 12(b)(6) arguing that it is an unenforceable penalty based on Delaware public policy. It did not move to dismiss or answer the second count. The plaintiff filed a motion for summary judgment and default judgment on the second count based on the defendant’s failure to answer the complaint and file an affidavit pursuant to 10 Del. C. § 3901.
In upholding Delaware’s strong public policy for trials on the merits, and adopting the majority view of the federal courts, the court held that a pre-answer motion for partial dismissal tolls the period for answering the whole complaint. It further held that a motion for partial dismissal does not support a default on claims not asserted in such a motion. The court did note, however, that Delaware trial courts retain the discretion to order the filing of an answer to a complaint’s unchallenged claims based on the courts’ inherent power to control their dockets and for expediency’s sake. Undoubtedly, the Delaware courts have always been free under Delaware rules to make case-specific judgments to maintain orderly adjudication of claims.
Smart Sand, Inc. v. US Well Servs., LLC[80](Upholding a liquidated damages provision awarding more than $48.2 million). Pursuant to a Product Purchase Agreement (“PPA”), the plaintiff agreed to supply the defendant with frac sand for a monthly non-refundable reservation charge, which defendant was required to pay whether it actually purchased and took the frac sand each month or not. Under the PPA, the defendant agreed to purchase a total of two million tons of frac sand at fluctuating prices. If it failed to purchase frac sand for a given month, the PPA required the defendant to pay an amount equal to $40 multiplied by the difference in frac sand it was required to purchase under the PPA and the amount of frac sand that it had actually purchased. Before the end of the contract, the defendant stopped purchasing frac sand from the plaintiff and terminated the contract early. Accordingly, the plaintiff sent the defendant an invoice for a shortfall payment of more than $48.2 million for its failure to purchase more than 1.2 million tons of frac sand under the agreement.
The court rejected the defendant’s argument that such a “take-or-pay” provision was unconscionable. The court held that the liquidated damages provision was valid and enforceable under Delaware law because (1) the damages were uncertain at the time of contracting, and (2) the liquidated damages were reasonable. Specifically, the court found that the liquidated damages provision was enforceable because the quarterly pricing of frac sand was difficult to ascertain as it was based on the volatile pricing of oil. Moreover, it was the defendant that asked for the $40/ton no-take rate agreed to by the plaintiff. The court found this to be a reasonable rate based on the offer and acceptance between the parties at the time of contracting even though it resulted in a substantial payment. Therefore, the court upheld the liquidated damages provision. Although the defendant likely regretted the agreement it made on the pricing terms in the PPA, the court reinforced that both good and bad contracts governed by Delaware law will be enforced.
ARKRAY Am., Inc. v. Navigator Bus. Sols., Inc.[81] (Examining Delaware’s divergent precedent on whether choice-of-law clauses apply only to contract-based claims).In ARKRAY America, the parties entered into a software and consulting services agreement and a license agreement. Both of the agreements contained similar choice-of-law provisions whereby one agreement was governed by Delaware law while the other agreement was governed by Utah law. The plaintiff terminated the agreements and filed suit after the defendant failed to meet various deadlines and failed to provide a successful software system. The suit involved both breach of contract and fraudulent misrepresentation claims, as well as alleged statutory violations of Minnesota law. The parties agreed that the choice-of-law provisions were valid and applied to the contract-based claims; however, the parties disagreed as to whether the provisions would also apply to the tort and statutory claims.
Finding that the precedent in Delaware is divergent on this issue, the court analyzed the language of the choice-of-law provisions. It applied a two-part test to determine: (1) whether there were any conflicts between the laws of the potentially applicable states; and (2) if so, which state has the most substantial relationship to the dispute. Ultimately, the court concluded that the two choice-of-law provisions at issue were narrow and by their terms applied only to the contract-based claims and not to the tort or statutory claims. In its analysis of the Minnesota statutory claims, the court further found that there was no conflict between the laws of Minnesota, Utah, and Delaware. Therefore, the court concluded that Delaware public policy would not be offended by applying Minnesota law to the statutory claims.
§ 1.3.3. Florida’s Complex Business Litigation Courts
MAS Family Trust v. KLP Holdings, Inc.[82] (Default judgment entered on complaint seeking compensatory damages for alleged loss of company value due to breach of fiduciary duty was void due to failure to hold evidentiary hearing or trial to establish amount of damages). Following the buyer’s failure to make the second payment owed pursuant to an agreement for the sale of an entity, the seller brought claims against the buyer (breach of agreement), the buyer’s guarantor (breach of guaranty), and two officers/directors of the buyer (breach of fiduciary duty). The defendants failed to file responsive pleadings, and a final default judgment was entered as to each following a non-evidentiary hearing with seven days’ notice to the parties. The final judgment held the defendants jointly and severally liable for the damages due pursuant to the agreement (i.e., the amount of the second payment). Subsequently, an officer defendant moved for relief from the judgment, claiming it was void because the underlying claim against him sought unliquidated damages, and the court failed to set the unliquidated damages claim for trial or provide him with adequate notice. After considering the parties’ arguments, Judge Michael Hanzman of the 11th Judicial Circuit’s Complex Business Litigation Division granted the defendant’s motion for relief after finding the judgment void for failure to afford the defendant due process. Analyzing the issues, Judge Hanzman considered that the well-pled allegations of the complaint included claims for liquidated damages against the buyer and guarantor (i.e., seeking the second payment, the amount of which was set forth in the sale agreement), but claims for unliquidated damages against the officer (i.e., seeking compensatory damages for breach of fiduciary duty). Accordingly, the officer was entitled to 30 days’ notice, personal service of the trial setting, and an opportunity to be heard, which were not provided. Thus, the judgment was deemed void as to the objecting officer.
In re: Scurtis v. Rodriguez Consol. Derivative Actions[83] (Plaintiff’s time-barred derivative actions could neither be related back to previously-filed direct action arising from same set of facts nor could statute of limitations be equitably tolled). A limited partner in several real-estate-holding single purpose limited partnerships brought a direct action for breach of contract against the partnerships and his former partner, claiming that the defendants wrongfully sold certain properties without authority and without compensating him. While the limited partner pled no derivative claims on behalf of the partnerships, he sought, through his complaint, to be awarded damages that accrued to the partnerships. Nearly seven years later, the limited partner filed thirteen separate derivative actions on behalf of the partnerships, alleging breaches of fiduciary duties by his former partner and the partnerships’ chief operating officer. The defendants in the derivative actions moved for summary judgment on each claim, asserting that the claims were time-barred by the statute of limitations. The limited partner argued in response that: (1) the derivative actions related back to his original direct action; or (2) the statute of limitations should be equitably tolled because he’d acted in reliance on earlier denials of motions to dismiss his direct action in which the defendants had claimed that he had impermissibly combined direct and derivative actions in a single case. Pointing to the applicable Florida Rule of Civil Procedure, Judge Hanzman noted that nothing in the rule permitted claims in separate lawsuits to be related back to the time an earlier lawsuit was filed. Moreover, the statute of limitations could not be equitably tolled, the court held, because his predecessors had neither found that direct and derivative claims could be combined in the same case nor given the limited partner legal advice (which he would not have been entitled to rely on in any event). While the court noted that the limited partner had indeed sought to “recover for himself damages that belonged to some of the juridical entities he [later sought] to represent derivatively . . . [,] that [did] not transform his direct action into a derivative case,” and the predecessor courts had done nothing more than issue unelaborated orders denying the motions to dismiss. Accordingly, the court granted summary judgment in favor of the defendants on the derivative actions.
§ 1.3.4. State-wide Business Court in Georgia
Savannah Green I Owner, LLC v. ARCO Design/Build, LLC[84] (Interpretation of order declaring a statewide judicial emergency and tolling certain deadlines). This action involves a contract for the design and construction of a large warehouse. Under that agreement, the defendant, ARCO Design/Build would submit monthly payment applications to the plaintiff, Savannah Green I Owner, LLC. ARCO was also required to execute lien waivers after receiving payment from Savannah Green. ARCO was deemed to have received payment under O.C.G.A. § 44-14-366—regardless of whether it, in fact, received payment—60 days after submitting an application to Savannah Green, unless ARCO filed an affidavit of nonpayment or claim of lien within those 60 days. ARCO submitted an application for payment on April 22, 2020. Before then, in March 2020, the Chief Justice of the Supreme Court of Georgia tolled all statutory deadlines and filing requirements by a series of emergency orders declaring, then extending, a statewide judicial emergency in response to the COVID-19 pandemic. On July 10, 2020, the Chief Justice reimposed filing deadlines. Believing its obligations were tolled until this reimposition of deadlines, ARCO waited until September 14 to record its affidavits of nonpayment. A month later, it recorded a claim of lien for outstanding amounts owed against Savannah Green, and by counterclaim in the Business Court action, sought damages to foreclose on that lien and asserted a claim for breach of contract. Savannah Green moved for partial summary judgment arguing that ARCO failed to file an affidavit of nonpayment or claim of lien within 60 days of submitting its application for payment, and that this delay was not excused by the Supreme Court’s emergency orders. The court agreed and granted the motion.
The court first held that O.C.G.A. § 1-3-1(d)(3)’s “computation of time” requirements, apply to Section 44-14-366. All deadlines falling on weekends or holidays are thus extended to the next business day. And as a result, the court found “[i]n a world without COVID-19” ARCO would have had until Monday, June 22 to file its claim of lien.
The court then held that this deadline was not tolled by the Supreme Court’s emergency order. Analyzing the plain text of the emergency order, its amendments, and the analogous statute that authorized the Chief Justice to enter them, the court held that the tolling of deadlines in the emergency order was not so expansive as to capture the statutory deadline in Section 44-14-366. The emergency order applies only to deadlines, time schedules, and filing requirements for “litigants” in “judicial proceedings” or legal proceedings related to civil or criminal cases. And while Section 44-14-366 imposes a statutory deadline, it is not a “legal” deadline imposed on litigants, nor is it a deadline in a “legal proceeding” or “judicial proceeding.” As a result, ARCO was required to file its affidavit of nonpayment by June 22, 2020. In failing to do so, its application for payment was “deemed paid” by operation of law.
Martin v. Hauser, Inc.[85](Enforceability of restrictive covenants and courts’ “blue pencil” authority).This action arose from an employment agreement with restrictive covenants. Martin sought a declaration that those covenants, including restrictions on client solicitation, employee recruitment, and supplier interference, were invalid and could not be enforced by his former employer, Defendant Hauser, Inc., an Ohio-based insurance and employee benefits brokerage firm. Martin was hired by Hauser as a team leader and signed the subject agreement shortly after starting at the company. He was later promoted to an executive vice president position. After controversy emerged regarding Hauser and its CEO, Martin began negotiating with, then resigned to join, one of Hauser’s competitors. Hauser asserted that Martin recruited two Hauser employees to join his competing company and solicited Hauser’s existing and potential clients in violation of the restrictive covenants.
The court granted in part and denied in part Martin’s request for a declaratory judgment and injunctive relief. First, the court held that the agreement was overbroad because it prohibited the solicitation of “former customers or clients,” and found its three-year non-solicitation provision presumptively unreasonable under the Georgia Restrictive Covenants Act (applicable to all restrictions longer than two years), which presumption Hauser’s evidence could not overcome. The court exercised its authority to modify, or “blue pencil,” the covenant. It found such modification appropriate to (1) protect Hauser’s legitimate business interests, since it invested heavily in Martin who had access to Hauser’s confidential information; and (2) effectuate the parties’ intent, as they clearly intended for there to be some post-employment constraint on Martin’s solicitation of customers. As a result, the court reduced the non-solicitation term to one year and added that this restriction would only apply to clients of Hauser when Martin resigned. Second, the court found unreasonable, declined to modify, and struck the two remaining restrictive covenants concerning non-recruitment of Hauser employees and non-interference with its suppliers. In addition to having three-year durations, the court noted those provisions lacked any geographic or other limitation to constrain their territorial reach. They failed to reasonably articulate the scope of prohibited activity, instead employing broad, ambiguous language that seemed “to apply to all Hauser employees, agents, representatives, and associates—wherever they are in the world and regardless of (i) what they do for the company, (ii) whether Plaintiff ever had any contact with them, and (iii) whether or not [they terminated their] association with Hauser to engage with a competing business.” In deciding to strike, rather than modify, these covenants, the court noted that they were “boilerplate restrictions” not updated for more than a decade, not tailored to specific employees, and not drafted to comply with the laws of the state where employed.
§ 1.3.5. Indiana Commercial Court
Aegean LLC v. The Ohio Security Ins. Co.[86] (Denying defendant’s motion to dismiss or transfer venue). The court denied Taggart Insurance Center Inc.’s Motion to Dismiss or Transfer Venue because it found that (1) Marion County, the county where the suit was brought, was a preferred venue under Indiana Trial Rule 75, and (2) Taggart had irrevocably consented to venue in Marion County under Indiana Commercial Court Rule 4.
If a suit is initially brought in a county that meets the preferred venue requirements of Ind. R. Tr. P. 75(A)(1)-(9), a transfer of venue will not be granted. Trial Rule 75(A)(2) provides, in relevant part, that preferred venue lies in “the county where the land…is located…if the complaint includes a claim…relating to such land… .” Taggart argued that Marion County was not a preferred venue because the action did not have a nexus with Aegean’s Marion County location. Instead, Taggart argued that Clark County was the preferred venue as the county where either the principal office of a defendant organization is located or the office or agency of a defendant organization to which the claim relates or out of which the claim arose is located. Aegean argued that because this dispute involved a property insurance policy issued to Aegean, located in Marion County, Marion County was the preferred venue under Trial Rule 75(A)(2). The court found that, because the policy was issued to Aegean in Indianapolis, and Aegean is seeking recovery under this policy due to cancelled seminars at the Indianapolis location as well as locations around the country, the complaint included a claim relating to land. Marion County was a preferred venue as the county where the land at issue is located.
The court also addressed the Indiana Commercial Court Identifying Notice rule. Under Indiana Commercial Court Rule 4, if a party seeks to have an eligible case assigned to the Commercial Court Docket, the attorney representing that party shall file a Notice Identifying Commercial Court Docket Case (the “Identifying Notice”). If a party does not consent to assigning the case to the Commercial Court Docket, the attorney representing that party shall file a Notice of Refusal to Consent to Commercial Court Docket (the “Refusal Notice”). This notice must be filed not later than the latter to occur of the following: (1) thirty days after service of the Identifying Notice; or (2) the thirty days after the date the non-consenting party first appears in the case. If no Refusal Notice is timely filed by any party that has appeared in the case, the assignment of the case is deemed permanent. Aegean filed a Complaint and an Identifying Notice on February 4, 2021. Taggart filed an appearance in this case on March 3, 2021. Therefore, Taggart was required to file a Refusal Notice on or before April 2, 2021. It did not. Because no Refusal Notice was timely filed, the assignment of the case was deemed permanent, and Taggart was found to have irrevocably consented to venue in the Marion County Commercial Court. On October 5, 2021, the Indiana Court of Appeals affirmed the Commercial Court’s decision to deny the motion to dismiss.[87]
Decker v. Star Fin. Group, Inc.[88] (Granting defendant’s motion to compel arbitration and motion to dismiss). In Decker, the plaintiffs alleged that Star Financial Group (“Star”), in October 2019, improperly charged a fee with regard to bank transactions involving the plaintiffs’ checking account at Star. The transactions were subject to contractual documents including a document titled Terms and Conditions (the “Terms”). The Terms, in relevant part, stated that it, along with any other documents given by Star pertaining to the account, established rules which controlled the account. The Terms further stated that after notification of any changes to the Terms, continued use of the account after the effective date of such changes would constitute agreement to the new terms.
In June 2020, the plaintiffs and Star discussed the situation in an attempt to reach a resolution regarding an alleged improper fee. However, in August 2020, Star included an Addendum along with the plaintiffs’ bank statement, which waived the plaintiffs’ right to try claims covered by arbitration in court before a judge or jury. In March of 2021, the plaintiffs filed suit. Star moved to have the proceedings dismissed and the case ordered to arbitration in accordance with the Addendum. In response, the plaintiffs argued that the Addendum was (1) outside the scope of the original Terms and Conditions, (2) was not made in good faith, and (3) that they did not receive reasonable notice.
In issuing its opinion, the court summarized Indiana caselaw which favors arbitration agreements. In Indiana, when construing arbitration agreements, every doubt is to be resolved in favor of arbitration. A party seeking to compel arbitration must demonstrate: (1) there is an enforceable agreement to arbitrate the dispute; and (2) that the disputed matter is the type of claim that the parties agreed to arbitrate. In analyzing the Addendum, the court concluded that the Terms were clear and within their ordinary meaning, and that they contemplated such changes as were made in the Addendum. The court also noted that Indiana law has not imposed a general duty of good faith within the relationship between banks and their customers, except in instances where the alleged injury results from fraud. Last, the court found that Addendum language was in capital and bold font and was thus in accordance with the standards required by Indiana case law and provided reasonable notice. On October 6, 2021, the plaintiffs appealed the Commercial Court’s Order to the Indiana Court of Appeals.[89] To date, the appeal remains pending.
Midwest Serv. and Supply, Inc. v. Auto-Owners Ins. Co.[90] (Granting plaintiff’s motion for leave to file second amended complaint). In Midwest Service, the plaintiff moved for leave to file a Second Amended Complaint to correct an earlier damages allegation and to join the plaintiff’s wholly owned subsidiary as an additional plaintiff in the case. The defendant argued that the motion should be denied due to (1) plaintiff’s undue delay, bad faith and dilatory motive after the parties had already agreed upon a court-ordered deadline to add parties; (2) the futility of the proposed amendments; and (3) the undue prejudice that would result to the defendant. The plaintiff in response argued that the court had full discretion to grant its motion notwithstanding the earlier case-management order deadline, and that Indiana’s Trial Rules, Commercial Court Rules, the Commercial Court Handbook, and applicable caselaw all instruct the court to liberally allow pleading amendments.
The court noted that Indiana law is indeed clear that leave to amend should be granted unless the amendment will result in prejudice to the opposing party. The court found that defendant had failed to demonstrate why plaintiff should not be granted leave to amend, and noted that the Second Amended Complaint did not add any additional defendants, causes of action, or prayers for relief. Additionally, the court pointed out that the motion was filed less than one year after the case had been filed, and more than one year before the date of the jury trial. Thus, there was ample time for any additional discovery that may result.
Pier 48 Indy, LLC v. Dugan[91] (Denying defendant’s motion to quash non-party subpoena duces tecum). In Pier 48 Indy, the plaintiff, a restaurant business LLC, sued one of its members, Kelli J. Dugan, over alleged breaches of contractual and fiduciary duties Dugan owed to Pier 48 Indy. Pier 48 Indy claimed that Dugan engaged in self-interested acts that served to enrich herself at the expense of Pier 48 Indy. Pier 48 Indy served a subpoena duces tecum on Dugan’s employer, Natera, Inc., a non-party. Dugan filed a Motion to Quash on July 26, 2021. Pier 48 Indy filed a Response in Opposition to the Motion to Quash on August 10, 2021.
Under Ind. Trial Rule 26(B)(1), parties “may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action[.]” A discovery request is valid “if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.” T.R. 26(B)(1). The Commercial Court Rules maintain the broad scope of discovery through Ind. Comm. Ct. Rule 6(A), which states, in part, “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case[.]”[92] Parties may also seek discovery from non-parties. However, the court may quash or modify a subpoena upon a showing that the subpoena is “unreasonable and oppressive” under Ind. Trial Rule 45(C)(1).
In her Motion to Quash, Dugan argued that the majority of the discovery sought from Natera could be obtained from Dugan directly, and the subpoena, therefore, was both cumulative and unduly burdensome. Pier 48 Indy countered that because their claims in this action involve Dugan’s alleged untrustworthiness, Pier 48 Indy should not have to rely on Dugan to provide fully complete discovery responses. Because Dugan asserted that she had already provided all responsive discovery documents in her custody and control and indicated that she would not produce emails housed on Natera servers without Natera’s authorization, the court found that Dugan’s argument that Pier 48 Indy could obtain the documents from a more convenient source no longer applied. The court further found that the discovery requests were sufficiently tailored to topics of information that could lead to the discovery of admissible evidence. The court therefore denied Dugan’s Motion to Quash Non-Party Subpoena duces tecum.
Gage v. SourceOne Group, LLC[93] (Granting partial summary judgment in favor of Defendant/Counterclaim Plaintiff SourceOne Group, LLC and Defendant Joy DenHouter). The litigation in Gage stemmed from the dissolution of a business relationship between Plaintiffs Gage and Grabill Insurance Center (“GIC”), and Defendant SourceOne. In December 2011, SourceOne entered into an Independent Contractor Agreement with Gage, who, at the time, was president of GIC. SourceOne and GIC, in connection with this business relationship, entered into a Joint Marketing, Ownership and Aggregation Agreement on January 1, 2012. Under this Agreement, Gage was retained as an independent contractor by SourceOne to perform marketing, managing, and administering services. Gage brought this action after he advised Defendant DenHouter of his intent to terminate the relationship and accept an offer with a competitor in April 2017. Defendant/Counterclaim Plaintiff SourceOne Group, LLC and Defendant Joy DenHouter ultimately sought to dismiss portions of the Third Amended Complaint through a motion for summary judgment.
Indiana Trial Rule 56 mirrors Federal Rule of Civil Procedure 56, but Indiana’s summary judgment procedure is different than federal summary judgment practice. Indiana courts require the moving party to affirmatively negate an opponent’s claim, as compared to federal summary judgment practice which allows the moving party to merely show that the party carrying the burden of proof lacks evidence on a necessary element. The intention of this practice is to err on the side of letting marginal cases proceed to trial on the merits.
The court granted the defendants’ partial summary judgment motion as to the Indiana Sales Representative Act claim because the Act only applies to wholesalers, and the court found that SourceOne is not a “wholesaler.” The court also granted partial summary judgment on the breach of fiduciary duty by DenHouter. This claim was based on DenHouter owing a fiduciary duty to Gage because they were both signatories to the Joint Marketing Agreement. However, contractual relationships do not create a fiduciary duty, and therefore, the court granted summary judgment as to this claim. The court then granted summary judgment on the claim of unjust enrichment because such claims are typically inapplicable when a contract exists. Because plaintiffs did not allege any damages in the unjust enrichment claim that were not already alleged in their breach of contract claims, the court concluded that this claim did not have a basis in law. The court denied partial summary judgment in favor of defendants on the issue of whether Gage violated the Independent Contractor Agreement and whether the non-compete provisions should be tolled in any duration. The motion for partial summary judgment on the alleged violation of the Independent Contractor Agreement was denied.
§ 1.3.6. Iowa Business Specialty Court
Tammy Welbes v. DuTrac Cmty. Credit Union[94](Motion to dismiss breach of contract and breach of the implied covenant of good faith and fair dealing). In this pre-trial opinion, the court reviewed Defendant DuTrac Community Credit Union’s pre-answer motion to dismiss, which argued in favor of dismissal of Plaintiff Tammy Welbes’s claims for breach of contract and breach of the implied covenant of good faith and fair dealing (bad faith). The petition asserted that defendant has a standard practice of assessing overdraft charges where the transaction is subject to a “debit hold.” Plaintiff alleged that when a customer authorizes a transaction from their account, defendant permits the receiving merchant to request a “debit hold” on the funds transferred, which may be larger than the amount authorized by the customer. Transactions subject to these “debit holds” may incur overdraft fees even if the transaction does not make the account balance negative.
The court’s inquiry was limited to whether this practice violated the parties’ account agreement. The court granted defendant’s motion in relation to the bad faith claim because the agreement stated the defendant may charge such a fee, and it is not a breach to charge fees where the agreement authorized it. However, the court overruled the defendant’s motion with regards to the breach of contract claim because doing so would require evidence beyond the scope of a motion to dismiss. The court further ruled the breach of contract claim was not preempted by federal fee disclosure laws.
Robert Colosimo v. Anthony Colosimo and A&R Env’t, LLC[95](Enforceable agreement joint venture ownership interests). In this case, two brothers sought the court’s involvement in a matter where their business relationship in several joint endeavors went sour. The court found that after the brothers reached an agreement regarding their respective interests, Defendant Anthony Colosimo devoted time, effort, and equity to his business, Sparta Environmental (“Sparta”), with no involvement from Plaintiff Robert Colosimo.
The court analyzed two issues: (1) whether there was an enforceable agreement regarding how the brothers were to separate their respective interests in Sparta; and (2) alternatively, whether plaintiff was estopped from denying an alleged business promise that he would transfer his business interest in Sparta to his brother. The court found for defendant in both respects. The court concluded there was clear and convincing evidence that the brothers’ respective actions towards the growth and equity of Sparta evidenced an agreement to separate with defendant retaining interest in Sparta. Moreover, the court concluded it would be unjust to not enforce plaintiff’s promise to transfer his interest considering his lack of involvement in the company.
§ 1.3.7. Kentucky Business Court Docket
Ken Combs Running Store, Inc. v. Owners Ins. Co.[96] (Dismissal of claims for insurance coverage of business disruption due to COVID-19). Plaintiff operates a retail specialty sports store in Louisville, Kentucky, which has a commercial insurance policy issued by defendant. Plaintiff alleged that the Governor’s executive order requiring closures due to COVID-19 caused plaintiff to not operate between March 25 and June 29, 2020. Plaintiff filed a business income loss claim with defendant, which defendant denied. Plaintiff brought an action against defendant for a declaratory judgment that defendant is obligated to provide coverage, breach of contract, and unjust enrichment. The court found that plaintiff’s insurance policy did not cover the claim under its unambiguous terms because it covered only “business income loss resulting from physical loss or damage that may be remedied by repair, rebuilding, or replacement of the property.” Therefore, the court granted defendant’s motion to dismiss the declaratory judgment and breach of contract claim with prejudice. The court granted defendant’s motion to dismiss the unjust enrichment claim without prejudice.
Wilkins v. Lastique Int’l Corp.[97] (Shareholder demand for inspection of corporate records). Plaintiff, a shareholder and former long-time employee of defendant, brought an action for inspection of defendant’s corporate books and records. The court treated plaintiff’s “Motion for Summary Order of Inspection” under the applicable standard for motions for summary judgment. The court found that “there remains a genuine issue of material fact as to whether his demand is made in good faith and for the proper purpose of investigating corporate misconduct or for an improper purpose of obtaining leverage in the buyout negotiations.” The court further found that plaintiff failed to describe with “particularity the records sought or shown that they are directly connected with his purpose of valuing his shares.” Therefore, the court denied plaintiff’s Motion for Summary Order of Inspection.
§ 1.3.8. Maine Business and Consumer Docket
Black v. Cutko[98](Lease of designated public lands).In 1993, the people of Maine ratified Article IX, Section 23 of the Maine Constitution, to require that designated public lands cannot be “reduced” or their “uses substantially altered” unless two thirds of both houses of the Maine Legislature agree to any such change. The central question presented in this case was whether certain decisions made in 2014 and 2020 by the Bureau of Public Lands (the “BPL”)—the Executive Branch agency that holds title to the lands for the benefit of all Maine people—to lease portions of two parcels of public reserved land in the Upper Kennebec Region to Central Maine Power Company (“CMP”) to construct part of the New England Clean Energy Connect (“NECEC”) transmission corridor were proper.
Maine Sen. Russell Black, along with 18 other individuals and entities, filed a complaint against BPL and CMP, alleging that the execution of the 2014 and 2020 leases was ultra vires and asserting that the Maine Constitution required a two-thirds legislative vote before the NECEC could cut a 150-foot wide, one-mile long corridor across two parcels that are considered Public Reserved Land. Initially, BPL took the position that leases such as the ones at issue here are categorically exempt from the requirements of Article IX, Section 23, and thus the agency was not obligated to make a “reduction” or “substantial alteration” determination. The court rejected that contention in a March 2021 Order. In response, BPL argued that it actually did consider the substantial alteration issue and determined that the 2020 lease would not substantially alter the uses of the public trust lands.
In reviewing the administrative record, the court found no competent evidence supporting BPL’s assertion that it made the requisite public, pre-execution findings that the 2020 lease would not reduce or substantially alter the uses of the lands. Although BPL had conducted in 2014 what it termed a “resource-based analysis,” that is not the standard called for in Article IX, Section 23 and in 12 M.R.S.A. § 598. Moreover, although BPL relied on a “management plan” finalized in 2019 to support the proper determination, the court concluded that “designing and implementing a management plan is not the same as making a public, pre-lease determination that the lease would not frustrate the essential purposes as articulated in the Maine Constitution and as defined by the Maine Legislature.” The court vacated the lease for NECEC to bisect the public lands, stating that “BPL exceeded its authority when it entered into the 2020 lease with CMP, and BPL’s decision to do so is reversed.” BPL and CMP have appealed the decision to the Maine Supreme Judicial Court.
§ 1.3.9. Massachusetts Business Litigation Session
UMNV 205-207 Newbury, LLC v. Caffé Nero Americas, Inc.[99](Frustration of purpose due to COVID-19).UMNV 205-207 Newbury, LLC (“UMNV”) filed a lawsuit against its former tenant, Caffé Nero Americas, Inc. (“Caffé Nero”), seeking to recover unpaid rent and other expenses. Caffé Nero operated a chain of cafés, including a location on Boston’s Newbury Street (“Newbury Street café”) in premises owned by UMNV. Between March and June 2020, Caffé Nero was forced to close its Newbury Street café temporarily to comply with an order from the Massachusetts Governor’s office barring all restaurants from offering on-premises dining during the COVID-19 pandemic. Upon closing its Newbury Street café, Caffé Nero wrote to UMNV to explain that it would not be able to pay rent while the café was closed. UMNV refused to waive or reduce any of the rent payments due under Caffé Nero’s 15-year lease and, instead, sent Caffé Nero a letter purporting to terminate the lease and ordering Caffé Nero to quit the premises. Caffé Nero remained but continued not to pay rent. In June 2020, the Governor allowed restaurants to resume first outdoor and then indoor dining. Caffé Nero reopened its Newbury Street location accordingly, but nevertheless closed the Newbury Street café and quit the premises in October 2020 after continuing not to pay rent and reaching no agreement with UMNV.
Deciding UMNV’s motion for partial summary judgment on the issue of Caffé Nero’s liability for breach of the lease, the court denied UMNV’s motion and instead granted summary judgment for Caffé Nero despite the fact that Caffé Nero had not cross-moved. As the court noted, the lease for the Newbury Street café provided that Caffé Nero could use the leased premises “solely” for “[t]he operation of a Caffé Nero themed café under Tenant’s Trade Name and for no other purpose.” As such, the court concluded, the fundamental purpose of the lease was frustrated when the Governor required restaurants in Massachusetts to suspend on-premises dining. Because frustration of purpose excused Caffé Nero’s obligation to pay rent, it was not in breach of the lease when UMNV sent its purported letter of termination and order to quit. The court noted that frustration of purpose might not have excused Caffé Nero’s duty to pay rent if the lease had permitted it to use the premises for a different purpose, not barred by the Governor’s order. The court rejected UMNV’s argument that the lease’s force majeure provision barred application of the frustration of purpose doctrine, concluding that this provision addressed the separate doctrine of impossibility of performance. The court also concluded that another provision, providing that Caffé Nero’s obligations under the lease constitute “separate and independent” covenants, did not prevent application of the frustration of purpose doctrine because other provisions of the lease still contemplated the doctrine could apply.
Athru Group Holdings, LLC v. SHYFT Analytics, Inc.[100](Breach of fiduciary duty).In late 2017, Athru Group Holdings, LLC (“Athru”) sold its one-fifth stake in SHYFT Analytics, Inc. (“SHYFT”), for 75 cents per share to eleven buyers including, Medidata Solutions, Inc. (“Medidata”). Six months later, Medidata acquired SHYFT outright, paying $2.95 per share to purchase all the SHYFT stock it did not own, including the stock that Athru had just recently sold to the ten other buyers. Athru filed suit, alleging that it would not have sold its interest in SHYFT if it had known that SHYFT was interested in being acquired or that Medidata intended to acquire it. In particular, Athru alleged claims for breach of fiduciary duty against a director and a CEO/director of SHYFT as well as claims of fraud and misrepresentation, breach of contract, and violation of c. 93A against various combinations of these two individuals, SHYFT, and Medidata.
The court dismissed Athru’s complaint in full. Because SHYFT was a Delaware corporation, the court applied Delaware law to analyze the breach of fiduciary duty claim. Applying Delaware law, the court concluded that SHYFT’s officers and directors did not have a duty to disclose to Athru SHYFT’s alleged interest in merging with Medidata. Even assuming there had been preliminary merger discussions between SHYFT and Medidata, SHYFT’s officers and directors had no duty to disclose such discussions to SHYFT’s shareholders, like Athru, until fundamental terms of a merger agreement were finalized. Turning to the fraud and misrepresentation claims, the court similarly concluded that the defendants, some of whom had purchased shares from Athru, did not owe Athru a duty to disclose any preliminary merger discussions. Athru argued that such a duty existed because Athru’s understanding that SHYFT would not be acquired was “basic to” the parties’ share purchase agreements. The court rejected this argument, noting that the agreement provided for Athru to receive additional compensation if its SHYFT stock was resold at a certain price. The court dismissed Athru’s c. 93A claim because it was “wholly derivative” of Athru’s unavailing fraud claim. And the court dismissed the remaining breach of contract claims because they needed to be submitted to an independent auditor under the alternative dispute resolution procedures set forth in the various stock purchase agreements.
Needham Bank v. Guaranteed Rate, Inc.[101](Misappropriation of trade secrets and breach of confidentiality agreements). Needham Bank (“Needham”) brought suit against a former employee, Edward Coppinger (“Coppinger”), and his new employer, Guaranteed Rate, Inc. (“GRI”). Beginning in 2014, Coppinger worked as a Vice-President of Residential Lending for Needham. In this role, he was responsible for originating and closing residential mortgages through his personal and professional contacts. At various times during his employment, Coppinger was required to sign agreements providing that he would not use Needham’s confidential information outside the scope of his employment. These agreements defined confidential information to include client lists. In January 2021, Coppinger left Needham to take a similar position at GRI, a competitor of Needham in the business of providing residential mortgages. Evidence showed that before leaving Needham, Coppinger had sent customer lists and information about closed loans from his work email to his personal email account. Coppinger edited one of these lists to delete names of customers he did not recognize, add additional customers, and add customers’ email addresses. GRI, in turn, took this list and uploaded its client database. When Coppinger received a letter from Needham informing him that he had allegedly breached the confidentiality agreements, GRI sequestered this client list.
Needham moved for a preliminary injunction, asserting misappropriation of trade secrets and breach of the confidentiality agreements, among other claims. Applying the familiar preliminary injunction standard, the court first assessed Needham’s likelihood of success on the merits. The court concluded that Needham had failed to allege a viable claim under the Massachusetts Uniform Trade Secrets Act (“MUTSA”) because it had not alleged a protected trade secret. The customer list—the only document that Coppinger had been shown to have accessed and used—was readily ascertainable by proper means from public records and thus failed to constitute a trade secret. Similarly, the court expressed skepticism as to the viability of Needham’s breach of contract claim to the extent it was based on the customer list. Under the MUTSA, nondisclosure obligations only protect economically valuable information if that information constitutes a trade secret. As the court had previously found, the customer list did not meet this standard. Nevertheless, the court concluded that Needham had a likelihood of succeeding on the merits to the extent it alleged breaches based on Coppinger’s disclosure of information beyond the customer list. This included documents that Coppinger had emailed to himself and shared with GRI detailing the loan and credit information of Needham’s customers. The court rejected Needham’s claims for breach of a non-solicitation provision because the provision was ambiguous and lacked a temporal or geographic limitation. And the court expressed doubt as to the success of Needham’s tortious interference with contractual relations claim based on the facts. On the remaining preliminary injunction factors, Needham fared better. The court found that Needham had shown a plausible risk of suffering irreparable harm in the form of damage to its customer relationships. The court also found that the balance of harms tipped in Needham’s favor. With that, the court granted Needham’s motion in part, ordering Coppinger to return the customer list and customer information and refrain from soliciting any customer on the list for six months. GRI was also ordered to continue sequestering the customer contacts it had received from Coppinger and uploaded into its database.
§ 1.3.10. Michigan Business Courts
Benteler Auto. Corp. v. TG Mfg., LLC[102] (Requirements contract, statute of frauds). For years, defendant supplied automotive engine parts to plaintiff under a requirements contract. In anticipation of each shipment under the contract, plaintiff-buyer would send a scheduling agreement to the supplier stating the quantity of parts it required. In May 2019, the buyer emailed a scheduling agreement to defendant-seller dictating not only a quantity term, but also a new price and other new terms. One of the new terms obligated the seller to provide a six-week inventory when the buyer transitioned to a new supplier. Moreover, it stated that the seller’s acceptance “shall be conclusively presumed by Seller’s signature on this Order or by Seller’s shipment of the goods.” Without countersigning it, the seller continued to ship parts to the buyer.
In holding the terms of the May 2019 scheduling agreement enforceable, the court followed the Michigan Court of Appeals’ application of the UCC’s statute of frauds to requirements contracts. In that context, periodically-issued “material releases,” such as this scheduling agreement, satisfy the statute of frauds when coupled with automotive supply contracts – even when those contracts consist of boilerplate language and do not result from negotiations between the parties.
Brooks Williamson & Assoc., Inc. v. Braun[103] (Breach of fiduciary duty in employment context). At issue was whether the defendants owed fiduciary duties to their employer, plaintiff, a wetland consulting company. Three of the five defendants were part-time, hourly employees without employment agreements, confidentiality agreements, or non-competition agreements. One of the plaintiffs, Williamson, the president and sole owner of the company, acknowledged that these individuals were not officers, directors, or shareholders of the company, despite his characterization of them as key employees. Yet, the plaintiffs argued these employees owed fiduciary duties to the company by virtue of the agency relationship that existed as a consequence of their employment. Additionally, the plaintiffs argued that Berninger, another defendant, functioned as the company’s de facto Chief Operating Officer.
In granting summary disposition (summary judgment) to the defendants, the court rejected these arguments and noted that in Michigan employees generally do not owe fiduciary duties to their employers. As to Berninger, the company’s alleged de facto COO, the court found no evidence that Williamson or the company had reasonably placed in him the “faith, confidence, and trust” necessary for a fiduciary relationship to arise. The court also found it significant that Berninger was not an actual officer or director of the company.
General Motors LLC v. FCA US LLC[104] (Fraud, fraud by omission, unfair competition, civil conspiracy). In the aftermath of the Great Recession, European automaker Fiat acquired financially-distressed Chrysler to form FCA. According to General Motors (GM), FCA then initiated an alleged multimillion-dollar bribery scheme with key union officials at the UAW to weaken GM’s financial position, in anticipation of a future FCA-GM merger on terms favorable to FCA. In September 2020, GM filed suit against FCA, alleging fraud, fraud by omission, unfair competition, and civil conspiracy, among other claims, related to the collective bargaining agreement (CBA) GM had negotiated with the UAW in 2015.
The UAW is a union that supplies workers to certain automotive manufacturers, including GM and FCA. The labor negotiations process is structured so that the UAW’s contracts with each automaker all expire at the same time, on the same date. Typically, the UAW targets the best-performing automaker as the “lead” company and negotiates the first CBA with the lead. Then, the UAW uses a technique called pattern bargaining to pressure remaining automakers to pattern their CBAs after the lead’s. GM was the lead in 2011 and expected to be the lead again in 2015 “based on objective factors.” However, the UAW unexpectedly chose FCA as the lead, and FCA set an unfavorable pattern (from GM’s perspective) by granting the UAW large wage increases for Tier One workers and other concessions. Because the risk of a strike was too great, GM ultimately yielded to the UAW’s pressure for similar concessions at a cost to GM of over $1 billion above the tentative agreement GM had reached with the UAW earlier in the negotiations process.
Moreover, FCA’s collective bargaining agreement, and therefore GM’s also, permitted the automakers to take advantage of greater numbers of Tier Two workers, a cheaper source of labor. Leading up to the 2015 bargaining process, the UAW had insisted it would reinstate the former cap on Tier Two workers, limiting that group to 25% of the workforce. GM had structured its workforce in anticipation of this change. FCA, however, maintained a workforce comprising 42% Tier Two employees prior to the 2015 CBA. Thus, FCA benefitted from a lower wage-structure in its workforce prior to the 2015 CBA negotiations. Additionally, FCA was better positioned than GM to immediately benefit from the 2015 pattern CBA, because it already employed much greater numbers of Tier Two workers.
The court granted summary disposition (summary judgment) to FCA on GM’s fraud claims for failure to state a claim on which relief may be granted. GM failed to sufficiently allege facts showing that FCA’s alleged bribery scheme had proximately caused it harm, or that it had suffered a legally cognizable harm. The court rejected GM’s reliance on its tentative bargaining agreement to establish damages because it was speculative that the UAW would have continued to support the agreement absent the alleged bribery scheme. Instead, the court found that the economic force of pattern bargaining and threat of a strike forced GM’s hand. GM’s civil conspiracy claim relied on the fraud claims to supply a separate, actionable tort, and Michigan law requires any claim of unfair competition to be based on fraud. Consequently, these claims failed also.
Sea Land Air Travel Serv., Inc. v. Auto-Owners Ins. Co.[105] (Insurance, COVID-19). Plaintiff Sea Land Air Travel Service, Inc. sued its insurer under a commercial property insurance policy, seeking to recover for the interruption to its business caused by a government-ordered shutdown related to COVID-19. On the complaint alone, the court granted summary disposition (summary judgment) to the insurer on Sea Land’s breach of contract claims, finding that Sea Land had failed to state a cause of action. The policy required that Sea Land’s suspension of operations result from a “direct physical loss or damage to the property” for it to recover loss of business income. The court held that neither the government’s shut-down order nor the potential presence of the virus constituted a direct physical loss. The term “physical loss” should be given its plain meaning, such as water damage, burned premises, or a broken window. Additionally, the true cause of the business interruption was the government’s shutdown order, not the virus, and that order did not prohibit remote work. However, the court declined to adopt the insurer’s reasoning that the virus is a contaminant under the policy and that the policy’s pollution exclusion therefore applied to bar Sea Land’s claims.
§ 1.3.11. New Hampshire Commercial Dispute Docket
Labbe v. Counter Design, Inc.[106](Wage claims relating to an alleged equity interest). The plaintiffs in this case were employees of the defendant, and alleged that the defendant had offered each of them a “two percent (2%) ownership share of the Defendant company as part of [their] continued employment with the Defendant.” Upon an alleged failure to comply with the offer, the plaintiffs brought suit, including claims that this percentage ownership share constituted “wages” within the meaning of New Hampshire’s wage statute.
The statutory definition is broadly worded, and includes the catchall phrase “whether the amount is determined on a time, task, piece, commission or other base of calculation.” Notwithstanding the statutory definition, however, the court concluded that a promise of a percentage equity interest was not something that could be readily calculated, and therefore did not fall within the definition of wages in the statute. Therefore, the court granted the defendant’s motion to dismiss.
Atlantic Anesthesia, P.A. v. Lehrer[107] (Common interest doctrine and crime fraud exception).In this case, the court addressed an issue on which the New Hampshire Supreme Court had not yet ruled: whether the “common interest” provision within the attorney client privilege rule of evidence (“in a pending action and concerning a matter of common interest”) applied in the circumstances.
There was no pending action, but the defendants and a third party had communicated regarding the subject of the later litigation, and the defendants sought to protect discovery of their communications with that third party pursuant to the “common interest” rule.
The court ultimately determined that it need not resolve the issue of whether this doctrine can apply to communications before there is a “pending action,” because it further determined that the crime-fraud exception to the privilege applied in the context of an alleged breach of fiduciary duty. In doing so, the court concluded that the New Hampshire Supreme Court would find persuasive the reasoning of decisions from other jurisdictions finding sufficient parallels between fraud and the intentional breach of fiduciary duties to trigger the exception to the privilege rule.
Schleicher and Stebbins Hotels, LLC v. Starr Surplus Lines Ins. Co.[108] (Jurisdiction of the BCDD).The jurisdiction of New Hampshire’s business court is established by state statute and court rule, and in addition to the types of cases it may consider, both also require consent of all parties to the jurisdiction of the court.
In this case, the defendants sought such a transfer, and the plaintiffs objected. The defendants then argued that the requirement of consent by all parties was not “jurisdictional,” and therefore subject to waiver by the court in the exercise of its general superintendence.
The court determined that the consent requirement in the statute and rule was akin to a subject matter jurisdiction requirement, and therefore the absence of complete consent precluded the court from accepting a transfer of the case to the business court.
§ 1.3.12. New Jersey’s Complex Business Litigation Program
Jenkinson’s South Inc. and Jenkinson’s Pavilion v. Westchester Surplus Lines Ins. Co.[109](Denial of insurance claims relating to COVID-19). This case concerns the fallout from business closures stemming from the COVID-19 pandemic. Specifically, this dispute arises from the denial of insurance claims submitted by plaintiffs in May 2020 under multiple “all risk” primary and excess policies, after the COVID-19 pandemic resulted in the temporary closure of Jenkinson’s boardwalk and amusement business in Point Pleasant Beach, New Jersey. Plaintiffs claimed a loss in excess of $10 million.
All policies held by the plaintiffs included language insuring “against all risks of direct physical loss or damage to Insured Property, except as excluded.” The multiple insurance policies contained various exclusions relating to, inter alia, loss of use, pollutants or contaminants, and loss due to virus or bacteria.
The court denied plaintiffs’ motion for summary judgment and granted the defendant insurance companies’ cross-motions for summary judgment. In doing so, the court found that the defendants met their burden in proving the closure of the plaintiffs’ boardwalk business was a direct result of the COVID-19 pandemic and that no direct physical loss was incurred to the plaintiffs’ property, thus falling outside the scope of the policies’ coverage.
In holding that there was no direct physical loss or damage to plaintiffs’ property to trigger coverage under the policies, the court found that plaintiffs proffered evidence that various employees at the premises had contracted COVID-19 at or around the time that plaintiffs closed their facilities was insufficient and that there was no evidence that the employees contracted COVID-19 because of exposure to the property itself. In addition, the court ruled that plaintiffs failed to make a showing that the concentration of COVID-19 rose to a level where the property was rendered temporarily unsafe or inhospitable, and distinguished the instant scenario from a prior case where the presence and concentration of ammonia in a packaging plant required immediate closure and remediation before the property became safe for human occupancy. The court further noted that Governor Murphy’s Executive Orders that required plaintiffs to close their doors to the public did not require the actual presence of COVID-19 at the property to bar public access.
Finally, the court ruled that the Loss of Use exclusion barred coverage under the policies because plaintiffs’ damages arose out of the inability to use the property for its intended profit-making function, and also that the presence of COVID-19 at the property falls within the pollutant or contaminant and/or Biological material exclusions contained in the various policies.
§ 1.3.13. New York Supreme Court Commercial Division
SL Globetrotter L.P. v. Suvretta Capital Mgmt., LLC[110](Interpretation of conditions precedent in a contract). In this case, Justice Peter Sherwood declined to dismiss plaintiffs’ breach of contract claims, which arose out of a dispute over investment, through a special purpose acquisition vehicle (“SPAC”), in a new public company. The opinion sheds light on the interpretation of conditions precedent in a contract, particularly when they deal with the consistency of relevant financial information.
In July 2018, SL Globetrotter, L.P. and Global Blue Group Holding AG (the “Company”) and Global Blue Group AG (“Global Blue”), a provider of tax-free shopping and currency processing services, engaged Far Point Acquisition Corporation (“FPAC”), a SPAC, in order to consummate a transaction. The transaction would allow the Company to become a public company that would be owned by existing FPAC and Global Blue shareholders as well as investors such as defendants Suvretta Capital Management, LLC and Toms Capital Investment Management LP who made investments through a mechanism known as “private investments in public equity” or “PIPE.” In December 2019 and January 2020, defendants received an Investor Presentation, which included information about the transaction and the investment opportunity. The Investor Presentation explicitly disclaimed any guarantees of future performance and “warned that any forward-looking statements involved numerous risks, uncertainties, or other assumptions that could create a difference in results from those expressed or implied by the Investor Presentation.” On January 16, 2020, defendants entered into agreements pursuant to which they committed to purchase five million shares of the Company for $10 per share, for an aggregate purchase price of $50 million. The parties planned that the Company would use the money it obtained from defendants and other investors to purchase a portion of Global Blue’s shares. In the agreements they executed, defendants acknowledged the possibility of an immediate loss in their investment’s value. On June 19, 2020, FPAC filed a preliminary proxy statement with the Securities and Exchange Commission that explained that the COVID-19 pandemic had a negative impact on Global Blue’s financial performance. Three days later, defendants sent plaintiffs a repudiation letter, which stated that defendants would not perform their obligations under the agreements, including providing the funds necessary to purchase the New Global Blue shares.
Thereafter, plaintiffs sued defendants for breach of contract, and defendants moved to dismiss. In support of their motion to dismiss, defendants asserted that the conditions precedent to their obligation to purchase shares were not satisfied. “A condition precedent is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises[.]” A plaintiff cannot maintain a claim for breach of contract unless all conditions precedent to the defendant’s performance have been satisfied. In this case, defendants primarily argued that conditions precedent to their obligations were not satisfied because in the relevant agreements, Global Blue represented that the information in its proxy statement would not be materially inconsistent with the information included in the Investor Presentation. Defendants pointed to numerous differences between the proxy statement and the Investor Presentation which they argued were material, including (1) that Global Blue’s definitive proxy statement included no financial projections and stated that previous projections could no longer be relied upon, even though the Investor Presentation stated that Global Blue expected an annual revenue growth rate of 3-6%, and (2) that Global Blue’s definitive proxy statement revised financial information that was included in the Investor Presentation.
Justice Sherwood concluded that defendants’ argument failed based on the documentary evidence presented by the parties. Specifically, the court explained that the Investor Presentation included a disclaimer that the information in the presentation was based on the historical financial information included in Global Blue’s audited financial statements. The court also emphasized that the Investor Presentation stated that it contained “forward-looking statements” about future developments that Global Blue could not guarantee would occur, and which Global Blue had no obligation to update or revise. Furthermore, Justice Sherwood noted that defendants specifically acknowledged the risks incident to the transaction, including the possibility of total loss, when they agreed to purchase the shares. Thus, the court declined to dismiss plaintiffs’ breach of contract claims, concluding that “it would be improper to now allow defendants to disclaim their contractual obligations by arguing that the exclusion of forward-looking statements or the inclusion of corrected financial information in the [definitive proxy statement] are material inconsistencies in violation of” the relevant conditions precedent.
Certain Underwriters at Lloyd’s v. AT&T Corp.[111](Insurance policies’ anti-assignment clauses). In Certain Underwriters at Lloyd’s v. AT&T Corp., Justice Cohen of the New York County Commercial Division Court granted a motion for partial summary judgment and determined that Nokia, through its predecessor Lucent, had the right by assignment to seek coverage under certain insurance policies issued to AT&T that contained anti-assignment clauses. Although the general rule in New York is that such anti-assignment clauses are enforceable, this decision highlights how it can be more challenging to bar assignment in the special context of an insurance policy.
The court began its analysis by explaining that “under New York law, the enforceability of a no-transfer clause in an insurance contract is limited.” Specifically, as set forth in the leading First Department case of Arrowood Indemnity Co. v. Atlantic Mutual Insurance Co., “New York generally follows the majority rule that a no-transfer provision in an insurance contract is valid with respect to transfers that were made prior to, but not after, the insured-against loss.” As the First Department explained in Arrowood, “this principle is based on a judgment that while insurers have a legitimate interest in protecting themselves against additional liabilities that they did not contract to cover, once the insured-against loss has occurred, there is no issue of an insurer having to insure against additional risk.” Turning to the facts of the case, the court noted that any potential losses covered by the policies necessarily preceded the assignment because the underlying policies covered only “accidents” or “occurrences” during their respective policy periods, all of which had expired before the SDA was executed. The court thus found that Nokia need not establish that the claimed losses preceded the assignment to be successful on its motion—because all covered losses were by definition pre-assignment losses, and any post-assignment losses were not insurable under the policies.
