“Law is nothing else but the best reason of wise men applied for ages to the transactions and business of mankind.”   Abraham Lincoln

Advancing the Rule of Law Now

By Presidential Action on April 30, 2021, President Biden proclaimed May 1, 2021 as Law Day, U.S.A., 2021. The President “called upon all Americans to acknowledge the importance of our Nation’s legal and judicial systems . . .” setting the theme for Law Day, U.S.A., 2021 as “Advancing the Rule of Law Now.”  For the record, Law Day is not new; it was not created by Joe Biden.  President Eisenhower established May 1 as Law Day in 1958 (Eisenhower creates Law Day) with recitals like:

• “it is fitting that the people of this Nation should remember with pride and vigilantly guard the great heritage of liberty, justice and equality under law,”
• “the principle of guaranteed fundamental rights of individuals under the law is the heart and sinew of our Nation,”
• “a day of national dedication to the principle of government under laws would afford us an opportunity better to understand and appreciate the manifold virtues of such a government,” and
• “I especially urge the legal profession, the press, and the radio, television and motion picture industries to promote and participate in the observance of [Law Day],” 1958.  

Between the bookends of Law Day, 1958 and Law Day, U.S.A., 2021, America has celebrated many Law Days, most with themes applauding liberty, justice and equality. 

So, if Law Day was established to promote the United States’ system of justice and government with the legal profession (along with the media) charged as its ambassador, how do business lawyers in 2021, as members of the legal profession, promote and participate in the advancement of the Rule of Law now? 

Most business lawyers identify themselves by the types of transactions they assist clients with (such as M&A, Securities, Derivatives and Futures Law, International Business Law) or the types of entities or industries they work with the most (like Health Law, Nonprofit Organizations, or Credit Unions).  When asked what they do, most business lawyers describe their job as helping their clients navigate the legal landscape in which they operate, be it tax, securities laws, regulation, corporate governance.  Few business lawyers see themselves as agents of liberty, justice and equality – let alone promoters of the Rule of Law.  In contemplation of the Rule of Law call, some business lawyers might scratch their heads, digging way back into memories of law school to ponder long forgotten Con Law classes.  Or if very motivated, they might dust off a tattered copy of the U.S. Constitution (or pull up a PDF of it) to contemplate how the Bill of Rights has anything to do with M&A transactions.  Instead of overthinking it, business lawyers are best served by just accepting a simple truth – business lawyers are more than just agents of the Rule of Law. The Rule of Law is “the business” of a business lawyer.

What Does Rule of Law Mean?

Today, these three simple words are thrown around constantly.  “Ubiquitous” may be an understatement.   The overuse of the phrase “Rule of Law” is unfortunate since it dilutes how important this concept is to America and its history. 

The American Bar Association describes the rule of law as a set of principles, or ideals, for ensuring an orderly and just society. The rule of law assumes that no one is above the law, everyone is treated equally under the law, everyone is held accountable to the same laws, there are clear and fair processes for enforcing laws, there is an independent judiciary, and human rights are guaranteed for all. This description works well when informing individuals about how Rule of Law applies to them, but it is not particularly helpful to a lawyer understanding the specific lawyer’s role within a Rule of Law construct.  

The best way to understand Rule of Law constructionally might be to examine the words of our founding fathers. 

John Adams, in his Novanglus Essays, stated:

“This power in the people of providing for their safety anew by a legislative . . . which is founded only in the constitutions and laws of the government . . . For when men, by entering into society and civil government, have excluded force, and introduced laws for the preservation of property, peace, and unity, among themselves.” 

Basically, a legislative body elected by the people agrees upon and write downs the laws and then every member of society agrees to abide by those laws and if there is a dispute between members of society, those disputes will be resolved not by force but by a tribunal.  Hatfields and the McCoys – bad; Portia’s defense of Antonio in The Merchant of Venice – good. 

If John Adams carries the water for a civil society, James Madison might better illuminate how the founding fathers envisioned the Rule of Law in the context of commerce.  In Federalist Papers No. 10 James Madison[1] wrote:

“But the most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation, and involves the spirit of party and faction in the necessary and ordinary operations of the government. No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” 

In promoting the U.S. Constitution to the citizens of New York, the epicenter of commerce at the time (and now), Madison foretold the future role of the business lawyer within the Rule of Law framework.  While not completely conceptualized when the U.S. Constitution was adopted, Madison predicted the various areas of laws that Adams’ legislative body will tackle as the government’s regulatory system is built out – the rules that the law makers will make – our Rules of Law.  

The U.S. Constitution and the Bill of Rights

Our embrace of the Rule of Law is personified in the structure of governance embodied in the U.S Constitution and its amendments, and by reservation, the constitutions of the various states and territories that make up the United States.  So, the M&A lawyer (or any other business lawyer) who looked to the Bill of Rights to find a place within the Rule of Law, the “sinew of our Nation,” was not that far off when considering how that lawyer fits within the construct of the Rule of Law. 

The 10^th Amendment of the Bill of Rights[2] clarifies the concept of Powers and which “body” has which Powers – the United States, the States or the people.  Article I, Section 8 of the U.S. Constitution sets forth the various “Powers” of the Congress (Adams’ “legislative”) which includes the power to:

• tax (the Internal Revenue Code is “sparked”),
• coin money and regulate its value (banking, the regulation of it, cryptocurrency),
• promote science and the useful arts by securing rights of authors and inventors (the concept of the patent and the regulation (and encouragement) of innovation), and
• regulate commerce with foreign nations and among the several states (the mighty interstate commerce clause, the bedrock needed for the Uniform Commercial Code, securities regulation, not to mention contracts between parties from differing states – M&A transactions).

Today, business lawyers help their clients comply with the laws that have been established as a result of these Powers. 

But for the business lawyer, the Rule of Law is more than just black-letter law.   The U.S. Constitution does not directly empower either Congress or the Executive branch to create departments and administrative agencies (such as the IRS, NLRB, SEC, USDA, FDIC, FDA, or EPA), but the U.S. Supreme Court has generally recognized that Congress has the authority to establish federal agencies.[3] Just about every business lawyer engages with one or more these agencies or departments and the rules and regulations promulgated by them in servicing their clients.  And for many lawyers, these agencies are their clients (or “we, the people” are since agencies and departments do the work of the people), so by extrapolation business lawyers who work for federal agencies like the Securities and Exchange Commission are doubly embedded into the Rule of Law construct. 

The “power” of the 10^th Amendment does more than just create federal areas of law within which business lawyers practice. Because the U.S. Constitution is silent on the power of any federal branch to charter corporations, the 10^th Amendment assures that each State reserves the power to charter and govern corporations (and in modern times, other business entities).  It should not be surprising that Delaware, the First State,[4] includes in its constitution an entire separate article on Corporations.  Corporate governance would be a far less important part of a business lawyers’ everyday practice without the Rule of Law principles that created the parallel yet diverging State and Federal legal structures business lawyers pilot their clients through.     

Because Lincoln Said So

Yet another Law Day proclamation brings home for business lawyers why they should identify as agents of the Rule of Law. In Proclamation 8367 of April 30, 2009, for Law Day, U.S.A, 2009, President Obama’s theme for Law Day encouraged Americans to reflect upon the legacy of President Abraham Lincoln, describing Lincoln as “one of the greatest Presidents and one of the greatest lawyers, in our Nation’s history.”  Lincoln’s legacy embodies the Rule of Law and how Lincoln’s vision of a more perfect union “bound together by a recognition of the common good, guided our country through its darkest hour and helped it re-emerge as the beacon of freedom and equality under law.”  This greatest lawyer in our Nation’s history, a luminary of the Rule of Law, told us that “law is nothing else but the best reason of wise men applied for ages to the transactions and business of mankind,” signaling to all licensed lawyers[5]– even those lawyers whose personal practices are transactional or business law – that it is the lawyer’s job to assist clients (each of whom are members of mankind) through our Rules of Law. 

Most basically, Lincoln told us that for all lawyers, but especially business lawyers, the Rule of Law is our business. 

[1] The Federalist: A Collection of Essays Written in Favour of the New Constitution, is a series of essays written by Alexander Hamilton, John Jay, and James Madison between October 1787 and May 1788. The Federalist Papers were published to urge New Yorkers to ratify the proposed United States Constitution.

[2] “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

[3] Myers v. United States, 272 U.S. 52, 129 (1926) (“To Congress under its legislative power is given the establishment of offices, the determination of their functions and jurisdiction, the prescribing of reasonable and relevant qualifications and rules of eligibility of appointees, and the fixing of the term for which they are to be appointed and their compensation.”).

[4] Delaware is known as the First State not because of its status as the jurisdiction of choice for business formation but because on December 7, 1787, it was the first state to ratify the U.S. Constitution.

[5] In the United States, a person who holds themselves out as a “lawyer” must be admitted (have a license) to practice law in at least one State.  Licensure requires the lawyer to take an oath to support the Constitutions of the United States and the particular state of licensure.  Every state prohibits the unlicensed practice of law.

The last year and half was a time to be remembered in Bankruptcy Law. It started with an eye on increasing the ability of small businesses to utilize the Chapter 11 process in a more efficient and less expensive way, which led to record number of commercial filings, a reduction in consumer filings, and a test of the bankruptcy system. What will the second half of 2021 look like? This article will walk you through Consumer Bankruptcies in the age of COVID-19. The article will discuss the filing trends, Supreme Court cases (City of Chicago v. Fulton, 19-357), proposed legislation and the arena of consumer protection cases in bankruptcy proceedings.

In 2020, the total number of bankruptcy filings was 544,463. This was approximately 230,000 fewer filings then in either 2018 or 2019. Only Chapter 11 filings increased in 2020 to 8,113. This was almost a 1,300-case increase from 2019. This reduction of cases overall during the pandemic could be due to several factors, including:

• the foreclosure and eviction moratorium (which on a federal level will extend through July 2021),
• many financial institutions scaling back on vehicle repossessions;
• collection agency restrictions on the type of debt that could be collected,
• closing of courts around the country, and the corresponding inability to obtain and execute on judgments,
• increased unemployment benefits to laid off individuals, and
• the stimulus checks.

Whether we will see an increase in the number of bankruptcy filings later in 2021 will depend on how Congress is able to address the COVID-19 Stimulus bills and whether they may be an extension of the CARES Act SABRA provisions.

Despite the decreases in number of bankruptcy filings, the bankruptcy world was not stalled. The Supreme Court decided a very important case with potential far-reaching ramifications in consumer bankruptcy. City of Chicago v. Fulton (19-357), deals with turnover of collateral upon the filing of a bankruptcy proceeding and violation of the automatic stay. The Supreme Court held that the mere retention of the debtor’s collateral after filing does not violate 11 U.S.C. §362(a). The Court left the door open for further litigation on how to address the turnover motions in bankruptcy proceedings.

Additionally, at the end of 2020, we saw a bill introduced that would revamp the consumer bankruptcy system. Senator Elizabeth Warren and Representative Jerrold Nadler introduced the Consumer Bankruptcy Reform Act of 2020. The main purpose of the legislation is to create a new Chapter 10, and eliminate Chapter 7 and Chapter 13 in consumer cases. If passed, the bill would streamline the process of filing bankruptcy and lower costs for debtors. It would create a single-chapter consumer bankruptcy system, allowing modification of mortgages on all residences, and modification of vehicle loans based on the market value of the vehicle. It would also allow for the discharge of student loan debt on equal terms with most other types of debt. The legislation would reduce alleged abusive creditor behavior and close bankruptcy loopholes that allegedly allow the wealthy to exploit the bankruptcy process.

As the 116^th Congress ended, the bill died. However, with the Democrats in control of both the House and Senate in the 117^th Congress, there is a strong chance the bill will be reintroduced this year. When the bill was first introduced, there was both strong support and strong opposition from both sides involved in the bankruptcy process. Reintroduction of the bill could allow meaningful discussions in order to address some of the issues that plague bankruptcy cases on both the debtor and creditor sides.

Other movement in Congress occurred on February 25, 2021. Senators Dick Durbin and Chuck Grassley introduced bipartisan legislation to extend the CARES Act Bankruptcy Relief Provisions. The current law was to sunset on March 27, 2021. The legislation would extend the temporary bankruptcy provisions until March 2022 and provide critical relief to families and small business facing hardship due to the ongoing COVID-19 pandemic. (See Dick Durbin February 25, 2020 Press Release). The legislation would also extend the provisions of the Small Business Reorganization Act, increasing the maximum debt limit to $7.5 million. The bill would also exempt COVID-related relief payments from consumer cases for purposes of the means test and disposable income. Lastly, the bill would not deny a discharge to those debtors who missed 3 or fewer payments due to COVID circumstances. The legislation passed, and the protections under the CARES Act will now run through March of 2022. As a result, you can expect to see a continued number of Subchapter V filings.

Although the number of consumer filings did not explode, plaintiff and debtor attorneys continue to raise the issues of the itemization of interest fees and costs in proof of claims. Although this issue has not been widespread throughout the country, we have seen an increase in activity – particularly in Florida, Georgia, and Virginia. We have no Circuit Court opinions; however, several Bankruptcy Courts have set forth their views as to how these amounts should be set out and whether damages exist. In Thomas v. Midland Funding LLC (17-0510), the Bankruptcy Judge for Western District of Virginia issued a lengthy opinion setting forth her views on whether the breakdown of interest, fees, and costs satisfies the itemization requirement set forth in Federal Rule of Bankruptcy Procedure 3001(c)(2)(a) (“FRBP 2001(c)”). That Rule requires that an itemized statement of the interest, fees, expenses, or charges must be filed with the proof of claim “[i]f, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed.”

The court went on to state that the creditor, for failing to properly itemize, did not comply fully with FRBP 3001(c) and opened itself up to potential sanctions under FRBP 3001(c)(2)(D). The court has the ability to “award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” We will see where the Western District of Virginia proceeds on this issue, but it has laid out a current road map for creditors to follow.

2020 was a year that many would like to forget. What the second half of 2021 brings will be a wait and see scenario. Once foreclosures and evictions are initiated again, are we likely to see increases in consumer bankruptcy filings? Can small businesses survive, or will there be additional closures? Will Circuit Courts provide any additional guidance as to FDCPA actions and bankruptcy? Will the Supreme Court continue to accept and hear bankruptcy cases? Is bankruptcy reform on the horizon?

Six months into 2021, we have not seen the feared tsunami of consumer bankruptcy filings. Bankruptcy courts are not overwhelmed. This lack of an increase in bankruptcies could extend for a substantial period of time as businesses reopen, COVID restrictions are released, consumers begin to spend and travel, and certain states and the government look to resume foreclosure and eviction moratoriums. We optimistically wait to see what the second half of 2021 brings.

Don’t Panic

Facing an inter partes review (IPR) challenge is a new experience for many patent owners. But since their creation by Congress in 2011, IPRs have quickly become a preferred avenue for accused infringers and other interested parties to challenge the validity of an issued patent. In most cases, a patent owner should not be surprised when they receive a petition for IPR, since approximately 87% of patents challenged in IPRs are involved in copending litigation. Any patent owner considering asserting a patent should assume that at least one IPR will be filed by each accused infringer. Nevertheless, being pulled before the Patent Trial and Appeal Board (PTAB) to defend the validity of your duly-issued patent is an unwelcome and potentially expensive endeavor.

What should a patent owner do when they receive an IPR petition? First, they should immediately consult with counsel experienced with IPR procedures and educate themselves on what an IPR entails, conduct a cost-benefit analysis, and evaluate the likelihood of success in fending off the challenge. Second, the team of patent owner and counsel should form a comprehensive strategy for obtaining early termination of the proceeding and maintaining protection for the patented invention.  

What Does an IPR Entail?

An IPR is an administrative proceeding that allows third parties (“petitioners”) to challenge the validity of an issued patent at the USPTO’s Patent Trial and Appeal Board. Unlike in litigation, a patent is not presumed to be valid in an IPR proceeding, which makes it an attractive option for challenging a patent’s validity.

An IPR has two phases: a preliminary phase and a trial phase. The preliminary phase is initiated when a petitioner files a petition with the PTAB asserting that one or more claims of the challenged patent are invalid in view of prior art patents or printed publications. Petitions are often accompanied by a supporting declaration from a technical expert retained by the petitioner. The patent owner then has approximately three months to file an optional preliminary response. A panel of three administrative patent judges will then consider the petition and any preliminary response to determine whether the petition shows a reasonable likelihood of success with respect to at least one challenged claim. If so, the panel will institute trial on all the challenged claims. If not, the proceeding is terminated and the petitioner (in most cases) has no right to appeal.

The trial phase includes limited discovery, such as depositions of the technical experts and further briefing by the parties. Trial typically culminates in an oral hearing before the panel, which involves oral arguments by the parties, but usually no live witness testimony. The trial phase concludes with a final written decision regarding patentability of the challenged claims. In nearly all cases, the written decision is issued within 12 months of the institution of trial.

Next Steps: Digging In

After retaining qualified counsel, the patent owner should conduct a cost-benefit analysis, e.g. the value of the patent versus the cost of fighting the challenge, in view of the likelihood of success. If defense of the patent is warranted, the patent owner must decide whether to file a preliminary response, which is the patent owner’s only opportunity to terminate the proceeding without trial. Counsel must analyze the petition and asserted art for substantive and formal defects, such as whether the asserted art qualifies as a printed publication, or whether the petitioner failed to file the petition within one year of being served with a complaint for infringement of the challenged patent.

Another important consideration is whether to retain a technical expert to prepare a declaration to support the preliminary response. If there is copending litigation, any claim construction and patentability arguments must be coordinated in advance with litigation counsel to ensure that positions taken at the PTAB do not adversely affect litigation positions. And all of this should be done as quickly as possible in view of the three-month deadline to file the preliminary response.

A number of additional issues need to be considered early on:

• Counsel should investigate whether there are any other circumstances that could warrant denial of trial, such as these:
  • Upcoming trials in any copending litigation
  • Prior IPR challenges to the patent by the same or a related party
  • Prior art asserted in the petition that was already substantively considered by the USPTO during the patent’s prosecution or in later proceedings.
• Although discovery procedures are limited, are there facts that suggest that targeted discovery could uncover information that warrants a denial of trial?
• Is there any evidence of the real-life impact of the patented invention—for example, commercial success or copying of the invention by others—that could be marshalled to support the patentability of the claimed invention?
• Are there any shortcomings in the challenged claims that could be remedied in a motion to amend during trial, a pending continuation application, or a reissue application?

Each of these  questions should be considered as soon as possible so the patent owner can mount their best defense and because the short timeline of an IPR proceeding leaves little room for delay if trial is instituted.

Conclusion

These are just some of the considerations patent owners must address when facing an IPR. Although patent owners need not panic, they should act expeditiously to maximize the chances of winning at the preliminary phase or, if necessary, at trial.

When the Court of Appeals for the Ninth Circuit recently stated that a payment deduction sought by the State of California “would obliterate the distinction between recoupment and setoff,” it expressed a sentiment shared by many experienced bankruptcy practitioners confounded by the inability to separate the two doctrines.  The Bankruptcy Code permits – but narrowly confines – a creditor’s exercise of its common law right of setoff.  Only pre-petition debts and claims can be offset and the act of making the deduction is subject to the automatic stay.  Recoupment, on the other hand, is a defense embedded within a debt and is both exempt from the automatic stay and its exercise can cross the petition date divide.  Naturally, then, if an offset can be recast as a recoupment, there are significant advantages to the creditor.  Over time, as more and more offsets are labeled recoupments, the distinction between the two doctrines has been seriously eroded.  The Ninth Circuit’s decision in In re Gardens Regional Hospital, 975 F.3d 926 (9th Cir. 2020), has finally restored the proper boundaries between recoupment and setoff.

By way of background, a brief glossary will be useful.  The Bankruptcy Code defines a “claim” broadly to include every right to payment, whether or not reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured.  A creditor is an entity that holds a claim against the debtor that arose prior to the commencement of the bankruptcy case.  A “debt,” on the other hand, is a liability on a claim.  For purposes of setoff, the Code treats an obligation owed by a creditor to the debtor as a debt, whereas the obligation owed by the debtor to the creditor is a claim.  Usually it will be advantageous for a creditor to reduce its debt by deducting the amount of its claim because a debt is payable in full to the estate, whereas a claim may receive only a negligible dividend from the estate.  As the Supreme Court succinctly stated, setoff allows entities that owe each other money to apply their mutual debts again each other, “thereby avoiding the absurdity of making A pay B when B owes A.”  Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18 (1995).

Setoff is derived from common law rules of pleading under which parties to litigation are permitted to assert opposing claims.  Recoupment, on the other hand, is an equitable doctrine that is intended to compute the “proper amount” of a particular claim.  Section 553 of the Bankruptcy Code ensconces the right of setoff in all bankruptcy cases, subject to three key limitations.  First, the offsetting obligations (the debt and the claim) must each have arisen before the bankruptcy petition is filed.  A creditor cannot acquire, post-petition, a claim for purposes of offset.  See Bankruptcy Code § 553(a)(2) (setoff prohibited to the extent that the claim against the debtor was transferred to the creditor owing a debt to the debtor “after the commencement of the case.”).

Second, each of the obligations must be mutual – that is, they must be held by the creditor and the debtor standing in the same bilateral right and capacity.  For example, if the creditor owes a debt wearing a “fiduciary” hat, yet holds a claim wearing a “vendor” hat, the required mutuality will be lacking.  For the same reason, a “triangular” setoff (A owes Debtor, Debtor owes B, A offsets against B), will also fail.  Similarly, each entity within a corporate family is treated separately for purposes of mutuality – if a corporate parent owes $10 to the debtor, but the debtor owes an affiliate or subsidiary of the parent $10, the parent may not satisfy the $10 debt by deduction against its affiliate’s claim.  (The agencies and branches of the U.S. government, however, are considered a “unitary” creditor.)  Private contracts can neither create mutuality (for purposes of Section 553), nor opt-out of the mutuality requirement.  In re Orexigen Therapeutics, 990 F.3d 748 (3^rd Cir. 2021).

Third, the exercise of the right of setoff is subject to the automatic stay.  In order to actually make a permanent deduction, the creditor must first seek relief from the stay.  The Supreme Court in Strumpf permitted a creditor to temporarily “freeze” countervailing obligations (i.e., preserve the status quo as of the petition date) without violating the stay until the outcome of a subsequent motion to lift the stay.  Such an administrative hold, pending further instructions from the court or the parties, does not result in the permanent settlement of accounts that is needed for a setoff to actually occur.

