Lawyers and modern technology are a fascinating—and complicated—combination. On one side is a unique business model that is owned and led by partners and provides professional services. On the other side is an ever-changing industry that sells products and services aimed at disrupting the way things are done. And stuck in the middle? Lawyers.
The crux of the problem is that many law firms just are not making the investments in modern technology fast enough to remain competitive and deliver success for their clients. The fact that you are reading this article likely means you are in this situation yourself or acutely aware of it.
Further complicating things is the fact that running a law firm is uniquely challenging. There is the firm partnership structure, which is much different than the typical corporate model where a small group at the top consisting of board members, a C-team, and senior executives run things. The complex, nonlinear relationships that law firms have differ greatly from the top-down, linear structure that most corporations employ. There is also a fee-based revenue model for firms, as opposed to straight product and service (e.g., SaaS) revenue, and let’s not even get into all the regulations and conflicts that must be addressed!
Hundreds of lawyers in the United States and the United Kingdom—many of them partners with ownership stakes in their respective firms—weighed in on their attitudes toward technology in a survey recently conducted by Intapp in partnership with YouGov. The survey polled 258 lawyers at firms with 50+ employees: 133 in the United States and 125 in the United Kingdom.
The survey shows that lawyers recognize the importance of using software that is purpose-built for their needs and those of their clients as opposed to generic solutions. Yet, despite the growing awareness of the need for modern technology solutions that help deliver a level of service that delights clients (in the hopes of doing more work to help them solve complicated issues), the survey reveals that law firm use of technology designed specifically for legal applications is lagging.
Here are some of the key findings from U.S. lawyers:
Lawyers are not happy with the tech they have.
Forty percent said little to none of the software they use regularly has been designed with a law firm in mind.
There is great hope for artificial intelligence (AI).
Thirty percent said that AI could help draft legal documents.
Another 30 percent said AI could help track billable time.
Others said AI’s value lies in conflicts clearance (25 percent), compliance with client billing requirements (20 percent), and estimating fees of an engagement (19 percent).
The tech must change.
Forty-one percent indicate that user interface is a problem, followed by a need for software more tailored to the business of law (29 percent) and more intuitive operation of the software (29 percent).
What U.S. lawyers say their clients want.
Thirty-five percent reported that clients are demanding faster service, whereas 24 percent say their clients want more transparency about the status of matters.
Regarding fees, 25 percent identified lower fees as a client demand.
Unsurprisingly, the opinions on lower fees vary between large and other-sized firms, with large law firms valuing lower fees at 33 percent versus 15 percent for other-sized firms.
The survey results map closely to what I hear from clients, colleagues, and industry thought leaders every day. They also align with the larger business trend of organizations recognizing the need to shift to industry-vertical technology solutions and away from the one-size-fits-all model. Given their unique structures, law firms require more collaboration among those who run and own the firms and the professionals who staff the functional areas like IT, HR, business development, marketing, and practice management. Thus, the technology they use must reflect this business model.
The legal game has changed. One of the biggest catalysts is the ongoing upheaval in the way legal services are delivered. The competition from other law firms, the Big Four consulting firms, online legal service providers, and in-house attorneys is too fierce to not take advantage of modern, purpose-built technology.
Based on the survey results and my own deep experience in the legal tech space, I can say with confidence that the “modern” law firm is one that integrates people, processes, and data. Doing so fosters collaboration, fuels growth, and delivers client success.
The good news is that the technology is available for firms to modernize their tech stacks. There are purpose-built solutions that span the entire client lifecycle, from business development to client service and internal processes. Do your homework and go into the search and procurement process with an open mind. Your ideal modern tech stack is out there waiting for you, but you must move quickly or your firm will be left behind.
Since President Gerald Ford signed it into law on December 22, 1974, the Real Estate Settlement Procedures Act (RESPA)[2] has been amended to cover many diverse yet related “real estate” subjects. In its present iteration, only sections 2605(g) and 2609 deal with mortgage escrow accounts, with much of RESPA’s escrow-themed jurisprudence centering on the former.[3] Despite its sparsity,[4] this precedent’s perusal reveals the popularity of a peculiar interpretation of section 2605(g) within the federal judiciary[5]—namely, “[]though . . . [it] does not explicitly set this out as a pleading standard,” section 2605(f) impliedly requires a showing of pecuniary damages in order to state a claim under section 2605’s every subpart, including its escrow-centric section 2605(g).[6] As a result of this extrapolation’s increasing sway, another weapon for use by the many subject to RESPA’s positive commands and plain prohibitions has been forged, one too often unexploited by defendants and forgotten by plaintiffs.
Organized under the laws of the state of Maryland in 1995, New Century Financial Corporation (New Century) sited its headquarters in Irvine, California. In 2004, New Century converted itself into a real estate investment trust; in 2006, it ranked second only to HSBC Finance Corporation in the issuance of subprime mortgages. By the spring of 2006, this phoenix’s death spiral had commenced, culminating in its filing of Chapter 11 bankruptcy on April 2, 2007. Among one portfolio of assets subsequently sold by New Century’s bankruptcy trustee sat an outstanding mortgage owed by Demonfort and Leandra Carter (Carters, collectively).
In the months after this interest’s acquisition, this mortgage’s new owner unwittingly repeated its predecessors’ blunders. Most notably, it too neglected to supply the Carters with notice of all changes in the identities of the loan’s servicers or of the trustees authorized to commence a nonjudicial foreclosure. In so doing, as the Carters alleged, their debt’s most recent possessor had clearly violated section 2605(b). Soon after a court so concluded, however, a singular realization upended proceedings: for all their efforts, the Carters would never be able to adduce proof of a single computable injury or monetizable harm.
B. Misplaced Letters
A decade later, due to a married couple’s erratic payment history, another mortgagee exercised its right under a duly executed deed of trust (DOT) to mandate the creation and upkeep of a mortgage escrow account. At the same time, this entity promised the mortgagors that it would make timely disbursements from this regularly replenished account for the payment of their mortgage insurance. Pursuant to these representations, first the DOT’s two holders and then the obligation’s servicer diligently sent the necessary sums to a small insurance company headquartered in the Virginian swamplands, month after month and year after year. As the servicer likely knew, section 2605(g) required no less.
This process broke down in the course of one muggy, three-month stretch. Beginning in June of 2016, the property’s longtime insurer sent renewal notices to the servicer warning of the policy’s imminent expiration in August. Inexplicably, these missives failed to induce a response, whether an acknowledgement of receipt or an application for the policy’s renewal, from the servicer’s appointed staff. Hence, once the deadline passed without receipt of a wired or mailed payment, the mortgagors’ insurance automatically lapsed.
Soon thereafter, a hurricane besieged the mortgagors’ ramshackle home, prompting the servicer first to discover the policy’s termination and then to respond in two conspicuous ways. Within days, it force-placed coverage, backdated to the former policy’s date of expiration, on the now-battered home; within weeks, it ordered its chosen adjustor to utilize the formula for reimbursement set out in the expired policy. Maybe inevitably, once this expert submitted his valuation, the mortgagors proffered their own, and the parties began feuding over manifold objects’ appropriate valuation. As these disagreements’ intractability spiked, the mortgagors, at their new lawyer’s behest, pondered the potential of a section 2605(g) claim.
III. Statutory Scheme
A. RESPA’s Origins and Objectives
In the 1950s, an increase in the settlement costs incurred by home purchasers first garnered a modicum of Congress’s attention.[8] Nevertheless, it took until 1969 for the rash of consumer complaints over these fees to prod a congressional subcommittee to more than perfunctorily wade into this fraught area of law and finance.[9] In the aftermath of the extensive public hearings that followed, Congress empowered the Secretary of the U.S. Department of Housing and Urban Development and the Administrator of Veterans Affairs to conduct an official study of settlement costs on certain government-insured loans[10] in section 701 of the Emergency Home Finance Act of 1970.[11] From the written peroration produced by these agencies came RESPA.[12]
Since its effective date of June 20, 1975,[13] RESPA has regulated the conduct of the varied participants in “the settlement process for residential real estate,”[14] governing this “narrow field of financial transactions” but affecting “a broad group of financial institutions.”[15] In relevant part, RESPA then defined, and still does, a real estate “settlement service” as “any service provided in connection with a real estate settlement, including, but not limited to” title searches, title insurance, attorney services, document preparation, credit reports, appraisals, property surveys, loan processing and underwriting, and the like,[16] relating to “a[ny] federally related mortgage loan,” itself an expressly delineated term.[17] From 1975 through today, RESPA has obligated the entities offering such services and dealing with such loans to deliver “greater and more timely information on the nature and costs of the settlement process” to consumers and to forsake the “abusive practices” blamed for “unnecessarily high settlement charges.”[18] A certain belief underlay, and still accounts for, these sections: “that those who pay settlement costs rarely understand them and have little ability to affect their imposition through consumer choice.”[19]
A similar view has always animated section 2609, one of RESPA’s original parts.[20] As its legislative record amply confirms, Congress crafted section 2609 to “attack[]” and “outlaw[]” some lenders’ practice of “maintaining an overlarge ‘cushion’ of borrowers’ tax and insurance premiums [in mortgage escrow accounts] to profit from the interest gained by investing it.”[21] Whatever their original defensibility, these accounts had “developed into a lucrative source of interest-bearing capital for mortgage lenders” in the decades since their emergence in the 1930s, a transformation little noticed, for good or ill, until the late 1960s.[22] At that point, and for years afterward, borrowers brought hundreds of suits to recoup their lost interest income or recover the profits that they believed lenders had so illicitly accumulated.[23] “[T]he consumer movement” had recently “singled out the escrow account for particular attention,” one knowledgeable observer reflected in 1972, “the probable result of a sense of frustration on the part of the average borrower and the deep-seated feeling that he[, she, or them] is being gypped and the industry is taking advantage of him [her, or them].”[24] Due to a surfeit of such unequivocally telling evidence, section 2609’s impetus and mark—“[t]he common practice of profiting by overcharging and investing escrow funds”—have never been in doubt.[25]
In 1991, Congress extended RESPA to the “servicing” of “federally related mortgage loans” with the enactment of section 2605.[26] It did so in response to a major study of mortgage loan servicing practices, conducted by the U.S. General Accounting Office, that collected a substantial number of consumer grievances regarding abusive practices by certain servicers.[27] In pained and thorough detail, testimonial after testimonial documented perpetual “mistakes in calculating escrow account payments, unresponsiveness to inquiries”, and failures “to make timely property tax and hazard insurance premium payments” as well as “to provide adequate notice of a mortgage loan servicing transfer.”[28] Other protests “pointed out that these errors . . . [could] potentially result in the imposition of late payment charges and payments to the wrong parties.”[29] These writers’ excoriations naturally fixated upon servicers of residential loans or mortgages, the typical point of contact for the average borrower.[30] To address these apprehensions, Congress opted to expansively define “servicing” for purposes of section 2605 as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts described in section [2609] . . . , and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”[31] As the practice of loan servicing by parties other than the original lender has become more commonplace, and as servicers’ ability to initiate foreclosures has been more firmly established,[32] section 2605’s prominence has mushroomed.
Cognizant of this history, courts tag RESPA in toto as a remedial consumer protection statute[33] and correspondingly construe its provisions.[34] Thus, because “[t]he express terms of RESPA clearly indicate that it is . . . a consumer protection statute,”[35] its every clause must be “read remedially . . . to further its goals of providing more information for consumers and preventing abusive practices by servicers.”[36] To these jurists, this view can (and often does) warrant capacious explications of RESPA’s scope and duties.[37] RESPA’s evolution into a “comprehensive law that covers virtually every loan secured by residential real property” by 1993[38] has only reinforced this interpretive predilection.