Ronald Benderson 1995 Trust v. Erie County Med. Ctr. Co.[112](Yellowstone injunction request). In this case, Justice Walker of the Erie County Commercial Division granted plaintiff’s request for a Yellowstone injunction where the defendant landlord provided a faulty notice of default to the plaintiff tenant. This case arises out of a dispute between a commercial real estate tenant-plaintiff and a hospital landlord-defendant in the context of a commercial lease for retail space located in the lobby of the hospital. The initial term of the lease, which was for ten years, provided that the tenant would pay a “Partial Rent” amount until all rentable space was sublet and open for business. The Partial Rent was calculated by “multiplying the Full Rent due for each month by a fraction the numerator of which is the total combined square footage of each subtenant open for business in the [lobby] and the denominator of which is the total square footage of the [lobby].” Plaintiff began paying Partial Rent in accordance with the lease provisions on May 22, 2003. The lease provided plaintiff the option to renew for a second ten-year term, and specified that the full rent for the second ten-year term would increase by a certain amount. The renewal option, however, was silent as to the Partial Rent provision. Plaintiff exercised the renewal option on August 22, 2011, and served defendant with a notice clarifying the rent for the renewal period in accordance with the Partial Rent provision, i.e., the monthly rent for the renewal period multiplied by the Subtenant occupancy rate. Defendant accepted the prorated rent without objection until October 2020. Following a major economic loss during the COVID-19 pandemic and an appraisal which determined that defendant was losing money on its lease of the lobby space, defendant sent plaintiff a notice of a default under the lease. After a few months of trying to resolve their disputes, defendant directed plaintiff to “quit and surrender” the lobby space. Plaintiff then moved for a Yellowstone injunction.
In order to succeed on a Yellowstone injunction, a plaintiff must demonstrate that “(1) it holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.” New York courts typically do not require a showing of likelihood of success on the merits and irreparable harm in order to issue a Yellowstone injunction, although the court nonetheless proceeded with an analysis of the usual preliminary injunction factors in reaching its decision in this case.
As an initial matter, the court found that the plaintiff was entitled to the requested relief because the alleged notice of default was defective in a number of respects. For example, it was sent to the wrong party at the wrong address in violation of the notice clause in the lease. Furthermore, the court held that the notice violated then-Governor Andrew Cuomo’s Executive Order providing for a moratorium on commercial evictions during the COVID-19 pandemic. More importantly, the court found that the notice of default was “so impermissibly vague that it was insufficient to commence a ‘cure’ period, as a matter of law.” It claimed for the first time that the Full Rent Commencement date had occurred on an unspecified date in 2014 and that plaintiff “shall pay… [the Full Rent amount],” but also provided two different and logically inconsistent rental rates. The notice went on to say that the renewal option did not include a Partial Rent period. The notice provided thirty days to cure the default “to avoid termination of the Lease,” but did not explain how plaintiff could cure the alleged breach. “Notably, the notice letter was silent as to whether ‘cure’ meant paying increased rent moving forward, paying back-rent for years in the past, or which amount of rent would apply in either case.” Because of these ambiguities with respect to plaintiff’s ability to cure, the notice letter was insufficient to commence a cure period as a matter of law, and thus the “cure” period could not have expired because it was never commenced.
The court went on to address the plaintiff’s likelihood of success on the merits with respect to the remaining Yellowstone factors. Although the court recognized that the defendant had some meritorious public policy arguments with respect to the validity of the lease in question, and that the plaintiff had likely failed to pay the full amount of rent due under the lease, it ultimately granted the plaintiff’s request for injunctive relief, noting New York’s well-settled law that the loss of a leasehold constitutes irreparable harm and that the equities disfavor the forfeiture of valuable leasehold interests, particularly where, as here, the notice of default was a nullity.
Costello v. Molloy[113](Mandatory injunction for reinstatement as member in LLC). In Costello v. Molloy, Justice Gretchen Walsh of the Westchester County Commercial Division denied Plaintiff William Costello’s request for a mandatory injunction against Defendants Ronald Molloy and Curis Partners, LLC reinstating Costello as a member of the LLC. Although the court found that Costello demonstrated a likelihood of success on the merits of his claim that his LLC membership was wrongfully terminated, the court held he failed to clearly establish the type of extraordinary circumstances necessary to warrant the granting of mandatory injunctive relief reinstating his membership in Curis.
Despite finding that Costello had established a likelihood of success on his claim that Defendants breached the Operating Agreement, the court nonetheless denied Costello’s request for a mandatory injunction reinstating him as a Curis member. Specifically, the Court explained that a mandatory injunction is an “extraordinary and drastic remedy” that should only be granted when essential to maintain the status quo pending trial. Because the injunctive relief enjoining Defendants from taking any actions that would prejudice Costello’s purported rights or membership in the LLC—which the court extended under the requested preliminary injunction—was sufficient to protect Costello’s interests, such a drastic remedy was not necessary. The court also reasoned that absent extraordinary circumstances, a mandatory injunction should not issue where, as here, to do so would grant the movant the ultimate relief to which he would be entitled in a final judgment.
§ 1.3.14. North Carolina Business Court
Monarch Tax Credits, LLC v. N.C. Dept. of Revenue[114] (Motion to dismiss for failure to state a claim and for lack of jurisdiction). The North Carolina Department of Revenue brought a motion to dismiss plaintiff’s petition for judicial review and complaint for declaratory relief for lack of jurisdiction under Rules 12(b)(1) and 12(b)(2) and for failure to state a claim upon which relief may be granted under Rule 12(b)(6). The court’s order addressed only Rules 12(b)(1) and 12(b)(2), and deferred ruling on the merits under Rule 12(b)(6). Plaintiff sought declaratory relief on whether defendant unconstitutionally administered tax law to deny tax credits to plaintiff’s investor customers. Plaintiff “formed structured investment partnerships to encourage investment by North Carolina taxpayers related to renewable energy, mill restoration and historic redevelopment” and to use “these partnerships to aggregate investments necessary to fund such projects, and to then allocate to investors the tax credits those projects yield.” The court found plaintiff did not have jurisdiction to challenge defendant’s enforcement of a September 10, 2018 publication as an administrative rule under N.C. Gen. Stat. § 150B-4, but found plaintiff did have jurisdiction to “pursue a direct constitutional claim for the damage it has suffered unaffected by any invocation of sovereign immunity, otherwise known as a Corum[115] claim.”
Ford v. Jurgens[116] (Attorney-client privilege and work product doctrine). Plaintiffs moved to compel the production of certain draft operating agreements and related emails withheld by defendants on the basis of attorney-client privilege and/or the work product doctrine. The court considered and rejected plaintiffs’ arguments that the draft operating agreements were not privileged because: (1) they were not intended to be confidential; (2) any privilege had been waived because defendants “put advice they received from counsel ‘at issue’”; (3) due to the fiduciary exception; or (4) due to the crime-fraud exception. Therefore, the court denied the motion as to the draft operating agreements. As to the related emails, the court granted the motion in part and ordered the production of several transmittal emails that attached draft operating agreements because those emails did not furnish or request legal advice; therefore, they were not attorney-client privileged communications. The court denied the motion as to more substantive emails that were made in the course of giving or seeking legal advice for a proper purpose.
Buckley LLP v. Series 1 of Oxford Ins. Co. NC LLC[117] (Attorney-client privilege and work product doctrine). Both parties moved to compel the production of certain email communications withheld by the opposing party on the basis of attorney-client privilege and/or the work product doctrine. Plaintiff, a law firm, brought the action against defendant, an insurance company, for refusing to provide coverage under an insurance policy for “certain losses associated with the departure of key revenue-generating partners.” Plaintiff hired an outside law firm to provide services relating to an investigation of alleged misconduct of one of plaintiff’s partners. Defendant contended that plaintiff improperly withheld communications between plaintiff and its outside counsel. The court reviewed in camera the challenged communications and determined that certain communications reflected outside counsel’s participation in the investigation “in accordance with plaintiff’s firm policies and were unrelated to the rendition of legal services.” Therefore, the court found such communications were not properly withheld as privileged. On the other hand, the court found that other communications reflecting a primary purpose of giving or receiving legal advice were privileged. The court further considered and rejected plaintiff’s contention that its communications with outside counsel were protected under the work product doctrine. The court reasoned the investigation would have been conducted whether or not litigation was anticipated and no evidence suggested litigation was anticipated.
Plaintiff contented that defendant improperly withheld communications including its internal in-house counsel because the in-house counsel primarily was engaged in her business role rather than in giving legal advice. The court reviewed in camera the challenged communications and determined that most reflected the in-house counsel’s business role in reviewing plaintiff’s claim in the ordinary course of defendant’s insurance business. Therefore, the court found such communications were not properly withheld as privileged.
Erwin v. Myers Park Country Club, Inc.[118] (Shareholder inspection rights). Erwin, a member of Myers Park Country Club, sought to inspect the corporate records of the club related to certain renovations projects and assessments approved by the Board of Directors. The court first examined whether Erwin had an absolute right of inspection pursuant to N.C. Gen. Stat. § 55-16-02(a). The court concluded that Erwin, as a qualified shareholder under the statute, had an absolute right to inspect the minutes of all Myers Park shareholders meetings addressing the renovation project, Myers Park revenue shortfalls, and proposals to address revenue shortfalls. However, because Myers Park had failed to keep the minutes of the shareholder meetings held during the relevant time period, the court allowed Erwin a right of inspection “of all final actions taken by shareholders without a meeting” during the relevant time period, as well as “all communications with shareholders generally” that addressed the project and revenue shortfalls.
Next, the court turned to the qualified right of inspection of records pursuant to N.C. Gen. Stat. § 55-16-02(b), which requires that the demand be made “in good faith and for a proper purpose.” Myers Park argued that Erwin’s demand lacked a proper purpose and was merely an attempt to second-guess the Board’s decision to move forward with the project. The court rejected Myers Park’s attempt to use the Business Judgment Rule to shield its decision process from shareholder inspection, noting that Myers Park failed to overcome the presumption of reasonableness with respect to Erwin’s requests.
However, the court stopped short of granting Erwin’s request to see the minutes from all Board meetings, explaining that the statute only grants the right to inspect minutes that reflect the final action of the Board. Accordingly, the court narrowed the requests to those encompassing only final actions. Likewise, the court only granted Erwin access to the capital operating budgets and capital operating expenditures that were actually approved by the Board.
Lunsford v. JBL Communications, LLC[119] (Discovery sanctions). This opinion deals with a litigant’s eighteen-month attempt to force the opposing party to produce documents. Soon after being served with the complaint in September of 2019, Defendant JBL served discovery requests on Lunsford, to which Lunsford failed to respond. After Lunsford added additional plaintiffs to the lawsuit, JBL again served discovery requests on the new parties as well. By June 2020, JBL sought relief with the Business Court, submitting a Rule 10.9 dispute and contending that plaintiffs’ responses were long overdue. The court ordered plaintiffs to provide a date certain by which they would produce responsive documents. Again, plaintiffs failed to comply. By the time JBL’s first motion for sanctions came on for hearing in August of 2020, plaintiffs had only produced a few documents in an unreadable format and could not give a production timeframe because they had not even begun looking for relevant documents with respect to several email account and at least one mobile device.
The court entered sanctions against plaintiffs, ordering them to pay JBL’s attorneys fees and produce documents consistent with the parties’ agreed-upon ESI protocols within 30 days. Plaintiffs still did not produce any documents within the court-ordered timeframe and instead, sought several extensions of time, and filed an ex parte motion asking the court to suspend the production deadline indefinitely. During a status conference to determine a new discovery schedule, plaintiff’s counsel admitted that he had spent virtually no time on document review and still had no production date in mind. On November 20, 2020, after JBL filed a second motion for sanctions, plaintiffs stated they had no immediate plans to produce documents, citing the large volume of documents and the high cost of their document review vendor. On February 3, 2021, plaintiffs’ attorney admitted at another status conference that although he had now obtained a new vendor, he had no basis for believing he could meet the production schedules he previously agreed to and that his prior assurances were simply “blind optimism.”
In ruling on JBL’s second motion for sanctions, the court rejected plaintiffs’ argument that their recent procurement of a vendor was a mitigating factor, noting that their efforts came only after JBL’s motion. The court also rejected counsel for plaintiffs’ contention that he was unaware of the complexities of electronic discovery involved in this case. Noting plaintiffs’ “casual disregard for court orders and rules alike,” the court entered a sanction prohibited plaintiffs from introducing evidence in support of their claims and defenses against JBL. Additionally, the court once again ordered plaintiffs to produce the documents and pay JBL’s attorneys fees caused by plaintiffs’ failure to obey the court’s prior orders. However, the court declined to strike plaintiffs’ pleadings and enter default judgment or to find them in civil contempt, though it did warn plaintiffs that going forward, “only the most severe sanctions remained.”
Quad Graphics, Inc. v. N. Carolina Dep’t of Revenue[120] (Tax and constitutional law). In this tax appeal, petitioner Quad Graphics, Inc., a Wisconsin corporation that prints books and catalogs for direct mail, filed for judicial review of the ruling of the Office of Administrative Hearings, which had upheld an assessment of sales tax against it. Petitioner argued it was not a “retailer” under N.C. Gen. Stat. § 105-164.3(35)(a) required to pay sales tax because it did not make any sales in North Carolina subject to tax as defined in the statute. Petitioner additionally argued that the state’s attempt to collect sales tax in this instance violated the Commerce Clause of the United States Constitution. Although petitioner had customers in North Carolina and hired a sales representative in North Carolina in 2009, the materials petitioner sold were all printed and delivered to post office locations outside the state, and its contracts specified that title to the materials transferred to the customers when the materials were deposited on the carrier’s shipping dock. Thus, petitioner argued that it did not make actual sales in North Carolina.
The court rejected petitioner’s interpretation of “retailer,” first noting that the Revenue Act imposed both a sales and use tax on retailers, lending support to the Department of Revenue’s ruling. The court also looked to other provisions in the statute, including N.C. Gen. Stat. § 105-164.6, titled “Complementary use tax,” which specifically provided authority for the state to collect a use tax from retailers who sold personal property outside North Carolina for use in the state. Finally, the court looked to N.C. Gen. Stat. § 105-164.8, which requires retailers to collect sales tax on personal property that enters the state, even when that property is delivered to a carrier F.O.B. outside the state.
However, the court agreed with petitioner that the attempted collection of sales tax violated the Commerce Clause. In doing so, the court looked to whether North Carolina had a sufficient “transactional nexus” with the sales in question. Petitioner argued that the controlling case was McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944), where the United States Supreme Court precluded Arkansas from assessing sales tax on goods shipped from Tennessee to Arkansas residents via a common carrier. The court rejected the State’s argument that Dilworth had been overruled by the later Supreme Court opinions Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), noting that neither overruled Dilworth’s principle that “to meet the transactional nexus requirement under the Commerce Clause, a state sales tax must only be imposed on sales where the transfer of title or possession occurs within the taxing state.” The court found that North Carolina lacked a sufficient nexus to the transactions at issue because it was undisputed that the transactions occurred out of state. Therefore, it reversed and granted summary judgment in favor of petitioner.
Columbus Life Ins. Co. v. Wells Fargo Bank, N.A.[121] (Motion to dismiss 12(b)(6) and 12(b)(2)). This case highlights a tension that exists in North Carolina’s (and many other states’) insurance laws. North Carolina has long held that an insurance policy taken out by one who lacks an insurable interest is void against public policy as an illegal wager on human life. However, N.C. Gen. Stat. § 58-58-22(2) requires all insurance contracts to contain a clause barring the insurer from contesting the validity of any policy more than two years after it has been in force for any reason except the failure to pay premiums. In this case, Columbus Life claimed that a $1 million policy taken out in 2005 on a doctor who had never paid premiums and had immediately assigned a collateral interest on the policy was part of a “stranger-originated life insurance,” or “SOLI” scheme. After several subsequent assignments, Wells Fargo came to hold the policy as a securities intermediary for Luxembourg-based LSH, Co. In the action, Columbus Life sought a declaratory judgment that the policy was void ab initio. Wells Fargo and LSH moved to dismiss for failure to state a claim and lack of personal jurisdiction respectively.
Wells Fargo argued that the more recent statute N.C. Gen. Stat. § 58-58-22(2) represented a legislative change in North Carolina’s public policy, barring even SOLI claims after two years. Wells Fargo additionally argued that allowing SOLI claims to be an exception to the strict wording of the statute would wrongfully incentivize insurance companies to accept premiums on suspected SOLI claims as long as possible before seeking to declare the policies void. Despite recognizing a split in authority, the court joined the Supreme Courts of New Jersey and Delaware, reasoning that if the insurance policy never legally came into effect, neither did its two-year incontestability provision. Thus, Columbus’s claims against Wells Fargo were not barred by the statute.
However, the court did dismiss the claims against LSH, concluding that North Carolina’s long-arm statute did not reach it. Even if by becoming a beneficial owner LHS could be said to have entered a “contract of insurance” for purposes of the statute, the action did not “arise” out of any contract entered into by LSH, but rather with the origination of the policy in 2005. Thus, LHS, as a subsequent purchaser, did not establish minimum contacts with North Carolina.
§ 1.3.15. Philadelphia Commerce Case Management Program
Chest-Pac Assocs., L.P. v. Del Frisco’s of Philadelphia, Inc.[122] (Lease termination during COVID-19 would result in unacceptable forfeiture under substantial performance doctrine). In Chest-Pac Associates, the Commerce Court addressed a commercial landlord-tenant dispute involving late rent payments, resulting from the Governor’s executive orders imposing business limitations because of the COVID-19 pandemic. Over a period of months, the restaurant tenant did not make its rent payments, but did actively communicate with the landlord in attempting to reach a negotiated accommodation to save its business by making alternative rent arrangements. The landlord sent a number of default notices (though no notice that it would seek possession), and offered some counter-proposals. After not paying rent from March 2020 on, the tenant paid all past due sums in November 2020, and was current with its rent thereafter. The landlord still brought suit, seeking possession of the premises.
Commerce Court Supervising Judge Gary Glazer granted the tenant summary judgment under the substantial performance doctrine. Pennsylvania law disfavors forfeitures and courts “should not enforce forfeiture ‘when the contract has been carried out or its literal fulfillment has been prevented by oversight or uncontrollable circumstances.’” Rather, “[c]ourts seek to avoid forfeitures particularly where there has been considerable part performance.” “[T[he doctrine of substantial performance was created by the courts to use as an instrument of justice intended to avoid forfeiture because of technical, inadvertent or unimportant omissions.” It “is intended for the protection and relief of those who have faithfully and honestly endeavored to perform their contracts in all material and substantial particulars.” Judge Glazer found the substantial performance doctrine a well-suited tool for this case, in light of the tenant’s efforts and payments, and its technically curing any defaults. Further, “[w]hile the … COVID-19 executive orders do not relieve or excuse [the] obligation to pay rent under the Lease, one cannot turn a blind eye to the unfortunate economic impact that such orders had on [the tenant’s] ability to timely pay its rent, especially since prior to March 2020, [it] was current with its rental obligations.”
Brown v. Cottrell[123](Piercing the corporate veil). In Brown, the plaintiff real estate developer contracted with defendant management company (the “LLC”) to perform project management services on various real estate projects. The LLC’s principal, also named a defendant, represented that he and the LLC had extensive management experience. In fact, the principal gave a false name, prevented plaintiff from discovering his criminal history, and misrepresented the fact that he and his company had little actual experience as project managers. Plaintiff never would have hired defendants had it known the truth.
Judge Glazer, in a non-jury trial, found facts supporting piercing the corporate veil to hold the principal liable. These facts included the LLC did not maintain adequate insurance, the principal and the LLC did not have separate identities, the LLC was grossly undercapitalized and lacked sufficient bank funds to protect creditors, the LLC did not maintain corporate formalities, and personal and business bank account funds were comingled. Both defendants were found liable under breach of contract and fraudulent inducement theories, though the court did limit damages.
Spector Gadon Rosen Vinci, P.C. v. Valley Forge Ins. Co.[124] (Law firm COVID-19 insurance coverage suit). In Spector Gadon, Commerce Court Judge Nina Wright Padilla (now Supervising Judge) addressed insurance coverage for a law firm’s business interruption losses due to the Governor’s executive orders limiting business operations during the COVID-19 pandemic. The court had to analyze the policy language “direct physical loss of or damage to property” to determine the merits of the law firm’s coverage claim. Judge Padilla determined that loss of use alone did not constitute “direct physical loss of or damage to property,” following other case law[125] reaching that same conclusion, which focused on the physical nature of the loss required to meet this policy language.
Judge Padilla also rejected coverage under the policy’s Civil Authority provision as, again, there was no physical loss. Further, there was no evidence the virus was present at the property or within five miles thereof. Moreover, the government shutdown order was issued to control a health crisis, not because of any physical loss at the premises or within five miles thereof. Finally, the policy also had a broad virus exclusion that barred coverage even for losses indirectly caused by viruses.
Lehigh Valley Baseball, L.P. v. Philadelphia Indemnity Ins. Co.[126] (Baseball team COVID-19 insurance coverage suit). In Lehigh Valley Baseball, a minor league baseball team sought coverage for business income losses due to executive orders shutting down its business, issued by the Governors of Pennsylvania and New Jersey to address the COVID-19 pandemic. Like Judge Padilla in Spector Gadon, Commerce Court Judge Glazer found a physical loss was required to invoke coverage, and there was none in this matter. Moreover, even if the court deemed the presence of COVID-19 to constitute a physical loss, the policy had a virus exclusion that precluded coverage for losses from a virus like COVID-19. Judge Glazer rejected the argument that the virus exclusion was void because it was obtained improperly from the Pennsylvania and New Jersey insurance authorities in 2006, on the theory the carrier failed to disclose the virus exclusion reduced existing coverage. Judge Glazer found the plaintiff did not plead any facts supporting the notion that a pre-2006 standard commercial insurance policy would have covered the kind of COVID-19 losses at issue.
Pine View Condo. Ass’n v. The Views at Pine Valley II. L.P.[127](Puffery not fraud). In Pine Valley Condominium Association, a condominium association brought suit against the declarant, developers and various individuals based on construction defects and financial deficiencies. Among other claims, the association alleged fraudulent inducement. The court dismissed this claim on the basis the alleged misrepresentations amounted to puffery, and not a knowing or reckless material misrepresentation upon which the purchasers reasonably relied to their financial detriment. Puffery is defined as an “‘exaggeration or overstatement addressed in broad, vague and commendatory language.’” It is “‘offered and understood as an expression of the seller’s opinion only, which is to be discounted as such by the buyer, and on which no reasonable [person] would rely.’” A seller’s general self-praise of its own product, without any actual detailed promises or guaranties regarding the particular characteristics of what is being sold, is a commonly recognized practice upon which a reasonable person should not rely.
Commerce Court Judge Remy I. Djerassi found the following language to be puffery: (1) the condominium brings modern luxury to life by building upscale residences honoring the surrounding neighborhood’s character; (2) the project will provide distinctive and unique features not to be found elsewhere; (3) the declarant’s personnel and contractors have extensive experience in developing residential communities; and (4) a health care system connected to the condominium is a long-standing and trusted provider, with a mission to provide care, comfort and healing to enrich the lives of older adults through innovative initiatives. Judge Djerassi concluded, “[t]hese representations are indefinite and elusive in meaning and constitute puffery which may not form the basis of a fraud claim.”
§ 1.3.16. Rhode Island Superior Court Business Calendar
CharterCARE Community Bd. v. Lee[128] (Motion to dismiss claim under Uniform Fraudulent Transfer Action). Receivers brought action under the Uniform Fraudulent Transfer Action (“UFTA”) against administrative agent/collateral agent to recover funds that were loaned to company to pay dividends to shareholders. Defendant/administrative agent/collateral agent sought to have action dismissed for failure to state a claim. The court denied the motion to dismiss on the grounds that: (1) defendant was a transferee for purposes of the UFTA; (2) as a collateral agent, defendant is a person for whose benefit the transfers were made; and (3) the transfer was made without the company receiving reasonably equivalent value. In addition, the court found that intent to defraud was not relevant and the plaintiffs did not need to limit their actions to the debtors/company and/or the ultimate recipients of the dividends.
Howland v. Howland[129] (Conveyance of a note in estate dispute).This case tells the sad saga of a woman who meticulously planned the disposition of her assets with input from leading professionals and her children. Since her death in 2009, her children have battled and prevented her estate from closing. The plaintiff children contended that a certain 2003 Note (the “2003 Note”) was indirectly conveyed by the decedent to the 2003 Trust of which they are beneficiaries; that the 2003 Note is in default; and the defendant child, as Trustee, must pay it in full. Defendant asserted that the 2003 Note poured over to the 1997 Trust of which he is beneficiary.
The court recognized that the Uniform Commercial Code provides two routes for conveyance of a note to another person: (1) by indorsing it to another person, R.I.G.L. § 6A-3-201; or (2) by delivery to another person for the purpose of giving the recipient the right to enforce it, § 3-203(a) and that such a transfer “vests in the transferee any right of the transferor to enforce the instrument.” § 3-203(b). The solitary difference between these two methods of conveying the value of a promissory note is one of presumption. See UCC Editor’s Notes, § 3-203, ¶ 2. The court stated “Because the transferee is not a holder, there is no presumption under § 3-308 that the transferee, by producing the instrument, is entitled to payment. The instrument, by its terms, is not payable to the transferee and the transferee must therefore, account for possession of the unindorsed instrument by proving the transaction through which it was acquired. Proof of a transfer to the transferee by a holder is proof that the transferee has acquired the rights of a holder. The transferee is then entitled to the presumption under § 3-308.” Thus, a subsequent possessor of the note without indorsement, who received the note through an intentional transfer for the purpose of giving the recipient the right to enforce the note is the owner of the note.
The court concluded as a matter of law that the plaintiffs established by more than a preponderance of the evidence that (1) the 2003 Note was transferred to the HH FLP Trust; (2) the HH FLP Trust was terminated in 2008; and (3) the 2003 Trust owns all the assets formerly owned by the HH FLP Trust. As such, the 2003 WBP Note was an asset of the 2003 Trust of which the plaintiffs are beneficiaries.
Barletta/Aetna 1-195 Washington Bridge North Phase 2 JV v. State[130] (Public contract bid protest). This action arose out of the bidding process that occurred during the second phase of a construction project (the “Project”) owned by the Rhode Island Department of Transportation (RIDOT). The Department of Administration (the “DOA”, and collectively with RIDOT herein called the “State”) is the state agency in charge of advertising requests for proposals and creating the “Procurement Regulations” which govern the solicitation process for contracts with the State pursuant to G.L. 1956 §§ 37-2-1 et seq. Aetna Bridge Company is a Rhode Island corporation. Barletta Heavy Division, Inc. is a Massachusetts corporation. Aetna and Barletta formed a joint venture (the “JV”) for the purposes of submitting a bid to RIDOT in connection with phase two of the Project. Cardi Corporation had been hired to perform certain work during the first phase of the Project and submitted a bid for the second phase of the Project as well. Following the issuance of the Phase 2 RFP, the three bidders, including the JV, submitted questions to the State in an attempt to clarify the quantity and description of the work completed during Phase 1 of the Project.
The court held: “Here, the Petition of the JV is sufficient to survive the pleading stage. “Specifically, the Petition alleged that (1) the State Respondents’ ‘failure to provide all [bidders] with the same material and competitively useful information constitutes a significant violation” of the State Purchases Act, the Procurement Regulations, and the Phase 2 RFP’; (2) ‘the JV was significantly disadvantaged over Cardi by the procurement process itself’; (3) Respondents ‘failed to equalize the competition and, therefore, compromised the integrity of the competitive procurement process’; (4) Respondents ‘failed to provide all prospective bidders . . . with comprehensive information relative to the Phase 2 RFP,’ which resulted in the solicitation processes being ‘neither comprehensive nor fair’; and (5) Respondents failed ‘to provide a comprehensive and fair solicitation relative to the Phase 2 RFP, the [Respondents’] actions relative to the Phase 2 RFP constitutes palpable abuse of discretion.’” The Petition also alleges that the information describing the work in the Phase 2 RFP and in the Respondents’ responses to the JV’s questions was “false.” The court concluded, assuming “all allegations [in the Petition] are true,” Petitioners have sufficiently pled that there was a significant violation by failing to equalize the competition because Petitioners were disadvantaged by the Respondents’ actions during the solicitation process.
Cambio v. Commerce Park Realty, LLC[131] (Receivership income taxes and tax returns). Receiver brought an action for confirmation that a receivership estate was not responsible for income taxes and for approval for how he intends to prepare the tax returns. The members of the receivership entities objected to the Receiver’s proposal to file a Form 1065 return making certain assumptions including that the properties the Receiver has sold had a zero basis for tax gain purpose with the members being allowed to note any issues or disputes with the filing in a separate statement to accompany the filings. The court confirmed that the Receiver was not responsible for payment of the income taxes. With respect to the preparation of the returns, the court ordered that the members be allowed to provide documentation to the Receiver’s accountant to prepare and file accurate returns.
§ 1.3.17. Tennessee Business Court
Greg Carl v. Tennessee Football, Inc.[132](Motion to dismiss). This case involves a breach of contract dispute. Plaintiffs are holders of permanent seat licenses (“PSL”) for the Tennessee Titans and brought suit against Defendants Tennessee Football Inc. and Cumberland Stadium Inc. (“defendants”). Plaintiffs alleged that defendants increased the price of tickets for individuals that defendants considered to be ticket resellers and restricted the ability of ticket resellers to transfers their tickets or permanent seat licenses. Plaintiffs brought claims of declaratory judgment, breach of contract and breach of the duty of good faith and fair dealing, violation of the Tennessee Consumer Protection Act (“TCPA”), negligent misrepresentation, and promissory estoppel. In response, defendants filed a 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted on all claims except the declaratory judgment claim. defendants asserted that plaintiffs did not meet the heightened pleading requirements for TCPA claims which require pleading with particularity. Defendants also alleged that plaintiffs’ TCPA claim is inadequate because the TCPA claim did not allege that defendants’ conduct caused injury to any plaintiff. Additionally, defendants argued that plaintiffs’ negligent misrepresentation claim should be dismissed.
The court denied defendants’ motion to dismiss as to the plaintiffs’ breach of contract and breach of the duty of good faith and fair dealing claims. Additionally, the court denied defendants’ motion to dismiss as to the TCPA claim. The court held that the allegations in Plaintiffs’ Amended Complaint were sufficient to satisfy TCPA’s enhanced pleadings requirement as the plaintiffs specifically addressed statements by defendants’ employee, inaccurate statements on defendants’ website, and other representations made by defendants to demonstrate that defendants’ position was deceptive and unfair. However, the court held that the plaintiffs failed to allege their claim for negligent misrepresentation sufficiently based on a failure to disclose and granted defendants’ motion to dismiss that claim. Nevertheless, the court held that plaintiffs had adequately pled negligent misrepresentation based on an affirmative misrepresentation. The court also held that plaintiffs’ promissory estoppel claim sought to change the terms of existing, valid contracts and that precedent demonstrated that promissory estoppel was not available as a claim for such purposes. Consequently, the court granted defendants’ motion to dismiss plaintiffs’ promissory estoppel claim. Litigation in this matter will continue.
Christopher Harrod, M.D., LLC v. East Louisiana Surgical Servs., LLC[133](Corporate records request). In this case, Plaintiff Harrod, LLC (“plaintiff”) brought suit against Defendants East Louisiana Surgical Services (“ELSS”), Delta Surgical Services (“DSS”), and Tom Gallaher (collectively, the “defendants”) for failure to provide plaintiff with appropriate access to ELSS’ books and records despite plaintiff’s numerous requests. Plaintiff is one of two members of ELSS and holds 60% of the company’s membership interests. DSS is the ELSS managing member. Plaintiff alleges breach of contract, breach of fiduciary duty, tortious interference with contract, and aiding and abetting breach of fiduciary duty.
Plaintiff filed a motion for judgment on the pleadings requesting an order mandating that defendants provide plaintiff with unaltered copies of defendants’ books of account and records. The court granted plaintiff’s motion. Interpreting Louisiana law, the court held that pursuant to LSA-R.S. § 1319(B) and the terms of the Operating Agreement, plaintiff, as a member of ELSS, was entitled to any of ELSS’s records, including information regarding the business and financial state of the business. The court also ordered defendants to provide other records regarding the business upon plaintiff’s reasonable request. Notably, the court recognized the challenge of protecting confidential information of other unrelated entities whose information was embedded in defendants’ accounting software. The court ordered defendants to file a notice with a sworn statement from a representative with technical knowledge of the accounting system explaining how the system operated, the information contained in the system, the method by which information could be extracted for individual entities, the feasibility of doing so, and what format the information could be produced in. The court then held that it would supplement its order to include instructions as to providing the accounting software records.
Girl Scouts of Middle Tennessee, Inc. v. Girl Scouts of the United States of America[134] (Declaratory judgment and Tennessee Nonprofit Fair Asset Protection Act). Plaintiff Girl Scouts of Middle Tennessee (“GSMT”) brought suit against Defendant Girl Scouts of the United States of America (“GSUSA”) to protect GSMT’s contractual right to offer Girl Scouting in Middle Tennessee. GSMT alleges that GSUSA is requiring GSMT to enter into commercially unreasonable agreements surrounding GSUSA’s technology platform and onboarding process. Specifically, GSUSA has indicated that GSMT is in a “viability review” to address GSMT’s decision not to enter into the technology agreements with GSUSA. GSMT brought claims of declaratory judgment and violations of the Tennessee Nonprofit Fair Asset Protection Act. GSMT alleges that it is a legal entity separate and distinct from GSUSA. Additionally, GSMT asserted that it is responsible for its own governance, finances, operations, and expenses. GSMT also alleged that GSUSA’s governing documents vest the National Council with the sole authority to establish requirements for GSMT to enter into the technology agreements at issue. GSUSA has filed a notice of removal to the United States District Court for the Middle District of Tennessee.
§ 1.3.18. West Virginia Business Court Division
MarkWest Liberty Midstream & Resources L.L.C. v. J.F. Allen Co.[135] (Breach of contract bench trial).This case was referred to the Business Court Division on April 10, 2018 and involves a dispute related to the construction of a hybrid retaining wall at a natural gas processing plant owned by plaintiff. MarkWest contracted with Defendant J.F. Allen Company, a heavy highway contractor and earthmover, to construct a large retaining wall, and J.F. Allen then subcontracted with two other defendants to perform various functions associated with building the wall.
MarkWest sued J.F. Allen and other defendants, alleging that they breached their contract with it by failing to design and build the retaining wall to have a useful life expectancy of 75–100 years, to complete the wall on time, and to meet other requirements in the contract. MarkWest also brought claims for negligence, gross negligence, fraud, negligent misrepresentation, and specific performance. J.F. Allen brought counterclaims for breach of contract, quantum merit and unjust enrichment, enforcement of mechanic’s lien, and declaratory judgment, claiming that MarkWest failed to pay J.F. Allen for its work on the retaining wall and breached the contract in other ways.
The case went to a seventeen-day, in-person bench trial. The judge denied a motion for a fully remote trial but permitted several accommodations to which the parties agreed. These included social distancing in the courtroom, allowing some witnesses to testify remotely, and enforcing mask-wearing and other safety protocols. The case resolved in early 2021.
Directional One Services Inc. USA v. Antero Resources Corp.[136] (Breach of contract jury trial). This case was referred to the Business Court Division on February 19, 2019, and involves a dispute between Directional One Services Inc. USA, a directional drilling contractor, and Antero Resources Corporation, an oil and gas well owner. Antero hired Directional One to perform directional drilling services, and the parties entered into a contract. The dispute giving rise to this case concerned costs associated with equipment that became lodged in the well bore and could not be retrieved. Both parties brought claims concerning alleged breaches of the contract between them.
This case went to trial by jury on August 26, 2020, before the same judge who conducted the in-person bench trial in the MarkWest case above. To ensure the safety of jurors and others, the judge held jury selection offsite to allow for social distancing. This procedure worked so well that other judges in his judicial circuit adopted it. The judge also required mask-wearing and had counsel remain at the dais for argument.
The jury found in favor of the plaintiff, and the judge entered judgment awarding the plaintiff approximately $1.48 million on November 4, 2020.
City of Charleston v. West Virginia Paving, Inc.[137] (Antitrust). This case, consolidated with an action brought by the West Virginia Attorney General and Secretary of Transportation, was an antitrust suit against 11 asphalt and paving companies. The case settled for $101.3 million in October 2020 on the eve of trial. Following the settlement, the judge entered agreed orders of dismissal between the plaintiffs and defendants on December 16, 2020.
In addition to requiring the defendants to pay $101.3 million in both cash and project credits to the state highway fund, the settlement enjoined them from entering into any contract to restrain trade or from monopolizing or attempting to monopolize asphalt manufacturing or Paving Services in West Virginia. It also required the defendants to make certain structural changes in their businesses, to give advance notice of prospective mergers to the West Virginia Attorney General, or to refrain from entering into certain mergers altogether. The case was disposed of on March 24, 2021, following the entry of an agreed order of dismissal of a crossclaim involving three of the defendants.
§ 1.3.19. Wisconsin Commercial Docket Pilot Project
L’Eft Bank Wine Co., LTD. v. Bogle Vineyards, Inc.[138] (Forms battle over an arbitration provision and injunction granted under Wisconsin Fair Dealership Law). A double feature dealing with two issues that come up often in business disputes, especially in Wisconsin, this case arose when Bogle, a wine producer, attempted to terminate L’Eft Bank, Bogle’s Wisconsin wine distributor. L’Eft Bank immediately sought to preserve its dealership, filing suit for violations of the Wisconsin Fair Dealership Law (“WFDL”) and requesting a TRO and temporary injunctive relief. After expedited discovery, Bogle moved to stay the case and compel the parties to arbitrate the dispute, arguing that an arbitration provision in the terms and conditions Bogle sent to L’Eft Bank required the parties to arbitrate. L’Eft Bank argued that Bogle waived any right to arbitrate by engaging in discovery on the injunction and, in any event, L’Eft Bank had already rejected the arbitration provision during prior negotiations with Bogle. The court rejected the waiver argument but held that under Wisconsin’s version of the UCC, the arbitration provision materially altered the parties’ agreement and could not be added to the agreement by way of terms and conditions attached to an invoice. The court found that there was no clear acceptance of the terms, including the arbitration provision, and that binding L’Eft Bank to the terms would result in unreasonable surprise and undue hardship which the UCC prohibits.
Later, following a three-day evidentiary hearing, the court granted L’Eft Bank’s motion for a temporary injunction to preclude termination of its exclusive Bogle dealership. The court held that L’Eft Bank had established a likelihood of success on the merits of its claim that it had a dealership protected under the WFDL under the test established in in Ziegler Co. v. Rexnord, Inc.[139] for determining whether a community of interest exists.
[1] For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History].
[2] For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1039 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Oct. 20, 2021).
[3] Business Courts Bench Book, supra note 1, at xx.
[4]Business Courts History, supra note 1, at 207, 211.
[54] “Request for Public Comment on Proposal to Amend Commercial Division Rule 11 to Include a Preamble on Proportionality and Reasonableness and to Add Provisions Allowing the Court to Direct Early Case Assessment Disclosures and Analysis,” (Sept. 14, 2021), https://www.businesscourtsblog.com/wp-content/uploads/2021/09/01786079.pdf.
[55] “Request for Public Comment on Proposal to Amend Commercial Division Rules 11-c, 8, 1(b), 9(d), 11-e(f), 11-g, and Appendices A, B, E, and F to Provide Additional Guidelines Related to the Discovery of Electronically Stored Information in the Commercial Division,” (Sept. 7, 2021), https://www.pbwt.com/content/uploads/2021/09/Request-for-Public-Comment-ESI.pdf.
[56] The average age was calculated based on the ages of the nine cases for which this information was available. Case ages were not available when a case was subject to a mandatory stay or transferred to a new division.
[58] On September 21, 2021, the Wyoming Supreme Court adopted three sets of rules: Wyoming Rules of Civil Procedure for the Chancery Court, Uniform Rules for the Chancery Court, and Rules for Fees and Costs for the Chancery Court. These rules are available on Chancery Court’s website, https://www.courts.state.wy.us/chancery-court/.
[59] Wyo. Stat. Ann. § 5-13-115(b); W.R.C.P.Ch.C.2(b).
[60] Wyo. Stat. Ann. §5-13-115(b); W.R.C.P.Ch.C.2(b).
[61] Wyo. Stat. Ann. §5-13-115(b); W.R.C.P.Ch.C.2(b).
[62] Wyo. Stat. Ann. §5-13-115(b); W.R.C.P.Ch.C.2(b).
[63] Wyo. Stat. Ann. § 5-13-115(c); W.R.C.P.Ch.C.2(c).
[92] Judge Welch has similarly cited Indiana Commercial Court Rule 6(A) as the basis for compelling discovery in other Commercial Court cases in Marion County, Indiana this year. See Indiana Automobile Insurance Plan v. New Hampshire Insurance Company, No. 49D01-1902-PL-006478, at 7 (Ind. Comm. Ct., Marion Cnty., Jan. 14, 2021) (Order partially granting plaintiff’s second motion to compel production of documents by defendant); see also Backhaul Direct, LLC v. Prass, et al., No. 49D01-2103-PL-010510, at 3 (Ind. Comm. Ct., Marion Cnty., Sept. 9, 2021) (Order granting plaintiff’s motion to compel non-party subpoena).
[125] Judge Padilla principally relies upon Port Authority of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) and 4341, Inc. v. Cincinnati Ins. Cos., 504 F.Supp. 3d 368 (E.D. Pa. 2021). By contrast, Pittsburgh Commerce and Complex Litigation Center Judge Christine A. Ward, also applying Pennsylvania law, interpreted direct physical loss of or damage to property to encompass COVID-19 damages. See MacMiles, LLC v. Erie Ins. Exchange, No. GD-20-7753 (C.C.P. Allegheny May 25, 2021), https://www.businesscourtsblog.com/wp-content/uploads/2021/08/Macmiles-v.-Erie-Judge-Ward-Covid-decision-01759909xB05D9.pdf.
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Mark Casciari Seyfarth Shaw LLP 233 South Wacker Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
Michael Cederoth Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
Christina Cerasale Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
Benjamin J. Conley Seyfarth Shaw LLP 233 South Wacker Drive Suite 8000 Chicago, Illinois 60606-6448 (312) 460-5000 [email protected] www.seyfarth.com
§ 1.1 Want to Put More Away in Your 401(k)? Qualified Plan Limits Generally Remain Constant in 2021
Seyfarth Synopsis: Many of the limitations that apply to tax-qualified plans, including 401(k) and 403(b) plans, are subject to cost-of-living increases. The IRS just announced the 2021 limits. The annual employee salary deferral contribution limits are not changing, but there are a few adjustments for 2021 that employers maintaining tax-qualified retirement plans will need to make to the plans’ administrative/operational procedures.
In Notice 2020-79, the IRS recently announced the various limits that apply to tax-qualified retirement plans in 2021. Notably, the “regular” 401(k) contribution limit and the “catch-up” contribution limit are not changing, and will remain at $19,500 and $6,500, respectively, for 2021. Thus, if you are or will be age 50 by the end of 2021, you may be eligible to contribute up to $26,000 to your 401(k) plan in 2021. These same limitations apply if you work for a governmental or tax-exempt employer and participate in a 403(b) plan.
The annual plan limits that did increase for 2021 include:
the maximum that may be contributed to a defined contribution plan (e.g., 401(k) or 403(b) plan) in 2021, inclusive of both employee and employer contributions, will increase by $1,000 to $58,000; and
the maximum annual compensation that may be taken into account under a plan (the 401(a)(17) limit) will increase from $285,000 to $290,000.
The Notice includes numerous other retirement-related limitations for 2021, including a $6,000 limit on qualified IRA contributions (unchanged) and adjustments to the income phase-out for making qualified IRA contributions. Other dollar limits for 2021 that are not changing include the dollar limitation on the annual benefit under a defined benefit plan ($230,000), the dollar limit used to determine a highly compensated employee ($130,000), and the dollar limit used when defining a key employee in a top-heavy plan ($185,000).
Individuals should check their plan contribution elections and consult with their personal tax advisor before the end of 2020 to make sure that they take full advantage of the contribution limits in 2021. Although many limits are not changing, employers who sponsor a tax-qualified retirement plan should still consider any necessary adjustments to plan administrative procedures and participant notices to ensure proper administration of the plan in 2021.
Employers who sponsor defined benefit pension plans (e.g., cash balance plans) also should be sure to review the new limits in the IRS Notice and make any necessary adjustments to plan administrative/operational procedures.
Sarah Touzalin and Richard G. Schwartz
§ 1.2 The Supreme Court Wrestles (Again) With The Constitutionality Of The Affordable Care Act (ACA)
Earlier today, the Supreme Court heard oral arguments on the most recent challenge to the Affordable Care Act. The case has the potential to invalidate the entire law. While the Court’s decision isn’t expected soon, the oral arguments may provide some clues as to which way the Justices are leaning. We stress, however, that statements made during oral argument are not binding, and Justices remain free to rule as they deem appropriate.
On November 10, 2020, the Supreme Court heard oral argument on the constitutionality of the ACA. The case is captioned California v. Texas, No. 19-10011.
The case was brought by a group of state attorneys general in the wake of the 2017 Tax Cuts and Jobs Act, which reduced the individual tax for failure to maintain health insurance coverage to $0. The Trump Administration chose not to defend the law, but the lower courts granted leave to other states’ attorneys general and to the House of Representatives to defend the law. The arguments in the case addressed the following three issues:
Do the plaintiff states have standing to challenge the constitutionality of the individual mandate?
If so, did Congress’s actions in “zeroing out” the penalty for the mandate render the mandate an unconstitutional exercise of Congressional power?
If so, is the mandate severable from the remainder of the ACA, or should the entire law fall?
The Court had previously ruled in 2012 that the ACA’s individual mandate was constitutional, as it represented an exercise of the lawful power of Congress to tax, and provide citizens with a reasonable choice of purchasing approved health insurance or paying a tax as a penalty. In that ruling, however, five Justices found that Congress cannot rely on its Commerce Clause power to enact the ACA. In other words, the Court upheld the mandate only by finding that the mandate was a tax, not a penalty. So, the question before the Court at present is whether the mandate can truly be considered a tax if it generates no revenue.
The Court under Chief Justice Roberts has shown an aversion to wading into politically sensitive rulings, given the current politically polarized climate. And this case has a complicated political overlay. The Court’s ruling here takes on heightened significance in the wake of the recent election in which Republicans appear to have maintained control of the Senate, because that takes away the Democrats’ avenue to “cure” the challenged provision by simply implementing a tax above $0 to enforce the individual mandate.
There are two ways that the Court can avoid a finding of unconstitutionality.
First, there is the issue of Article III standing. As we have previously opined, https://www.beneficiallyyours.com/?s=california+texas, there is a substantial question whether there is a sufficient injury traceable to the actions of the defendants to justify a lawsuit on the merits. The November 10 oral argument focused on whether an injury could be said to have occurred because of increased reporting requirements, Medicaid payments by the state and the ACA restriction on what health policies an American can purchase in the marketplace. But a failure to purchase insurance does not directly cause injury—the tax penalty is $0. Justice Thomas described this issue in terms that we all can understand given our COVID times. He asked whether an American could sue in federal court to challenge a mask mandate that is not enforced. Justice Gorsuch and some of the more liberal Justices, however, expressed some concern that if the Court were to grant standing in this case, it would open the door to more challenges to federal law.
Look for the Court to limit any finding of standing to the peculiar facts of California v. Texas, given the concern about the federal judicial chaos that could result from a broader ruling on standing.
Second, there is the issue of severability. It is true that the individual mandate remains a part of the ACA, and it does state that all Americans “shall” purchase compliant insurance. It is also true that the constitutionality of that mandate is based on Congress’s taxing power that now is exercised at $0. It is true as well that a future Congress might increase the tax above $0, which might explain why the 2017 reduction to that level was not accompanied with a repeal of the individual mandate.
Justice Thomas pressed the attorney for the House of Representatives on how he could argue that the mandate is severable when, in 2012, he had argued that it was the “heart and soul” of the law. On the other hand, many Court observers honed in on statements from Chief Justice Roberts and Justice Kavanaugh, both of whom seemed to express reservation at “reading into” Congressional intent rather than simply looking to the actions taken by Congress in zeroing out the individual mandate (while leaving the rest of the law intact). Justice Alito offered a hypothetical involving a plane that is presumed to be incapable of flight without a crucial instrument, but that then continues flying without issue once that instrument is removed.
While it is impossible at oral argument to discern how nine Justices will rule, hints from the arguments suggest the Court may have the votes to find standing (in a limited way) and declare only the individual mandate (and not the remainder of the law) to be unconstitutional as long as it is enforced by a $0 tax. We anxiously await the decision of the Court, and its reasoning.
Mark Casciari and Benjamin J. Conley
§ 1.3 No, You Cannot Invest Your Retirement Plan to Save the Planet!
Seyfarth Synopsis: On October 30, 2020, the Department of Labor (“DOL”) released a final regulation amending the fiduciary regulations governing investment duties under the Employee Retirement Investment Security Act of 1974 (“ERISA”). This final regulation is clear that an ERISA fiduciary should not consider “non-pecuniary” factors such as environmental, social or corporate governance (“ESG”) or sustainability factors when considering an investment or investment strategy. Under the final rule, investment fiduciaries must evaluate investments and investment strategies solely based on pecuniary factors. The final regulation is generally effective 60 days after it is published in the Federal Register.
The DOL proposed this regulation on June 23, 2020, which is discussed in our July 1, 2020 post, Can You Invest Your Retirement Plan to Save the Planet? ERISA investment fiduciaries have been faced with the dilemma of whether social investing concepts have a role when investing ERISA plan assets. It appears that the DOL has answered this question. Specifically, social investing concepts only have a role if they potentially impact the risk of loss or opportunity for return of the proposed investment.
The DOL received numerous comment letters and objections critical to its proposed regulation, including claims that it was unnecessary rulemaking, reflected antiquated views, and provided too short a comment period. Despite the extensive comments it received, the final regulation is substantially the same as the proposed regulation. References to ESG were removed from the final regulation because the DOL did not want to narrow or limit the application of the final regulation. Under the final regulation, challenges remain for fiduciaries who consider non-pecuniary factors when making investment decisions.
The final regulation limited pecuniary factors to those factors that a fiduciary prudently determines are expected to have a material effect on the risk and/or return of an investment in light of the plan’s investment horizon, investment objectives and funding policy. While many investors may believe that a company that incorporates ESG principles to manage its risks and create opportunities offers an inherently less risky investment, the DOL does not appear to be willing to accept the argument that ESG in and of itself could be a pecuniary factor.
The final rule continues to provide for “tie breakers,” even though the preamble questions whether there could be a true tie-breaker situation. In such a situation, fiduciaries must document: why pecuniary factors were not sufficient to select the investment or investment course of action; how the selected investment compares to available alternatives; and how the non-pecuniary factors considered were consistent with the interest of the participants in their plan benefits. The DOL indicated in the preamble that whether an investment could increase plan contributions — e.g., investing the assets of a multiemployer plan in projects that will employ union members and increase contributions to the plan — was not a pecuniary interest. The same is true for adding an investment in response to interest expressed by plan participants.
For individual account plans that allow plan participants to choose from a range of investment alternatives, the regulation prohibits a fiduciary from considering or including an investment fund solely because the fund promotes, seeks or supports one of more non-pecuniary goals—e.g., an ESG focused fund. But, it does not prohibit including an ESG focused fund in the investment line-up. The final regulation, however, prohibits qualified default investment alternatives (QDIAs) with investment objectives or principal investment strategies that “include, consider, or indicate the use of one or more non-pecuniary factors.” This prohibition could be interpreted to cast a wide net.
The regulations would make it difficult or impossible for plan fiduciaries to consider non-pecuniary factors (e.g., religious tenets, ESG factors, etc.) when selecting investment options under an ERISA participant-directed defined contribution plan. A potential solution could be offering a brokerage window, which can provide access to individuals who wish to invest their accounts according to non-pecuniary factors such as religious tenets. Brokerage windows have their pros and cons. In addition, a fiduciary’s duties and responsibilities with respect to a brokerage window are not settled.
Historically, the DOL’s position on the role of ESG in ERISA plan investing has shifted with changes in administrations. With these final regulations, there is no doubt that the DOL has clearly shifted against marketplace trends. But, with a Biden administration coming onboard, calls for the SEC to address ESG disclosures and a Senate task force aimed at overhauling corporate governance, questions remain on whether the door on the role of ESG investing is closed. For information on ESG in the broader marketplace and what it means from a company perspective, see our alert series here, here, here and here.
If you are concerned about an existing non-pecuniary investment or investment strategy (e.g., an ESG or sustainability investment) or are interested in such an investment or strategy, be sure to contact your Seyfarth employee benefits attorney.
Linda Haynes and Candace Quinn
§ 1.4 Happy New Year! The IRS Grants Permission to Celebrate New Year’s Eve
Seyfarth Synopsis: The IRS has announced that the due date for contributions to a single-employer defined benefit pension plan due in 2020, previously extended to January 1, 2021, by the CARES Act, will be considered timely if made no later than January 4, 2021.