Recoupment, unlike setoff, does not involve the netting of independent obligations but rather the determination of the proper liability on a claim.  The competing obligations that give rise to recoupment must arise from the same transaction or occurrence.  In order to meet this requirement, courts typically assess whether there is a “logical relationship” between the obligations.  That test does not measure temporal proximity (i.e., did the claims arise contemporaneously), but whether they are logically connected.  If so, recoupment may be used to recover across the petition date divide and without any automatic stay perils.

Virtually every recoupment decision acknowledges that, as an equitable exception to the automatic stay, the doctrine must be “narrowly construed.”  Neither a single contract, nor the same parties, nor a similar subject matter, nor a shared legal framework necessarily satisfies the ‘same transaction test’ to permit recoupment.  In re University Medical Center, 973 F.2d 1065 (3rd Cir. 1992).  Nor, as Gardens has now established, will a statutory right of deduction of “any” debts or claims between two parties meet the same transaction test. 

As might be apparent from the foregoing, applying these principles to varying factual patterns can lead to rather disparate results.  Over time, the line separating setoff from recoupment has blurred.  Now, Gardens teaches that one cannot “cross the payment streams” (to borrow a classic phrase from Ghostbusters).  The payment streams must arise from the “very same acts” to meet the logical relationship test for recoupment.  The mere fact that dueling payment streams can be cabined within a single contract, a single statute or even a single commercial relationship, is insufficient to qualify for recoupment.

The facts in Gardens were not complicated.  The debtor operated Gardens Regional Hospital, a private, not-for-profit acute care hospital located in Hawaiian Gardens, California.  The hospital participated in the State of California’s Medicaid program, known as Medi-Cal.  Under the Medi-Cal relationship, the hospital was paid for medical services under a fee-for-service (“FFS”) model.  Under that model, the State of California would retrospectively reimburse the hospital for the cost of treatment (either at negotiated rates, or pursuant to a regulatory scheme) provided by the hospital to Medi-Cal patients.  (By contrast, under a managed care model, the State prospectively remits a fixed capitation payment to a hospital provider regardless of the ensuing need for, or actual cost of, care given to patients.) 

As is common under the FFS model, from time to time in the normal course of business, the State might occasionally make an overpayment to a hospital provider.  Overpayments can be due to patient ineligibility, inadvertent double-payments or inaccurate coding, among other reasons.  Under the Medi-Cal system, the State is entitled to deduct overpayments mistakenly paid to the hospital from future FFS reimbursements due to a hospital.  These overpayment adjustments, based on a constant account balancing process (i.e., recurring payments due to and from a hospital for the provision of medical services), fit within the classic parameters of recoupment and, typically, continue unabated and unchallenged in most bankruptcy cases.

Separately, the hospital was also entitled to receive a supplemental Medi-Cal payment based on the State’s assessment of a tax (specifically, a hospital quality assurance fee, or “QAF”) on non-public acute care hospitals in the State.  The QAF revenues were deposited in a segregated fund and later redistributed to a variety of beneficiaries (such as public hospitals, or health coverage for low-income children), including some of the same private hospitals that had contributed to the fund by paying the QAF assessments.  Under the QAF program, the State was entitled to deduct any unpaid QAF assessments against any State payments owed to the hospital, whether or not derived from the QAF program.

At the time Gardens Regional Hospital filed its Chapter 11 case, it owed the State about $700,000 in missed QAF assessments.  The State used this claim to reduce its Medi-Cal debts owed to the hospital, including the supplemental Medi-Cal payments the hospital was entitled to receive under the QAF program and the FFS reimbursements that it had earned.  The hospital later filed a motion to compel payment of the withheld amounts because the State had violated the automatic stay by making an impermissible setoff across the petition date divide.  The State countered that its deductions were recoupment and thereby exempt from the automatic stay. 

At the outset, the Gardens court recognized that properly delimiting the border between setoff and recoupment would have important consequences in bankruptcy cases.  As noted, recoupment is neither subject to the automatic stay nor restricted to pre-petition debts and claims (i.e., it may be deployed across the petition date).  A setoff typically arises from separate and distinct transactions.  Recoupment, however, must arise from the same transaction or occurrence.  A setoff entails the net adjustment of independent obligations.  On the other hand, recoupment is a right to reduce the common nucleus of a single obligation.

The traditional test for recoupment asks whether the countervailing obligations enjoy a “logical relationship.”  In the Ninth Circuit, temporal immediacy has neither been required nor dispositive to qualify for recoupment.  The Ninth Circuit, however, has also rejected, as overly restrictive, the “single integrated transaction” test adopted in the Third Circuit.  But, the Gardens court cautioned that the test should not be applied “so loosely that multiple occurrences in any continuous commercial relationship would constitute one transaction.”  Indeed, to stretch the doctrine too far would impair a fundamental policy of bankruptcy law to promote equality of treatment among creditors.

The Gardens court dispatched the notion that a contract alone could provide the necessary linkage to permit the reduction of a post-petition debt on account of a pre-petition claim.  That justification was rejected by the court in Orexigen in the setoff context and, now, by Gardens in the recoupment context.  As the Ninth Circuit warned, by that logic, virtually any obligations referenced under a contractual umbrella could be recoupable – the exception (recoupment) would thus swallow the rule (Section 553).  Similarly, a statutory right of deduction of “any” debts or claims is also insufficient, on its own, to create a right of recoupment. 

So, what is the dividing line?  According to the Gardens court, the crucial question is whether the two obligations at issue arise “from the very same acts.”  Coupled with other factors (such as a contractual relationship), this can create the “intertwined” legal and factual connections to permit recoupment.  Applying that standard, the court had little difficulty concluding that the State’s claim for unpaid QAF assessments was logically related to the State’s debt for supplemental Medi-Cal payments.  The deposit of QAF receipts into the QAF fund for distribution to QAF participants created a direct factual and legal “linkage between these two streams of money.”  Indeed, the circularity of the QAF program was unique, even though the amounts of the QAF assessment and the Medi-Cal supplemental payment were each independently calculated under separate, complex formulas.  The QAF assessments were “paid by hospitals into the segregated funds and the supplemental payments [were] made to hospitals from those same funds.” (emphasis in original).

On the other hand, the deduction of the unpaid QAF assessments against the FFS reimbursements was not a permissible recoupment.  The FFS payments were not drawn from the same fund as the supplemental Medi-Cal payments, nor was there any “unique linkage” between the QAF program and the Med-Cal system – the court noted that the “fee-for-service system was an established part of California’s Medi-Cal plan long before the QAF program, with its segregated funding, was established.”  Most importantly, however, the countervailing obligations did not arise from the “same acts.”  The QAF program was a self-contained, specialized and continuous funding vehicle with a distinct objective (to obtain greater federal Medicaid matching funds).  The Medi-Cal system, by contrast, was based on differing medical services provided to individual patients from time to time pursuant to an autonomous rate structure. 

According to the court, neither a statutory (i.e., the State’s right to offset any amount due to a State agency from any person or entity) nor a contractual underpinning (i.e., the hospital’s form provider agreement with the State) was enough to overcome the Bankruptcy Code.  The court explained: “were we to accept California’s contention that its statutory assertion of such a sweeping right of setoff alone establishes a sufficient logical relationship to warrant recoupment, we would effectively obliterate the distinction between recoupment and setoff and thereby exempt California entirely from the Bankruptcy Code’s restrictions on setoffs.”  The court stressed that a factual link was critical – the competing obligations must arise from the same underlying actions.

One aspect of the Gardens decision that may prove helpful to debtors is the treatment of subrogation claims.  As we know from Section 553(a)(2) of the Bankruptcy Code, the post-petition act of acquiring the pre-petition claim of another creditor, whether by transfer, subrogation or otherwise, does not permit the use of that claim for purposes of setoff.  This result should also, practically by definition, establish the absence of the factual link needed for recoupment.  After all, if the creditor/subrogee hadn’t voluntarily inserted itself into the debtor-creditor relationship (the relationship between the debtor and the creditor/subrogor) there would be no factual connection at all between the debt and the new claim that the creditor might seek to recoup.

The Gardens court’s refusal to further “expand the concept of recoupment” has reinforced the narrow strictures of recoupment.  To supply the necessary logical relationship for recoupment, a creditor must demonstrate both a legal and factual connection between the competing obligations.  Otherwise, the ability to recoup would encroach upon and undermine the core purposes of the Bankruptcy Code’s limitations on setoff.  At last, bankruptcy practitioners have a coherent and rigorous basis to disentangle setoff from recoupment.

Introduction

Secured creditors in bankruptcy often face the prospect of recovering less than the full value of their claims against the debtor.  This frequently arises when the creditor’s collateral is worth less than the amount of its claim, an “undersecured claim” in bankruptcy parlance.  Undersecured claims are bifurcated into two separate claims: a secured claim for the value of the collateral, and an unsecured claim for the remainder of the creditor’s claim.[1]  Secured claims are typically paid in full, while creditors often receive little or nothing on unsecured claims. Because the value of a secured creditor’s collateral may fluctuate in response to market conditions—say, for example, a systemic housing market crash or a pandemic-induced recession—it can be left with an artificially low secured claim in some cases.  Coupled with the likelihood of receiving little to nothing on the unsecured portion of its claim, these secured creditors are left with a bitter pill to swallow. However, in chapter 11 cases, a secured creditor has the option of avoiding the bifurcation of its claim entirely. That is, the secured creditor can elect to have the entire amount of its allowed claim treated as secured, even if the amount of the claim far exceeds the value of the collateral.[2]

This election, found in § 1111(b) of the U.S. Bankruptcy Code,[3] can be a boon to an undersecured creditor in some circumstances. However, it may not always be the best course of action. Understanding the requirements, effects, and limitations of § 1111(b) is key to using it strategically to maximize the recovery for an undersecured creditor.

Requirements

There are several threshold requirements for a secured creditor to be eligible to make the § 1111(b) election, most of which are set forth in the statute itself. First, if the debtor sells or intends the sell the creditor’s collateral through the bankruptcy case or under the plan, the election is not available (unless the claim arises from a non-recourse obligation, where the creditor may look only to the collateral for repayment).[4]  Second, the creditor’s secured claim in the collateral cannot be of “inconsequential value.”[5]  This requirement has generated conflicting caselaw regarding when a secured creditor may make the § 1111(b) election.  Some courts will compare the value of the collateral to the amount of the creditor’s total claim, and deem the collateral of “inconsequential value” if it represents a small proportion of the creditor’s total claim, typically less than 10%.[6]  Other courts have held that the correct approach is to compare the value of the creditor’s secured claim to the value of the collateral.[7]  This approach is relevant for a secured creditor holding a junior lien, but would probably never bar a secured creditor with a first priority lien from making the election.  Still other courts have held, in the context of chapter 11 cases proceeding under the recently-enacted subchapter V, that the court should take the purpose and policy behind the statute into account in conducting its analysis.[8]  Finally, a creditor must generally make the election prior to the conclusion of the hearing on the debtor’s disclosure statement.[9]  Thus, in subchapter V cases, where no disclosure statement is required,[10] creditors should take care to ensure that a deadline for making the election has been set by the court, and request the imposition of such a deadline if it has not been set. 

Effects

Making the § 1111(b) election has three important effects on the creditor’s claim.  First, it makes the entire claim a secured claim, which means the creditor will have no unsecured claim in the case.  Second, it entitles the creditor to retain its lien on its collateral, in the full amount of its claim, until paid in full.  This can be particularly valuable where the creditor believes there is a high likelihood of the debtor defaulting under the plan.  Third, it entitles the creditor to specific plan treatment.  Unless the creditor accepts less favorable treatment, the plan must provide for payments to the creditor with a present value (as of the effective date of the plan) equal to the amount the creditor’s secured claim would have been had it not made the § 1111(b) election.[11]  Further, the plan must propose to pay the entire claim in full, over time.[12]  For example, if a creditor has a claim for $100,000 secured by collateral worth only $40,000, and it makes the § 1111(b) election, the plan must propose to pay the creditor payments with a present value (e.g. with interest to compensate for the time-value of money if paid over time) of $40,000, and the total payments the creditor receives under the plan must total at least $100,000.

Limitations

The first drawback to the § 1111(b) election is that there is little restriction on how the debtor pays the entire claim over time. Using the example above, the debtor could propose to pay $40,000 in cash on the effective date, and then pay the remaining $60,000 with no interest over 20 or 30 years.  If the collateral is real property, many courts would likely conclude that such treatment is fair and equitable.[13]  Another major limitation on the election is the elimination of the electing creditor’s unsecured deficiency claim.  If the debtor’s plan proposes a substantial payout to creditors holding general unsecured claims, it may be in the creditor’s best pecuniary interest to forego the election in favor of realizing a recovery on its deficiency claim.  Similarly, in cases where the creditor making the election is the largest creditor in the case and is projected to have a substantial deficiency claim, it may be preferable to forego the election in order to be in a position to carry the vote of the general unsecured class.  This may put the creditor in a position to block confirmation and leverage more favorable plan treatment from the debtor. 

Conclusion

The § 1111(b) election provides a useful tool for a secured creditor in chapter 11 cases.  It can provide some insurance for creditors who believe that the debtor (or market conditions) has under-valued their collateral, or who believe that the debtor is unlikely to fully perform its obligations under the plan.  However, in some circumstances it can provide an undersecured creditor with a smaller recovery than opting to have a bifurcated claim.  In order to maximize its recovery, an undersecured creditor must consider the nature of its collateral, the likelihood of the debtor performing under the plan, and the alternative stream of cashflows which may be realized by foregoing the election and retaining an unsecured claim.

[1] 11 U.S.C. § 506(a).

[2] 11 U.S.C. § 1111(b)(2).

[3] 11 U.S.C. § 101 et seq.

[4] 11 U.S.C. § 1111(b)(1)(B)(ii).

[5] 11 U.S.C. § 1111(b)(1)(B)(i).

[6] See, e.g., In re Wandler, 77 B.R. 728 (Bankr. D.N.D. 1987).

[7] See McGarey v. MidFirst Bank (In re McGarey), 529 B.R. 277, 284 (D. Ariz. 2015) (“Thus, in order to determine ‘inconsequential value’, Section 1111(b) directs that we compare the lien value to the asset value. Nothing in Section 1111(b) suggests that it would be appropriate to compare the lien value to the total value of the creditor’s claim.”).

[8] See In re Body Transit, Inc., 619 B.R. 816, 836 (Bankr. E.D. Pa. 2020) (“The key point here is that the ‘inconsequential value’ determination is not a bean counting exercise; the determination cannot be based solely on a mechanical, numerical calculation. Some consideration must be given to the policies underlying both the right to make the § 1111(b) election and the exception to that statutory right.”).

[9] Fed. R. Bankr. P. 3014.

[10] See 11 U.S.C. §§ 1125 and 1181(b).

[11] 11 U.S.C. § 1129(a)(7)(B).

[12] 11 U.S.C. § 1129(b)(2)(A)(i)(II).

[13] See, e.g., In re Velazquez, No. 18-02209-EAG11, 2020 Bankr. LEXIS 1387, 2020 WL 4726199 (Bankr. D.P.R. May 27, 2020) (confirming plan proposing to pay secured claim subject to § 1111(b) over 20 years when the collateral was real property).

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Phillip Buffington Jr.

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§1.1 Introduction

This chapter summarizes significant legislative and case law developments in 2020 concerning the indemnification of directors, officers, employees and agents by the corporations or other entities they serve, as well as the rights of such persons to the advancement of litigation expenses before final resolution of the litigation.[1] This chapter also refers to legislative developments under Delaware law and the Model Business Corporation Act.

§1.2 Indemnification and Advancement – 8 Del. C. § 145

The Delaware General Corporation Law (“DGCL”),[2] codified at 8 Del. C. § 145, authorizes (and at times requires) a corporation to indemnify its directors, officers, employees, and agents for certain claims brought against them. Section 145 also allows a corporation to advance funds to those persons for expenses incurred while defending such claims. Specifically, Sections 145(a) and (b) broadly authorize a Delaware corporation to indemnify its current and former corporate officials for expenses incurred in legal proceedings to which a person is a party “by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise.” Upon successfully defending against a legal proceeding brought “by reason of the fact” that the person is or was a director or officer of the corporation, § 145(c) requires the corporation to indemnify that person for expenses (including attorneys’ fees) reasonably incurred in connection with the defense. “For indemnification with respect to any act or omission occurring after December 31, 2020, references to ‘officer’ for purposes of” § 145(c) “shall mean only a person who at the time of such act or omission is deemed to have consented to service by the delivery of process to the registered agent of the corporation.”  With respect to persons “not a present or former director or officer of the corporation,” the corporation “may indemnify” them “against expenses (including attorneys’ fees) actually and reasonably incurred . . . to the extent he or she has been successful on the merits . . . .”

Pursuant to § 145(e) the corporation also may advance “expenses (including attorneys’ fees)” incurred by a corporate official to defend against an investigation or lawsuit prior to final disposition.

The Model Business Corporation Act (MBCA) contains similar provisions, as do alternative entity statutes of Delaware and many other jurisdictions. For example, 6 Del. C. § 18-108 provides that “[s]ubject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.” Similarly, Delaware’s Revised Uniform Limited Partnership Act states “[s]ubject to such standards and restrictions, if any, as are set forth in its partnership agreement, a limited partnership may, and shall have the power to indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever.” 6 Del. C. § 17-108. Thus, limited liability companies and partnerships have a “wider freedom of contract to craft their own indemnification” and advancement schemes “than is available to corporations under § 145 of the DGCL.” Weil v. Vereit Operating P’ship, L.P., C.A. No. 2017-0613-JTL, 2018 Del. Ch. LEXIS 48, *9-10 (Del. Ch. Feb. 13, 2018) (unpublished). As a result, prospective and current partners, members, and managers of alternative entities should pay close attention to advancement and indemnification rights granted by operating and/or partnership agreements and react accordingly.

Not only are officers and directors often entitled to advancement and indemnification under the codified provisions of Delaware law and the MBCA, but many corporations provide their officers with additional rights to advancement and indemnification. These provisions are often set forth in company charters and bylaws or included in agreements between companies and their officers, directors, and employees. These provisions can, and often do, make indemnification and advancement mandatory under circumstances specifically stated in the agreements.

§1.2.1 Legislative Developments

The Delaware General Assembly made several revisions to 8 Del. C. § 145 during 2020, effective July 16, 2020. Providing greater clarity to who qualifies as an “officer” entitled to mandatory indemnification, the General Assembly amended § 145(c) as follows (amendments in italics):

(c)

(1) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. For indemnification with respect to any act or omission occurring after December 31, 2020, references to “officer” for purposes of this paragraphs (c)(1) and (2) of this section shall mean only a person who at the time of such act or omission is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to § 3114(b) of Title 10 (for purposes of this sentence only, treating residents of this State as if they were nonresidents to apply § 3114(b) of Title 10 to this sentence).

(2) The corporation may indemnify any other person who is not a present or former director or officer of the corporation against expenses (including attorneys’ fees) actually and reasonably incurred by such person to the extent he or she has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein.

Additionally, the General Assembly made a small revision to § 145(f). Although § 145(f) previously stated that the right to indemnification could not be eliminated after the fact by an amendment to a certificate of incorporation or bylaw, the revised § 145(f) went further to state that the right to indemnification could not be eliminated after an occurrence by repeal or elimination of the certificate of incorporation or bylaw.

The American Bar Association did not make any changes to the indemnification and advancement provisions of the MBCA during 2020.

§1.2.2 Case Law Developments

§1.2.2.1 Brick v. Retrofit Source, LLC[3]

Brick v. Retrofit Source, LLC presented an interesting question regarding advancement of legal fees from two related limited liability companies. The requesting party, Nathan Brick, had served as the Chief Operating Officer of The Retro Source, LLC (“Opco”), which was wholly owned by TRS Holdco, LLC (“Holdco”). In addition to serving as COO of Opco, Brick also served as a member of the board of TRS Holdco, LLC (“Holdco”). Both companies were Delaware LLCs (the “Companies”). Holdco owned membership interests in Opco and managed Opco. The question presented was ultimately whether Brick was entitled to advancement and indemnification as a member of the Holdco board when his challenged conduct was on behalf of Opco.

The dispute between Brick and the Companies arose after Opco’s Vice President of Finance discovered that Opco had been underpaying Customs duties for years pursuant to a “double-invoicing” scheme. Although certain parties, including Brick, contested who was responsible for the scheme, there was no dispute that Brick played some role in it. Opco voluntarily disclosed to U.S. Customs that Opco suspected it had been underpaying Customs duties, and Opco engaged counsel to conduct an investigation. Counsel conducted an audit of Opco’s customs policies and issued a report to U.S. Customs and Border Protection. According to Brick, this exposed him and others to civil and criminal liability.

During the course of the dispute, the Holdco Board ultimately decided to terminate Brick’s employment, with one Board member claiming that Brick had mislead them. Brick refused to sign a separation agreement, and instead resigned all of his positions with Holdco and Opco. He then retained counsel to represent him against claims made by Opco and in proceedings involving U.S. Customs and Board Protection. When Holdco and Opco rejected Brick’s claim to advancement and indemnification, Brick filed suit.

At the outset, the court recognized that “the stated policy of the Delaware LLC Act is ‘to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.’  ‘When interpreting advancement and indemnification provisions in a limited liability company agreement, a Delaware court will follow ordinary contract interpretation principles.’”  Thus, where clear and unambiguous, courts honor the intent of the parties. Nevertheless, “the LLC Act is ‘less paternalistic’ than the corporate code in that it ‘defers completely to the contracting parties to create and limit rights and obligations with respect to indemnification and advancement.’”

Based on Delaware law, the court analyzed the Holdco LLC Agreement. Based on the language of the agreement, “indemnification for officers [was] discretionary and indemnification for Holdco Board members [was] mandatory.”  The Holdco Board had previously decided to deny Brick advancement in his capacity as COO of Opco, that the court determined Brick was not a covered person under the Agreement. Additionally, although Brick was a member of the Holdco Board, the Companies had submitted detailed evidence demonstrating that Brick’s relevant conduct occurred in connection with his role as COO of Opco, not in his capacity as a Board member. Brick failed to dispute these material facts on summary judgment, and the court concluded Brick’s claim for advancement was solely related to his capacity as COO of Opco. Consequently, the court rejected Brick’s claim for advancement as a matter of law.