B. RESPA’s Escrow Provisions: Sections 2605 and 2609
RESPA imposes disparate duties on lenders and servicers with respect to mortgage escrow accounts. As to the former, it (1) limits the amount that lenders can require current or prospective borrowers to deposit into them, but (2) forces loan servicers (a) to deliver borrowers with account statements and notifications of shortage, and (b) to make timely payments from the escrow account for taxes, insurance premiums, and other charges in certain situations.[39] Applicable far beyond the date of the closing, the RESPA escrow provisions binding upon servicers appear in sections 2609 and 2605(g).[40]
Strictly tailored, section 2609 polices “when, what, and how much a servicer may collect from a borrower for deposit in an escrow account.”[41] In particular, it (1) prohibits the imposition of certain requirements on “the borrower or prospective borrower”;[42] (2) compels a servicer to “notify the borrower not less than annually of any shortage in the escrow account”;[43] and (3) enumerates a multitude of specifications as to escrow accounts’ initial and annual statements[44] whenever a lender forces a borrower to make advance deposits in a mortgage escrow account. By targeting these practices, section 2609 attempts to “relieve[] the home buyer of the burden of making advance deposits covering long periods of time, while [still] assuring lenders that these charges will be paid.”[45] As commonly parsed, however, this escrow provision awards no private cause of action, a conclusion[46] that has arguably limited its utility.[47]
In contrast, section 2605, which broadly focuses upon the servicing of mortgages, has long been held to provide exactly such a prerogative.[48] Among its various paragraphs, section 2605(g) alone “governs when a servicer is required to pay taxes and insurance premiums on a mortgaged property where there has been no escrow waiver.”[49] In accordance with this subsection, a servicer must “make payments from the escrow account for such taxes, insurance premiums, and other charges in a timely manner as such payments become due” so long as “the mortgage loan terms require the borrower to make payments to the servicer for deposit into an escrow account to assure payment of taxes, insurance premiums, and other charges with respect to the property.”[50] As the Consumer Financial Protection Bureau has advised, a servicer must make the payment required by section 2605(g) “on or before the deadline to avoid a penalty” and thereby escape liability for its trespass.[51]
C. RESPA’s Implicit Requirement: Section 2605(g)’s Causal Prerequisite
Bereft of any direction from RESPA itself, court after court has done the same, precisely as logic and practice compel: it has imported a causal prerequisite into section 2605’s every subparagraph, including section 2605(g). Textually, however, section 2605(f) expresses no such thing,[52] and neither section 2605(b) nor section 2605(g) speak as to causation.[53] Still, assuming section 2605’s three-year statute of limitations has not yet run,[54] a defendant can only be liable for “any actual damages to the borrower as a result of the failure” to comply with “any provision” of section 2605 per section 2605(f)(1)(A).[55] Having construed this text to render damages into “an essential element in pleading a RESPA claim,”[56] much precedent now expects a plaintiff to initially allege and later prove two verities when suing for a violation of section 2605:[57] (1) “pecuniary damages” (2) traceable to the defendant’s purported noncompliance with one of section 2605’s sundry provisions.[58]
With impressive rapidity, this dualistic construction led to the derivation of a newfangled pleading requirement for section 2605(g) claims. Simply put, an actual connecting link between quantifiable damages and that subsection’s breach must first be plausibly alleged and then competently evidenced for such a claim’s dismissal to be avoided under Federal Rules of Civil Procedure 12(b) and 56.[59] A plaintiff’s failure to specify a section 2605(g) violation and some measurable harm that directly flowed from that transgression will, in turn, ensure a section 2605(g) claim’s defeat,[61] as will reliance on “general allegations of harm”[62] or “conclusory statement[s] of law.”[63]
IV. Some Real-World Guidance for Defendants and Plaintiffs
Putting aside questions as to its objective cogency, section 2605(g)’s implied causal requirement presents defendants and plaintiffs with both peril and possibility.
For a defendant, its existence affords new means for beating back any claim founded on its purported contravention. The want of plausible allegations as to causation or to a distinct harm attributable to section 2605(g)’s breach, as determined by the standard set out in Bell Atlantic Corp. v. Twombly[64] and Ashcroft v. Iqbal,[65] demands the dismissal of any such cause of action even at the pleading stage, thus justifying an early motion to dismiss or for judgment on the pleadings—or notice of that probability before a suit’s commencement. After discovery’s end, the dearth of much more than a scintilla of competent evidence of either should lead to the same result if articulated in a short motion for summary judgment. Finally, purely as a practical matter, any RESPA-covered entity that promptly corrects any section 2605(g) violation and tenders the nonbreaching plaintiff with the same kind of insurance coverage as under the lapsed policy, and actually possesses and successfully introduces evidence of such pre-suit efforts into a case’s record before or during trial,[66] will find itself well-positioned to sidestep liability under section 2605(g). The reason is simple: if a defendant can prove that it thusly acted, its breach of section 2605(g) cannot have precipitated any cognizable harm. Based on section 2605’s prevailing interpretation, such a finding abrogates any claim under section 2605(g) as a matter of law.
Meanwhile, a plaintiff must prepare to rebuff such rejoinders from first light. At a minimum, he, she, or they must not scrimp on the fashioning and propounding of allegations that, taken as a whole, depict a plausible connection between section 2605(g)’s defiance and some ultimately measurable harm in framing every pleading. Obviously, if the breaching entity quickly recovered and arranged for coverage consistent with that previously furnished, likely doom would dog any such claim; after all, the nonexistence of a true injury is not something that can be pled away, only artfully obscured for a spell. Depending on the facts, a prescient plaintiff—one who anticipates this risk—can endeavor to minimize it by (1) credibly avowing their intent to obtain potentially more generous coverage than formerly imposed pre-suit, or by demonstrating that the servicer, whether directly or indirectly, had failed (2) either to obtain at least comparable coverage prior to the initiation of any lawsuit or the threat of litigation, or (3) to utilize the more beneficial matrix or algorithm set forth in the expired policy, as it may have promised.[67] For these plaintiffs, discovery must be dedicated to the gathering of evidence so substantiating from the mortgagors, breaching party, insurer, and, if necessary, an expert or two—more than a modicum necessary to dodge a section 2605(g) claim’s dismissal on the eve of trial. To summarize, in accordance with the federal judiciary’s preferred construction of section 2605, any plaintiff should be ready first to allege and subsequently to show how a breach of section 2605(g) engendered an actual injury, one preferably reducible to paper dollars and jingling cents, before docketing a single page. The judicial penchant for “interpret[ing] this [causal] requirement liberally” will surely ease this burden,[68] but cannot fully negate it.
Aside from making the aforementioned arrangements, a plaintiff’s only option is to dispute the propriety of this causal prerequisite’s imputation into section 2605’s silent text. Such a contention arguably accords with today’s “well-established principles of statutory construction,”[69] which decidedly bar any tinkering with a statute’s enacted language.[70] Yet, considering section 2605(f)’s highly redolent language and the judiciary’s longstanding rejection of this argument, its odds of success at trial or on appeal are vanishingly small.
V. Conclusion
In its current form, section 2605(g) lacks either a palpable ambiguity or a maddening ornateness. Rather, this subsection lays out duties, the disregard of which can trigger liability in relatively transparent prose.[71] No reference to causation graces its text, and no such clear demand appears in the overall statute of which it constitutes but a part. Perhaps made uncomfortable by the omission of this common statutory element, countless courts have nonetheless implanted it within section 2605 in general and section 2605(g) in particular. Notwithstanding this decision’s soundness, its present-day ascendency is an established fact, and until courts or Congress act, its propagation invites defendants to argue for the imputation of such a condition into RESPA’s as-yet-untouched sections—and perhaps other, still unaffected consumer protection statutes.
*Amir Shachmurove is an associate at Troutman Sanders LLP and is always reachable at [email protected]. As usual, the views expressed and the mistakes made herein are his alone and should be attributed to neither friend nor employer, past or present. Lastly, this article is for general information purposes and is not intended to be, and should not be taken as, legal advice.
[1] In this article, any reference to “section []” or “§ []” is to a provision of RESPA, as codified in 12 U.S.C. §§ 2601–2617.
[2] As typically defined, an “escrow account” is “a bank account, generally held in the name of the depositor and an escrow agent, that is returnable to the depositor or paid to a third person on the fulfillment of specified conditions.” Black’s Law Dictionary 22 (10th ed. 2014). In the RESPA context, and as used in this article, the term “escrow account” is synonymous with “impound account,” defined as “[a]n account of accumulated funds held by a lender for payment of taxes, insurance, or other periodic debts against real property.” Id.
[3] The judicial consensus that section 2609 does not allow for a private cause of action likely explains this distribution. See infra note 46 and accompanying text.
[4]Cf. Hyderi v. Wash. Mut. Bank, FA, 235 F.R.D. 390, 400 (N.D. Ill. 2006) (describing section 2605(g) as “a seldom-invoked provision of RESPA”).
[5] In this article, any reference to “court” or “courts” is to one or more federal trial and appellate courts, whether operating pursuant to Article I or Article III of the U.S. Constitution, unless otherwise noted.
[6] Allen v. United Fin. Mortg. Corp., 660 F. Supp. 2d 1089, 1097 (N.D. Cal. 2009).
[7] The tales précised in this section come from publicly available sources. Some facts have nonetheless been altered for the sake of confidentiality and readability.
[8] George S. Mahaffey Jr., A Product of Compromise: Or Why Non-Pecuniary Damages Should Not Be Recoverable under Section 2605 of the Real Estate Settlement Procedures Act, 28 U. Dayton L. Rev. 1, 6 (2002).
[9] Diana Stoppello, Federal Regulation of Home Mortgage Settlement Costs: RESPA and Its Alternatives, 63 Minn. L. Rev. 368, 374 n.20 (1979).
[10] Mahaffey, supra note 8, at 7. The U.S. Department of Housing and Urban Development today bears much of the responsibility for RESPA’s implementation and enforcement. 12 U.S.C. § 2617. In addition, RESPA is effectuated by regulations, collectively known as Regulation X, promulgated by the Consumer Financial Protection Bureau. 12 C.F.R. §§ 1024.1 et seq.
[11] Pub. L. No. 91-351, 84 Stat. 450 (1970); P. Barron, Federal Regulation of Real Estate: The Real Estate Settlement Procedures Act 11 (1975).
[12] Michael Darrow, The Real Estate Settlement Procedures Act of 1974, as Amended in 1975, 5 U. Balt. L. Rev. 383, 383–86 (1976). With RESPA’s passage, “[h]omeownership” had finally become an “American dream” worthy of federal succor. Predatory Mortgage Lending: The Problem, Impact, and Response: Hearings Before the U.S. S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. 1 (2001) (statement of Sen. Paul S. Sarbanes, Chairman, S. Comm. on Banking, Housing, and Urban Affairs).
[16] 12 U.S.C. § 2602(3); 12 C.F.R. § 1024.2(b); H.R. Rep. No. 102-760, at 158 (1992). Somewhat helpfully, section 2602(3) includes a nonexhaustive list of “settlement services.” 12 U.S.C. § 2602(3); Bloom v. Martin, 77 F.3d 318, 321 (9th Cir. 1996).
[17] 12 U.S.C. § 2602(1); Wilson v. Bank of Am., N.A., 48 F. Supp. 3d 787, 796 (E.D. Pa. 2014); Moses v. Citicorp Mortg., 982 F. Supp. 897, 900 n.3 (E.D.N.Y. 1997). As applied, this term’s definition has two prongs. Knowles v. Bayview Loan Servicing, LLC (In re Knowles), 442 B.R. 150, 158 (B.A.P. 1st Cir. 2011).
[18] 12 U.S.C. § 2602(3); see also Sosa v. Chase Manhattan Mortg. Corp., 348 F.3d 979, 981 (11th Cir. 2003) (explicating RESPA’s purpose); United States v. Graham Mortg. Corp., 740 F.2d 414, 419-20 (6th Cir. 1984) (same).
[19] Charles Szypszak, Real Estate Records, the Captive Public, and Opportunities for the Public Good, 43 Gonz. L. Rev. 5, 19 (2007–08); see also, e.g., Wanger v. EMC Mortg. Corp., 127 Cal. Rptr. 2d 685, 689, 693 (Cal. Ct. App. 2002); see also, e.g., Cortez v. Keystone Bank, No. 98-2457, 2000 U.S. Dist. LEXIS 5705, at *30, 2000 WL 536666, at *10 (E.D. Pa. May 2, 2000) (“The principal purpose of RESPA is to protect home buyers from material nondisclosures in settlement statements and abusive practices in the settlement process.”).
[20] Seth M. Mott, Note, Tacking the Perplexing Sound of Statutory Silence: Why Courts Should Imply a Private Right of Action Under Section 10(a) of RESPA, 64 Wash. & Lee L. Rev. 1159, 1165 (2007).
[21] Iver Peterson, Padding in the Escrow Cushion, N.Y. Times, Feb. 24, 1991, at 1.
[22] Christopher L. Sagers, Note, An Implied Cause of Action under the Real Estate Settlement Procedures Act, 95 Mich. L. Rev. 1381, 1382 (1997); Thomas H. Broad, Comment, The Attack Upon the Tax and Insurance Escrow Accounts in Mortgages, 47 Temp. L.Q. 353, 352 (1974).
[23] Charles A. Pillsbury, Note, Lender Accountability and the Problem of Noninterest-Bearing Mortgage Escrow Account, 54 B.U. L. Rev. 516, 517 (1974).
[24] Robert E. Ulbricht, Impound Accounts and After, 28 Bus. Law. 203 (Nov. 1972).
[26] Cranston-Gonzalez National Affordable Housing Act of 1990, Pub. L. No. 101-625, § 941, 104 Stat. 4079, 4405; 12 U.S.C. § 2602(1); see also Cortez, 2000 U.S. Dist. LEXIS 5705, at *31–32, 2000 WL 536666, at *10 (“By its terms, however, RESPA applies not only to the actual settlement process but also to the ‘servicing’ of any ‘federally related mortgage loan.’”).