Under the funding rules for qualified defined benefit pension plans, plan sponsors generally must make any minimum required contributions no later than 8-1/2 months after the plan year to which they relate. For calendar year plans, this means that the minimum required contribution is due no later than September 15th of the year following the applicable plan year. Plans with a funding shortfall for the prior plan year also must make quarterly minimum required contributions (for a calendar year plan, these contributions are due April 15th, July 15th, October 15th and the following January 15th).
The CARES Act, enacted in late March 2020 in response to the COVID-19 pandemic, delayed the timing of any annual and quarterly minimum required contributions due in 2020 (i.e., attributable to the 2019 plan year for calendar year plans) until January 1, 2021. As a practical matter, because January 1, 2021, is a national holiday and banks will not transfer funds on that date, the delayed contributions were actually due no later than December 31, 2020. IRS Notice 2020-82, just issued on November 16th, effectively extends the deadline to the first business day after the new year, i.e., January 4th. The guidance is welcome news for plan sponsors who wish to make contributions in calendar year 2021 rather than 2020.
Subsequent to the issuance of the IRS Notice, the PBGC followed suit and revised its guidance to incorporate the extension for contributions due in 2020 to January 4, 2021 for PBGC purposes.
Christina Cerasale
§ 1.5 Final Rule regarding Transparency in Coverage for Health Care Services
Seyfarth Comments: The final Transparency in Coverage Rule was published jointly by the Departments of Health and Human Services, Treasury, and Labor on November 12, 2020. The Rule aims to increase transparency in cost-sharing for patients by requiring non-grandfathered group health plans and insurance issuers to publish certain healthcare price information estimates. The Rule takes effect January 11, 2021, with staggered effective dates for required disclosures through January 1, 2024.
The Transparency in Coverage Rule attempts to execute on the Trump Administration’s executive order on Improving Price and Quality Transparency in American Healthcare to Put Patients First, issued on June 24, 2019. The final Rule requires certain disclosures regarding prices and cost-sharing information for certain healthcare items and services provided by non-grandfathered group health plans and insurance issuers. The Rule generally applies to traditional health plan coverage, and does not apply to account-based group health plans (such as HRAs, including individual coverage HRAs, or health FSAs), excepted benefits, or short-term limited-duration insurance.
The Rule requires two categories of disclosures: disclosures to the public, and disclosures to plan participants.
Public Disclosures
For plan years beginning on or after January 1, 2022, group health plans and insurance issuers will be required to publicly disclose health care pricing information on an internet website, which must be updated monthly. In general, plans and issuers will have to disclose:
In-network provider negotiated rates for covered items and services;
Historical data showing billed and allowed amounts for covered items or services, including prescription drugs, furnished by out-of-network providers; and
Negotiated rates and historical net prices for prescription drugs furnished by in-network providers.
Participant Disclosures
Under the participant disclosure requirements, group health plans and issuers must provide certain personalized cost-sharing information to participants and beneficiaries in advance and upon request. The disclosures must be available both using an internet-based self-service tool and on paper if requested. The required disclosures must include the following information:
The estimated cost-sharing liability for a requested covered item or service;
Accumulated amounts, including unreimbursed amounts the participant or beneficiary has paid toward meeting his or her individual deductible and/or out-of-pocket limit (and if enrolled in other than self-only coverage, amounts incurred toward meeting the other than self-only coverage deductible or out-of-pocket limit);
In-network negotiated rates for covered items and services;
Out-of-network allowed amounts, or any other rate that provides a more accurate estimate of what the plan or issuer will pay for the requested covered item or service;
Lists of covered items and services that are part of a bundled payment arrangement;
Notice of items and/or services subject to a “prerequisite,” which is defined as concurrent review, prior authorization, and step-therapy or fail-first protocols that must be satisfied before the plan or issuer will cover the item or service (not including medical necessity determinations or other medical management techniques); and
Due to the extensive nature of the required disclosures, the Departments include a staggered schedule for providing the required participant disclosures under the Rule. For plan years beginning on or after January 1, 2023, plans must make this information available for 500 items and services listed in the Rule, and for plan years beginning on or after January 1, 2024, plans must make the information available for all items and services.
Compliance
A group health plan may satisfy the disclosure requirements by entering into a written agreement with its third-party administrator (TPA), whereby the TPA will provide the information required by the Rule. Notably, if the TPA fails to provide the information required by the Rule, the plan remains responsible for noncompliance.
A plan or issuer will not fail to comply with the disclosure requirements if, while acting in good faith and with reasonable diligence: i) it makes an error or omission and corrects the information as soon as practicable; or ii) its internet website is temporarily inaccessible, provided it makes the information available as soon as practicable.
The extensive disclosures required by the Rule have been greeted with much criticism, in particular by the insurance industry. Litigation and other challenges to the Rule are anticipated. In particular, there are concerns that the Rule will impede the ability of service providers and drug companies to negotiate prices. Accordingly, the final Rule contains a severability clause so if a court holds any provision of the Rule to be unlawful, the remaining provisions will survive.
Seyfarth will continue to track further developments regarding the Rule. Also, be sure to sign up for our blog, Beneficially Yours, for further discussion of employee benefits topics and updates at https://www.beneficiallyyours.com/.
Joy Sellstrom
§ 1.6 SCOTUS Upholds Arkansas PBM Law Against ERISA Preemption Arguments
Seyfarth Synopsis: The Supreme Court unanimously upheld Act 900, an Arkansas law regulating Pharmacy Benefit Managers (PBMs). The opinion could be used as a framework for states to attempt to indirectly regulate ERISA plans via statutes or regulations that affect plan costs.
Background
We previously addressed the Supreme Court’s consideration of Rutledge v. PCMA, which featured a pharmaceutical industry group’s challenge to Arkansas Act 900. The Act (a) regulated the price PBMs paid for certain prescription drugs, (b) created an appeal process whereby pharmacies could challenge a PBM’s rate of reimbursement, and (c) permitted pharmacies to decline to sell drugs at reimbursement rates below acquisition cost. As noted in our prior posts, PCMA (as supported by many amicus briefs from ERISA groups) argued that the law “relate[s] to an employee benefit plan” and, insofar as it applies to self-funded ERISA plans is preempted and thus impermissible. These ERISA groups argued that piecemeal state regulation undermines a central purpose of ERISA: to create one national private sector benefit plan jurisprudence, resulting in administrative savings and ultimately more plan benefits.
Holding
In an 8-0 Opinion (Justice Amy Coney Barrett not participating), the Court unanimously ruled in favor of Arkansas. The Court found that, while the Act can be said to be connected to increased plan costs and operational inefficiencies, “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” The Court added: “[C]ost uniformity was almost certainly not an object of pre-emption.” Finally, the Court said that ERISA plans are not essential to the Act’s operation, meaning that it has no exclusive reference to ERISA plans.
Justice Thomas alone concurred in the Opinion. He continued his disagreement with the Court’s ERISA preemption “connection with or reference to” standard. He would replace that standard with one that addresses whether any ERISA provision governs the same matter as the state law, and has a “meaningful,” presumably direct, relationship to the plan in light of ERISA’s text.
Implications for ERISA Plan Sponsors
The Court’s Opinion could be problematic for ERISA plan sponsors, who typically prefer a uniform administrative scheme across state lines. Many PBM agreements contain provisions permitting PBMs to charge additional fees or limit the scope of their services where states impose more restrictive regulations or guidelines. The Opinion will embolden states and localities to be more aggressive in their regulation of pharmacy benefits. We should expect these jurisdictions to argue that, after Rutledge, there is no preemption because they are simply regulating plan costs.
In any event, Rutledge leaves open the possibility that preemption will apply if the cost regulation is “so acute that it will effectively dictate plan choices.” And, state law that provides a cause of action or additional state remedies for claims allowed by ERISA, or directly amends ERISA plan terms or the ERISA scheme that governs plan administration, remain preempted.
Stay tuned to this blog for further updates on this important issue of benefit plan administration.
Mark Casciari, Benjamin J. Conley and Michael W. Stevens
§ 1.7 Changes to HIPAA Privacy Rules on the Horizon
Seyfarth Synopsis: The Department of Health and Human Services (HHS) has proposed changes to the required Privacy Notice under the HIPAA privacy regulations. If finalized, these would be the first significant changes to the HIPAA rules since the HITECH changes effective back in 2013.
The press release issued by HHS on December 10, 2020, states its intention to empower patients, improve coordinated care, and reduce regulatory burdens in the health care industry. HHS notes that the medical crises brought on by the opioid and COVID-19 epidemics have heightened the need to make these updates. While many of the changes directly affect health care providers and their patients, several provisions will also have an impact on employer-provided health plans. The Notice of Proposed Rulemaking is voluminous, but includes such things as an expansion of the definition of health care operations and the minimum necessary rule, changes to the required HIPAA Privacy Notice, shortened time frames to respond to individuals requests regarding their rights to their PHI, and disclosures of applicable fees for access to PHI. The Notice also provides long-awaited additional guidance on Electronic Health Records.
For more detailed information on the impact of these proposed changes on covered entity health plans, please see our Legal Update here. Also, click here for our Legal Update discussing these proposals and health care providers.
Diane Dygert
§ 1.8 HHS Proposes Changes to HIPAA Privacy Rules Affecting Group Health Plans
Seyfarth Synopsis: The Department of Health and Human Services (HHS) has issued a Notice of Proposed Rulemaking (NPRM) to modify the HIPAA Privacy Rule that protects the privacy and security of individuals’ protected health information (PHI) maintained or transmitted by or on behalf of HIPAA covered entities, such as employer-sponsored health plans. One of the stated purposes of the NPRM is to address some of the HIPAA Privacy Rule provisions that may limit care coordination and case management communications among individuals and healthcare providers.
Under the NPRM, some of the changes that would affect employer-sponsored health plans include:
Individual Care Coordination and Case Management. A health plan is permitted to use or disclose PHI for its own health care operations. (In addition, a health plan may disclose PHI to another covered entity for that entity’s health care operations in certain situations.) In order to encourage better, lower cost health care, the NPRM would revise the definition of “health care operations” to clarify that health plans can conduct care coordination and case management activities not only at the population level across multiple enrolled individuals, but also at the individual level. The NPRM also adds an exception to the minimum necessary rule for disclosures to, or requests by, a health plan for care coordination and case management activities that are at the individual level.
Business Associate Disclosures of PHI. The NPRM would clarify that a business associate is required to disclose PHI to the covered entity so the covered entity can meet its access obligations. However, if a business associate agreement provides that the business associate will provide access to PHI in an electronic health record (EHR) directly to the individual or the individual’s designee, the business associate must then provide such direct access.
Limited Disclosure When Individual is Not Present. The HIPAA Privacy Rule provides that if an individual is not present, or the opportunity to agree or object to the use or disclosure of PHI cannot be provided because of the individual’s incapacity or emergency circumstance, the health plan may disclose PHI that is directly relevant to the person’s involvement with the individual’s care or payment if the covered entity determines in its professional judgment that disclosure is in the best interest of the individual. The proposed rule would modify the standard under which that the determination is made, to be based on a good faith belief that the disclosure is in the best interests of the individual. This standard will allow health plan administrators to be better able to rely on this permitted disclosure circumstance by removing the inference that it only applied to providers when using a “professional” standard.
Privacy Notice. The proposed rule would require changes to the notice of privacy practices. The NPRM requires a notice of privacy practices to include the following header:
“THIS NOTICE DESCRIBES:
– HOW MEDICAL INFORMATION ABOUT YOU MAY BE USED AND DISCLOSED
– YOUR RIGHTS WITH RESPECT TO YOUR MEDICAL INFORMATION
– HOW TO EXERCISE YOUR RIGHT TO GET COPIES OF YOUR RECORDS AT LIMITED COST OR, IN SOME CASES, FREE OF CHARGE
– HOW TO FILE A COMPLAINT CONCERNING A VIOLATION OF THE PRIVACY, OR SECURITY OF YOUR MEDICAL INFORMATION, OR OF YOUR RIGHTS CONCERNING YOUR INFORMATION, INCLUDING YOUR RIGHT TO INSPECT OR GET COPIES OF YOUR RECORDS UNDER HIPAA.
YOU HAVE A RIGHT TO A COPY OF THIS NOTICE (IN PAPER OR ELECTRONIC FORM) AND TO DISCUSS IT WITH [ENTER NAME OR TITLE AT [PHONE AND EMAIL] IF YOU HAVE ANY QUESTIONS.”
In addition, the notice would have to describe the right of access to inspect and obtain a copy of PHI at limited cost or, in some cases, free of charge.
Faster Access to PHI. Under the NPRM, a health plan would have to act on a request for access to inspect or obtain a copy of PHI in a shorter timeframe, namely 15 days after receipt of the request. Other time frames would be shortened as well.
Electronic Health Record (EHR). The NPRM adds (i) a definition of EHR, (ii) requirements applicable to EHRs, including the right of an individual to direct his or her health plan to submit a request to a health care provider for electronic copies of PHI in an EHR; and (iii) a documentation requirement for EHRs.
Fee Disclosures. Finally, the NPRM would require health plans to post fee schedules on their website for common types of requests for copies of PHI and, upon request, provide individualized estimates of fees for copies.
Comments on the NPRM will be due on or before 60 days after the NPRM is published in the Federal Register, which means comments will likely be due in mid-February.
Joy Sellstrom
§ 1.9 I Am Not Throwing Away My [COVID] Shot!
COVID-19 vaccines are finally here! Employers have a lot to think about in how this new tool in the fight against COVID-19 applies in the workplace, and whether it should be a mandatory aspect of employment. Check out the labor and employment considerations about the extent to which an employer should implement a vaccine policy, here and here.
Employers offering vaccine programs can also implicate ERISA as well when paying for (or mandating) the vaccine distributed to those employees not already covered under the employer’s group health plan. Check out this Legal Update here for thoughts on the benefits considerations employers face with their COVID-19 vaccine programs.
Getting the vaccines is the first step, but employers have decisions to make about what to do next. Keep tuned to our blog for future updates.
Benjamin J. Conley, Diane Dygert and Jennifer Kraft
§ 1.10 Yes, I Know it’s a Pandemic, But What About ERISA?!?!?!?
Benefits Implications in Employer-Sponsored COVID Vaccine Programs
Synopsis: Now that we have two approved vaccines (and several more on the horizon) employers are starting to explore whether they should require their employees to get vaccinated in order to report to work. There has been a lot of discussion on this topic by our labor & employment brethren and we direct you to those articles here and here for information about the extent to which an employer should implement a vaccine policy. This update explores the significance of mandating a vaccine versus offering voluntary vaccine coverage, and how that distinction may implicate additional requirements under ERISA.
Background: Why ERISA May Apply to Vaccination Programs
When employers pay for the provision of medical care to their employees, they are offering group health plan coverage (insured or self-funded) and they create an ERISA-governed welfare benefit plan. Group health plans are also subject to other federal statutes such as the Internal Revenue Code, the Affordable Care Act and the recent CARES Act. [See our post here on the CARES Act and vaccine requirements.] This framework leads to two critical questions in analyzing a vaccination program under ERISA:
Is an Employer-Paid Vaccine Program “Medical Care”? The EEOC has recently opined that the vaccine itself is not a medical examination. Fair enough; we didn’t think so. But, the questions that inevitably accompany the administration of the vaccine — for example, questions about allergies or auto-immune disorders—would constitute a medical examination and, therefore, must be job related. This doesn’t directly impact the analysis of whether we are dealing with a health plan here, but does highlight the government’s view that there is some aspect of the delivery of medical care present.
If the Vaccine Program is for the Employer’s Benefit (i.e., mandatory) does ERISA still apply? Arguably though, a mandatory program, as opposed to a voluntary inoculation program, is not offered for the employee’s own health. Section 3(1) of ERISA defines the term “employee welfare benefit plan” as a plan maintained by an employer to the extent it “is established or is maintained for the purpose of” providing medical benefits or benefits in the event of sickness. If an employee is receiving a COVID-19 vaccine through a mandatory program, arguably, it is not “for the purpose of” providing a medical benefit. That is an incidental benefit. Instead the vaccine is being provided to ensure the health and safety of those around the employee — co-workers, clients, customers or vendors. Under this argument, employers providing the vaccine through a mandatory program would not need to do so through an ERISA benefit plan. The DOL adopted this view in a nearly 25-year-old advisory opinion, albeit on the topic of mandatory workplace drug testing programs.
Why This Matters: Significance of ACA Requirements
The above questions are significant because the Affordable Care Act requires that all group health plans comply with certain requirements, including offering no-cost preventive services (e.g., colonoscopies, mammograms, etc.). A stand-alone COVID vaccination program, if offered on a voluntary basis, would not comply with those mandates. Accepting that the regulatory agencies might afford enforcement discretion given the circumstances, the IRS/DOL and HHS did provide a potential roadmap to “cure” this (technical) noncompliance in guidance issued earlier this year involving COVID testing.
There, the agencies seemed to suggest that COVID testing would be considered a group health plan, subject to the ACA mandates. This should not matter for employees enrolled in the employer-sponsored medical plans, because those individuals already have access to such free preventive care (as the health plan is required to offer it). So under earlier agency guidance, the two benefits could be considered a compliant, bundled offering.
For all other employees though, the agencies offered another “fix”. This informal guidance indicated that if such testing were to be “offered under” another type of benefit that is exempt from these ACA requirements, it would also benefit from the exemption. The two examples offered included an Employer Assistance Program (EAP) or an onsite clinic. This should, for most employers, offer a relatively simple solution. First, we would expect that once vaccines are available, many employers will offer an onsite vaccination program. For those that do not, most employers offer some form of EAP to their entire workforce (without regard to whether such persons are enrolled in the employer’s health coverage).
While the agency guidance was in the context of testing (not vaccinations), we believe it would be reasonable to assume the same exemption applies. Further, we assume this “bundling” could be offered without extensive additional efforts. Assuming a summary plan description already exists for the EAP (or onsite clinic), this could be as simple as adding a few lines to such document noting that the COVID vaccination program is a component of the offering.
Parting Shots (Pun Intended)
While uncertainty remains about whether the government would consider a mandatory COVID-19 vaccine program to be an ERISA plan, it is clear that the CARES Act mandates all group health plans to provide coverage for the COVID-19 vaccine. So, employer health plans will need to start covering the vaccine. Providing a COVID-19 vaccine program as an extension of the employer’s EAP should be permitted assuming the agencies carry forward COVID testing guidance (and we believe they would as they have every incentive to do so). While it is unclear whether such an approach would be necessary only for voluntary programs, or for mandatory programs as well, this offers a simple solution for employers to provide this benefit to the greatest number of its employees, while still ensuring compliance with ERISA.
Keep your eye on this space for developing news about vaccine programs.
Benjamin J. Conley, Diane Dygert and Jennifer Kraft
§ 1.11 Paycheck Protection Program Update: Additional COVID Relief under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
On December 27, 2020, President Trump signed into law the $2.3 trillion coronavirus relief and government funding bill. In addition to other provisions, the law specifically adds $284 billion to the already successful Paycheck Protection Program (“PPP”) previously enacted under the CARES Act. PPP loans will be available both to first-time borrowers and some second-time borrowers, but different criteria apply to each group.
While the Small Business Administration (“SBA”), the federal agency principally responsible for administering the PPP, has yet to announce details and guidance specifically relating to this supplemental funding, the following key details of the program are described in the new law, itself:
The following groups of first-time borrowers are eligible for PPP loans:
borrowers that had been eligible for PPP loans are expected to be eligible
not-for-profits (including churches and, for the first time, trade associations and other organizations exempt from tax under section 501(c)(6) of the Internal Revenue Code), subject to satisfaction of certain criteria (such as, employing no more than 300 employees, not being primarily engaged in political or lobbying activities)
businesses that previously elected to take the Employee Retention Tax Credit
news organizations (which were not previously eligible), subject to satisfaction of certain criteria (such as, employing no more than 500 employees per physical location or otherwise meeting the applicable SBA size standard, certifying that the proceeds of the PPP loan will be used for the business involved in production or distribution of locally focused or emergency information)
certain hotel and food service operators with fewer than 300 employees per location and that fall within NAICS code 72
A borrower that received funding in the initial round is eligible to receive a second round of funding if it meets the following eligibility criteria: (i) has fewer than 300 employees, (ii) has used or will use the full amount of the first PPP loan, and (iii) has experienced a 25% decline in gross receipts in at least one 2020 quarter when compared to the same quarter in 2019. The maximum loan size for second time borrowers is limited to $2,000,000.
Borrowers that returned PPP loans in the first round may reapply for a PPP loan in this second round.
Funds have been earmarked for distribution to (i) live venues, independent movie theaters and cultural institutions, (ii) “very small businesses” through community-based lenders like Community Development Financial Institutions and Minority Depository Institutions, and (iii) low income and underserved communities.
Emphasis will be placed on minority and women owned businesses.
Proceeds from PPP loans will be forgiven if not less than 60% of the loan proceeds were used to pay qualifying expenses which (in addition to employee wages, mortgage interest, rent and utility costs previously approved under PPP1) now include expenditures for worker protection and facility modification to comply with COVID-19 health guidelines, certain qualifying supplier costs and specified software and cloud computing costs and accounting payments.
Reversing the IRS, the new law makes it explicit that businesses that had their PPP loan forgiven can continue and deduct the business expenses that were paid with the loan proceeds (this applies both to new PPP loans and outstanding PPP loans).
The law provides for a simplified forgiveness process on loans of up to $150,000.
The amount forgiven does not have to be reduced by the amount of any Economic Injury Disaster Loan Advance (up to $10,000) received.
While most borrowers remain eligible to borrow up to a maximum of 2.5 times average monthly payroll costs, hotel and food service operators that fall within NAICS code 72 are now eligible to borrow up to 3.5 times monthly payroll costs.
PPP loans will be made available until March 31, 2021. Borrowers will be able to choose a covered period of eight to twenty-four weeks during which to spend PPP loan proceeds on qualified expenses.
In addition, the law provides $20 billion for new Economic Injury Disaster Loans for businesses in low income communities, $43.5 billion for SBA debt relief payments and increases the refundable employee retention credit from $5,000 per employee for all of 2020 to $7,000 per employee per calendar quarter through the second quarter of 2021 by changing the calculation from 50% of wages paid up to $10,000 per employee for all 2020 calendar quarters to 70% of wages paid up to $10,000 per employee for any quarter through the second quarter of 2021.
Regulations are directed to be issued within 10 days of passage of the law. Seyfarth is actively monitoring all aspects of federal COVID-19 business stimulus funding legislation. Additional updates will be provided as guidance becomes available and is published. Visit our Beyond COVID-19 Resource Center for more information.
Edward J. Karlin, Stanley S. Jutkowitz, and Suzanne L. Saxman
§ 1.12 Stimulus Redux: What It Means for Welfare Benefit Plans
Seyfarth Synopsis: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 which includes several provisions affecting employer-sponsored benefit plans, and provides voluntary relief related to the COVID-19 public health emergency that employers may choose to offer. Given the length and complexity of the Act, this Legal Update summarizes some of the key provisions affecting health and welfare plans.
Flexible spending arrangements (FSAs)
The Act contains several provisions intended to provide flexibility for participants in flexible spending account programs.
Mid-year election changes. For plan years ending in 2021, a plan may allow participants to change the amount of their contributions to health or dependent care FSAs prospectively, without regard to any change in status.
Carryover of account balances. A plan may allow participants to carry over any unused amounts or contributions remaining in a health or dependent care FSA from the 2020 plan year to the 2021 plan year, or from the 2021 plan year to the 2022 plan year.
Grace Period Extension. For plan years ending in 2020 or 2021, plans may extend their grace period to 12 months after the end of the plan year.
Unused Health FSA Account Balances. A plan may allow an employee who terminates his or her participation in a health care FSA during the 2020 or 2021 calendar year to continue to receive reimbursements from unused account balances through the end of the plan in which such participation ended (including any applicable grace).
Dependent Care FSA & Aging Out. To qualify as an employment-related expense which is reimbursable from a dependent care FSA, the expense must be for care for a “qualifying individual” – which means a dependent who has not attained age 13. For dependents who aged out of eligibility during the pandemic (specifically, during the last plan year with a regular enrollment period ending on or before January 31, 2020), plans may extend the maximum age from 13 to 14.
Plan sponsors that want to take advantage of any of these relief provisions must adopt a plan amendment by the end of the first calendar year beginning after the end of the plan year in which the change takes effect. (For example, if mid-year election changes are allowed in 2021, a calendar year plan must be amended by December 31, 2022.) In addition, the plan must be operated in accordance with the amendment terms as of the effective date of the amendment.
Surprise Billing
A section of the Act called the “No Surprises Act” protects plan participants from surprise medical bills for certain emergency and non-emergency services rendered by out-of-network providers.
Emergency Services. If a plan provides any benefits with respect to “emergency services”, then the plan must cover such emergency services without the need for any prior authorization, regardless of whether the provider is in-network or out-of-network. With respect to services provided by out-of-network providers:
The cost-sharing amounts for such services cannot be greater than if the services were provided by an in-network provider, and are calculated as if the total amount charged was equal to the median of contracted rates;
A plan must make an initial payment or issue a notice of denial of payment to the provider within 30 days after receiving the provider’s bill, and must pay a total amount equal to the amount by which the out-of-network rate exceeds the cost-sharing; and
Any cost-sharing payments made by the participant or covered beneficiary must be counted toward the plan’s in-network deductible or out-of-pocket maximum.
With respect to an item or service furnished by an out-of-network provider, the Act provides for a 30-day open negotiation period to agree on the out-of-network rate to be paid, and an independent dispute resolution (IDR) process to resolve disputes. The IDR process will be run by independent entities with no affiliation to the plan or provider.
Non-Emergency Services. If a plan provides any coverage of non-emergency services performed by out-of-network providers at an in-network facility, the plan must cover such services under requirements similar to the emergency services requirements described above. The participant shall only be required to pay the in-network cost for out-of-network care provided at in-network facilities, unless the out-of-network provider notifies the patient of its out-of-network status and estimated charges 72 hours prior to receiving the out-of-network services, and the patient consents. In this case the out-of-network provider may balance bill the patient.
Air Ambulances. If a plan would cover air ambulance services from an in-network provider, the plan must cover such services provided by an out-of-network provider, under the parameters set forth above for emergency services.
Mental Health and Substance Use Disorder Benefits
In an attempt to strengthen parity between medical benefits and mental health benefits, plans and insurers that provide both medical/surgical benefits and mental health or substance use disorder (“mental health”) benefits and that impose non-quantitative treatment limitations (NQTLs) on mental health or substance use disorder benefits are required to perform and document comparative analyses of the design and application of NQTLs. Beginning February 10, 2021, these analyses must be made available to the DOL, HHS or IRS upon request.
The Act also requires the agencies to issue a compliance program guidance document to help plans comply with the mental health benefit requirements and to finalize guidance and regulations relating to mental health parity no later than 18 months after enactment (i.e. by June 27, 2022).
Transparency Rules
Gag Clauses. The Act prohibits “gag clauses” regarding price or quality information. Plans may not enter into agreements with health care providers (or a network of providers), third-party administrators or other service providers that would restrict the plan from:
providing provider-specific cost or quality of care information to referring providers, plan sponsors, participants, beneficiaries or individuals eligible to become participants or beneficiaries;
electronically accessing de-identified claims information for each participant or beneficiary in the plan, upon request and consistent with the HIPAA privacy rules, GINA and the ADA; or
sharing this information, or directing that such information be shared, with a business associate, consistent with the HIPAA privacy rules, GINA and the ADA.
The Act requires group health plans to submit an annual attestation to HHS that the plan is in compliance with these requirements.
Cost Sharing Disclosure. For plan years beginning January 1, 2022, plans must include the following information on any identification card issued to participants and beneficiaries:
Any applicable deductibles and out-of-pocket maximum limits.
A telephone number and website address through which participants can obtain plan-related information.
Good Faith Estimates. For plan years beginning January 1, 2022, plans that receive a health care provider’s good faith estimate of expected charges for providing a service to a participant must furnish the participant a notice – in most cases within one business day of receiving the provider’s notice – that contains specified coverage information. For example, the plan’s notice to a participant must state:
Whether the provider is a participating provider with respect to the scheduled service and, if so, the contracted rate for the service based on relevant billing and diagnostic codes.
A good faith estimate of how much the health plan will pay for the items and services included in the provider’s estimate.
Loss of Network Provider Status. For plan years beginning January 1, 2022, if a plan has a contractual relationship with a health care provider or facility and either the contract or benefits provided under the contract are terminated while the individual is a “continuing care patient”, the plan must notify each such patient of the termination and permit the patient to elect to continue receiving benefits from the provider. Continuing care patients include those who are: undergoing a course of treatment for a pregnancy or serious condition, scheduled to undergo non-elective surgery or receive postoperative care, or receiving treatment for a terminal illness.
Reporting on Pharmacy Benefits
By December 27, 2021, and annually thereafter, plans will be required to submit to the DOL, IRS and HHS a report with specific information on the benefits paid for prescription drugs provided to participants and beneficiaries, including:
The dates of the plan year, number of participants and beneficiaries, and each state in which coverage is offered.
The 50 brand prescription drugs most frequently dispensed and the total number of paid claims for each drug.
The 50 most costly prescription drugs by total annual spending.
The 50 prescription drugs with the greatest increase in plan expenditures over the preceding plan year.
Average monthly premium paid by the employer and by participants and beneficiaries.
Impact of rebates, fees and other remuneration paid by drug manufacturers on premiums and out-of-pocket costs.
Within 18 months after the first pharmacy drug reports are received, the agencies will post a report on the internet on prescription drug reimbursement under group health plans, with pricing and premium trends.
Student Loan Repayments
Although the Act did not extend further relief for the actual repayment of student loans, it did extend the ability for employers to provide tax-preferred payments to employees for student loans. [See link here for our earlier post about the CARES Act relief on this.] The Act extends the ability of employers to make these payments under IRC Section 127 of up to $5250 per employee for five more years through December 31, 2025.
Disclosure of Compensation for Service Providers
Effective in 2012, employee benefit plan fiduciaries were required to get fee disclosures from service providers pursuant to ERISA Section 408(b)(2). However, service providers for welfare plans were temporarily exempt from that requirement until further guidance was issued. The Act ends that reprieve and extends the fee disclosure rules to group health plans, which means that service providers will have to comply with the fee disclosure rules, effective December 27, 2021.
Deductible Medical Expenses
Expenses incurred for medical care are deductible on an individual’s income tax return to the extent they exceed 7.5% of adjusted gross income. That was scheduled to increase to 10% beginning in 2021. The Act makes the 7.5% threshold permanent.
Plans will likely need assistance from their TPAs and pharmacy benefit managers complying with the new reporting and disclosure requirements. Please feel free to reach out to your Seyfarth benefits attorney for help with appropriate amendments to plans and service agreements. Also watch for additional Legal Updates addressing specific employee benefit provisions of the Act and related guidance.
Diane V. Dygert and Joy Sellstrom
§ 1.13 Stimulus Redux: What It Means for Retirement Plans
Seyfarth Synopsis: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the “Act”), which includes several changes that impact tax-qualified retirement plans (both defined benefit and defined contribution plans, including certain multiemployer plans). This Legal Update summarizes the key changes impacting retirement plans. See our parallel Legal Update for a description of the health and welfare-related provisions of the Act.
Partial Plan Terminations
Typically, whether a partial termination has occurred (which would require a plan to fully vest affected participants) is based on applicable facts and circumstances, and there is a rebuttable presumption that a turnover rate of at least 20% creates a partial termination. Under the Act, however, a plan will not experience a partial termination under the Code during any plan year that occurs during the period that begins on March 13, 2020 and ends on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.
Observation. The Act’s bright line rule should be helpful to plan sponsors who experienced high turnover, furloughs and layoffs among its employee population in 2020 due to the COVID-19 pandemic.
Disaster Relief Provisions
The Act includes a number of disaster relief provisions that allow defined contribution plan participants who reside in a qualified disaster area and who have sustained an economic loss by reason of a qualified disaster to take a tax-favored withdrawal or distribution from a retirement plan, borrow more money from a plan or suspend loan repayments on new or existing plan loans.
A “qualified disaster area” under the Act is generally any area where a major disaster was declared by the President during the period beginning on January 1, 2020, and ending on February 25, 2021, if the period during which such disaster occurred (the “incident period” as specified by FEMA), began on or after December 28, 2019, but on or before December 27, 2020 (i.e., the date of the enactment of the Act). Notably, the disaster relief under the Act does not apply where the President has declared a disaster only on account of the COVID-19 pandemic.
Tax-Favored Disaster Withdrawals. A participant may take a tax-favored withdrawal from defined contribution plan (including an IRA) of up to $100,000, free from the 10% penalty that normally applies to early withdrawals. When determining whether the $100,000 limit has been exceeded, you take into account all plans maintained by the employer and members of its controlled group. For an individual affected by more than one qualified disaster, these limits apply separately to each qualified disaster.
A qualified disaster distribution must be made on or after the first day of the incident period of a qualified disaster and before June 25, 2021 (180 days after the date of the enactment of the Act). A participant who takes a tax-favored disaster withdrawal may elect to include the distribution in taxable income ratably over a three-year period and/or re-contribute the distribution to an eligible retirement plan within such three-year period. A participant who chooses to repay is treated as having received the distribution in an eligible rollover distribution, and then directly transferring it tax-free to the eligible retirement plan.
Re-contribution of Certain Hardship Withdrawals. The Act allows a defined contribution plan participant who took hardship withdrawal that was intended to be used to purchase or construct a principal residence to re-contribute the distribution to an eligible retirement plan in the event that it could not be used for such purpose on account of the occurrence of a qualified disaster in the area where the home was located or was to be constructed.
In order to be eligible for this relief, the participant must have received the hardship withdrawal during the period beginning on the date that is 180 days before the first day of the incident period of the qualified disaster, and ending on the date that is 30 days after the last day of the incident period. A participant who meets the requirements for this relief must re-contribute the hardship withdrawal during the period that begins on or after the first day of the incident period of a qualified disaster and before June 25, 2021 (i.e., 180 days after the date of the enactment of the Act).
Plan Loans: Increase in Limit and Extension of Period to Repay. Certain “qualified individuals” (defined below) may now borrow more from their defined contribution retirement plans, and have additional time to repay new or existing plan loans if the requirements below are satisfied.
Increase in Limit for New Loans. For a qualified individual, the limit on plan loans is increased to the lesser of $100,000, or 100% of the participant’s vested account balance, instead of the $50,000 and 50% vested account balance limits that normally apply under law. This applies for loans made from December 27, 2020 to June 25, 2021 (the 180-day period beginning on the date of the Act’s enactment).
Extension of Period to Repay for New and Existing Loans. The Act also provides some relief for new and existing loans, delaying repayments for plan loans outstanding on or after the first day of the incident period of the disaster by one year (or if later, June 25, 2021), provided the payment is otherwise due on or before and ending on the date which is 180 days after the last day of such incident period. This additional year is disregarded for purposes of applying the maximum 5-year term that applies to a general purpose loan, or the maximum term that applies to a home loan (pursuant to the terms of the plan and loan agreement). When payments recommence, they are reamortized to reflect the delay in repayment and any interest accrued during the suspension period.
A “qualified individual” is defined under the Act as an individual whose principal place of residence at any time during the incident period of a qualified disaster is located in the qualified disaster area, and such individual has sustained an economic loss by reason of the qualified disaster.
Plan Amendment Deadline. Plan sponsors have at least until the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022 for calendar year plans) to amend their plans to provide for this disaster relief. Plan sponsors of governmental plans would have an extra two (2) years to amend their plans to provide for this relief (i.e., until December 31, 2024 for calendar year governmental plans). (These are the same amendment deadlines that apply under the CARES Act).
Observations. The disaster relief provisions under the Act are reminiscent of distribution and loan relief issued for prior disasters, including the relief provided recently under the CARES Act, which made it easier for certain individuals to access retirement plan money in light of the coronavirus pandemic. Similar to the loan relief issued for past disasters, these provision appears to be optional. However, it would be helpful if we heard from Treasury and/or IRS with respect to whether these provisions are optional, and also with respect to the type of certification/documentation that may be necessary for plan administrators to obtain from participants requesting the disaster relief provided for under the Act.
Pension Plan Asset Transfers for Retiree Medical
Under Code Section 420, sponsors with overfunded pension plans may transfer excess pension assets to a Code Section 401(h) account in the pension plan to prefund retiree medical benefits. A “qualified future transfer” under Code Section 420 can prefund up to 10 years of future medical benefits, but these transfers must meet a number of requirements, e.g., the plan must be 120 percent funded at the outset and it must remain 120 percent funded throughout the transfer period. The Act allows employers to make a one-time election during 2020 and 2021 to end any existing transfer period for any taxable year beginning after the date of election. Assets previously transferred to a Code Section 401(h) account that were not used as of the election effective date are required to be transferred back to pension plan within a reasonable amount of time. Assets transferred back to plan are treated as a taxable employer reversion, unless the amount is transferred back to the applicable Code Section 401(h) account before the end of the five-year period beginning after the original transfer.
Observation. The market changes due to the COVID-19 pandemic may have caused plans that have been consistently over 120 percent funded to fall below 120 percent, and plan sponsors may face a requirement to address large market losses in order to get back to the 120 percent funding threshold. The Act may be welcome relief for pension plans that are using surplus assets to offset retiree welfare costs.
Money Purchase Pension Plan CARES Act Distributions
The Act amends the CARES Act to reflect that the in-service coronavirus distributions allowed under the CARES Act are also permitted to be made from money purchase pension plan assets. See our prior blog post and legal update for information on coronavirus distributions under the CARES Act.
Observation. Under the Act, this treatment is retroactive to the date of the passage of the CARES Act (i.e., March 27, 2020). However, because coronavirus distributions under the CARES Act must be made before December 31, 2020, this provision was likely enacted too late in the year to allow for many plans and participants to take advantage of the clarification. The Act did not extend the deadline for taking a coronavirus distribution beyond 2020.
In-Service Distributions from Certain Multiemployer Plans
The Act allows in-service distributions at age 55 from certain multiemployer plans in the construction industry for employees who were participants in the plans on or before April 30, 2013. (The general rule for pension plans is that in-service distributions are permitted at age 59-1/2.) In order for this provision to apply, the multiemployer plan trust must have (1) been in existence before January 1, 1970, and (2) received a favorable determination letter before December 31, 2011, at a time when the multiemployer plan provided that in-service distributions may be made to employees who have attained age 55.
The Act is lengthy and there is a lot to digest. We hope that Treasury and IRS will issue additional guidance pertaining to these provisions. For further information and updates, continue to follow our blog.
Christina M. Cerasale and Sarah J. Touzalin
§ 1.14 You May Even Get a Vaccine Before Needing to Go to the Notary; the IRS Has Extended Remote Witnessing of Participant Elections
Seyfarth Synopsis: The IRS has extended the remote notarization relief that gives plans and participants greater flexibility for participant elections, including spousal consents, that must be signed in person and witnessed by a notary or plan representative in order to be valid. The IRS has also requested comments on this relief, including comments as to whether this relief should be made permanent.
As described in our prior post, Notice 2020-4 provides relief from the rule in Treasury Regulation Section 1.401(a)-21(d)(6) that requires the signature of an individual making an election to be witnessed in the physical presence of a plan representative or a notary public. That relief was set to expire on December 31, 2020. In recognition of the continued public health emergency caused by the COVID-19 pandemic, the IRS has issued Notice 2021-3, which extends relief from this physical presence requirement through June 30, 2021.
This extended relief means that physical presence is not required for any participant election witnessed by:
A notary public in a state that permits remote notarization; or
A plan representative using live audio technology, provided the requirements detailed in our prior post are satisfied.
Notably, Notice 2021-3 also requests comments on this relief, including comments as to whether this relief should be made permanent, and what, if any, procedural safeguards are necessary in order to reduce the risk of fraud, spousal coercion, or other abuse in the absence of a physical presence requirement.
Plan administrators that have already taken advantage of this guidance can continue to benefit from the changes that were put in place through June 30, 2021. Meanwhile, plan administrators that have not yet adopted remote witnessing procedures may consider making these administrative changes in light of the continuing pandemic and indications from the IRS that this guidance may be made permanent.
Irine Sorser and Liz J. Deckman
§ 1.15 SBA Posts Interim Final Rules Implementing Changes to First Draw and Second Draw Loans under the Paycheck Protection Program
On January 6, 2020, the Small Business Administration (“SBA”) issued its much anticipated Interim Final Rules (“IFR”) under the $2.3 trillion coronavirus relief and government funding act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”), which was signed into law on December 27, 2020. In addition to other provisions, the Act adds $284 billion to the Paycheck Protection Program (“PPP”), establishes changes to the existing PPP, and creates a second draw to the PPP.
This update summarizes the key details of the guidance issued by the SBA.
Changes to Existing PPP; First Draw PPP Loans
1. Eligibility
The Act and IFR expand the set of eligible borrowers under the PPP to include housing cooperatives (but not condominiums), certain 501(c)(6) trade organizations (discussed below), and nonprofit destination marketing organizations, that employ no more than 300 employees.
The Act and IFR also expand the set of eligible borrowers to print, and radio and television, broadcast organizations, both businesses and nonprofits, that employ no more than 500 employees per location (or, if applicable, the size standard established by SBA regulations).
Though the 501(c)(6) trade organizations included are 501(c)(6) organizations generally, professional sports teams or organizations that devote significant activities to lobbying (defined as (i) more than 15 percent of the total activities of the organization, or (ii) more than $1,000,000 during the tax year ended February 15, 2020) are not eligible. Public companies, other than news organizations, and companies that are permanently closed are not eligible for PPP loans under the Act.
Under the first draw PPP, the maximum amount a borrower can borrow is the lesser of (i) $10 million; and (ii) the amount yielded by a payroll-based formula, which is, in general, 2.5 times average monthly payroll costs in 2019 or 2020, less pro rata payroll costs in excess of $100,000.
2. Permitted Uses
The list of permitted expenditures of PPP funds is also expanded. In addition to the uses previously permitted, current and future PPP borrowers are permitted to use PPP funds for certain software, human resources, accounting, property damage repairs related to public disturbances occurring in 2020, and PPE used to comply with health and safety guidelines. Expenses for group life, disability, vision and dental insurance are also included. Note however, that the relative percentages of expenditures required for forgiveness have not been changed, so a borrower must spend at least 60% of loan proceeds on payroll costs to remain eligible for full forgiveness.
Importantly, under the Act and IFR, expenses paid for with PPP loan proceeds are tax deductible, which reversed the IRS position.
3. Loan Forgiveness
PPP loan forgiveness has also been changed in three important ways. First, Economic Injury Disaster Loans (EIDL) advances (which are up to $10,000) are no longer deducted from a borrower’s forgiveness amount.
Second, PPP borrowers can select a covered period that ends at any point between 8 weeks and 24 weeks after loan disbursement, without having to choose between 8 and 24 weeks (although earlier guidance indicated that subject to certain conditions a covered period of less than 24 was permissible).
Third, PPP borrowers with loan amounts up to $150,000 may submit a one-page forgiveness application, without additional documentation. However, borrowers must maintain all relevant documentation.
With the new legislation, Congress and the SBA have addressed many of the concerns of borrowers under the PPP.
Second Draw PPP Loans
The SBA is authorized to guarantee PPP loans under the second draw program established by Section 311 of the Economic Aid Act (the “Second Draw PPP Loans”) under generally the same terms and conditions available under the PPP.
1. Eligibility
(a) General Eligibility Requirements
The eligibility requirements for Second Draw PPP Loans are narrower than the eligibility requirements for First Draw PPP Loans. A borrower is eligible for a Second Draw PPP Loan only if: it has 300 or fewer employees; experienced a revenue reduction in 2020 relative to 2019; has received a First Draw PPP Loan, and has used, or will use, the full amount of the First Draw PPP Loan on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower, and the full amount of its First Draw PPP Loan was spent on eligible expenses; and it is not an ineligible entity.
The revenue reduction requirement may be satisfied by comparing the borrower’s quarterly gross receipts for any one quarter in 2020 with the receipts for the corresponding quarter of 2019. If a borrower was in operation in all four quarters of 2019, it is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.
A borrower that did not experience a 25% annual decline in revenues, or that was not in operation in all four quarters of 2019, may still meet the revenue reduction requirement under the quarterly measurement.
(b) Business Concerns with More than One Physical Location
Unlike under the CARES Act, where any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and employs not more than 500 employees per physical location is eligible to receive a First Draw PPP Loan, in the case of Second Draw PPP Loans, the limit on employees per physical location is reduced to 300.
(c) Affiliation Rules
As a general matter, the same affiliation rules that apply to First Draw PPP Loans apply to Second Draw PPP Loans, with reduced size requirement. Business concerns with a NAICS code beginning with 72 will continue to qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees. Eligible news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans only if they employ 300 or fewer employees per physical location.
(d) Excluded Entities
Generally, an entity that is ineligible to receive a First Draw PPP Loan under the CARES Act is also ineligible for a Second Draw PPP Loan. In addition, the Economic Aid Act also prohibits several categories of borrowers from receiving a Second Draw PPP Loan, including an entity primarily engaged in political activities or lobbying activities, certain entities organized under the laws of, or with other special ties to, the People’s Republic of China or the Special Administrative Region of Hong Kong, a person or entity that receives a grant for shuttered venue operators under section 324 of the Economic Aid Act, and a publicly traded company.
2. Other Key Terms
SBA will guarantee 100% of Second Draw PPP Loans and the SBA may forgive up to the full principal loan amount.
No collateral will be required.
No personal guarantees will be required.
The interest rate will be 1%, calculated on a non-compounding, non-adjustable basis.
The maturity is five years.
3. Maximum Loan Amount
In general, the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of 2.5 months of the borrower’s average monthly payroll costs or $2 million. The Economic Aid Act also provided tailored methodologies for certain categories of borrowers, e.g., for borrowers assigned a NAICS code beginning with 72 at the time of disbursement, the maximum loan amount is equal to 3.5 months of payroll costs rather than 2.5 months. In addition, businesses that are part of a single corporate group may not receive more than $4,000,000 of Second Draw PPP Loans in the aggregate. First Draw PPP Loans and Second Draw PPP Loans use the same approach to determining “payroll costs”.[1]
4. Documentation Requirements
The PPP application form was revised on Friday, January 8, 2021. It is available here.
As a general matter, the documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans. An applicant will not be required to submit additional documentation if such applicant (i) used calendar year 2019 figures to determine its First Draw PPP Loan amount, (ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and (iii) submits its application for the Second Draw PPP Loan to the same lender as the lender that made the applicant’s First Draw PPP Loan. However, the lender may always request additional documentation, if the lender concludes that it would be useful in conducting the lender’s good-faith review of the borrower’s loan amount calculation.
For loans with a principal amount greater than $150,000, the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements. For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a loan, but must be submitted on or before the date the borrower applies for loan forgiveness.
5. Loan Forgiveness
Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans, except that Second Draw PPP Loan borrowers with a principal amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.
Seyfarth is actively monitoring all aspects of federal COVID-19 business stimulus funding legislation. Additional updates will be provided guidance becomes available is published. Visit our Beyond COVID-19 Resource Center for more information.
[1] Subsection(B)(4)(g) of the Consolidated First Draw PPP IFR provides: “What qualifies as “payroll costs? Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.” Subsection(B)(4)(h) of the Consolidated First Draw PPP IFR provides:
“h. Is there anything that is expressly excluded from the definition of payroll costs? Yes. The Act expressly excludes the following: i. Any compensation of an employee whose principal place of residence is outside of the United States; ii. The compensation of an individual employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred; iii. Federal employment taxes imposed or withheld during the applicable period, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and iv. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116-127).”
Aselle Kurmanova, William B. Eck, Stanley S. Jutkowitz, Suzanne L. Saxman and Edward J. Karlin
§ 1.16 EEOC’s New ADA Regulations Could Complicate Employer Plans’ Efforts to Offer Incentives for Getting the COVID Vaccine as Part of a Wellness Program
As COVID-19 vaccines become more readily available in coming months, employers are exploring ways to maximize vaccination rates within their workforce. Some employers are considering making vaccination mandatory. Be sure to read our alert for more relating to legal considerations involved with a mandatory vaccination program. Other employers are considering simply encouraging employees to get vaccinated, offering a voluntary vaccination program, or even offering an incentive to employees who receive the vaccine as part of a workplace wellness program. Employers should be aware of the existing (and recently proposed) Americans with Disabilities Act (ADA) guidelines that may impact the design of any such program.
Background – ADA Restrictions on Wellness Programs
As described in greater detail here, the ADA applies to employer-sponsored wellness programs that include a medical exam or disability-related inquiry. The ADA generally permits employers to make medical examinations or inquiries in connection with a wellness program, but only if such program is “voluntary.” Under EEOC guidelines, that means:
The program is reasonably designed to promote health or prevent disease, is not overly burdensome, and is not a subterfuge for discrimination.
The program is not a “gateway plan,” requiring employees to submit to a medical exam or inquiry in order to access an enhanced benefits package.
The program offers a reasonable accommodation to persons for whom it is medically inadvisable to participate
Participants are provided with a notice informing them of why their information is being requested, how it will be used, and how it will be protected.
Incentives are limited.
The final requirement, relating to the level of permitted incentives, is in a state of flux. Until 2016, there were no guidelines on how much of an incentive could be offered to encourage participation in a wellness program. In 2016, however, the EEOC finalized regulations that would permit an incentive of up to 30% of the cost of self-only coverage under the employer’s health plan. Those regulations were challenged by the AARP, however, and were ultimately struck down by the District Court who ordered the EEOC to reissue guidelines that engage in a more thorough process detailing how it determined that the incentive level met the ADA’s voluntary standard.
Last week, the EEOC issued a Notice of Proposed Rulemaking that would limit any incentives offered in a connection with a participation-only wellness program (i.e., one where participants are simply required to submit to a medical exam or inquiry but not required to achieve any particular outcome) to a “de minimis” threshold. Examples of permissible incentives in the proposed regulations included a water bottle or a gift card of modest value.
Analysis of ADA’s Applicability to a Vaccination Program
The EEOC updated its Technical Assistance document on December 16, 2020, to provide that the administration of a vaccine, in and of itself, does not constitute a medical examination. That said, vaccine administration is almost always accompanied by medical questions to ascertain whether the person is susceptible to an allergic reaction, etc. That type of inquiry could constitute a disability-related inquiry and therefore would be subject to restrictions under the ADA if the information is solicited by the employer or by an entity administering the vaccine to employees pursuant to a contract with the employer.
However, the ADA can be avoided altogether if the employee gets vaccinated by a third party provider who is not under a contract with the employer to administer the vaccine because the medical pre-screening questions are not attributed to the employer under this scenario. Thus, an employer could structure its wellness program to provide a financial incentive to participants to receive a vaccine from a third-party vendor, not under contract with the employer (e.g., a local pharmacy chain), without running afoul of the ADA. While the employer could require proof that the individual received a vaccination, that should not trigger ADA restrictions because, as noted above, vaccination status is not, in and of itself, a medical examination or inquiry under the ADA.
Duty to Accommodate
Current EEOC regulations on wellness programs require accommodation for disabilities absent undue hardship. Although the proposed regulations on wellness programs do not address accommodations on the basis of religion, presumably the EEOC’s position on accommodation would be the same and the language from the current regulations regarding accommodation remains unchanged. While current EEOC regulations do not specify what type of accommodation must be offered in a vaccination scenario, presumably the employer would have to come up with an accommodation that is an alternative requirement to getting the vaccine, such as wearing a mask, getting weekly COVID tests and social distancing, so the person with the disability-related or religious objection can earn the incentive.
Of course, the duty to accommodate would generally only be implicated in situations where an individual is actually unable to get the vaccine due to a disability (or potentially a bona fide religious objection) and reasonable accommodation need only be made absent undue hardship. The viability of any such claim may be impacted by what the FDA says about any vaccine it approves in terms of any medical contraindication.
Level of Permitted Incentive
At present, it is unclear what level of incentive would be considered voluntary under ADA guidelines. Prior regulations permitting incentives up to 30% of the cost of health coverage were invalidated by the courts. The newly proposed regulations only permitting de minimis incentives are in proposed form, and the EEOC has stated that they are “simply proposals and they do not change the law or regulations.” Further, there’s a possibility these regulations could be frozen by the incoming Biden Administration and/or revised before taking final form. In any event, it’s unlikely the regulations would be finalized before more broad-based vaccine rollouts take place.
Even so, there is some risk that a plaintiff could seize upon this proposed regulations to argue that any incentive that exceeds a de minimis threshold is involuntary. To be clear, the current regulations are only in proposed form and, as noted, the EEOC has made clear it is not “law.” Further, courts can defer to, but often do not follow EEOC regulations. But, employers should keep this proposal in mind as they implement an incentive-based COVID vaccination program.