§1.2.2.2 Westchester Fire Ins. Co. v. Schorsch[4]

In Westchester Fire Ins. Co., the Supreme Court of New York, Appellate Division, answered a question of first impression: whether a D&O liability policy’s bankruptcy exception, which allows claims asserted by the bankruptcy trustee or “comparable authority,” applies to claims raised by a Creditor Trust, as a post-confirmation litigation trust, to restore D&O coverage removed by the policy’s insured vs. insured exclusion. In concluding that the bankruptcy exception does apply, the court interpreted the broad term “comparable authority,” “to encompass a Creditor Trust that functions as a post-confirmation litigation trust, given that such a Creditor Trust is an authority comparable to a ‘bankruptcy trustee’ or other bankruptcy-related or ‘comparable authority’ listed in the bankruptcy exception.”

This case arose out of RCS Capital Corporation’s (“RCAP”) chapter 11 bankruptcy proceedings, which created a Creditor Trust. Pursuant to the bankruptcy court’s order confirming the bankruptcy plan, the Creditor Trust could “enforce, sue on, settle, or compromise … all Claims, rights, Causes of Action, suits, and proceedings … against any Person without the approval of the Bankruptcy Court [and] the Reorganized Debtors.” In March of 2017, the Creditor Trust brought suit against the former directors and officers of RCAP (“defendant insureds”), alleging that they had breached their fiduciary duties to RCAP (the “Creditor Trust Action”), which ultimately caused defendants insureds to seek coverage and indemnification under RCAP’s D&O liability insurance policy. The policy included an insured vs. insured exclusion, which eliminated coverage for “any Claim made against an Insured Person … by, on behalf of, or at the direction of the Company or Insured Person.” The policy also included a bankruptcy exception to the insured vs. insured exclusion, which restored coverage for claims “brough by the Bankruptcy Trustee or Examiner of the Company or any assignee of such Trustee or Examiner, or any Receiver, Conservator, Rehabilitator, or Liquidator or comparable authority of the Company.”

Westchester Fire Insurance Co. (“Westchester”), which provided RCAP with an excess liability D&O policy, initiated the instant case, seeking a declaratory judgment, arguing that because the Creditor Trust Action was brought on behalf of RCAP against its own directors and officers, Westchester had no coverage obligations pursuant to the policy’s insured vs. insured exclusion, or, alternatively, other policy exclusions. Defendant insureds answered and filed three counterclaims (1) for breach of contract with respect to excess insurers’ coverage obligations, (2) alleging bad faith breach, and (3) seeking a declaration of coverage, defense, and attorney’s fees, all of which Westchester moved to dismiss. The trial court denied Westchester’s motion and granted partial summary judgment to defendant insureds on their counterclaim for breach of contract regarding defense, liability coverage, attorney’s fees, and cost of defense.

On appeal, the court held that the language “the Bankruptcy Trustee or … comparable authority” in the bankruptcy exception restored coverage that was otherwise barred by the insured vs. insured exclusion. The court noted that the plain language of the policy did not indicate an intent to bar coverage for D&O claims brought by the Creditor Trust, reasoning that

[t]o begin, the policy included the crucial language brought by or on behalf of in the insured vs. insured exclusion and the bankruptcy exception. Thus, the exclusion and exception both focused on the identity of the party asserting the claim, not on the nature of the claim being brought. Moreover, the policy included the debtor corporation, or DIP, as an insured under the insured vs. insured exclusion, but did not to include the DIP under the bankruptcy trustee and comparable authorities exception. Thus, when read together, the bankruptcy exception restores coverage for bankruptcy-related constituents, such as the bankruptcy trustees and comparable authorities, and the insured vs. insured exclusion precludes the possibility of a lawsuit by a company as DIP, or by individuals acting as proxies for the board or the company.

Moreover, the court explained that concluding that the bankruptcy exception did not apply to the Creditor Trust would ignore the rationale and purpose for post-confirmation litigation trusts, which allow the reorganized debtor’s management to focus on running the business post-bankruptcy and another entity to pursue litigation. Especially in these types of situations, where the litigation often involves claims against directors and officers which management may be reluctant to pursue.

Although the court determined that the insured vs. insured exclusion did not bar coverage in the Creditor Trust Action, it also determined that factual disputes remained regarding the application of Westchester’s other defenses and therefore partial declaratory judgment to defendant insureds’ claims for breach of contract on the coverage obligations and declaration of coverage should not have been granted by the trial court. Moreover, the trial court should not have declared that the excess insurers were obligated to pay for all indemnity costs or award defendants insureds attorney’s fees incurred in defending the instant action. The court, however, did determine that the defendant insureds were entitled to the advancement of defense costs in defending the Creditor Trust Action, noting that

the policies issued by the excess insurers provide a broad right to the provision of defense costs subject to repayment in the event and to the extent that the loss “is not covered under this Policy.” The policies further provide that the carrier will advance defense costs for any claim “before the disposition.” This Court’s finding that the Creditor Trust action “may reveal” that defendants insureds’ claim is not covered necessarily means that there is a possibility of coverage under the policies for the advancement of defense costs for defendants insureds.

Therefore, the court modified the trial court’s order to deny defendant insureds’ motion for partial summary judgment on their first counterclaim, to vacate the declaration that excess insurers are obligated to pay for indemnity costs incurred in the Creditor Trust Action, and to vacate the award of attorney’s fees incurred by defendant insureds in the instant action, but affirmed the trial court’s Order in all other respects.

§1.2.2.3 Dolan as Trustee of Charles B. Dolan Revocable Trust v. DiMare[5]

This case arose out of a dispute concerning the business affairs of multiple closely-held, family-run corporations. Dolan brought derivative claims on behalf of the parent company DiMare, Inc., and two of its subsidiaries DiMare Brothers, Inc. and AD Share Capital, Inc. against Paul DiMare. Paul managed the two subsidiaries and was the president and director of all three corporations. Paul contended that Dolan could not properly assert derivative claims. The trial court, however, determined that Dolan could assert the derivative claims, and in doing so, addressed the requirements for shareholders to bring derivative claims under Delaware law.

First, the court noted that Dolan had standing to bring derivative claims as trustee of a trust that owned shares of DiMare, Inc., a Delaware corporation, and that under Delaware law, “a shareholder of a parent corporation may bring suit derivatively to enforce the claim of a wholly owned corporate subsidiary, where the subsidiary and its controller parent wrongfully refuse to enforce the subsidiary’s claim directly.” Second, the court explained that a corporate shareholder may not bring a derivative action unless he/she made a demand on the corporation to institute such an action or can demonstrate that such a demand would be futile. To demonstrate futility, the allegations must “create a reasonable doubt that … the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” The court found that Dolan had met this requirement by alleging that half of the board of directors consisted of Paul, his two sons, and his brother and that Paul caused the business to pay these directors substantial salaries over a long period of time. Last, the court stated that “[a] shareholder may not commence or maintain a derivative proceeding unless the shareholder … fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.”

In addition to his derivative claims, Dolan sought to bar any use of the assets of DiMare Brothers, Inc. or AD Share Capital, Inc. for the indemnification or advancement of legal expenses incurred by Paul in defending the derivative claims. The court concluded that this claim failed as a matter of law, recognizing that DiMare, Inc.’s bylaws provide for the indemnification and advancement of legal expenses incurred by its directors and officers. Moreover, DiMare Brothers, Inc. is a wholly-owned subsidiary of DiMare, Inc., and in turn, AD Share Capital, Inc., is a wholly-owned subsidiary of DiMare Brothers, Inc. Therefore, the parent corporation, DiMare, Inc., is “entitled to use the resources of its direct and indirect wholly-owned subsidiaries to carry out any lawful purpose of the parent[.]”—i.e., indemnification and advancement.

§1.2.2.4 Ironwood Capital Partners, LLC et al. v. Jones[6]

This case illustrates the impact that an automatic stay in a bankruptcy proceeding can have on a director’s or officer’s indemnification rights. In Ironwood, Timbervest, LLC and its four officers, Jones, Shapiro, Boden, and Zell entered into a settlement agreement with AT&T to resolve various claims of fraud and misuse of assets pursuant to ERISA. Thereafter, Jones sought, inter alia, a declaratory judgment stating that he was entitled to indemnification for the portion of the settlement for which he might be liable. Timbervest, the three other officers, and other related corporations counterclaimed, seeking to have Jones pay his pro rata share of the settlement. The trial court granted Jones’s motion for declaratory judgment regarding indemnification and dismissed most of the counterclaims. While the appeal was pending, Shapiro petitioned for chapter 7 bankruptcy.

Because of Shapiro’s bankruptcy petition, the court found that Jones’s claim for declaratory relief against all defendants seeking indemnification constituted a judicial action against the debtor, which was subject to the automatic stay. The court explained that the “filing of a bankruptcy petition automatically operates as a stay of ‘the commencement or continuation … of a judicial … action or proceeding against the debtor.” Moreover, “[a]ny orders or judgments entered in violation of an automatic bankruptcy stay are void; they are deemed without effect and are rendered an absolute nullity.” The court also found that while automatic stay provisions generally do not extend to third parties, “any action for declaratory relief against Shapiro is inextricably intertwined with action for declaratory relief against the other co-defendants such that we cannot resolve any of the numerations of error regarding the declaratory judgment with the automatic stay in place.” Therefore, the court remanded the case with instructions for the trial court to enter a stay pending the resolution of Shapiro’s bankruptcy proceedings. The court noted, however, that once Shapiro’s bankruptcy proceedings were resolved or the bankruptcy court lifted the automatic stay, the defendants could reinstitute the appeal.

§1.2.2.5 LZ v. Cardiovascular Research[7]

In LZ v. Cardiovascular Research, the California Court of Appeal illustrated the importance of specificity when drafting director and officer indemnification language, in order to prevent the drafting of a clause that provides indemnification well beyond the intended scope. In LZ, employees of Cardiovascular Research Foundation (“CRF”) were staying at a Marriot Hotel while attending a nearby conference. While cleaning the room of a CRF executive, housekeeper L.Z. was sexually assaulted and battered by another CRF employee who happened to walk by the room. L.Z. brought a breach of contract action against CRF, alleging that CRF was liable for the harm caused by its employee pursuant to an indemnification clause contained in a contract between CRF and the Marriot. The indemnification clause at issue stated:

Each party to this Agreement shall, to the extent not covered by the indemnified party’s insurance, indemnify, defend, and hold harmless the other party and its officers, directors, agents, employees, and owners from and against any and all demands, claims, damages to persons or property, losses, and liabilities, including reasonable attorneys’ fees (collectively, ‘Claims’), arising solely out of or solely caused by the indemnifying party’s negligence or willful misconduct in connection with the provisions and use of [the Marriott] as contemplated by [the CRF-Marriot Contract].

CRF moved for summary judgment, arguing that the indemnification clause did not cover an employee’s conduct that fell outside the scope of employment. The trial court granted the motion.

On appeal, the court affirmed the judgment of the trial court, concluding that because CRF and the Marriott intended the word “party” to mean CRF or the Marriott, the express language of the indemnification clause limited coverage to the negligence or willful misconduct attributable to only CRF or the Marriott. Therefore, the court noted that throughout the contract and specifically in the indemnification clause, the use of the word “party” referred only to CRF and the Marriot, not their employees. “In fact, CRF and the Marriott’s use of the phrase ‘party and its officers, directors, agents, employees, and owners’ in one part of the indemnification clause supports a determination that they intended to distinguish between ‘party’ on the one hand and ‘officers, directors, agents, employees, and owners’ on the other.” Therefore, CRF was not liable for its employee’s misconduct, which fell outside the scope of his employment.

§1.2.2.6 Xtreme Limo, LLC v. Antill[8]

The takeaway from the Xxtreme Limo decision is that, at least under Ohio law, a corporation’s By-Laws may provide discretion for the Board to advance litigation expenses to employees who are not directors or officers, but unless that discretion is explicit, an employee has no advancement rights. In Xtreme Limo, Antill was an employee of US Tank Alliance, Inc., managing one of its affiliates, Xtreme Limo, LLC. At some point, Antill left US Tank and began working for an alleged competitor of Xtreme Limo. A month later, US Tank and Xtreme Limo sued Antill for breach of fiduciary duty, breach of contract, unjust enrichment, tortious interference with business relationships, conversion, and misappropriation of trade secrets. Antill moved to require US Tank to advance him litigation expenses, pursuant to his employer’s By-Laws. The trial court denied that motion.

On interlocutory appeal, Antill argued not that he was entitled to the mandatory advancement of litigation expenses as a director or officer of US Tank under Ohio law, but, rather, that he was entitled to advancement contractually, based on US Tank’s By-Laws. The court affirmed the trial court’s decision, concluding that neither the law nor US Tank’s By-Laws required the advancement of litigation expenses to Antill. Section 5.04 of US Tank’s By-Laws stated that US Tank shall make the advancement of litigation expenses “incurred by a director or officer in defending a lawsuit upon receipt of an undertaking by … the director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in Article V.” The court explained that the “[By-Law] entitlement to advance payments therefore is limited to directors or officers, as Section 5.04 further underscores by providing that ‘other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.’” Although Antill’s title was President of Xtreme Limo, the court found that he was not a director or officer of US Tank and, therefore, was not entitled to the advancement of litigation expenses under US Tank’s By-Laws.

Xtreme Limo demonstrates that a corporation’s By-Laws may provide discretion for the Board to advance litigation expenses to employees, even if the employee is not an officer or director. It is important when drafting By-Laws to use specific language outlining the boundaries for the advancement of litigation expenses and indemnification, such that only intended categories of corporate membership are included within that scope.

§1.2.2.7 VBenx Corporation v. Finnegan[9]

In VBenx Corp. v. Finnegan, the Massachusetts Superior Court illustrated that an officer or director who was advanced litigation expenses pursuant to the corporation’s By-Laws may have to repay part of that advancement if he or she is only partially successful in defending the claims asserted against him or her.

VBenx arose after myriad litigation, including two trials and two appeals. As a result of that litigation, the jury returned verdicts in favor of VBenx on its claims against Finnegan for breach of fiduciary duty, aiding and assisting that breach, and malicious prosecution. Finnegan did, however, successfully defend himself against a conspiracy claim and other counterclaims related to him and other defendants. In VBenx, VBenx moved for the repayment of funds, in the amount of $618,044 plus interest, that it had advanced to Finnegan for the defense of certain counterclaims asserted against him, based on his position as a former director and officer of VBenx. VBenx’s motion was opposed by Finnegan, who argued that he was successful in the dismissal of the conspiracy claim and the exclusion of VBenx’s damages expert’s $21 million lost profit analysis.

In reviewing VBenx’s motion, the court noted that under Delaware law:

[F]unds are advanced if a corporate official is called upon to defend himself in a civil or criminal proceeding in which the claims asserted against him are “ ‘by reason of the fact’ that [he] was a corporate officer, without regard to [his] motivation for engaging in that conduct.” Tafeen, 888 A.2d at 214. Whether the officer/director can, however, retain advanced funds, as relevant to this case, depends upon whether he was “successful on the merits or otherwise in defense of any … suit, or in defense of any claim, issue or matter therein.” 8 Del. Corp. § 145(c). In a case in which a defense is partially, but not wholly, successful: “the burden is on the [former officer] to submit a good faith estimate of expenses incurred relating to the indemnifiable claim.” May v. Bigmar, Inc., 838 A.2d 285, 290 (Del. Ch. 2003). It is therefore necessary to separate the “winning issues from the losing ones.” Id. at 291. Whether a corporate officer may have won “a battle” in the course of a litigation, but “lost the war,” i.e., was generally unsuccessful in the litigation, is an important consideration in apportioning fees. Id.

The court in VBenx also noted that the successful defense of any claims that resulted from Finnegan’s conduct occurring after he was no longer an officer or director would be uncovered claims, and would not included in offsetting the advancement that he was ordered to repay. Ultimately, the court held that VBenx was entitled to the repayment of advancement funds in the amount of $583,044.22, plus interest, which was offset by Finnegan’s successful defense of three counterclaims. The court determined that Finnegan, however, was not entitled to an offset for the defense of the conspiracy claim nor the exclusion of the expert witness’s lost-profit analysis, because both of those claims pertained to Finnegan’s conduct that occurred after he was no longer an officer or director for VBenx.

In finding Finnegan liable for the repayment of the advancement amounts, the court in VBenx explained that pursuant to VBenx’s By-Laws, Finnegan executed an “Undertaking of Repay Advanced Funds,” if it was determined that he was not entitled to indemnification. The court further explained:

[I]f the prosecution of the plaintiff in the underlying proceeding established that the indemnitee acted in bad faith, particularly through a showing that the indemnitee knew that his actions were damaging to the company or that his conduct was unlawful, “that would be conclusive evidence that the [indemnitee] is not entitled to indemnification.”

The court found that Finnegan had a non-indemnifiable state of mind based on the jury’s finding that he breached his fiduciary duty to VBenx and that he attempted to gain control of VBenx from its majority shareholders while he was still chairman of the company.

§1.2.2.8 Clarkwestern Dietrich Building Systems, LLC v. Certified Steel Stud Association, Inc.[10]

This Ohio Court of Appeals decision addresses the priority of a company’s duty to indemnify directors and/or officers over that of general creditors, after a lawsuit settlement.

In Clarkwestern Dietrich Building Systems, LLC v. Certified Steel Stud Ass’n, Inc., Clarkwestern Dietrich Building Systems (“ClarkDietrich”) previously brought multiple claims against Certified Steel Stud Association, Inc. (“the Association”). After an eleven-week jury trial, on the eve of closing arguments, ClarkDietrich offered to dismiss with prejudice the claims against the Association, which the Association rejected. The jury returned a verdict in favor of ClarkDietrich, awarding it $43 million. The Association stipulated that it had insufficient tangible assets to satisfy the judgment. Thereafter, the trial court appointed a receiver (the “Receiver”), on ClarkDietrich’s motion, to investigate and pursue any claims against the Association’s officers and directors arising from their decision to reject ClarkDietrich’s dismissal offer. Upon his appointment, the Receiver filed a complaint against the Association’s four directors. At some point during litigation, the Receiver and Director Jung reached a settlement agreement, requiring Jung to pay $550,000 in exchange for the dismissal of the claims against him. The trial court subsequently granted ClarkDietrich’s motion to distribute the settlement funds in order to pay the outstanding $43-million-dollar judgment owed by the Association, which the Association opposed, arguing that its duty to indemnify its directors took priority over repayments to creditors such as ClarkDietrich.

On appeal, the court affirmed the trial court’s decision to release the settlement funds to ClarkDietrich for multiple reasons. First, the court concluded that because the Association failed to seek a stay before the settlement funds were distributed, its appeal was moot. The court explained that

[w]here the trial court rendering judgment has jurisdiction of the subject matter of the action and of the parties, and where fraud has not intervened, and the judgment is voluntarily paid and satisfied, payment puts an end to the controversy and takes away from the defendant the right to appeal or prosecute error or even to move for vacation of judgment.

Moreover, the court concluded that even if the appeal was not moot, the Receiver was not authorized to pay indemnification claims. The court noted that the trial court’s receivership order clearly stated that the Receiver was appointed for the limited purpose of investigating claims against the Association’s directors and officers and to bring, prosecute, and manage those claims. This limited authority never authorized the Receiver to pay indemnification claims to directors. The court explained that “[a]ny decision otherwise would have been contrary to the trial court’s intended purpose in creating the receivership and inconsistent with the plain language of the receivership order.” Finally, the court found that the remaining directors’ claims were pending before the Ohio Supreme Court, making any right to indemnification merely speculative. The court reasoned that even if the remaining directors were successful in their indemnification claims against the Association, the Association was still operating and could indemnify the directors with alternate funds.

As shown by this case, courts strictly interpret receivership orders. In situations such as this, directors and officers must address ambiguities in receivership orders early, especially where indemnity claims have been made or are anticipated.

§1.2.2.9 Revolutionar, Inc. v. Gravity Jack, Inc.[11]

The court in Revolutionar, Inc. v. Gravity Jack, Inc., essentially ruled that indemnity may apply to a claim brought by a company against its own directors and officers—i.e., indemnity rights are not limited to third-party claims, unless the language of the indemnification clause is clear and unambiguous.

The Revolutionar case arose out of a business dispute between RevolutionAR and its CEO, Joshua Roe, and Gravity Jack and its President, Luke Richey. RevolutionAR was formed to develop and market “custom interacting learning, process, training, and maintenance applications using augmented reality technology.” Roe was named the CEO and Richey a member of the board of directors. RevolutionAR executed three contracts with Gravity Jack which covered “Gravity Jack’s development of software for RevolutionAR’s interactive augmented reality applications for learning and training.” Years later, RevolutionAR and Roe sued Gravity Jack and Richey, alleging that “Gravity Jack used the content the company developed for RevolutionAR’s prototype application when Gravity Jack marketed and sold augmented reality software content to its other clients.” RevolutionAR and Roe also alleged that Gravity Jack stole business from RevolutionAR. Moreover, RevolutionAR and Roe alleged that Richey, through Gravity Jack, “breach representations, utter false and misleading statements about RevolutionAR, dissuaded investors from backing RevolutionAR, and discouraged customers from conducting business with RevolutionAR.”

Gravity Jack and Richey moved for summary judgment, contending that the contract language released them from any liability, and neither RevolutionAR nor Roe had a legally protected interest in the augmented-reality prototype prepared by Gravity Jack. The trial court granted summary judgment, dismissed all claims, and awarded Gravity Jack and Richey reasonable attorney’s fees and costs.

On appeal, in relevant part, Richey contended that the indemnification clause in RevolutionAR’s articles of incorporation, benefiting RevolutionAR’s board of directors, shielded Richey from liability, because he was a director. RevolutionAR argued that the indemnification clause applied only to third-party claims brought against members of its board of directors. The court in Revolutionar concluded that RCW 23B.08.510 permitted corporations to indemnify the members of its board of directors in limited circumstances, and RevolutionAR’s articles of incorporation indemnified its directors “from ‘all liability, damage, or expense resulting from the fact that such person … was a director, to the maximum extent and under all circumstances permitted by law,’ except when grossly negligent.” Explaining that the indemnification clause did not solely apply to third-party claims against directors, the court in RevolutionAR reasoned that

[t]he broad language of the indemnification provision does not limit its import to third party claims, but instead extends to the maximum protection allowed by law. Indemnification may be sought in many types of proceedings, whether third-party actions or actions by or in the right of the corporation. 18B AM. JUR. 2D Corporations § 1628 (2020). Accordingly, a corporation may be required to indemnify an officer for expenses incurred in successfully defending against an action by the company. Truck Components Inc. v. Beatrice Co., 143 F.3d 1057, 1061 (7th Cir. 1998).