[28] John Jin Lee & John H. Mancuso, Housing Finance: Major Developments in 1989, 45 Bus. Law. 1863, 1870 (1990); see alsoWanger, 127 Cal. Rptr. 2d at 689 (quoting article).
[30] Sutton v. CitiMortgage, Inc., 228 F. Supp. 3d 254, 261 (S.D.N.Y. 2017). As time would show, investors had their own reasons to fret. Cf. Adam J. Levitin, Andrey D. Pavlov & Susan M. Wachter, The Dodd-Frank Act and Housing Finance: Can It Restore Private Risk Capital to the Securitization Market?, 29 Yale J. on Reg. 155, 156–57 (2012) (“Investors have discovered that loss severities on defaulted loans are heavily dependent on servicer behavior regarding loan modifications and foreclosures[,]” but that they “have little ability to monitor servicer conduct or discipline wayward servicers.”).
[31] 12 U.S.C. § 2605(i)(3) (emphasis added); see also, e.g., Christenson v. Citimortgage, Inc., No. 12-cv-02600-CMA-KLM, 2013 U.S. Dist. LEXIS 13344, at *17–19, 2013 WL 5291947, at *6 (D. Colo. Sept. 18, 2013) (explaining why servicing under section 2605(i)(3) cannot be read to “encompass acceleration or foreclosure issues”).
[32] Arielle L. Katzman, Note, A Round Peg for a Square Hole: The Mismatch between Subprime Borrowers and Federal Mortgage Remedies, 31 Cardozo L. Rev. 497, 518 (2009); Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185, 2210–12 (2007).
[33] Ploog v. HomeSide Lending, Inc., 209 F. Supp. 2d 863, 870 (N.D. Ill. 2002).
[34] McLean v. GMAC Mortg. Corp., 398 F. App’x 467, 471 (11th Cir. 2010) (“RESPA is a consumer protection statute”; “[c]onsequently, RESPA is to be ‘construed liberally in order to best serve Congress’ intent.’” (quoting Ellis v. Gen. Motors Acceptance Corp., 160 F.3d 703, 707 (11th Cir. 1998) (addressing the remedial nature of the Truth in Lending Act))); cf. Clemmer v. Key Bank N.A., 539 F.3d 349, 353 (6th Cir. 2008) (stating that several consumer protection statutes must be “accorded ‘a broad, liberal construction in favor of the consumer’” (quoting Begala v. PNC Bank, Ohio, Nat’l Ass’n, 163 F.3d 948, 950 (6th Cir. 1998))).
[35] Johnstone v. Bank of Am., N.A., 173 F. Supp. 2d 809, 816 (N.D. Ill. 2001).
[36] Weisheit v. Rosenberg & Assocs., LLC, JKB-17-0823, 2017 U.S. Dist. LEXIS 188605, at *8–9, 2017 WL 5478355, at *3 (D. Md. Nov. 15, 2017); see also Flagg v. Yonkers S&L Ass’n, 307 F. Supp. 2d 565, 580 (S.D.N.Y. 2004) (similarly construing RESPA).
[37]See, e.g., Rawlings v. Dovenmuehle Mortg., Inc., 64 F. Supp. 2d 1156, 1166 n.7 (M.D. Ala. 1999) (broadly construing section 2605, “clearly a remedial, consumer-protection statute,” and disagreeing with Katz, 992 F. Supp. at 254–56); Dujanovic v. MortgageAmerica, Inc., 185 F.R.D. 660, 669 (N.D. Ala. 1999) (observing that Congress enacted RESPA “to protect borrowers from brokers” and that “Congress clearly stated that RESPA was designed to protect consumers”).
[38] Mary S. Robertson, The “New and Improved” Real Estate Settlement Procedures Act and Regulation X, 47 Consumer Fin. LQ. Rep. 272, 273 (1993).
[39]Flagg, 307 F. Supp. 2d at 578–81. RESPA does so in some of the same sections applicable to servicers. E.g., 12 U.S.C. §§ 2605, 2607, 2609(a).
[40] Bryce v. Lawrence (In re Bryce), 491 B.R. 157, 179 (Bankr. W.D. Wash. 2013); MorEquity, Inc. v. Naeem, 118 F. Supp. 2d 885, 900 (N.D. III. 2000).
[41] Kevelighan v. Trott & Trott, P.C., 771 F. Supp. 2d 763, 770 (E.D. Mich. 2010).
[43] 12 U.S.C. § 2609(b); Dolan v. Fairbanks Capital Corp., 930 F. Supp. 2d 396, 417 (E.D.N.Y. 2013).
[44] 12 U.S.C. § 2609(c); Hardy v. Regions Mortg., Inc., 449 F.3d 1357, 1359–60 (11th Cir. 2006).
[45] Michael S. Glassman, Note, Real Estate Settlement and Procedures Act of 1974 and Amendments of 1975: The Congressional Response to High Settlement Costs, 45 U. Cin. L. Rev. 448, 456 (1976).
[46] This construction has been chiefly based on the absence of the requisite legislative intent. E.g., Hardy, 449 F.3d at 1360; Louisiana v. Litton Mortg. Co., 50 F.3d 1298, 1304 (5th Cir. 1995); Allison v. Liberty Sav., 695 F.2d 1086, 1087 (7th Cir. 1982); McCray v. Bank of Am. Corp., No. ELH-14-2446, 2017 U.S. Dist. LEXIS 54388, at *35, 2017 WL 1315509, at *15 (D. Md. Apr. 10, 2017); Burkett v. Bank of Am., N.A., No. 1:10CV68-HSO-JMR, 2011 U.S. Dist. LEXIS 112719, at *7–8, 2011 WL 4565881, at *3 (S.D. Miss. Sept. 29, 2011); Sarsfield v. Citimortgage, Inc., 667 F. Supp. 2d 461, 467 (M.D. Pa. 2009); Birkholm v. Wash. Mut. Bank, F.A., 447 F. Supp. 2d 1158, 1163 (W.D. Wash. 2006); McAnaney v. Astoria Fin. Corp., 357 F. Supp. 2d 578, 591 (E.D.N.Y. 2005); Campbell v. Machias Sav. Bank, 865 F. Supp. 26, 31 (D. Me. 1994); Bergkamp v. N.Y. Guardian Mortgagee Corp., 667 F. Supp. 719, 723 (D. Mont. 1987). Courts tend to give two reasons for this conclusion about congressional intent. First, RESPA explicitly sets forth statutes of limitations for claims brought pursuant to sections 2605, 2607, and 2608 in section 2614. 12 U.S.C. § 2614. “Had Congress intended to create a private right of action under § 2609, that section also would have been included in the statute of limitations section.” McAnaney, 357 F. Supp. 2d at 591; accord Allison, 695 F.2d at 1089; McWilliams v. Chase Home Fin., LLC, No. 4:09CV609 RWS, 2010 U.S. Dist. LEXIS 43549, at *9–12, 2010 WL 1817783, at *3–4 (E.D. Mo. May 4, 2010). Second, Congress did amend section 2609 after several circuit courts had so decided, but only added an administrative remedy to section 2609(c). McAnaney, 357 F. Supp. 2d at 591. It therefore implicitly endorsed this construction. Litton, 50 F.3d at 1301; see also Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507, 2520 (2015) (“Congress’ decision in 1988 to amend the . . . [Fair Housing Act (FHA)] while still adhering to the operative language in §§ 804(a) and 805(a) is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”); cf. Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Prot., 474 U.S. 494, 501 (1986) (“The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific.”).
[47]See Mott, supra note 20, at 1191–1202 (disputing this construction for this and other reasons). This reading, of course, has not limited section 2609’s usefulness to public plaintiffs.
[48]E.g., Collins, 105 F.3d at 1367; Au v. Republic State Mortg. Co., 948 F. Supp. 2d 1086, 1101 (D. Haw. 2013); Martin v. Citimortgage, Inc., No. 1:09-cv-03410-JOF, 2010 U.S. Dist. LEXIS 43525, at *7 n.3, 2010 WL 1780076, at *3 n.3 (N.D. Ga. May 4, 2010). Per the weight of the relevant jurisprudence, there are only three private causes of action under RESPA: “actions pursuant to Sections 2605, 2607, and 2608.” Arroyo v. PHH Mortg. Corp., No. 13-CV-2335(JS) (AKT), 2014 U.S. Dist. LEXIS 68534, at *37, 2014 WL 2048384, at *13 (E.D.N.Y. May 19, 2014). Section 2607 prohibits kickbacks and unearned fees, and section 2608 bars sellers from “requir[ing] directly or indirectly, as a condition to selling a covered property, that title insurance covering the property be purchased by the buyer from any particular title company.” 12 U.S.C. §§ 2607–08.
[50] 12 U.S.C. § 2605(g); Jacques v. U.S. Bank N.A. (In re Jacques), 416 B.R. 63, 70 (Bankr. E.D.N.Y. 2009); Kevelighan, 771 F. Supp. 2d at 770; see also, e.g., Burkett, 2011 U.S. Dist. LEXIS 112719, at *5, 2011 WL 4565881, at *2 (“Section 2605(g) governs the administration of escrow accounts[.]”); Girgis v. Countrywide Home Loans, Inc., 733 F. Supp. 2d 835, 848 (N.D. Ohio 2010) (same). So worded, section 2605(g) does not govern the timeliness of an initial deposit to an escrow account or when the servicer can collect funds from the borrower for such payments. Staats v. Bank of Am., N.A., No. 3:10-CV-68 (BAILEY), 2011 U.S. Dist. LEXIS 158376, at *17–18, 2011 WL 12451607, at *6 (N.D. W. Va. Aug. 23, 2011); Kevelighan, 771 F. Supp. 2d at 770.
[51] 12 C.F.R. § 1024.17(k)(1); Althaus v. Cenlar Agency, Inc., No. 17-445 (JRT/DTS), 2017 U.S. Dist. LEXIS 167475, at *2, 2017 WL 4536074, at *1 (D. Minn. Oct. 10, 2017).
[52] 12 U.S.C. § 2605(f); Christiana Tr. v. Riddle, 911 F.3d 799, 804 (5th Cir. 2018). Compounding this problem, RESPA neither denotes nor tenders an example of the term “actual damages.” Tauss v. Midland States Bank, No. 5:16-cv-00168-RLV-DSC, 2017 U.S. Dist. LEXIS 139364, at *20, 2017 WL 3741980, at *7 (W.D.N.C. Aug. 30, 2017). Formally and colloquially, this phrase means the “amount awarded to a complainant [either] to compensate for a proven injury or loss” or to “repay actual losses.” Black’s, supra note 2, at 471.
[53] Lane v. Vitek Real Estate Indus. Grp., 713 F. Supp. 2d 1092, 1101 (E.D. Cal. 2010); Allen, 660 F. Supp. 2d at 1097.
[54] 12 U.S.C. § 2614; Girgis, 733 F. Supp. 2d at 847.
[55] 12 U.S.C. § 2605(f)(1)(A) (emphasis added); see Hutchinson v. Delaware Sav. Bank, FSB, 410 F. Supp. 2d 374, 382 (D.N.J. 2006) (construing section 2605(f)(1)(A)); see also Jones v. Select Portfolio Serv., Inc., No. 08-972, 2008 U.S. Dist. LEXIS 33284, at *27, 2008 WL 1820935, at *9–10 (E.D. Pa. Apr. 22, 2008) (finding complaint to have failed to properly plead causation and specific damages to support the RESPA claim); Katz v. Dime Sav. Bank, FSB, 992 F. Supp. 250, 255–57 (W.D.N.Y. 1997) (granting summary judgment for a plaintiff’s failure to show actual pecuniary harm).
[56] Renfroe v. Nationstar Mortg., LLC, 822 F.3d 1241, 1246 (11th Cir. 2016) (citing, among others, Toone v. Wells Fargo Bank, N.A., 716 F.3d 516, 523 (10th Cir. 2013) and Hintz v. JPMorgan Chase Bank, N.A., 686 F.3d 505, 510-11 (8th Cir. 2012)); accord, e.g., Hagan v. Credit Union of Am., No. 11-1131-JTM, 2012 U.S. Dist. LEXIS 56100, at *12–13, 2012 WL 1405734, at *5 (D. Kan. Apr. 23, 2012).
[57]McLean, 398 F. App’x at 471 (as to section 2605(e)); accord, e.g., Stevens v. Citigroup, Inc., No. 00-3815, 2000 U.S. Dist. LEXIS 18201, at *11, 2000 WL 1848593, at *3–4 (E.D. Pa. Dec. 15, 2000); see also, e.g., Quinlan v. Carrington Mortg. Servs., LLC, 2014 U.S. Dist. LEXIS 95448, at *14–15, 2014 WL 3495838, at *5 (D.S.C. July 14, 2014) (applying principle); Champion v. Bank of Am., N.A., No. 5:13-CV-00272-BR, 2014 U.S. Dist. LEXIS 78, at *7–9, 2014 WL 25582, at *3–4 (E.D.N.C. Jan. 2, 2014) (collecting cases so holding).