Karla Grossenbacher, Jennifer A. Kraft and Benjamin J. Conley
§ 1.17 EEOC Wellness Rules Proposed, Water Bottle Enthusiasts Rejoice
Synopsis: For years, employers have struggled to understand what level of incentives in wellness programs might be considered “voluntary” under the Americans with Disabilities Act (ADA). After earlier guidelines were challenged and ultimately thrown out by a federal court, the EEOC has finally issued its long-awaited, revised guidelines under the ADA and the Genetic Information Nondiscrimination Act (GINA). As described in this alert, the newly proposed rules would generally limit incentives to “de minimis” levels for so-called “participation-only” wellness programs, while deferring to HIPAA’s guidelines for “health-contingent” wellness programs.
Brief Background on Federal Laws Governing Wellness Programs
Employers generally offer wellness programs to promote health and disease prevention within their workforce. Despite these noble intentions, a variety of federal laws govern such programs with the intent of balancing workforce health against the risks of employment discrimination on the basis of adverse health conditions or genetic information. While not an exclusive list, employer wellness programs are generally governed by some or all of the following federal laws (depending on the design of the program):
Health Insurance Portability and Accountability Act (HIPAA)
HIPAA generally breaks wellness plans/programs into two categories:
Participation-Only Wellness Programs. These include wellness programs that do not require participants to achieve a specific health outcome, but instead simply require them to take a certain action (e.g., obtain a flu shot, submit to a biometric screening, take a health risk assessment). HIPAA does not impose any requirements upon these types of programs, other than require that they be made available to similarly situated participants. These types of programs are regulated by, and the target of, new guidelines under the ADA, as described below.
Health Contingent Wellness Programs. Health contingent wellness programs are those that require participants to attain a certain outcome or meet a health standard (e.g., run a 5k, maintain a certain cholesterol level, cease smoking, maintain a certain Body Mass Index (BMI)). These types of programs are required to comply with five standards under HIPAA:
The program must be reasonably designed to promote health or prevent disease.
Any reward offered cannot exceed 30% of the cost of coverage elected by the participant (increase to 50% for programs involving a tobacco cessation component).
The full reward must be available to all similarly situated individuals unless the program offers a reasonable alternative for obtaining the reward. (Note that different requirements apply for activity-only and outcome-based programs.)
Participants must be notified of the availability of the reasonable alternative.
Participants must be given the opportunity no less frequently than annually to attain the reward.
Americans with Disability Act
The ADA applies to employer-sponsored wellness programs that include a medical exam or disability-related inquiry. Examples of the types of programs that might be subject to the ADA include health risk assessments that involve medical questions or biometric screenings. Smoking cessation programs are not necessarily subject to the ADA unless smoking status is determined based on a biometric screening (medical exam) instead of a self-certification.
The ADA generally permits employers to make medical examinations or inquiries in connection with a wellness program, but only if such program is “voluntary.” For years, employers have struggled in determining what constitutes a “voluntary” program for these purposes. In 2016, the EEOC finally issued regulations establishing certain parameters to assist employers in determining whether a program would be considered voluntary. Generally, those standards included the following:
The program is reasonably designed to promote health or prevent disease, is not overly burdensome, and is not a subterfuge for discrimination.
The program is not a “gateway plan,” requiring employees to submit to a medical exam or inquiry in order to access an enhanced benefits package.
Incentives to participate do not exceed 30% of the cost of self-only
The program offers a reasonable accommodation for persons for whom it is medically inadvisable to participate.
Participants are provided with a notice informing them of why their information is being requested, how it will be used, and how it will be protected.
Shortly after the rules were issued, the AARP challenged the EEOC’s interpretation of the voluntariness standard, arguing that they exceeded their regulatory authority in permitting incentives of up to 30% of the cost of coverage. The District Court agreed, and it struck down that portion of the rule effective as of January 1, 2019 (the rest of the rule remained in force).
The newly proposed rule (described below) is intended to address the Court’s directive that the EEOC reissue guidelines that engage in a more thorough process detailing how it determined that the incentive level met the ADA’s voluntary standard.
Genetic Information Nondiscrimination Act
GINA is generally intended to prevent employers from discriminating against employees on the basis of genetic information. The law broadly restricts employers from incentivizing employees to provide genetic information or to provide medical information about family members.
In 2016, the EEOC issued guidelines that established parameters for how employers may collect genetic information or information about family members without running afoul of GINA guidelines. Under those rules:
Individuals must provide a knowing, voluntary, written authorization prior to disclosing such information.
Employers may not offer an incentive that exceeds 30% of the cost of self-only coverage in soliciting genetic information from the spouse of an employee.
Employers could not offer any inducement for genetic information about an employee’s child.
In the same legal challenge described above, the District Court struck down the EEOC’s 30% threshold as applied to GINA (the rest of the rule remained in force). The rule described below attempts to issue new guidelines in accordance with the Court’s directive.
Highlights of the New ADA Rule
The EEOC’s proposed rule takes a similar approach to the earlier HIPAA rule, splitting wellness programs into two categories and applying different rules to each:
3. Participation-Only Wellness Programs. The proposed rule targets participation-only wellness programs, limiting incentives offered in connection with such a program to a “de minimis” standard. Any incentive offered that exceeds that threshold would be considered involuntary, in violation of the ADA. The rule offers the following examples:
Permissible Incentives: water bottles or gift cards of modest value
Impermissible Incentives: a paid annual gym membership or free airline tickets
The EEOC’s proposed rule requests comments on whether additional examples would be helpful.
4. Health Contingent Wellness Programs. The EEOC’s proposed rule would offer a “safe harbor” for any health contingent wellness program offered as part of a group health plan. Under the safe harbor, the program would be deemed to be in compliance with the ADA if it complies with the HIPAA rules described above.
Notably, the rules also appear to eliminate the previously-required ADA notice described above. The EEOC explained that because incentives will no longer be able to exceed a de minimis threshold, no such notice would be required to ensure voluntariness.
Highlights of the New GINA Rule
Under the proposed rule, employers can offer incentives to encourage employees or their spouses to provide genetic information, but those incentives must be no more than de minimis. In a departure from the earlier rule, employers may offer incentives to encourage provision of genetic information of dependent children as well (as long as those incentives are no more than deminimis).
Timing/Effective Date of EEOC Rules
The new EEOC guidelines are in proposed form, and the EEOC is soliciting comments for 60 days following the date the rules are published in the Federal Register. The EEOC will review any comments received before issuing a final rule. Until the rules are final, the EEOC has stated that they are “simply proposals and they do not change the law or regulations.” It would be important to caveat these comments though as follows:
Regulatory Freeze. As is common in new administrations, the Biden Administration has announced it intends to implement a broad-based regulatory freeze on all pending rules upon entering office. Presumably this rule will be included, although it is unclear whether the rule will ultimately be adopted by the new administration.
Interim Interpretation of ADA’s Voluntariness Standard. Even in the absence of this rule, the ADA remains an active law, including its undefined requirement that wellness programs must be voluntary. Participants in a wellness program could challenge any form of incentive on the basis that it renders the program involuntary (and there are pending lawsuits in which plaintiffs allege a seemingly reasonable incentive renders the program involuntary). There is some risk that a plaintiff could seize upon this proposed rule to argue that any incentive that exceeds a de minimis threshold is involuntary. To be clear, the current rule is only in proposed form and, as noted, the EEOC has made clear it is not “law.” But, employers should keep this proposal in mind as they implement new or review current wellness plans.
Considerations for Employers in Designing Wellness Programs
If finalized, this rule could lead to some employers to either scale back their participation-only wellness programs or to gravitate toward health-contingent wellness programs. Under these rules (and the HIPAA guidelines), employers would have far greater flexibility to incentivize behavior under health-contingent programs.
Similarly, the regulatory agencies have indicated in prior, non-binding guidance that a participation-only wellness program might be considered a health contingent wellness program if it only targets participants based on health status (e.g., if only diabetics have to take a biometric screening). Employers might consider offering more targeted programs based on health status in the hopes of avoiding the more restrictive ADA “de minimis” standard. Under this approach, the wellness program would need to comply with the other HIPAA requirements as discussed above.
Finally, we understand that many employers are considering whether and to what extent to incorporate a mandatory or incentivized COVID vaccination program into their current wellness design. These rules have the potential to impact any such design. Click here for more on vaccine-related wellness considerations.
Benjamin J. Conley, Jennifer Kraft, Diane Dygert and Joy Sellstrom
§ 1.18 PBGC Simplifies Calculation Of Liability For Withdrawal From Multiemployer Pension Plans
Seyfarth Synopsis: The Pension Benefit Guaranty Corporation (PBGC) recently issued a final rule intended to simplify the calculation of withdrawal liability for multiemployer plans that have adopted benefit reductions, benefit suspensions, surcharges, and contribution increases.
Under ERISA, multiemployer pension plans assess withdrawal liability on employers that withdraw from the plans. Withdrawal liability represents a withdrawing employer’s proportionate share of a plan’s unfunded vested benefits. The calculations of withdrawal liability can be highly complex.
Congress approved changes under the Pension Protection Act in 2006 and the Multiemployer Pension Reform Act in 2014 that permitted financially troubled plans to reduce certain benefits, impose benefit suspensions, assess surcharges, and impose contribution increases as part of a “funding improvement plan” or “rehabilitation plan.” Under the law, these changes are generally disregarded for purposes of calculating withdrawal liability. The PBGC’s final rule provides simplified methods that plans may use in excluding those changes from the withdrawal liability determination.
The final rule will apply to employer withdrawals from multiemployer pension plans that take place in plan years beginning on or after February 8, 2021. The PBGC expects the final rule will benefit multiemployer pension plans that adopt the simplified methodology by reducing the cost associated with the withdrawal liability calculation. Notably, however, it does not appear that the final rule will result in any significant changes to the amounts of withdrawal liability assessed on employers that withdraw from multiemployer pension plans. The rule only simplifies the way that those amounts are calculated.
Even though the PBGC issued this rule to “simplify” the calculation of withdrawal liability for certain plans, this area of law itself remains very complex. Employers that are considering withdrawal from a multiemployer pension plan, are engaging in reorganizations or transactions that might trigger a withdrawal, or that have been assessed withdrawal liability, should be sure to consult with counsel.
Additionally, the PBGC’s rule may be just the beginning of a busy year of legal developments affecting multiemployer pension plans. With the number of severely underfunded plans continuing to increase and a new administration about to begin, Congress is likely to soon consider new legislation to address the risk of insolvencies in multiemployer pension plans. Stay tuned for further developments.
James M. Hlawek
§ 1.19 Recent Supreme Court Trump Decisions and ERISA Jurisprudence
Seyfarth Synopsis: The Supreme Court has shown a recent reluctance, as a general matter, to expand the scope of its review. That reluctance should apply as well to cases that seek to extend the scope and enforcement of ERISA.
Is there a connection between — the Supreme Court’s December 2020 decisions dismissing Presidential election lawsuits and the Presidential policy of excluding from census apportionment immigrants not considered to be in lawful status, on the one hand, and ERISA jurisprudence, on the other hand?
These recent Supreme Court decisions reveal a strong majority of Justices who believe federal court jurisdiction is limited, and dramatically so. Texas v. Pennsylvania, challenged, among other things, the lack of compliance with state legislative election law. Seven of the nine justices ruled that “Texas has not demonstrated a judicially cognizable interest in the manner in which another State conducts its elections.” In the immigration census decision, Trump v. New York, six justices ruled the case non-justiciable. They relied on two related doctrines — standing and ripeness. On standing, the majority said that a case must demonstrate “an injury that is concrete, particularized, and imminent rather than conjectural or hypothetical.” On ripeness, they said that any case must not be dependent on “contingent future events that may not occur as anticipated, or indeed may not occur at all.” To be sure, these cases may yet wind their way back to the Court for a review on the merits, but the route will be a bumpy one.
This judicial reluctance to rock the boat applies to ERISA jurisprudence as well. In Rutledge v. Pharmaceutical Care Management Association (No. 18-540), the Supreme Court refused to strike down an Arkansas PBM law on ERISA preemption grounds. The decision was unanimous. SeeSCOTUS Upholds Arkansas PBM Law Against ERISA Preemption Arguments | Beneficially Yours.
Commentators have noted that Justice Roberts, in particular, employs a strong philosophy of judicial deference or restraint. His view is that the people should take their complaints to the ballot box, not the courthouse. Enough of his fellow conservatives on the Court are often persuaded to agree, notwithstanding calls for a more aggressive Court.
So, as a general matter, private lawsuits that are commenced to “make new law” may increasingly be commenced in state court. ERISA lawsuits are not so easily accommodated via state litigation, however. All ERISA claims, other than claims for benefits, must be commenced in federal court. 29 U.S.C. 1132(e)(1). As we have noted previously, when commenting on the Spokeo and Thole standing decisions, a number of technical ERISA violations, including some fiduciary breach claims, may be beyond the reach of private plaintiffs. SeeSpokeo and the Future of ERISA Litigation | Beneficially Yours; The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution | Beneficially Yours. And ERISA limits remedies, see Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985), and that can make it tough to allege concrete injuries for technical violations.
It remains to be seen, of course, how aggressive the Department of Labor will be in enforcing ERISA violations under President Biden. But private ERISA plaintiffs trying to extend the scope and enforcement of ERISA will have a tougher time making their case to the Supreme Court.
Mark Casciari and Rebecca Bryant
§ 1.20 Hold Up! Maybe You Can Invest Your Retirement Plan to Save the Planet!
Seyfarth Synopsis: DOL final regulation on fiduciary implications of investing in ESG under review by the Biden administration.
You may recall our prior blog posts and Legal Update discussing the back-and-forth over the years surrounding the wisdom, or even ability, for plan fiduciaries to invest plan assets in funds with a strategy focused on factors such as environmental, social or corporate governance, sustainability or religion — the so-called ESG factors. See our blog posts here and here, and our Update here.
When we left you last, in November 2020, the DOL had finalized its regulation that basically came down on the side that ESG factors are non-pecuniary and it would be inappropriate for fiduciaries to make investment decisions based on non-pecuniary factors. This was in the face of voluminous criticism received from the investing community.
Well, this regulation is listed here among those that the Biden administration wants reviewed in accordance with the Executive Order “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” In addition, the White House issued a memo to all agency heads to “consider” postponing for 60-days rules that have published rules but have not yet taken effect.
So, stay tuned!
Diane Dygert
§ 1.21 IRS Announces 2021 Limits for Certain Health and Fringe Benefit Options
Seyfarth Synopsis: The IRS has announced the adjustments to key limits for certain health and welfare benefit programs, including HDHP deductibles, HSA and FSA contributions, and other fringe benefit options for 2021.
The IRS issued new limits on health and fringe benefit options under Rev. Proc. 2020-32, Rev. Proc. 2020-45, and Notice 2020-84, which announce the 2021 limits for certain benefit programs, including dollar limits for contributions to health savings plans (“HSAs”) under high deductible health plans (“HDHPs”), flexible spending accounts (“FSAs”) under Section 125 cafeteria plans, qualified transport fringe benefit programs, Qualified Small Employer Health Reimbursement Accounts (“QSEHRAs”), and the new PCORI fee.
While some of the limits have not changed, there are a few notable increases. A summary of the key limits for employers to note for 2021 are included in the table below:
Benefit Programs and Limits:
Health Savings Accounts (HSAs) – Maximum HSA contribution:
Family Maximum: 2020 Limit: $10,600; 2021 Limit: $10,700
– PCORI Fee*
2020 Limit: $2.54; 2021 Limit: $2.66
* For plan years ending on or after October 1, 2020 and before October 1, 2021.
Rev. Proc. 2020-45 provides other limits that may impact benefit offerings, including the 2021 premium tax credits and small business health care tax credit. The revised limits provided in Rev. Proc. 2020-32 and Rev. Proc. 2020-45 took effect as of January 1, 2021.
Also, look to and sign up for our blog Beneficially Yours for further discussion of employee benefits topics and updates at https://www.beneficiallyyours.com/
Joy Sellstrom
§ 1.22 How to SECURE Your Safe Harbor Plan
Seyfarth Synopsis: The IRS issued Notice 2020-86, which provides guidance on the rules that apply to safe harbor plans that were changed by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The guidance covers the increase in automatic contributions permitted under a qualified automatic contribution arrangement (or “QACA”) safe harbor plan, safe harbor notice requirement changes, and issues related to the retroactive adoption of safe harbor status.
The SECURE Act included a number of changes to the rules that apply to safe harbor plans. As described in our prior Legal Update available here, the SECURE Act (1) increased the 10% cap on automatic contributions under a QACA to 15%, (2) eliminated the requirement that a non-elective safe harbor plan notify participants of the plan’s safe harbor status before the beginning of the plan year, and (3) established new rules that permit the adoption of a non-elective safe harbor plan design at any time during a plan year (or even the following plan year) if certain requirements are met.
Notice 2020-86 answers a number of open questions relating to these changes to the safe harbor rules.
Increase in 10% Cap to 15% for Automatic Contributions. While plan sponsors are not required to increase the cap on automatic deferrals under a QACA from 10% to 15%, some plans incorporate the maximum cap on automatic deferrals by reference to the Code. For those plans, if the plan sponsor does not want the 15% increased cap to apply, the plan must be amended (generally by December 31, 2022). The Notice makes clear that a failure to timely amend in that situation may result in a plan operational error.
Safe Harbor Notice Requirements. The guidance clarifies that a notice may still be required for certain plans, even if the plan is designed to provide non-elective contributions to satisfy the safe harbor requirements.
The safe harbor notice requirement continues to apply to traditional safe harbor plans that provide safe harbor non-elective contributions if the plan also provides non-safe harbor matching contributions that are designed so that they are not required to satisfy the ACP test.
The safe harbor notice requirements continues to apply to plans that have an eligible contribution arrangement (or “EACA”) (i.e., those plans that provide for the permissive withdrawal of automatic contributions within 90 days) with a non-elective contribution that satisfies either the traditional or QACA safe harbor requirements.
The Notice also addresses how a plan sponsor would provide notice to preserve the right to reduce or suspend safe harbor non-elective contributions mid-year if a safe harbor notice is no longer required. Generally, under IRS rules, a plan sponsor may reduce or suspend safe harbor contributions mid-year if it includes a statement in the safe harbor notice that the contributions could be suspended midyear. (If this statement is not included in the safe harbor notice, then the plan sponsor must be able to show that it is operating at an economic loss to suspend the contributions.) The guidance states that including this suspension statement in any type of notice is acceptable, and that for the 2021 plan year, a notice with the suspension statement may be provided as late as January 31, 2021 for a calendar year plan.
Retroactive Safe Harbor Status. The Notice also includes several helpful questions and answers addressing the retroactive adoption of safe harbor non-elective contributions:
Plan sponsors may re-adopt a non-elective safe harbor formula for the entirety of the plan year after reducing or suspending non-elective safe harbor contributions mid-year. In this case, the plan is not required to satisfy the ADP or ACP test for the plan year.
Safe harbor non-elective contributions must be made by the extended tax return due date in order to be deductible for the prior year. So, even though plan sponsors may now amend a plan after the end of the plan year to provide for 4% non-elective safe harbor contributions, these contributions will not be deductible for such prior plan year if made after the plan sponsor’s tax return due date. (Instead, they would be deductible for the taxable year in which they were contributed to the plan.)
The Notice indicates that the IRS does not intend this guidance to be the final word and that the IRS hopes to issue regulations related to the safe harbor changes found in the SECURE Act. We will be ready if and when those regulations are issued.
Christina Cerasale and Sarah Touzalin
§ 1.23 Fate of EEOC Wellness Regulations Remains Unknown
Seyfarth Synopsis: Unpublished U.S. Equal Employment Opportunity Commission (EEOC) proposed regulations regarding incentives offered under wellness programs are set to be withdrawn and reviewed after the Biden White House issues a regulatory freeze.
On January 7, 2021, the EEOC forwarded to the Office of Federal Register its proposed rules under the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) related to wellness programs for publication. The proposed regulations had already been cleared for publication by the Office of Management and Budget (“OMB”). The EEOC also published an unofficial version of the regulations on its website at that time. Seyfarth’s Legal Updates on aspects of the proposed rules, including COVID vaccine implications, can be found here and here.
Before the proposed rules actually were published, however, the Biden White House issued a regulatory freeze. Under the regulatory freeze, it appears that these proposed regulations will be withdrawn from the Office of the Federal Register and set aside for review. The review and approval must be completed by a department or agency head appointed or designated by President Biden (or an approved delegate), unless the OMB director allows publication of the proposed regulations due to some sort of emergency exception.
Whether publication of the EEOC proposed rules will continue to be delayed or whether the rules in their current form will be published at all remains unclear. We look forward to further clarity once the Biden administration informs the public of its intentions for wellness programs generally, and of the fate of the proposed regulations. As explained in our Legal Update, the incentive provisions were removed from the regulations, effective January 1, 2019. Until regulations addressing incentives are published in the Federal Register, employers have little guidance as to the extent to which the new EEOC will allow wellness incentives under the ADA.
Christina Cerasale and Joy Sellstrom
§ 1.24 To Vote or Not to Vote? That Is (Still) the Question
Seyfarth Synopsis: In mid-December 2020, after a truncated comment period and without public hearings, the US Department of Labor (DOL) finalized its proposed regulations on a fiduciary’s responsibilities when exercising shareholder rights like proxy voting (summarized here). They were published in the Federal Register on December 16, 2020 (click here) and were designated as effective on January 15, 2021. However, given the new Administration, the future of that final rule is unclear.
As part of the DOL’s one-two punch to plan fiduciaries’ obligations regarding investment selection and management, the agency quickly finalized its proposed regulation on exercising shareholder rights. (See our other blogs here and here regarding the DOL regulations on ESG investing.) 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.” As we noted in our prior post, the DOL’s view on fiduciaries conducting proxy voting ties the obligation to their concern that voting proxies may relate to non-pecuniary interests. In that case, the DOL’s position in the proposed rule was that plan fiduciaries should actually refrain from voting the proxy.
After receiving a great deal of reaction (including written comments and submissions) from a variety of stakeholders, the DOL made significant changes to the proposed rule. Instead of requiring or prohibiting the voting of certain proxies, the DOL has adopted a principles-based approach under which fiduciaries must adopt a process for exercising shareholder rights that emphasizes their existing ERISA duties of prudence, acting solely in the interest of the plan participants and beneficiaries, and acting exclusively for the purpose of providing benefits to such plan participants and beneficiaries and defraying administrative costs.
The DOL also adjusted some of the other language in the proposed rule that was more prescriptive. This includes modifying the requirement to “investigate” facts surrounding an investment decision to one that requires an “evaluation” of the facts. Also, the obligation that fiduciaries require specific documentation of the rationale for proxy voting decisions from an investment manager who was delegated the proxy voting function has been removed in favor of a more general monitoring approach.
The fate of this final rule is unclear under the new Administration. This is in contrast to the final rule addressing investment selection and management, which was specifically identified in President Biden’s Executive Order “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” (See our blog here discussing that Executive Order and those DOL regulations.)
So, yet another reason to stay tuned!
Diane Dygert and Linda Haynes
§ 1.25 The Biden Administration Removes Limits on Agency “Guidance” – And Creates A New Agenda Enforcement Tool
Synopsis: On January 20, 2021, the Biden Administration revoked the Trump Administration Executive Order (EO) which had restricted agency Guidance. On January 27, 2021, the Department of Labor (DOL) rescinded the “PRO Good Guidance” rule that it had issued pursuant to the Trump EO – a rule that limited the force of informal guidance in DOL enforcement actions. This rescission may undercut the persuasive effect of an employer interpretation of federal statutes at the agency level, because more Guidance limits the ability for employer interpretations and increases agency enforcement power.
In September of 2020, we published a blog post describing how the Trump Administration reigned in the role of informal federal Department of Labor opinions, generally called “Guidance,” in the agency’s enforcement actions against employers. See our blog post here. The upshot was that there would be less Guidance, and thus more employer freedom to interpret federal statutes.
Now, the Biden Administration has weighed in by rescinding the Trump Administration’s Guidance rule. In a final rule, effective on January 27, 2021, the Department of Labor posits that Trump’s internal rule on guidance “deprives the Department and subordinate agencies of necessary flexibility” and “unduly restricts the Department’s ability to provide timely guidance on which the public can confidently rely.” The Biden Executive Order that led to this agency action, in turn, states that the Administration intends “to use available tools to confront urgent challenges,” including the pandemic, economic recovery, racial justice and climate change. The Order added that the Administration is relying on “robust agency action” to achieve its goals.
You can compare the Trump rule at Fed. Reg. vol. 85, no. 168 (8/28/20) with the Biden rule at Fed. Reg. vol. 86, no. 16 (1/21/21) to drill down on the different treatment of agency Guidance.
We draw these conclusions from the latest Department action on Guidance:
Employers should expect more Guidance.
Employers should expect the Department of Labor (and likely other federal agencies) to insist on compliance with each and every issuance of Guidance, thus shrinking the universe of employer statutory interpretations that don’t conflict with Guidance.
More Guidance may mean more clarity in agency enforcement standards, depending on the drafting quality of the Guidance.
Whether any particular Guidance is legally binding will still depend on court rulings, as it may be inconsistent with governing statutes or the Constitution .
Please reach out to your Seyfarth attorney if you would like to discuss the impact the Biden Administration rescission may have on your employee benefit plans.
Mark Casciari and Joy Sellstrom
§ 1.26 Missing Participant Guidance Trifecta
On January 12, 2021, the Department of Labor (DOL) issued a 3-part set of missing participant guidance for employer-sponsored retirement plans, addressing a variety of issues:
Best practices for reducing missing participant populations;
Explanation of the DOL’s goals and process in missing participant audits under the Terminated Vested Participant Project; and
Authority for fiduciaries of terminating defined contribution plans to use the PBGC Missing Participant Program.
Uniting participants with their retirement benefits has been a priority for the DOL for a number of years, as well as for plan sponsors and fiduciaries who want to see their employees benefit from their hard earned retirement dollars. In that regard, while additional guidance is always welcome, as discussed below, several of the DOL’s best practices could be viewed as impractical at best, or at worst, unworkable by plan fiduciaries.
Best Practices for Reducing Missing Retirement Plan Participants
Under ERISA, a plan fiduciary has a legal duty to act prudently and to administer an ERISA-governed retirement plan in accordance with its terms. The DOL (mostly via plan audits) has long been on a mission to alert and remind plan fiduciaries of their obligations under ERISA to locate and distribute retirement benefits to “missing” participants and beneficiaries.
Missing participants and beneficiaries are commonly identified in connection with:
becoming entitled to a distribution as the result of a plan termination;
becoming eligible for a mandatory distribution upon termination of employment under the plan’s small benefit cash out rules;
reaching their required beginning date for minimum distributions (or earlier required distributions, if applicable);
becoming entitled to a plan benefit upon someone’s death;
becoming entitled to a benefit under the terms of a qualified domestic relations order; and
by not cashing a plan check (or by having undeliverable mail).
Prior to this most recent guidance, the most extensive, albeit informal, guidance issued by the DOL in this area focused on missing participants and beneficiaries under a terminated defined contribution plan. See DOL Field Assistance Bulletin (FAB) 2014-1. Not surprisingly, plan fiduciaries (as well as DOL investigators) have applied the principals espoused in FAB 2014-1, by analogy, to active plans.
The DOL’s most recent foray into the issues of missing participants and beneficiaries was published on January 12, 2021, as an informal “best practices” memo (the “Memo”). In its own words, the Memo “outlines best practices that the fiduciaries of defined benefit and defined contribution plans, such as 401(k) plans, can follow to ensure that plan participants and beneficiaries receive promised benefits when they reach retirement age.”
The Memo begins by listing a number of “red flags” fiduciaries should be aware of that may indicate a systemic issue is either around the corner or exists currently, and in either case, should be addressed promptly. These red flags include (among others) missing, inaccurate, or incomplete contact information in the plan’s system, and the absence of procedures for handling uncashed checks.
The memo then describes the DOL’s vision of best practices in the form of the following four categories of action items, along with the DOL’s relatively extensive bullet point “recommendations” for satisfying a fiduciary’s duty under each category:
Maintaining accurate census information for the plan’s participant population.
Implementing effective communication strategies.
Conducting missing participant searches.
Documenting procedures and actions.
While many of the suggestions are seemingly prudent and sensible, others may not be feasible for some plans or may be cost prohibitive. Additionally, each plan’s circumstances may differ based on a number of factors such as plan size and type (e.g., defined benefit or defined contribution). Correctly, the DOL agrees with this sentiment, stating “[n]ot every practice …is necessarily appropriate for every plan.” We suggest, nonetheless, that all plan fiduciaries review their policies and procedures for locating missing participants, at least to be prepared for questions that may arise if their plan is examined by the DOL. This latest guidance can be found here: Missing Participants – Best Practices for Pension Plans (dol.gov)
DOL’s Goals and Process in Missing Participant Audits
The second part of the DOL’s January 12, 2021 guidance on missing participants, Compliance Assistance Release 2021-01 (Release), describes the DOL’s approach on auditing defined benefit plans under its Terminated Vested Participants Project (TVPP). The DOL’s purpose is to unite participants and beneficiaries with their benefits and help them avoid significant and unnecessary RMD-related excise taxes. The goals of the TVPP are to ensure plans:
maintain adequate records to identify their participants, the amount they are due under the plan, and when their benefits can start,
inform participants of their rights and responsibilities (e.g., steps required to avoid required minimum distribution excise taxes), and
implement appropriate search procedures where participant and beneficiary information is incorrect or incomplete.
To that end, the Release explains how the DOL identifies plans that have difficulty tracking terminated vested participants and timely distributing benefits, red flags that can suggest a problem, and its approach to closing out cases. In particular, the DOL identified (i) plans that report a large number of terminated vested participants entitled to future benefits, (ii) bankruptcy, and (iii) corporate merger and acquisition activities, as instances where plans could face problems with loss of participant data.
Investigation Process
The DOL generally sends two letters when opening an investigation: one opening the case and one requesting more targeted information and documentation. During the investigation, the DOL generally looks for evidence of:
systemic errors in plan recordkeeping and administration associated with failure of a participant or beneficiary to enter pay status before death or RMD beginning dates,
inadequate procedures for identifying and locating missing participants and beneficiaries,
inadequate communications (see Further on Communications, below) with terminated vested participants nearing normal retirement age (and beneficiaries of terminated vested participants) informing them of their right to commence benefits, and
inadequate procedures for addressing uncashed distribution checks.
Red flags suggesting possible problems include: census data with missing or incomplete participant data, more than a “small” number of terminated vested participants who are eligible to claim benefits but have not done so, continuing to mail to bad addresses without taking steps to find the correct address, failing to use resources like the USPS Address Correction Service and/or the National Change of Address database to find replacement addresses, and not taking advantage of recordkeeper services for finding missing participants. The DOL also said fiduciaries should monitor the performance of retained third party search firms and ensure they are complying with any contractual commitments regarding missing persons.
Further on Communications
The DOL commented on conditions that can reduce a notice’s effectiveness. For example, benefit notices that do not clearly explain the participant’s right to pension benefits, e.g., his/her vested status, right to benefits, and/or the consequence of excise taxes, can contribute to a terminated vested participant problem. Failure to write in “plain English” and sending to populations not fluent in English without providing language assistance, or communicating the availability of assistance, also can make communications less effective than intended. Participants may have benefits under prior plans or worked for a company under a different name due to mergers or acquisitions, and the DOL is concerned that participants might not recognize the connection to their benefits if a successor plan’s correspondence does not include the name of the prior employer or plan.
Working with the Fiduciary and Closing the Case
The DOL seemed to express a collaborative approach, reiterating its goal of helping the plan find missing participants. It noted it will give reasonable time to respond to information requests, engage in meaningful discussions with plan fiduciaries, and grant time extensions where appropriate. Further, the DOL indicated that if the plan provides appropriate remedies for affected individuals and corrects flaws in its recordkeeping, communication, search and other relevant policies, the DOL will generally list those corrective steps without citing the individual plan fiduciaries for specific violations of ERISA when closing out a case.
Temporary Enforcement Policy for Use of PBGC Missing Participant Program by Terminating Defined Contribution Plans
In conjunction with the above guidance, the DOL also issued Field Assistance Bulletin (FAB) 2021-01, which announces a temporary enforcement policy on terminating defined contribution plans’ use of the Pension Benefit Guaranty Corporation’s (PBGC) Missing Participants Program (Program). The policy applies to both plan fiduciaries of terminating defined contribution plans and qualified termination administrators (QTA) of abandoned individual account plans.
As background, the DOL currently provides a fiduciary safe harbor under DOL Reg. § 2550.404a-3 for use in making distributions from terminated defined contribution plans and abandoned plans to missing and nonresponsive participants and beneficiaries. The safe harbor generally requires that distributions be rolled over to an IRA, although in limited circumstances fiduciaries may make distributions to certain bank accounts or to a state unclaimed property fund. If the conditions of the safe harbor are met, the plan fiduciary or QTA will be deemed to have satisfied ERISA’s requirements with respect to the distribution of benefits.
In December 2017, the PBGC issued final regulations expanding the Program to defined contribution plans that are terminated on or after January 1, 2018. Under the expanded Program, terminating defined contribution plans may either (i) transfer missing or nonresponsive participant benefits to the PBGC, in which case the PBGC will make payments to missing participants once they are located; or (ii) submit missing or nonresponsive participant information to the PBGC (but not transfer the account), in which case the PBGC will communicate such information to the participants once they are located. The Program requires fiduciaries to conduct a diligent search to locate missing participants before reporting them as missing.
Under FAB 2021-01, the DOL announced that, pending further guidance, it will not pursue fiduciary breach claims against plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans in connection with the transfer of a missing or non-responsive participant’s or beneficiary’s account balance to the Program rather than using one of the available options under the DOL’s fiduciary safe harbor regulation described above (i.e., an IRA). To qualify for this relief, the plan fiduciary or QTA must comply with the guidance in FAB 2021-01 and have acted in accordance with a good faith, reasonable interpretation of ERISA. The DOL also indicated the fee charged by the PBGC for certain accounts transferred to the Program could be paid for from the transferred account, as long as the plan’s terms do not prohibit such payment.
The DOL noted, however, that the temporary enforcement policy does not preclude the DOL from pursuing ERISA violations for a failure to diligently search for participants and beneficiaries prior to transferring their accounts to the PBGC or for a failure to maintain plan and employer records. Additionally, the temporary enforcement policy does not legally protect plan fiduciaries or QTAs from civil claims made by plan participants or their beneficiaries. Nonetheless, the DOL’s announcement is welcome news for fiduciaries and QTAs who opt to take advantage of the Program. A copy of FAB 2021-01 is available here.
The recent DOL guidance provides a lot of information for plan sponsors and fiduciaries to consider. Please contact your Seyfarth Employee Benefits Attorney with any questions you may have about this guidance and its application to your plan.
Kelly Joan Pointer, Benjamin F. Spater and Kaley M. Ventura
§ 1.27 How to Sign Your Life Away… Electronically
Seyfarth Synopsis: Electronic signatures may be the wave of the future for the IRS, and are more necessary now as a result of the remote work environment. The IRS issued some recent guidance, allowing two authorization forms (Forms 2848 and 8821) to be signed electronically. While this guidance is a welcome step in the direction of electronic signature acceptance, the guidance is very limited, and its use may not be as practical as we would have hoped. Many IRS filings related to benefit plans, e.g., determination letter filings and Voluntary Compliance Program filings, require signatures on forms not covered by the guidance. Thus, benefit plan sponsor and administrators will need more comprehensive relief from the IRS before being able to use electronic signatures broadly for common IRS filings for benefit plans.
In the remote working environment of the COVID-19 pandemic, coordinating “wet” ink signatures on IRS forms has presented challenges for clients and their tax professionals alike. In the benefit plan space, the Form 2848, Power of Attorney and Declaration of Representative, is required to authorize the IRS to discuss matters such as a determination letter application or Voluntary Compliance Program submission with the plan sponsor’s representative, including their outside legal counsel. The Form 2848 must be signed by both the plan sponsor and its outside representative – a feat that has become harder to coordinate as many of us continue to work remotely from home, and some have questioned whether the IRS would accept an electronic signature on this Form.
New guidance provides clarity on the circumstances in which the IRS will accept electronic signatures on a Form 2848. In News Release IR-2021-20, the IRS announced an online tool for submitting the authorization forms without a handwritten signature. The IRS guidance notes that using the online tool with a Secure Access account is the only method to submit electronic signatures on the Form 2848; a Form 2848 that is mailed or faxed to the IRS still requires “wet” signatures.
That said, plan sponsors, plan administrators, and their representatives will still need to coordinate handwritten signatures on other documents for matters before the IRS. For example, the Form 5300, Application for Determination for Employee Benefit Plan, in the case of a determination letter application, and the penalty of perjury statement, in the case of a VCP, are not covered by the new guidance and still appear to require handwritten signatures.
Additionally, use of the online tool presents its own challenges for plan sponsors and their attorneys alike. To take advantage of the tool, the plan sponsor’s attorney must first create a Secure Access account and provide the IRS with certain personal information (such as the attorney’s individual tax filing status and a financial account number linked to their name). Similarly, the attorney may be required by the IRS to verify personal identification (for example, by requesting a driver’s license) of the individual signing for the plan sponsor before submitting the Form 2848.
Observation: The Secure Access account can be used by individual taxpayers for their own personal income tax purposes, which would explain the requirements to provide a tax filing status and financial account information. These requirements make less sense when the Secure Access account is being used by an attorney to upload forms for a client.
Irine Sorser and Christina Cerasale
§ 1.28 Extended Loan Rollover Timeline: More Flexibility for Participants and More Complexity for Plan Administrators
Seyfarth Synopsis: The IRS released final regulations, under T.D. 9937, that generally adopt the proposed rules relating to qualified plan loan offsets issued last year, with one modification relating to the applicability date. Plan administrators should be prepared to evaluate whether their systems can properly track qualified plan loan offsets, which must now be specifically identified in any Form 1099-R that is distributed to an employee.
Background
Many defined contribution plans require an outstanding loan balance to be immediately repaid by a participant in certain events, such as termination of the plan, a request for a distribution, or a participant’s termination of employment. A failure to timely repay the balance results in a loan default. Once in default following one of these events, a participant’s account balance is offset (or reduced) by the amount of his or her outstanding loan balance in satisfaction of that remaining loan balance. This offset amount is treated as an actual distribution from the plan — rather than a “deemed distribution” — and is subject to traditional distribution taxation rules.
Participants can avoid these taxation rules by rolling over the offset amount to an eligible retirement plan, which includes another employer-sponsored defined contribution plan or an IRA, when permissible. Historically, the standard 60-day rollover period applied to a plan loan offset. However, effective January 1, 2018, the tax code was amended by the Tax Cuts and Jobs Act of 2017 to provide an extended rollover period for a type of plan loan offset called a “qualified plan loan offset” or “QPLO.” A QPLO is a plan loan offset that occurs under a defined contribution plan solely due to either:
Termination of a qualified defined contribution plan, or
Termination of employment, coupled with an offset that occurs within 12 months after the employee’s termination date.
Under the extended rollover period, a participant may rollover all or a portion of the QPLO any time up until the participant’s federal income tax filing due date, including extensions, for the year that the QPLO was distributed. A plan loan offset amount that is not a QPLO, but is an otherwise eligible rollover distribution, may still be rolled over by a participant or surviving spouse; however, the standard 60-day rollover period applies.
For example, assume a participant terminates employment with an outstanding loan balance of $10,000, and a 401(k) account balance of $50,000. If the participant elects to take a distribution of her account balance immediately following her termination date, she would receive a cash payment of her net account balance, or $40,000, which is her account balance, reduced by the outstanding loan balance. Although the plan issued a check for only $40,000, the plan will report an actual distribution of $50,000 on the participant’s Form 1099-R. In order to avoid having to pay taxes and potential early withdrawal penalties, the participant may roll over the $40,000 amount within 60 days of its distribution under the general rollover rules. Additionally, in order to avoid taxation of and potential penalties on the $10,000 qualified plan loan offset, the participant would be responsible for funding and rolling over that additional $10,000 amount before her tax filing due date, with extensions, for the year of the distribution.
The IRS issued proposed regulations in August 2020 that addressed the extended rollover period associated with QPLOs and solicited comments.
The Final Regulations
The final regulations mostly mirror the proposed, with a key modification related to their applicability date. Specifically, the final regulations apply to distributions made on or after January 1, 2021. The IRS indicated that this revision gives plan sponsors time to review plan administration and update their systems to track plan loan offsets, termination dates, and the participant’s one-year anniversary date of termination. This is especially important because QPLO distributions must be separately identified on the Form 1099-R beginning with the 2021 tax year (i.e., Forms 1099-R filed in January 2022).
For reporting purposes, Forms 1099-R are required to distinguish between the QPLOs and other plan loan offsets. A plan loan offset other than a QPLO is reported on Box 7 of Form 1099-R as an actual distribution, rather than a deemed distribution. If the plan loan offset is a QPLO, however, then Box 7 is marked with Code “M.”
Considerations for Plan Administrators
Communicate the appropriate rollover deadline to participants depending on the type of offset (i.e., a standard plan loan offset subject to the 60-day rollover requirement versus a QPLO subject to the extended rollover deadline).
Confirm whether current administration can identify a standard plan loan offset versus a QPLO to ensure that Box 7 of the Form 1099-R is appropriately coded.
Update plan loan procedures and other materials, summary plan descriptions, and relevant plan documentation as may be necessary.
You can read the full regulations here, which were published in the Federal Register on January 6, 2021.
Jon Karelitz and Lauren Salas
§ 1.29 Waistbands Aren’t the Only Thing Requiring Flexibility During the Pandemic
The Consolidated Appropriations Act of 2021 (“CAA”) offers significant relief for employers sponsoring flexible spending accounts. After much clamoring from the employer community, the IRS finally issued clarifying guidance in the form of Notice 2021-15 (the “Notice”). Check out our full Legal Update for details.
Benjamin J. Conley, Jennifer Kraft, Joy Sellstrom and Diane Dygert
§ 1.30 One-Year Expiration of Outbreak Period: Pandemic Rages On, But It’s (Probably) Time to Pay Your COBRA Premiums
Seyfarth Synopsis: As you’ll recall, last Spring, the DOL and IRS issued guidelines providing relief from certain deadlines for employee benefit plans, retroactive to March 1, 2020 (i.e., the beginning of the COVID-19 national emergency declared by the President). The relief was issued pursuant to authority granted to the agencies under ERISA Section 518 and Code Section 7508(A) and extended through the end of the “Outbreak Period.” Click here, here and here to review our prior articles on the Outbreak Period. We wanted to provide a quick update on what we’re hearing out of Washington D.C. relating to the timing and process for the expiration of the “Outbreak Period.”
In general, the extended deadline relief applied to the following deadlines applicable to participants and plan administrators:
The COBRA election deadline;
The COBRA premium payment deadline;
The HIPAA special enrollment deadline;
The deadline for filing a claim or appeal for benefits or a request for an external review of an adverse benefits determination; and
The deadline for plan administrators to provide the COBRA election notice.
Under the guidance, any such deadline occurring on or after March 1, 2020, would be tolled for the entirety of the national emergency, plus 60 days (the “Outbreak Period”). That said, when the guidance was published it was widely believed that the national emergency period would be lifted at some point in 2020. In fact, the authority granted to the DOL and IRS under ERISA Section 518 and Code Section 7508(A) only allows such relief to extend for a one-year period.
Given this framework, our understanding is that the relief afforded under these rules will expire effective February 28, 2021 – and this expiration would be a “hard stop,” meaning there will not be a 60 day “wind down” period as anticipated in the original guidance. (But keep in mind that the deadlines were simply tolled during this period, so any remaining time a participant or plan administrator had to complete the action when the suspension took effect on March 1, 2020, will still be available after February 28, 2021.)
We reached out to various Washington D.C. policy groups to get insight into whether the agencies agree with this interpretation, and whether and to what extent they believe they have the authority to further extend the Outbreak Period, absent Congressional action granting them such authority. Here are a few key takeaways from that discussion:
Both agencies are aware of the issue and are considering whether to issue clarifying guidance.
The DOL seems more open to seeking avenues to further extend the Outbreak Period. The ideas they are contemplating include treating this as an “evergreen period,” with a new one year period commencing after the conclusion of the prior one year period, or perhaps even applying the one-year window on an individual-by-individual basis (which would be an administrative mess).
The IRS is less keen on issuing any sort of extension. They are sensitive to the fact that the IRS more broadly relies on the authority under Code Section 7508(A) to extend a number of other non-benefits-related deadlines. So, they are concerned about the precedent this might set if they extend further in this context.
Regardless of the above, both agencies seemed to tacitly confirm that, absent any further action, February 28, 2021 will be the end date for the deadline relief.
Looming in the background of all of this is the proposed COVID relief bill which would include a prospective COBRA subsidy of 85% of the cost of coverage, including the right for persons to elect COBRA prospectively to run for the remainder of their COBRA window, even if the election period has expired. So, seemingly the urgent need for an extension of the Outbreak Period is lessened (assuming the COBRA subsidy makes it into the final bill).
Given the balance of likelihoods, employers should consider communicating this upcoming expiration of the Outbreak Period (e.g., through a Summary of Material Modification or other participant communication), at the very least to COBRA participants but potentially to the broader population given the implications for HIPAA special enrollments and claim filing deadlines. (That is, unless the employer had previously communicated a February 28, 2021 end date.) It will also be important to coordinate with COBRA and claims administration vendors to ensure there is alignment/uniformity in approach.
In any case, we’re monitoring and will keep you posted on developments.
Benjamin J. Conley and Kaley Ventura
§ 1.31 Waistbands Aren’t the Only Thing Requiring Flexibility During the Pandemic: IRS Clarifies Guidance on Latest FSA Provisions and Offers Additional Relief
Seyfarth Synopsis: The Consolidated Appropriations Act of 2021 (“CAA”) offers significant relief for employers sponsoring flexible spending accounts (for a more detailed description of those changes, check out our alert). After much clamoring from the employer community, the IRS finally issued clarifying guidance in the form of Notice 2021-15 (the “Notice”). Notably, the guidance included new, additional relief that extends certain flexibility from earlier notices (Notices 2020-29 and 2020-33) into the 2021 calendar year.
Clarifying Guidance
Full Carryover/Grace Period Permitted for HCFSA or DCFSA for 2020 and 2021 Plan Years
Typically, carryovers of unused balances were not permitted for dependent care FSAs (DCFSAs) at all, and health care FSA (HCFSA) carryovers were limited to $550 (as adjusted for inflation in accordance with IRS Notice 2020-33). Employers sponsoring an HCFSA or DCFSA could implement a grace period, not to exceed 2.5 months after the close of the plan year, during which participants could continue to incur expenses to spend down their remaining FSA balances.
The CAA permits a full carryover of any unused balance under either an HCFSA or DCFSA for plan years ending in 2020 and 2021. In the alternative, it allows employers to offer a grace period of up to 12 months following the close of the 2020 and/or 2021 plan years.
The Notice includes the following clarifications to these provisions:
The carryover or grace period can apply to an HCFSA, a DCFSA or a limited purpose HCFSA (i.e., an HSA-compatible FSA that can be used for dental or vision expenses and/or post-deductible medical expenses).
The provision does not permit cross-pollination of HCFSA and DCFSA balances. Remaining health care dollars can only be use for the next year’s HCFSA and remaining dependent care dollars can only be used for the next year’s DCFSA.
The carryover option is available for plans that already had a carryover, plans that previously had a grace period, and plans that had neither a grace period nor a carryover. The same flexibility applies for implementing a grace period.
If a plan had an extended grace period for the 2019 plan year (pursuant to the relief provided in IRS Notice 2020-29), then any amounts remaining as of the end of that grace period as of December 31, 2020 (or, such earlier date within the 2020 calendar year, as elected) would be eligible for carryover into 2021. On the other hand, 2019 balances remaining solely because of the DOL’s pandemic relief extending claims deadlines during the “Outbreak Period” would not be eligible for carryover.
As is normally the case for carryovers, an employer may require that employees make a minimum deferral election to access prior year funds available for carryover. To the extent the employer requires such a minimum, if an employee initially declined to enroll but later elects to enroll (either due to a mid-year election change event or because the employer has offered election change flexibility), the employer may permit the employee to access such carryover amounts and use those amounts for expenses incurred between January 1, 2021 and the date of the employee’s mid-year election to participate.
Employers can limit the carryover or grace period to an amount less than the full balance, and may limit the carryover or grace period to a window less than the full plan year.
For participants who may be switching from a non-HDHP with a general purpose HCFSA to an HDHP, the carryover or grace period would generally impact HSA eligibility. To mitigate this impact, employers may either:
allow participants to opt-out of the carryover or grace period;
allow participants to elect to convert the carryover or grace period balance to a limited purpose HCFSA; or
automatically convert the carryover or grace period balance to a limited purpose HCFSA.
This is notable in that existing IRS guidance did not seem to allow for such a participant-by-participant grace period opt-out/conversion feature (it was only expressly allowed for carryovers).
Amounts available during the extended grace period or carryover are disregarded for nondiscrimination testing.
Employers can adopt a carryover for the HCFSA and a grace period for the DCFSA (or vice versa).
Any amounts carried over under the CAA (pursuant to a carryover or grace period) are disregarded for purposes of DCFSA W-2 reporting.
While balances available at the end of a grace period are typically forfeited, the Notice clarifies that the forfeiture requirement does not apply here because the full-year grace period would extend through the next plan year rather than ending at the end of the plan year. As such, if a plan adopts a grace period (rather than a carryover), 2020 balances can be available through the 2021 and 2022 plan years.
This means the main practical difference between adopting a grace period or a carryover under the CAA relief is the availability of a spend down beyond the year of termination for a terminated employee. As described in the next section, this continued participation is only available under a plan with a grace period, not a carryover. Given this subtle difference, the IRS would require that an employer specify whether it has adopted a grace period or a carryover in its plan amendment.
Continuation of Participation in HCFSA by Terminated Participants
Typically, employers could permit former DCFSA participants to continue to spend down balances on post-termination qualifying expenses for the remainder of the year, but HCFSA participants could only continue participation post-termination if they were eligible for and elected COBRA.
The CAA permits employers to allow former HCFSA participants who terminate during 2020 or 2021 to continue participating post-termination, through the end of the plan year in which they terminated (plus any grace period).
The Notice includes the following clarifications to this provision:
Employers may limit the length of the post-termination participation period, if desired.
Employers may limit the post-termination balance to the participant’s year-to-date contributions at the time of termination (rather than the full year election amount, as would typically be required under the uniform availability rules that apply to HCFSAs).
This provision may only extend coverage beyond the end of the plan year in which the termination occurred if the plan has a grace period. It is not available for carryover balances into the plan year following termination.
Notably, this provision does not eliminate the requirement to send a COBRA notice where applicable.
Special Relief under DCFSA For Aged-Out Dependents
Typically, DCFSAs can reimburse expenses incurred for qualifying child care for children up to age 13.
The CAA allows plans to temporarily raise the eligible age limit to 14, but only for amounts contributed during the plan year with an enrollment period ending on or before January 31, 2020 (for calendar year plans, the 2020 plan year).
The Notice includes the following clarifications to this provision:
Employees can seek reimbursement for expenses incurred in the 2020 or in the 2021 plan year for aged out dependents (those between 13 and 14), if the employer adopts a carryover or grace period provision carrying forward unused 2020 DCFSA election amounts.
Relaxed Election Change Guidelines for FSAs
Typically, FSA elections are irrevocable during the plan year, unless the employee experiences a mid-year status change event and timely notifies the plan administrator of the event.
The CAA permits employers to allow mid-year election changes for FSAs without regard to whether such employee incurred a qualifying life event, for plan years ending in 2021.
The Notice includes the following clarifications to this provision:
The CAA permits employers to allow an employee who previously declined to enroll in the HCFSA or DCFSA to make a new election to enroll. (Some had speculated this provision only allowed election changes for persons who had an existing election in place.)
Employers may limit the time period for making such an election (e.g., an employer could establish a two week window in March to permit election changes).
If an employee revokes an election mid-year, the employer can decide whether to continue to allow the employee to spend down accumulated amounts on future expenses or to limit the employee to reimbursement of expenses incurred prior to the revocation.
While FSA election changes may only be prospective, the IRS would permit employers to allow employees to use such prospectively elected FSA deferrals for expenses incurred after January 1, 2021, but before the date of such election change.