The court, however, agreed with RevolutionAR that indemnification did not extend to claims brought by the corporation against Richey for breaches of his duties to the corporation, because as a director and advisor of RevolutionAR, Richey had a duty of good faith and to act in the best interest of the company.

The RevolutionAR decision illustrates the importance of crafting an indemnification clause to specifically limit indemnification of third-party claims against members of the corporation’s board of directors,if that is the intended purpose. If the indemnification clause lacks specificity, courts may interpret the broad language to require corporations to indemnify members of its board of directors against claims brought by third-parties and even the corporation itself.

[1] The views reflected herein are those of the author(s) and may not reflect those of any law firm or its clients.

[2] The DGCL is found in Title 8 of the Delaware Code.

[3] C.A. No. 2020-0254, 2020 Del. Ch. LEXIS 266 (Del. Ch. Aug. 18, 2020).

[4] 186 A.D.3d 132 (N.Y. App. Div. 2020).

[5] No. 1984CV03525BLS2, 2020 WL 4347607 (Mass. Super. June 15, 2020).

[6] 844 S.E.2d 245 (Ga. Ct. App. 2020).

[7] No. A155721, 2020 WL 2520114 (Cal. Ct. App. May 18, 2020) (unpublished).

[8] 2020 WL 5250390 (Ohio Ct. App. Apr. 9, 2020).

[9] 2020 WL 2521297 (Mass. Super. Apr. 9, 2020).

[10] 2020 WL 1847478 (Ohio Ct. App. Apr. 13, 2020).

[11] 13 Wash.App.2d 1044 (Wash. Ct. App. 2020) (unpublished).

Editors

Chelsea Mikula

Tucker Ellis LLP
950 Main Avenue, Suite 1100
Cleveland, OH 44113
216-696-2476
[email protected]

Giovanna Ferrari

Seyfarth Shaw LLP
560 Mission Street, Suite 3100
San Francisco, CA 94105
415-544-1019
[email protected]

§1.1 Introduction

Trial lawyers eagerly anticipate the day they begin opening statements in the courtroom and get to take their client’s matter to trial. With a trial comes a lot of hard work, preparation, and navigation of the civil rules and local rules of the jurisdiction. This chapter provides a general overview of issues that a lawyer will face in a courtroom, either civil or criminal. The authors have selected cases of note from the present United States Supreme Court docket, the federal Circuit Courts of Appeals, and selected federal District Courts, that provide a general overview, raise unique issues, expand or provide particularly instructive explanations or rationales, or are likely to be of interest to a broad cross section of the bar. It is imperative, however, that prior to starting trial, the rules of the applicable jurisdiction are reviewed.

§1.2 Pretrial Matters

§ 1.2.1 Pretrial Conference and Pretrial Order

Virtually all courts require a pretrial conference at least several weeks before the start of trial. A pretrial conference requires careful preparation because it sets the tone for the trial itself. There are no uniform rules across all courts, so practitioners must be fully familiar with those that affect the particular courtroom they are in and the specific judge before whom they will appear.

According to Federal Rule of Civil Procedure 16, the main purpose of a pretrial conference is for the court to establish control over the proceedings such that neither party can achieve significant delay or engage in wasteful pretrial activities.[1] An additional goal is facilitating settlement before trial commencement.[2] Following the pretrial conference, the judge will issue a scheduling order, which “must limit the time to join other parties, amend the pleadings, complete discovery, and file [pre-trial] motions.”[3]

A proposed pretrial conference order should be submitted to the court for review at the conference. Once the judge accepts the pre-trial conference order, the order will supersede all pleadings in the case.[4] The final pretrial conference order is separate from pretrial disclosures, which include all information and documents required to be disclosed under Federal Rule of Civil Procedure 26.[5]

§ 1.2.2 Motions in Limine

A motion in limine, which means “at the threshold,”[6] is a pre-trial motion for a preliminary decision on an objection or offer of proof. Motions in limine are important because they ensure that the jury is not exposed to unfairly prejudicial, confusing, or irrelevant evidence, even if doing so limits a party’s defenses.[7] Thus, a motion in limine is designed to narrow the evidentiary issues for trial and to eliminate unnecessary trial interruptions by excluding the document before it is entered into evidence.[8]

In ruling on a motion in limine, the trial judge has discretion to either rule on the motion definitively or postpone a ruling until trial.[9] Alternatively, the trial judge may make a tentative or qualified ruling.[10] While definitive rulings do not require a renewed offer of proof at trial,[11] a tentative or qualified ruling might well require an offer of evidence at trial to preserve the issue on appeal.[12] A trial court’s discretion in ruling on a motion in limine extends not only to the substantive evidentiary ruling, but also the threshold question of whether a motion in limine presents an evidentiary issue that is appropriate for ruling in advance of trial.[13]

Motions in limine are not favored and many courts consider it a better practice to deal with questions as to the admissibility of evidence as they arise at trial.[14]

§1.3 Opening Statements

One of the most important components of any trial is the opening statement—it can set the roadmap for the jury of how they can find in favor of your client. The purpose of an opening statement is to:

“acquaint the jury with the nature of the case they have been selected to consider, advise them briefly regarding the testimony which it is expected will be introduced to establish the issues involved, and generally give them an understanding of the case from the viewpoint of counsel making a statement, so that they will be better able to comprehend the case as the trial proceeds.”[15]

It is important that any opening statement has a theme or presents the central theory of your case. As a general rule, a lawyer presents facts and evidence, and not argument, during opening statements. Being argumentative and introducing statements that are not evidence can be grounds for a mistrial.[16] It is also important that counsel keep in mind any rulings on motions in limine prohibiting the use of certain evidence. Failure to raise an objection to matters subject to a motion in limine or other prejudicial arguments can result in the waiver of those rights on appeal.[17] And the “golden rule” for opening statements is that the jurors should not be asked to place themselves in the position of the party to the case.[18]

§1.4 Selection of Jury

§1.4.1 Right to Fair and Impartial Jury

The right to a fair and impartial jury is an important part of the American legal system. The right originates in the Sixth Amendment, which grants all criminal defendants the right to an impartial jury.[19] However, today, this foundational right applies in both criminal and civil cases.[20] This is because the Seventh Amendment preserves “the right of trial by jury” in civil cases, and an inherent part of the right to trial by jury is that the jury must be impartial.[21] Additionally, Congress cemented this right when it passed legislation requiring “that federal juries in both civil and criminal cases be ‘selected at random from a fair cross section of the community in the district or division where the court convenes.’”[22]

Examples of ways that jurors may not be impartial include: predispositions about the proper outcome of a case,[23] financial interests in the outcome of a case,[24] general biases against the race or gender of a party,[25] or general biases for or against certain punishments to be imposed.[26]

Over the years, impartiality has become more and more difficult to achieve. This is due mainly to citizens’ (potential jurors) readily available access to news, and the news media’s increased publicity of defendants and trials.[27] In Harris, the Ninth Circuit analyzed whether pre‑trial publicity of a murder trial biased prospective jurors and prejudiced the defendant’s ability to receive a fair trial.[28] The court recognized that “[p]rejudice is presumed when the record demonstrates that the community where the trial was held was saturated with prejudicial and inflammatory media publicity about the crime.”[29] However, the court found that despite immense publicity prior to trial, because the publicity was not inflammatory but rather factual, there was no evidence of prejudice in the case.[30]

§1.4.2 Right to Trial by Jury

All criminal defendants are entitled to a trial by jury and must waive this right if they elect a bench trial instead.[31] However, a criminal defendant does not have a constitutional right to a bench trial if he or she decides to waive the right to trial by jury.[32] In civil cases, the party must expressly demand a jury trial. Failure to make such a demand constitutes a waiver by that party of a trial by jury.[33] For example, in Hopkins, the Eleventh Circuit explained that a plaintiff waived his right to trial by jury in an employment discrimination case when he made no demand for a jury trial in his Complaint and did not file a separate demand for jury trial within 14 days after filing his complaint.[34]

Additionally, not all civil cases are entitled to a trial by jury. First, the Seventh Amendment expressly requires that the amount in controversy exceed $20.[35] Additionally, only those civil cases involving legal, rather than equitable, issues are entitled to the right of trial by jury.[36] Equitable issues often arise in employment discrimination cases where the plaintiff seeks backpay or another sort of compensation under the ADA, ERISA, or FMLA.[37]

Another issue that arises in civil cases is contractual jury trial waivers. Most circuits permit parties to waive the right to a jury trial through prior contractual agreement.[38] Generally, the party seeking enforcement of the waiver “must show that consent to the waiver was both voluntary and informed.”[39]

§1.4.3 Voir Dire

Voir dire is a process of questioning prospective jurors by the judge and/or attorneys who remove jurors who are biased, prejudiced, or otherwise unfit to serve on the jury.[40] The Supreme Court has explained that “voir dire examination serves the dual purposes of enabling the court to select an impartial jury and assisting counsel in exercising peremptory challenges.”[41]

Generally, an oath should be administered to prospective jurors before they are asked questions during voir dire.[42] “While the administration of an oath is not necessary, it is a formality that tends to impress upon the jurors the gravity with which the court views its admonition and is also reassuring to the litigants.”[43] Moreover, jurors under oath are presumed to have faithfully performed their official duties.[44]

Federal trial judges have great discretion in deciding what questions are asked to prospective jurors during voir dire.[45] District judges may permit the parties’ lawyers to conduct voir dire, or the court may conduct the jurors’ examination itself.[46] Although trial attorneys often prefer to conduct voir dire themselves, many judges believe that counsel’s involvement “results in undue expenditure of time in the jury selection process,” and that “the district court is the most efficient and effective way to assure an impartial jury and evenhanded administration of justice.”[47]

“[I]f the court conducts the examination it must either permit the parties or their attorneys to supplement the examination by such further inquiry as the court deems proper or itself submit to the prospective jurors such additional questions of the parties or their attorneys as the court deems proper.”[48] However, a judge still has much leeway in determining what questions an attorney may ask.[49] For example, in Lawes, a firearm possession case, the Second Circuit found that it was proper for a trial judge to refuse to ask jurors questions about their attitudes towards police.[50] If, on appeal, a party challenges a judge’s ruling from voir dire, the party must demonstrate that trial judge’s decision constituted an abuse of discretion.[51] Thus, it is extremely difficult to win an appeal regarding voir dire questioning.[52]

§1.4.4 Ground for Challenge

A challenge “for cause” is a request to dismiss a prospective juror because the juror is unqualified to serve, or because of demonstrated bias, an inability to follow the law, or if the juror is unable to perform the duties of a juror. 18 U.S.C. § 1865 sets forth juror qualifications and lists five reasons a judge may strike a juror: (1) if the juror is not a citizen of the United States at least 18 years old, who has resided within the judicial district at least one year; (2) is unable to read, write, or understand English enough to fill out the juror qualification form; (3) is unable to speak English; (4) is incapable, by reason of mental or physical infirmity, to render jury service; or (5) has a criminal charge pending against him, or has been convicted of a state or federal crime punishable by imprisonment for more than one year.[53]

In addition to striking a juror for these reasons, an attorney may also request to strike a juror “for cause” under 28 U.S.C. § 1866(c)(2) “on the ground that such person may be unable to render impartial jury service or that his service as a juror would be likely to disrupt the proceedings.”[54]

A challenge “for cause” is proper where the court finds the juror has a bias that is so strong as to interfere with his or her ability to properly consider evidence or follow the law.[55] Bias can be shown either by the juror’s own admission of bias or by proof of specific facts that show the juror has such a close connection to the parties, or the facts at trial, that bias can be presumed. The following cases illustrate examples of challenges for cause:

• S. v. Price: The Fifth Circuit explained that prior jury service during the same term of court is not by itself sufficient to support a challenge for cause. A juror may only be dismissed for cause because of prior service if it can be shown by specific evidence that the juror has been biased by the prior service.[56]
• Chestnut v. Ford Motor Co.: The Fourth Circuit held that the failure to sustain a challenge to a juror owning 100 shares of stock in defendant Ford Motor Company (worth about $5000) was reversible error.[57]
• United States v. Chapdelaine: The First Circuit found that it was permissible for trial court not to exclude for cause jurors who had read a newspaper that indicated co‑defendants had pled guilty before trial.[58]
• Leibstein v. LaFarge N. Am., Inc.: Prospective juror’s alleged failure to disclose during voir dire that he had once been defendant in civil case did not constitute misconduct sufficient to warrant new trial in products liability action.[59]
• Cravens v. Smith: The Eighth Circuit found that the district court did not abuse its discretion in striking a juror for cause based on that juror’s “strong responses regarding his disfavor of insurance companies.”[60]

§1.4.5 Peremptory Challenge

In addition to challenges for cause, each party also has a right to peremptory challenges.[61] A peremptory challenge permits parties to strike a prospective juror without stating a reason or cause.[62] “In civil cases, each party shall be entitled to three peremptory challenges. Several defendants or several plaintiffs may be considered as a single party for the purposes of making challenges, or the court may allow additional peremptory challenges and permit them to be exercised separately or jointly.”[63]

Parties can move for additional peremptory challenges.[64] This is common in cases where there are multiple defendants. For example, in Stephens, two civil codefendants moved for additional peremptory challenges so that each defendant could have three challenges (totaling six peremptory challenges for the defense).[65] In deciding whether to grant the defendants’ motion, the court recognized that trial judges have great discretion in awarding additional peremptory challenges, and that additional challenges may be especially warranted when co-defendants have asserted claims against each other.[66] The court in Stephens ultimately granted the defendants’ motion for additional challenges.[67]

Parties may not use peremptory challenges to exclude jurors on the basis of their race, gender, or national origin.[68] Although “[a]n individual does not have a right to sit on any particular petit jury, . . . he or she does possess the right not to be excluded from one on account of race.”[69] When one party asserts that another’s peremptory challenges seek to exclude jurors on inappropriate grounds under Batson, the party challenged must demonstrate a legitimate explanation for its strikes, after which the challenging party has the burden to show that the legitimate explanation was pre-textual.[70] The ultimate determination of the propriety of a challenge is within the discretion of the trial court, and appellate courts review Batson challenges under harmless error analysis.[71]

Finally, some courts have found that it is reversible error for a trial judge to require an attorney to use peremptory challenges when the juror should have been excused for cause. “The district court is compelled to excuse a potential juror when bias is discovered during voir dire, as the failure to do so may require the litigant to exhaust peremptory challenges on persons who should have been excused for cause. This result, of course, extinguishes the very purpose behind the right to exercise peremptory challenges.”[72] However, courts also acknowledge that an appeal is not the best way to deal with biased jurors. The Eighth Circuit recognized that “challenges for cause and rulings upon them . . . are fast paced, made on the spot and under pressure. Counsel as well as court, in that setting, must be prepared to decide, often between shades of gray, by the minute.”[73]

§1.5 Examination of Witnesses

§1.5.1 Direct Examination

Direct examination is the first questioning of a witness in a case by the party on whose behalf the witness has been called to testify.[74] Pursuant to Fed. R. Evid. 611(c), leading questions, i.e., those suggesting the answer, are not permitted on direct examination unless necessary to develop the witness’ testimony.[75] Leading questions are permitted as “necessary to develop testimony” in the following circumstances:

• To establish undisputed preliminary or inconsequential matters.[76]
• If the witness is hostile or unwilling.[77]
• If the witness is a child, or an adult with communication problems due to a mental or physical disability.[78]
• If the witness’s recollection is exhausted.[79]
• If the witness is being impeached by the party calling him or her.[80]
• If the witness is frightened, nervous, or upset while testifying.[81]
• If the witness is unresponsive or shows a lack of understanding.[82]

Additionally, it is improper for a lawyer to bolster the credibility of a witness during direct examination by evidence of specific instances of conduct or otherwise.[83] Bolstering occurs either when (1) a lawyer suggests that the witness’s testimony is corroborated by evidence known to the lawyer, but not the jury,[84] or (2) when a lawyer asks a witness a question about specific instances of truthfulness or honesty to establish credibility.[85] For instance, in Raysor, the Second Circuit found that it was improper for a witness to bolster herself on direct examination by testifying about her religion or faithful marriage.[86]

When a party calls an adverse party, or someone associated with an adverse party, the attorney has more leeway during direct examination. This is because adverse parties may be predisposed against the party direct-examining him. Because of this, the attorney may ask leading questions, and impeach or contradict the adverse witness.[87] Courts have broadened who they consider to be “associated with” or “identified with” an adverse party. Employees, significant others, and informants have all constituted adverse parties for purposes of direct examination.[88] Further, even if the witness is not adverse, an attorney may also ask leading questions to a witness who is hostile. In order to ask such leading questions, the direct examiner must demonstrate that the witness will be resistant to suggestion. This often involves first asking the witness non-leading questions in order to show that the witness is biased against the direct examiner.[89]

When a witness cannot recall a fact or event, the lawyer is permitted to help refresh that witness’s memory.[90] The lawyer may do so by providing the witness with an item to help the witness recall the fact or event. Proper foundation before such refreshment requires that:

the witness’s recollection to be exhausted, and that the time, place and person to whom the statement was given be identified. When the court is satisfied that the memorandum on its face reflects the witness’s statement or one the witness acknowledges, and in his discretion the court is further satisfied that it may be of help in refreshing the person’s memory, the witness should be allowed to refer to the document.[91]

However, the item/memorandum does not come into evidence.[92] In Rush, the Sixth Circuit found that although the trial judge properly permitted defense counsel to refresh a witness’s memory with the transcript of a previously recorded statement, the trial judge erred in allowing another witness to read that transcript aloud to the jury.[93]

Further, sometimes the party calling a witness wishes to impeach that witness. Generally, courts are hesitant to permit parties to impeach their own witnesses because the party who calls a witness is vouching for the trustworthiness of that witness, and allowing impeachment may confuse the jury or be unfairly prejudicial.[94] Prior to adoption of the Federal Rules of Evidence, a party could impeach its own witness only when the witness’s testimony both surprised and affirmatively damaged the calling party.[95]

However, Federal Rule of Evidence 607 states that “the credibility of a witness may be attacked by any party, including the party calling the witness.”[96] The Advisory Committee Notes of Rule 607 indicate that this rule repudiates the surprise and injury requirement from common law.[97] A party can impeach a witness through prior inconsistent statements, cross-examination, or prior evidence from other sources.[98] However, a party may not use Rule 607 to introduce otherwise inadmissible evidence to the jury.[99] Additionally, a party may not call a witness with the sole purpose of impeaching him.[100] Further, even courts that don’t permit a party to impeach its own witness still permit parties to contradict their own witnesses through another part of that witness’s testimony.[101]

§1.5.2 Cross-Examination

Cross-examination provides the opposing party an opportunity to challenge what a witness said on direct examination, discredit the witness’s truthfulness, and bring out any other testimony that may be favorable to the opposing party’s case.[102] Generally under the federal rules, cross-examination is limited to the “subject matter” of the direct examination and any matters affecting the credibility of the witness.[103] The purpose of limiting the scope of cross-examination is to promote regularity and logic in jury trials, and ensure that each party has the opportunity to present its case in chief. However, courts tend to liberally construe what falls within the “subject matter” of direct examination.[104] For example, in Perez-Solis, the Fifth Circuit found that a witness’s brief reference to collecting money from a friend permitted opposing counsel to cross-examine him on all of his finances.[105] Additionally, the language of Fed. R. Evid. 611(b) states that although cross-examination “should not” go beyond the scope of direct examination, the court may exercise its discretion to “allow inquiry into additional matters as if on direct examination.”[106] However, if the questioning goes beyond the subject matter, it generally should not include leading questions.

One of the main goals of cross-examination is impeachment. The Federal Rules of Evidence explain three different methods of impeachment: (1) impeachment by prior bad acts or character for untruthfulness,[107] (2) impeachment by prior conviction of a qualifying crime,[108] and (3) impeachment by prior inconsistent statement.[109] Additionally, courts still apply common law principles and permit impeachment through three additional methods as well: (1) impeachment by demonstrating the witness’s bias, prejudice, or interest in the litigation or in testifying, (2) impeachment by demonstrating the witness’s incapacity to accurately perceive the facts, and (3) impeachment by showing contradictory evidence to the witness’s testimony in court.[110] The following present case examples of each of the six methods of impeachment:

• Prior bad Act or Dishonesty: In O’Connor v. Venore Transp. Co.,[111] the First Circuit found that trial judge did not abuse discretion when he allowed defense counsel to cross-examine plaintiff with his prior tax returns with the purpose of demonstrating dishonesty.
• Conviction of qualifying crime: In Smith v. Tidewater Marine Towing, Inc.,[112] the Fifth Circuit found that, in Jones Act action arising from injuries plaintiff received while working on a tugboat, defense counsel permissibly crossed the plaintiff about his prior convictions.
• Prior inconsistent statement: In Wilson v. Bradlees of New England, Inc.,[113] a product liability case, the First Circuit found that defense counsel appropriately crossed plaintiff with an inconsistent statement made in a complaint filed in a different case against a different defendant.
• Bias or prejudice: In Udemba v. Nicoli,[114] the First Circuit found that it was permissible for defense counsel to cross-examine the plaintiff’s wife about domestic abuse to show bias in a case involving excessive force claims against the police.
• Incapacity to accurately perceive: In Hargrave v. McKee,[115] the Sixth Circuit found that the trial court should have permitted defense counsel to question a victim about how her ongoing psychiatric problems affected her perception and memory of events.
• Contradictory evidence: In Barrera v. E. R. DuPont De Nemours and Co., Inc.,[116] the Fifth Circuit held, in a personal-injury action, that the trial judge erred in denying the use of evidence showing that plaintiff received over $1000 per month in social security benefits because the evidence was admissible to contradict defendant’s volunteered testimony on cross-examination that he did not have a “penny in his pocket.”