[58]SeeAllen, 660 F. Supp. 2d at 1097 (as to section 2605 generally); see also, e.g., Frazile v. EMC Mortg. Corp., 382 F. App’x 833, 836 (11th Cir. 2010) (affirming dismissal of a claim for “fail[ing] to allege facts relevant to the necessary element of damages caused by assignment [of loan servicing]” under section 2605(f)); Bishop v. Quicken Loans, Inc., No. 2:09-01076, 2010 U.S. Dist. LEXIS 93692, at *19–20, 2010 WL 3522128, at *6 (S.D. W. Va. Sept. 8, 2010) (dismissing RESPA claim due to plaintiff’s failure to allege how servicer’s noncompliance with § 2605(f) caused them harm); Singh v. Wash. Mut. Bank, No. 09-2771, 2009 U.S. Dist. LEXIS 73315, at *16, 2009 WL 2588885, at *5 (N.D. Cal. Aug. 19, 2009) (dismissing RESPA claim because, “[i]n particular, plaintiffs have failed to allege any facts in support of their conclusory allegation that as a result of defendants’ failure to respond, defendants are liable for actual damages, costs, and attorney fees”) (quotation marks and citation omitted); cf. Davis v. Bowens, No. 1:11CV691, 2012 U.S. Dist. LEXIS 101402, at *18, 2012 WL 2999766, at *5 (M.D.N.C. July 23, 2012) (dismissing claim due to complaint’s general allegations of harm from the combined actions of all defendants). When there is no allegation that a defendant engaged in “a pattern or practice of noncompliance with the requirements” of section 2605, its statutory damages provision is inapplicable. 12 U.S.C. § 2605(f)(1)(B) (emphasis added).
[59]Frazile, 382 F. App’x at 836; see also, e.g., Stefanowicz v. SunTrust Mortg., No. 3:16-CV-368, 2018 U.S. Dist. LEXIS 24274, at *18–19, 2018 WL 1385976, at *6–7 (M.D. Pa. Feb. 13, 2018) (collecting cases so holding); Yuhre v. JPMorgan Chase Bank, No. 09-CV-02369 (GEB) (JFM), 2010 U.S. Dist. LEXIS 44948, at *16, 2010 WL 1404609, at *6 (E.D. Cal. Apr. 6, 2010) (holding that any alleged loss “must be related to the RESPA violation itself”). A recent appellate opinion underscores the continuing viability of this approach. See Moore v. Wells Fargo Bank, 908 F.3d 1050, 1059 (7th Cir. 2018) (so ruling as to a claim under section 2605(e)(2)).
[61]McLean, 398 F. App’x at 471; see also, e.g., Giordano v. MGC Mortg., Inc., 160 F. Supp. 3d 778, 781 (D.N.J. 2016) (quoting Straker v. Deutsche Bank Nat’l Tr., No. 3:09-CV-338, 2012 U.S. Dist. LEXIS 187379, at *31, 2012 WL 7829989, at *11 (M.D. Pa. Apr. 26, 2012)); Gorbaty v. Wells Fargo Bank, N.A., No. 10-CV-3291 NGG SMG, 2012 U.S. Dist. LEXIS 55284, at *16, 2012 WL 1372260, at *5 (E.D.N.Y. Apr. 18, 2012); Rubio v. U.S. Bank N.A., No. C 13-05752 LB, 2014 U.S. Dist. LEXIS 45677, at *45–46, 2014 WL 1318631, at *15 (N.D. Cal. Apr. 1, 2014) (citing, for support, Lal v. Am. Home Servicing, Inc., 680 F. Supp. 2d 1218, 1223 (E.D. Cal. 2010) and Allen, 660 F. Supp. 2d at 1097).
[62] Davis v. Bowens, No. 1:11CV691, 2012 U.S. Dist. LEXIS 101402, at *18, 2012 WL 2999766, at *5 (M.D.N.C. July 23, 2012).
[63]See Garcia v. Wachovia Mortg. Corp., 676 F. Supp. 2d 895, 909 (C.D. Cal. 2009) (likewise describing a statement alleging that a RESPA violation “subjects defendant[] to actual damages”).
[66] The federal courts’ relatively generous doctrine of judicial notice and rules for the admission of business records will probably abet any such effort. See Fed. R. Evid. 201 (setting the standard and procedures for judicial notice of adjudicative facts in federal court), 803(6) (codifying the hearsay exception for records of a regularly conducted business activity); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (construing Federal Rule of Evidence 201); Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (same).
[67] Depending on the precise relationship among the insurer, servicer, and adjustor, the servicer may not have actually been responsible for the relevant oversight, but so long as one (or both) took place, the plain language of section 2605(g) renders it legally liable.
[68] Yulaeva v. Greenpoint Mortg. Funding, Inc., No. 09-1504, 2009 U.S. Dist. LEXIS 79094, at *44, 2009 WL 2880393, at *15 (E.D. Cal. Sept. 9, 2009) (citing, as examples, Hutchinson, 410 F. Supp. 2d at 382, and Cortez, 2000 U.S. Dist. LEXIS 5705, at *38–40, 2000 WL 536666, at *10–13); cf., e.g., Moon v. Countrywide Home Loans, Inc., No. 3:09-cv-00298, 2010 U.S. Dist. LEXIS 11281, at *13, 2010 WL 522753, at *5 (D. Nev. Feb. 9, 2010) (“Even if . . . [the defendant] was the servicer of [p]laintiff’s loan and failed to respond to a qualified written request [as required under section 2605(e)], such failure alone does not substantiate a RESPA claim.”).
[69] RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012).
[70]See Amir Shachmurove, Eligibility for Attorneys’ Fees under the Post-2007 Freedom of Information Act: A Onetime Test’s Restoration and an Overlooked Touchstone’s Adoption, 85 Tenn. L. Rev. 571, 634–36 (2018) (describing this standard); cf. Amir Shachmurove, Sovereign Speech in Troubled Times: Prosecutorial Statements as Extrajudicial Admissions, 86 Tenn. L Rev. 401, 462–67 (2019) (same, but as to Federal Rules of Evidence); Amir Shachmurove, The Consequences of a Relic’s Codification: The Dubious Case for Bad Faith Dismissals of Involuntary Bankruptcy Petitions, 26 Am. Bankr. Inst. L. Rev. 115, 151–57 (2018) (same, but also advocating specific modifications in cases arising under title 11 of the U.S. Code).
[71]Cf. Mahaffey, supra note 8, at 11 (describing section 2605(f)’s “language” as “rather uncomplicated”).
The U.S. Supreme Court declined to review the decision of the Ninth Circuit Court of Appeals in Lusnak v. Bank of Am., N.A., 833 F.3d 1185 (9th Cir. 2018), which effectively overturned a national bank regulation preempting state mortgage escrow laws. At issue was California Civil Code Section 2954.8(a), which requires financial institutions to pay two-percent interest per year on funds held in mortgage loan escrow accounts. The Ninth Circuit found a way around a 2004 preemption determination by the Office of the Comptroller of the Currency, the division of the U.S. Treasury which regulates national banks, set forth in 12 C.F.R. § 34.4(a)(6), which states, “[a] national bank may make real estate loans . . . without regard to state law limitations concerning . . . [e]scrow accounts, impound accounts, and similar accounts.”
Although state laws are preempted if they prevent or significantly interfere with a national bank’s exercise of its powers, the Ninth Circuit determined “no legal authority establishes that state escrow interest laws prevent or significantly interfere with the exercise of national bank powers, and Congress itself, in enacting Dodd-Frank, has indicated they do not.” The Dodd-Frank Reform Act added section 1639(g)(3) to the Truth in Lending Act (TILA). The Dodd-Frank TILA amendment applies to only higher-priced mortgages and only requires creditors to pay interest to consumers on amounts held in any escrow account if prescribed by applicable law. Nonetheless, the Ninth Circuit applied section 1639(g)(3) to the entire Lusnak class.
In November 2018, the Supreme Court denied certiorari despite the OCC’s amicus brief urging that the case be heard. The OCC asserted that the Ninth Circuit’s decision erred in a matter of fundamental importance to the national banking system and pointed to the Supreme Court’s own decision giving the OCC authority to make preemption determinations in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Bank of Am., N.A. v. Lusnak, 139 S. Ct. 567 (2018).
The immediate result of the Supreme Court’s refusal to review the case is that national banks must pay at least two-percent annual interest on escrow accounts in California. Whether the Ninth Circuit’s constrained view of preemption will be applied to other state-law requirements (for example, maximum late charges under Civil Code Section 2954.5), or be adopted by other circuits, remains to be seen.
There has been much recent media attention around the Equality Act, especially after it passed in the U.S. House of Representatives on May 17, 2019. The act has been heralded as a first-of-its-kind bill and comes at a time when, according to the New York Times, “departments across the Trump administration have dismantled policies friendly to gay, bisexual and transgender individuals, like barring transgender recruits from serving in the military or formally rejecting complaints filed by transgender students who are barred from restrooms that match their gender identity.” Recently, the Department of Justice filed an amicus briefopposing protections for LGBTQ individuals in the trio of cases now before the U.S. Supreme Court that will decide whether Title VII already prohibits sexual orientation and gender identity discrimination.
Background
Despite significant progress both legislatively and judicially, lesbian, gay, bisexual, transgender, and queer (LGBTQ) Americans still lack the most basic of legal protections in states across the country and at the federal level. This deficit in legal protection means that it is still lawful for an employer to fire or refuse to hire gay, lesbian, and bisexual people. In addition, despite federal judicial decisions that have recognized that Title VII prohibits discrimination against transgender and gender nonconforming individuals, there is no national standard, and many state laws remain hostile to transgender status.
The patchwork nature of federal and state laws providing various degrees of protection—or none at all—leaves millions of people subject to uncertainty and potential discrimination that adversely impacts their livelihoods. A common illustration of the unconscionable unfairness of the legal status quo is a gay, lesbian, or bisexual person that can legally be fired on Monday simply for lawfully marrying the person she or he loves on Sunday.
Our nation’s civil rights laws prohibit and provide remedies for discrimination in areas such as employment, public accommodations, housing, and education on the basis of certain protected classes, such as race, color, national origin, sex, disability, and religion. However, as explained above, federal law does not provide consistent nondiscrimination protections based on sexual orientation or gender identity. The need for these protections is clear, especially in light of the current political climate that has been hostile to LGBTQ rights; in fact, nearly two-thirds of LGBTQ Americans report having experienced discrimination in their personal lives. Alarmingly high percentages of that cohort report that such discrimination has adversely impacted their work environment as well as their physical, psychological, and spiritual well-being.
According to the Human Rights Campaign, the leading LGBTQ rights advocacy group in the United States, “[d]ecades of civil rights history show that civil rights laws are effective in decreasing discrimination because they provide strong federal remedies targeted to specific vulnerable groups.” Explicitly including sexual orientation and gender identity in these fundamental laws would afford LGBTQ people the exact same protections that already exist under federal law. In other words, the aim is not to seek a special class of rights for LGBTQ persons, but to guarantee that they enjoy the same protections others already have.
Further, research shows broad public support for legislation that would ensure equal protection for LGBTQ persons, including a groundswell of support in the business community.[1]
What Is the Equality Act?
If enacted, the Equality Act (H.R. 5, S. 788, 116th Congress) would provide consistent and explicit nondiscrimination protections for LGBTQ people across key areas of life, including employment, housing, credit, education, public spaces and services, federally funded programs, and jury service.
The Equality Act would amend existing civil rights law—including the Civil Rights Act of 1964, the Fair Housing Act, the Equal Credit Opportunity Act, the Jury Selection and Services Act, and several other laws regarding employment with the federal government—to explicitly include sexual orientation and gender identity as protected characteristics. The legislation also amends the Civil Rights Act of 1964 to prohibit discrimination in public spaces and services and federally funded programs on the basis of sex.
Additionally, the Equality Act would update the public spaces and services covered in current law to include retail stores, services such as banks and legal services, and transportation services. These important updates would strengthen existing protections for everyone.
Legislative History of the Act
The bipartisan Equality Act was introduced in the House of Representatives by Reps. David Cicilline (D-RI) and Brian Fitzpatrick (R-PA), and in the Senate by Sens. Jeff Merkley (D-OR), Susan Collins (R-ME), Tammy Baldwin (D-WI), and Cory Booker (D-NJ), on March 13, 2019. The bill was introduced with 287 original cosponsors—the most congressional support that any piece of pro-LGBTQ legislation has received upon introduction.