If an employer elects to limit reimbursements from a general purpose HCFSA following revocation to expenses incurred prior to revocation, then the employee will not be treated as being enrolled in disqualifying coverage for HSA purposes starting with the month following such revocation.
New Guidance
Extension of Relaxed Election Change Rules to non-FSA Elections
While the CAA only relaxes election change guidelines for FSAs, the Notice extends such relief to all Section 125 elections, subject to similar parameters as outlined in IRS Notice 2020-29 (more on those limits, here).
The Notice provides employers with flexibility in choosing to implement (and/or limiting implementation of) this CAA provision and lists various types of “guardrails” an employer might put in place, including limiting elections to increases/enrollment, limiting the timeframe for elections, and limiting the number of election changes an employee could make during the plan year.
Amendment Relief for Pre-tax OTC/Menstrual Product Reimbursements
As described in greater detail here, the CARES Act permits plans to expand reimbursement under certain pre-tax vehicles (HCFSAs, HSA, MSAs, HRAs) to include over-the-counter drugs and menstrual products. The provision was effective retroactive to January 1, 2020, but unlike with other laws impacting Section 125 plans, the CARES Act included no relief from the general rule that amendments may only be made prospectively.
The Notice solves this dilemma by permitting employers to amend their Section 125 plan to expand permitted reimbursements at any time, with a retroactive effect to January 1, 2020.
We will continue to monitor and alert you of any new or additional regulatory developments clarifying provisions of the CAA. In the interim, please contact the authors of this Alert or the benefits lawyer you work with for additional information.
Benjamin J. Conley, Jennifer Kraft, Joy Sellstrom, and Diane Dygert
§ 1.32 DOL Issues Clarification of Outbreak Period — Sort of
At the 11th hour, on February 26, 2021, the Department of Labor (DOL) issued EBSA Disaster Relief Notice 2021-01 (the “Notice”) to provide guidance on the duration of the COVID-related relief previously provided by the DOL in Notice 2020-01 and by the DOL and IRS in a separate joint notice (the 2020 Notices). Under the 2020 Notices, various timeframes under ERISA and the Internal Revenue Code were to be disregarded, including for purposes of filing claims for benefits, electing and paying for COBRA continuation coverage, and requesting special enrollments. See our previous alert here.
The relief provided in the 2020 Notices began March 1, 2020 and continued until 60 days after the announced end of the COVID National Emergency or such other date announced by the relevant agencies (the “Outbreak Period”). However, by statute, the disregarded period for individual actions was limited to one year from the date the individual action would otherwise have been required or permitted. One year from March 1, 2020 is February 28, 2021. Employers, vendors and other stakeholders have been unclear as to how to apply the limit as the February 28th date approached, as we commented on in our recent blog post here.
End of Suspension Period
Notice 2021-01 states that the timeframes that are subject to the relief under the 2020 Notices will have the applicable periods disregarded until the earlier of:
One year from the date the individual or plan was first eligible for relief; or
60 days after the announced end of the COVID National Emergency.*
In other words, the relief will be applied on an individual-by-individual basis, which is likely to present a host of administrative difficulties for employers. An example in the 2020 Notices provides that if a qualified beneficiary would have been required to make a COBRA election by March 1, 2021, the election requirement is delayed until the earlier of one year from that date (i.e., March 1, 2022) or the end of the Outbreak Period.
Individual Accommodation and Notice
In addition to providing that the relief is to be applied on an individual-by-individual basis, the Notice implies that after the relief is no longer available due to the statutory one-year limit, plan administrators should individually notify participants of the end of a relief period and ensure that participants who are losing coverage under an employer-provided plan are aware of other coverage options such as the Health Insurance Marketplace. The Notice states that the guiding principle for administering employee benefit plans is to act reasonably, prudently, and in the interest of the workers and families who rely on their health, retirement and other employee benefit plans for their physical and economic well-being. Accordingly, plan fiduciaries should make reasonable accommodations to prevent the loss or undue delay in payment of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established time frames.
“For example, where a plan administrator or plan fiduciary knows, or should reasonably know, that the end of the relief period for an individual action is exposing a participant or beneficiary to a risk of losing protections, benefits, or rights under the plan, the administrator or fiduciary should consider affirmatively sending a notice regarding the end of the relief period. Moreover, plan disclosures issued prior to or during the pandemic may need to be re-issued or amended if such disclosures failed to provide accurate information regarding the time in which participants of beneficiaries were required to take action….”
Given the DOL’s statements, plan administrators should consider communicating the relief provided by this Notice to participants and beneficiaries. In addition, employers should ensure that their vendors will apply the time frames on an individual-by-individual basis.
Please contact the attorney at Seyfarth Shaw LLP with whom you usually work if you would like assistance in applying the relief or preparing a Summary of Material Modification (SMM) or other communication.
*President Biden announced in a letter to Congress on February 24, 2021 that the national emergency declared in Proclamation 9994 will continue in effect beyond March 1, 2021.
Joy Sellstrom, Danita N. Merlau, Kaley M. Ventura and Diane V. Dygert
§ 1.33 Parliamentarian to Decide Fate of Multiemployer Pension Reform in the COVID Relief Act
Seyfarth Synopsis: If the Senate Parliamentarian blesses it, the $1.9 trillion American Rescue Plan (a.k.a. the latest COVID-19 relief bill) may include multiemployer pension relief that would provide underfunded multiemployer pension plans with sufficient monies from the Treasury Department to pay for all accrued benefits owed to retirees, without reduction, through the plan year ending in 2051. Notably, any multiemployer pensions plans eligible for this relief would not have to repay those monies.
Embedded in the $1.9 trillion “American Rescue Plan” is yet another attempt at multiemployer pension plan reform, entitled the “Butch Lewis Emergency Pension Plan Relief Act of 2021” (“Butch Lewis”). The Senate Parliamentarian is to decide whether Butch Lewis has the necessary budget impact to remain part of what is to be a budget reconciliation bill that will need only majority approval in the Senate. That decision should come very soon.
Butch Lewis is a continuation of various prior legislative efforts aimed at addressing the multiemployer pension plan crisis, including earlier versions of the Butch Lewis Act of 2019, the Emergency Pension Plan Relief Act of 2020, and other pending pension reform legislation. Gone are attempts to share any economic pain among the stakeholders, or to provide any mechanism for the repayment of financial assistance given to underfunded multiemployer pension plans. Instead, if it remains in the American Rescue Plan, Butch Lewis as drafted will make any underfunded multiemployer plan eligible for “special financial assistance” that is not subject to any financial repayment obligations, provided it meets one of the following criteria:
The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
The multiemployer pension plan suspended benefits in accordance with the process set forth in the Multiemployer Pension Reform Act of 2014 (“MPRA”);
The multiemployer pension plan is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022, has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and the denominator of which is current liabilities) of less than 40%, and has a ratio of active to inactive participants which is less than 2 to 3; or
The multiemployer pension plan became “insolvent” after December 16, 2014, as defined under Internal Revenue Code Section 418E, and has remained so insolvent and has not been terminated as of the date of enactment of Butch Lewis.
Multiemployer pension plans seeking special financial assistance must apply no later than December 31, 2025, with revised applications submitted no later than December 31, 2026. Butch Lewis allows the PBGC to limit applications during the first 2 years following enactment to certain plans, such as those that are insolvent or are likely to be insolvent within 5 years.
The amount of financial assistance provided to eligible multiemployer pension plans is equal to the amount required to pay all accrued benefits, without reduction, due from the date of payment of the special financial assistance through the last day of the plan year ending in 2051. In short, eligible multiemployer pension plans should have sufficient funds to pay benefits for the next 30 years, provided investment performance over that period is line with projected investment returns and other actuarial assumptions.
Butch Lewis does have provisions to attempt to limit plans from mismanaging the monies they receive. The special financial assistance and any earnings on such assistance must be segregated from other plan assets, and can only be invested in investment-grade bonds or other investments as permitted by the PBGC. The PBGC also is authorized to impose by regulation conditions on plans receiving special financial assistance relating to increases in future accrual rates and any retroactive benefit improvements; allocation of plan assets; reductions in employer contribution rates; diversion of contributions to, and allocation of expenses to, other benefit plans; and withdrawal liability.
Any multiemployer pension plan that receives special financial assistance shall be deemed to be in critical status until the last plan year ending in 2051, and it also must reinstate any previously suspended benefits under the MPRA, and provide payments equal to the amount of benefits previously suspended (either as a lump sum or in equal monthly installments). Multiemployer pension plan accepting special financial assistance under Butch Lewis will not be eligible to apply for a new suspension of benefits under the MPRA.
The funds used to pay for the special financial assistance would come directly from the Treasury Department. The payment to the multiemployer pension plan would be a single, lump-sum payment. There is currently no provision for a tax on participating employers, or any reduction in participating employee benefits. The proposed law does provide, however, for an increase in premium rates for multiemployer plans from the currently indexed annual per participant rate (which is $31 per participant for plan years beginning in 2021) to $52 per participant for plan years beginning after December 31, 2030, with indexing for inflation tied to the Social Security Act’s national wage index.
Any participating employer that withdraws within 15 calendar years from the effective date of when a plan receives special financial assistance will not see any reduction in its withdrawal liability assessment due to the special financial assistance. Withdrawal liability will be calculated without taking into account special financial assistance received until the plan year beginning 15 calendar years after the effective date of the special financial assistance. As currently drafted, Butch Lewis would not otherwise change how withdrawal liability is calculated, including application of the withdrawal liability payment schedule, the 20-year cap on payments, or the mass withdrawal liability rules.
In short, Butch Lewis as currently drafted basically would result in the federal government picking up the tab for certain seriously underfunded multiemployer pension plans for the next 30 years, without imposing any costs directly on such plans or their participating employers, unions, participants or retirees. As such, it could be a huge relief for such underfunded plans and their participating employers and participants if Butch Lewis is passed. Stay tuned.
Ronald Kramer, Seong Kim, and James Hlawek
§ 1.34 Pension and Executive Compensation Provisions in the American Rescue Plan Act
Seyfarth Synopsis: On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), the $1.9 trillion COVID-19 relief bill. ARPA includes various forms of multiemployer and single employer pension plan relief, as well as certain executive compensation changes under Section 162(m) of the Internal Revenue Code (“Code”), which are discussed further below. Please see our companion Client Alert on the other employee benefit items of interest in ARPA here.
Multiemployer Pension Plan Relief
ARPA retains the key provisions of the Butch Lewis Emergency Pension Relief Act of 2021 (the “Butch Lewis Act of 2021”), providing relief to financially troubled multiemployer pension plans. The Butch Lewis Act of 2021 was a continuation of multiple prior legislative efforts aimed at addressing the multiemployer pension plan crisis, including its earlier iterations (the Butch Lewis Act of 2017, the Butch Lewis Act of 2019), the Emergency Pension Plan Relief Act of 2020, the Chris Allen Multiemployer Pension Recapitalization and Reform Act, and other legislative proposals. Most notably, ARPA includes the provision of the Butch Lewis Act of 2021 for direct financial assistance without a repayment obligation. ARPA also gives multiemployer plans the opportunity to extend zone status, extend funding improvement and rehabilitation plans, and provides amortization relief .
Special Financial Assistance
ARPA creates a “special financial assistance fund” under the Treasury Department from which the Pension Benefit Guaranty Corporation (“PBGC”) will be able to make grants to financially troubled multiemployer pension plans. As noted above, any multiemployer pension plan receiving relief would not have to repay those funds. To be eligible for financial relief, a multiemployer pension plan would need to satisfy one of the following criteria:
The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
The multiemployer pension plan suspended benefits in accordance with the process set forth in the Multiemployer Pension Reform Act of 2014 (“MPRA”);
The multiemployer pension plan is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022, has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and the denominator of which is current liabilities) of less than 40%, and has a ratio of active to inactive participants which is less than 2 to 3; or
The multiemployer pension plan became “insolvent” after December 16, 2014, as defined under Code Section 418E, and has remained so insolvent and has not been terminated as of the date of enactment of ARPA.
Under this program, multiemployer pension plans seeking special financial assistance must apply no later than December 31, 2025, with revised applications submitted no later than December 31, 2026. ARPA also allows the PBGC to limit applications during the first two years following enactment to certain plans, such as those that are insolvent or are likely to be insolvent within five years.
The amount of financial assistance provided to eligible multiemployer pension plans is equal to the amount required to pay all benefits, without reduction, due from the date of payment of the special financial assistance through the last day of the plan year ending in 2051. The payment to the multiemployer pension plan would be a single, lump-sum payment. Interestingly, there is no noted cap on the amount of financial assistance available per plan or the order which the PBGC will prioritize applications for financial assistance. The PBGC is expected to issue further guidance shortly.
ARPA places certain restrictions on plans receiving special financial assistance. The money received (and earnings on such amounts) must be segregated from other plan assets, and may only be invested in investment-grade bonds or other investments as permitted by the PBGC. The PBGC is authorized to impose additional conditions on plans receiving special financial assistance. These restrictions relate to (1) increases in future accrual rates and any retroactive benefit improvements; (2) allocation of plan assets; (3) reductions in employer contribution rates; (4) diversion of contributions to, and allocation of expenses to, other benefit plans; and (5) withdrawal liability.
Any multiemployer pension plan that receives special financial assistance will be deemed to be in critical status until the last plan year ending in 2051, and must also reinstate any previously suspended benefits under the MPRA (either as a lump sum or in equal monthly installments paid over five years). Multiemployer pension plans accepting special financial assistance will not be eligible to apply for a new suspension of benefits under the MPRA.
ARPA also provides for an increase in PBGC premium rates for multiemployer plans from the currently indexed annual per participant rate (which is $31 per participant for plan years beginning in 2021) to $52 per participant for plan years beginning after December 31, 2030, with indexing for inflation tied to the Social Security Act’s national wage index.
Earlier versions of the Butch Lewis Act of 2021 included provisions stating that any participating employer that withdraws within 15 calendar years from the effective date of when a plan receives special financial assistance would not see any reduction in its withdrawal liability assessment due to the special financial assistance. The relief bill as passed, however, no longer appears to include this carve out for withdrawal liability. As passed, ARPA would not otherwise change how withdrawal liability is calculated, including application of the withdrawal liability payment schedule, the 20-year cap on payments, or the mass withdrawal liability rules. As noted above, however, ARPA gives the PBGC authority to impose additional conditions with respect to withdrawal liability.
Temporary Funding Status Relief.
Under ARPA, eligible multiemployer pension plans may elect to retain for plan year 2020 or 2021 (known as the “designated plan year”) the zone status that applied for the previous year. In addition, any multiemployer plans that were in endangered or critical status in the year prior to their designated plan year would not be required to update their funding improvement plan, rehabilitation plan, or corresponding schedules, until the year following the designated year.
If a multiemployer plan is not considered to be in endangered or critical status as a result of an election, no further notification is required regarding its endangered or critical status, but such plan must provide notice to its participants, beneficiaries, the PBGC, and the DOL of its election under ARPA.
Funding Improvement Plan and Rehabilitation Plan Relief.
ARPA allows multiemployer pension plans that are already in endangered or critical status to extend any applicable funding improvement plan or rehabilitation plan for five years. This relief applies to plan years beginning on or after December 31, 2019.
Amortization Relief.
Similar to relief provided in 2008 and 2009, ARPA allows multiemployer pension plans to amortize investment losses for plan years ending on or after February 29, 2020 over a 30-year period (instead of 15 or less). In addition to investment losses, the extended amortization period also applies to “other losses” related to COVID-19, including experience losses related to reductions in contributions, reductions in employment, and deviations from anticipated retirement rates.
Single Employer Pension Plan Relief
ARPA has two sections that grant some funding relief to single-employer defined benefit pension plans. First, ARPA extends the amortization period for certain funding shortfalls under the minimum funding requirements and resets certain prior shortfall amounts to zero. Single-employer pension plans are subject to minimum funding requirements under the Code and ERISA. One of the items included in the required minimum funding calculation is a shortfall amortization charge, which allows plans to spread the charge for funding shortfalls over a certain number of years. Before ARPA’s adoption, the amortization period used to determine this charge was generally 7 years. ARPA has extended this period to 15 years. ARPA also sets all prior shortfall amounts to zero for plan years beginning after December 31, 2021 (or an earlier year as elected by the plan sponsor), so any shortfall amount will be recalculated and spread over a longer time period.
Additionally, ARPA extends the funding stabilization changes that were enacted by Congress over the past 10 years, beginning with the MAP-21 changes in 2012, that were scheduled to start phasing out in 2021. Under these funding stabilization rules, the interest rates used for determining the present value of plan liabilities are subject to maximum and minimum percentages and the difference between the maximum and minimum percentages gradually increases (i.e., phases out) over time. ARPA shrinks the difference between the two percentages and extends the period before the range begins to phase out, which further stabilizes the funding calculations. ARPA also creates a 5% floor for the 25-year average of the interest rate that is subject to the minimum and maximum percentages. If an increase to the otherwise effective interest rate occurs due to the floor, this would decrease the present value of plan liabilities. These changes are effective for plan years beginning after December 31, 2019, but a plan sponsor may elect to wait to apply the changes for all purposes, or just for purposes of determining the application of the benefit restrictions under Code Section 436 until the 2021 or 2022 plan year.
162(m) Changes
The earlier version of the bill that passed the House contained a section freezing the cost of living adjustments for Code Section 415 and 401(a)(17) (i.e., the limits on “Annual Additions” and annual “Compensation” that may be considered under a qualified retirement plan) for calendar years beginning after 2030. However, this section was removed from the bill in the Senate and replaced with an expansion of the $1 million deduction limitation on compensation under Code Section 162(m), described further below.
Code Section 162(m) prohibits publicly held corporations from deducting wages or other compensation in excess of $1 million paid annually to certain covered employees. Currently, the limitation applies to anyone who has served as CEO, CFO or one of the next three highest compensated officers during any tax year beginning after December 31, 2016. ARPA expands the application of the $1 million deductibility cap to include the next five highest compensated employees, in addition to the CEO, CFO and the three other highest compensated officers. Unlike other covered employees, ARPA does not require that these additional five employees be permanently treated as covered employees; rather, this group of five additional covered employees would be re-determined based on compensation levels each year. This change will take effect for tax years beginning after December 31, 2026.
Seong Kim, Christina M. Cerasale, Kaley M. Ventura and Alan B. Cabral
§ 1.35 Freedom Ain’t Free. COBRA, On the Other Hand… American Rescue Plan Act Provides 100% COBRA Subsidy
Seyfarth Synopsis: The latest COVID relief bill, the American Rescue Plan Act (ARPA), provides for a 100% COBRA premium subsidy from April 1, 2021 through September 30, 2021. ARPA, which was signed into law by President Biden on March 11, 2021, also significantly expands a tax break for dependent care expenses. This Alert provides an overview of these key welfare benefit provisions and how they may impact plan sponsors. Please see our companion Client Alert on the other employee benefit items of interest in ARPA here.
COBRA Subsidy
Most notably, ARPA offers a 100% subsidy to COBRA qualifying beneficiaries for the period commencing April 1, 2021 continuing through September 30, 2021 (the “Subsidy Period”). The subsidy is available to those who become COBRA eligible during the Subsidy Period as well as those currently enrolled and those who are within their COBRA continuation window but who failed to elect or previously dropped coverage.
The COBRA subsidy in many ways mirrors the subsidy offered during the American Recovery and Reinvestment Act of 2009 (ARRA), so while ARPA is light on details, we can look to IRS/DOL guidance under ARRA for clues as to how the agencies may implement these provisions. Key highlights from the bill include the following:
Who is Eligible? The COBRA subsidy is available to any person who experienced a qualifying event due to termination of employment or reduction in hours (other than a voluntary separation), who is still within their COBRA continuation window (generally 18 months following loss of coverage), even if that person did not timely elect COBRA. In certain circumstances eligibility can end before the conclusion of the Subsidy Period, as noted below.
Calculating the Subsidy. During the Subsidy Period, qualifying individuals are treated as having paid the full amount of COBRA premiums owed (typically, 102% of the cost of coverage.
Extended Election Period. ARPA gives a qualified beneficiary who (a) is eligible for COBRA but did not elect COBRA as of April 1, 2021, or (b) elected and discontinued COBRA coverage before April 1, 2021 another chance to elect COBRA during the period beginning April l, 2021 and ending 60 days after notice of the extended election period is received.
Employer Notice Obligations.
General Notice. With respect to any person who becomes entitled to elect COBRA during the Subsidy Period, employers must include information in the COBRA election notice regarding the availability of the premium subsidy and (if applicable) the option to enroll in different coverage.
Notice of Extended Election Period. With respect to the individuals described above who are entitled to an extended election period, by May 31, 2021, employers must notify those persons of the new 60-day opportunity to elect COBRA prospectively for the Subsidy Period. ARPA directs the DOL to put out model notices within 30 days of enactment, but it notes that the obligation can be satisfied by modifying existing notices or adding an insert.
Notice of Expiration of Subsidy Period. ARPA also requires notice when premium assistance is expiring, with the notice to be sent no more than 45 days from expiration, and no less than 15 days from expiration. ARPA directs the DOL to issue a model notice within 45 days of passage of the Act.
New Open-ish Enrollment Window. ARPA allows plans to offer a 90 day “open enrollment” window in which a COBRA-covered (or eligible) individual could (a) enroll in coverage, or (b) switch to another employer benefit plan option other than the one in which the person is currently enrolled (or was enrolled in at the time of the qualifying event). This opportunity would be at the plan administrator’s discretion and must be limited to coverage that is the same cost or less expensive than the option in which the person was enrolled in as of the qualifying event date (and is not an excepted benefit, a qualified small employer health reimbursement arrangement (QSEHRA) or a health flexible spending account).
Early Loss of Eligibility. Any person who has become eligible for other group health coverage or Medicare will no longer be eligible. ARPA places an obligation on the participant to notify the plan administrator of such loss of eligibility and imposes penalties on the participant for failure to do so. (Under ARRA, if a person had an election window for other group coverage before the commencement of the subsidy period but that election window had lapsed, the individual would be considered subsidy eligible until the next enrollment window for the other coverage. We would expect the agencies to adopt similar guidelines here.)
Tax Credit for Employer/Carrier. Employers (for self-funded plans and fully-insured plans subject to federal COBRA), who cover subsidy-eligible persons are reimbursed for the foregone COBRA premium via an advanced tax credit equal to the value of the subsidy. While the tax credit is capped at the total payroll taxes owed by the employer (or insurer), it is a refundable tax credit with respect to any excess. Additional guidance is expected on how the credit is claimed in other scenarios (e.g., multiemployer plans).
No Tax on Participant. The COBRA subsidy is not treated as income for purposes of the plan participant.
Interaction with Outbreak Period. As described in our Alert, the DOL and IRS previously provided relief by suspending the time period for an individual to elect COBRA until 60 days after the end of the National Emergency, or if earlier, one year after the individual became eligible for the relief (the Outbreak Period). It is unclear how this relief will be coordinated with the new enrollment and notice rules in ARPA, and whether a single notice could be used to satisfy notice all COBRA-related notice obligations.
Expanded Dependent Care Exclusion for 2021
Current tax rules permit an exclusion from income for up to $5,000 (married filing jointly) or $2,500 (single or married filing separately) for employer-provided dependent care benefits or pre-tax salary deferrals through a Section 125/129 plan.
ARPA more than doubles this limit for the 2021 tax year, allowing an exclusion of up to $10,500 (married filing jointly) or $5,250 (single or married filing separately).
Employers may amend their Section 125/129 plan at any point before the end of the 2021 plan year to adopt this provision. Employers who choose to expand such tax deferral limits should be cognizant of the potential impact on nondiscrimination testing, which is notoriously challenging for certain employers to pass even at existing levels.
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We will continue to track the regulatory agencies’ implementation of these provisions and keep you apprised of any further developments.
Benjamin J. Conley and Joy Sellstrom
§ 1.36 Baby Steps: Departments Issue Third Set of COVID FAQs
Seyfarth Synopsis: On February 26, 2021, the Departments of Labor, Health and Human Services, and the Treasury (collectively, the Departments) jointly issued FAQS ABOUT FAMILIES FIRST CORONAVIRUS RESPONSE ACT AND CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT IMPLEMENTATION PART 44 regarding implementation of the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and other health coverage issues related to COVID-19. These FAQs continue building the knowledge bank from prior FAQs, such as the ones issued in June 2020 (here).
Are things beginning to settle after the storm? As plans get accustomed to our “new normal,” including covering COVID testing and vaccinations, the Departments further refine and clarify guidance on what precisely does (and does not) need to be covered, which helps employers in establishing a roadmap to make vaccines widely available to their employees inside the bounds of group health plan requirements.
COVID-19 Testing
Under the FFCRA and CARES Act, group health plans are required to cover diagnostic testing and related items and services without cost-sharing requirements[1] and providers of diagnostic tests for COVID-19 must publish the cash price of a COVID-19 diagnostic test on the provider’s public internet website. The FAQs address more specific fact patterns related to testing. For example, the FAQs explain that:
The Departments previously said a plan cannot limit the number of tests that it will cover for an individual. (See Q/A-6 of FAQ 43). This is true, per these latest FAQs, even if the individual is asymptomatic and has no recent exposure. No criteria or screening can be imposed on the coverage of tests. And as long as the test is issued by a licensed health care provider, the location of the test does not matter (e.g., drive-through tests are covered). (See Q/A-3).[2] In addition, point-of-care (i.e., rapid) tests must be covered on the same basis as other tests. (See Q/A-4).
The Departments previously distinguished testing for diagnostic purposes from testing for surveillance or employment purposes, stating that testing for diagnostic purposes (sought by the individual) has to be covered, but testing for general public surveillance or employment purposes (such as pursuant to a “return to work” program) does not. One way to distinguish is that a public surveillance or employment purpose is not primarily for individualized diagnosis and treatment. These latest FAQs clarify that plans and issuers can make that distinction, and encourage them to communicate the difference in circumstances where testing is (or is not) covered. (See Q/A-2.)
COVID-19 Vaccines
Most group health plans are required to cover preventive services without cost-sharing requirements. This now includes any “qualifying coronavirus preventive service”, which is an item, service, or immunization that is intended to prevent or mitigate COVID-19 and that is, with respect to the individual involved—
An evidence-based item or service that has in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force (USPSTF); or
A vaccine that has in effect a recommendation from the Advisory Committee on Immunization Practices (ACIP) of the Centers for Disease Control and Prevention (CDC).
Plans must provide coverage without cost-sharing for the cost and administration of all COVID-19 vaccines that receive a recommendation – starting no later than 15 business days after the date the USPSTF or ACIP makes the recommendation regarding a qualifying coronavirus preventive service. (See Q/A-7 & Q/A-8). As of the date of the FAQs, February 26, 2021, the ACIP had approved Pfizer BioNTech and Moderna COVID-19 vaccines. Subsequently, on February 28, 2021 the ACIP recommended the Johnson and Johnson COVID-19 vaccine. Even if a participant is not in a category of individuals prioritized for vaccination at the time he/she receives it, the plan must cover it. (See Q/A-10).
SBC Notice Requirements
Normally, if a plan makes a material modification in any of the terms of the plan or coverage that would affect the content of the Summary of Benefits and Coverage (SBC), the plan must provide notice of the modification to enrollees not later than 60 days prior to the date on which the modification becomes effective. Although the Departments will not take enforcement action against a plan that does not provide at least 60 days’ advance notice of a material modification regarding the addition of qualifying coronavirus preventive services, plans should notify participants about coverage of qualifying coronavirus preventive services as soon as reasonably practicable. (See Q/A-11).
Ways for Employers to Issue COVID Vaccines
Many employers have asked how they can sponsor programs to facilitate vaccination of their employees who are not enrolled in the employer’s major medical plan. The answer as of now appears to be offering the vaccine through an Employer Assistance Program (EAP) or through an onsite clinic.
Our December 2020 alert discussed employer sponsored vaccine programs (here) and the technical concern that such programs create a group health plan which then, in turn, is subject to the Affordable Care Act, COBRA, and other laws applicable to group health plans. Certain “excepted benefits,” however, are exempt from many such requirements. The Departments previously said that COVID testing under an EAP or onsite clinic would ameliorate the concern about operating a group health plan out of compliance with the ACA. As anticipated in our alert, the Departments confirm in these FAQs that an EAP can offer COVID vaccines (and their administration) and still remain an excepted benefit.[3] The same goes for on-site medical clinics. (See Q/A-12 and 13).
Also see our alert about offering incentives for vaccinations, here.
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We hope you find this helpful, and welcome you to contact your Seyfarth Employee Benefits lawyer with any questions about these FAQs or any other related guidance.
[1] See Issue 42 of the joint FAQs, here, and our blog post here.
[2] State and local public health authorities can limit eligibility for tests if necessary to manage testing supplies, for example, but once the test is issued (at least for individual, diagnostic purposes), it has to be covered. (See Q/A-1).
[3] The EAP would need to still comply with other applicable requirements, however.
Kelly Joan Pointer and Joy Sellstrom
§ 1.37 Yes, Your Health FSA Can Cover Your Surgical Mask Purchase!
Seyfarth Synopsis: Avid readers of Beneficially Yours may recall that just over a year ago we asked the pressing question of whether surgical mask purchases could be covered under a health care FSA, among other “novel” coronavirus questions — see what we did there? [Click here for our previous post.] The IRS has confirmed our ground-breaking declaration that masks purchased to prevent contracting the coronavirus could be reimbursable under your health care FSA.
The IRS has finally weighed in — Announcement 2021-7 — allowing personal protective equipment (PPE) to be treated as qualifying medical expenses under Internal Revenue Code Section 213. PPE includes such items as masks, hand sanitizers and sanitizing wipes for the primary purpose of preventing the spread of the virus that causes COVID-19. So, if these items are not otherwise covered by insurance or deducted on an individual’s tax return, they can be reimbursed under the individual’s health care flexible spending account (FSA), health care reimbursement account (HRA), health care savings account (HSA), or Archer medical savings account (MSA).
To the extent these health care arrangements have been permitting these reimbursements already, this announcement provides welcome confirmation. Other plan sponsors may want to use this opportunity to review the rules for their FSAs and HRAs to determine if they should be expanded to specifically allow for reimbursements for these PPE purposes. The IRS states that FSAs and HRAs may be amended for any period beginning on or after January 1, 2020, as long as the plan has been operated consistently and the amendment is in place before the end of the calendar year following the end of the year for which the change is effective. For example, by December 31, 2021 for a change effective January 1, 2020. No retroactive amendment may be adopted later than December 31, 2022.
Diane Dygert
§ 1.38 A Ninth Circuit Panel Finds No ERISA Preemption Of Seattle Health Care Ordinance
Seyfarth Synopsis: A recent panel decision from the Ninth Circuit rejects an ERISA preemption argument that a Seattle ordinance regulating private sector health care should be nullified in order to safeguard the ERISA administrative scheme.
On March 17, 2021, a three judge panel of the Court of Appeals for the Ninth Circuit found that ERISA did not preempt a provision in the Seattle Municipal Code that mandates hotel employers and ancillary hotel businesses to provide money directly to designated employees, or to include those employees in the employer’s health benefits plan. If the employer provides self-insured health benefits, that plan ordinarily would be protected from state laws intruding on its administration, under the broad ERISA preemption clause that nullifies state and local laws that “relate to” ERISA plans.
This case is captioned — The ERISA Industry Committee v. City of Seattle, No. 20-35472.
The three panel judges reasoned that the Seattle ordinance was not preempted by relying on the Ninth Circuit decision in Golden Gate Rest. Ass’n v. City & Cnty. of San Francisco, 546 F.3d 639 (2008). The panel said that the Seattle ordinance does not “relate to” any ERISA plan, in accord with Golden Gate, because the employer may fully discharge its expenditure obligations by making the required level of employee health care expenditures to a third party, here the employees directly. The decision was unsigned (per curiam).
There are a number of interesting aspects to the Seattle decision.
First, the panel labeled the decision as an unpublished Memorandum. Circuit Rule 36-3(a) states that unpublished Memoranda are not precedent. The panel thus limited the impact of its decision, which is unfortunate given a conflict in the circuits (noted below).
Second, the Ninth Circuit panel made no mention of the conflict between Golden Gate and Retail Indus. v. Fielder, 475 F.3d 180 (4th Cir. 2007). In Fielder, the Court of Appeals for the Fourth Circuit ruled that a Maryland law that required large employers to spend at least 8% of their total payrolls on employee health insurance costs or pay the shortfall to the state was preempted by ERISA. The court reasoned that the Maryland law was preempted because it “effectively” required employers in Maryland to restructure their ERISA plans, and thus conflicted with ERISA’s goal of permitting uniform nationwide administration of those plans.
Third, the Ninth Circuit panel applied a presumption “against” ERISA preemption. By contrast, a recent (unanimous) ERISA preemption decision of the Supreme Court, Rutledge v. Pharmaceutical Care Management Assn., discussed in a previous blog post blog post, makes no reference to any such presumption.
Fourth, the Ninth Circuit panel seems to apply field preemption concepts set forth in Justice Thomas’s concurring opinion in Rutledge. That test can be explained by asking whether a provision in ERISA governs the same matter as the state law, and thus could replace it. ERISA, of course, does not regulate direct payments to employees. This construct of preemption appears to narrow the ERISA preemption standard now applied by a solid majority of the Supreme Court.
We live in an age of state experimentation with matters arguably regulated by ERISA. Expect to see more such experimentation and more litigation to defend the federal scheme in ERISA.
Mark Casciari and Kathleen Cahill Slaught
§ 1.39 ARPA COBRA Subsidy: DOL Releases Model Notices, Punts (to IRS?) on Most Open Issues
Seyfarth Synopsis: As discussed in our March 11, 2021 Alert, Congress has made another avenue of health coverage more accessible by fully subsidizing the cost of COBRA coverage from April 1 – September 30, 2021 for individuals who lost their health coverage due to an involuntarily termination or a reduction in hours under the American Rescue Plan Act of 2021 (ARPA). On April 7, 2021, the Department of Labor (DOL) published FAQsto further explain this COBRA subsidy and provided models of the required related notices.
Notable Points from the FAQs
Eligibility Based on Reduction in Hours. The FAQs take an expansive view on when a reduction in hours constitutes a qualifying event (clarifying that “involuntary” does not modify the reduction in hours trigger), stating that the following situations are covered: “reduced hours due to change in a business’s hours of operations, a change from full-time to part-time status, taking of a temporary leave of absence, or an individual’s participation in a lawful labor strike, as long as the individual remains an employee at the time that hours are reduced.” Terminations of employment only render an employee eligible for the subsidy though if involuntary. (The guidance did not define what constitutes an involuntary termination, but clarified that exclusions for gross misconduct will still apply.)
Interaction with DOL Outbreak Period. The election extension provided under the DOL’s Outbreak Period guidance (generally tolling the COBRA election period window for up to a year) does not apply to the newly created, 60-day election window under the ARPA. In other words, subsidy-eligible individuals who fail to elect COBRA within 60 days of the date they receive the notice will not be eligible for a subsidy. (They may still qualify for COBRA under the DOL’s Outbreak Period rules, but it will be at their own cost.)
Similarly, the DOL relief extending notice deadlines does not apply to the ARPA-required notices (the general election notice or the notice of pending subsidy expiration, discussed below).
Impact of Employer COBRA Subsidy. The FAQs do not address one of the key questions many employers have been asking: If the employer subsidizes COBRA via a severance arrangement, will that reduce the amount of tax credit the employer may claim? The guidance merely states the following: “An employer or plan to whom COBRA premiums are payable is entitled to a tax credit for the amount of the premium assistance.”
Deadline for Distributing New Election Notice. The FAQs specify that the deadline for plans to distribute the new ARPA general election notice is May 31, 2021. Any coverage elected pursuant to that general notice would be effective retroactive to the first period of coverage beginning on or after April 1, 2021. Or, the employee can elect to enroll only prospectively following receipt of the notice (but that delayed enrollment does not extend the subsidy window). An individual may want to delay enrollment if he or she was enrolled in Marketplace coverage and receiving a tax credit (as the subsidized COBRA could render that person ineligible for the tax credit).
Timing of Participant Coverage Election. If an individual believes he or she qualifies for the COBRA subsidy, that person can reach out to the COBRA administrator or plan administrator in advance of receiving the election notice and request the right to enroll. If the person is correct that he or she qualifies, the plan cannot require the person to pay a premium (even if it intends to reimburse them later after the election notice goes out). Presumably the person would ultimately need to later return the election notice however (which certifies to the employer the individual’s eligibility for the subsidy).
Plan Cannot Require Payment of Admin Fee. The FAQs make clear that the assistance-eligible individual cannot be charged anything for COBRA (the plan cannot charge the admin fee to the participant).
Marketplace Special Enrollment at Subsidy Expiration. The FAQs indicate a subsidy expiration “may” constitute a Marketplace special enrollment event. It is unclear whether this suggests that offering such a special enrollment is at the discretion of the Marketplace/carrier, or if it is required.
New Model Notices
ARPA requires employers to notify qualified beneficiaries regarding the availability of this COBRA subsidy and their related rights. The DOL provided the following model notices as described more fully below:
Deadline: 60 days after the qualifying event (normal COBRA procedure).
Description: This notice is for plans subject to Federal COBRA to send to individuals experiencing any qualifying event between April 1, 2021-September 30, 2021 (including voluntary terminations). It is essentially the DOL’s standard COBRA general notice with ARPA information woven throughout. So, while this notice may be provided separately or with the standard COBRA general notice, it makes sense to use the ARPA general notice during the relevant period rather than providing participants two sets of notices.
Description: This notice is an option for plans subject to state mini-COBRA laws (not Federal COBRA). They may send to individuals experiencing any qualifying event between April 1, 2021-September 30, 2021 (including voluntary terminations).
Notice:Notice of Extended Election Period.
Deadline: May 31, 2021.
Description: This is the notice directed at people who had COBRA qualifying events in the past. It is for individuals who lost Federal COBRA coverage due to involuntary termination of employment or reduction in hours occurring generally between October 1, 2019 and March 31, 2021.* So by May 31, 2021, employers must notify such individuals that they have a special 60-day opportunity to elect COBRA prospectively between April 1, 2021 through September 30, 2021. The COBRA coverage period cannot exceed the coverage period they otherwise would have been entitled to in connection with the original qualifying event.
Description: ARPA also requires notice when premium assistance is expiring, with the notice to be sent no more than 45 days from expiration, and no less than 15 days from expiration. It must be sent to anyone whose subsidized Federal or State mini-COBRA ends between April 1, 2021 and September 30, 2021, and is still entitled to more COBRA coverage after the subsidy ends.
The FAQs provide that employers may be subject to an excise tax of $100 per qualified beneficiary per day, not to exceed $200 per family per day, for failure to timely provided the above notices.
Please contact your Seyfarth Benefits Attorney with any questions.
*This is general guidance only. The specific dates may vary from plan to plan.
Kelly Joan Pointer, Danita N. Merlau and Benjamin J. Conley
§ 1.40 Positive Employer Risk Management: Ninth Circuit Approves ERISA Plan Forum Selection Clause
Seyfarth Synopsis: In a decision with major significance for ERISA plans, the Court of Appeals for the Ninth Circuit has upheld the validity of forum selection clauses in those plans.
ERISA is replete with details. Among them is the proper forum for litigation under the statute. ERISA lists multiple potential venues. The question then becomes whether an ERISA plan can mandate that litigation must be commenced in one of those venues. Pondering this question is not merely an academic exercise as ERISA jurisprudence is not uniform, raising the risk of inconsistent interpretations by different courts. Additionally, certain courts see more ERISA litigation than others, allowing greater familiarity with the statute.
In the case of In re Becker, No. 20-72805, – F.3d – (9th Cir. April 1, 2021), the Ninth Circuit considered whether the district court properly transferred a 401(k) plan lawsuit from the Northern District of California to the District of Minnesota (where the plan sponsor resides and the plan is administered) pursuant to the plan’s forum-selection clause.
ERISA provides that lawsuits “‘may be brought’ where: (1) the plan is administered; (2) the breach took place; or (3) a defendant resides or may be found.” The Court held that the statute’s use of “may” indicates that any of these options is acceptable. (Indeed, the Court said, even an arbitration forum is permitted). Accordingly, it held that a plan clause mandating where a lawsuit may be commenced is permitted by the statute if the selected forum is one of those listed in the statute.
The Court noted that a forum selection clause can support the important ERISA goal of uniform plan administration by having the same court interpreting the plan. Plan sponsors can readily appreciate this point as they prefer to select individuals to serve as plan fiduciaries who can be expected to review many claims in a consistent fashion.
The Ninth Circuit decision comports with all other Courts of Appeal decisions that have considered the ERISA plan forum selection issue and should make ERISA litigation more predictable, while frustrating any potential forum shopping by plaintiffs.
Jules Levenson and Mark Casciari
§ 1.41 Do You Have Employees in Washington State? Take Note: New Long-Term Care Payroll Tax Goes Into Effect January 1, 2022
Seyfarth Synopsis: In an effort to plan for the projected long-term care needs of its residents, State of Washington passed the Long-Term Services and Supports Trust Act (SHB 1323) requiring each worker in Washington to contribute $0.58 per $100 (0.58%) of wages to a trust set aside to pay long-term care benefits for its residents. The law was enacted in 2019 and becomes effective in 2022. Benefits under the Act are first payable in 2025. Washingtonians may opt out, but must have qualifying long-term care coverage in place by November 1, 2021.
Overview:
Starting January 1, 2022, employers must remit on a quarterly basis a payroll tax of 0.58% (adjusted based on Washington’s CPI) of Washington employees’ wages to the trust. There is no cap on wages for this purpose.
There is a one-time opt-out window from October 1, 2021 to December 31, 2022 for individuals who have qualifying long-term care coverage from any source (e.g., their employer, spouse’s employer, an individual policy) by November 1, 2021. There are special effective dates for union employees.
The right to opt-out belongs to the individual (not the employer). To opt out, the individual will apply to the State. If approved, the State will send an opt-out approval letter to the individual. The individual will then provide a copy of the letter to current and future employers. Other specifics on the opt-out procedure are still in the works.
Long-term care benefits are only available to Washington residents who have paid premiums for either: (i) a total of 10 years with no more than a five-year interruption; or (ii) three of the six years before the date of application for benefits. Additionally, the resident must have worked at least 500 hours during each of the 10 or three year measurement period, as applicable.
The maximum benefit payable is $100/day up to a maximum lifetime benefit of $36,500.
Options for Employers:
Do not offer long-term care insurance to Washington-based employees and simply collect and remit the payroll tax (other than for those employees with an opt-out approval letter),
Review long-term care coverage already in effect to determine if it is considered qualifying coverage under the Act, or
Quickly procure new long-term care coverage that meets the Act’s definition of qualifying coverage.
Regardless of the option selected, employers may wish to inform their Washington employees of the upcoming payroll tax and their ability to opt out.
Please contact your Seyfarth attorney with any questions.
Liz Deckman and Kelly Pointer
§ 1.42 Protecting Your Nest Egg From Cyber-Criminals
Seyfarth Synopsis: Retirement plans hold millions (sometimes, hundreds of millions) of dollars in assets, and participants’ personal information is increasingly maintained and accessible online. With such large amounts of money accessible electronically, retirement plans can be a prime target for cyber-criminals. In response to this growing issue, on April 14, 2021, the Department of Labor (“DOL”) issued a three-part set of informal guidance with best practices and suggestions from different perspectives for addressing cybersecurity in the retirement plan world. Acknowledging that businesses largely rely on third parties, namely, the plan’s recordkeeper, to secure and protect participant data, the guidance describes what cybersecurity protection to look for when selecting service providers. The guidance also provides tips for recordkeepers and other service providers responsible for maintaining plan data, and ideas for plan participants on safeguarding their data and plan accounts online.
The three guidance documents are titled: Tips for Hiring a Service Provider with Strong Security Practices, Cybersecurity Program Best Practices and Online Security Tips.
“Tips When Hiring a Service Provider With Strong Security Practices”(for Plan Fiduciaries)
Plan administrators have a fiduciary duty under ERISA to act prudently when selecting and monitoring plan service providers. This DOL two-page guidance document provides tips for fiduciaries when hiring a service provider, and provisions to include in the contract with the service provider.
The tips to consider when evaluating a service provider include:
Consider the service provider’s cybersecurity standards, practices, policies and results, and compare these to standards adopted by other service providers in the industry.
Look for a service provider that follows a “recognized standard” for information security and that uses a third-party auditor to review and validate its cybersecurity practices.
Ask the service provider how it validates its cybersecurity practices and levels of security standards it has met and implemented.
Evaluate the service provider’s track record. How has it handled past security breaches?
Consider whether the service provider carries any insurance policies that would cover losses caused by cybersecurity and identity theft breaches (for both internal and external threats).
Observation. These tips could be helpful, and highlight what many plan administrators already consider when evaluating and hiring service providers. However, as we have seen, adhering to these tips and suggestions may reduce the likelihood or severity of data breaches, but they are not a guarantee against cybersecurity issues.
“Cybersecurity Program Best Practices”(for Service Providers)
The DOL also issued a number of best practices for use by plan recordkeepers and other service providers that are responsible for plan data. The best practices include having a formal, well documented cybersecurity program, conducting annual risk assessments and third party audits of security controls, conducting periodic cybersecurity awareness training and appropriately responding to any past cybersecurity incidents. The DOL has indicated that these items should be reviewed and considered by the plan fiduciaries when evaluating whether to hire a service provider.
Observation. When reviewing a service provider’s cybersecurity program and internal controls, plan administrators may want to consider involving individuals from the IT department or an outside security consultant to ensure that explanations provided by the vendor align with these best practices.
“Online Security Tips”(for Participants)
The DOL guidance illustrates that it is not solely up to plan fiduciaries and plan service providers to take the necessary steps to secure plan data. Plan participants also play a vital role in reducing the risk of fraud and retirement plan account losses resulting from cyber-attacks. The third part of the DOL guidance provides online security tips for participants, including the use of unique passwords, two-factor authorization, regularly monitoring plan accounts, being cautious of phishing attacks and making sure that antivirus software is current. The guidance does not currently suggest that plan fiduciaries or service providers should periodically provide online security tips to participants.
Observation. Plan administrators and recordkeepers may want to consider reviewing and updating summary plan descriptions, enrollment materials and other annual participant-facing notices to incorporate some of these security tips so that participants are on notice of the steps that they can take to reduce the risk of fraud and retirement account losses resulting from a the unauthorized access of their retirement account.
Next Steps
This informal guidance illustrates that protecting against data breaches is complicated and not an all-or-nothing proposition. A plan administrator could follow every tip outlined by the DOL when selecting a service provider, but if the participant compromises his or her own account password, the administrator’s efforts are moot. Thus, service providers, plan fiduciaries and participants should all take steps to protect against cybersecurity breaches.
Please contact your Seyfarth Employee Benefits Attorney with any questions you may have about this guidance and its application to your plan.
Christine M. Cerasale, Sara J. Touzalin and Kelly Joan Pointer
§ 1.43 Federal Court Allows Discovery in ERISA Case Based on “Information and Belief” Allegations That Plaintiff Merely Believed to Be True
Seyfarth Synopsis: A federal district court denied a motion to dismiss an ERISA complaint that was based in large part on secondhand “information and belief” allegations about the defendants’ business operations. The decision serves as a warning to defendants that they may be forced into costly discovery based on allegations that a plaintiff merely believes to be true.
In Teamsters Local Union No. 727 Health and Welfare Fund v. De La Torre Funeral Home & Cremation Services, Inc., No. 19-cv-6082, 2021 U.S. Dist. Lexis 42046 (N.D. Ill. Mar. 5, 2021), the court refused to dismiss an ERISA and LMRA complaint seeking to hold defendants, who did not sign a collective bargaining agreement, liable for a settlement agreement related to delinquent contributions to various health, welfare, and pension funds. The plaintiff brought the allegations under alter ego, joint employer, and successor liability theories. The complaint was based in large part on “information and belief” allegations about the defendants’ business operations. The court noted that the allegations relied on secondhand information that plaintiff merely believed to be true, and that the allegations regarded matters particularly within the knowledge of the defendants. The court denied the defendants’ motion to dismiss, finding that such allegations were sufficient to allow the plaintiff’s claim to proceed.
This decision is important because of the substantial consequence of losing a motion to dismiss. Losing a motion to dismiss is a ticket to the often distasteful world of discovery. As the Supreme Court noted in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), discovery, at least in the class action context, is so expensive that it often leads to settlement regardless of the merits of the case. This is all the more true today given the enormous increase in electronic data a party maintains, especially after a pandemic that has created much more video and other electronic data that may be subject to discovery.
So, while the Supreme Court has made it more difficult under some circumstances for ERISA plaintiffs to withstand motions to dismiss, district courts may still favor discovery over dismissal. Individual district courts may decide to encourage settlement and preclude appellate review by allowing claims to continue, even when the allegations are based on information that a plaintiff merely believes to be true.
Motion to dismiss litigation in ERISA cases will continue to command the attention of federal courts. At issue is whether the plaintiff can allege enough to access substantial discovery rights.
Mark Casciari and James Hlawek
§ 1.44 Don’t Look Now, But Is That a New SECURE Act on the Horizon?
Seyfarth Synopsis: The SECURE Act, passed at the end of 2019, significantly altered the retirement landscape. Now, proposed legislation, “SECURE Act 2.0,” sets out to make even more changes. As before, several of the proposed provisions will require employers to closely consider the new rules. For newly established plans, there will be requirements that did not exist before. For a reminder on how the SECURE Act 1.0 changed the retirement landscape in 2020 click here and here.
Last week, on May 5, the House Ways and Means Committee sent the Securing a Strong Retirement Act of 2021, “SECURE Act 2.0,” to the House for consideration. Here are some of the more significant changes that the bill as currently drafted would bring to the retirement landscape:
Raises the minimum distribution age. After being based on attainment of age 70½ for decades, the Act would raise the required minimum distribution (“RMD”) age once again over several years. The SECURE Act 1.0 raised the RMD to age 72. If passed, SECURE Act 2.0 would continue the raise in the RMD age to 73 in 2022, 74 in 2029, and 75 in 2032.
Increases and “Roth-ifies” catch-up contributions. The limit on 401(k) catch-up contributions for 2021 is $6,500, indexed annually for inflation. The proposed provisions would keep the catch-up age at 50 but increase the limit by an additional $10,000 per year for employees at ages 62, 63, and 64. The Act also provides that effective in 2022, catch-up contributions to 401(k) plans must be made on an after-tax, Roth basis.
Also allows Roth-ification of matching contributions. Plan sponsors may, but are not required, to permit employees to elect that some or all of their matching contributions to be treated as Roth contributions for 401(k) plans.
Student loan matching. The Act would allow, but not require, employers to contribute to an employee’s 401(k) or 403(b) plan account by matching a portion of their student loan payments.
Expanding automatic enrollment for new plans. Defined contribution plans established after 2021 will be required to enroll new employees at a pretax contribution level of 3% of pay. This level will increase annually by 1% up to at least 10% (but no more than 15%). There are exceptions for small businesses with 10 or fewer employees, new businesses, church plans and governmental plans.
Expedited part-time workers. One of the more significant changes under SECURE Act 1.0 was the expansion of eligibility for “long-term, part-time workers” to contribute to their employers’ 401(k) plan. SECURE Act 2.0 would expedite plan participation by these workers by shortening their eligibility waiting period from 3 years to 2 years, meaning employees could contribute if they have worked at least 500 hours per year with the employer for at least 2 consecutive years and are at least age 21 by the end of that 2 year period. If passed, the first group of affected workers would become eligible on January 1, 2023, not 2024 as is the case under current law.
As noted, this bill has not been signed into law. Although there is bipartisan support, it is likely that the provisions will be modified as the bill makes its way through Congress. Presently, this proposal is expected to be taken up by the Senate after its August recess. To stay up to date, be on the lookout for additional Beneficially Yours blog posts and Seyfarth Legal Updates.
Liz Deckman & Sarah Magill
§ 1.45 The Big Apple Joins a Small Crowd, With Possible Headaches for Local Employers
Seyfarth Synopsis: New York City has joined the growing list of jurisdictions to establish a mandatory auto-IRA retirement savings program for private sector employers who do not offer employees access to a retirement plan. By doing so, it becomes part of the trend to provide the opportunity for employees who do not have access to an employer-sponsored plan to save for their retirement during their working years through a payroll-deduction process.
Three states — California, Oregon and Illinois — have established, and operate, such programs at the state level, whereby covered employers are required to auto-enroll employees in IRA retirement savings accounts. The California program, CalSavers, recently prevailed in the U.S. Court of Appeals for the Ninth Circuit against a challenge that the program was pre-empted by ERISA. The primary bases for this decision are that the program is not run by a private employer and that employers maintaining ERISA retirement plans are exempted from coverage by the program (hence no interference with an ERISA plan).