Once the right of cross-examination has been fully and fairly exercised, it is within the trial court’s discretion as to whether further cross-examination should be allowed.[117] In order to recall a witness, the party must show that the new cross-examination will shed additional light on the issues being tried or impeach the witness. Further, it is helpful if the party seeking recall demonstrates that it came into possession of additional evidence or information that it did not have when it previously crossed that witness.[118] Further, it is difficult to succeed on an appeal of a trial court’s failure to permit recall for further cross‑examination. This is because courts review a trial judge’s decision for abuse of discretion, and often find that the lack of recall was a harmless error.[119]

§1.5.3 Expert Witnesses

Experts are witnesses who offer opinion testimony on an aspect of the case that requires specialized knowledge or experience. Experts also include persons who do not testify, but who advise attorneys on a technical or specialized area to better help them prepare their cases. A few key criteria should be considered at the outset when choosing an expert. First is the level of relevant expertise and the ability to have the expert’s research, assumptions, methodologies, and practices stand up to the scrutiny of cross-examination. Many law firms, nonprofits, commercial services, and government agencies maintain lists of experts categorized by the expertise; those lists are a helpful place to begin. Alternatively, counsel may begin by researching persons who have spoken or written about the subject matter that requires expert testimony. An Internet search is, in many cases, the place to start when developing a list. Counsel also might consider using a legal search engine to identify persons who have provided expert testimony on the subject matter in the past. Westlaw and LexisNexis both maintain expert databases.

Any expert who is on counsel’s list of candidates should produce, in addition to his or her curriculum vitae (CV), a list of prior court and deposition appearances, as well as a list of publications over the last 10 years. In federal court, this information must be disclosed in the expert report, per Federal Rule of Civil Procedure 26(a)(2).[120]

Another consideration when retaining an expert is whether he or she will be a testifying expert, or whether the expert will only act in a consulting role in preparing the case for trial (non-testifying expert) because this will determine the discoverability of the expert’s opinions. Testifying experts’ opinion are always discoverable, while consulting experts’ opinions are nearly always protected from discovery.

A testifying expert must be qualified, and the proponent of an expert witness bears the burden of establishing the admissibility of the expert’s testimony by a preponderance of the evidence. Federal Rule of Evidence 702 sets forth a standard for admissibility, wherein a witness may be qualified as an expert by knowledge, skill, experience, training or education and may testify in the form of an opinion if they meet certain criteria. It is for the trial court judge to determine whether or not “an expert’s testimony both rests on a reliable foundation and is relevant to the task at hand,” thereby making it admissible.[121]

§1.6 Evidence at Trial

§1.6.1 Authentication of Evidence

With the exception of exhibits as to which authenticity is acknowledged by stipulation, admission, judicial notice, or exhibits which are self-authenticating, no exhibit will be received in evidence unless it is first authenticated or identified as being what it purports to be. Under the Federal Rules of Evidence, the authentication requirement is satisfied when “the proponent . . . produce[s] evidence sufficient to support a finding that the item is what the proponent claims it is.”[122]

When an item is offered into evidence, the court may permit counsel to conduct a limited cross-examination on the foundation offered. In reaching its determination, the court must view all the evidence introduced as to authentication or identification, including issues of credibility, most favorably to the proponent.[123] Of course, the party who opposed introduction of the evidence may still offer contradictory evidence before the trier of fact or challenge the credibility of the supporting proof in the same way that he can dispute any other testimony.[124] However, upon consideration of the evidence as a whole, if a sufficient foundation has been laid in support of introduction, contradictory evidence goes to the weight to be assigned by the trier of fact and not to admissibility.[125] It is important to note that many courts have held that the mere production of a document in discovery waives any argument as to its authenticity.[126]

While there are many topics to discuss regarding authentication of evidence, this section will focus on electronically stored information. Proper authentication of e-mails and other instant communications, as well as all computerized records, is of critical importance in an ever-increasing number of cases, not only because of the centrality of such data and communications to modern business and society in general, but also due to the ease in which such electronic materials can be created, altered, and manipulated. In the ordinary course of events, a witness who has seen the e-mail in question need only testify that the printout offered as an exhibit is an accurate reproduction.

• Web print out – Printouts of Internet website pages must first be authenticated as accurately reflecting the content of the page and the image of the page on the computer at which the printout was made before they can be introduced into evidence; then, to be relevant and material to the case at hand, the printouts often will need to be further authenticated as having been posted by a particular source.[127]
• Text message – When there has been an objection to admissibility of a text message, the proponent of the evidence must explain the purpose for which the text message is being offered and provide sufficient direct or circumstantial corroborating evidence of authorship in order to authenticate the text message as a condition precedent to its admission; thus, authenticating a text message or e-mail may be done in much the same way as authenticating a telephone call.[128]
• Social networking services – Proper inquiry for determining whether a proponent has properly authenticated evidence derived from social networking services was whether the proponent adduced sufficient evidence to support a finding by a reasonable jury that the proffered evidence was what the proponent claimed it to be.[129]

§1.6.2 Objecting to Evidence

Objections must be specific. The party objecting to evidence must make known to the court and the parties the precise ground on which the objecting party is basing the objection.[130] The objecting party must also be sure to indicate the particular portion of the evidence that is objectionable.[131] However, a general objection may be permitted if the evidence is clearly inadmissible for any purpose or if the only possible grounds for objection is obvious.[132]

The purpose of a specific objection to evidence is to preserve the issue on appeal. On appeal, the objecting party will be limited to the specific objections to evidence made at trial. However, an objection raised by a party in writing is sufficiently preserved for appeal, even if that same party subsequently failed to make an oral, on-the-record objection.[133]

Objections to evidence must be timely so as to not allow a party to wait and see whether an answer is favorable before raising an objection.[134] Failure to timely object results in the evidence being admitted. Once the evidence is admitted and becomes part of the trial record, it may be considered by the jury in deliberations, the trial court in ruling on motions, and a reviewing court determining the sufficiency of the evidence.[135] In some instances, the trial judge may prohibit counsel from giving descriptions of the basis for his or her objections. However, the attorney must still attempt to get in the specific grounds for the objection on the record.[136]

§1.6.3 Offer of Proof

If evidence is excluded by the trial court, the party offering the evidence must make an offer of proof to preserve the issue on appeal.[137] For an offer of proof to be adequate to preserve an issue on appeal, counsel must state both the theory of admissibility and the content of the excluded evidence.[138] Although best practice is to make an offer of proof at the time an objection is made, an offer of proof made later in time, even if it is made at a subsequent conference or hearing, may be acceptable.[139] An offer of proof can take several different forms:

• A testimonial offer of evidence, whereby counsel summarizes what the proposed evidence is supposed to be. Attorneys using this method should be cautious, however, as the testimony may be considered inadequate.[140]
• An examination of a witness, whereby a witness is examined and cross-examined outside of the presence of a jury.[141]
• A written statement by the examining counsel, which describes the answers that the proposed witness would give if allowed to testify.[142]
• An affidavit, taken under oath, which summarizes a witness’s expected testimony and is signed by the witness.[143] However, this use of documentary evidence should be marked as an exhibit and introduced into the record for identification on appeal.[144]

There are exceptions to the offer of proof requirement. First, an offer of proof is unnecessary when the content of the evidence is “apparent from the context.”[145] Second, a cross-examiner who is conducting a proper cross-examination will be given more leeway by a court, since oftentimes the cross-examiner does not know what a witness will say if permitted to answer a question.[146]

§1.7 Closing Argument

Different than an opening statement, closing argument is the time for advocacy and argument on behalf of your client. It is not an unfettered right, however, and there are certain rules to remember about closing argument. First, present only that which was presented in evidence and do not deviate from the record.[147] You also do not want to comment on a witness that was unable to testify or suggest that a defendant’s failure to testify results in a guilty verdict.[148] Further, an attack on the credibility or honesty of opposing counsel is considered unethical.[149] But that does not mean lawyers cannot comment on the credibility of evidence and suggest reasonable inferences based on the evidence.[150] And keep in mind, generally, courts are “reluctant to set aside a jury verdict because of an argument made by counsel during closing arguments.”[151]

§1.8 Judgment as a Matter of Law

Federal Rule of Civil Procedure 50 governs the standard for judgment as a matter oflLaw, sometimes referred to as a directed verdict in state court matters.[152] A motion for  judgment as a matter of law “may be made at any time before the case is submitted to the jury” and the motion “must specify the judgment sought and the law and facts that entitle the movant to the judgment.”[153] But, “[a] motion under this Rule need not be stated with ‘technical precision,’” so long as “it clearly requested relief on the basis of insufficient evidence.”[154] Although it may be “better practice,” there is no requirement that the motion be made in writing.[155] The 6th Circuit Court of Appeals has even held that it is “clearly within the court’s power” to raise the motion “sua sponte.”[156]

Importantly, Rule 50 uses permissive, not mandatory, language, which means “while a district court is permitted to enter judgment as a matter of law when it concludes that the evidence is legally insufficient, it is not required to do so.” The Supreme Court has gone as far as to say “the district courts are, if anything, encouraged to submit the case to the jury, rather than granting such motions.”[157] There is a practical reason for this advice: if the motion is granted, then overturned on appeal, a whole new trial must be conveyed. Conversely, if the case is allowed to go to the jury, a post-verdict motion or appellate court can right any wrong with more ease.

In entertaining a motion for judgment as a matter of law, courts should review all of the evidence in the record, but, in doing so, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence.[158] Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.[159] The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury might reasonably find a verdict for that party. Since granting a judgment as a matter of law deprives the party opposing the motion of a determination of the facts by a jury, it is understandable that it is to be granted cautiously and sparingly by the trial judge.

§1.9 Jury Instructions

§1.9.1 General

The purpose of jury instructions is to advise the jury on the proper legal standards to be applied in determining issues of fact as to the case before them.[160] The court may instruct the jury at any time before the jury is discharged.[161] But the court must first inform the parties of its proposed instructions and give the parties an opportunity to respond.[162] Although each party is entitled to have the jury charged with his theory of the case, the proposed instructions must be supported by the law and the evidence.[163]

§1.9.2 Objections

Federal Rule of Civil Procedure 51 provides counsel the ability to correct errors in jury instructions.[164] The philosophy underlying the provisions of Rule 51 is to prevent unnecessary appeals of matters concerning jury instructions which should have been resolved at the trial level. An objection must be made on the record and state distinctly the matter objected to and the grounds for the objection.[165] Off-the-record objections to jury instructions, regardless of how specific, cannot satisfy requirements of the rule governing preservation of such errors.[166] A party may object to instructions outside of the presence of the jury before the instructions and arguments are delivered or promptly after learning that the instructions or request will be, or has been, given or refused. [167] Even if the initial request for an instruction is made in detail, the requesting party must object again after the instructions are given but before the jury retires for deliberations, in order to preserve the claimed error.[168]

Whether a jury instruction is improper is a question of law reviewed de novo.[169] Instructions are improper if, when viewed as a whole, they are confusing, misleading, and prejudicial.[170] If an instruction is improper, the judgment will be reversed, unless the error is harmless.[171] A motion for new trial is not appropriate where the omitted instructions are superfluous and potentially misleading.[172]

Further, while some courts have been lenient on whether objections are made in accordance with Rule 51, many courts hold that one who does not object in accordance with Rule 51 is deemed to have waived the right to appeal. A patently erroneous instruction can be considered on appeal if the error is “fundamental” and involves a miscarriage of justice, but the movant claiming the error has the burden of demonstrating it is a fundamental error.[173]

§1.10 Conduct of Jury

§1.10.1 Conduct During Deliberations

Jury deliberations must remain private and secret in order to protect the jury’s deliberations from improper, outside influence.[174] Control over the jury during deliberations, including the decision whether to allow the jurors to separate before a verdict is reached, is in the sound discretion of the trial court.[175] During this time, a judge may consider the fatigue of the jurors in determining whether the time of deliberations could preclude effective and impartial deliberation absent a break.[176] Although admonition of the jury is not required, one should be given if the jury is to separate at night and could potentially interact with third parties.[177]

The only individuals permitted in the jury room during deliberations are the jurors. However, in the case of a juror with a hearing or speech impediment, the court will appoint an appropriate professional to assist that individual and the presence of that professional is not grounds for reversal so long as the professional: (1) does not participate in deliberations; and (2) takes an oath to that effect.[178]

Courts have broad discretion in determining what materials will be permitted in the jury room.[179] Materials received into evidence are generally permitted,[180] including real evidence,[181] documents,[182] audio recordings,[183] charts and summaries admitted pursuant to Federal Rule of Evidence 1006,[184] video recordings,[185] written stipulations,[186] depositions,[187] drugs,[188] and weapons.[189] Additionally, jurors are typically permitted to use any notes he or she has taken over the course of trial.[190] Pleadings, however, are ordinarily not allowed.[191]

§1.10.2 Conduct During Trial

Traditionally, the trial judge has discretion to manage the jury during trial.[192] To ensure the jurors are properly informed, the court may, at any time after the commencement of trial, instruct the jury regarding a matter related to the case or a principal of law.[193] If a party wishes to present an exhibit to the jurors for examination over the course of trial, counsel should request that the court admonish the jury not to place undue emphasis on the evidence presented.[194] Additionally, the trial court may, in its informed discretion, permit a jury view of the premises that is the subject of the litigation.[195]

During trial, the court may allow the jury to take notes and dictate the procedure for doing so.[196] The trial court may permit note-taking for all of the trial or restrict the practice to certain parts.[197] A concern of permitting note-taking during trial is that jurors may place too much significance on their notes and too little significance on their recollection of the trial testimony.[198] To mitigate this risk, a judge should give a jury instruction informing each juror that he or she should rely on his memory and only use notes to assist that process.[199]

Allowing a juror to participate in examining a witness is within the discretion of the trial court,[200] although some courts have strongly opposed the practice.[201] If allowed, procedural protections should be encouraged to mitigate the risks of questions.[202] Additionally, the court should permit counsel to re-question the witness after a juror question has been posed.[203]

While trial is ongoing, jurors should not discuss the case among themselves[204] or share notes[205] prior to the case being submitted for deliberations. The same rule applies to communication between jurors and trial counsel[206] or jurors and the parties,[207] although accidental or unintentional contact may be excused.[208]

§1.11 Relief from Judgment

§1.11.1 Renewed Motion for Judgment as a Matter of Law

Pursuant to Federal Rule of Civil Procedure 50(b) a party may file a “renewed” motion for judgment as a matter of law, previously known as a “motion for directed verdict,” asserting that the jury erred in returning a verdict based on insufficient evidence.[209] However, in order to file a renewed motion, a party must have filed a Rule 50(a) pre-verdict motion for judgment as a matter of law before the case was submitted to the jury.[210] The renewed motion is limited to issues that were raised in a “sufficiently substantial way” in the pre-verdict motion[211] and failure to comply with this process often results in waiver.[212] The renewed motion must be filed no later than 28 days after the entry of judgment.[213]

The standard for granting a renewed motion for judgment as a matter of law mirrors the standard for granting the pre-suit motion under Rule 50(a).[214] A party is entitled to judgment only if a reasonable jury lacked a legally sufficient evidentiary basis to return the verdict that it did.[215] In rendering this analysis, a court may not weigh conflicting evidence and inferences or determine the credibility of the witnesses.[216] Upon review, the court must:

“(1) consider the evidence in the light most favorable to the prevailing party, (2) assume that all conflicts in the evidence were resolved in favor of the prevailing party, (3) assume as proved all facts that the prevailing party’s evidence tended to prove, and (4) give the prevailing party the benefit of all favorable inferences that may reasonably be drawn from the facts proved. That done, the court must then deny the motion if reasonable persons could differ as to the conclusions to be drawn from the evidence.”[217]

The analysis reflects courts’ general reluctance to interfere with a jury verdict.[218]

§1.11.2 Motion for New Trial

Federal Rule of Civil Procedure 59 permits a party to file a motion for new trial, either together with or as an alternative to a 50(b) renewed motion for judgment as a matter of law.[219] Like a renewed motion for judgment as a matter of law, a motion for new trial must be filed no later than 28 days after an entry of judgment.[220]

Rule 59 does not specify or limit the grounds on which a new trial may be granted.[221] A party may move for a new trial on the basis that “the verdict is against the weight of the evidence, that the damages are excessive, or that, for other reasons, the trial was not fair . . . and may raise questions of law arising out of alleged substantial errors in admission or rejection of evidence.”[222] Other recognized grounds for new trial include newly discovered evidence,[223] errors involving jury instruction,[224] and conduct of counsel.[225] Courts often grant motions for new trial on the issue of damages alone.[226]

Unlike when reviewing a motion for judgment as a matter of law, courts may independently evaluate and weigh the evidence.[227] Additionally, the Court, on its own initiative with notice to the parties and an opportunity to be heard, may order a new trial on grounds not stated in a party’s motion.[228]

When faced with a renewed judgment as a matter of law or a motion for new trial, courts have three options. They may (1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct the entry of judgment as a matter of law.[229]

§1.11.3 Clerical Mistake, Oversights and Omissions

Federal Rule of Civil Procedure 60(a) provides that “the court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice.” This rule applies in very specific and limited circumstances, when the record makes apparent that the court intended one thing but by mere clerical mistake or oversight did another; such mistake must not be one of judgment or even of misidentification, but merely of recitation, of the sort that clerk or amanuensis might commit, mechanical in nature.[230] It is important to note that this rule can be applied even after a judgment is affirmed on appeal.[231]

§1.11.4 Other Grounds for Relief

Federal Rule of Civil Procedure 60(b) provides for several additional means for relief from a final judgment:

• mistake, inadvertence, surprise, or excusable neglect;
• newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
• fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
• the judgment is void;
• the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
• any other reason that justifies relief.

Courts typically require that the evidence in support of the motion for relief from a final judgement be “highly convincing.”[232]

§1.12 Virtual Hearings and Trials

In the wake of the COVID-19 pandemic and numerous government shut downs, hearings and trials in both criminal and civil matters have been proceeding electronically. It may be necessary, now and in the future, to submit an application for a trial to proceed remotely.[233]

And while trials always present unique and challenging issues, virtual trials present a new set of challenges, especially jury trials. It brings about a whole new set of factors—what makes for a successful trial in person can be very different from a successful trial over a virtual platform. There are new considerations for testimony by witnesses who are no longer in the same room as counsel, presentation of evidence when counsel can no longer bring binders or large boards, jury selection, and a myriad of other issues. What remains the same, however, is that preparation and practice are key. Being familiar with the local court’s practice and working out any technology issues in advance are critical to ensuring a successful virtual trial.

To date, the Courts have not created consistent rules for remote trials; every judge has their preferred procedures and technology.  Accordingly, it is important to review judge and court rules regarding remote proceedings.  For example, many judges have rules that prohibit the coaching of witnesses through off-screen methods, dictate courtroom behavior and appearance, limit public access and recording, and provide guidance on presentation of documents including documents that are filed under seal,[234] These rules not only dictate how the trial proceeds day-to-day, but may provide a basis for motions in limine and should be discussed with your judge in the pre-trial conference.

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

[2] Id.

[3] Id.

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

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

[6] Luce v. United States, 429 U.S. 38, 40 n.2 (1984).

[7] United States v. Romano, 849 F.2d 812, 815 (3d Cir. 1988).

[8] Frintner v. TruPosition, 892 F. Supp. 2d 699 (E.D. Pa. 2012).

[9] United States v. LeMay, 260 F.3d 1018, 1028 (9th Cir. 2001).

[10] Wilson v. Williams, 182 F.3d 562, 565-66 (7th Cir. 1999).

[11] Id. at 566 (“Definitive rulings, however, do not invite reconsideration.”).

[12] Fusco v. General Motors Corp., 11 F.3d 259, 262-63 (1st Cir. 1993).

[13] Flythe v. District of Columbia, 4 F. Supp. 3d 222 (D.D.C. 2014).

[14] U.S. v. Denton, 547 F. Supp. 16 (E.D. Tenn. 1982).

[15] Henwood v. People, 57 Colo 544, 143 P. 373 (1914). An opening statement presents counsel with the opportunity to summarily outline to the trier of fact what counsel expects the evidence presented at trial will show. Lovell v. Sarah Bush Lincoln Health Center, 397 Ill. App. 3d 890, 931 N.E.2d 246 (4th Dist. 2010).

[16] Testa v. Mundelein, 89 F.3d 445 (7th Cir. 1996) (“being argumentative in an opening statement does not necessarily warrant a mistrial, but being argumentative and introducing something that should not be allowed into evidence may be a predicate for a mistrial.”).

[17] Krengiel v. Lissner Copr., Inc., 250 Ill App. 3d 288, 621 N.E.2d 91 (1st Dist. 1993) (“party whose motion in limine has been denied must object when the challenged evidence is presented at trial in order to preserve the issue for review, and the failure to raise such an objection constitutes a waiver of the issue on appeal.”).

[18] Forrestal v. Magendantz, 848 F.2d 303, 308 (1st Cir. 1988) (suggesting to jury to put itself in shoes of plaintiff to determine damages improper because it encourages the jury to depart from neutrality and to decide the case on the basis of personal interest and bias rather than on the evidence.).

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

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

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

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

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

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

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

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

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

[28] Id. at 1362.

[29] Id. at 1361.

[30] Id.

[31] People v. Jordan, 2019 IL App (1st Dist.) 161848.

[32] Singer v. United States, 380 U.S. 24, 36 (1965) (finding that it is constitutionally permissible to require prosecutor and judge to consent to bench trial, even if the defendant elects one); United States v. Talik, No. CRIM.A. 5:06CR51, 2007 WL 4570704, at *6 (N.D.W. Va. Dec. 26, 2007).

[33] Fed. R. Civ. P. 38; Hopkins v. JPMorgan Chase Bank, NA, 618 F. App’x 959, 962 (11th Cir. 2015).

[34] Hopkins, 618 F. App’x at 962.

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

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

[37] See Lutz v. Glendale Union High Sch., 403 F.3d 1061, 1069 (9th Cir. 2005) (“[W]e hold that there is no right to have a jury determine the appropriate amount of back pay under Title VII, and thus the ADA, even after the Civil Rights Act of 1991.  Instead, back pay remains an equitable remedy to be awarded by the district court in its discretion.”); see also Bledsoe v. Emery Worldwide Airlines, 635 F.3d. 836, 840-41 (6th Cir. 2011) (holding “statutory remedies available to aggrieved employees under the Worker Adjustment and Retraining Notification (WARN) act provide equitable restitutionary relief for which there is no constitutional right to a jury trial.”).

[38] K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 758 (6th Cir. 1985); Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986); Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988).

[39] Zaklit v. Glob. Linguist Sols., LLC, 53 F. Supp. 3d 835, 854 (E.D. Va. 2014); see also Nat’l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977).

[40] United States v. Steele, 298 F.3d 906, 912 (9th Cir. 2002) (“The fundamental purpose of voir dire is to ‘ferret out prejudices in the venire’ and ‘to remove partial jurors.’”) (quoting United States v. Howell, 231 F.3d 615, 627-28 (9th Cir. 2000)); Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 189 (4th Cir. 1994) (stating that the purpose of voir dire is to ensure a fair and impartial jury, not to operate as a discovery tool by opposing counsel).