Made a legislative priority by Speaker Nancy Pelosi, the act passed the House on May 17, 2019, by a vote of 236-173. All Democratic members and eight Republicans voted for it. Its passage marked the first time legislation of its kind—that includes broad protections and remedies for LGBTQ people without religious exemptions—has ever passed in either chamber of Congress.
Why Now and Why Not?
Whether Title VII, as it is currently written, prohibits discrimination on the basis of sexual orientation and/or gender identity will soon be answered by the U.S. Supreme Court as it takes up three cases in its 2019–2020 term. Predicting what the Court will do, especially before oral argument, may be a fool’s errand, but the current conservative bent of the Court means that a broad interpretation of Title VII is unlikely. The stakes are high, however. If a majority of justices narrowly read Title VII’s prohibition against discrimination on the basis of sex, their decision would reverse two federal courts of appeal sitting en banc that have managed to find majorities across an ideological spectrum to hold that Title VII protects workers from discrimination on the basis of sexual orientation.[2] Further, one might reasonably predict that such a narrow reading of Title VII would reverse the Court’s own decision in Price Waterhouse v. Hopkins, a case decided in 1989 that broadly read Title VII’s prohibition against sex discrimination to include sex discrimination claims based on gender stereotyping.[3] A narrow decision might also upset the Court’s unanimous 1998 decision in Oncale v. Hopkins that made same-sex sexual harassment claims actionable.[4]Hopkins, Oncale, and their progeny have contributed to progress in workplace gender equality over the last few decades.[5]
A simple and unambiguous legislative solution is waiting in the wings with the Equality Act. It would appease textual conservatives who do not oppose LGBTQ rights but who chafe at the thought of judicial overreach in interpreting statutory language. It would appease progressives who are nervous at the thought that a single Supreme Court decision could turn back decades of progress in the direction of gender equality in the workplace. Finally, the business community supports it. Corporate America has led the way with inclusive nondiscrimination policies; the law must catch up.
The question is not why, but when? The answer is now. Congress must finish the task it started.
[1] The nonpartisan Public Religion Research Institute (PRRI) found that, nationally, support for a bill like the Equality Act topped 70 percent, which includes a majority of Democrats, Republicans, and Independents. In addition, the Equality Act has been endorsed by the Business Coalition for the Equality Act, a group of more than 200 major companies with operations in all 50 states, headquarters spanning 27 states, and a collective revenue of $3.8 trillion. In total, these companies employ more than 10.9 million people across the United States. See Human Rights Campaign, Business Coalition for the Equality Act.
[2]See Davis & Litchfield, 1 LGBTQ Employment Law Practice Guide §§ 1.03 (Matthew Bender 2018).
[3] Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S. Ct. 1775 (1989).
[4]See Davis & Litchfield, supra note 2, at §§ 1.02.
This article is adapted from The Shield of Silence by Lauren Stiller Rikleen, published in May 2019.
The backlash to #MeToo has significant potential to further diminish opportunities for women at work, as some men claim to be fearful of engaging in mentoring and other relationships important to career advancement. In but one example, a survey reported that “65% of men say it’s now ‘less safe’ to mentor and coach members of the opposite sex.” Some survey respondents expressed concern that the work environment has become too sterile and that women are not being held accountable for their work because managers fear being accused of gender bias.
Days after the Harvey Weinstein story broke, a New York Times article identified a “heightened caution” experienced by men who fear their own careers could be ended as a result of “one accusation or misunderstood comment.” The article also noted the potential negative career impacts on women who lose valuable mentors and sponsors when men take steps to protect themselves from hypothetical accusations: “But their actions affect women’s careers, too—potentially depriving them of the kind of relationships that lead to promotions or investments.” Further to those career impacts, the article identified one survey in which 64 percent of senior men and 50 percent of junior women indicated that they avoided interactions that could give rise to the risk of rumors.
This analysis by the New York Times of industry sectors where men reported their fears and avoided interaction with professional women provided a sweeping—and worrisome—indication that women are at risk of losing career-critical relationships. In identifying where the potential impact on women was greater, the article reported a wide range of workplace settings: “People were warier in jobs that emphasized appearance, as with certain restaurants or TV networks; in male-dominated industries like finance; and in jobs that involve stark power imbalances, like doctors or investors.”
Business sectors are expressing fears that, ironically, will result in further disadvantaging women in the workplace. An article about the potential backlash in the legal profession noted: “The fallout is that some male lawyers are so fearful of being tainted with sexual harassment charges that they’re running for the hills, dodging close working relationships with women.” Similarly, in an article about backlash in the financial services field, the author wrote: “I’ve heard men say that they’re less likely to hire or associate with women as a result of the intensity of MeToo. . . . I have heard directly from male executives at two prominent Wall Street firms that they are moving their female direct reports to female bosses.”
The sad fact is that these fears are countered by significant research demonstrating the infrequency with which actual victims report sexual harassment. The notion that the #MeToo movement has put men at greater risk is contrary to the actual consequences women have faced from reporting, the continued power dynamics in the workplace that disfavor women, the greater likelihood that silence governs behaviors, and even the complicity of the courts in protecting the accused.
As discussed previously, research demonstrates that the court system has failed to adequately protect workers, erecting procedural, evidentiary, and other barriers for employees bringing discrimination, harassment, and retaliation claims. As documented in the book Unequal: How America’s Courts Undermine Discrimination Law, there are a variety of reasons that the law has evolved to favor employer over employee rights.
One such reason is the argument, adopted in a Supreme Court decision, that narrow rulings are warranted to protect employers from false claims. Yet research has shown this argument is not grounded in actual facts. For example, in 2013, there were 39 percent fewer cases involving civil rights employment claims than were brought ten years earlier in 2003. As the authors documented:
The number of federal civil rights claims is also not significant when compared to the total number of people in the workforce. In the twelve-month period ending in March 2013, only 12,665 cases were filed in comparison to 143,929,000 people employed in the civilian workforce. In other words, only a tiny fraction of the workforce files a discrimination suit in any given year. . . .
Available social science evidence does not support any significant faker problem. Instead, it actually shows that employees are reluctant to believe that their employers discriminated against them. In circumstances when they believe discrimination has occurred, they are reluctant to complain to their employer, the EEOC, or a state agency. People can be reticent to make discrimination claims because they may fear retaliation.
In Heather Mac Donald’s 2018 Hillsdale College speech. Mac Donald feeds the narrative that the #MeToo movement is bad for the workplace—indeed, bad for the economy—yet she seems unencumbered by the extensive research that undermines her arguments. She expresses concern that the #MeToo movement will lead to greater calls for diversity and gender equity, which will negatively impact decisions made on merit. For example, she referred to a public radio show’s series on gender and racial inequities in classical music as “irresponsible,” noting that, throughout history, “the greatest composers have been male. . . . We should simply be grateful—profoundly grateful—for the music these men created.”
But what about the music we have never been able to hear because female composers lacked the opportunities and networks to help their music reach the public? To Mac Donald, it is simply because the male composers had greater merit. Then how does she explain the transformation in the gender composition of most major orchestras in the decades since auditions have been conducted behind a screen, the candidate’s gender unknown to those responsible for hiring?
Mac Donald also pushed back on concerns about the lack of women in STEM fields:
Despite the billions of dollars that governments, companies, and foundations have poured into increasing the number of females in STEM, the gender proportions of the hard sciences have not changed much over the years. This is not surprising, given mounting evidence of the differences in interests and aptitudes between the sexes. . . . Females on average tend to choose fields that are perceived to make the world a better place, according to the common understanding of that phrase.
Her data point for this sweeping assertion? Mac Donald referenced a preschool teacher who was profiled in an article and who, notwithstanding a bachelor’s degree in neuroscience, chose not to go to medical school so she could work with poor and minority children. Mac Donald concluded her speech by acknowledging the abuses of power revealed by #MeToo, even as she again attacked any underlying effort for greater equality:
The #MeToo movement has uncovered real abuses of power. But the solution to those abuses is not to replace valid measures of achievement with irrelevancies like gender and race.
Mac Donald’s speech sets forth a comprehensive attack on #MeToo as a rationale for resisting gender equality, a pairing that seems to be a particularly pernicious form of backlash. The dismissal of gender and race as irrelevant to the way in which achievement has been measured ignores decades of research demonstrating otherwise. Those who sow the seeds of a #MeToo backlash only serve to exacerbate the silence.
Functus Officio is a Latin term meaning that once the purpose of the task at hand is completed, there is no further force or authority to undertake any further measures. When applied to arbitrations, the term means that once a final arbitration award has issued, there is no further authority for the arbitration panel to modify the award for any reason or to clarify the same. The rationale behind the rule is a belief that it is necessary to prevent a reexamination of issues by a nonjudicial officer where there might have been further outside communication or undue influence post-hearing. However, in a recent decision, General Re Life Corporation v. Lincoln National Life Insurance Company, 2018 U.S. App. Lexis 33340 (2d Cir. 2018), the Second Circuit joined the Third, Fifth, Sixth, Seventh, and Ninth Circuits in holding that an exception to this doctrine exists.
The governing arbitration panel had rendered a final arbitration award in 2015 resolving a dispute between the parties concerning the ability of General Re to increase premiums under a YRT Reinsurance Agreement with Lincoln. The panel found that General Re was entitled to increase the premiums under the governing contract and went on to address the recapture rights held by Lincoln. The panel determined that the award would be effective as of April 1, 2014; however, the panel did not address the parties’ rights with respect to transactions and recapture rights arising prior to that date. Thereafter, a dispute between the parties arose concerning the pre-April 2014 time period. Lincoln then sought a clarification from the panel, and General Re opposed, citing the doctrine of Functus Officio as precluding the panel from issuing a clarification; the panel rejected this argument and issued a clarification. General Re then moved to confirm the award without the clarification, and Lincoln cross-moved to confirm the award with the clarification issued by the panel. The district court confirmed the award as clarified, and an appeal was taken to the Second Circuit by General Re.
In affirming the decision, the Second Circuit recognized an exception exists “where an arbitral award ‘fails to address a contingency that later arises or when the award is susceptible to more than one interpretation’” (citation omitted). In the instant case, the court noted that both parties had advanced a different interpretation of the language in question, and the panel in its clarification had concluded something completely different; as a result, the court determined there was ambiguity in the award. The court specifically noted that adopting this exception furthers the general rule that when a court is asked to confirm an ambiguous award, the court should instead remand to the arbitrators for clarification. Based upon this, the Second Circuit noted that if the court can remand an ambiguous award back to a panel, it certainly means a panel can clarify an ambiguous award on direct request. However, the court did note that a panel can issue a clarification only where three specific conditions exist: “(1) the final award is ambiguous; (2) the clarification merely clarifies the award rather than substantively modifying it; (3) the clarification comports with the parties’ intent set forth in the agreement that gave rise to the arbitration.” Thus, at present, counsel should be mindful of the existing split in the circuits when considering the impact and application of this doctrine.
In the recent decision David Xiaoying Gao v. China Biologic Holdings, Inc. (Dec. 10, 2018), the Grand Court of the Cayman Islands considered the following issues:
the propriety of issuing new shares to dilute the voting power of existing shareholders;
the extent to which it is possible for a beneficial owner of shares (i.e., not the registered shareholder) to enforce rights attaching to those shares;
whether a registered shareholder is able to assert an equitable claim in respect of impropriety which occurred before he or she became a registered shareholder; and
whether the right to pursue a claim relating to shares is assignable independently of the shares themselves.
This decision is wide-ranging. It touches and concerns many of the issues that regularly come before the courts of the Cayman Islands, given the international nature of the disputes that the Grand Court faces. It provides valuable, clear jurisprudence to litigators and clients alike.
Background
On August 24, 2018, the defendant, a biopharmaceutical company in the People’s Republic of China, allotted and issued shares to four groups of investors under share purchase agreements (the SPAs) and a board resolution of the same date. The plaintiff, a shareholder, hastily responded by filing a Writ of Summons in the Cayman Islands on August 27, 2018, and Statement of Claim on September 10, 2018. Responding to challenges made by the defendant on the plaintiff’s locus standi to bring a claim, an Amended Statement of Claims was filed on September 20, 2018, and a Reamended Statement of Claim (RASC) on October 31, 2018. Prior to the court granting leave for the plaintiff to advance the third iteration of the Statement of Claim. The defendant, by way of a summons dated October 4, 2018 (which was later amended and filed on October 31, 2018), sought the court’s directions on various questions of law, including whether:
the defendant owed any fiduciary, equitable, contractual, and/or other duty to the plaintiff in respect of its directors’ power to allot/issue shares pursuant to the SPAs dated August 24, 2018 (Relevant Date) in circumstances where the plaintiff was not a registered shareholder of the defendant at the Relevant Date;
the plaintiff had taken any valid assignment from Cede and Co. (the registered owner of a portion of shares and the assignor of all rights and remedies to the plaintiff on October 22, 2018) of a right of action against the defendant; and
the plaintiff had a cause of action against the defendant under the circumstances and, therefore, standing to bring these proceedings.