Several other states have begun to implement similar programs, in some cases mandatory and in others (like New York State) voluntary. All the programs appear to have in common that they create an administrative board to operate the program, and then leave such board to work out the details of implementation.
The New York City legislation follows the same pattern — one piece of legislation establishes the program and another establishes a “retirement savings board” to implement and oversee the program. The program applies to private sector employers located in the City employing at least five employees and that do not currently offer a retirement plan such as a 401(k) plan or a pension plan. The default employee contribution rate, which will apply to employees who are age 21 or older and working at least 20 hours a week, is set at 5%, although an employee can choose a higher rate (up to the IRA annual maximum) or a lower rate (including none).
Although the City’s legislation takes effect 90 days after enactment (i.e., in August 2021), the program will not go into effect until implemented by the retirement savings board, which is contemplated to take as long as two years. Further, the program will not go into effect if the City’s corporation counsel determines that there is a substantial likelihood that the program will conflict with, or be preempted by, ERISA. Such determination should take the Ninth Circuit decision into consideration, given the strong resemblance between the City’s program and the CalSavers program.
Like several other states, New York State has authorized an auto-IRA program (the New York State Secure Choice Savings Program), but the New York State program differs from most other such programs by using Roth (after-tax) IRAs, which have a limit on the contributor’s income, although such limit is unlikely to be exceeded by the employees targeted by the program. Further, the New York State program is voluntary — no employer is required to make it available to employees.
No conflict should arise between the City’s program and the New York State Secure Choice Savings Program, because the current state program is voluntary. However, there are current proposals to make the New York State program mandatory, in which case a conflict could arise. Even under the current New York State program, it is unclear whether the City would accept Roth IRA contributions as meeting the City’s mandate, leaving aside questions regarding the contribution rate and which employers and employees are covered.
A more formidable operational difficulty for City employers is that Connecticut and New Jersey have authorized, but not yet implemented, mandatory auto-IRA programs for employers located in those states, although Connecticut is reported to be launching a pilot program in July, 2021. Although all these programs exempt employers that maintain an ERISA retirement plan, there may be employers located within the metropolitan New York City area whose employees will be subject to differing mandates depending on whether employed in New Jersey, Connecticut or the City itself, all of which will require compliance by that employer but with possibly differing rules.
At the moment there is nothing a New York City employer needs to do. We are monitoring developments related to this new program, including the corporate counsel’s determination as to whether or not there is a substantial likelihood that the New York City program will be preempted by ERISA, and will report back.
If you have any questions, please contact your Seyfarth attorney for additional information.
Richard Loebl
§ 1.46 IRS Releases Extensive Guidance on ARPA COBRA Subsidy
Seyfarth Synopsis: On March 11, 2021, President Biden signed into law the American Rescue Plan Act (“ARPA”), which requires plan sponsors to provide free COBRA coverage from April 1, 2021 through September 30, 2021, to individuals who lose coverage due to an involuntary termination of employment or reduction of hours. This is also referred to as the “100% COBRA Subsidy” or “COBRA premium assistance.” On April 7, 2021, the Department of Labor (“DOL”) published additional guidance on the COBRA Subsidy requirements in the form of Frequently Asked Questions (“FAQs”) and model notices. The updated DOL guidance, while helpful, still left many questions unanswered. On May 18, 2021, the Internal Revenue Service (“IRS”) issued additional guidance in IRS Notice 2021-31 (the “Notice”) to provide further clarification for employers, plan administrators, and health insurers regarding the COBRA Subsidy.
We have summarized the key points from IRS Notice 2021-31 below.
Who is an Assistance Eligible Individual (“AEI”)?
The ARPA provides for a temporary 100% reduction in COBRA premiums for individuals who: (1) lose healthcare coverage due to an involuntary termination or a reduction in hours; (2) are eligible for COBRA continuation coverage for some or all of the period from April 1, 2021, through September 30, 2021 (the “Subsidy Window”); and (3) elect COBRA continuation coverage. These individuals are referred to Assistance Eligible Individuals (“AEIs”). AEIs also include qualified beneficiaries who are the spouse or dependent child of the employee. A qualified beneficiary is considered an AEI if he or she was covered under the group health plan on the day before the reduction in hours or involuntary termination that caused the loss of coverage.
Ineligibility. Eligibility for other group health coverage renders an individual ineligible for the 100% Cobra Subsidy, even if that other coverage does not provide “minimum value” or “affordable” coverage as defined under the Affordable Care Act.
An individual may become an AEI more than once. If an individual elects free COBRA and then later becomes eligible for (and enrolled in) another group health plan during the Subsidy Window, he or she will no longer qualify as an AEI. If the individual then loses coverage under the other group health plan (within the Subsidy Window), he or she can regain their status as an AEI.
Self-certification or attestation. An employer may, but is not required to, have individuals self-certify or attest to the fact that they are eligible for free COBRA and/or that they are not eligible for other group health plan coverage or Medicare. While this is not a legal requirement, employers that plan to claim the available tax credit to offset the costs of the COBRA Subsidy will need to retain records substantiating individuals’ eligibility. In addition, an employer may have knowledge of an individual’s initial eligibility for COBRA, but they may not necessarily have knowledge of their ongoing eligibility. For these reasons, obtaining an attestation and/or self-certification of eligibility may be desirable. An employer may also rely on other evidence to substantiate eligibility, such as employment records concerning a reduction in hours or involuntary termination of employment.
Eligibility for other coverage. Eligibility for other coverage will only disqualify an individual from the COBRA Subsidy if they have an active, open enrollment period during the Subsidy Window. So, for example, if an individual had an opportunity to enroll in their spouse’s plan during a 30-day window in January 2021, but did not enroll, that person can still qualify for the COBRA Subsidy. But, the IRS guidance notes that, due to the DOL’s Covid-19 “Outbreak Period” relief, most plans are required to extend HIPAA special enrollment windows for up to a year. To the extent an individual’s extended special enrollment window runs into the Subsidy Window, that will disqualify them from receiving COBRA premium assistance.
Enrollment in another plan. If an individual enrolls in coverage under another group health plan, they may still qualify for the COBRA Subsidy, provided the individual is no longer covered by the other group health plan coverage as of April 1, 2021.
Enrollment in Medicare. The Notice clarifies that if an individual is enrolled in Medicare before becoming eligible for COBRA due to a reduction in hours or involuntary termination of employment, they may remain on Medicare but they would not qualify for the COBRA Subsidy. This is because they were enrolled in Medicare first (before COBRA).
Other qualifying events. Qualifying events other than a reduction in hours or an involuntary termination of employment, are not qualifying events for COBRA premium assistance purposes. Further, if the qualifying event was something other than an involuntary termination of employment or a reduction in hours (such as divorce or a dependent aging out), the individual would not qualify for the COBRA Subsidy even if the person later experiences a reduction in hours or an involuntary termination of employment.
Second qualifying event. If the original qualifying event was an involuntary termination of employment or a reduction in hours, and the employee remains covered beyond 18 months due to a disability extension or a second qualifying event (e.g., divorce or a dependent aging out), the employee could qualify for the COBRA Subsidy during the extended (i.e., post-18 month) period, if that extended period overlaps with the Subsidy Window. Contrary to earlier DOL guidance which indicated employers may only need to look back to qualifying events occurring on or after October 2019 to determine who may be an AEI, this guidance could require employers to look back much earlier (potentially as far back as April of 2018).
Retiree health coverage. Retiree health coverage only impacts an individual’s eligibility for the COBRA Subsidy if it is provided under a different plan than the plan in which the individual was enrolled when he or she experienced a qualifying event. So, for instance, if a plan permitted persons who terminated at age 55 to elect COBRA or to remain covered under the active plan for a period of time, a person who chose to remain on active coverage could still elect COBRA and qualify for the COBRA Subsidy.
New dependents. COBRA premium assistance is limited to AEIs that were enrolled as of the coverage termination date, as well as, a child who is born or adopted by the covered employee during the COBRA continuation coverage period.
Unpaid premiums. An individual’s eligibility for COBRA premium assistance is not affected by late or unpaid premiums for retroactive COBRA continuation coverage (pre-April 1, 2021).
Reduction in hours
The Notice confirms that a reduction in hours constitutes a qualifying event for purposes of the subsidy, regardless of whether the reduction in hours was involuntary or voluntary. This includes furloughs and work stoppages resulting from a lawful strike initiated by employees (or their representatives) or a lockout initiated by the employer.
What is an “involuntary” termination?
The Notice confirms that the determination of whether a termination is “involuntary” is based on facts and circumstances surrounding the event. The following are examples of events that may qualify as involuntary terminations:
Voluntary termination for good reason. Where the termination is due to employer action that results in a material negative change in the employment relationship analogous to a constructive discharge. This includes terminations designated as voluntary or as a resignation if the employee is willing and able to continue working.
Termination while absent due to illness or disability. Only if there was an expectation that the employee would return to work following the illness or disability.
Retirement. Only if the employee would have been terminated, absent the retirement, and the employee had knowledge of the impending involuntary termination.
Resignation. If due to a material change in geographic location of employment.
Voluntary separation programs. The Notice provides that involuntary terminations include employee participation in a voluntary severance program that constitutes a window arrangement, where the employee was facing an impending termination. This leaves open the question of whether participation in a VSP would qualify where there is no stated (or unstated) risk of impending termination. Similarly, it does not address whether a VSP qualifies if not structured as a “window program.” Notably, in 2009 the IRS indicated that any form of “buy-out” program could qualify if there was a suggestion that some employees may be terminated after the program concluded. Other FAQs within the notice make clear that circumstantial evidence can always lead to the conclusion that a termination labeled “voluntary” could still be considered involuntary, but employers would have certainly welcomed more direct guidance addressing these types of programs.
Resignation for safety. If due to concerns about workplace safety, but only if the employee can demonstrate the employer’s actions or inactions resulted in a material negative change in the employment relationship analogous to a constructive discharge.
Involuntary reduction in hours. An employee-initiated termination of employment in response to an involuntary material reduction in hours is treated as a termination for good reason.
Non-renewal of employment contract. If the employee was willing and able to continue the employment relationship and execute another contract. This does not qualify, however, if the parties never intended a renewal to be executed.
The following examples do not constitute involuntary terminations:
Termination due to gross misconduct. Presumably, this event is carved out because COBRA is not required for terminations resulting from gross misconduct. Many employers still extend COBRA when there is not overwhelming support for concluding the behavior was gross misconduct. Employers could likely apply the same rationale in treating such individuals as AEIs, if COBRA was extended. Family members employees terminated for gross misconduct are also ineligible for the COBRA subsidy.
Terminations for personal reasons. Examples include health conditions of employee or family member, childcare issues, or other similar issues.
Death of the employee. If the individual died following a reduction in hours or involuntary termination, the dependents would remain eligible for COBRA continuation coverage.
What coverage is eligible for COBRA premium assistance?
Dental, vision, and HRAs qualify for premium assistance. Retiree coverage also qualifies, but only if it is offered under the same group health plan as the coverage made available to active employees. The notice does not explicitly discuss other COBRA-eligible benefits such as EAPs or onsite clinics, but we presume that to the extent an employer has determined those benefits are subject to COBRA, they should also qualify for the subsidy.
If an AEI enrolls in other, more expensive coverage than the coverage in which the individual was enrolled as of the qualifying event date, the individual loses eligibility for the subsidy entirely, unless the coverage in which the individual was enrolled in is no longer available. If the plan in which the individual was enrolled is no longer available, the individual must be offered the most similar plan available. In that case, the individual will be eligible for the subsidy even if the plan of benefits is more expensive.
For example, an AEI was enrolled in a plan with an $800 per month COBRA premium. The employer also offers coverages that are $700, $750, or $1,000 per month. The individual can enroll in the $700 or $750 per month options with premium assistance. The AEI will not be eligible for premium assistance if he or she enrolls in the $1,000 per month option.
When does the COBRA Subsidy period begin and end?
The COBRA Subsidy period begins with the first period of coverage a premium is charged beginning on or after April 1, 2021. AEIs must be allowed to elect coverage prospectively or retroactively to April 1, 2021, provided the qualifying event date was on or before that date.
The subsidy period ends at the earliest of: (1) the first day the AEI becomes eligible for other group health plan coverage or Medicare; (2) the day the individual ceases to be eligible for COBRA continuation coverage; or (3) the end of the last period of coverage beginning on or before September 30, 2021.
ARPA extended election period
A qualified beneficiary who does not have COBRA continuation coverage in effect on April 1, 2021, but who would have been an AEI if the election were in effect, may elect COBRA continuation coverage under the ARPA extended election period. This includes an individual who has an open COBRA election period as of April 1, 2021. So, for example, if an employee elected COBRA as of the qualifying event date but the spouse did not, the spouse would be entitled to an extended election right to take advantage of the ARPA subsidy.
Additionally, an individual who, as of his or her original qualifying event date, only elected certain of the coverages in which that person was enrolled (i.e., dental-only or vision-only) can still elect the remaining coverages under the extended election period.
How does this interact with the Outbreak Period Guidance?
Within 60 days from receiving the election notice, an AEI may elect subsidized COBRA. If the AEI elects subsidized COBRA, within the same 60 day period, the AEI must also elect or decline COBRA continuation coverage retroactive to the loss of coverage. If the qualified beneficiary elects retroactive COBRA continuation coverage, the qualified beneficiary may be required to pay COBRA premiums for periods of coverage beginning before April 1, 2021.
If an election is not made during the 60 day period, a qualified beneficiary will lose the right to elect retroactive coverage. They will also forgo the 100% COBRA subsidy. It is unclear from the Notice whether the qualified beneficiary would still be permitted to elect coverage prospective at a later date (during the Outbreak Period).
The DOL’s Outbreak Period relief extends the period of time that individuals have to make COBRA elections and premium payments for up to a full year (or, if sooner, through the end of the Public Health Emergency plus 60 days).
Calculating the premium tax credit and employer subsidies
Employers can only claim the tax credit in the amount equal to the amount the employee would have been required to pay in the absence of the ARPA subsidy. So, if the employer typically charges less than 102% of the premium, or has offered the employee a premium subsidy pursuant to a severance agreement, the amount the employer could claim would be reduced accordingly. But, if an employer increases the employee’s premium obligation from the previous, reduced amount, the employer can claim the increased tax credit. Separately, if an employer does not subsidize COBRA directly, but provides the employee a taxable lump sum payment intended for COBRA, the employer can still claim the full amount of the tax credit.
If additional non-AEIs are covered (e.g., because a non-AEI spouse is added during open enrollment) causing the total COBRA premium to increase, the incremental cost is not considered to be COBRA premium assistance for purposes of the tax credit. If there is no additional cost for adding non-AEIs, then the employer can claim the full cost as a tax credit.
Claiming the premium tax credit
Employers are entitled to the tax credit as of the date on which the employer receives the AEI’s election of COBRA continuation coverage. Employers are permitted to reduce payroll tax deposits and claim a refund of amounts, up to the amount of the anticipated credit. If applicable, an employer can file IRS Form 7200 to request an advance of the anticipated premium assistance credit that exceeds the federal employment tax deposits available for reduction on a quarterly basis.
To claim the premium assistance credit, the employer reports the credit and the number of individuals receiving COBRA premium assistance on IRS Form 941 for the applicable quarter. If an employee fails to notify the employer that he or she became eligible for other coverage, the employer can still claim the tax credit, unless the employer knew the individual was ineligible for the subsidy. The credit is included in the employer’s gross income, but the employer cannot “double dip” and also claim the credit as qualified wages under the CARES Act, or as qualified health plan expenses under the FFCRA. Employers are entitled to the credit regardless of whether it uses a third-party payer to report and pay employment taxes.
If an employer originally collected, but then reimburses an AEI for premiums that should have been covered under the ARPA, the employer is entitled to the credit on the date in which they reimburse the AEI. ARPA requires the employer to reimburse the employee within 60 days of the date the premium was paid (or presumably later if the employer didn’t receive the individual’s attestation until a later date).
Additional issues
The Notice states that the Treasury Department and the IRS are aware of additional issues related to the COBRA premium assistance provisions, which are still under consideration. There is a possibility of additional guidance in the future.
We will continue to track the regulatory agencies’ implementation of these provisions and keep you apprised of any further developments.
Benjamin J. Conley, Seong Kim, Sarah N. Magill and Joy Sellstrom
§ 1.47 Ninth Circuit Rules – State Pension Mandate Not Preempted Even Though An Employer Chooses Not To Establish ERISA Plan
Seyfarth Synopsis: The Court of Appeals for the Ninth Circuit has once again upheld against an ERISA preemption challenge, a State private sector benefits mandate, notwithstanding that ERISA provides that the decision to establish an ERISA plan rests solely with the employer.
The Supreme Court has often stated that ERISA is not a pension mandate statute; rather it simply encourages private sector employers to establish ERISA pension plans. See Gobeille v. Liberty Mutual Ins. Co., 136 S.Ct. 936 (2016) (“ERISA does not guarantee substantive benefits.”)
(The federal no-mandate rule is different in the health plan context, primarily due to the Affordable Care Act.)
ERISA accomplishes its purpose to encourage, and not to mandate, plans through streamlined rules of administration, limited court remedies and a broad preemption clause. That clause preempts all state and local laws that merely relate to an ERISA plan as a “don’t worry about state law” reward for choosing to establish an ERISA plan. The statutory scheme is that the final word on whether to establish an ERISA pension plan remains within the complete discretion of the employer.
Now, in Howard Jarvis Taxpayers Assoc. v. CalSavers Program, the Ninth Circuit has again found no preemption. The issue was whether a California law, like those of six other States (and Seattle and New York City), see generally The Big Apple Joins a Small Crowd, With Possible Headaches for Local Employers | Beneficially Yours, mandates private sector employers, which choose not to establish an ERISA plan, to contribute employee wages to the state to provide pension benefits. The court found no preemption because the contributed money becomes a state, not an ERISA, plan benefit. It is of no moment, the court said, that the employer’s contribution becomes a pension benefit, because the state’s contributory scheme imposes minimal administrative duties on the employer. The court added that the proliferation of state benefits mandates presents serious policy issues that Congress may want to address down the road. It is unclear whether the CalSavers preemption decision will be litigated further.
It also is unclear whether the CalSavers decision will encourage private sector employers now without ERISA plans to establish (or refrain from establishing) plans.
One current example of this preemption dilemma arises in Washington State, which recently passed the Long-Term Services and Supports Trust Act. The Act imposes a payroll tax on each employee in Washington of .58% of wages. These amounts are collected by the employer and sent to a trust established by the State to pay long-term care (LTC) benefits for its residents. Employees who have qualifying private LTC insurance (including coverage from an ERISA long term care plan) can be exempt from the payroll tax. Employees still must satisfy certain eligibility requirements. Employers with unhappy workers who must pay the tax, but never become eligible for benefits, may now feel State pressure to establish an ERISA plan, when they otherwise would not. Or they may feel pressure not to establish an ERISA plan, relying on the State to provide benefits instead. And, of course, the Act may be challenged on preemption grounds.
Expect more State benefit mandates and perhaps more litigation throughout the country on whether these laws are preempted by ERISA.
Liz Deckman and Mark Casciari
§ 1.48 Did You Get Your Vaccine Yet… Your Employer May Offer You an Incentive
Seyfarth Synopsis: The EEOC has released anticipated guidance (found here) related to the COVID-19 pandemic and what employers can and cannot do (“Updated Guidance”). The Updated Guidance provides guidance on 4 main topics: (1) employer mandated vaccination policies; (2) reasonable accommodations; (3) employee vaccination and confidentiality; and (4) vaccine incentives. This legal update focuses on permissible incentives provided by employers which encourage employees to be vaccinated. For a discussion of the other topics, see our Employment Law Lookout found here.
We previously noted that the EEOC’s existing guidance under the Americans with Disabilities Act (ADA) makes it unclear whether and what level of an incentive an employer may offer to encourage employees to get the COVID-19 vaccine. Offering an incentive in exchange for a vaccination could create a wellness program that contains disability-related inquiries. Although the Updated Guidance does not answer what level of incentive would be permissible, it provides helpful guidance for employers who want to establish an incentive program.
Incentives Permitted Under the ADA
Although the ADA prohibits employers from making disability-related inquiries to employees, there is an exception for inquiries made in connection with a voluntary employee health program (such as a wellness program offering vaccines). It is currently unclear what level of incentive would cause a program to be involuntary. (Regulations proposed in January 2021 permitting only de minimis incentives — such as water bottles — have been withdrawn by the current administration).
Where a vaccine is administered by a third party (e.g. pharmacy, personal health care provider or clinic), the Updated Guidance clarifies that requesting documentation or confirmation that an employee received a COVID vaccination is not a disability-related inquiry covered by the ADA. Therefore, an employer may offer any size incentive to an employee to provide confirmation of vaccination administered outside of the work environment.
If the vaccine is administered by the employer or its agent (e.g. a provider hired by the employer), however, employees would have to answer disability-related screening questions from the employer or the agent prior to receiving the vaccine. Therefore, the ADA would apply and restrict the incentives that could be offered. A “very large incentive” could make employees feel pressured to disclose protected medical information and the program may not be voluntary.
Incentives Permitted Under GINA
The Genetic Information Nondiscrimination Act (GINA) restricts employers from requesting genetic information from employees, including information about the manifestation of disease or disorder in a family member (i.e. family medical history). The Updated Guidance explains when employer provided incentives for COVID vaccinations could violate GINA.
Employees
The Updated Guidance provides that GINA is not violated when an employer offers an incentive to employees to provide proof of vaccination from a third party, because the fact that the employee received a vaccination is not genetic information. GINA is also not violated when an employer offers an incentive to employees if the vaccine is administered by the employer or its agent, because the vaccines currently available (Pfizer, Moderna and Johnson and Johnson) do not require pre-vaccination screening questions that inquire about genetic information. (See above for a discussion regarding the ADA.)
Family Members
The Updated Guidance provides that GINA would allow an employer to offer an incentive to employees to provide documentation or other confirmation from a third party that their family members have been vaccinated.
GINA would be violated, however, if an employer offers an incentive to employees in return for a family member getting vaccinated by the employer or its agent, because this would require asking the family member medical questions. Asking these medical questions would lead to the employer’s receipt of genetic information in the form of family medical history of the employee.
Notably, an employer can offer vaccinations to an employee’s family members without offering an incentive, as long as the employer takes steps to comply with GINA. This means that the employer must; (1) ensure that all medical information obtained during the screening process is used only for providing the vaccination; (2) the information is kept confidential; and (3) the information is not provided to any managers, supervisors, or others who make employment decisions for the employees. In addition, employers need to obtain prior, knowing, voluntary, and written authorization from the family member before the family member is asked any questions about his or her medical conditions.
To stay up to date with future guidance, be on the lookout for additional Beneficially Yours blog posts and Seyfarth Legal Updates.
Diane V. Dygert, Joy Sellstrom, and Sarah N. Magill
§ 1.49 Rule 10b5-1: Fix the Cracks But Save the Baby
On June 7, 2021, U.S. Securities and Exchange Commission Chair Gary Gensler announced at the CFO Network Summit that he has asked his staff to make recommendations for the Commission’s consideration on how it might “freshen up” Rule 10b5-1, which provides officers and directors with a way to limit risks associated with the purchase or sale of their company’s securities. Chair Gensler critiqued what he identified as “real cracks” in the present insider trading regime, including the absence of : (1) mandatory cooling off period requirements before an insider can make their first trade; (2) limitations on insiders’ ability to cancel plans when they do have material nonpublic information; (3) disclosure requirements regarding trading plans; and (4) limitations on the number of trading plans a company can issue. Chair Gensler appears to be advocating for tightening of the rules in these respects, rather than abolishment of important Rule 10b5-1 trading plans.
Overview of Rule 10b5-1
While Exchange Act Section 10(b) and Rule 10b-5 generally prohibit the purchase or sale of securities “on the basis of” material nonpublic information, Rule 10b5-1, adopted in 2002, establishes an affirmative defense for insider trading allowing insiders to purchase or sell securities pursuant to pre-formulated trading plans. A purchase or sale is not considered to be made “on the basis of” material nonpublic information if the person making the purchase or sale demonstrates that before becoming aware of the information, the person had:
Entered into a binding contract to purchase or sell the security,
Instructed another person to purchase or sell the security for the instructing person’s account, or
Adopted a written plan for trading securities;
and the contract, instruction or plan meets certain elements set forth in the rule. See 17 CFR § 240.10b5-1.
10b5-1 Plans as Applied
By executing pre‐planned transactions under a Rule 10b5‐1 plan entered in good faith, an individual is insulated from liability, even if actual trades made pursuant to the plan are executed at a time when the individual may be aware of material, non‐public information that would otherwise subject that person to liability under Section 10(b) or Rule 10b5‐1. When properly created and implemented, Rule 10b5-1 trading plans permit company insiders to sell their shares without litigation risk or exposure. Specifically, through the Rule, insiders can effectively refute any inference of scienter by demonstrating that the trades were pre-scheduled and therefore not likely to indicate misuse of material inside information.
In addition to insulating officers and directors from liability for insider-trading claims, such plans also can protect against unfounded allegations of scienter premised on insider sales (i.e., securities fraud and breach of fiduciary duty claims). Insider sales can sometimes be used by plaintiffs as part of their attempt to show a strong inference of knowledge of fraudulent activity. For example, plaintiffs typically allege that the sale of company stock by insiders shortly prior to public knowledge of alleged fraud is indicative of scienter. However, where such sales are effectuated pursuant to trading plans that were implemented prior to the alleged fraud, the inference of knowledge of fraud from those sales is in many cases mitigated.
Notably, however, Rule 10b5-1, may not protect officers and directors where there is evidence that the trading officer or director had knowledge of material, nonpublic information at the time the plan was enacted.
Observations and Considerations
Officers and directors are expected by many companies to invest in the company at some level. In most cases such ownership has the beneficial effect of aligning the interest of directors and officers with those of shareholders whose only connection to the company is ownership of the shares. While current trends in many public companies are questioning of the maximization of shareholder value being the sole proper goal of officers and directors, (see, e.g., Directors Roundtable publications) it is certainly one of the goals that directors and officers must consider. 10(b)-5-1 is well designed to help officers and directors avoid the risks of being sued criminally or in widespread and sometimes baseless civil actions when impact purchases and sales are for financial planning purposes rather than to take advantage of material inside information. By allowing directors and officers to adopt a financial plan which is developed based on their own financial needs, 10(b)5-1 allows for directors and officers to avoid in some cases potential liability when they are simply following a financial plan unrelated to material inside information.
Based on the comments from Chair Gensler, it is likely that we will see some additional restrictions on Rule 10b5-1 plans in the future, including mandatory cooling off periods between the adoption of a plan and when it goes into effect, limitations on cancellation, modifications and overall number of plans, as well as mandatory disclosure. However, Rule 10b5-1 trading plans remain an important risk mitigation tool for officers and directors and we hope and expect that Chair Gensler is very thoughtful in proposing restrictions on their use.
Assuming Mr. Gensler’s proposed changes when described in more detail are limited to eliminating misuse of such plans they are to be applauded. What remains to be done is to see that the changes do not accidently throw out valuable aspects of these plans. In other words, the baby with the bath water. 10(b)-5-1, properly used, is very beneficial in several respects, including in encouraging able directors to serve in that capacity.
Gregory A. Markel, Daphne Morduchowitz and Renée B. Appel
§ 1.50 Audio Recordings Are Up for the Taking!
Seyfarth Synopsis: The DOL has waded into a long-simmering debate about whether audio recordings of phone calls between a plan participant and the plan’s administrator or insurer should be provided to the participant when challenging a benefit determination under the plan, and they have come down squarely on the side of the participant.
A recent DOL information letter lays out the Department’s view that audio recordings are considered relevant documents that plan administrators, insurers, and third party administrators must provide to a claimant upon request, regardless of how the recording is used in the course of plan administration or a benefit determination.
The DOL’s position was expressed in response to a claimant’s request for an advisory opinion after a claims administrator denied the claimant’s request for audio recordings of a phone call associated with an adverse benefits determination. The DOL felt that this issue was best addressed through an information letter (as opposed to an advisory opinion) as it invoked established principles under ERISA, which would apply more broadly than to the discreet facts of the claimant’s situation.
In the claimant’s situation, the administrator made a transcript of the call available as an alternative to the audio recording. It asserted that it was not obligated to provide the actual recordings because they were “not created, maintained, or relied upon for claim administration purposes” and were instead made “for quality assurance purposes.”
In addressing the matter, the DOL turned to its long-standing claims regulations under ERISA Section 503. These regulations require that a claimant be provided with copies of all documents, records and other information “relevant” to the claim for benefits. The DOL was not persuaded by the claims administrator’s arguments that the phone recordings were not relevant, and it cited to two parts of 29 CFR 2560.503-1(m)(8) in its assertion that audio recordings are indeed relevant records that should be provided to claimants.
First, in response to the plan administrator’s argument that the recordings were “not relied upon for claim administration purposes,” the DOL cites 29 CFR 2560.503-1(m)(8)(ii). This section notes that a record is considered relevant if it “was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination.” (emphasis added). With this, the DOL is not concerned with whether the recording was used in the course of the benefit determination. Rather, if a recording was generated in the course of a benefit determination, then it is considered relevant and should be produced by the applicable plan administrator, insurer, or third party administrator.
Second, in response to the plan administrator’s argument that the recordings were made for quality assurance purposes, the DOL cites 29 CFR 2560.503-1(m)(8)(iii). This section notes that a record is considered relevant if it “demonstrates compliance with the administrative processes and safeguards required pursuant to” the plan’s claims procedures. Relevance is further established if the record can be used as an administrative safeguard that verifies consistent decision making under a plan. The plan administrator’s quality assurance argument ironically works against the administrator because an audio recording made for the purposes of quality assurance and plan consistency falls squarely into the definition of section (m)(8)(iii) and, therefore, renders the recording relevant. As such, an administrator’s attempt to argue withholding on the basis of quality assurance will be futile and the recording should be produced to the claimant.
Further, the DOL shot down any argument that relevant records include only paper or other written materials, saying that the preamble to their recent amendments to the regulations makes it clear that audio recordings can be part of the administrative record.
Overall, the information letter shines a spotlight on the common practice of insurers and third party administrators to deny access to audio recordings, often even to representatives of the plan administrator. Looking forward, plan administrators should work with their vendors and review the terms of their service agreements to ensure that any requests for relevant documents, records, or information are reviewed under this broad definition and appropriately provided to the claimant upon request. Not doing so risks non-compliance with the DOL regulations and potentially the imposition of substantial penalties if challenged in court.
Diane Dygert and Lauren Salas
§ 1.51 SCOTUS Doesn’t Want to Tell Us How They Really Feel About The ACA – Dismissal of ACA Lawsuit Based Only on Standing Grounds
Seyfarth Synopsis: In Texas v. California, the Supreme Court rejected another challenge to the Affordable Care Act (“Obamacare” or “ACA”). The Court never reached the merits of the challenge, relying instead on its now robust Article III standing doctrine. The plaintiffs failed to allege injury traceable to the allegedly unlawful conduct and likely to be redressed by their requested relief.
On June 17, in Texas v. California, the Supreme Court dismissed the declaratory judgment challenge to the ACA’s constitutionality brought by Texas and 17 other states (and two individuals), finding that the plaintiffs lacked Article III standing. Our earlier blog post on this case after oral argument explained that the plaintiffs alleged that the ACA’s “individual mandate” was unconstitutional in the wake of Congress reducing the penalty for failure to maintain health insurance coverage to $0.
The Court side-stepped all issues on the merits, and ruled 7-2 that the plaintiffs did not have standing because they failed to show “a concrete, particularized injury fairly traceable to the defendants’ conduct in enforcing the specific statutory provision they attack as unconstitutional.” The majority said that the plaintiffs suffered no indirect injury, as alleged, because they failed to demonstrate that a lack of penalty would cause more people to enroll in the state-run Marketplaces, driving up the cost of running the programs. Similarly, the majority found no direct injury resulting from the administrative reporting requirements of the mandate. The majority found that those administrative requirements arise from other provisions of the ACA, and not from the mandate itself.
Justices Alito and Gorsuch dissented, opining that the states not only have standing, but that the individual mandate is now unconstitutional and must fall (as well as any provision inextricably linked to the individual mandate).
This is the third significant challenge to the ACA over the last decade.
Moreover, the latest ACA decision has implications beyond just that statute. A solid majority of the Court has emboldened its already tough standing requirements that precondition any merits consideration in federal court. Our prior blogs here and here, have explained that the Court is intent on narrowing the door to the courthouse for many cases, including ERISA cases. This is significant because ERISA fiduciary breach cases, in particular, can be brought only in federal court. As such, we expect to see more ERISA defense arguments based on Article III standing deficiencies. And it certainly will not be enough for plaintiffs to mount a challenge under the Declaratory Judgment Act as a way to avoid the very stringent Article III injury in fact requirement.
Benjamin J. Conley and Mark Casciari
§ 1.52 Lights, Camera, Action! Another Extension to the Relief For Remote Plan Elections: Is Permanent Relief On Its Way?
Seyfarth Synopsis: The IRS has extended its relief from the physical presence requirement related to certain plan elections through June 30, 2022.
Certain elections for distributions from plans require spousal consent provided in the presence of a notary or plan representative. Although states were relaxing their notarization requirements due to the COVID-19 pandemic, many plan administrators were reluctant to accept remote notarizations for plan elections because a “physical presence” requirement remained in the IRS guidance.
In June 2020, the IRS gave temporary relief from the physical presence requirement in the Treasury Regulations related to plan elections. The relief allowed for elections to be witnessed by a notary public of a state that permits remote electronic notarization using live audio-video technology. It also allowed remote witnessing by plan representatives using live audio-video technology if certain requirements were met. See our prior blog post on this relief here.
In January 2021, the IRS further extended this temporary relief through June 30, 2021. The IRS has now extended the relief for another 12 months through June 30, 2022. The guidance also requests specific comments on whether the relief should be permanent. Among other items, the IRS asked for comment about any costs or burdens associated with the physical presence requirement and whether the removal of the physical presence requirement could cause increased fraud, spousal coercion or abuse.
This guidance will provide plan sponsors and plans continued flexibility as plan participants continue to work remotely to some degree, and particularly with respect to former employees, and we expect that plan administrators would welcome the opportunity to continue to use remote authorizations. In fact, given the widespread acceptance of remote work technologies, including video meetings apps, it makes sense that the IRS is considering making the relief permanent. Seyfarth will continue to monitor how the physical presence requirements for plan elections are evolving.
Christina Cerasale
§ 1.53 Agencies Add Lengthy “No Surprises Act” Regulations to your Summer Reading List: Overview of Impact on Employer-Sponsored Plans
Seyfarth Synopsis: The No Surprises Act (the “Act”) was part of the Consolidated Appropriations Act of 2021 signed into law last December 2020. The Act was aimed at protecting insured individuals from getting a bill from a health care provider for the balance of amounts not covered by their health plan. The first set of interim final regulations (IFRs) under this new Act were released last week by the Departments of Treasury, Labor, and Health and Human Services. This alert provides an overview of the impact on employer-sponsored plans. For our broader overview of the regulations, see our July 9 Legal Update.
While most people do expect to pay some portion of the cost of their medical services after their plan pays, the “surprise” comes when these non-covered balances are exceedingly large. This is often the case when the health care provider is not “in-network” under the health care plan and is therefore free to charge whatever rate it wants for the service provided. Even when individuals make efforts to ensure their health care is provided by an in-network doctor or hospital, out-of-network services can sneak into the overall care and treatment program without their knowledge or consent. Surprise!
Prior to the No Surprises Act, the Affordable Care Act provided some level of financial protection for participants who incurred emergency services by setting a minimum level of reimbursement for health plans. These new IFRs, however, will effectively replace those rules, as of January 1, 2022. Notably, the ACA’s rules only apply with respect to so-called “non-grandfathered plans” (i.e., those that had been modified from a cost-sharing perspective since 2010 when the ACA passed into law). These new rules apply to all group health plans, without regard to grandfathered status.
The IFR tries to implement the protections for covered individuals for balance billing surprises by putting various requirements on both health care providers as well as health plans, including insurers and self-funded employer-sponsored plans.
Briefly, the rule accomplishes this goal through the following steps:
Identifies three settings in which the law has determined participants should not be held accountable for balance billing. These settings include: non-network emergency services, services performed by a non-network provider in a network facility, and non-network air ambulance services.
Requires plans to pay for services in those settings at certain minimum rates and to allow participants to pay at cost-sharing levels akin to what would be paid in-network.
Requires providers to object and/or negotiate an agreed-upon payment amount with the plan within 30 days.
If no agreement is reached, the rule requires plans and providers to submit to a binding independent dispute resolution where a third-party determines the appropriate payment rate.
This alert provides additional details on each of these steps, including:
Coverage Rules
Health plans must cover emergency services without any prior authorization and regardless of whether the facility is in-network.
Observation: Most employer-provided health plans already meet this requirement, as the ACA mandated this coverage for all non-grandfathered plans. Although, the definition of emergency services has been broadly interpreted under these rules and should be reviewed in conjunction with your claims administrator.
Health plans must cover certain out-of-network services, performed as part of an in-network visit, even if generally excluded.
Observation: So, a plan that generally excludes all coverage for services performed by out-of-network providers, such as an HMO or EPO, may have to adjudicate related claims for out-of-network provider services where they are performed as part of a participant’s visit to an in-network facility.
Cost-Sharing Rules
Health plans must limit required participant cost sharing for out-of-network services in these settings to no more than the level required for the same in-network services.
Observation: This may require plans to modify their network cost-share to match. For example, both in- and out-of-network cost sharing would be set at 80%-20%, as opposed to setting out-of-network at a lower level, such as 70%-30%.
Health plans must count any participant cost share—whether incurred in- or out-of-network—toward in-network accumulators (deductibles and out-of-pocket maximums).
Observation: This may require a change to how some plans currently tally the participant-paid portion of their health services.
Getting to the crux of the matter for employer health plans—to the extent that a plan typically reprices non-network claims, the plan must calculate the payment to out-of-network providers (and the resulting cost-share required of participants) as if the total amount that was charged was equal to the “recognized amount.” This recognized amount is lesser of the All-Payer Model Agreement of the Social Security Act (APMA), state law where the APMA does not apply, or the “qualifying payment amount” (QPA) where state law does not apply.
Observation: The QPA will generally be the applicable standard for employer group health plans, except where the plan is fully insured. In that case, the relevant state law (if any) would apply. Self-insured plans are permitted (but not required) to opt-in to governing state laws, but to the extent such a plan opts in, the plan will be required to notify participants of the law’s applicability.
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 IFRs start out by looking at the contracted rates in place under a plan as of January 1, 2019.
Observation: The QPA (or state law) will replace the traditional usual, customary and reasonable standard (UCR) or Medicare rate that many plans used, as well as other external measures (e.g., Fair Health) that many providers have pushed (at least in the context of services covered by the No Surprises Act). The agencies are particularly looking for comments on how to determine the QPA.
Any “clean claim” for a service covered by the IFR must be processed by the health plan within 30 days.
Observation: Typically, ERISA requires that a plan issue a notification of an adverse benefit determination on a post-service claim within 30 days, so this largely aligns with how these types of claims would typically be processed.
Prohibition on Balance Billing
The IFRs limit the amount required to be paid to an out-of-network provider by the plan to the amount agreed to by the employer’s plan (where state law is not applicable) or, if there is no agreement, to an amount determined by an “IDR entity.” The IDR is directed to consider the QPA when making its determination. The IFR defers on the details of the IDR entity process for future regulatory guidance.
Observation: As this rule is slightly different from the cost-sharing rule above, the payment to the provider might result in a different amount from the recognized amount less the cost-share portion.
The rules require providers to obtain consent from patients to waive balance billing protections, if they want to have the right to balance bill for certain post-stabilization services or non-emergency services by an out-of-network provider at a network facility.
Observation: While this requirement generally applies to health care providers and not the health plans, it is important to know that participants must receive this notice and provide their consent in order for the out-of-network provider to try to impose any obligation on the participant for the balance after the plan has paid.
Notice Requirements
Both plans and providers must post a publicly available notice about the protections for balance billing, and plans must include relevant language on each EOB for a covered service. The agencies issued a model disclosure notice that may be used.
Observation: Employer plans should work with their administrator to ensure the required information is available on the website and added to each EOB. Further, plan administrator may want to include this information in the plan’s SPD.
The regulations are generally effective for group health plans for plan years beginning on or after January 1, 2022. That means any planning for required changes to plans should start now. Be sure to reach out to your Seyfarth Employee Benefits lawyer for information and assistance as you work through these new rules.
Benjamin J. Conley and Diane V. Dygert
§ 1.54 PBGC Issues Much Anticipated Interim Final Rule on Special Financial Assistance Under American Rescue Plan Act
Seyfarth Synopsis: On July 9, 2021, the PBGC issued its interim final rule on ARPA’s Special Financial Assistance Program for financially troubled multiemployer pension plans. The new regulations provide guidance on the application process for Special Financial Assistance and the related restrictions and requirements, including the priority in which applications will be reviewed. The guidance also sets forth special rules regarding employer withdrawals and withdrawal liability settlements for plans receiving Special Financial Assistance. Please see our companion Legal Update on the Pension and Executive Compensation Provisions in the American Rescue Plan Act here.
On July 9, 2021, the Pension Benefit Guaranty Corporation (“PBGC”) issued extensive guidance in an interim final rule interim final rule (the “Interim Final Rule,” “Rule,” or “regulation”) to implement the American Recue Plan Act’s Special Financial Assistance (“SFA”) Program for financially troubled multiemployer defined benefit pension plans. Under the SFA Program, an eligible plan will receive the funds required for the plan to pay all benefits due from the date of the SFA payment and ending on the last day of the plan year ending in 2051. An eligible plan will receive – in a single lump sum payment – the funds required to pay all benefits due (Click here for our Legal Update on the Pension and Executive Compensation Provisions in the American Rescue Plan Act).
The Interim Final Rule, set forth in new Section 4262 of the PBGC’s regulation, provides guidance to plan sponsors on the SFA application process, including what plans need to file to demonstrate eligibility for relief; calculating the amount of SFA; assumption requirements; the PBGC’s review of SFA applications; and other restrictions and conditions. The Interim Final Rule also sets forth the order of priority in which applications will be reviewed and provides much anticipated clarification on the calculation of withdrawal liability and the assumptions to be used for SFA.
There is a thirty (30) day public comment period starting from the date of publication of the rule in the Federal Register on July 12, 2021.
The following is a high level summary of the key provisions from the Interim Final Rule. Seyfarth will hold a webinar on Friday, July 30, 2021, at 1:00 central to review the regulation in more detail, as well as the considerations for plan sponsors and contributing employers. Stay tuned for more details about the webinar.
1. Eligible Multiemployer Pension Plans
A multiemployer pension plan is eligible for SFA relief if they fall into any one of the following four categories:
The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
The multiemployer pension plan suspended benefits in accordance with the Multiemployer Pension Reform Act of 2014 (“MPRA”);
The multiemployer pension plan: (i) is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022; (ii) has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and withdrawal liability due, and the denominator of which is current liabilities) of less than 40%; and (iii) has a ratio of active to inactive participants which is less than 2 to 3; or
The multiemployer pension plan became “insolvent,” as defined under Code Section 418E, after December 16, 2014, and has remained so insolvent and has not been terminated as of March 11, 2021.
Elected Critical Status Plans, Plans Terminated by Mass Withdrawal Prior to January 1, 2020
The regulation clarifies that a multiemployer pension plan that has elected to be in critical status under ERISA Section 305, but has not yet been certified as being in critical status, is not eligible for SFA. Similarly, a multiemployer pension plan that is terminated by mass withdrawal that took place prior to January 1, 2020 is not eligible for SFA relief.
Clarification on Determining Eligibility for Critical Status Plans
To ensure uniformity in applications, the data reported on the Form 5500 is to be used for purposes of determining a plan’s eligibility for SFA as a critical status plan under category “3” above. For purposes of determining the number active to inactive participants, plans should use line 6a on the 2020 Form 5500 (for total number of active participants), and the sum of lines 6b, 6c, and 6e (for total number of inactive participants based on retired or separated participants receiving benefits, retired or separated participants entitled to future benefits, and decease participants whose beneficiaries are receiving or entitled to benefits).
The regulation also provides that the three conditions necessary for a critical status plan to be eligible for SFA in category 3 above do not need to be satisfied for the same plan year, in recognition that the filing deadlines for the certification of plan’s status (known as the “zone certifications”) and the Form 5500 are not the same. The deadline for filing the certification of plan status can be more than a year before the deadline to filing the Form 5500 for the same plan year in question, and the data used for both purposes maybe from different plan years.
Assumptions For Determining Eligibility
The treatment of assumptions under the Rule differs based on the date of the applicable zone certification for the plan. If a plan sponsor applies for SFA and asserts eligibility based on a certification of critical status or critical and declining status issued prior to January 1, 2021, the PBGC is required to accept the assumptions that are incorporated into the certification, unless they are clearly erroneous.
If a plan sponsor applies for SFA and asserts eligibility based on a zone certification of critical status that was not completed prior to January 1, 2021, the plan sponsor must determine whether the multiemployer pension plan is still in critical or critical and declining status using the assumptions from the plan’s most recently completed certification prior to January 1, 2021, unless those assumptions are unreasonable (excluding the plan’s interest rate). If a plan sponsor determines one or more of those assumptions are no longer reasonable, they may propose changes to them in its application for SFA. The sponsor must disclose the proposed change, explain why the assumptions are no longer reasonable, and demonstrate that the proposed changes are reasonable.
2. Amount of Special Financial Assistance
Under ARPA, the amount of SFA relief for eligible multiemployer plans is the “amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment…and ending on the last day of the plan year ending in 2051….” The PBGC clarifies that the plain meaning of the statutory language means the SFA is the amount by which “a plan’s resources fall short of its obligations, taking all plan resources and obligations into account.” The relevant amounts are determined as of the “SFA measurement date,” which is the last day of the calendar quarter immediately preceding the date the plan’s application was filed. The amount of SFA, however, is subject to further adjustment for interest, outstanding PBGC loans, and the date that funds are paid to the plan.
Resources and Obligations
The value of a multiemployer pension plan’s obligations is the sum of the present value of specified benefits payments and administrative expenses to be paid by the plan through the “SFA Coverage Period” (the period beginning on the plan’s SFA measurement date and ending on the last day of the last plan year ending in 2051). The amount of benefit payments is determined as of the SFA measurement date, and is calculated by including any reinstated benefits that were previously suspended under the MPRA.
A multiemployer pension plan’s resources include the total fair market value of assets as of the SFA measurement date, plus the present value of future contributions, investment returns, withdrawal liability payments, and other expected payments into the plan during the SFA Coverage Period. It does not include any financial assistance loans received from the PBGC under ERISA Section 4261 or the amount of SFA.
3. Calculating SFA
The projection of the plan’s resources and obligations must be made on a deterministic basis and using a single set of assumptions as set forth in Section 4262.4(d) of the new regulation. That means projections must be made based on participant data as of the first day of the plan year in which the plan’s initial application is filed for SFA. If the initial application date is less than 270 days after the beginning of the current plan year, and the current year’s actuarial valuation is not yet complete, the projections may be based instead on participant census data from the first day of the plan year preceding the plan year that the initial application is filed.
The amount of SFA must generally be calculated in accordance with generally accepted actuarial principals and certain prescribed assumptions as set forth below.
Interest Rate Assumption
For purposes of determining the amount of SFA, the assumed interest rate is the lesser of: (1) the long-term interest rate used for funding standard account purposes as projected in the most recent certification of plan status completed before January 1, 2021; and (2) the “third segment rate” specified in ERISA Section 303(h) plus 200 basis points, for the month the plan’s application is filed or one of the three preceding months, as selected by the plan.
Other Assumptions
For any other assumptions than the interest rate, the plan is to look to those used in its most recently completed certification of plan status before January 1, 2021, unless they are unreasonable. If a multiemployer plan determines that any such assumptions are unreasonable, it may include a proposed change in its SFA application, except with respect to the interest rate assumption. The PBGC will accept a plan’s proposed changes to these assumptions unless it determines that the assumption is “individually unreasonable,” or that the proposed changes in assumptions are “unreasonable in the aggregate.”
4. Multiple Applications
The PBGC explains that the wording of ARPA suggests plans may have multiple filing dates by providing for separate deadlines for initial applications and revised applications. The PBGC also notes there is no limit to the number of times a multiemployer pension plan may revise its application for SFA, as long as the last revised application is filed by the statutory deadline of December 31, 2026. To prevent plan sponsors from submitting multiple applications to change the interest rate, however, the PBGC dictates in the Rule that the assumed interest rate will always be the rate from the plan’s initial application.
5. Certain Events Disregarded For Calculation Of SFA
Recognizing that a plan could implement certain changes that could entitle the plan to more SFA than was intended under the ARPA, certain events that occur between July 9, 2021 and the SFA measurement date (the last day of the quarter preceding the plan’s application) are disregarded in calculating the amount of SFA for a multiemployer pension plan. The following events are disregarded:
Transfers of assets or liabilities, including spin-offs.
Benefit Increases. The execution of a plan amendment increasing accrued or projected benefits, other than a restoration of benefits previously reduced under the MPRA.
Contribution Reductions. The execution of “a document reducing a plan’s contribution rate (including any reduction in benefit accruals adopted simultaneously or arising from a pre-exiting linkage between benefit accruals and contributions),” but only if the plan does not demonstrate that risk of loss for participants and beneficiaries is reduced by execution of the document (disregarding any SPA). The plan sponsor must make such demonstration in accordance with the instructions on the PBGC’s website at gov. The “document” referred to in this rule can be either a collective bargaining agreement not rejected by the plan, or a document reallocating contribution rates.
If a multiemployer pension plan experiences a merger between July 9, 2021, and the measurement date, the total amount of SFA available is limited to the sum that each individual plan would have been eligible for had the merger not occurred. The PBGC further concludes that it is reasonable and within its regulatory authority to disregard changes made to a multiemployer pension plan after July 9, 2021, if the effect was to artificially inflate the amount of SFA. In that regard, the PBGC explained it was authorized to impose reasonable conditions to ensure that the amount of SFA provided to plans is not “inflated by way of contrived events.”
6. Information To Be Filed With SFA Application
Initial Application
The following information is required to be submitted with a multiemployer pension plan’s SFA application in order for it to be considered complete:
Basic plan information specified in Section 4262.7 of the new regulation, including the name of the plan, EIN and plan number, identification of the individual filing the application and his or her role, contact information for the plan sponsor and authorized representative(s), the amount of SFA requested, identification of the applicable eligibility criteria, priority group identification, plan documents, actuarial valuation reports from the 2018 plan year to the year the application is filed, most recent rehabilitation or funding improvement plan and all amendments, Form 5500 filings, actuarial certifications and financial information, and withdrawal liability policies and procedures;
Actuarial and financial information specified in Section 4262.8, including projected benefit payments as reported on Form 5500 and Schedule MB for 2018 to the year the application is filed, identification of the 15 largest employers (for plans with more than 10,000 participants), historical financial information, information used to determine the amount of SFA including, among other things, interest rate, fair market value of plan assets, projected amount of contributions and withdrawal liability payments, projected administrative expenses, and explanations for any proposed changes to assumptions from certification prior to January 1, 2021, and information regarding certain events;
Copy of an executed plan amendment confirming the plan was amended to add the following provision: “Beginning with the SFA measurement date selected by the plan in the plan’s application for special financial assistance, the plan shall be administered in accordance with the restrictions and conditions specified in section 4262 of ERISA and 29 CFR part 4262. This amendment is contingent upon approval by PBGC of the plan’s application for special financial assistance;”
Copy of a proposed plan amendment to reinstate any benefits previously suspended under the MPRA;
A complete checklist and certain other information as described on the PBGC’s website at gov.
Trustee Signature
The application for SFA must be signed and dated by an authorized trustee who is a current member of the plan’s board of trustees, or another authorized representative. The following statement must also be included in the application and signed by the authorized trustee:
“Under penalties of perjury under the laws of the United States of America, I declare that I have examined this application, including accompanying documents, and, to the best of my knowledge and belief, the application contains all the relevant facts relating to the application, and such facts are true, correct, and complete.”
Actuarial Certification
All required calculations for the SFA application must be accompanied by a certification by the plan’s enrolled actuary.
Duty to Supplement and Clarify
The PBGC may require additional information from the plan sponsor to substantiate or clarify information provided in the application. Plan sponsors are required to promptly comply with such requests.