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

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

[43] Id.

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

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

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

[47] Hicks v. Mickelson, 835 F.2d 721, 726 (8th Cir. 1987).

[48] U.S. v. Lewin, 467 F.2d 1132 (7th Cir. 1972) (citing Fed. R. Crim. P. 24(a)).

[49] U.S. v. Lawes, 292 F.3d 123, 128 (2d Cir. 2002); Hicks v. Mickelson, 835 F.2d 721, 723-26 (8th Cir. 1987).

[50] Lawes, 292 F.3d at 128 (noting that “federal trial judges are not required to ask every question that counsel—even all counsel—believes is appropriate”).

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

[52] Mayes v. Kollman, 560 Fed. Appx. 389, 395 n.13 (5th Cir. 2014); Richardson v. New York City, 370 Fed. Appx. 227 (2d Cir. 2010); c.f. Kiernan v. Van Schaik, 347 F.2d 775, 779 (3d Cir. 1965) (finding that judge’s refusal to ask prospective jurors questions about connection to insurance companies constituted reversible error).

[53] See 28 U.S.C. § 1865(b).

[54] 28 U.S.C. § 1866.

[55] United States v. Bishop, 264 F.3d 535, 554-55 (5th Cir. 2001).

[56] United States v. Price, 573 F.2d 356, 389 (5th Cir. 1978).

[57] Chestnut v. Ford Motor Co., 445 F.2d 967 (4th Cir. 1971); c.f. United States v. Turner, 389 F.3d 111 (4th Cir. 2004) (finding that district court was within its discretion in failing to disqualify jurors who banked with a different branch of the bank that was robbed).

[58] United States v. Chapdelaine, 989 F.2d 28 (1st Cir. 1993).

[59] Leibstein v. LaFarge N. Am., Inc., 767 F. Supp. 2d 373 (E.D.N.Y. 2011), as amended (Feb. 15, 2011).

[60] Cravens v. Smith, 610 F.3d 1019, 1032 (8th Cir. 2010).

[61] See 28 U.S.C. § 1866 (stating that a juror may be “excluded upon peremptory challenge as provided by law”).

[62] Swain v. Alabama, 380 U.S. 202, 220, (1965) (“The essential nature of the peremptory challenge is that it is one exercised without a reason stated, without inquiry and without being subject to the court’s control.”).

[63] 28 U.S.C. § 1870; see also Fedorchick v. Massey-Ferguson, Inc., 577 F.2d 856 (3d Cir. 1978).

[64] Stephens v. Koch Foods, LLC, No. 2:07-CV-175, 2009 WL 10674890, at *1 (E.D. Tenn. Oct. 20, 2009).

[65] Id.

[66] Id.

[67] Id.

[68] See Batson v. Kentucky, 476 U.S. 79 (1986) (race); J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127 (1994) (gender); Rivera v. Nibco, Inc., 372 F. App’x 757, 760 (9th Cir. 2010) (national origin).

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

[70] Robinson v. R.J. Reynolds Tobacco Co., 86 F. App’x 73, 75 (6th Cir. 2004).

[71] Rivera v. Illinois, 556 U.S. 148 (2009); see also King v. Peco Foods, Inc., No. 1:14-CV-00088, 2017 WL 2424574 (N.D. Miss. Jun. 5, 2017).

[72] Kirk v. Raymark Indus., Inc., 61 F.3d 147, 157 (3d Cir. 1995) (holding, in asbestos litigation, that trial court’s refusal to remove two panelists for cause was error, and the party’s subsequent use of peremptory challenges to remedy the judge’s mistake required per se reversal and a new trial) (citations omitted).

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

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

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

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

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

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

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

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

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

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

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

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

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

[86] Id.

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

[88] See Rosa-Rivera v. Dorado Health, Inc., 787 F.3d 614, 617 (1st Cir. 2015) (employees); United States v. Bryant, 461 F.2d 912, 918-19 (6th Cir. 1972) (informants); United States v. Hicks, 748 F.2d 854, 859 (4th Cir. 1984) (girlfriend).

[89] See U.S. v. Cisneros-Gutierrez, 517 F.3d 751, 762 (5th Cir. 2008).

[90] Fed. R. Evid. 612 authorizes a party to refresh a witness’s memory with a writing so long as the “adverse party is entitled to have the writing produced at the hearing, to inspect it, to cross-examine the witness thereon, and to introduce in evidence those portions which relate to the testimony of the witness.”

[91] Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).

[92] Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).

[93] Id. at 718-19.

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

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

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

[97] Id.

[98] Util. Control Corp. v. Prince William Const. Co., 558 F.2d 716, 720 (4th Cir. 1977).

[99] United States v. Gilbert, 57 F.3d 709, 711 (9th Cir. 1995).

[100] United States v. Finley, 708 F. Supp. 906 (N.D. Ill. 1989).

[101] United States v. Finis P. Ernest, Inc., 509 F.2d 1256, 1263 (7th Cir. 1975); United States v. Prince, 491 F.2d 655, 659 (5th Cir. 1974).

[102] See Davis v. Alaska, 415 U.S. 308, 316, 94 S. Ct. 1105, 1110, 39 L. Ed. 2d 347 (1974) (“Cross-examination is the principal means by which the believability of a witness and the truth of his testimony are tested.”).

[103] See Fed. R. Evid. 611(b) (effective December 1, 2011) (“(b) Scope of Cross-Examination. Cross-examination should not go beyond the subject matter of the direct examination and matters affecting the witness’s credibility. The court may allow inquiry into additional matters as if on direct examination.”).

[104] See United States v. Perez-Solis, 709 F.3d 453, 463-64 (5th Cir. 2013); see also United States v. Arias-Villanueva, 998 F.2d 1491, 1508 (9th Cir. 1993) (cross-examination is within the scope of direct where it is “reasonably related” to the issues put in dispute by direct examination); United States v. Moore, 917 F.2d 215 (6th Cir. 1990) (subject matter of direct examination under Rule 611(b) includes all inferences and implications arising from the direct); United States v. Arnott, 704 F.2d 322, 324 (6th Cir. 1983) (“The ‘subject matter of the direct examination,’ within the meaning of Rule 611(b), has been liberally construed to include all inferences and implications arising from such testimony.”).

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

[106] Id; see also MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274, 1282 (8th Cir. 1994), cert. denied, 513 U.S. 824, 115 S. Ct. 89, 130 L. Ed. 2d 40 (1994) (“When cross-examination goes beyond the scope of direct, as it did here, and is designed, as here, to establish an affirmative defense (that the statute of limitations had run), the examiner must be required to ask questions of non-hostile witnesses as if on direct.).

[107] Under Fed. R. Evid. 608, if the witness concedes the bad act, impeachment is accomplished. If the witness denies the bad act, Rule 608(b) precludes the introduction of extrinsic evidence to prove the act. In short, the cross-examining lawyer must live with the witness’s denial.

[108] To qualify, “the crime must have been a felony, or a misdemeanor that has some logical nexus with the character trait of truthfulness, such as when the elements of the offense involve dishonesty or false statement. The conviction must have occurred within ten years of the date of the witness’s testimony at trial, or his or her release from serving the sentence imposed under the conviction, whichever is later, unless the court permits an older conviction to be used, because its probative value substantially outweighs any prejudice, and it should, in the interest of justice, be admitted to impeach the witness. If the prior conviction is used to impeach a witness other than an accused in a criminal case, its admission is subject to exclusion under Rule 403 if the probative value of the evidence is substantially outweighed by the danger of unfair prejudice, delay, confusion or the introduction of unnecessarily cumulative evidence. If offered to impeach an accused in a criminal case, the court still may exclude the evidence, if its probative value is outweighed by its prejudicial effect.” Behler v. Hanlon, 199 F.R.D. 553, 559 (D. Md. 2001).

[109] Fed. R. Evid. 608 (bad acts or character of untruthfulness); Fed. R. Evid. 609 (qualifying crime); Fed. R. Evid. 613 (prior inconsistent statement).

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

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

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

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

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

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

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

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

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

[119] Id.

[120] FED. R. CIV. P. 26(a)(2).

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

[122] Fed. R. Evid. 901.

[123] U.S. v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (“[T]here need be only a prima facie showing, to the court, of authenticity, not a full argument on admissibility . . . .  [I]t is the jury who will ultimately determine the authenticity of the evidence, not the court.”).

[124] Id.

[125] Fed. R. Evid. 803(6), 902(11); United States v. Senat, 698 F. App’x 701, 706 (3d. Cir. 2017).

[126] See, e.g., Stumpff v. Harris, 31 N.E.3d 164, 173 (Ohio App. 2 Dist. 2015) (“Numerous courts, both state and federal, have held that items produced in discovery are implicitly authenticated by the act of production by the opposing party); Churches of Christ in Christian Union v. Evangelical Ben. Trust, S.D. Ohio No. C2:07CV1186, 2009 WL 2146095, *5 (July 15, 2009) (“Where a document is produced in discovery, ‘there [is] sufficient circumstantial evidence to support its authenticity’ at trial.”).

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

[128] Rules of Evid., Rule 901(a). Idaho v. Koch, 334 P.3d 280 (Idaho 2014).

[129] State v. Smith, 2015-1359 La. App. 4 Cir. 4/20/16, 2016 WL 3353892, *10-11 (La. Ct. App. 4th Cir. 2016); see also OraLabs, Inc. v. Kind Group LLC, 2015 WL 4538444, *4, Fn 7  (D. Colo. 2015) (in a patent and trade dress infringement action, the court admitted, over hearsay objections, Twitter posts offered to show actual confusion between the plaintiff’s and defendant’s products.).

[130] Jones v. U.S., 813 A.2d 220, 226-227 (D.C. 2002).

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

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

[133] U.S. v. Gomez-Alvarez, 781 F.3d 787, 792 (5th Cir. 2015).

[134] Jerden v. Amstutz, 430 F.3d 1231, 1237 (9th Cir. 2005).

[135] See, e.g., Hastings v. Bonner, 578 F.2d 136, 142-143 (5th Cir. 1978); United States v. Johnson, 577 F.2d 1304, 1312 (5th Cir. 1978); United States v. Jamerson, 549 F.2d 1263, 1266-67 (9th Cir. 1977).

[136] See United States v. Henderson, 409 F.3d 1293, 1298 (11th Cir. 2005).

[137] Inselman v. S & J Operating Co., 44 F.3d 894, 896 (10th Cir. 1995).

[138] See United States v. Adams, 271 F.3d 1236, 1241 (10th Cir. 2001) (“In order to qualify as an adequate offer of proof, the proponent must, first, describe the evidence and what it tends to show and, second, identify the grounds for admitting the evidence.”).

[139] Murphy v. City of Flagler Beach, 761 F.2d 622 (11th Cir. 1985).

[140] See id. at 1241-42 (“On numerous occasions we have held that merely telling the court the content of . . . proposed testimony is not an offer of proof.”).

[141] Fed. R. Evid. 103(c) (The trial court “may direct an offer of proof be made in question-and-answer form.”). See, e.g., United States v. Yee, 134 F.R.D. 161, 168 (N.D. Ohio 1991) (stating that “hearings were held for approximately six  weeks” on whether DNA evidence was admissible).

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

[143] Id.

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

[145] Fed. R. Evid. 103(a)(2); Beech Aircraft v. Rainy, 488 U.S. 153 (1988).

[146] Alford v. United States, 282 U.S. 687, 692 (1931).

[147] United States v. Harris, 536 F.3d 798, 812 (7th Cir. Ill. Aug. 6, 2008).

[148] See, e.g., United States v. St. Michael’s Credit Union, 880 F.2d 579 (1st Cir. 1989); Griffin v. California, 380 U.S. 609, 615 (Apr. 28, 1965).

[149] Model Rule of Professional Conduct Rule 3.4(e).

[150] Jones v. Lincoln Elec. Co., 188 F.3d 709, 731 (7th Cir. 1999) (“We find nothing improper in this line of argument. Closing arguments are the time in the trial process when counsel is given the opportunity to discuss more freely the weaknesses in his opponent’s case.”).

[151] Vineyard v. County of Murray, Ga., 990 F.2d 1207, 1214 (11th Cir. 1993).

[152] See, Fed. R. Civ. P. 50(a)(1) (“If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.”).

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

[154] Arch Ins. Co. v. Broan-NuTone, LLC, 509 F. App’x 453, fn. 5 (6th Cir. 2012) (quoting Ford v. Cnty. of Grand Traverse, 535 F.3d 483, 492 (6th Cir. 2008).

[155] U. S. Indus., Inc. v. Semco Mfg., Inc., 562 F.2d 1061, 1065 (8th Cir. 1977).

[156] Am. & Foreign Ins. Co. v. Gen. Elec. Co., 45 F.3d 135, 139 (6th Cir. 1995).

[157] Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 405 (2006).

[158] Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000); citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 554-555, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Liberty Lobby, Inc., supra, at 254, 106 S.Ct. 2505; Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, n.6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962).

[159] Id.

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

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

[162] Fed. R. Civ. P. 51(b) (1)-(2); see also Vialpando v. Cooper Cameron Corp., 92 F. App’x 612 (10th Cir. 2004) (explaining that “a district court can no longer give mid-trial instructions without first advising the parties of its intent to do so and giving the parties an opportunity to object to the proposed instruction.”).

[163] Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 WL 3232424 (N.D. Cal. July 28, 2017); see also Daly, 491 F.2d.104 (affirming court’s omission of instructions on the due process requirements of the Fourteenth Amendment since no facts supported a violation).

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

[165] Estate of Keatinge v. Biddle, 316 F.3d 7 (1st Cir. 2002).

[166] Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 65 Fed. R. Evid. Serv. 1366 (5th Cir. 2004).

[167] Fed. R. Civ. P. 51(c)(2); Fed. R. Crim. P. 30(d); see also Abbott v. Babin, No. CV 15-00505-BAJ-EWD, 2017 WL 3138318, at *3 (M.D. La. May 26, 2017) (explaining that upon an untimely objection courts may only consider a plain error in the jury instructions).

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

[169] Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996).

[170] Benaugh v. Ohio Civil Rights Comm’n, No. 104-CV-306, 2007 WL 1795305 (S.D. Ohio June 19, 2007), aff’d, 278 F. App’x 501 (6th Cir. 2008).

[171] Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996) (reversing judgment since the instructions could allow a jury to find the defendant liable based on premise unsupported by law).

[172] United States v. Grube, No. CRIM C2-98-28-01, 1999 WL 33283321 (D.N.D. Jan. 16, 1999) (denying motion for new trial since the omitted instructions were superfluous and potentially misleading); see also Cupp v. Naughten, 414 U.S. 141, 94 S. Ct. 396, 397, 38 L. Ed. 2d 368 (1973); Lannon v. Hogan, 555 F. Supp. 999 (D. Mass.), aff’d, 719 F.2d 518 (1st Cir. 1983) (generally cannot seek such relief based on a claim of improper jury instructions, unless the error “so infect[ed] the entire trial that the resulting conviction violated the requirements of Due Process Clause and the Fourteenth Amendment.”).

[173] Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir. 2002) (failure to make specific objections to jury instructions before jury retires to deliberate results in waiver, and Court of Appeals may review the instruction for fundamental error only.).

[174] United States v. Olano, 507 U.S. 725, 737 (1993).

[175] Cleary v. Indiana Beach, Inc., 275 F.2d 543, 545-46 (7th Cir. 1960); Sullivan v. United States, 414 F.2d 714, 715-16 (9th Cir. 1969).

[176] Cleary, 275 F.2d at 546; Magnuson v. Fairmont Foods Co., 442 F.2d 95, 98-99 (7th Cir. 1971).

[177] See United States v. Williams, 635 F.2d 744, 745-46 (8th Cir. 1980) (“It is essential to a fair trial, civil or criminal, that a jury be cautioned as to permissible conduct in conversations outside the jury room. Such an admonition is particularly needed before a jury separates at night when they will converse with friends and relatives or perhaps encounter newspaper or television coverage of the trial.”); United States v. Hart, 729 F.2d 662, 667 n.10 (10th Cir. 1984) (“[A]n admonition . . . should be given at some point before jurors disperse for recesses or for the day, with reminders about the admonition sufficient to keep the jurors alert to proper conduct on their part.”).

[178] United States v. Dempsey, 830 F.2d 1084, 1089-90 (10th Cir. 1987).

[179] United States v. Gross, 451 F.2d 1355, 1359 (9th Cir. 1971).

[180] United States v. Williams, 87 F.3d 249, 255 (8th Cir. 1996).

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

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

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

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

[185] United States v. Chadwell, 798 F.2d 910, 914-15 (9th Cir. 2015).

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

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

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

[189] United States v. Gonzales, 121 F.2d 928, 945 (5th Cir. 1997).

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

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

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

[193] Fed. R. Civ. P. § 51(b)(3).

[194] United States. v. Venerable, 807 F.2d 745, 747 (8th Cir. 1986).

[195] United States v. Gray, 199 F.3d 547, 550 (1st Cir. 1999).

[196] United States v. Scott, 642 F.2d 791, 797 (9th Cir. 2011); United States v. Bassler, 651 F.2d 600, 602 n.3 (8th Cir. 1981).

[197] See, e.g., United States v. Darden, 70 F.2d 1507, 1537 (8th Cir. 1995) (court permitted note-taking while examining exhibits only); United States v. Porter, 764 F.2d 1, 12 (1st Cir. 1985) (court permitted note-taking only during opening statements, closing statements, and jury charge).

[198] United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011).

[199] See United States v. Rhodes, 631 F.2d 43, 45-46 (5th Cir. 1980) (“The court should also explain that the notes taken by each juror are to be used only as a convenience in refreshing that juror’s memory and that each juror should rely on his or her independent recollection of the evidence rather than be influenced by another juror’s notes.”).

[200] United States v. Richardson, 233 F.3d 1285, 1288-1289 (11th Cir. 2000).

[201] United States v. Rawlings, 522 F.3d 403, 408 (D.C. Cir. 2008); United States v. Bush, 47 F.3d 511, 514-516 (2nd Cir. 1995); DeBenedetto by DeBenedetto v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir. 1985).

[202] Perhaps the most important protection is a screening mechanism where questions are submitted to a judge and reviewed by counsel prior to the question being posed. Rawlings, 522 F.3d at 408; United States v. Collins, 226 F.3d 457, 463 (6th Cir. 2000).

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

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

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

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

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

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

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

[210] Exxon Shipping Co. v. Baker, 554 U.S. 471, 486, 128 S. Ct. 2605, 2617 n.5, 171 L. Ed. 2d 570 (2008).

[211] CFE Racing Prod., Inc. v. BMF Wheels, Inc., 793 F.3d 571, 583 (6th Cir. 2015).

[212] Id. (explaining that the waiver rule serves to protect litigants’ right to trial by jury, discourage courts from reweighing evidence simply because they feel the jury could have reached another result, and prevent tactical victories at the expense of substantive interest as the pre-verdict motion enables the defending party to cure defects in proof) (quoting Libbey-Owens-Ford Co. v. Ins. Co. of N. Am., 9 F.3d 422, 426 (6th Cir. 1993)).

[213] Bowen v. Roberson, 688 F. App’x 168, 169 (3d Cir. 2017).

[214] McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241, 1254 (11th Cir. 2016).

[215] Bavlsik v. Gen. Motors, LLC, 870 F.3d 800, 805 (8th Cir. 2017).

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

[217] Id.

[218] See, e.g., Stragapede v. City of Evanston, Illinois, 865 F.3d 861, 866 (7th Cir. 2017), as amended (Aug. 8, 2017) (upholding jury verdict in favor of plaintiff for ADA violation when challenged in renewed 50(b) motion on grounds that the jury properly discounted employer’s evidence).

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

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

[221] Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (noting that federal courts are guided by the common law’s established grounds for permitting new trials).

[222] Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940).

[223] Kleinschmidt v. United States, 146 F. Supp. 253, 257 (D. Mass. 1956) (explaining that a party seeking new trial on ground of newly discovered evidence has substantial burden to explain why the evidence could not have been found by due diligence before trial).

[224] Gross v. FBL Fin. Servs., Inc., 588 F.3d 614, 617 (8th Cir. 2009) (granting new trial in age discrimination case where jury instruction improperly shifted the burden of persuasion on a central issue).

[225] Warner v. Rossignol, 538 F.2d 910, 911 (1st Cir. 1976) (counsel’s conduct in going beyond the pleadings and evidence to speculate and exaggerate the plaintiff’s injuries, despite repeated warnings from the trial judge, warranted new trial).

[226] See, e.g., Bavlsik v. Gen. Motors LLC, No. 4:13 CV 509 DDN, 2015 WL 4920300, at *1 (E.D. Mo. Aug. 18, 2015) (granting new trial on issue of damages and rejecting defendants’ argument that the record demonstrated a compromised verdict).

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

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

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

[230] In re Transtexas Gas Corp., C.A.5 (Tex.) 2002, 303 F.3d 571.

[231] U.S. v. Mansion House Center North Redevelopment Co., C.A.8 (Mo.) 1988, 855 F.2d 524, certiorari denied 109 S.Ct. 557, 488 U.S. 993, 102 L.Ed.2d 583 (district court had jurisdiction to modify judgment, even after it was affirmed on appeal, in order to clarify its intentions and conform judgment to parties’ pretrial stipulation).

[232] See United States v. Cirami, 563 F.2d 26, 33 (2d Cir. 1977).

[233] Flores v. Town of Islip, No. 18-CV-3549 (GRB)(ST), 2020 WL 5211052, at *1 (E.D.N.Y. Sept. 1, 2020) (the court granted a motion to proceed with a virtual trial but required counsel and the court staff to have a pre-trial conference to discuss the logistics of a virtual trial).

[234] See, e.g., New Jersey Federal Bankruptcy Court Zoom Trial Guidelines.

In November 2017, the ABA’S Business Law Section unveiled its new format for Business Law Today: a dynamic website that would cover every practice area in the business law arena and provide monthly updates and analytical articles on critical issues and substantive topics in business law. The unveiling of www.businesslawtoday.org witnessed the culmination of two years of intense planning and development that was spearheaded by Chris Rockers, former BLS chair and current delegate to the ABA House of Delegates, and Jonathan Rubens, the BLT website’s first Editor-in-Chief.

But one ingredient was the key to the BLT website’s success: the staff editor who would guide, nurture, and grow the content. The Business Law Section was fortunate in finding for its first editor, Sarah Claypoole.    