The defendant applied, in the alternative, to strike out the plaintiff’s claim pursuant to the Grand Court rules and the inherent jurisdiction of the court on the grounds that it did not disclose a reasonable cause of action and/or that it was an abuse of the process of the court.
The Reamended Statement of Claim
The plaintiff alleged in his RASC that he was a director of the defendant since October 2011, chairman from March 2012, and CEO from May 2012. These facts were not controversial. The plaintiff was removed as chairman and CEO on July 1, 2018, and July 12, 2018, respectively. The legality of those removals was not challenged by the plaintiff, although they were characterized by him as a “board coup” in the RASC. The court noted that this “coup” was likely to have been humiliating, and so his urgent reactive response was not surprising.
Other background facts not at issue were that the defendant had received an acquisition proposal from CITIC Capital Holdings Limited (CITIC) to acquire all of its shares not already owned by CITIC. The offer was publicized by the defendant on June 19, 2018. On August 17, 2018, a consortium, of which the plaintiff was a part, submitted an offer to acquire all of the other shares in the defendant. On August 24, 2018, the board of the defendant announced that CITIC’s proposal had been withdrawn and that the bid of the plaintiff’s consortium had been rejected. Instead, the board had decided to issue and allot 5,850,000 shares.
The plaintiff alleged that the share allotment had been made for an improper purpose—namely, to seek to alter the balance of power between the incumbent management consortium and that of the plaintiff, thereby thwarting the offer of the plaintiff’s consortium. He further claimed that the board of the defendant had breached its fiduciary duty to the plaintiff in entering into the SPAs and allotting the shares to the incumbent management consortium.
The plaintiff sought, inter alia, a declaration that the SPAs and the board decision of August 24, 2018, were invalid and unenforceable, together with an order requiring the defendant to rescind the SPAs and to rectify the register of the company accordingly.
The Court’s Approach
Of particular note was the court’s findings in respect of the four questions posed above:
Does a registered shareholder possess legal standing to assert a personal claim for breach of fiduciary duty in respect of a board decision to allot and issue shares for an improper purpose?
The defendant argued that fiduciary duties owed by company directors to act bona fide in the best interests of the company are not owed to individual shareholders,[1] but to the company, and that a “special factual relationship” would have to be established in order to create a right of action in favor of an individual shareholder against a company for breach of duty. Principally, the court was invited to follow the decision of the English Court of Appeal in Bamford v. Bamford,[2] where two minority shareholders sought a declaration that an allotment had been made to block a takeover bid. The issue of whether the shareholders could ratify the allotment was determined as a preliminary issue on the assumption that the allotment had been approved by the directors for an improper purpose. In Bamford, the court at first instance held that the shareholders could ratify the directors’ invalid decision. Dismissing the appeal against this decision, the court held:
It is trite law, I had thought, that if directors do acts, as they do every day . . . because they are actuated by improper motives . . . can, by making full and frank disclosure and calling together the general body of shareholders, obtain absolution and forgiveness of their sins and provided the acts are not ultra vires the company as a whole, everything will go on as if it had been right from the beginning . . . .
The only question is whether the allotment, having been made, as one must assume, in bad faith, is voidable and can avoided at the instance of the company . . . because the wrong, if wrong it be, is a wrong done to the company. . . .
Citing an Australian appellate decision,[3] the plaintiff submitted that there was clear authority in support of the proposition that shareholders could pursue personal claims for breaches of fiduciary duty with a view to invalidating an improperly motivated allotment of new shares which diluted the power of existing shareholders. In the Australian case, the court at first instance held that the plaintiffs (minority shareholders) lacked standing because they did not fall within the exceptions to the rule in Foss v. Harbottle (that subject to certain exceptions, shareholders have no separate cause of action for wrongs committed against the company). The appeal court unanimously rejected the finding:
Diminution of voting power stands on a fundamentally different footing from other detriments resulting from abuse of power by directors. . . . The rule in Foss v Harbottle has no application where individual membership rights as opposed to corporate rights are involved. . . .
In answering this question, the Cayman court in China Biologic held that individual minority shareholders ordinarily have no legal standing to sue for breach of fiduciary duty in relation to a complaint that their voting power has been diluted by a share allotment approved by directors for an improper use. The court considered the comments in Argentine Holding accurately, albeit obiter, to state the law. The court further found:
Shareholders ordinarily acquire their shares on the explicit basis that their only means of controlling the management is by successfully passing resolutions at general meetings. It would be inconsistent with what is essentially a functional rule, and potentially expose companies to limitless litigation, if shareholders were permitted to enforce duties which are not owed to them.[4]
The court rejected the view that the dilution of voting rights constitutes a free-standing exception to the rule in Foss v. Harbottle. Instead, the court found that the general position of a minority shareholder facing a dilution of his or her voting power through an improperly motivated share allotment does not constitute special circumstances giving rise to a fiduciary duty on the directors’ part owed to the shareholders.
Does the beneficial owner of shares possess legal standing to assert a personal claim for breach of fiduciary duty in respect of a board decision to allot and issue shares for an improper purpose?
Citing section 38 of the Cayman Islands Companies Law (2018 Revision), the court found that a “member” is by statutory definition a registered member and quoted with approval the submission of the defendant’s counsel, which relied on the following statement of the court in JKX Oil and Gas v. Eclairs Group:[5]
Companies are, in general, both entitled and obliged to deal with those who are registered as having the legal ownership of their shares. Companies are, in general, entitled to decline to deal with mere beneficial owners . . . .
That principle having been confirmed by the Cayman Islands Court of Appeal in Schultz v. Reynolds[6] (albeit that case was not actually decided on the standing issue) and Svanstrom v. Jonasson,[7] the China Biologic court considered itself bound by those decisions. Notwithstanding that the relevant standing rule is not an absolute one, the plaintiff was unable to make out a case based on special circumstances in this instance.
Does a shareholder who acquires legal title to his or her shares after the impugned board approval of a share allotment have standing to assert a personal claim to set it aside?
The court considered the above question upon the hypothetical premise that it had incorrectly found that the plaintiff had no standing to assert a shareholder claim at all, but was correct in a secondary finding that a beneficial owner cannot assert a personal shareholder claim. This was an altogether more vexing question. The court found that a shareholder does have standing to pursue an equitable claim to impugn an allotment of shares authorized by the directors prior to him or her becoming a registered shareholder. The court posed the question: if prior wrongdoing can be complained of in the absence of statutory language, why, then, should there be a general bar to shareholders complaining of conduct before they became shareholders at all?
In order to answer that question, the court accepted the submission of the defendant’s counsel that an assessment would be necessary as to whether an equitable claim passed with legal title to the shares. The court cited Guest on the Law of Assignment:[8]
A “mere equity,” for example a right to rescind or rectify a contract, is probably not a chose in an action. It is not assignable unless it is transferred as an incident of property conveyed or a chose in action assigned and is not sought to be assigned separately from the property or chose in action to which it is incident.
The court preferred the view that there could be no general prohibition on a new shareholder complaining about a continued wrong that first occurred before he or she became a shareholder. This victory was, in light of the finding, a Pyrrhic one for the plaintiff.
Does the plaintiff have standing to pursue a personal claim based on the Cede & Co assignment?
The court’s consideration of this question revolved around whether Cede & Co had validly assigned the equitable right to sue, which they held as at August 24 (they purportedly assigned all rights and remedies to the plaintiff on October 22, 2018) in respect of shares they continued to hold as the plaintiff’s nominee. The question was a free-standing one, which referenced the document assigning the shares. The assignment was characterized by the court as a “rush job” in order to appease an impatient and aggrieved litigant. The defendant submitted that the document, by virtue of its incoherence and ambiguity, had not assigned any right to pursue proceedings. It was held that the plaintiff’s skeleton argument concluded with a “lifeboat submission”[9]—namely, an application that Cede & Co be joined to the proceedings as co-plaintiff. Unsurprisingly, given the tenor of the court’s remarks, it was held that the assignment did not transfer effectively from Cede & Co to the plaintiff the right to pursue an equitable breach of fiduciary duty claim. The court found the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society[10] irresistible:
[W]hat is assigned is the chose, the thing, the debt or damages to which the assignor is entitled. The existence of a remedy or remedies is an essential condition for the existence of the chose in action but that does not mean the remedies themselves are property in themselves, capable of assignment separately from the chose.
Conclusion
The claim was struck out. It is worth noting the fact that the court remarked[11] that the plaintiff had a derivative claim and pointed to it being, potentially, a more appropriate remedy—something for litigants and practitioners to bear in mind when considering their strategy. These proceedings evidence a clear statement of the law in the Cayman Islands—namely, that the dilution of share voting rights does not constitute a free-standing exception to the rule in Foss v. Harbottle.
[1] Citing Smellie, J. (as he then was) in Argentine Holding Ltd v. Buenos Aires et. al [1997] CILR 90 at 104.
On August 30, 2018, the California Supreme Court rendered a long-awaited decision in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc.[1] Primarily, the case considers what disclosures are required under California law to make a client’s “advance” conflict waiver enforceable. The decision also addresses when a dormant client is a “current” client and the extent to which a law firm may be entitled to payment for legal services rendered even in the face of a violation of the Rules of Professional Conduct.
Facts
J-M Manufacturing Co., Inc. (J-M) was sued in a qui tam lawsuit alleging misrepresentations about products sold to approximately 200 public entities nationwide. When the qui tam complaint was unsealed, some of those entities intervened as plaintiffs in the lawsuit.
During the litigation, J-M decided to replace its litigation counsel with Sheppard, Mullin.[2] A conflicts check revealed that an attorney in a different Sheppard Mullin office had represented one of the plaintiffs, South Tahoe Public Utility District (South Tahoe), periodically over the previous eight years but only on employment matters.
The 2002 South Tahoe engagement letter, renewed in 2006, contained a prospective or “advance” waiver provision similar to what the court quoted from the J-M engagement letter:
Conflicts with Other Clients: Sheppard Mullin . . . has many attorneys and multiple offices. We may currently or in the future represent one or more other clients (including current, former, and future clients) in matters involving [J-M]. We undertake this engagement on the condition that we may represent another client in a matter in which we do not represent [J-M], even if the interests of the other client are adverse to [J-M] (including appearance on behalf of another client adverse to [J-M] in litigation or arbitration) and can also, if necessary, examine or cross-examine [J-M] personnel on behalf of that other client in such proceedings or in other proceedings to which [J-M] is not a party provided the other matter is not substantially related to our representation of [J-M] and in the course of representing [J-M] we have not obtained confidential information of [J-M] material to the representation of the other client. By consenting to this arrangement, [J-M] is waiving our obligation of loyalty to it so long as we maintain confidentiality and adhere to the foregoing limitations. We seek this consent to allow our Firm to meet the needs of existing and future clients, to remain available to those other clients and to render legal services with vigor and competence. Also, if an attorney does not continue an engagement or must withdraw therefrom, the client may incur delay, prejudice or additional cost such as acquainting new counsel with the matter.
Sheppard Mullin’s general counsel analyzed the work the law firm had done for South Tahoe and determined that such employment-law-related legal work was not “substantially related” to the qui tam litigation. This standard, mentioned in the advance waiver provision, might be relevant under the Model Rules of Professional Conduct[3] if South Tahoe had been a former, not a current, client (a question litigated in the case).
Note also that the language at the beginning of the quoted conflicts provision accomplishes nothing: Model Rule 1.10(a) (and now new California Rule 1.10(a)) provides that if one attorney in a law firm has a disqualifying conflict of interest, that attorney’s conflict is imputed to every other lawyer in the firm, regardless of how many attorneys and how many offices the law firm may have.
Sheppard Mullin’s general counsel also concluded that that the advance conflict waiver signed by South Tahoe would authorize the firm to undertake a representation adverse to South Tahoe. The firm did not, at that time, disclose its representation of South Tahoe to J-M but assured J-M that there were no conflicts preventing it from undertaking the proposed representation.
Procedural History
After commencing its representation of J-M, Sheppard Mullin provided additional employment-law-related legal services to South Tahoe. Thereafter, attorneys representing South Tahoe in the qui tam litigation became aware of Sheppard Mullin’s representation of South Tahoe, and in March 2011 wrote Sheppard Mullin to assert the conflict. Sheppard Mullin responded by invoking the advance conflict waiver provision and arguing the adequacy of the firm’s screening procedures (which apparently were established only after being contacted by South Tahoe’s attorneys about the conflict).