The regulation specify that plan sponsors have a duty to promptly notify the PBGC if at any time when the application is pending they become aware that any material fact or representation is no longer accurate, or that any material fact or representation was omitted from the application.
Disclosure of Information
Unless it is considered confidential under the Privacy Act, all information submitted as part of an SFA application may be made publicly available, and the PBGC offers no assurances that any information or documentation submitted with an application will remain confidential.
7. Applications For Plans With Partitions
ARPA requires the PBGC to provide an alternative application for use by multiemployer pension plans that have been approved for a partition by the PBGC before March 11, 2021. This alternative process is provided in Section 4262.9 of the new regulation. A plan sponsor of a partitioned plan must file a single application with information about the original plan and successor plan. The filing of an application for partitioned plans falls under “priority group 2.”
8. Processing, Priority Groups, And Filing Deadlines
All initial applications for SFA must be filed by December 31, 2025. Any revised application must be filed by December 31, 2026. Applications must be filed electronically.
The PBGC will limit the number of applications accepted in a manner so that each application can be processed within 120 days. The PBGC will approve or deny the application within 120 days. The PBGC may consider an application incomplete if it does not have all of the required information. A plan sponsor may withdraw their application or revise it.
Priority Groups
Until March 11, 2023, certain plans will be given priority to file an application if they are in one of the following groups:
Priority Group 1. The plan is insolvent or projected to become insolvent by March 11, 2022. A plan in priority group 1 may file SFA applications beginning on July 9, 2021.
Priority Group 2. The plan suspended benefits under the MPRA as of March 11, 2021, or the plan is expected to be insolvent within 1 year of the date the plan’s application was filed (as indicated above, plans that have undergone partition also fall in priority group 2). A plan in priority group 2 may file SFA applications beginning on January 1, 2022, or such earlier date specified on the PBGC’s website.
Priority Group 3. The plan is in critical and declining status and had 350,000 or more participants. A plan in priority group 3 may file SFA applications beginning on April 1, 2022, or such earlier date specified on the PBGC’s website.
Priority Group 4. The plan is projected to become insolvent by March 11, 2023. A plan in priority group 4 may file SFA applications beginning on July 1, 2022, or such earlier date specified on the PBGC’s website.
Priority Group 5. The plan is projected to become insolvent by March 11, 2026. The PBGC will specify the date a plan in this group can file an application on its website at least 21 days in advance of such date, and such date will not be later than February 11, 2023.
Priority Group 6. The plan is projected by the PBGC to have a present value of financial assistance payments under ERISA Section 4261 that exceeds $1,000,000,000 if special assistance is not provided. The PBGC will specify the date a plan in this group can file an application on its website at least 21 days in advance of such date, and such date will not be later than February 11, 2023.
Additional Priority Groups. The PBGC may add additional priority groups and deadlines to apply, which will be posted on its website.
Beginning with when the PBGC starts accepting applications for priority group 2, an application for emergency filing may be accepted if: (1) the plan is insolvent or expected to become insolvent within 1 year of filing the application or suspended benefits under the MPRA as of March 11, 2021; and (2) the plan notifies the PBGC before submitting the application that it qualifies as an emergency in accordance with the instructions on the PBGC website.
9. Restrictions on SFA Use and Investment
A multiemployer pension plan that receives SFA must separately account for such amounts and it must be segregated from other assets. SFA funds, and any earnings thereon, can only be used to make benefit payments and pay administrative expenses. SFA funds must also be invested in fixed income securities and investment-grade bonds or other investments as permitted by Section 4262.14 of the PBGC regulation. Plans will be required to keep at least one year’s worth of benefit payments and administrative expenses invested in accordance with these rules, even if it runs out of SFA funds.
The PBGC acknowledged concerns that its restrictions on investing SFA could have adverse impacts on overall plan financial health, especially given historically low interest rates on fixed income securities. The PBGC considers the investment restrictions set forth in the new regulation to be a starting point, and is seeking public input on refining its rules in this area, with several specific questions posed by the PBGC for public comment.
10. Conditions for Receipt of SFA
A multiemployer pension plan that receives SFA must be administered in accordance with PBGC guidelines. Those conditions include prohibiting benefit increases during the SFA period if it is attributable to service accrued prior to the amendment (other than restoring benefits suspended under the MPRA), and only allowing prospective benefit increases where the plan’s actuary certifies that employer contribution increases are sufficient to pay for the benefit and those increases were not included in the determination of SFA.
During the SFA period, the contributions that a multiemployer pension plan receives per contribution base unit (e.g., per hour worked) cannot be less than those set forth in the collective bargaining agreement(s) or plan documents in effect on March 11, 2021, unless the plan sponsor determines the change lessens the risk of loss to participants. If the reduction affects annual contributions over $10 million and over 10% of all employer contributions, the change is subject to PBGC approval.
The regulation also prohibits a decrease in the proportion of income received or an increase in the proportion of expenses allocated to a plan that receives SFA, subject to certain exceptions. Plans receiving SFA are also prohibited from engaging in a transfer of assets or liabilities (including a spinoff) or merger except with PBGC approval.
The PBGC is soliciting public comment on whether there are other circumstances relating to the conditions for receipt of SFA where the PBGC should consider providing approval for exceptions.
11. Withdrawal Liability Conditions for Receipt of SFA
As anticipated, the PBGC did impose certain conditions on withdrawal liability for plans that receive SFA. The PBGC, however, considered and apparently rejected mandating that, during the SFA Coverage Period, SFA assets would be disregarded in the determination of unfunded vested benefits for the assessment of withdrawal liability. Instead, it adopted two other conditions: a restriction on withdrawal liability interest assumptions, and a requirement for PBGC approval of certain withdrawal liability settlements.
Withdrawal Liability Interest Assumptions
The interest assumptions used to determine unfunded vested benefits and calculate withdrawal liability must be the PBGC’s mass withdrawal interest assumptions that approximate the market price that insurance companies charge to assume a similar pension-benefit-like liability. Plans receiving SFA must use those interest assumptions for withdrawal liability calculations until the later of 10 years after the end of the plan year in which the plan receives payment of SFA or the last day of the plan year in which the plan no longer holds SFA or any earnings thereon in a segregated account. Given plan termination interest rates are generally much lower than rates most plans use to calculate withdrawal liability, this will likely increase a withdrawing employer’s liability—although whether that increase will necessarily offset the impact of SFA may depend upon the particular circumstances of the withdrawing employer and the plan.
The PBGC determined that without the interest assumption change “the receipt of SFA could substantially reduce withdrawal liability owed by a withdrawing employer,” and “could cause more withdrawals in the near future than if the plan did not receive SFA.” Payment of SFA “was not intended to reduce withdrawal liability or to make it easier for employers to withdraw.”
PBGC Approval of Certain Withdrawal Liability Settlements
Any settlement of withdrawal liability during the SFA Coverage Period is subject to PBGC approval if the present value of the liability settled is greater than $50 million. The PBGC will only approve such a settlement if it determines that: (1) it is in the best interests of the participants in the plan; and (2) it does not create an unreasonable risk of loss to PBGC. The information the PBGC will require in order to review a proposed settlement includes: the proposed settlement agreement; the facts leading to the settlement; the withdrawn employer’s most recent 3 years of audited financials and a 5-year cash flow projection; a copy of the plan’s most recent actuarial evaluation; and a statement certifying the trustees have determined that the proposed settlement is in the best interest of the plan, its participants and beneficiaries.
12. Promise of Additional PBGC Regulations as to Assumptions for All Plans
Last but not least, in its explanation of the final interim rule the PBGC noted that it plans to use its authority under Section 4213(a) of ERISA to propose a separate rule of general applicability setting forth actuarial assumptions which “may” be used to determine an employer’s withdrawal liability. Presumably, this general rule would be applicable to all plans, not simply those that receive SFA. This could have a significant impact on how withdrawal liability is calculated in the future.
CONCLUSION
It will take some time for plans and participating employers to digest the interim final rule and what it means for their particular situation. As noted there will be a thirty-day public comment period, which may lead to additional changes. The PBGC is not done with its rulemaking, both as to SFA recipients or, apparently, plans generally. Stay tuned, and mark your calendars for the webinar on July 30th.
There are a number of issues that have not been addressed in this regulation, and we will be issuing a further memorandum soon outlining some of the important open questions.
Seong Kim, Ronald Kramer and Alan Cabral
§ 1.55 Who Is Liable for Withdrawal Liability? — The Seventh Circuit Explains an Expansive Definition
Seyfarth Synopsis: In a recent decision highlighting the potential for far-reaching responsibility for withdrawal liability payments, the Court of Appeals for the Seventh Circuit affirmed a judgment against two individuals contending that their ownership interest in the contributing company’s principal place of business was a purely passive investment.
In February 2018, a trucking company ceased all operations and withdrew from the Local 705 Teamsters Multi-Employer Pension Fund. The fund sent the company, and the individuals who owned its principal place of business, a demand for payment of withdrawal liability.
The company and the individuals did not request review of the demand. The fund then commenced litigation to collect on its demand.
The Seventh Circuit affirmed a judgment in favor of the fund and against the contributing company and individuals. The decision is reported as Local 705 International Brotherhood of Teamsters Pension Fund v. Pitello, 2021 WL 2818326 (7th Cir. July 7, 2021).
The court explained that withdrawal liability extends to all “trades or businesses” under common control with the withdrawing employer, on a joint and several liability basis. The court said that joint and several liability does not extend, however, to parties with purely “passive or personal investments.”
The individuals argued that their ownership of the at-issue property should not be deemed a trade or business because they: (1) never received any rent or tax benefits as a result of the company’s use of the property, (2) purchased the property 18 years earlier and held it purely as an investment, (3) did not lease it to anyone after the company ceased operations, and (4) never employed anyone to manage the property.
The court found that another company the individuals owned did charge rent for the property after the contributing company ceased operations. The court thus reasoned that “whatever value the[y] received through their rent-free arrangement with [the company] had been lost,” and the decision to generate replacement rental income thereafter made clear that their ownership of the property was a business venture.
The Paycheck Protection Program (PPP) loan forgiveness deadlines are quickly approaching. In order to avoid making unnecessary PPP loan payments, borrowers must submit loan forgiveness applications to their lenders within 10 months from the end of their respective covered periods. This means that borrowers receiving PPP loans in the initial tranche in early- to mid-April 2020 will have due dates beginning in July 2021. If a loan forgiveness application is received by the due date, payments are deferred until a decision on the forgiveness application is made by the lender and the Small Business Administration (SBA).
In December 2020, the SBA began requiring borrowers of more than $2 million to submit a loan necessity questionnaire in connection with the application for loan forgiveness. Many borrowers found these questionnaires to be intimidating, burdensome, and intrusive.
Significantly, the SBA has officially eliminated the loan necessity forms and review for PPP loans of $2 million or greater in a notice sent out on July 9, 2021. In this notice, the SBA said it would no longer request either version of the loan necessity questionnaire (SBA form 3509 for for-profit borrowers and SBA Form 3510 for not-for-profit borrowers). Also, loan necessity questionnaires previously requested are no longer required to be submitted. For PPP loans with an open request for additional documentation related to the loan necessity questionnaire, the SBA advised lenders to close the request and submit the loan back to the SBA.
Thus, to apply for loan forgiveness, the SBA Form 3508, SBA Form 3508EZ, or SBA Form 3508S (or a lender equivalent) must be completed and submitted to the lender, together with supporting documentation. Although the SBA eliminated the loan necessity questionnaire, it did not eliminate the need for borrowers requesting forgiveness of a PPP loan to document the use of loan proceeds.
For payroll, documentation should be provided for payroll periods that overlapped with the covered period. This would include bank statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees. It could also include payroll tax reported, or that will be reported, to the IRS (typically Form 941) and state quarterly employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant states.
Wages may not be taken into account when calculating eligible payroll costs for loan forgiveness to the extent they are qualified wages paid during April 1, 2020, through December 31, 2021, that are taken into account for purposes of claiming the Employee Retention Credit under Section 2301 of the CARES Act.
Documentation of forgivable non-payroll costs should also be included. For example, lender amortization schedules and receipts verifying payments, or lender account statements, can document business mortgage interest payments. Similarly, copies of leases and receipts or cancelled checks can verify rent expenses. Similar documentation can confirm utility payments, eligible operations expenditures, eligible supplier costs, and eligible worker protection measures.
The loan forgiveness application and supporting documentation must be submitted to the PPP lender, usually via an online portal. It is critical for borrowers to follow up with their lender promptly regarding requests for additional documentation, and to communicate with their lender throughout the loan forgiveness process.
The SBA still has the right to undertake a review of the PPP loan and the forgiveness decision by the lender. If it does so, the lender will provide the borrower notification of the SBA review, and any subsequent SBA review decision. Borrowers have the right to appeal certain SBA review decisions.
In summary, the PPP loan forgiveness deadlines are quickly approaching, but the process has recently been made simpler by elimination of the loan necessity questionnaire previously in place for PPP loans of $2 million or greater. Despite elimination of the necessity questionnaire, the SBA has not eliminated its review of loan necessity.
PPP borrowers are urged to submit their loan forgiveness application and supporting documentation within 10 months of the last day of the covered period in order to obtain deferral of PPP loan payments and ultimately loan forgiveness.
William B. Eck, Stanley S. Jutkowitz and Suzanne L. Saxman
§ 1.57 IRS Issues Highly Anticipated Update to Qualified Plan Correction Procedures
On July 16, 2021, the IRS issued Revenue Procedure 2021-30, updating its Employee Plans Compliance Resolution System (“EPCRS”), which permits retirement plan sponsors and administrators to correct compliance failures that may adversely impact the tax-qualified status of their defined contribution (including 403(b)) and defined benefit plans. Rev. Proc. 2021-30 includes numerous highly anticipated (and mostly welcome) updates to the IRS correction procedures, including two new correction methods for defined benefit plan overpayments, an increase in certain de minimis correction thresholds, elimination of the ability to make an anonymous submission under the program, and the expansion of the Self-Correction Program (“SCP”) with respect to the use of retroactive plan amendments. Unless otherwise noted below, the changes to EPCRS are effective July 16, 2021.
Correction of Plan Overpayments
Undoubtedly, the most significant changes to EPCRS relate to the correction of plan overpayments. Several years ago, the IRS updated EPCRS to set forth the methods that could be used by a plan sponsor to correct a plan overpayment. Generally, these options included the return of overpayment method, a “make-whole” contribution by the plan sponsor for the amount of the overpayment (adjusted for earnings) or, in some cases, a retroactive plan amendment. For several years, the IRS has been considering additional changes relating to the recoupment of overpayments. The hope has been that any update would address when it may not be necessary to recoup an overpayment from a participant. Happily, the Revenue Procedure has been revised and reformatted to include helpful clarifications relating to the long-standing return of overpayment method, as well as two new correction methods that plan sponsors may use to correct defined benefit plan overpayments.
Return of Overpayment Method (Applicable to DC and DB Plans)
Under Revenue Procedure 2019-19, the prior iteration of EPCRS, plan sponsors may generally correct overpayments from defined contribution plans (including 403(b) plans) and defined benefit plans by using the return of overpayment correction method. Under this method, the plan sponsor takes reasonable steps to have the amount of the overpayment, adjusted for earnings at the plan’s earnings rate, returned to the plan by the participant. If the amount returned to the plan is less than the overpayment, adjusted for earnings, then the plan sponsor must contribute the difference to the plan unless the overpayment only occurred because the distribution was made in the absence of a distributable event and the amount of the distribution was otherwise consistent with the plan’s terms. The plan sponsor must also notify the participant that the amount of the overpayment was not eligible for tax-free rollover.
Rev. Proc. 2021-30 expands upon the return of overpayment correction method, providing that plan sponsors may give the recipient of an overpayment a choice of how they would like to repay. Specifically in the context of defined benefit plans, plan sponsors may allow overpayment recipients to repay as follows:
As a single, lump sum payment,
Through an installment agreement (provided the overpayment recipient is not a “disqualified person” or an owner-employee), OR-
By having future periodic benefit payments reduced by an amount necessary to recoup the amount of the overpayment, if applicable. Note that under this option a spouse’s survivor benefit may not be reduced to recoup the overpayment, even if the overpayment amount has not been fully recouped during the participant’s lifetime.
Note, if the amount repaid to the plan by the overpayment recipient as a lump sum payment or through an installment agreement is less than the amount of the overpayment adjusted for earnings, the plan sponsor must contribute the difference to the plan. This “make-whole” rule, however, does not apply if future periodic benefit payments are reduced to recoup the amount of the overpayment, even if the participant dies, for example, before the entire amount of the overpayment has been recouped.
Revenue Procedure 2021-30 does allow plan sponsors of defined contribution plans to give overpayment recipients a choice as to the method of repayment, but does not point directly to the specific repayment methods permitted for defined benefit plans. We would expect the IRS to interpret this ability to choose in the defined contribution space to include similar methods as described for defined benefit plans, as appropriate.
For both defined benefit and defined contribution plans, the new Revenue Procedure retains language indicating that other appropriate correction methods (presumably those not detailed therein) may be used to correct an overpayment.
New Correction Methods for Overpayments (Applicable to DB Plans)
Revenue Procedure 2021-30 adds two new correction methods that employers may use when correcting overpayments from a defined benefit plan: (1) the funding exception correction method and (2) the contribution credit correction method. As described in more detail below, these new correction methods reduce the amounts necessary for plan sponsors to recoup from participants or to contribute to the plan to make the plan “whole” when overpayment errors occur.
Note, these two new correction methods may not be used if the overpayment is associated with a failure to satisfy a statutory limit, such as Code Sections 401(a)(17), 415(b) and 436, and may also not be used to correct an overpayment made to a disqualified person or an owner-employee.
The Funding Exception Correction Method
As its name suggests, this new correction method is generally tied to a defined benefit plan’s adjusted funding target attainment percentage, or “AFTAP.” Specifically, no corrective payment to the plan (by either the recipient of the overpayment or the plan sponsor) is necessary if, in the case of a plan subject to Code Section 436, the plan’s certified or presumed AFTAP applicable at the time of correction is equal to at least 100% (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status, determined at the date of correction). If these requirements are met, then for purposes of EPCRS:
No further corrective payments from any party are required,
Reductions to future benefit payments to the recipient of an overpayment (or the spouse or beneficiary of an overpayment recipient) to recoup the amount of an overpayment are not permitted, and
Corrective payments from the recipient of an overpayment (or the spouse or beneficiary of an overpayment recipient) are not permitted.
Future benefit payments must be reduced, however, to the correct benefit payment amount, if applicable.
“Contribution Credit” Correction Method
This new correction method limits the amount of an overpayment that is required to be repaid to a plan. Under this method, the amount of an overpayment that must be repaid to the plan is equal to the amount of the overpayment reduced (but not below zero) by a “contribution credit” that is equal to the following:
The cumulative increase in the plan’s minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance, or funding standard account credit balance), beginning with (1) the plan year for which the overpayments are taken into account for funding purposes, through (2) the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; AND
Certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made.
If, after applying the contribution credit, the amount of the overpayment is reduced to zero, then (1) no further corrective payments from any party are required, (2) no further reductions to future benefit payments to the recipient of an overpayment (or their spouse or beneficiary) are permitted, and (3) no corrective payments from the recipient of an overpayment (or their spouse or beneficiary) are permitted.
If a net amount of an overpayment remains after applying the contribution credit, the plan sponsor must make a contribution to the plan of the remaining amount or take action to recoup the remaining amount from the overpayment recipient. The amount may be recouped from the overpayment recipient using a method described above (i.e., single sum payment, installments, reduction of future benefit payments), but additional special rules apply when recouping a net overpayment after applying the contribution credit. Also, when requesting a repayment of that net overpayment from a recipient, the plan sponsor must provide the recipient of the overpayment with a special written notice that includes information about the overpayment and about the three repayment options available to the recipient. If the recipient does not choose a repayment option within a reasonable period of time (deemed to be at least 30 days), then the notice must explain that the default repayment option will be the adjustment of future payments, provided the recipient is entitled to future payments under the plan, or a single sum payment if not entitled to future payments. Note, this notice requirement does not appear to apply when providing a recipient with options for repayment under the general repayment of overpayment correction method described above.
In order to be eligible to use the contribution credit correction method, the plan may not have a funding deficiency or an unpaid minimum required contribution as of the end of the last plan year before the plan year for which the plan sponsor takes into account the corrected benefit payment amount for funding purposes (taking into account contributions made after the end of the plan year that are credited to that plan year).
Additional Correction Principles for Overpayments
Revenue Procedure 2021-30 provides that when correcting overpayments, the following correction rules/principles apply (some of these are not new):
If periodic payments are involved, any future benefit payments must be reduced to the correct benefit payment amount (i.e., plan sponsors must “stop the bleeding”).
Generally, the plan sponsor must notify the recipient of the overpayment (in writing) that the amount of the overpayment is not an eligible rollover distribution (i.e., is not eligible for tax-free rollover), even if the recipient of the overpayment is not required to repay the amount of the overpayment under the applicable correction methods described above.
In many circumstances, with a few exceptions, if the overpayment is not repaid, the plan sponsor must make the plan whole. For example, if a net overpayment amount remains after the contribution credit from (2) above is applied and the participant does not repay the overpayment amount, the plan sponsor must reimburse the plan for the remaining amount of the overpayment (adjusted for earnings).
Other Meaningful Updates to EPCRS
Increase in De Minimis Threshold
A welcome change in Rev. Proc. 2021-30 is an increase to the de minimis threshold that applies to plan overpayments and excess amounts (e.g., excess employee or employer contributions) from $100 to $250. For example, if the total amount of a plan overpayment is $250 or less (after adjustment for earnings), the plan sponsor is not required to seek return of the overpayment from the participant, or notify the participant that the overpayment was not eligible for tax-free rollover. Note, however, plan sponsors must still notify participants that overpayment amounts resulting from exceeding a statutory limit are not eligible for favorable tax treatment.
Replacement of Anonymous VCP Submissions with New Procedures
Effective January 1, 2022, the anonymous VCP submission procedures are eliminated, and replaced with new pre-submission procedures. Under the new pre-submission procedures, beginning January 1, 2022, plan sponsors may request (at no fee) an anonymous, pre-submission meeting with the IRS regarding issues for correction under VCP when their requested correction methods are not any of the safe harbor correction methods described in the EPCRS guidance.
Correction of Operational Issues via Plan Amendment
Revenue Procedure 2021-30 further expands the correction of operational errors by plan amendment under the IRS’ Self-Correction Program (“SCP”). Previously, the IRS had expanded the SCP to allow for the correction of certain operational failures via a retroactive plan amendment under the following conditions:
The corrective amendment must result in an increase of a participant’s benefit, right or feature;
The increase in benefit, right or feature is provided to all employees eligible to participate in the plan;
The increase in benefit, right or feature (a) was permitted under IRS rules and (b) satisfied certain applicable correction principles under Revenue Procedure 2019-19.
With respect to the second requirement above, the IRS’ prior informal position was that all employees eligible to participate in the plan really meant every single employee eligible to participate, making this a difficult requirement to meet. In many cases, an error only occurs with respect to a subset of participants in a plan and not all employees eligible to participate (e.g., erroneous exclusion of overtime wages from the definition of compensation only affects non-exempt employees eligible for overtime). In Rev. Proc. 2021-30, the IRS completely eliminated the requirement that the increase in benefit, right or feature must be provided to all eligible employees, thus making it easier to retroactively amend a plan under SCP without having to file an application under VCP in these circumstances.
Extension of SCP Correction Period for Significant Failures
Historically, plans have had until the last day of second plan year following the plan year for which a significant operational or plan document failure occurred to self-correct under the SCP. Rev. Proc. 2021-30 extends this correction period by an additional year, until the last day of the third plan year following the plan year for which the failure occurred. The change to this SCP correction period also results in an extension of the deadline for self-correcting certain elective deferral failures (under the special safe harbor correction method) lasting more than three months but not longer than the SCP correction period for significant failures.
Extension of Sunset Safe Harbor Correction Method
Revenue Procedure 2015-28 added a safe harbor correction for certain automatic contributions failures that generally were corrected by the end of the 9½ month period after the end of the plan year when the failure first occurred. Under the safe harbor correction, a plan sponsor was not required to make-up missed employee contributions (pre-tax or Roth) if the plan had an automatic enrollment feature and certain other requirements, including a 45-day notice, were met. Unfortunately, under Rev. Proc. 2015-28 and subsequent EPCRS Revenue Procedures (including Rev. Proc. 2019-19), this special correction option was available only for failures that began on or before December 31, 2020. Revenue Procedure 2021-30 extends this correction method by an additional three years, so this safe harbor may continue to be used for failures that begin on or before December 31, 2023. This extension is retroactively effective back to January 1, 2021.
Revenue Procedure 2021-30 is lengthy, and this is a only summary of many of the new provisions. For further information and updates, check back here and follow our blog, or contact your Seyfarth employee benefits attorney.
Sarah J. Touzalin and Christine M. Cerasale
§ 1.58 Write Well – ERISA Plan Terms Control Against Defendants Too
Seyfarth Synopsis: The Court of Appeals for the Ninth Circuit recently rejected the application of the doctrine of equitable estoppel to prevent a plan trustee from enforcing the clear terms of the plan. So, it bears repeating that drafters of ERISA plans are well advised to draft as clearly and carefully as possible.
In Wong v. Flynn-Kerper, 999 F.3d 1205 (9th Cir. 2021), an ESOP trustee sued to enforce the terms of the Plan. The operative Plan terms mandated that the Plan not pay more than fair market value for company stock, as determined at the time of the transaction by an independent appraiser. The Plan sought revision of a transaction where the Plan had promised to pay for stock, by alleging that the stock was overvalued. The Plan claimed that the independent appraiser was unaware that the Plan sponsor was carrying substantial uncollectable debt and facing mounting attorney’s fees and administrative penalties.
The defendant holder of the promissory note attempted to invoke the doctrine of equitable estoppel to dismiss the claim, relying on a side agreement between the defendant and the trustee that affirmed an obligation to pay for the stock even if overvalued. The defendant thus argued that the Plan was equitably estopped from reducing the value of the note. The district court agreed and granted the defendant’s motion to dismiss. The Ninth Circuit reversed, holding that the doctrine of equitable estoppel could not be invoked against an ERISA plan trustee to contradict the terms of the plan. Allowing the terms of the side agreement to prevail, the court stated, would plainly violate those Plan terms mandating that the Plan not pay more than fair market value. The Ninth Circuit thus joined the Fourth Circuit in barring the defensive use of equitable estoppel to contradict an ERISA plan’s express terms. See Ret. Comm. of DAK Ams. LLC v. Brewer, 867 F.3d 471 (4th Cir. 2017).
We note as well that the Ninth Circuit did not apply a wholesale ban on the application of equitable estoppel in ERISA actions. Rather, the court said that equitable estoppel could apply if, in addition to meeting the traditional elements of equitable estoppel, a party established (1) extraordinary circumstances, (2) that the provisions of the plan are ambiguous, and (3) that the representations made about the plan were an interpretation, and not a modification, of the plan.
Takeaway — We have previously discussed the importance of careful drafting of ERISA plans. See here and here. That admonition bears repeating. As the Supreme Court has stated: “The plan, in short, is at the center of ERISA.” See US Airways, Inc. v. McCutchen, 569 U. S. 88 (2013). And even the Ninth Circuit agrees in Wong v. Flynn-Kerper.
Mark Casciari and Michael Cederoth
§ 1.59 Cross-Border Transactions: Key Items to Review When Performing Human Resource and Employment Due Diligence
In the world of cross-border mergers and acquisitions, complex human resource and employment considerations arise during the transaction’s due diligence process. Depending on the transaction’s structure, these issues can be diverse and range in topics from immigration requirements to employee benefit matters to employee representative consultation obligations.
From the purchaser’s perspective, proper human resource and employment due diligence can help structure a transaction’s terms and limit any unwanted surprises after the deal is signed or closes. Conversely, failure to spot key human resource and employment diligence issues can cause business interruptions and liabilities and negatively impact employee morale.
In this short article, we outline some essential human resource and employment items for cross-border transaction due diligence. This is not intended to be an exhaustive list of due diligence matters and, as with any piece of this kind, should not be relied upon as legal advice.
Employee Consultation Obligations and Collective Bargaining Agreements
In many countries, a target company’s employees may be represented by a union, works council, or other employee representative body and covered by a collective bargaining agreement.
Closely analyze employee representative arrangements to assess if there are notification or consultation obligations that must occur before the transaction is signed and/or the deal is closed. It may take anywhere from a few weeks to a few months to satisfy the applicable requirement, so it’s important to build sufficient time into the deal timeline to account for the necessary processes. In some cases, employee representatives may also have co-determination rights, which require the applicable employee representative to consent to the transaction before it proceeds.
Failure to properly observe applicable notification, consultation, or co-determination rights can result in criminal liability. It can also result in litigation and materially delay the transaction’s consummation.
Change in Control and Severance Provisions
To determine whether any meaningful payouts or entitlements will be triggered by the transaction, review key employees’ agreements.
In particular, perform diligence on any agreements containing transaction bonuses, severance provisions, equity acceleration clauses, or so-called “change in control” terms. Assessing this before signing the transaction will help the purchaser determine if new employment agreements should be provided in connection with the transaction (or as a condition of the transaction) to supersede existing entitlements.
If the transaction will trigger such payments or entitlements, this may also result in material tax issues. As a result, tax diligence should also be performed as part of this review.
Pension Schemes
Review employee retirement and pension schemes, and pay particularly close attention to the types of pension plans the target company has in place in any asset purchase transaction or transaction where employees are changing employers outside the US. If the target company participates in or has participated in a defined benefit pension scheme outside the US (as opposed to a defined contribution pension scheme), there may be significant liabilities. In such case, perform robust due diligence before the transaction’s signing to ensure all legal requirements are followed, the transaction agreement adequately protects the purchaser from the target company’s existing liabilities, and the purchaser understands its pension obligations if it moves forward with the transaction.
Independent Contractor Status
Many companies engage individuals as independent contractors, but treat them like employees in practice. Most countries require a company to reclassify an individual as an employee if the individual is being incorrectly categorized as an independent contractor. If the misclassified individual who provides services to the company is not employed by another entity that is properly treating the individual like an employee (e.g. withholding taxes and remitting social security contributions, accounting for overtime, etc.), liabilities for the company can be significant. This is especially true if the company’s relationship with the individual has gone on for a significant period of time at a high pay rate.
Review a global census of the target company’s independent contractor engagements to assess if independent contractor misclassification might be a material issue. If it is, conduct additional diligence to determine if the purchaser should seek a specific compliance representation with a corresponding indemnity in the transaction agreement.
Immigration Issues
Companies that have multinational workforces often employ individuals with visa requirements or other immigration needs. When a change in ownership of the company or corporate structure that sponsors the applicable employee visa or work permit occurs, the change typically requires a filing or notification with the local immigration authority. Failure to adhere to applicable immigration filing and notification requirements can result in stiff fines, the suspension of the sponsored employee’s ability to work, and the inability to sponsor employees in the future.
Assess whether the transaction triggers a change of corporate ownership or employer that will require updates to any employee’s visa or work permit. If updates are required (including obtaining a new visa or work permit), bake sufficient time and terms into the transaction to account for them (e.g., filings and approvals from the local immigration offices). Such authorizations can take several months depending on the country and type of change. Review any immigration restrictions or waiting times that may also be in place due to COVID-19.
If the target company is a company with a moderate US headcount, conduct diligence on the target company’s I-9 compliance. Failure to comply can result in material fines and other criminal penalties. Performing diligence on this issue will also help the purchaser assess whether it should redo target company employee I-9s within the prescribed post-closing time period to mitigate any legacy liability.
Unique State or Local Requirements
Depending on the transaction type and jurisdictions involved, conduct targeted local due diligence. For example, California has several notable state and local laws on employee privacy, restrictive covenants, paid sick leave, vacation payout, and employee classification that do not apply to many other US states. If the transaction has a material nexus to California, perform diligence into the target company’s compliance with California specific employment laws. Similarly, depending on the nature of the target company’s business and the transaction’s nexus to the EU, performing due diligence on employee staff leasing, GDPR compliance, and pay equity obligations may be worthwhile.
Conclusion
While there are many other important diligence items that should be reviewed as part of standard human resource and employment due diligence on a cross-border transaction, do not overlook the foregoing items. As a best practice, ensure the purchaser’s deal team has a thorough checklist of all due diligence items it wants to cover as part of the transaction’s due diligence process. As due diligence progresses, hone in on key issues based on the information gleaned from the target company’s diligence responses. Submit supplemental diligence requests to flesh out any material open issues.
Marjorie, Jeremy, and Dan are all part of Seyfarth’s leading International Employment team who help leading employers navigate global workforce issues. To find out more about cross-border transaction human resource and employment issues, and how they might affect your business, please reach out to them or anyone else on our specialist team.
Marjorie Culver, Jeremy Corapi and Dan Waldman
§ 1.60 Never Fear: More COBRA Subsidy Guidance Is Here
On July 26, 2021, the U.S. Internal Revenue Service (“IRS”) issued Notice 2021-46, providing additional guidance on the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) and premium assistance and tax credit provisions of the American Rescue Plan Act of 2021 (“ARPA”). As described in our Legal Update, ARPA requires employers to cover 100% of the cost of continuing group health coverage under COBRA from April 1, 2021 through September 30, 2021 for assistance eligible individuals (i.e., individuals who lose coverage due to an involuntary termination of employment or reduction of hours ). On May 18, 2021, the IRS issued guidance in IRS Notice 2021-31 as we described in our prior blog post to provide clarification for employers, plan administrators, and health insurers regarding this subsidy. Notice 2021-46 expands on that guidance.
The key points from IRS Notice 2021-46 are summarized below.
How Does the Subsidy Apply to Assistance Eligible Individuals Who Are Entitled to Extended Coverage Periods?
Notice 2021-46 clarifies that assistance eligible individuals may be entitled to the COBRA subsidy for extended coverage periods (e.g., disability extensions, second qualifying events or an extension under State mini-COBRA laws), even if the assistance eligible individual didn’t elect extended coverage before April 1, 2021.
The Notice provides an example of an individual who is involuntarily terminated and elects COBRA continuation coverage effective October 1, 2019. The individual’s 18-month COBRA continuation period would have lapsed March 31, 2021. However, on March 1, 2020, a disability determination letter was issued by the Social Security Administration providing that the individual was disabled as of November 1, 2019. This disability determination entitles the individual to the 29-month extended COBRA continuation coverage, but the individual failed to notify the plan of the disability determination by April 30, 2020, which is 60 days after the date of the issuance of the disability determination letter (as would normally be required to qualify for the COBRA disability extension period). However, under the EBSA Disaster Relief Notices 2020-01 and 2021-01, the individual has one year and 60 days from the issuance of the disability determination letter to notify the plan of the disability to extend COBRA continuation coverage. On April 10, 2021, the individual notifies the plan of the disability and elects ongoing COBRA coverage from April 1, 2021. Assuming the individual is not eligible for other disqualifying group health plan coverage or Medicare, the individual is an assistance eligible individual and is entitled to the COBRA premium assistance.
Does Eligibility For Other Health Coverage That Does Not Include Vision or Dental Benefits Terminate an Assistance Eligible Individual’s Eligibility For the COBRA Subsidy for Vision-Only or Dental-Only Coverage?
Yes. Eligibility for the COBRA premium assistance ends when the Assistance Eligible Individual becomes eligible for coverage under any other disqualifying group health plan or Medicare, even if the other coverage does not include all of the benefits provided by the COBRA coverage.
Which Entity May Claim the Tax Credit for the COBRA Subsidy?
Where a group health plan (other than a multiemployer plan) subject to COBRA covers employees of two or more employers, each common-law employer is generally treated as the premium payee entitled to claim the premium assistance tax credit with respect its own employees and former employees, even where such common-law employers are part of a controlled group.
The Notice also clarifies that an entity that provides health benefits to employees of another entity, but is not a third-party payer of their wages, will not be treated as a third-party payer for purposes of applying Notice 2021-31. For example, if a group health plan covers employees of two or more unrelated employers in a multiple employer welfare arrangement (“MEWA”), the entity entitled to claim the tax credit is generally the common law employer; the association that sponsors the MEWA is not entitled to claim the tax credit for the COBRA subsidy.
Reminder: Tell Participants that the Subsidy Period is Ending
As we mentioned in our previous Legal Update, ARPA requires plan sponsors to notify participants 15-45 days before their COBRA subsidy ends. Participants will need to be informed (i) when their subsidy ends, and (ii) how much their non-subsidized COBRA premium will be. Employers may already have sent this notice on a “one-off” basis to COBRA qualified beneficiaries whose 18 or 36 months of COBRA coverage has ended or will end before September 30th. However, the subsidy will expire on September 30, 2021 for all COBRA qualified beneficiaries (even if they may still have time remaining in their 18 or 36 month COBRA period); thus, employers may need to do one last bulk mailing. The mailing needs to go out any time between August 16, 2021 and September 15, 2021. The Department of Labor’s model notice is here.
Please contact Irine Sorser ([email protected]), Kelly Joan Pointer([email protected]) or any member of Seyfarth’s Employee Benefits Group if you would like further information about these updates.
Irine Sorser and Kelly Joan Pointer
§ 1.61 Anti-Vax Tax Facts: Legal Considerations for Premium Differentials Based on Vaccination Status
Seyfarth Synopsis: As employers continue to struggle with strategies for safely re-opening their workplaces, we have previously discussed the possibility of mandating a vaccine or providing incentives for getting the vaccine [Here]. As employers shift their focus toward the cost of COVID hospitalizations (which studies show are a much greater risk for unvaccinated individuals), employers are increasingly considering imposing a premium differential between vaccinated and unvaccinated covered participants. Imposing such a premium differential is doable, but likely creates a group health plan wellness program, which implicates both HIPAA (under rules issued by HHS), and the ADA and GINA (governed by the EEOC) wellness program rules.
There are myriad intricacies to consider when setting up a wellness program. We will hit some of the highlights here:
HIPAA Wellness Programs
HIPAA’s rules divide the world of wellness programs into two main categories:
Participation-only programs. These are programs that do not require any conditions for receiving a reward and have very few requirements associated with them, except that they must be available to all similarly situated individuals.
Health-contingent programs. These are programs that base rewards on satisfying a standard related to a health factor, which are further subdivided into
activity-only, and
outcomes-based programs
While at first blush it may seem like getting a vaccine is participation-only as a person simply needs to get the shot, and does not need to remain free from COVID-19, there is some thought that it may actually be health-contingent because not everyone can get the vaccine due to underlying health conditions.
Most practitioners do not believe such a program is a health-contingent “outcomes-based” program, as the reward does not depend on staying COVID-19-free. However, at least one consultant has taken the position that this type of program could even be outcomes-based if having simply received the vaccine is considered a “health status.”
Although HHS has not provided any direct guidance here, we think it is more likely that such a program would be a health-contingent “activity-only” program. In general, a health-contingent activity-only wellness program must meet the following requirements:
Incentive Limit:
Limit the incentive to 30% of the cost of coverage (this limit is increased to 50% if the program includes a tobacco cessation component);
The limit is based on the overall cost of coverage — i.e., the COBRA rate — applicable to the value of coverage elected — i.e., self-only, family, etc.;
This incentive would need to be combined with any other “health contingent” wellness program offered under the plan when determining whether the incentives exceed the limit (except that if any incentive is linked to smoker status, the limit is increased to 50%)
Reasonable Alternative
A reasonable alternative must be offered to persons who cannot get vaccinated because it is medically inadvisable or, as a result of the overlay of Title VII, due to a sincerely held religious belief.
Participants must be notified of the availability of the reasonable alternative in all materials substantially describing the program.
Annual Opportunity to Qualify:
Provide an opportunity to qualify for the reward at least once per year
Be uniformly available to all similarly situated individuals; and
Not be a subterfuge for discrimination.
(Note: There are additional requirements for health contingent wellness programs that are outcomes-based programs.)
EEOC and the ADA
The EEOC has modified its wellness program rules a few different times in the last few months. Ultimately, we read the current loosening of the EEOC’s wellness program rules as the administration’s attempt to not discourage incentives.
If the wellness program is for a health-contingent activity-only program, the EEOC is okay if the plan meets the HIPAA/HHS standards. (The new EEOC wellness program rules will also allow an incentive for participatory programs that is not overly large (i.e., considered coercive).)
Similarly, recent EEOC guidance has indicated that vaccine status alone is not a “medical exam or disability-related inquiry” under the ADA. So, if an employer simply requests proof of vaccination status but does not require the employee to get the vaccine directly from the employer (or its contractor), the program is arguably outside of the scope of the EEOC’s wellness guidelines entirely.
Affordable Care Act
For ACA purposes, if the “incentive” is structured as an increased premium, the employer must treat all employees as if they failed to get vaccinated and were required to pay the increased amount for purposes of determining the affordability of coverage, regardless of whether that’s the case. However, there are ways for plan sponsors to mitigate this concern. For instance, the employer could design its “penalty” as a deductible increase rather than a premium increase, which would not impact affordability. (It would impact minimum value, but the employer likely has more flexibility there.) Similarly, because the ACA only requires that employers offer one affordable option, the employer could link the incentive only to its higher-cost benefit options (leaving untouched its lower-cost, “affordable” option.)
* * *
While beyond the scope of this legal update, employers should also be cautious of how they structure the program considering collective bargaining obligations, HIPAA privacy concerns and Section 125 requirements (for mid-year implementations). We will continue to monitor trends in this space with an eye toward any agency indications as to whether they intend to regulate these types of programs.
Benjamin J. Conley and Diane V. Dygert
§ 1.62 If You Have Been Racing to Meet these Deadlines… You May Have Just Gotten an Extension
Seyfarth Synopsis: The Departments of Labor, Health and Human Services, and Treasury (the “Departments”) have issued FAQs which address certain provisions of the Affordable Care Act (ACA) and Title I (No Surprises Act) and Title II (Transparency requirements) of the Consolidated Appropriations Act of 2021 (CAA). The FAQs provide welcome relief for group health plans as they postpone many compliance deadlines and allow for some breathing room.
The ACA requires “transparency in coverage” cost-sharing disclosures by most health plans. In November of 2020, the Departments issued Final Transparency in Coverage Rules (TiC Rules) which require group health plans and health insurance issuers to disclose cost-sharing information to participants, beneficiaries, and, in some cases, the public. See our legal update here. The CAA also includes Transparency requirements, some of which overlap with the TiC Rules.
The No Surprises Act protects plan participants from surprise medical bills for services provided by out-of-network or nonparticipating providers and facilities. The No Surprises Act also contains extensive provisions regarding reporting and disclosure of charges and benefits. The first round of guidance on the surprise billing requirements was issued in July, 2021 (see our legal update here).
The FAQs address some of the guidance expected under the TiC Rules and the CAA, and announce that no further guidance will be issued for certain provisions. This legal update addresses what requirements will apply to group health plans, and when.
Machine-Readable Files
For plan years beginning on or after January 1, 2022, the TiC Rules require plans to disclose on a public website information regarding in-network provider rates for covered items and services, out-of-network allowed amounts and billed charges for covered items and services, and negotiated rates and historical net prices for covered prescription drugs in three separate machine-readable files. (According to the preamble to the TiC Rules, this will allow the public to have access to health coverage information that can be used to understand pricing and potentially dampen the rise in health care spending.)
FAQ Takeaways – According to the FAQs, the Departments will enforce the machine-readable file provisions in the TiC Rules, subject to two exceptions.
The requirement that plans publish machine-readable files relating to prescription drug pricing is deferred pending further rulemaking to determine if these requirements remain appropriate.
The requirement to publish in-network rates and out-of-network allowable amounts and billed charges is deferred until July 1, 2022. The FAQs state, however, that on July 1, 2022, the Departments will begin enforcing the requirement that plans publicly disclose information for plan years beginning on or after January 1, 2022.
Price Comparison Tools
Both the TiC Rules and the CAA require plans to create an internet-based self-service tool to disclose cost-sharing information to participants. The TiC Rules require a plan to provide cost-sharing information for a covered item or service: (i) by billing code or description, and/or (ii) in connection with an in-network provider, or an out-of-network allowed amount for a covered item or service provided by an out-of-network provider. The CAA’s price comparison is mostly repetitive of the TiC Rules, but it added the requirement that this information must also be provided over the telephone, if requested. The TiC Rules’ effective date is January 1, 2023 with respect to 500 items and services listed in the preamble to the TiC Rules, and January 1, 2024 with respect to all covered items and services. The CAA’s effective date is January 1, 2022.
FAQ Takeaways – The Departments will:
Propose rulemaking and seek public comment to determine if the internet-based self-service tool requirements of the TiC Rules satisfy the requirements under the CAA.
Propose rulemaking to require that the pricing information required under the TiC Rules must also be provided over the telephone if requested.
Defer enforcement of the requirement to provide a price comparison tool until January 1, 2023. Until that time, the Departments will focus on compliance assistance.
Plan or Insurance Identification Cards
The No Surprises Act requires plans to include, in clear writing, on physical or electronic insurance identification (ID) cards, any applicable deductibles and out of pocket maximum limitations, and a telephone number and website address for individuals to seek consumer assistance. This requirement is effective January 1, 2022.
FAQ Takeaways – The Departments:
Do not intend to issue regulations addressing the ID card requirements before the effective date. Instead, plans are expected to make a good faith interpretation of the law to reasonably design the ID cards to provide the required information.
When analyzing a plan’s compliance efforts, the Departments will consider whether the ID cards are reasonably designed and implemented to provide the required information to all participants, beneficiaries, and enrollees.
Good Faith Estimate of Expected Charges
The No Surprises Act requires providers and facilities, upon an individual’s scheduling of items or services, or upon request, to provide a notification of a good faith estimate of the expected charges for furnishing the scheduled item or service and any items or services reasonably expected to be provided in conjunction with those items and services. If the individual is enrolled in a health plan and is seeking to have a claim submitted to the plan, the provider must provide this notification to the plan. Otherwise, the notification must be provided to the individual.
The effective date is January 1, 2022. Because uninsured individuals do not have the claims and appeals processes in place to protect them as do individuals covered by a group health plan, with respect to uninsured individuals, HHS intends on enforcing the good faith requirements beginning January 1, 2022, and issuing regulations prior to January 1, 2022.
FAQ Takeaways – The Departments will:
Defer enforcement for individuals enrolled in a health plan until future rulemaking is issued.
Issue regulations implementing good faith estimate requirements for uninsured individuals prior to January 1, 2022.
Advanced Explanations of Benefits
The No Surprises Act requires that plans, upon receiving a good faith estimate, provide participants with an Advanced Explanation of Benefits (the “AEOB”) in clear and understandable language. The AEOB must include whether the provider or facility is in-network; the contracted rate for the item or service, or an explanation as to how the individual can obtain information on participating providers; the good faith estimate received from the provider; an estimate of what the plan will pay and the participant’s cost-sharing obligation; and whether any medical management techniques apply. The statutory effective date is January 1, 2022.
FAQ Takeaway – The Departments intend to undertake notice and comment rulemaking in the future to establish appropriate data transfer standards between plans and providers to implement the AEOB requirement. In the meantime, the Departments will not enforce the requirement.
Prohibition on Gag Clauses
Effective December 27, 2020, the Transparency requirements of the CAA prohibit plans from entering into an agreement that would restrict the plan from accessing or sharing certain information with a provider, network of providers, third-party administrator, or other service provider offering access to a network. Specifically, an agreement cannot restrict a plan from: (i) providing provider-specific cost or quality of care information to referring providers, the plan sponsor, participants and beneficiaries, or individuals eligible for coverage; (ii) electronically accessing certain de-identified claims information for each participant; or (iii) sharing such information with a HIPAA business associate.
FAQ Takeaway – The Departments will not be issuing regulations and expect plans to implement the requirements using a good faith, reasonable interpretation. The Departments will begin collecting attestations of compliance in 2022 and intend on issuing guidance to explain how plans should submit their attestations.
Provider Directories
The No Surprises Act requires plans to establish a process to update and verify the accuracy of provider directory information and to establish a protocol for responding to requests by telephone and electronic communication from a participant, beneficiary, or enrollee about a provider’s network participation status. Under a correction method provided, if a participant is provided with incorrect information that a provider is in-network and a service or item is provided by a nonparticipating provider, then the plan cannot impose a cost-sharing amount that is greater than the cost-sharing amount that would be imposed for items and services furnished by a participating provider and the plan must count cost-sharing amounts toward any in-network deductible or in-network out-of-pocket maximum. The effective date is January 1, 2022.
FAQ Takeaways – The Departments will not:
Issue regulations until after January 1, 2022. Until then, plans are expected to implement these provisions using good faith, reasonable interpretation of the law.
Deem a plan out of compliance, provided the correction method is used.
Balance Billing Disclosures
The No Surprises Act requires plans to make publicly available, post on a public website of the plan and include on each explanation of benefits (EOB) for an item or service information on the prohibitions on balance billing. The disclosure provisions are effective January 1, 2022.
FAQ Takeaways – The guidance states:
The Departments may provide guidance in the future. Until then, plans are expected to implement these requirements using a good faith, reasonable interpretation of the law.
A model notice that may be used to satisfy the disclosure requirements is available on the CMS website. (See here)
Continuity of Care
The No Surprises Act ensures that participants won’t lose coverage when changes in provider or facility network status occur. These provisions are effective January 1, 2022.
FAQ Takeaway – The FAQs state that the Departments expect to issue further guidance to fully implement these provisions and provide a new, prospective effective date. Until then, plans are to implement the requirements using a good faith, reasonable interpretation of the law.
Grandfathered Health Plans
The FAQs provide that the CAA does not include an exception for grandfathered health plans.
Reporting on Pharmacy Benefits and Drug Costs
The Transparency requirements of the CAA require that by December 27, 2021, and by each June 1st thereafter, plans submit relevant information to the Departments regarding plan coverage for prescription drugs. This includes, but is not limited to, a list of the 50 most frequently dispensed brand prescription drugs, and the total number of paid claims for each such drug; the 50 most costly prescription drugs by total annual spending, and the annual amount spent by the plan for each such drug; and the 50 prescription drugs with the greatest increase in plan expenditures over the plan year preceding the plan year that is the subject of the report, and, for each such drug, the change in amounts expended by the plan or coverage in each such plan year.
Additionally, plans must report (i) total spending on health care broken down by type of costs (i.e. hospital, provider costs for primary care and specialty care, costs for prescription drugs and other medical costs), and spending on drugs by the plan and participants; (ii) average monthly premium paid by employer and employee; (iii) any impact on premiums by rebates, fees and other amounts paid by drug manufacturers to the plan; and (iv) any reduction in premiums and out-of-pocket costs associated with rebates, fees, and other amounts paid by drug manufacturers.
FAQ Takeaways – The Departments:
Will issue regulations to address these reporting requirements.
Will defer enforcement of the requirement to report the specified information until the issuance of regulations or further guidance.
Strongly encourage plans to start working to ensure they are in a position to report the data for 2020 and 2021 by December 27, 2022.
To stay up to date with future guidance, be on the lookout for additional Seyfarth Legal Updates.
Joy Sellstrom and Sarah N. Magill
§ 1.63 Seventh Circuit Rejects Plan’s Attempt to Compel Individual Arbitration of Participant’s Fiduciary Breach Claims
Seyfarth Synopsis: Recognizing that the Plan contained an unambiguous arbitration provision, and that “ERISA claims are generally arbitrable,” the Seventh Circuit Court of Appeals nonetheless found that arbitration could not be compelled where the provision prospectively barred the plaintiff from pursuing certain statutory remedies.
In Smith v. Bd. of Dirs. of Triad Mfg., Inc., a Plan participant brought a putative class action suit asserting that the Plan’s fiduciaries breached their fiduciary duties and engaged in prohibited transactions in connection with the sale of all of the Plan sponsor’s stock to the Plan. Within two weeks of the transaction, the shares’ ostensible value dropped from $106 million to less than $4 million.
After the stock transaction—but before the suit was filed—the Plan sponsor amended the Plan to add an arbitration provision with a class action waiver. The provision prohibited an individual from bringing claims in anything other than an individual capacity, and further stated that an individual could not “seek or receive any remedy which has the purpose or effect of providing … relief to any [person] other than the Claimant.”
Based on this language, the Plan moved to compel individual arbitration of Plaintiff’s suit. The district court denied the motion. On appeal, the Seventh Circuit stated it was guided by the “liberal federal policy favoring arbitration agreements,” but nonetheless affirmed the decision of the district court, based on the “effective vindication” exception to the FAA. This exception invalidates arbitration agreements that operate as prospective waivers of a party’s right to pursue statutory remedies. Here, the plaintiff sought a variety of equitable remedies—including the potential removal of the Plan’s trustee—which would inescapably have had the effect of providing relief to individuals beyond the Plaintiff. As such, Plaintiff’s requested relief was impermissibly in conflict with the Plan’s arbitration provision.