A recent graduate of the University of Chicago, Sarah joined the staff in January 2018 and quickly began to familiarize herself with the various topic areas of business law and demonstrated the valuable traits of an editor who must adhere to quality standards of writing while also balancing deadlines and schedules.

“The new Business Law Today is one of the content offerings of which I’m most proud,” said Norm Powell, Business Law Section Content Officer. “Designed based on significant polling from Section members, it has steadily increased in popularity since the launch. Sarah’s been a huge part of that success. She has shared and delivered on the vision that we were creating a virtual hub (a coffee shop, if you will), where folks regularly pop in to see what’s happening in their worlds.”

During Sarah’s tenure, hundreds of articles and month-in-briefs have published, as well as videos, podcasts, and, most recently, an ambitious content offering of recent developments in business and commercial litigation. The shear amount and quality of content is a reflection on Sarah and her eclectic, analytical approach to subject matter and her appreciation of fine writing.

Her interest in business law was the catalyst for Sarah to consider a career as a lawyer, and, in May 2021, she committed to attend the Duke University School of Law, and will leave as editor of www.businesslawtoday.org in July to make her new home in Durham, North Carolina.

“Sarah has been an integral part of every decision made at BLT since BLT was re-launched as an online platform in 2018,” said Lisa Stark, current Editor-in-Chief. “Sarah’s contributions to BLT have been crucial to BLT’s success.  Sarah also is an amazing person and will be sorely missed.”

A new BLT editor will improve on Sarah’s accomplishments and continue the tradition of quality content that has been a hallmark of the Business Law Section’s content offerings.  Yet, Sarah Claypoole has left her mark on the BLT website and the BLS content members and leadership wish her continued success in law school and in her future career as a lawyer.

Editor

Kathleen Cahill Slaught (Chair)

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

Contributors

To Disclose Or Not During ERISA Administrative Review —

Jon Karelitz
Mark Casciari

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

Stunning Development – The Ninth Circuit Enforces an ERISA Plan Arbitration and Class Action Waiver Provision

Michael W. Stevens
Jonathan A. Braunstein

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

Mark Casciari

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

ERISA Preemption – The Courts of Appeal Continue to Rule as They Await Further Supreme Court Attempts to Define, Once and For All, Its Limiting Principles

Mark Casciari
Ian Morrison

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

The Trump Administration Wants You to Know, Guidance is NOT Law!

Mark Casciari

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

No Partnership, No Common Control, No Withdrawal Liability: Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability

Jessica Stricklin

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000

Alan Cabral
Ryan Tzeng

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

Beware of the “Overshare”: Construe Requests for ERISA Plan Documents Narrowly!

Mark Casciari
Sarah Touzalin

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

Supreme Court Remands Case Back Seeking Clarification of the Dudenhoeffer Pleading Standard

Jim Goodfellow

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

Kathleen Cahill Slaught

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

Supreme Court’s Sulyma Ruling Toughens ERISA’s “Actual Knowledge” Standard & Makes Dismissal of Fiduciary Breach Actions More Unlikely

Ian Morrison

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

Will the ACA Case Now Before the Supreme Court Make it Harder for ERISA Fiduciary Breach Plaintiffs to Establish Standing?

Mark Casciari

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

ERISA Fee Motions After COVID-19 — A Substantive and Procedural Review

Rebecca Bryant
Mark Casciari

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

Whose Law? Where? When? — Risk Management for ERISA Plans in Uncertain Times

Richard Loebl

Seyfarth Shaw LLP
620 Eighth Avenue
New York, New York 10018-1405
(212) 218-3319
[email protected]
www.seyfarth.com

Mark Casciari

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

The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution

Michael W. Stevens

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

Mark Casciari

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

Limits To ERISA’s Equitable Remedies — What The Supreme Court’s Latest Securities Act Decision Tells Us

Michael W. Stevens

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

Mark Casciari

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

The 10th Circuit’s New Interpretation of What is Mandated under ERISA’s Notice Requirements May have Far Reaching Effects On Plan Administrator’s Duties

Rebecca K. Bryant
Ian H. Morrison
Sam M. Schwartz-Fenwick

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

Transgender Patients Remain Protected: District Court Blocks HHS Rule From Taking Effect

Emily Miller

Seyfarth Shaw LLP
Seaport East
Two Seaport Lane, Suite 300
Boston, MA 02210-2028
(617) 946-4800
[email protected]
www.seyfarth.com

Ben Conley
Sam Schwartz-Fenwick

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

Countdown to the Supreme Court’s ERISA Preemption Oral Argument in Rutledge — Two Noteworthy Case Developments

Jules Levenson
Mark Casciari

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

How to Minimize Judicial Review of ERISA Fiduciary Decisions

Ronald Kramer
Mark Casciari

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

First Circuit Rules That Private Equity Funds Are Not Responsible For Portfolio Company Withdrawal Liability

Bryan M. O’Keefe

Seyfarth Shaw LLP
975 F Street, N.W.
Washington, DC 20004-1454
(202) 463-2400
[email protected]
www.seyfarth.com

Ronald Kramer

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

Samuel Rubinstein

Seyfarth Shaw LLP
620 Eighth Avenue
New York, New York 10018-1405
(212) 218-3340
[email protected]
www.seyfarth.com

§1.1 To Disclose Or Not During ERISA Administrative Review — The Fourth Circuit Weighs In With An Affirmative Answer

In Odle vs. UMWA 1974 Pension Plan, the Court of Appeals for the Fourth Circuit reversed a district court’s decision on summary judgment in favor of a pension plan’s fiduciaries (in this case, the board of trustees for a coal industry multiemployer fund).  The case involved a dispute over service credit towards a deceased participant’s pension.  The plan fiduciaries had denied a claim by the participant’s surviving spouse, concluding that 13.5 years of the participant’s service was actually performed in a position that was not classified as eligible under an industry-wide union agreement.  The administrative record indicated that the fiduciaries based their denial, in part, on an audit of employer timesheet records that was not disclosed to the claimant.  The claimant alleged as well that she requested the audit records, and the plan refused to provide them.  The Fourth Circuit held that “by failing to disclose that audit during the administrative process, the Plan denied [the claimant] the ‘full and fair review’ of her claim that she was entitled to under ERISA.”

The regulations under ERISA Section 503 require that a claimant “be given reasonable access to documents relevant to her claim,” The regulations provide that documents, records and other information are “relevant” if they are “submitted, considered, or generated in the course of making the benefit determination.”

Under the Odle holding, a fiduciary should disclose all documents upon which a claim or appeal decision was based, unless there is a good reason not to.  Such disclosure should provide the claimant with an opportunity to consider all relevant information, and use that information in making arguments in support of the claim.  Of course, there may be compelling reasons not to disclose, under certain circumstances, and Odle does not address all possible arguments that cut against disclosure.

Jon Karelitz and Mark Casciari

§1.2 Stunning Development — The Ninth Circuit Enforces an ERISA Plan Arbitration and Class Action Waiver Provision

In Dorman v. Charles Schwab Corp., No. 18-15281, 934 F.3d 1107 and 2019 WL 3939644 (Aug. 20, 2019), the Ninth Circuit reversed course, overruled precedent, and enforced an arbitration provision in an ERISA 401(k) plan that mandated individual, and not class, arbitration of ERISA § 502(a)(2) and (3) claims.

In Dorman, a 401(k) participant brought suit on behalf of a putative class of plan participants and beneficiaries, alleging that the fiduciaries had breached their fiduciary duties by investing assets in the funds affiliated with the defendant.  However, nine months prior to the named plaintiff’s termination of employment and nearly a year before his account withdrawal, the plan was amended to expressly include an arbitration provision binding the plan to arbitration, and forbidding class actions.

The defendant moved to compel arbitration.  The district court denied the motion on multiple grounds, ruling that ERISA claims cannot be subject to mandatory arbitration; the arbitration provision was added after the named plaintiff’s participation in the plan began; and the plaintiff’s claims were brought on “behalf of the plan,” rather than as an individual, and thus could not be subject to the plan’s arbitration clause.

Thirty-five years ago, in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), the Ninth Circuit had held that ERISA claims were not subject to arbitration.  Amaro reasoned that an arbitral forum may “lack the competence of courts to interpret and apply statutes as Congress intended.” In Dorman, however, the Ninth Circuit recognized that later Supreme Court cases, including American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), had held that arbitrators were competent to interpret and apply federal statutes.  Thus, Dorman expressly overruled Amaro.

In an unpublished companion opinion, the Ninth Circuit addressed and reversed other holdings by the Dorman district court.  Although the Ninth Circuit had recently held, in Munro v. Univ. of S. Cal., 896 F.3d 1088 (9th Cir. 2018), that Section 502(a)(2) claims belong to the plan, rather than the individual, the critical difference in Dorman was that the plan had been amended to include an arbitration provision binding the plan.  Thus, the Ninth Circuit found, the plan “expressly agreed” that all ERISA claims should be arbitrated.  The Ninth Circuit also held, citing LaRue v. DeWolff Boberg & Assocs., Inc., 552 U.S. 48 (2008), that although a § 502(a)(2) claim may belong to the plan, losses are inherently individualized in the context of a defined contribution plan such as the one at issue.  The Ninth Circuit reversed and remanded with instructions to the district court to compel arbitration.

The Dorman plaintiff filed a petition for en banc review, so it remains to be seen whether the latest Dorman decisions will stand.  On October 2, 2019, the Ninth Circuit ordered the defendants to respond to Dorman’s Petition.  This indicates that the Ninth Circuit may agree to rehear its prior decision that sent Dorman’s claims to arbitration, on an individual basis.

The Ninth Circuit has been the most hostile to arbitration, so Dorman (unless vacated) is a monumental change that could be the start of trend favoring ERISA plan arbitration.  Arbitration in lieu of court litigation has pros and cons that need to be considered carefully before mandating arbitration and a class action waiver in ERISA plans, even though the court most hostile to forced arbitration now seems to allow it.

Michael W. Stevens, Jonathan A. Braunstein and Mark Casciari

§1.3 ERISA Preemption — The Courts of Appeal Continue to Rule As They Await Further Supreme Court Attempts To Define, Once and for All, Its Limiting Principles

The federal Employee Retirement Income Security Act (ERISA) has been effective, as a general matter, since 1974.  Its section 514 preempts state laws that “relate to” ERISA plans.  The United States Supreme Court has wrestled, in 18 cases, with how to define, and thus limit, “relate to,” as everything can be said to be related to everything else.  Compounding matters is that section 514 lists specific exceptions to “relate to” preemption.  It is our expectation that the Supreme Court will agree to hear more ERISA preemption cases in the future.

In the meantime, the Courts of Appeal continue to rule on the limits to ERISA preemption, often with opposite results.

In Rudel v. Hawai’i Management Alliance Ass’n, 2019 U.S. App. LEXIS 27371 (9th Cir. Sept. 11, 2019), an ERISA plan participant received ERISA medical plan benefits after a motorcycle accident.  Plan terms allowed it to seek reimbursement from a third party tortfeasor, to the extent the tortfeasor paid general damages, up to the amount of the plan payout.  The participant sued to clarify the plan’s reimbursement right, or lack thereof to be more precise, relying on a Hawai’i statute that invalidated general damage insurance reimbursement rights.  The Ninth Circuit said that the state law “related to” an ERISA plan, but found no preemption, relying on the statutory exemption to ERISA preemption in favor of state laws that regulate insurance.

The Ninth Circuit found that the Hawai’i statute regulated insurance because it was directed at insurance reimbursement rights.  The Court added that the state statute affected the risk pooling arrangement between the insurer and the insured by impacting the terms by which insurance providers must pay plan members.

In Dialysis Newco, Inc. v. Cmty. Health Sys. Grp. Health Plan, 2019 U.S. App. LEXIS 27418 (5th Cir. Sept. 11, 2019), however, the Court of Appeals for the Fifth Circuit found ERISA preemption.  The ERISA medical plan at issue contained a valid anti-claim assignment provision.  A third party health care provider sued to recover on what it claimed was a valid assignment of plan benefits, by relying on a state statute requiring plan administrators to honor assignments made to healthcare providers.

The Fifth Circuit found that the state statute “related to” the ERISA plan because it impacted a “central matter of plan administration” and interfered with “nationally uniform plan administration.” The Court said, because states could—and seemingly already do—impose different requirements on when such assignments would be honored, permitting one state law to govern the plan would interfere with nationally uniform plan administration.

These two cases show how the courts continue to grapple with the nearly infinite nuances of ERISA’s remarkably broad preemption provision.  Given the historic interest of the Supreme Court on ERISA preemption, it is likely only a matter of time until this or a related ERISA preemption question is again before that Court.  ERISA preemption is bound to get more interesting before it gets boring.

Mark Casciari and Ian Morrison

§1.4 The Trump Administration Wants You to Know, Guidance is NOT Law!

Employee benefit lawyers, including employee benefit litigators, have historically been inclined to rely on federal agency guidance that does not technically have the force of law.  Lawyers have followed this practice to appease the agency—the first line of potential opposition—and thus allow a client to re-focus quickly on business goals.  Another reason is that the federal courts have for years given deference to federal agencies.  So why not reflexively back away from a fight when the agency is likely to win in court anyway?

The difficulty with a “guidance-as-gospel” approach is that federal agency officials and regulators are not elected and thus cannot enact legislation.  Deference may operate as a shield for guidance that is outside what Congress has legislated, and is based on an executive-branch political agenda.

This is the view of the Trump administration.

One of the new executive orders attempts to stop reliance on guidance that goes beyond a statute, or notice and comment regulations (which have the force of law, if consistent with the governing statute).  The other order requires agencies to establish a single, searchable toolbar that links to all of the already issued guidance.  Additionally, the website must note that the guidance does not have the force and effect of law, unless as authorized by law or incorporated into a contract.  The new executive orders direct that enforcement action cannot be based only on guidance.  Enforcement must be based on the governing statute.

The force of the new executive orders may extend beyond the life of the Trump administration.

Federal courts increasingly question the wisdom of the historic deference given to guidance.  Noteworthy is Kisor v. Wilkie, 139 S. Ct. 2400 (2019), wherein a veteran sought PTSD disability benefits from the Department of Veterans Affairs.  The agency partially denied his claim and the Court of Appeals for the Federal Circuit affirmed by deferring to the agency’s interpretation of what it said was an ambiguous regulation.  The Supreme Court reversed and remanded the case back to the Court of Appeals.  Justice Elana Kagan wrote the majority opinion, and stated that a court should defer to the agency only after satisfying itself that the regulation is “genuinely” ambiguous, and if so, “reasonable.” The Court added that the agency’s interpretation must be an official position, as opposed to an ad hoc statement, must implicate its substantive expertise, and be otherwise “fair and considered.”

To be sure, Kisor does not involve guidance, but its holding—federal courts must not reflexively defer to agency action—applies with the same (or greater) force to guidance.  So, employers and fiduciaries should rely only on guidance they believe is fully consistent with a careful analysis of the governing statutory law.

Mark Casciari

§1.5 No Partnership, No Common Control, No Withdrawal Liability: Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability

In a 2013 decision, the District Court of Massachusetts found that the two Sun Capital PE funds were not only engaged in “trade or business,” but also were a partnership acting under “common control” with a bankrupt portfolio company, and therefore, liable for the portfolio company’s $4.5 million withdrawal liability to a multiemployer pension plan incurred upon its bankruptcy.  Under ERISA, the common control standard is met if there is an 80% ownership interest.  The district court found that even though the two PE funds had individual investment stakes in the portfolio company of only 70% and 30% respectively, they were acting as a partnership and so their ownership interests should be aggregated, thereby exceeding the 80% threshold.

The PE funds appealed the decision and the First Circuit reached its decision: no partnership, no common control, no withdrawal liability.  Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370 (1st Cir. Nov. 22, 20190.  The First Circuit applied factors derived from an old tax court case, Luna v. Commissioner, and concluded that the PE funds’ activities did not rise to the level of a partnership.  Among the factors considered, the PE funds were not acting in concert when making investments, conducted business under separate names, filed separate tax returns, kept separate books, and disclaimed any sort of partnership.  The court also noted the fact that the PE Funds were formed as LLCs further demonstrated an intent not to form a partnership.

Importantly, the court stated that it was reluctant to impose withdrawal liability on the PE funds when there was no clear congressional intent to do so, and no guidance from the PBGC.

But beware: While this is a significant victory for PE funds in general, the court’s decision was very fact specific, and it did not “reach other arguments that might have been available.” It will be interesting to see if other circuit courts follow this precedent.

Ryan Tzeng, Jessica Stricklin, and Alan Cabral

§1.6 Beware of the “Overshare”: Construe Requests for ERISA Plan Documents Narrowly!

Section 104(b)(4) of ERISA requires that plan administrators provide certain plan documents to a participant or beneficiary (or their authorized personal representative) upon written request, including copies of the summary plan description, plan document, annual report, trust agreement, contract and bargaining agreement, as well as documents that fall within a catch-all of “other instruments under which the plan is established or operated.” When document requests are received, it’s not at all uncommon for the request to include a long list of documents, often times repetitive, leaving the plan administrator to weed through the request and identify the documents that must be provided under ERISA.

In Theriot v. Building Trades United Pension Trust Fund, et al. (E.D. La. Nov. 4, 2019), plaintiff alleged that the defendants, a multi-employer pension fund and its trustees, failed to timely produce plan documents in violation of Section 104(b)(4), entitling the plaintiff to statutory penalties of up to $110 per day.

In 2017, the plaintiff requested “a complete copy of the plan agreement, including [her deceased mother’s] application and all other correspondence from her to the Fund.” The defendants provided a copy of the plan document, current through 2017.  The plaintiff alleged that the defendants should have known that she was also requesting other plan documents, including an outdated version of the plan document and summary plan description, even though she did not specifically request them.

In 2018, the plaintiff made a second request, also including a long list of additional plan documents.  The defendants provided only copies of the 2017 plan document, trust agreement and summary plan description in effect as of the dates specifically requested, as well as copies of Forms 5500 and attachments.  Plaintiff, however, alleged that the defendants failed to produce any of the other documents from the 2018 request.  The court determined that certain of the document requests were not sufficiently clear, some of the requested documents did not exist and some were not relevant to the plaintiff understanding her rights under the plan.  The court also determined that a reasonable plan administrator would not have known that the plaintiff was requesting other documents beyond the 2017 plan document.  And notably, the court agreed with the majority of other circuits that Section 104(b)(4) did not encompass the fidelity bonding policy, any errors and omissions insurance policy or any fiduciary insurance policy.

Takeaway: The Theriot case shows that narrowly construing Section 104(b)(4) can be defensible.  It also can be advisable.  Any lawsuit challenging fiduciary conduct must allege plausible facts to survive a motion to dismiss and enter into expensive discovery.  There is no sound reason to make the plaintiff’s task in this regard easier by over-producing documents under Section 104(b)(4).

Sarah Touzalin and Mark Casciari

§1.7 Supreme Court Remands Case Back Seeking Clarification of the Dudenhoeffer Pleading Standard

In Retirement Plans Committee of IBM v. Jander, the Supreme Court, in a unanimous opinion, clarified the its opinion in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), which set forth the duties that administrators of Employee Stock Ownership Plans (“ESOP”) owe to participants, and when they are required to act on inside information.

In this case, plaintiffs alleged that the IBM’s ESOP fiduciaries violated their duty of prudence under ERISA by continuing to invest the plan’s funds in IBM’s stock even though they knew the stock’s market price was artificially inflated.  Under Dudenhoeffer, a plaintiff bringing such a claim must allege that a fiduciary in the same position could not have concluded that taking a different action “would do more harm than good to the fund.” The question presented to the Court in Jander was whether the plaintiffs’ complaint can survive a motion to dismiss when they make only general allegations that the costs of undisclosed fraud grow over time.

Though the Court agreed to take the case, it ultimately declined to opine on the issue presented.  Rather, it remanded the matter to the Second Circuit for further consideration of the SEC’s position on whether an ERISA based duty to disclose inside information, that is not otherwise required to be disclosed by the securities laws, would otherwise conflict with the objectives of the insider trading and corporate disclosure requirements contained in the securities laws.  IBM argued that ERISA imposed no duty to act on inside information.

Thus, the Supreme Court left unresolved the question presented regarding the pleading standard.  It did, however, provide some helpful guidance to fiduciaries of ESOP plans in that it emphasized that ERISA’s duty of prudence does not require a fiduciary to break the law.  Thus, if taking an action on inside information would violate the securities law, there is no violation of ERISA for not taking that action.  But we will also wait to see how the SEC views ERISA’s duty of prudence in this context.

Jim Goodfellow and Kathleen Cahill Slaught

§1.8 Supreme Court’s Sulyma Ruling Toughens ERISA’s “Actual Knowledge” Standard & Makes Dismissal of Fiduciary Breach Actions More Unlikely

Plaintiff Christopher Sulyma filed a putative class action in October 2015, alleging that Intel’s investment committee and other plan administrators breached their fiduciary duties by utilizing “alternative investments” that lagged behind high-performing index funds.  The Northern District of California granted summary judgment to the committee based on plan disclosures that clearly revealed the disputed investments and were published more than three years before the plaintiff filed suit.  The Ninth Circuit reversed the ruling, finding that Sulyma’s deposition testimony that he did not recall reviewing plan disclosures created a dispute of fact as to his “actual knowledge” and precluded summary judgment.

Affirming the Ninth Circuit, the Supreme Court unanimously found in an opinion authored by Justice Alito that although ERISA does not define “actual knowledge,” it plainly requires awareness of the “relevant facts” provided in the plan’s disclosures.  In addition, Congress’s language in ERISA clearly identifies whether a particular statute of limitations is triggered by what a plaintiff actually knows or what he reasonably should know.  The language in § 1113(2), however, clearly notes that only a plaintiff’s “actual knowledge” triggers the 3-year limitations period for a fiduciary breach action, rather than what he should have known from disclosures provided to him.

Justice Alito, however, stressed that that a participant’s assertion that he did not know about the disclosed information related to the alleged breach might not be the end of the story.  “Actual knowledge” may be proved through inference from circumstantial evidence.  For instance, electronic records may show that a plaintiff reviewed plan disclosures and acted in response.  If a plaintiff’s denial of knowledge is “blatantly contradicted” by the factual record, the Supreme Court instructed trial courts to act accordingly.

The case provides succor to the plaintiffs’ bar because the Court could have found that mere delivery of plan disclosures triggers the three-year limitations period.  While disclosures are not an automatic shield, they form an important part of the defense in most cases.  To rebut claims of lack of knowledge, plans may wish to consider adopting electronic procedures to confirm that participants have reviewed disclosures, such as requiring participant acknowledgments.