When South Tahoe’s counsel moved to disqualify Sheppard Mullin, the firm informed J-M about the alleged conflict for the first time. The disqualification motion argued that a general advance waiver was inadequate under California ethics rules because it did not constitute informed consent. Sheppard Mullin countered that (1) South Tahoe did not carry its burden of proving that it was a “current” client when Sheppard Mullin accepted the representation of J-M; (2) even if South Tahoe was a “current” client, it had signed a prospective waiver to future litigation against it; and (3) even absent the prospective conflict waiver, laches and waiver should preclude South Tahoe from succeeding on its disqualification argument. Sheppard Mullin also noted that in retaining its current law firm in the qui tam litigation, South Tahoe had agreed to a similar prospective waiver provision.
South Tahoe replied that it remained a current client. The scope of the engagement letter encompassed general employment matters, and the attorney-client relationship thereunder terminated only upon (1) written notice from either party or (2) completion of the “Matter,” which by its nature was recurring. Notably, whether Sheppard Mullin’s representation of South Tahoe is properly viewed as continuous or as a series of discrete, sequential engagements, there were many times when the firm was simultaneously representing both, including the representation of J-M adverse to South Tahoe. Furthermore, the putative waiver was arguably inapplicable to the qui tam matter in that Sheppard Mullin had pursued a California Public Records Act (CPRA) request against South Tahoe, while simultaneously providing legal advice to South Tahoe about how to respond to CPRA requests, thereby constituting a “substantially related representation.”
On July 14, 2011, the federal court granted, without opinion, South Tahoe’s motion to disqualify Sheppard Mullin.
Meanwhile, Sheppard Mullin had billed J-M approximately $3 million in the qui tam matter, with approximately $1 million uncollected. When the firm sued to collect the outstanding amount, J-M counterclaimed for breach of contract, breach of fiduciary duty, and fraudulent inducement and sought both an accounting and disgorgement of the $2 million already paid to Sheppard Mullin. Pursuant to the engagement letter, Sheppard Mullin sought compulsory arbitration. J-M resisted, arguing that Sheppard Mullin’s conflict of interest rendered the engagement letter illegal and unenforceable, but the trial court ordered the parties to arbitration, where Sheppard Mullin prevailed.
The arbitrators concluded that the firm’s failure to disclose its representation of South Tahoe and to obtain a specific waiver from J-M was an ethics violation, but not sufficiently serious or egregious to warrant forfeiture or disgorgement of Sheppard Mullin’s fees. The conflict had not caused J-M any damage, and the services Sheppard Mullin rendered to J-M were not “less effective or less valuable.”[4] The arbitrators accordingly awarded Sheppard Mullin $1.3 million in fees and interest.
The Superior Court rejected J-M’s objections and, holding that a violation of the ethics rules does not render a retainer agreement unenforceable, confirmed the award. The California Court of Appeals reversed, however, holding that concurrent representation of J-M and South Tahoe violated Rule 3-310(C)(3), notwithstanding the scope of the conflict waivers in the parties’ respective engagement agreements, and this violation rendered the entire engagement agreement unenforceable. The Court of Appeals remanded the case for a finding as to when that concurrent representation began.
The California Supreme Court Decision
Sheppard Mullin petitioned for review on the following issues: (1) whether a court may invalidate an arbitration award on grounds that the agreement containing the arbitration agreement violates the public policy of the state as expressed in the Rules of Professional Conduct, as opposed to statutory law; (2) whether Sheppard Mullin violated the Rules of Professional Conduct in view of the broad conflicts waiver signed by J-M; and (3) whether any such violation automatically disentitles Sheppard Mullin from any compensation for the work it performed on behalf of J-M. The California Supreme Court granted review and rejected most of Sheppard Mullin’s arguments. “California law holds that a contract may be held invalid and unenforceable on public policy grounds even though the public policy is not enshrined in a legislative enactment.”[5]
Addressing the advance waiver provision, the court interpreted Rule 3-310(C)(3)’s requirement (essentially comparable to Model Rule 1.7(a)(1)) of informed written consent, confirmed in writing, to mean “informing the client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client. . . .”[6]
The court rejected Sheppard Mullin’s argument that when it began representing J-M, South Tahoe was a “former client” or a “dormant client” of the law firm, and that South Tahoe did not again become a “current client” until after its representation of J-M began. Sheppard Mullin’s engagement letter with South Tahoe was open-ended, with the scope of the representation being described as “in connection with general employment matters (the ‘Matter’)” and, absent an earlier termination by either South Tahoe or Sheppard Mullin, the representation of South Tahoe would terminate “upon completion of the Matter.”[7] Sheppard Mullin had provided employment-law-related legal services to South Tahoe since 2002 and had done so as recently as November 2009, and again on March 29, 2010, less than a month after taking on the qui tam matter.
Under comparable circumstances, where a law firm and a client have had a long-term course of business calling for occasional work on discrete assignments, courts have generally held the fact that the firm is not performing any assignment on a particular date and may not have done so for some months—even years—does not necessarily mean the attorney-client relationship has been terminated. . . . Absent any express agreement severing the relationship during periods of inactivity, South Tahoe could reasonably have believed that it continued to enjoy an attorney-client relationship with its longtime law firm even when no project was ongoing.[8]
This conclusion became the linchpin for the rest of the decision.[9]
This result creates practical difficulties. Applying the current client conflict rules and the rule with respect to imputation of such conflicts makes enforceability of “advance” waiver provisions in engagement letters in the context of the realities of contemporary law practice a matter of grave concern.
The typical “advance” waiver—similar to the one in both the South Tahoe and J-M engagement letters—provides that the client is agreeing, at the outset of representation, that the law firm may undertake other representations adverse to the client so long as that other adverse representation is not “substantially related” to the matter for which the client is retaining the firm. This “substantially related” caveat is not adventitious; rather, it allows a firm to treat a “current client” as a “former client” for conflict-of-interest purposes vis-à-vis ABA Model Rule 1.9, whereby lawyers can be directly adverse to a former client without the need separately to secure the latter’s consent, if the new matter adverse to the former client is not “substantially related” to the matter for which the attorney previously represented the former client. As such, an “advance” waiver is, and should be, a reasonable compromise between the attorney and the occasional or “dormant” client.
Nonetheless, if the California Supreme Court’s conclusion that South Tahoe remained a “current client” of Sheppard Mullin from 2002 to May 2011 is accepted, the court’s rejection of the application of the “advance” conflict waiver in the J-M engagement letter makes sense. That waiver provision attempted to cover both ongoing and future matters adverse to J-M; however, more disclosure was necessary to satisfy the requirements of informed consent.
The court’s assessment of what constitutes informed consent had consequences of long-range significance:
First, the Sheppard Mullin advance waiver provision was inadequate. By not apprising J-M that a conflict was not merely possible in the abstract, but actually existed at the very moment the firm was asking J-M to waive any current or future conflicts, Sheppard Mullin had failed to disclose all relevant information. Disclosure that an actual conflict might exist but not that a concurrent conflict of interest actually exists is inadequate. “Simply put, withholding available information about a known, existing conflict is not consistent with informed consent.”[10]
Second, the court held that “Sheppard Mullin’s concurrent representation of J-M and South Tahoe violated rule 3-310(C)(3) and rendered the engagement agreement between Sheppard Mullin and J-M unenforceable.”[11] The court rejected the argument that violation of ethics rules regarding the obtaining of informed consent did not invalidate the entire engagement letter, which addressed many other issues.
It is true that Sheppard Mullin rendered J-M substantial legal services pursuant to the agreement, and J-M has not endeavored to show that it suffered damages as a result of the law firm’s conflict of interest. But the fact remains that the agreement itself is contrary to the public policy of the state. The transaction was entered under terms that undermined an ethical rule designed for the protection of the client as well as for the preservation of public confidence in the legal profession. The contract is for that reason unenforceable.[12]
Third, the arbitral award was null and void because it arose from a mandatory arbitration provision in an unenforceable contract.
Nevertheless, the California Supreme Court rejected the conclusion of the court of appeals that because of the ethics violation Sheppard Mullin was “categorically barred” from recovering any fees. Although the Restatement[13] contemplates that violating a duty to a client may require fee forfeiture, not all violations of the rules of professional conduct rise to that level. “The Restatement instructs, and we agree, that the egregiousness of the attorney’s conduct, its potential and actual effect on the client and the attorney-client relationship, and the existence of alternative remedies are all also relevant to whether and to what extent forfeiture of compensation is warranted.”[14] Despite the stigma of an ethics violation, the decision allowed that recovery in quantum meruit might be possible if Sheppard Mullin could “show that the conduct was not willful, and its departure from ethical rules was not so severe or harmful as to render its legal services of little to no value to the client.”[15] Accordingly, the case was remanded to the trial court with these admonitions:
To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantummeruit recovery. Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated.[16]
Conclusion
The Sheppard Mullin litigation is not a repudiation of “advance” waivers generally, as some might have apprehended. It is, however, a reminder that any client consent to waive a conflict must be an informed one. Thus, when asking a client to sign an engagement letter with an “advance” waiver, lawyers should scrupulously disclose any known conflicts upfront.
Some uncertainty remains as to the treatment of “dormant” clients. Such dormant clients may or may not have a reasonable belief that they are still “current” clients. That places a premium on adequate disclosure to ensure enforceability of engagement letters in general and advance waivers in particular.
[2] The facts set forth herein are derived from the California Supreme Court’s majority opinion, the concurring and dissenting opinions, the underlying California Court of Appeals decision, 244 Cal. App. 4th 590, 198 Cal. Rep. 2d 253 (Cal. Ct. App. 2016), and pleadings in the qui tam action, U.S. v. J-M Manuf., Inc. d/b/a JM Eagle, et al., Case No. 5:06-cv-00055-GW-PJW (C.D. Cal., filed Jan. 17, 2006). Except for key holdings of the California Supreme Court, citations to these documents will, in the interests of space, generally be omitted.
[3] The “substantially related” language appears in Model Rule 1.9 (Duties to Former Clients) but not in Model Rule 1.7 (Conflicts of Interest: Current Clients). The same dichotomy holds true under Rules 1.7 and 1.9 of the new California Rules of Professional Conduct adopted in November 2018. No “substantially related” language appeared in the language of the prior California Rules of Professional Conduct in force at the time this matter arose (Rule 3-310(C)(3)).
[8]Id. at 14–16. The California high court expressly linked an attorney’s duty of loyalty to a current client to the requirement that a conflict waiver, to be informed, requires the attorney to disclose “all material facts the attorney knows and can reveal.” Id. at 16. “An attorney or law firm that knowingly withholds material information about a conflict has not earned the confidence and trust the rule is designed to protect.” Id.
[9]But cf. Ky. Bar Assoc. Ethics Op. E-148 2–3 (July 1976) (internal citations omitted) (expressing doubt whether, absent special circumstances, frequency or length of time of prior employment of a lawyer should be dispositive of current versus former client status, unless the client pays a continuing retainer).
[15]Id. at 20. The court went on to say, “The law firm may have been legitimately confused about whether South Tahoe was [Sheppard Mullin’s] current client when it took on J-M’s defense, or it may in good faith have believed the engagement agreement’s blanket waiver provided J-M with sufficient information about potential conflicts of interest, there being at the time no explicit rule or binding precedent regarding the scope of required disclosure. The conflict was, moreover, not one in which Sheppard Mullin represented another client against J-M.” Id. at 24 (internal citations omitted).
With the growing use and popularity of the internet, more and more people and businesses have made the leap into cyberspace to sell, advertise, or promote their company, name, products, or services. With this growing evolution, the inevitable clash over domain names has also grown.
What exactly is a domain name? Simply put, a domain name is essentially the user-friendly form of the internet equivalent to a telephone number or street address. It is the address of a person or organization on the internet where other people can find them online, and it can also become the online identity of that person or organization. For example, many businesses will register their company name as their domain name. A domain name can function as a trademark if it is used to identify goods or services and is not used simply as a website address. Although providing a staggering global market forum, the internet also provides fertile ground for trademark infringers. One of the most common avenues for infringement on the web is that traveled by “cybersquatters.”
A cybersquatter, sometimes referred to as a cyberpirate, is a person or entity that engages in the abusive registration and use of trademarks as domain names, commonly for the purpose of selling the domain name back to the trademark owner or to attract web traffic to unrelated commercial offers. To provide trademark owners with a remedy and a means by which to evict cybersquatters, two alternatives developed: the Anti-Cybersquatting Consumer Protection Act (ACPA), a federal statute providing the basis for a court action against cybersquatters, and the Uniform Domain Name Dispute Resolution Policy (UDRP or Policy), which provides for an administrative proceeding for the resolution of domain name disputes, much like an arbitration.
The ACPA was enacted in 1999 to redress cybersquatting by allowing trademark owners to bring a civil action against a cybersquatter if that person has a bad-faith intent to profit from the mark and registers, traffics in, or uses a domain name that in the case of a distinctive mark, is identical or confusingly similar to that mark, or in the case of a famous mark, is identical or confusingly similar to, or dilutive of, that mark. Remedies include statutory damages between $1,000 and $100,000 per domain for which the cybersquatter is found liable, actual damages, the transfer or cancellation of the domain name, and/or attorneys’ fees.