The Seventh Circuit stated that its holding is limited to the language of the arbitration provision at issue, and that it was not deciding whether a claimant could be bound by an amendment enacted after his employment ended, or whether a plan sponsor can unilaterally amend a plan to require arbitration as to all participants. The Court was also quick to say that it did not view its decision as creating conflict with the Ninth Circuit’s holding in Dorman v. Charles Schwab Corp. (discussed here), in which that court held a that an ERISA plan’s mandatory arbitration and class action waiver provision was enforceable, and could require individualized arbitration of fiduciary breach claims. Still, the tension between the Seventh Circuit’s holding in Smith and the Ninth’s in Dorman—together with the Supreme Court’s repeated statements encouraging enforcement of arbitration provisions—has already lead to speculation that a petition for certiorari will be filed.
Thus, while the Seventh Circuit in Smith stated that ERISA claims are generally arbitrable, Smith leaves open many questions about the proper scope of such provisions and how those provisions (to the extent they are enforceable) will shape ensuing arbitration and litigation. Stay tuned as we continue to track this evolving area of the law.
The agencies confirmed that a plan may impose a premium differential based on vaccination status if it complies with the HIPAA wellness plan rules. In this regard, the agencies confirmed that a premium differential based on vaccination status will be a “health-contingent activity-only” wellness program. Recall that there was some debate about whether such a program would be “participatory only” or whether it might even be considered a “health-contingent outcomes-based” wellness program. While the agencies did not go into any deep analysis, at the time we based our view that the program would be “activity-only” on the fact that some individuals may not be able to get the vaccination due to their personal health status (e.g., someone undergoing chemotherapy treatment) making getting the vaccine health-contingent. And, the agencies settled that getting a COVID-19 vaccination is an activity related to a health factor.
Can Cost Sharing Be Imposed on Vaccines?
The agencies reiterated that effective January 5, 2021, plans and issuers must cover COVID-19 vaccines along with their administration without cost sharing immediately upon a vaccine becoming authorized under an Emergency Use Authorization (EUA) or approved under a Biologics License Application (BLA). The agencies clarified that this includes immediate required coverage for any authorized booster shots upon the date authorized and immediate required coverage for any expanded age group (e.g., children under age 12) on the date authorized. Due to apparent confusion about the effective date of required coverage for expanded vaccinations under any amended EUA or BLA, this requirement will be effective prospectively only.
Can Group Health Plan Eligibility or Benefits Be Conditioned on Vaccination Status?
This is a hard no, as it would be considered discriminating based on a health factor. To be clear, while a health plan cannot condition eligibility or benefits on vaccination status, the agencies have noted that plans may condition premiums or cost-sharing on vaccination status, within the parameters of HIPAA as described in our earlier alert.
How Does a Premium Differential Impact ACA Affordability?
The agencies also confirmed our prior view that premium incentives will be treated as not earned for purposes of measuring affordability under the ACA. This is true for all wellness incentives, other than for those related to tobacco use.
Benjamin J. Conley and Diane V. Dygert
§ 1.65 We Have No Idea When the Outbreak Period Will End, But We Have a Better Idea When COBRA Payments Are Due
Seyfarth Synopsis: The IRS has attempted to provide clarity (following the DOL’s earlier attempt) on how the coronavirus Outbreak Period will work and how it applies to COBRA election and premium payment deadlines, in Notice 2021-58.
Background
At the beginning of the COVID-19 National Emergency, in May of 2020, the Department of Labor (DOL) and the Internal Revenue Service (IRS) issued a Joint Notice that extended certain timeframes applicable to COBRA continuation coverage under a group health plan by requiring plans to disregard the period from March 1, 2020 until 60 days after the announced end of the COVID National Emergency or such other date announced by the relevant agencies (the “Outbreak Period”). (See our prior legal update).
The Joint Notice provided extensions for the following COBRA timeframes:
The 60-day election period for COBRA continuation coverage,
The dates for making COBRA premium payments,
The date for individuals to notify the plan of a qualifying event or determination of disability, and
The date for providing a COBRA election notice for group health plans.
In February of 2021, we explained how the DOL clarified that the extensions would apply separately to each individual and would last until the earlier of (1) one year from the date relief was first available (e.g. an individual’s original election due date or payment due date), or (2) the end of the Outbreak Period. At the end of this disregarded period, the applicable timeframes that were disregarded resume.
Recently the IRS issued Notice 2021-58 to clarify certain questions that have arisen as to how the disregarded period applies to COBRA election and premium payment deadlines.
COBRA Payment Deadlines
We now know that the periods run concurrently. For example, an individual may not delay electing COBRA for a year and then add another year to make payment. The following timeframes will apply to individuals making initial COBRA premium payments:
If an individual elected COBRA continuation coverage more than 60 days after receipt of the COBRA election notice, that individual generally will have one year and 105 days after the date COBRA notice was provided[1] to make the initial COBRA premium payment.
If an individual elected COBRA continuation coverage within 60 days of receipt of the COBRA election notice, that individual will have one year and 45 days after the date of the COBRA election to make the initial COBRA premium payment.
For each subsequent COBRA premium payment, the maximum time an individual has to make a payment while the Outbreak Period continues is one year from the date the payment originally would have been due in the absence of previous extensions, but subject to the transition relief provided below.
Transitional Relief for COBRA Payments
Despite the new guidance that the periods run concurrently, an individual cannot be required to make an initial premium payment before November 1, 2021 (even if November 1, 2021 is more than one year and 105 days after the election notice is received), provided that the individual makes the initial payment within one year and 45 days after the date of the election.
Coordination with ARPA’s COBRA Subsidy
The American Rescue Plan Act (ARPA) provided a temporary 100% COBRA premium subsidy for “Assistance Eligible Individuals” for periods of coverage beginning on or after April 1, 2021 through September 30, 2021.
ARPA also gave individuals who either (a) were eligible for COBRA but did not elect COBRA as of April 1, 2021, or (b) elected and discontinued COBRA coverage before April 1, 2021 another chance to elect COBRA during the period beginning April l, 2021 and ending 60 days after notice of the “extended election period” is received. Employers were required to give notice of this extended election period (ARPA Notice) by May 31, 2021. (See legal update).
Notice 2021-58 reiterates that the extensions of the timeframes do not apply to the periods for providing the required ARPA Notice, or for electing subsidized COBRA. A plan may require an individual to elect COBRA retroactive to the date of loss of coverage within 60 days of receiving the ARPA Notice or lose eligibility for retroactive COBRA. For example, an individual who receives a COBRA election notice on August 1, 2020 would have until September 30, 2021 (one year and 60 days) to elect COBRA retroactive to August 1, 2020. But if the individual elects subsidized COBRA under ARPA, the individual would only have 60 days after the receipt of the ARPA Notice to elect retroactive COBRA coverage. If the individual receives the ARPA Notice on May 31, 2021 and elects subsidized COBRA beginning April 1, 2021, but does not elect retroactive COBRA, the individual cannot later elect retroactive COBRA.
Payment for Retroactive COBRA under ARPA
Notably, the disregarded periods continue to apply to payments of COBRA premiums after subsidized COBRA ends, to the extent that the individual is still eligible for COBRA continuation coverage and the Outbreak Period has not ended. Notice 2021-58 provides this example:
On November 1, 2020, Charley is involuntarily terminated and receives a COBRA election notice. On April 30, 2021, Charley receives notice of the ARPA extended election period. On May 31, 2021, Charley elects both retroactive COBRA coverage beginning on November 1, 2020, and subsidized COBRA beginning April 1, 2021.
Charley has until February 14, 2022 to make the initial COBRA premium payment (one year and 105 days after November 1, 2020). The initial COBRA payment would include premium payments for November 2020 through January 2021. The February 2021 premium payment would be due by March 3, 2022 (one year and 30 days after February 1, 2021), and the March 2021 premium payment would be due by March 31, 2022 (one year and 30 days after March 1, 2021). Premium payments would be due every month after that for the months Charley is eligible for COBRA coverage, except that no payments would be due for the periods beginning on or after April 1, 2021, through September 30, 2021.
Other helpful examples are provided that should help plan administrators and COBRA administrators in collecting COBRA premium payments. Please contact the employee benefits attorney at Seyfarth Shaw LLP with whom you usually work if you have any questions.
[1]The Notice uses both the date “provided” and the date “received” in explaining when the initial COBRA premium must be paid. Additional clarification as to whether “provided” means the date sent or date received would be helpful.
Seyfarth Synopsis: If an ERISA plaintiff establishes a fiduciary breach, expect the computation of damages to be a complicated process that may enhance damages through judgment. And a court judgment in complicated cases can take years to issue. This is the lesson from a recent decision of the Court of Appeals for the Second Circuit.
Browe v. CTC Corporation, 2021 WL 4449878 (2d Cir. 9/29/21) is a complex ERISA case, both procedurally and substantively. This article focuses on the portion of the ruling that relates to the calculation of fiduciary breach damages. This is because the computation of ERISA fiduciary breach damages is central to successful discovery and settlement negotiations.
In Browe, former employees and officers of a defunct corporation asserted ERISA claims against the corporation and its former CEO for mismanagement of the firm’s deferred compensation plan. The controversy arose from a decision to terminate the Plan and use its funds to pay business operating expenses. The district court found in favor of plaintiffs and awarded damages based on the projected account balances as of Plan termination, after rejecting plaintiffs’ assertion that ERISA required restoration of Plan losses through judgment.
The Second Circuit overturned the restoration award. It found that the Plan was improperly terminated — so it was not terminated at all. The Court then held that ERISA required that the award “return the participants to the position they would have occupied” but for this fiduciary breach. This included all losses, including unrealized gains, through the date of judgment. It remanded the case back to the district court for recalculation of award to capture losses through the date of judgment.
Citing to Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985), the Court instructed that the award be based on the assumption that Plan funds were prudently invested, with the caveat that if several investment strategies were equally plausible, the district court should presume that the funds would have been invested in the most profitable of various options. The Court added that uncertainties in fixing damages must be resolved against the breaching fiduciary.
Damage Computation Takeaway – By computing damages for a fiduciary breach through judgment, the Court is advising fiduciary breach litigants that there will be a battle of the experts in determining what investment likely “would have happened.” If a fiduciary breach case survives a motion to dismiss, expect complicated and expensive expert damage discovery that serve to inflate settlement demands.
This article is the second in a series identifying a number of myths related to IP rights, and explaining, in simple terms, steps you can take to recognize and protect the IP your business creates and acquires. In the first installment, the authors discuss trademark myths.
Second in this three-part series identifying myths related to IP rights is Copyright Myths.
Copyright is a form of protection provided by the laws of the United States to the authors of “original works of authorship” that are fixed in a tangible form of expression. An original work of authorship is a work that is independently created by a human author and possesses at least some minimal degree of creativity. A work is “fixed” when it is captured (either by or under the authority of an author) in a sufficiently permanent medium such that the work can be perceived, reproduced, or communicated for more than a short time. Copyright protection in the United States exists automatically from the moment the original work of authorship is fixed.
U.S. copyright law is federal law (17 U.S.C. §§ 101-1401), which addresses both unpublished and published works of authorship. There is no state law governing copyright rights, and a state cannot register or enforce a copyright.
Copyright law is a nebulous area of law, and many aspects of it do not have a straightforward answer. Below, we try to dispel certain copyright misconceptions.
1. I can sue for copyright infringement as long as I have submitted my application to the United States Copyright Office.
In the Supreme Court case, Fourth Estate Public Benefit Corp. v. Wall-Street.com, 139 S.Ct. 1881 (2019), the court unanimously ruled that a copyright infringement suit must wait until the copyright is successfully registered by the United States Copyright Office. Therefore, a pending copyright application is insufficient grounds to bring suit. Given that copyright applications are relatively inexpensive ($60 per application), we recommend registering your work whenever possible.
2. Copyright can protect my ideas.
Copyright applies to a tangible work, and cannot apply to something as intangible as an idea. Indeed, section 102(b) of the Copyright Act explicitly states, “in no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.”
3. I can copyright a name or title.
Copyright laws require creativity and originality, and do not apply to items such as names and titles that may be duplicated coincidentally, or that may be legitimately used in unrelated instances. Book titles are among the list of things that cannot be copyrighted. Titles are only “short phrases,” not original enough to be eligible for protection. The Copyright Office will not restrict titles to one book; there may be other works for which a title may be equally usable and appropriate. For example, in McGraw-Hill Book Co. v. Random House, Inc., 32 Misc.2d 704, 710, 225 N.Y.S.2d 646, 653 (Sup.Ct. 1962), McGraw Hill was unable to bar Random House from publishing a book titled, “John F. Kennedy & PT 109” even though McGraw Hill had first published a book titled, “PT 109: John Kennedy in World War II.” The court found legitimate use of the words “PT 109” and “John Kennedy” and that the words could not be copyrighted. Id. at 713.
4. Everything on the internet is in the public domain and free to use.
This is false. Although much information posted to the internet is freely available to the public, the internet is not itself public domain. Most material posted there is protected by copyright law, regardless of whether a content host obtained the requisite permissions from the author. A work does not fall into the public domain until its copyright expires, which is typically many decades after an author’s death.
5. Anything without a copyright notice is not protected.
Use of a copyright notice is optional, and has been since March 1, 1989. Thus, copyright protections apply regardless of whether a copyright notice is displayed on the work. An author of an original work may receive absolute protection as soon as the work is created. Registration is not mandatory, but it is worthwhile to place a copyright notice on a work because it reminds others that copyright exists and, therefore, may help deter infringement. Additionally, putting a notice on your work may help establish willful infringement, which enhances the monetary compensation to which you are entitled.
6. If I change someone else’s work, I can claim it as my own.
The act of copying or adapting someone else’s work is a restricted act. Any adaptation will be legally regarded as a derived work. The purpose and character of your intended use of the material is the single most important factor in determining whether a use is fair under U.S. copyright law. If you simply adapt a work, it will still be considered the work of the creator, and that person may object if you publish an adaptation without permission to do so. They are also entitled to reclaim any money you make from selling their work. If, however, your use is transformative—i.e., the new work has significantly changed the appearance or nature of the copyrighted work—you are more likely to succeed in a fair use defense. The transformative use concept arose from a 1994 decision by the U.S. Supreme Court, Campbell v. Acuff-Rose Music, 510 U.S. 569 (1994), concerning the song “Pretty Woman” by the rap group 2 Live Crew, a parody of “Oh, Pretty Woman” by Roy Orbison. The court focused not only on the small quantity taken from the copyrighted work, but also on the transformative nature of the defendant’s use, and was persuaded that no infringement occurred because the defendant added a new meaning and message rather than simply superseding the original work. This meant the new work likely would not affect the market for the original work, so the copyright owner would not suffer financial harm.
7. I can legally copy 10 percent without it being infringement.
This is not the case. Unless it is explicitly allowed under the doctrine of fair use, any unauthorized use of a copyrighted work can potentially lead to legal action. When using quotes or extracts, there is no magic figure or percentage that can be applied. Courts typically look to the quality and importance of the content copied, not simply the quantity. In fact, if you base a creation on someone’s copyrighted work, the result is called a “derivative work.” A derivative work must be substantially different from the original work (minor changes are not enough) in order to not be considered copyright infringement.
8. It’s okay to use, copy, or publish another’s work if I don’t make any money from it.
No, except in limited circumstances permitted under the doctrine of fair use, any copying or publication without the consent of the copyright owner may be deemed copyright infringement, and you could face legal action. If the use has a financial impact on the copyright owner (i.e., lost sales), then you could also face a claim for damages to reclaim lost revenue and royalties. The key factor is not the user, but the nature of the material, how it is being used, and whether the new use adversely affects the value of the original work. Because even a nonprofit educational use can undermine the value of a copyrighted work, it is advisable to consult an attorney before copying any original work.
***
We hope this has been a helpful starter guide on copyright law. Please tune in next month for part three of the series, in which we will debunk popular patent myths.
If you have questions or would like to follow up on the topics discussed in the series, please reach out to any of the authors listed above at Hunton Andrews Kurth LLP.
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]
§ 1.1 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.
§ 1.2 Pretrial Matters
§ 1.2.1 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]
§ 1.2.2 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]
§ 1.3 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.
§ 1.4 Selection of Jury
§ 1.4.1 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]
§ 1.4.2 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]
§ 1.4.3 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]
§ 1.4.4 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.
§ 1.4.5 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:
U.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]
§ 1.4.6 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]
§ 1.5 Examination of Witnesses
§ 1.5.1 Direct Examination
Direct examination is the first questioning of a witness in a case by the party on whose behalf the witness has been called to testify.[74] Pursuant to Fed. R. Evid. 611(c), leading questions, i.e., those suggesting the answer, are not permitted on direct examination unless necessary to develop the witness’ testimony.[75] Leading questions are permitted as “necessary to develop testimony” in the following circumstances:
To establish undisputed preliminary or inconsequential matters.[76]
If the witness is being impeached by the party calling him or her.[80]
If the witness is frightened, nervous, or upset while testifying.[81]
If the witness is unresponsive or shows a lack of understanding.[82]
Additionally, it is improper for a lawyer to bolster the credibility of a witness during direct examination by evidence of specific instances of conduct or otherwise.[83] Bolstering occurs either when (1) a lawyer suggests that the witness’s testimony is corroborated by evidence known to the lawyer, but not the jury,[84] or (2) when a lawyer asks a witness a question about specific instances of truthfulness or honesty to establish credibility.[85] For instance, in Raysor, the Second Circuit found that it was improper for a witness to bolster herself on direct examination by testifying about her religion or faithful marriage.[86]
When a party calls an adverse party, or someone associated with an adverse party, the attorney has more leeway during direct examination. This is because adverse parties may be predisposed against the party direct-examining him. Because of this, the attorney may ask leading questions, and impeach or contradict the adverse witness.[87] Courts have broadened who they consider to be “associated with” or “identified with” an adverse party. Employees, significant others, and informants have all constituted adverse parties for purposes of direct examination.[88] Further, even if the witness is not adverse, an attorney may also ask leading questions to a witness who is hostile. In order to ask such leading questions, the direct examiner must demonstrate that the witness will be resistant to suggestion. This often involves first asking the witness non-leading questions in order to show that the witness is biased against the direct examiner.[89]
When a witness cannot recall a fact or event, the lawyer is permitted to help refresh that witness’s memory.[90] The lawyer may do so by providing the witness with an item to help the witness recall the fact or event. Proper foundation before such refreshment requires that:
the witness’s recollection to be exhausted, and that the time, place and person to whom the statement was given be identified. When the court is satisfied that the memorandum on its face reflects the witness’s statement or one the witness acknowledges, and in his discretion the court is further satisfied that it may be of help in refreshing the person’s memory, the witness should be allowed to refer to the document.[91]
However, the item/memorandum does not come into evidence.[92] In Rush, the Sixth Circuit found that although the trial judge properly permitted defense counsel to refresh a witness’s memory with the transcript of a previously recorded statement, the trial judge erred in allowing another witness to read that transcript aloud to the jury.[93]
Further, sometimes the party calling a witness wishes to impeach that witness. Generally, courts are hesitant to permit parties to impeach their own witnesses because the party who calls a witness is vouching for the trustworthiness of that witness, and allowing impeachment may confuse the jury or be unfairly prejudicial.[94] Prior to adoption of the Federal Rules of Evidence, a party could impeach its own witness only when the witness’s testimony both surprised and affirmatively damaged the calling party.[95]
However, Federal Rule of Evidence 607 states that “the credibility of a witness may be attacked by any party, including the party calling the witness.”[96] The Advisory Committee Notes of Rule 607 indicate that this rule repudiates the surprise and injury requirement from common law.[97] A party can impeach a witness through prior inconsistent statements, cross-examination, or prior evidence from other sources.[98] However, a party may not use Rule 607 to introduce otherwise inadmissible evidence to the jury.[99] Additionally, a party may not call a witness with the sole purpose of impeaching him.[100] Further, even courts that do not permit a party to impeach its own witness still permit parties to contradict their own witnesses through another part of that witness’s testimony.[101]
§ 1.5.2 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]
§ 1.5.3 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]
§ 1.6 Evidence at Trial
§ 1.6.1 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]
§ 1.6.2 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.
§ 1.6.3 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]
§ 1.7 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] And keep in mind, generally, courts are “reluctant to set aside a jury verdict because of an argument made by counsel during closing arguments.”[151]
§ 1.8 Judgment as a Matter of Law
Federal Rule of Civil Procedure 50 governs the standard for judgment as a matter oflLaw, 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 6th 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, and 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 a 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.
§ 1.9 Jury Instructions
§ 1.9.1 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 theory of the case, the proposed instructions must be supported by the law and the evidence.[163]
§ 1.9.2 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 of 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]
§ 1.10 Conduct of Jury
§ 1.10.1 Conduct During Deliberations
Jury deliberations must remain private and secret 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]
§ 1.10.2 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]
§ 1.11 Relief from Judgment
§ 1.11.1 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]
§ 1.11.2 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]
§ 1.11.3 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]
§ 1.11.4 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]
§ 1.12 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. It may be necessary, now and in the future, 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, and as such, they may be around for some time to come, or maybe even permanently.[234]
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,[235] 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.[236]
So the question remains will remote trials remain a part of practice or not? Some would agree with the 1996 Advisory Committee Note to Federal Rule of Civil Procedure 43 “the importance of presenting live testimony in court cannot be forgotten” and that “the opportunity to judge the demeanor of a witness face-to-face is accorded great value in our tradition.”
[6]Luce v. United States, 429 U.S. 38, 40 n.2 (1984).
[7]United States v. Romano, 849 F.2d 812, 815 (3d Cir. 1988).
[8]Frintner v. TruPosition, 892 F. Supp. 2d 699 (E.D. Pa. 2012).
[9]United States v. LeMay, 260 F.3d 1018, 1028 (9th Cir. 2001).
[10]Wilson v. Williams, 182 F.3d 562, 565-66 (7th Cir. 1999).
[11]Id. at 566 (“Definitive rulings, however, do not invite reconsideration.”).
[12]Fusco v. General Motors Corp., 11 F.3d 259, 262-63 (1st Cir. 1993).
[13]Flythe v. District of Columbia, 4 F. Supp. 3d 222 (D.D.C. 2014).
[14]U.S. v. Denton, 547 F. Supp. 16 (E.D. Tenn. 1982).
[15]Henwood v. People, 57 Colo 544, 143 P. 373 (1914). An opening statement presents counsel with the opportunity to summarily outline to the trier of fact what counsel expects the evidence presented at trial will show. Lovell v. Sarah Bush Lincoln Health Center, 397 Ill. App. 3d 890, 931 N.E.2d 246 (4th Dist. 2010).
[16]Testa v. Mundelein, 89 F.3d 445 (7th Cir. 1996) (“being argumentative in an opening statement does not necessarily warrant a mistrial, but being argumentative and introducing something that should not be allowed into evidence may be a predicate for a mistrial.”).
[17]Krengiel v. Lissner Copr., Inc., 250 Ill App. 3d 288, 621 N.E.2d 91 (1st Dist. 1993) (“party whose motion in limine has been denied must object when the challenged evidence is presented at trial in order to preserve the issue for review, and the failure to raise such an objection constitutes a waiver of the issue on appeal.”).
[18]Forrestal v. Magendantz, 848 F.2d 303, 308 (1st Cir. 1988) (suggesting to jury to put itself in shoes of plaintiff to determine damages improper because it encourages the jury to depart from neutrality and to decide the case on the basis of personal interest and bias rather than on the evidence.).
[31]People v. Jordan, 2019 IL App (1st Dist.) 161848.
[32]Singer v. United States, 380 U.S. 24, 36 (1965) (finding that it is constitutionally permissible to require prosecutor and judge to consent to bench trial, even if the defendant elects one); United States v. Talik, No. CRIM.A. 5:06CR51, 2007 WL 4570704, at *6 (N.D.W. Va. Dec. 26, 2007).
[33] Fed. R. Civ. P. 38; Hopkins v. JPMorgan Chase Bank, NA, 618 F. App’x 959, 962 (11th Cir. 2015).
[37]See Lutz v. Glendale Union High Sch., 403 F.3d 1061, 1069 (9th Cir. 2005) (“[W]e hold that there is no right to have a jury determine the appropriate amount of back pay under Title VII, and thus the ADA, even after the Civil Rights Act of 1991. Instead, back pay remains an equitable remedy to be awarded by the district court in its discretion.”); see also Bledsoe v. Emery Worldwide Airlines, 635 F.3d. 836, 840-41 (6th Cir. 2011) (holding “statutory remedies available to aggrieved employees under the Worker Adjustment and Retraining Notification (WARN) act provide equitable restitutionary relief for which there is no constitutional right to a jury trial.”).
[38]K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 758 (6th Cir. 1985); Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986); Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988).
[39]Zaklit v. Glob. Linguist Sols., LLC, 53 F. Supp. 3d 835, 854 (E.D. Va. 2014); see also Nat’l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977).
[40]United States v. Steele, 298 F.3d 906, 912 (9th Cir. 2002) (“The fundamental purpose of voir dire is to ‘ferret out prejudices in the venire’ and ‘to remove partial jurors.’”) (quoting United States v. Howell, 231 F.3d 615, 627-28 (9th Cir. 2000)); Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 189 (4th Cir. 1994) (stating that the purpose of voir dire is to ensure a fair and impartial jury, not to operate as a discovery tool by opposing counsel).
[47]Hicks v. Mickelson, 835 F.2d 721, 726 (8th Cir. 1987).
[48]U.S. v. Lewin, 467 F.2d 1132 (7th Cir. 1972) (citing Fed. R. Crim. P. 24(a)).
[49]U.S. v. Lawes, 292 F.3d 123, 128 (2d Cir. 2002); Hicks v. Mickelson, 835 F.2d 721, 723-26 (8th Cir. 1987).
[50]Lawes, 292 F.3d at 128 (noting that “federal trial judges are not required to ask every question that counsel—even all counsel—believes is appropriate”).
[51]Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. 2000).
[52]Mayes v. Kollman, 560 Fed. Appx. 389, 395 n.13 (5th Cir. 2014); Richardson v. New York City, 370 Fed. Appx. 227 (2d Cir. 2010); c.f. Kiernan v. Van Schaik, 347 F.2d 775, 779 (3d Cir. 1965) (finding that judge’s refusal to ask prospective jurors questions about connection to insurance companies constituted reversible error).
[55]United States v. Bishop, 264 F.3d 535, 554-55 (5th Cir. 2001).
[56]United States v. Price, 573 F.2d 356, 389 (5th Cir. 1978).
[57]Chestnut v. Ford Motor Co., 445 F.2d 967 (4th Cir. 1971); c.f. United States v. Turner, 389 F.3d 111 (4th Cir. 2004) (finding that district court was within its discretion in failing to disqualify jurors who banked with a different branch of the bank that was robbed).
[58]United States v. Chapdelaine, 989 F.2d 28 (1st Cir. 1993).
[59]Leibstein v. LaFarge N. Am., Inc., 767 F. Supp. 2d 373 (E.D.N.Y. 2011), as amended (Feb. 15, 2011).
[60]Cravens v. Smith, 610 F.3d 1019, 1032 (8th Cir. 2010).
[61]See 28 U.S.C. § 1866 (stating that a juror may be “excluded upon peremptory challenge as provided by law”).
[62]Davis v. United States, 374 F.2d 1, 5 (1967) (“The essential nature of the peremptory challenge is that it is one exercised without a reason stated, without inquiry and without being subject to the court’s control.”).
[63] 28 U.S.C. § 1870; see also Fedorchick v. Massey-Ferguson, Inc., 577 F.2d 856 (3d Cir. 1978).
[64]Stephens v. Koch Foods, LLC, No. 2:07-CV-175, 2009 WL 10674890, at *1 (E.D. Tenn. Oct. 20, 2009).
[68]See Batson v. Kentucky, 476 U.S. 79 (1986) (race); J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127 (1994) (gender); Rivera v. Nibco, Inc., 372 F. App’x 757, 760 (9th Cir. 2010) (national origin).
[70]Robinson v. R.J. Reynolds Tobacco Co., 86 F. App’x 73, 75 (6th Cir. 2004).
[71]Rivera v. Illinois, 556 U.S. 148 (2009); see also King v. Peco Foods, Inc., No. 1:14-CV-00088, 2017 WL 2424574 (N.D. Miss. Jun. 5, 2017).
[72]Kirk v. Raymark Indus., Inc., 61 F.3d 147, 157 (3d Cir. 1995) (holding, in asbestos litigation, that trial court’s refusal to remove two panelists for cause was error, and the party’s subsequent use of peremptory challenges to remedy the judge’s mistake required per se reversal and a new trial) (citations omitted).
[87]Elgabri v. Lekas, 964 F.2d 1255, 1260 (1st Cir. 1992).
[88]SeeRosa-Rivera v. Dorado Health, Inc., 787 F.3d 614, 617 (1st Cir. 2015) (employees); United States v. Bryant, 461 F.2d 912, 918-19 (6th Cir. 1972) (informants); United States v. Hicks, 748 F.2d 854, 859 (4th Cir. 1984) (girlfriend).
[89]SeeU.S. v. Cisneros-Gutierrez, 517 F.3d 751, 762 (5th Cir. 2008).
[90] Fed. R. Evid. 612 authorizes a party to refresh a witness’s memory with a writing so long as the “adverse party is entitled to have the writing produced at the hearing, to inspect it, to cross-examine the witness thereon, and to introduce in evidence those portions which relate to the testimony of the witness.”
[91]Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).
[92]Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).
[98]Util. Control Corp. v. Prince William Const. Co., 558 F.2d 716, 720 (4th Cir. 1977).
[99]United States v. Gilbert, 57 F.3d 709, 711 (9th Cir. 1995).
[100]United States v. Finley, 708 F. Supp. 906 (N.D. Ill. 1989).
[101]United States v. Finis P. Ernest, Inc., 509 F.2d 1256, 1263 (7th Cir. 1975); United States v. Prince, 491 F.2d 655, 659 (5th Cir. 1974).
[102]SeeDavis v. Alaska, 415 U.S. 308, 316, 94 S. Ct. 1105, 1110, 39 L. Ed. 2d 347 (1974) (“Cross-examination is the principal means by which the believability of a witness and the truth of his testimony are tested.”).
[103]See Fed. R. Evid. 611(b) (effective December 1, 2011) (“(b) Scope of Cross-Examination. Cross-examination should not go beyond the subject matter of the direct examination and matters affecting the witness’s credibility. The court may allow inquiry into additional matters as if on direct examination.”).
[104]See United States v. Perez-Solis, 709 F.3d 453, 463-64 (5th Cir. 2013); see alsoUnited States v. Arias-Villanueva, 998 F.2d 1491, 1508 (9th Cir. 1993) (cross-examination is within the scope of direct where it is “reasonably related” to the issues put in dispute by direct examination), overruled on other grounds; United States v. Moore, 917 F.2d 215 (6th Cir. 1990) (subject matter of direct examination under Rule 611(b) includes all inferences and implications arising from the direct); United States v. Arnott, 704 F.2d 322, 324 (6th Cir. 1983) (“The ‘subject matter of the direct examination,’ within the meaning of Rule 611(b), has been liberally construed to include all inferences and implications arising from such testimony.”).
[106]Id; see also MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274, 1282 (8th Cir. 1994), cert. denied, 513 U.S. 824, 115 S. Ct. 89, 130 L. Ed. 2d 40 (1994) (“When cross-examination goes beyond the scope of direct, as it did here, and is designed, as here, to establish an affirmative defense (that the statute of limitations had run), the examiner must be required to ask questions of non-hostile witnesses as if on direct.).
[107] Under Fed. R. Evid. 608, if the witness concedes the bad act, impeachment is accomplished. If the witness denies the bad act, Rule 608(b) precludes the introduction of extrinsic evidence to prove the act. In short, the cross-examining lawyer must live with the witness’s denial.
[108] To qualify, “the crime must have been a felony, or a misdemeanor that has some logical nexus with the character trait of truthfulness, such as when the elements of the offense involve dishonesty or false statement. The conviction must have occurred within ten years of the date of the witness’s testimony at trial, or his or her release from serving the sentence imposed under the conviction, whichever is later, unless the court permits an older conviction to be used, because its probative value substantially outweighs any prejudice, and it should, in the interest of justice, be admitted to impeach the witness. If the prior conviction is used to impeach a witness other than an accused in a criminal case, its admission is subject to exclusion under Rule 403 if the probative value of the evidence is substantially outweighed by the danger of unfair prejudice, delay, confusion or the introduction of unnecessarily cumulative evidence. If offered to impeach an accused in a criminal case, the court still may exclude the evidence, if its probative value is outweighed by its prejudicial effect.” Behler v. Hanlon, 199 F.R.D. 553, 559 (D. Md. 2001).
[109] Fed. R. Evid. 608 (bad acts or character of untruthfulness); Fed. R. Evid. 609 (qualifying crime); Fed. R. Evid. 613 (prior inconsistent statement).
[123]U.S. v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (“[T]here need be only a prima facie showing, to the court, of authenticity, not a full argument on admissibility . . . . [I]t is the jury who will ultimately determine the authenticity of the evidence, not the court.”).
[125] Fed. R. Evid. 803(6), 902(11); United States v. Senat, 698 F. App’x 701, 706 (3d. Cir. 2017).
[126]See, e.g., Stumpff v. Harris, 31 N.E.3d 164, 173 (Ohio App. 2 Dist. 2015) (“Numerous courts, both state and federal, have held that items produced in discovery are implicitly authenticated by the act of production by the opposing party); Churches of Christ in Christian Union v. Evangelical Ben. Trust, S.D. Ohio No. C2:07CV1186, 2009 WL 2146095, *5 (July 15, 2009) (“Where a document is produced in discovery, ‘there [is] sufficient circumstantial evidence to support its authenticity’ at trial.”).
[128] Rules of Evid., Rule 901(a). Idaho v. Koch, 334 P.3d 280 (Idaho 2014).
[129]State v. Smith, 2015-1359 La. App. 4 Cir. 4/20/16, 2016 WL 3353892, *10-11 (La. Ct. App. 4th Cir. 2016); see also OraLabs, Inc. v. Kind Group LLC, 2015 WL 4538444, *4, Fn 7 (D. Colo. 2015) (in a patent and trade dress infringement action, the court admitted, over hearsay objections, Twitter posts offered to show actual confusion between the plaintiff’s and defendant’s products.).
[130]Jones v. U.S., 813 A.2d 220, 226-227 (D.C. 2002).
[133]U.S. v. Gomez-Alvarez, 781 F.3d 787, 792 (5th Cir. 2015).
[134]Jerden v. Amstutz, 430 F.3d 1231, 1237 (9th Cir. 2005).
[135]See, e.g., Hastings v. Bonner, 578 F.2d 136, 142-143 (5th Cir. 1978); United States v. Johnson, 577 F.2d 1304, 1312 (5th Cir. 1978); United States v. Jamerson, 549 F.2d 1263, 1266-67 (9th Cir. 1977).
[136]SeeUnited States v. Henderson, 409 F.3d 1293, 1298 (11th Cir. 2005).
[137]Inselman v. S & J Operating Co., 44 F.3d 894, 896 (10th Cir. 1995).
[138]SeeUnited States v. Adams, 271 F.3d 1236, 1241 (10th Cir. 2001) (“In order to qualify as an adequate offer of proof, the proponent must, first, describe the evidence and what it tends to show and, second, identify the grounds for admitting the evidence.”).
[139]Murphy v. City of Flagler Beach, 761 F.2d 622 (11th Cir. 1985).
[140]See id. at 1241-42 (“On numerous occasions we have held that merely telling the court the content of . . . proposed testimony is not an offer of proof.”).
[141] Fed. R. Evid. 103(c) (The trial court “may direct an offer of proof be made in question-and-answer form.”). See, e.g., United States v. Yee, 134 F.R.D. 161, 168 (N.D. Ohio 1991) (stating that “hearings were held for approximately six weeks” on whether DNA evidence was admissible).
[145] Fed. R. Evid. 103(a)(2); Beech Aircraft v. Rainy, 488 U.S. 153 (1988).
[146]Alford v. United States, 282 U.S. 687, 692 (1931).
[147]United States v. Harris, 536 F.3d 798, 812 (7th Cir. Ill. Aug. 6, 2008), overruled on other grounds.
[148]See, e.g., United States v. St. Michael’s Credit Union, 880 F.2d 579 (1st Cir. 1989); Griffin v. California, 380 U.S. 609, 615 (Apr. 28, 1965).
[149] Model Rule of Professional Conduct Rule 3.4(e).
[150]Jones v. Lincoln Elec. Co., 188 F.3d 709, 731 (7th Cir. 1999) (“We find nothing improper in this line of argument. Closing arguments are the time in the trial process when counsel is given the opportunity to discuss more freely the weaknesses in his opponent’s case.”).
[151]Vineyard v. County of Murray, Ga., 990 F.2d 1207, 1214 (11th Cir. 1993).
[152]See, Fed. R. Civ. P. 50(a)(1) (“If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.”).
[154]Arch Ins. Co. v. Broan-NuTone, LLC, 509 F. App’x 453, fn. 5 (6th Cir. 2012) (quoting Ford v. Cnty. of Grand Traverse, 535 F.3d 483, 492 (6th Cir. 2008).
[155]U. S. Indus., Inc. v. Semco Mfg., Inc., 562 F.2d 1061, 1065 (8th Cir. 1977).
[156]Am. & Foreign Ins. Co. v. Gen. Elec. Co., 45 F.3d 135, 139 (6th Cir. 1995).
[157]Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 405 (2006).
[158]Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000); citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 554-555, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Liberty Lobby, Inc., supra, at 254, 106 S.Ct. 2505; Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, n.6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962).
[162] Fed. R. Civ. P. 51(b) (1)-(2); see also Vialpando v. Cooper Cameron Corp., 92 F. App’x 612 (10th Cir. 2004) (explaining that “a district court can no longer give mid-trial instructions without first advising the parties of its intent to do so and giving the parties an opportunity to object to the proposed instruction.”).
[163]Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 WL 3232424 (N.D. Cal. July 28, 2017); see also Daly, 491 F.2d.104 (affirming court’s omission of instructions on the due process requirements of the Fourteenth Amendment since no facts supported a violation).
[165]Estate of Keatinge v. Biddle, 316 F.3d 7 (1st Cir. 2002).
[166]Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 65 Fed. R. Evid. Serv. 1366 (5th Cir. 2004), abrogated on other grounds.
[167] Fed. R. Civ. P. 51(c)(2); Fed. R. Crim. P. 30(d); see also Abbott v. Babin, No. CV 15-00505-BAJ-EWD, 2017 WL 3138318, at *3 (M.D. La. May 26, 2017) (explaining that upon an untimely objection courts may only consider a plain error in the jury instructions).
[169]Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996).
[170]Benaugh v. Ohio Civil Rights Comm’n, No. 104-CV-306, 2007 WL 1795305 (S.D. Ohio June 19, 2007), aff’d, 278 F. App’x 501 (6th Cir. 2008).
[171]Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996) (reversing judgment since the instructions could allow a jury to find the defendant liable based on premise unsupported by law).
[172]United States v. Grube, No. CRIM C2-98-28-01, 1999 WL 33283321 (D.N.D. Jan. 16, 1999) (denying motion for new trial since the omitted instructions were superfluous and potentially misleading); see also Cupp v. Naughten, 414 U.S. 141, 94 S. Ct. 396, 397, 38 L. Ed. 2d 368 (1973); Lannon v. Hogan, 555 F. Supp. 999 (D. Mass.), aff’d, 719 F.2d 518 (1st Cir. 1983) (generally cannot seek such relief based on a claim of improper jury instructions, unless the error “so infect[ed] the entire trial that the resulting conviction violated the requirements of Due Process Clause and the Fourteenth Amendment.”).
[173]Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir. 2002) (failure to make specific objections to jury instructions before jury retires to deliberate results in waiver, and Court of Appeals may review the instruction for fundamental error only.).
[174]United States v. Olano, 507 U.S. 725, 737 (1993).
[175]Cleary v. Indiana Beach, Inc., 275 F.2d 543, 545-46 (7th Cir. 1960); Sullivan v. United States, 414 F.2d 714, 715-16 (9th Cir. 1969).
[176]Cleary, 275 F.2d at 546; Magnuson v. Fairmont Foods Co., 442 F.2d 95, 98-99 (7th Cir. 1971).
[177]See United States v. Williams, 635 F.2d 744, 745-46 (8th Cir. 1980) (“It is essential to a fair trial, civil or criminal, that a jury be cautioned as to permissible conduct in conversations outside the jury room. Such an admonition is particularly needed before a jury separates at night when they will converse with friends and relatives or perhaps encounter newspaper or television coverage of the trial.”); United States v. Hart, 729 F.2d 662, 667 n.10 (10th Cir. 1984) (“[A]n admonition . . . should be given at some point before jurors disperse for recesses or for the day, with reminders about the admonition sufficient to keep the jurors alert to proper conduct on their part.”).
[178]United States v. Dempsey, 830 F.2d 1084, 1089-90 (10th Cir. 1987).
[179]United States v. Gross, 451 F.2d 1355, 1359 (9th Cir. 1971).
[180]United States v. Williams, 87 F.3d 249, 255 (8th Cir. 1996).
[194]United States. v. Venerable, 807 F.2d 745, 747 (8th Cir. 1986).
[195]United States v. Gray, 199 F.3d 547, 550 (1st Cir. 1999).
[196]United States v. Scott, 642 F.2d 791, 797 (9th Cir. 2011); United States v. Bassler, 651 F.2d 600, 602 n.3 (8th Cir. 1981).
[197]See, e.g., United States v. Darden, 70 F.3d 1507, 1537 (8th Cir. 1995) (court permitted note-taking while examining exhibits only); United States v. Porter, 764 F.2d 1, 12 (1st Cir. 1985) (court permitted note-taking only during opening statements, closing statements, and jury charge).
[198]United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011).
[199]See United States v. Rhodes, 631 F.2d 43, 45-46 (5th Cir. 1980) (“The court should also explain that the notes taken by each juror are to be used only as a convenience in refreshing that juror’s memory and that each juror should rely on his or her independent recollection of the evidence rather than be influenced by another juror’s notes.”).
[200]United States v. Richardson, 233 F.3d 1285, 1288-1289 (11th Cir. 2000).
[201]United States v. Rawlings, 522 F.3d 403, 408 (D.C. Cir. 2008); United States v. Bush, 47 F.3d 511, 514-516 (2nd Cir. 1995); DeBenedetto by DeBenedetto v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir. 1985).
[202] Perhaps the most important protection is a screening mechanism where questions are submitted to a judge and reviewed by counsel prior to the question being posed. Rawlings, 522 F.3d at 408; United States v. Collins, 226 F.3d 457, 463 (6th Cir. 2000).
[210]Exxon Shipping Co. v. Baker, 554 U.S. 471, 486, 128 S. Ct. 2605, 2617 n.5, 171 L. Ed. 2d 570 (2008).
[211]CFE Racing Prod., Inc. v. BMF Wheels, Inc., 793 F.3d 571, 583 (6th Cir. 2015).
[212]Id. (explaining that the waiver rule serves to protect litigants’ right to trial by jury, discourage courts from reweighing evidence simply because they feel the jury could have reached another result, and prevent tactical victories at the expense of substantive interest as the pre-verdict motion enables the defending party to cure defects in proof) (quoting Libbey-Owens-Ford Co. v. Ins. Co. of N. Am., 9 F.3d 422, 426 (6th Cir. 1993)).
[213]Bowen v. Roberson, 688 F. App’x 168, 169 (3d Cir. 2017).
[214]McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241, 1254 (11th Cir. 2016).
[215]Bavlsik v. Gen. Motors, LLC, 870 F.3d 800, 805 (8th Cir. 2017).
[218]See, e.g., Stragapede v. City of Evanston, Illinois, 865 F.3d 861, 866 (7th Cir. 2017), as amended (Aug. 8, 2017) (upholding jury verdict in favor of plaintiff for ADA violation when challenged in renewed 50(b) motion on grounds that the jury properly discounted employer’s evidence).
[221]Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (noting that federal courts are guided by the common law’s established grounds for permitting new trials).
[222]Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940).
[223]Kleinschmidt v. United States, 146 F. Supp. 253, 257 (D. Mass. 1956) (explaining that a party seeking new trial on ground of newly discovered evidence has substantial burden to explain why the evidence could not have been found by due diligence before trial).
[224]Gross v. FBL Fin. Servs., Inc., 588 F.3d 614, 617 (8th Cir. 2009) (granting new trial in age discrimination case where jury instruction improperly shifted the burden of persuasion on a central issue).
[225]Warner v. Rossignol, 538 F.2d 910, 911 (1st Cir. 1976) (counsel’s conduct in going beyond the pleadings and evidence to speculate and exaggerate the plaintiff’s injuries, despite repeated warnings from the trial judge, warranted new trial).
[226]See, e.g., Bavlsik v. Gen. Motors LLC, No. 4:13 CV 509 DDN, 2015 WL 4920300, at *1 (E.D. Mo. Aug. 18, 2015) (granting new trial on issue of damages and rejecting defendants’ argument that the record demonstrated a compromised verdict).
[230]In re Transtexas Gas Corp., (5th Cir 2002), 303 F.3d 571.
[231]U.S. v. Mansion House Center North Redevelopment Co., (8th Cir. 1988), 855 F.2d 524,, certiorari denied 109 S.Ct. 557, 488 U.S. 993, 102 L.Ed.2d 583 (district court had jurisdiction to modify judgment, even after it was affirmed on appeal, in order to clarify its intentions and conform judgment to parties’ pretrial stipulation).
[232] See United States v. Cirami, 563 F.2d 26, 33 (2d Cir. 1977).
[233]Flores v. Town of Islip, No. 18-CV-3549 (GRB)(ST), 2020 WL 5211052, at *1 (E.D.N.Y. Sept. 1, 2020) (the court granted a motion to proceed with a virtual trial but required counsel and the court staff to have a pre-trial conference to discuss the logistics of a virtual trial).
[234]In re Alle, No. 2:13-BK-38801-SK, 2021 WL 3032712 (C.D. Cal. July 19, 2021).
[235] See, e.g., New Jersey Federal Bankruptcy Court Zoom Trial Guidelines.
There are many types of intellectual property (IP)—for example, trademarks, trade secrets, copyrights, or patents. These are all valuable assets of a company. One way the legal department can help generate money for a company is to find ways to monetize the company’s IP. Being aggressive with enforcing patents is a good strategy, but the strategy goes nowhere if the company does not have any patents to fight with. To get over this hump, the first step is creating or enhancing a patent development program. It is a fairly straightforward process to generate patents. The licensing half, however, is not easy, but can be very lucrative if the patents are valid, have value, and you find the right targets.
A patent is a government-granted monopoly to build, sell, and use your invention (and prevent others from doing so). If you are issued a patent in the United States, it is typically good for twenty years, after which time your patent expires and anyone can copy, build, and sell your invention. In exchange for a short-term monopoly, you must disclose the details of your invention to the public so that someone practiced in the arts could recreate it. To receive a patent, your idea must meet four requirements.
The subject matter must be patentable, as defined by Congress and the courts.
Your idea must be new.
The idea must be useful.
Your idea must be non-obvious.
Additionally, there is what lawyers commonly called the Alice decision whereby the U.S. Supreme Court established a two-part test to determine if a software patent was patentable or not as pertaining to ineligible subject matter. To sum it up quickly, under Alice, simply reciting the use of a conventional computer in the claims to implement the known idea does not make the idea for a utility patent patentable subject matter.
There are three types of patents you can file for:
Utility patents may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof (good for twenty years).
Design patents may be granted to anyone who invents a new, original, and ornamental design (good for fourteen years).
Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant (good for twenty years).
There is a lot that goes into determining if your technology or idea is patentable and, if so, which type of patent is best. Unless the company has the money to have its own patent attorney on staff, you will need experienced outside counsel to help you with this process and draft the application. Simply put, getting a patent is not easy (unless you buy them from someone looking to sell or in bankruptcy, which is always an option). The overall process takes a lot of work and time. It can also be expensive—roughly $15,000–$25,000 to get a patent issued. Buying already issued patents is likely far more expensive. To start, in the United States, you need to file a patent application that sets out in detail a description of your idea. These applications must be filed by a patent attorney (in-house or outside) skilled in the art of drafting a patent application. You must also review publications and other sources to make sure there is nothing already out there that overlaps with your idea or would allow someone skilled in the arts to build your invention just from reading what is already out there. (This is called prior art.) Then an examiner from the U.S. Patent and Trademark Office (USPTO) reviews your application. They might reject it in total, or they might reject part of it (for any of the reasons noted). You have a chance to appeal (called an office action), and the examination process (with the exception of design patents) generally goes back and forth for several years before either your patent is issued or finally denied. At each stage, you must determine whether it is worth the cost and the effort to continue or, depending on the objections from the examiner, whether the changes you must make to your patent leave you with anything good after it is all said and done.
You also need to decide in which jurisdictions you will seek patent protection. Patents are only valid in the country where they are issued. You cannot enforce a patent issued in the United States against a business operating within the European Union or in China. You would need patents issued in those countries. Additionally, in the United States, you must seek patent protection within one year of when you first sold or disclosed the patented material. If you wait too long (more than twelve months), you cannot get a patent. Finally, one neat trick in the U.S. system is filing for what is called a provisional patent. This is a relatively inexpensive process that allows you to get an application on file quickly (with far less detail and expense than a regular patent application). The provisional patent application is good for one year and buys you time to decide if you truly want to pursue a full patent while preserving your position as first to file.
Given the cost, the business side will ask why they should get a patent. It is a fair question, especially if you are going to be spending time and treasure trying to get inventions patented. Ultimately, the answer to the question depends on the company’s strategy concerning IP generally and patents specifically. You can break the reasons down as follows:
Protect innovations. The most straightforward reason to get a patent is to protect a valuable invention, in particular, one you believe competitors or others may reverse engineer or invent on their own.
Offensive use. This means getting patents to use for licensing purposes (i.e., money) or to preclude others (competitors) from practicing your invention, which, if done correctly, could mean they are no longer competitors.
Defensive use. This contemplates getting patents to use to defend the company in the event a competitor or other patent owner tries to assert their patent against you. If the party asserting the patent operates a real business (versus being a patent troll), then you may own a patent that you could enforce against them. When this happens, the parties often agree to a cross-licensing program that allows each party to use the other’s patents.
Increase shareholder value. Patents have value. A portfolio of patents can increase the value of your company for its shareholders, particularly in cases of a potential sale of the business. You will always see questions around patents (and other IP) in a due diligence request. Additionally, if your company is publicly traded, a fulsome patent portfolio (or simply obtaining a single new, but important, patent) can mean an increase in share price.
Taxes. Being able to demonstrate that you apply for and have patents can be used as a justification for research and development costs, which typically qualify as deductions for purposes of corporate income taxes.
Prestige. Companies with large patent portfolios (or even just a handful of important patents) are viewed as innovators in their field. Employees, especially for technology companies, take pride in the innovations developed by their companies, including patents. This can lead to an improvement of morale generally, especially among the technical teams.
Another important consideration regarding any particular piece of intellectual property is whether you should protect it with a patent or treat it as a trade secret. Not all ideas are worth the cost of trying to obtain a patent. Additionally, once the patent issues, the particulars of the invention are disclosed to the world, and your protection only lasts for twenty years (and it also depends on how willing you are to enforce your patents). Accordingly, there are times when a patent simply does not make sense. For example, the good folks at Coca-Cola could have patented the formula for Coke. But, for obvious reasons, it was a far better decision to treat the formula as a trade secret and keep it out of the public realm. A patent only lasts twenty years. A trade secret can last forever. So, when deciding to patent something, you need to think hard about whether this is, in fact, the right course or if you are better off keeping it as a trade secret.
There are two key documents you must have in place as you look to develop your company’s IP. The first is an invention disclosure form. This is a form you require inventors to fill out so their inventions can be properly evaluated. The form should only be a few pages long to encourage inventors to complete it. The inventor should provide information such as:
a description of the technology, how it operates, the identity of competitors in the field, and their products/technology;
how the invention will make a difference in the marketplace for the company and allow the company’s products to surpass others (i.e., why is it worth seeking a patent);
are there easy ways to design around the technology;
the date the invention was created; and
whether the invention has been offered for sale and, if so, when?
The second document is a form whereby all employees who join the company agree to assign ownership of any inventions that employee creates on company time or using company resources to the company. This form is often combined with other agreements such as confidentiality, non-solicitation, and non-compete agreements. You do not want to be in a position where the company is defending challenges to its attempt to obtain a patent from an employee claiming she is the real owner.
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