The UDRP is a less costly and more efficient alternative to the court system.
Consistent with the ACPA, under the UDRP, the trademark owner must prove that: the allegedly infringing domain name is identical or confusingly similar to a trademark or service mark in which the complainant has rights; the alleged infringer has no rights or legitimate interests in the domain name; and the allegedly infringing domain name has been registered and is being used in bad faith.
Marks in which the complainant has rights includes marks that are federally registered, as well as unregistered marks that have acquired common-law rights. Common-law rights are acquired when the mark becomes a source indicator in commerce through its usage, promotion, marketing, and advertising. For example, it has been accepted in a succession of UDRP decisions that authors and performers may have trademark rights in the names by which they have become well-known. Performers can establish trademark rights either by showing that they have registered their names as marks for certain goods or services, or because, through deployment of the names as source indicators in commerce, they have unregistered or ‘common law’ rights to protection against misleading use.
By way of illustration, the recording artist professionally known as Sade was successful in obtaining transfer of the domain “sade.com,” despite the fact that she had not registered her mark SADE. However, she sufficiently demonstrated her usage of the stage name “Sade” as a mark to distinguish her goods and services as a singer, songwriter, performer, and recording artist, and the establishment of substantial goodwill therein, based upon evidence of her sales of records, CDs, clothing, and other merchandise using the mark SADE, as well as live tours, performances, advertising, and promotion.
Once the complainant has established its rights in the mark, it must establish that the disputed domain name is “identical or confusingly similar” to its mark. Not too surprisingly, where the domain name is identical to the complainant’s mark, the requirement of identity or confusing similarity as required by the UDRP has been found satisfied. The addition of “.com” or some other gTLD suffix is not a distinguishing difference where the domain name is otherwise identical to the complainant’s mark.
Determining “confusing similarity” is decided on a case-by-case basis. One particular scenario that continues to confound the UDRP Panels is the appendage of the term “-sucks” to another’s trademark. In one decision that discusses at length the various approaches taken to analyze this issue, the UDRP Panel transferred to the complainant, a company best-known for its sale of alcoholic beverages under the trademark “Guinness,” the disputed domain names: “guinness-really-sucks.com,” “guinness-really-really-sucks.com,” “guinness-beer-really-sucks.com,” and “guinness-beer-really-really-sucks.com” in addition to a host of other similar variations.
Another common scenario involving confusing similarity involves a form of cybersquatting known as “typosquatting,” where the registered domain is a misspelling of a trademark. In one case involving a notorious typosquatter, Disney Enterprises successfully obtained transfer of a myriad of domains that infringed on its famous DISNEY mark by fully incorporating the DISNEY mark, coupled with slight misspellings of other DISNEY-formative marks, like “Walt Disney World” (for example, the disputed domain names included “disneywold.com,” “disneywolrd.com,” and “disneyworl.com”). When internet users mistakenly entered the disputed domains into their web browsers, pop-up windows appeared containing third-party websites and advertisements for goods and services like music, games, credit approval, and casinos. When these windows were closed, additional pop-up windows would appear, containing still more third-party advertisements or websites in a continuous cycle, despite the fact that Disney was not affiliated with, nor had given permission to use its trademarks to, any of the websites appearing in the perpetual stream of pop-ups (a tactic which, as an aside, is curiously known as mousetrapping, but having no affiliation with or relation to Disney’s icon Mickey Mouse).
Any number of factors has been held to establish a domain name registrant’s lack of rights or a legitimate interest in the disputed domain name. For example, one common factor is where it may be inferred or established that the motive for registering the domain name was to sell it at auction on the internet, without any other apparent right or interest in the domain.
Pursuant to the UDRP, a domain name registrant can establish its rights or legitimate interest in the disputed domain name by demonstrating any of the following:
Registrant used, or made demonstrable preparations to use, the domain in connection with a bona fide offering of goods or services prior to the registrant’s receipt of notice of the dispute. For example, the owner of the domain and mark “sexplanet.com” lost its dispute over the domain name “sexplanets.com,” despite its claim that it was the first and most popular adult website for the download of live, streaming video, where the registrant of “sexplanets.com” demonstrated that the domain was registered without prior knowledge of the complainant’s domain name and it was immediately used to further its business plan of providing bona-fide free hosting services to webmasters of adult websites in exchange for advertising revenue generated from banners displayed on the adult sites hosted. In contrast, recording artist and performer Peter Frampton successfully obtained transfer of the domain “peterframpton.com” where evidence clearly demonstrated that the registrant had deliberately chosen to include Peter Frampton’s well-known trademarked name with the goal of commercially benefitting itself from the inevitable user confusion that would result from their concurrent usage of the domain name and Peter Frampton’s mark. In particular, the registrant, who coincidentally shared the name “Frampton,” clearly sought to capitalize on Peter Frampton’s fame and celebrity reputation where he used the domain to post a website offering goods directly competitive with Peter Frampton in the music industry. Such use was deemed to exploit user confusion and does not constitute bona fide commercial use.
Registrant has been commonly known by the domain name, even if it has acquired no trademark rights. For example, the musician Sting almost got stung by the registrant of the domain “sting.com” where the registrant argued his eight year use of the nickname “Sting”, most recently on the internet in connection with global online gaming services. However, the UDRP Panel was not persuaded that the registrant had established that he has been “commonly known” by the domain as the UDRP contemplates; rather, it determined that the word “sting” is not distinctive, most likely used by numerous other people in cyberspace and, in practice, merely provided the registrant with anonymity rather than a name by which he was commonly known. Unfortunately for the musician Sting, these findings were not sufficient to prevent denial of his complaint where the Panel accepted that he was world famous under the name “Sting,” but had not demonstrated his rights to it as an unregistered trademark or service mark, given that the personal name in this case is also a common word in the English language with a variation of meanings.
Registrant is making a legitimate noncommercial or fair use of the domain name without intent for commercial gain to misleadingly divert consumers or to tarnish the trademark at issue. Examples include parody sites, fan sites, and sites dedicated to criticism or commentary. Recording artist Pat Benatar, for example, was denied transfer of the domain name “patbenatar.com” where the registrant had created a fan website that provided a wide range of information concerning Pat Benatar, including detailed band history, chronology of her albums, and past and future appearances. The website contained clear disclaimers that it was strictly operated as a fan site and was unauthorized by, had no affiliation with, and was not endorsed by, Pat Benatar, her band, or agents. Equally important, there was no evidence that the registrant obtained any commercial benefit from the website, which may well have led to a different result. In a more extreme case, Eddie Van Halen of legendary rock fame was denied transfer of the domain “edwardvanhalen.com” from a fan who registered the domain with the alleged intent of putting up a fan site, even though the site never had any content added to it. In contrast, the law firm Hunton & Williams successfully obtained transfer of the domains “huntonandwilliams.com” and “huntonwilliams.com” where the registrant made a failed attempt at a parody website by posting content that was found to merely disparage the firm as greedy, parasitical, and unethical, including the text “PARASITES—no soul . . . no conscience . . . no spine . . . NO PROBLEM!!!” against a background of human skulls, together with a myriad of definitions of the term “parasite” and of advertised products, as opposed to imitating any distinctive style of the firm for comic effect or in ridicule.
Under the UDRP, both the registration and use of the disputed domain must be in bad faith. Evidence includes:
registration primarily for the purpose of selling, renting, or otherwise transferring it to the trademark owner or its competitor (e.g., in a proceeding initiated by the famous actress Julia Roberts, she successfully obtained transfer of “juliaroberts.com” where the registrant had registered and used the domain in bad faith by, among other things, putting it up for eBay auction).
registration to prevent the trademark owner from reflecting the mark in a corresponding domain name, provided that the registrant has engaged in a pattern of such conduct (e.g., also in the “juliaroberts.com” case, the registrant had admittedly registered other domain names, including several famous movie and sports stars).
registration primarily for disrupting a competitor’s business (e.g., Ticketmaster successfully obtained transfer of the domains “ticketmasters.com,” “wwwticketsmaster.com,” and “ticketsmasters.com” where the registrant had deliberately used various misspelling of its well-known mark (typosquatting) to attract internet users who mistype or misspell Ticketmaster’s name and, instead, were redirected to registrant’s competing website).
by using the domain, the registrant has intentionally attempted to attract, for commercial gain, internet users to its website, by creating a likelihood of confusion with the complainant’s mark as to the source, sponsorship, affiliation, or endorsement of its website or location or of a product or service on its website or location (e.g., the registrant’s automatic hyperlink of the domain to a competing website or a pornographic site, such as in a case disputing the domain name “bodacious-tatas.com,” where Tata Sons Limited successfully obtained cancellation of the domain, which directed to a pornographic website. In so doing, registrant was held to have registered and used the domain in bad faith where, among other things, it had unlawfully placed the complainant’s trademarked “TATA” in the meta-tags of its domain address so that when internet users performed an internet search using the “TATA” trademark in any internet search engine (e.g., Google), the search results would include the registrant’s unauthorized pornographic website which, the UDRP Panel held, could induce a potential customer or client of Tata Sons into believing that the porn site was licensed, authorized, or owned by Tata Sons).
The legal profession has moved at a slow pace in addressing issues of diversity and inclusion. Reports in the United States and Canada indicate that lawyers of color, lawyers with disabilities, LGBTQ2+ lawyers, and women lawyers (collectively, “diverse lawyers”) are not well-represented in the profession, particularly at the partner level or in leadership or management roles.
The Numbers
The American Bar Association reported in 2018 that 85 percent of lawyers in the United States were Caucasian/white, and 36 percent identified as female. A 2018 Report on Diversity in U.S. Law Firms by the National Association for Placement reported that, inter alia, (i) minority women continue to be the most underrepresented group at the partnership level, (ii) there are wide geographic disparities in the number of LGBT lawyers, (iii) reporting of lawyers with disabilities is scant, and (iv) representation of Black/African-American lawyers among partners has barely increased since 2009.
In Canada, demographic data is not as readily available. The Canadian legal profession has transformed over the course of the current decade; however, diverse lawyers continue to be under-represented. The Canadian Bar Association partnered with the Canadian Centre for Diversity and Inclusion to conduct a survey tracking law firm diversity in Canada. The study reported that women, lawyers with disabilities, and racialized lawyers are significantly under-represented, and there is a continued trend of Caucasian males occupying senior leadership positions.
Challenges Faced in Retention and Advancement
In recent years, law firms and corporate legal departments have improved recruiting and hiring practices, but inclusion and retention must be addressed. Although individual merit plays a key role in advancement, it is not often the reality. Barriers exist in both countries that impede the retention and advancement of diverse lawyers, such as in-group bias, unconscious bias and stereotyping, diversity fatigue, and the lack of a sponsor or champion. In order to increase inclusion and retention, the legal profession must address these underlying issues.
Diversity and Inclusion in the United States and Canada
A true comparison of the U.S. and Canadian experience is not possible given the historical and cultural differences in both countries. Nevertheless, both countries have similar challenges in recruitment, retention, and advancement and can benefit from their respective experiences and strategies. Best practices that can be used in the United States and Canada include:
Active and meaningful participation and support of senior leadership and management. It is difficult to effect change where those in leadership are not supportive of or active in moving the needle. The involvement and support of senior leadership and management is imperative for having an inclusive workplace.
RFPs, open letters, and other public support of diversity and inclusion from clients. Genuine strategy must be put in place to monitor outside counsel’s diversity and inclusion efforts and to hold them accountable. Meaningful strategies include a thorough examination of the members of the legal team, the percentage of work allocated to diverse lawyers, and the representation of diverse lawyers in senior positions within the firm. Many large financial institutions require quarterly reporting on these items, which allows them to track the outside firm’s commitment to and focus on diversity and inclusion.
A concerted focus on inclusion. This includes creating and maintaining a culture and work environment that is welcoming and allows lawyers to bring their full (professional) selves to the workplace.
Hiring from a broad pool of candidates to recruit diverse talent, and training those interviewing and hiring lawyers (e.g., unconscious bias training).
Internal accountability measures such as tying compensation to efforts of diversity and inclusion.
Law schools implementing diversity strategies, such as The Coelho Center for Disability Law, Policy & Innovation.
Ensuring that diverse lawyers have equal access to advancement opportunities. Challenging, high-profile, and career-advancing files should be assigned based on merit and work ethic, rather than nepotism, as may be the case.
Conclusion
The legal profession in the United States and Canada continue to address the challenges related to diversity and inclusion. Data generated from reports and studies highlight the need to formulate and implement appropriate strategies to address these issues. The initiatives of law firms and organizations in the United States and Canada have played a significant role in the diversity discourse. There are best practices that both countries should draw upon to enhance the recruitment, retention, and advancement of diverse lawyers.
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