Ian H. Morrison

§1.9 Will The ACA Case Now Before The Supreme Court Make It Harder For ERISA Fiduciary Breach Plaintiffs To Establish Standing?

On March 2, 2020, the United States Supreme Court granted certiorari in California v. Texas, No. 19-840, which appeals the decision of the Court of Appeals for the Fifth Circuit that struck down the individual mandate to the Affordable Care Act (ACA).

In Texas v. United States (as the case was styled previously), the Fifth Circuit held that the two individual plaintiffs who were self-employed residents of Texas had standing to challenge the ACA, despite not being subject to a financial penalty.  There was no penalty because the 2017 Tax Cuts and Jobs Act (TCJA) set the penalty for not maintaining individual health insurance at zero dollars.  According to the Fifth Circuit, the individual plaintiffs had standing because they demonstrated the “increased regulatory burden” that the individual mandate imposes.

The Supreme Court is keenly interested whether a federal court plaintiff has a sufficient injury to sue in a federal forum when she can show no other harm besides a technical statutory violation.  In Spokeo v. Robbins, the Supreme Court held that, although Congress can create federal claims, those claims can only be litigated in federal court as long as the plaintiff alleges a “concrete” injury (i) that affects the plaintiff in a personal and individual way, (ii) that is traceable to the defendant, and (iii) that is repressible by the federal judge.

It is possible that the Supreme Court may dismiss the individual plaintiffs in Texas v. United States for lack of standing, finding that they have not been harmed by a mere obligation to maintain individual health insurance without a corresponding penalty.  Such a ruling would seemingly comport with Spokeo, which suggests that private plaintiffs may not sue to enforce statutory obligations when they have not yet been harmed by violations of those obligations.  ERISA fiduciaries thus might expect a drop in class action filings, especially as all private claims for breaches of fiduciary duty under Section 502(a)(2) and (a)(3) may be brought only in federal court, and not in a state court.  A technical ERISA statutory violation may not be found “concrete and particularized,” or “actual or imminent,” and may instead be considered “conjectural” or “hypothetical,” buzz words used to determine the outcome of Spokeo arguments to dismiss.

Mark Casciari

§1.10 ERISA Fee Motions After COVID-19 — A Substantive and Procedural Review

Two interesting lower court decisions on attorney fee motions were recently issued from Judge Susan Brnovich of the federal District of Arizona and Judge Beau Miller in the District Court of Harris County, Texas of the 190th Judicial District.  One decision presents a refresher course on the merits of ERISA fee motions and the other used the novel procedural approach of conducting a Zoom video hearing in lieu of live appearances.

The first decision, United Air Ambulance LLC, v. Cerner Corporation, et al., Case No. CV-17-04016 (U.S. Dist. Ct. D. Ariz., Apr. 14, 2020), addressed when prevailing ERISA plaintiffs may recover fees as instructed by the Court of Appeals for the Ninth Circuit.  Judge Brnovich denied ERISA Section 502(g)(1) fees after carefully considering the following factors: (1) degree of the opposing party’s culpability or bad faith, (2) the ability of the opposing party to satisfy an award of fees, (3) whether an award of fees against the opposing party would deter others from acting under similar circumstances, (4) whether the party seeking fees sought to benefit all participants and beneficiaries under an ERISA plan or to resolve a significant ERISA legal question, and (5) the relative merits of the parties’ positions.  The Court found that these factors split evenly, save for two, which tipped the scales against an award of fees to the plaintiff.  The deterrence factor weighed against plaintiff because the case involved a unique set of facts, so no one else was likely to encounter the scenario at issue.  The resolution of the case was not a benefit to all participants under the plan and resolved no significant legal question about ERISA, as it focused on procedural shortcomings.  This decision is a reminder that, unlike the case with other federal statutes such as Title VII of the Civil Rights Act of 1964, ERISA fee motions by prevailing a plaintiff (or defendant) should not always be given a presumption of success.

In Ahmed v. Texas Fair Plan Assoc., Case No. 2016-09336, Judge Miller considered whether to grant a fee motion in an insurance case.  Following the Texas Supreme Court’s order mandating that all hearings be conducted remotely, the Court held a one-day bench trial via Zoom.

The post–COVID-19 world will present many new ways of doing business, and we can foresee federal judges experimenting with Zoom hearings in lieu of expensive and now unwelcome travel.  A good place to start may be with fee motions, as they are ancillary to the merits of the case.  Video hearings will present new challenges for lawyers and clients, not the least of which are video quality and reliability, and maintaining eye contact in a virtual world.  Savvy ERISA attorneys are likely to improve their command of video appearances and confront the unique challenges of video persuasion, as we enter the brave, new world of the e-trial attorney.

Rebecca Bryant & Mark Casciari

§1.11 Whose Law? Where? When? — Risk Management for ERISA Plans in Uncertain Times

The COVID-19 pandemic seems likely to spawn many claims for ERISA benefits, whether under health, retirement or disability plans, and now is the time to consider anew proactive risk management steps.  A recent decision from the Court of Appeals for the Tenth Circuit, Ellis v. Liberty Life, No. 19-1074 (10th Cir. May 13, 2020), illustrates the particular importance of the risk management tool of including a favorable choice of law provision in an ERISA long-term disability plan that provides benefits through an insurance policy.

The issue in Ellis was whether the federal district court’s review of the plan administrator’s denial of long-term disability benefits was subject to an abuse of discretion standard or subject to de novo review.  The lawsuit was filed in Colorado.  Colorado’s insurance regulations, like those in many states, forbid insurance policies from giving insurers, plan administrators or claims administrators discretion to interpret the policy’s terms in making benefits decisions.  Such laws have been challenged by relying on ERISA’s general preemption of state law that relates to an ERISA plan, but that preemption provision contains an exception for state laws regulating insurance.

However, the plan here contained a choice of law provision stating that if there was an issue of state law, then Pennsylvania law governed.  The employer was both incorporated and headquartered in Pennsylvania.  Unlike Colorado, Pennsylvania does not have an insurance law that prohibits discretionary clauses in insurance policies.  The question was whether the choice of law provision should be honored.

The Court held that such a clause should be enforced so long as the chosen state has a valid connection to the plan.  As the employer was both incorporated and headquartered in Pennsylvania, the Court found the choice of law provision applied and thus reviewed the claim for abuse of discretion.  Applying this standard, the Court affirmed the decision of the insurer.

Employers should take the opportunity now to review their ERISA plans to consider adding risk management provisions.  And such provisions may go beyond a choice of law.  For example, we cannot but wonder if the Ellis case would have proceeded more smoothly to its ultimate conclusion if there had been a forum selection clause mandating that the litigation be held in Pennsylvania.  In addition, the defendant likely could have avoided this entire inquiry if the plan sponsor had drafted a plan document, separate from the insurance certificate, that vested the insurer with discretion.  There are other plan-based risk management tools, such as plan limitations or arbitration provisions, which might be applied in other situations.

Richard Loebl and Mark Casciari

§1.12 The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution

In Thole v. U.S. Bank et al., No. 17-1712 (June 1, 2020), the U.S. Supreme Court affirmed dismissal of ERISA claims brought on behalf of participants in a defined benefit pension plan.  The participants alleged financial mismanagement, but suffered no financial loss.  The question was the following: may the participants sue in federal court for monetary relief because of the alleged mismanagement?  The relief demanded by the participants in their complaint was substantial — $750 million and $31 million in lawyer’s fees.

In a 5-4 decision, the majority reasoned that the plaintiffs “would still receive the exact same monthly benefit” even if they won in court, and thus had no concrete injury under the Constitution’s Article III that would allow for the lawsuit (and consequent expensive discovery and possible settlement).  It thus is important to note these controlling preconditions to any lawsuit in federal court that were reiterated in Thole:  (1) a concrete injury, (2) caused by the defendant, that is (3) redressable by the requested judicial relief.

The Article III stakes are high, because the tougher the preconditions for establishing standing to sue in federal court, the harder it will be for class actions to proceed there.  ERISA makes the Thole holding even more consequential because state courts have no jurisdiction to resolve claims of fiduciary breach under ERISA.  That means that plaintiffs cannot resort to state court to avoid Thole when alleging claims to recover excessive 401(k) fees and claims of mere statutory violations.

The majority did say plan participants, in another case, might be able to establish Article III standing if they plausibly allege “that the alleged mismanagement of the plan substantially increased the risk” that benefits would not be paid.  The precise meaning of this proviso will need to be developed in later litigation.  The Court also emphasized that the plan at issue provided a defined benefit, and that a defined contribution plan participant alleging the same wrongdoing might attain Article III standing.

Of note as well is that Justice Thomas, joined by Justice Gorsuch, said that ERISA case law is too tightly bound to the common law of trusts.  This may portend a new line of analysis by the Court in future ERISA cases.  The Court may focus more on the plain reading of the statute, as opposed to traditional notions of trust law not grounded in that statutory language.  Also of note is that Thole represents another effort by the Court, and especially Chief Justice Roberts, to limit federal jurisdiction generally.

The decision is good news for ERISA plans and their sponsors, as it will be more difficult for participants to bring individual or class actions for mere statutory violations that have not impacted benefits.

Michael W. Stevens and Mark Casciari

§1.13 Limits To ERISA’s Equitable Remedies — What The Supreme Court’s Latest Securities Act Decision Tells Us

ERISA’s civil enforcement provisions generally allow the federal courts to award appropriate “equitable” relief.  A permissible equitable remedy is disgorgement, which, in the ERISA context, is restoration to the affected plan of fiduciary profits that were illegally earned with plan assets.

Not much has been written about disgorgement, but Liu v. SEC, 591 U.S. ___, No. 18-1501 (June 22, 2020), a Supreme Court decision interpreting the federal Securities and Exchange Act, offers some insight on its meaning.  (The Court has already ruled that ERISA equitable relief does not permit extra-contractual or punitive damages.  See Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).  So, a disgorgement remedy cannot include extra-contractual or punitive damages.)

In Liu, an 8-1 majority held that “disgorgement” is a permissible equitable remedy in securities’ cases.  The Court observed that disgorgement can be seen as imposing a constructive trust or an accounting, and is equitable in nature even if not specifically mentioned in a statute.  The Court added that disgorgement is not joint and several, and is not limited to cases involving fiduciary breaches.  The Court held that district courts thus may enter disgorgement awards as part of equitable relief, as long as they target net profits, after deducting legitimate expenses.

Justice Thomas dissented, writing that disgorgement is not a traditional form of equitable relief.  He added that a disgorgement remedy, if ordered, must go to the plan participants victimized by the breach, and not to the government.

Notably, Justice Thomas cited ERISA for the proposition that the Supreme Court has never considered general statutory grants of equitable authority as giving federal courts a freewheeling power to fashion new forms of equitable remedies.  He said that the contours of equitable relief were transplanted to our country from the English Court of Chancery in 1789, in contradistinction to remedies at law, which turn on the words used in statutes.

It thus is worth noting that the parameters of ERISA’s equitable relief provisions will continue to be defined by the federal courts.  But it is now clear that disgorgement is an equitable remedy, even if not specifically mentioned in the statute, as long as it is net of legitimate expenses.  Look for more litigation in an appropriate case on the meaning of “profits” and “legitimate expenses.”  And attorneys for plans and plan sponsors should expect the ERISA plaintiff bar to seek disgorgement whenever possible.  Finally, ERISA practitioners should continue to pay close attention to securities’ decisions from the Supreme Court, as the Court continues to address the overlap between the two statutes.  See Retirement Plans Committee of IBM v. Jander, 573 U.S. __, No. 18-1165 (Jan. 14, 2020) (ERISA stock drop decision).

Mark Casciari and Michael W. Stevens

§1.14 The 10th Circuit’s New Interpretation of What is Mandated under ERISA’s Notice Requirements May have Far Reaching Effects On Plan Administrator’s Duties

In ERISA benefit claim litigation, where there is a sufficient delegation of discretionary authority to an administrator in the governing plan document, a court reviewing an administrator’s decision will generally employ the highly deferential abuse of discretion standard of judicial review rather than the de novo standard of review.

In a recent mental health treatment case, the Tenth Circuit added additional requirements before a court will apply the abuse of discretion standard to analyze a benefit claim determination.  Lyn M.; David M., as Legal Guardians of L.M., a minor v. Premera Blue Cross, No. 18-4098, __ F.3d __.  The court ruled that despite a grant of discretion to the administrator in the governing plan document, the deferential standard of review could not apply in litigation as there was no evidence demonstrating plan participants knew that the employer’s plan document containing the discretionary authority clause existed.  Rather, the participants had received only an SPD, which was silent as to discretionary authority.  The Court determined that proper notice requires the plan administrator to either (1) actually disclose its discretionary authority or (2) explicitly disclose the existence of the plan document containing information about the discretionary authority.  The court found that the fact that the governing plan document was available to participants on request was insufficient this new disclosure requirement.

In a biting dissent, Judge Allison H. Eid reasoned that the SPD sufficiently alerted participants that other plan documents existed and were available.  Judge Eid criticized the majority for imposing a duty on plan administrators, found nowhere in ERISA or case law, “to specifically inform members that documents exist that could affect judicial review.”  The dissent correctly noted that while SPDs must be provided and include certain mandatory information regarding benefit eligibility and claim procedures, there is no duty under ERISA to specifically notify participants of documents that may affect the judicial standard of review should their claims be decided in court.

This decision is a significant departure from the standard principle that the standard of review employed by a reviewing court does not turn on whether the document containing that standard was provided to participants during the claim review process.  Only time will tell if other courts will adopt the Tenth Circuit’s position.  For now, benefit plans operating in the Tenth Circuit should evaluate their claim procedures in light of this decision.

Rebecca K. Bryant, Sam M. Schwartz-Fenwick, and Ian H. Morrison

§1.15 Transgender Patients Remain Protected: District Court Blocks HHS Rule From Taking Effect

A Federal Court has temporarily enjoined the Trump administration from putting into effect its recent rule that strips the Affordable Care Act of its gender identity protections.

The section of the final rule on Section 1557 of the Affordable Care Act that stripped the regulations of their gender identity protections was slated to take effect yesterday.  But it did not.

Rather, on August 17, 2020, a federal judge in the Eastern District of New York issued a stay that blocked that portion of the U.S. Department of Health and Human Services’ final rule from taking effect.  (Tanya Asapansa-Johnson Walker and Cecilia Gentili v. Azar M. Azar II, and the U.S. Dept. of Health and Human Services, Case No. 20-CV-2834, United States District Court, E.D. of NY, August 17, 2020).  The Court only addressed the final rule’s interpretation of “discrimination on the basis of sex” in its stay and did not address the other changes ushered in under the Department’s final rule.  Those other changes took effect on August 18, 2020.

Section 1557 of the ACA prohibits health programs and activities that receive federal financial assistance from discriminating on the basis of race, color, national origin, disability, age, or sex.  Section 1557 takes its prohibition against discrimination on the basis of sex from its reference to Title IX of the Education Amendments of 1972 (Title IX).  Since its inception, Section 1557 has prohibited discrimination on the basis of gender identity in healthcare through its prohibition against discrimination on the basis of sex.

On June 12, 2020, the Department issued its final rule on Section 1557 – explicitly removing protection from discrimination on the basis of gender identity from its prohibition against discrimination on the basis of sex.  This meant that, once the final rule took effect, covered entities could discriminate against transgender patients without violating Section 1557.

On June 15, 2020, in Bostock v. Clayton County, the Supreme Court held that Title VII’s prohibition against discrimination on the basis of sex captures within it a prohibition against discrimination on the bases of sexual orientation and gender identity.  Specifically, the Court held that “it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.”

And so, we found ourselves in an accordion-like quagmire where “on the basis of sex” included gender identity under Title VII and but was still interpreted by at least one executive branch agency to exclude gender identity under Section 1557 vis-à-vis Title IX.

The injunction signals that a resolution to this quagmire may be on the horizon.

In his ruling, Judge Frederic Block found the Department knew that the then-forthcoming decision in Bostock could have “ramifications” for its final rule given that both Title VII and Title IX prohibit discrimination “on the basis of sex” but “was apparently confident that the Supreme Court would endorse the Administration’s interpretation of sex discrimination…” The Court wryly noted that the Department’s “confidence was misplaced” and held that once the Supreme Court issued Bostock, the Department had to consider its implications for its final rule.  As Judge Block stated: “Instead it did nothing….  Since [the Department] has been unwilling to take that path voluntarily, the Court now imposes it.” The final rule cannot take effect until a court decides what the decision in Bostock means for Section 1557.

And so, the portion of the final rule that would have allowed for discrimination on the basis of gender identity in health programs and activities did not take effect yesterday, and transgender patients remain protected while the litigation challenging the final rule continues.  We will continue to follow this case with interest.

Emily Miller, Ben Conley, and Sam Schwartz-Fenwick

§1.16 Countdown to the Supreme Court’s ERISA Preemption Oral Argument in Rutledge — Two Noteworthy Case Developments

The Supreme Court has agreed to hear Arkansas’s challenge to a decision by the Court of Appeals for the Eighth Circuit holding that ERISA preempts an Arkansas law regulating prescription drug reimbursement.  Merits briefing is now complete and oral argument is set for October 6, 2020 in Rutledge v. Pharmaceutical Care Management Association, (No. 18-540).

The Supreme Court’s decision in Rutledge will have resounding implications on ERISA plans.  fiduciaries and administrators.  Not only are state laws regulating pharmaceutical benefits (the subject matter of Rutledge) widespread, states have also taken to regulating a host of other benefit matters, presenting high hurdles for multi-state employers, fiduciaries and administrators seeking to establish uniform nationwide procedures.

So the precise location of where the Supreme Court draws the line on preemption will likely cause ripple effects well beyond pharmaceutical benefits.  And the Court’s line-drawing reasoning is important given that the statute preempts all state laws “relating” to employee benefit plans regulated by ERISA.

Two recent case developments underscore Rutledge’s importance, both in the pharmaceutical benefits realm and beyond.

First, the Eighth Circuit held that a North Dakota law regulating pharmaceutical benefits is preempted by ERISA because the law’s “provisions apply to plans subject to ERISA regulation and therefore the law cannot function irrespective of any ERISA plan.” Pharm. Care Mgmt. Ass’n v. Tufte, No. 18-2926, 2020 WL 4554980, at *1 (8th Cir. Aug. 7, 2020) (internal quotation marks omitted).  The Court relied on its prior decisions (including Rutledge) striking down similar laws.

Additionally, in another case (filed in the U.S. District Court for the District of New Jersey), an employer trade association is alleging that New Jersey’s WARN Act expansion requiring mandatory severance payments for certain employees is preempted by ERISA.  The ERISA Industry Comm. v. Angelo, No. 20-cv-10094 (D.N.J. Aug. 6, 2020).  The plaintiff contends that the severance obligation requires the creation of a benefit plan that has ongoing administrative obligations and requires the use of discretion in determining benefit eligibility.  The plaintiff alleges that this sort of plan would be governed by ERISA and therefore that the New Jersey law impermissibly “relates” to an ERISA plan.  The plaintiff also alleges that the New Jersey law creates the sort of state-by-state regulatory patchwork that ERISA was designed to avoid.

Jules Levenson and Mark Casciari

§1.17 How to Minimize Judicial Review of ERISA Fiduciary Decisions

One of the enduring paradoxes of ERISA litigation is the judicial standard of review of fiduciary decisions.  The standard of review is important because an easier standard will uphold more fiduciary decisions in court and encourage more individuals to serve as fiduciaries.  No one who acts in good faith—as the vast majority of ERISA fiduciaries do—likes to make tough decisions and be sued or reversed.

On the one hand, the courts frame their review of fiduciary decisions in exacting terms.  For example, in Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982), the Court of Appeals for the Second Circuit said that the ERISA fiduciary’s duty of loyalty to plan participants and beneficiaries is “the highest known to the law.”

But, in Bator v. District Council 4, Graphic Communications Conf., No. 18-cv-1770 (7th Cir. Aug. 27, 2020), the court proffered another viewpoint.  It considered whether ERISA fiduciaries violated their duties by undercutting the financial health of the pension plan they managed.  The plaintiffs alleged that the fiduciaries breached their duties by not enforcing the contribution terms of the Trust Indenture when they allowed one participating local union’s members at one company to contribute to the plan at lower rates than other members form the same local at another company.  Notably, the case did not involve a review of a claim for benefits, and the court’s decision did not turn on claim review.

The Bator court upheld the fiduciary decision by reasoning that the fiduciary interpretation of the governing plan document “falls comfortably within the range of reasonable interpretations” and “is compatible with the language and the structure” of that document.  The Court did so even though it recognized that the plaintiffs’ interpretation of the Trust Indenture was equally reasonable.

So, how can these very different standards of judicial review be reconciled?

Yes, reconciliation is possible.  ERISA’s core focus is the governing plan documents.  If, as in Bator, they provide the fiduciary with broad discretion to interpret their terms, and provide that the fiduciary decision shall be final and binding, the court should give the fiduciary the benefit of the doubt.

One final point is worth noting.  Plaintiffs often argue that equitable principles should govern judicial review of fiduciary decisions.  However, as Justice Thomas said recently in his concurrence in Thole v. U.S. Bank, 140 S.Ct. 1615 (2020), the common law of trusts is not the starting point for interpreting ERISA.  The starting point is the statute itself, and the statute commands that the courts honor ERISA plan terms, including terms that give interpretative discretion to fiduciaries.

Our take away is—there is no substitute for good drafting of ERISA plan terms.

Mark Casciari and Ronald Kramer

§1.18 First Circuit Rules that Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability

In a decision published on November 22, 2019, the First Circuit reversed a district court’s prior decision and held two Sun Capital private equity funds were not liable for the withdrawal liability incurred when a jointly owned portfolio company declared bankruptcy and withdrew from a union pension fund.  Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370 (1st Cir. Nov. 22, 2019).

The case arose after a brass manufacturing company, Scott Brass, Inc. (SBI), filed for bankruptcy following the decline of copper prices.  In connection with the bankruptcy, SBI withdrew from a multiemployer pension plan, incurring $4.5 million in withdrawal liability.  At the time of bankruptcy, SBI was a portfolio company owned by a holding company that itself was jointly owned by two private equity funds, Sun Capital Partners III, LP (Sun Fund III) and Sun Capital Partners IV, LP (“Sun Fund IV” and, collectively, the “Sun Funds”).  The Sun Funds were sponsored and managed by a private equity firm, Sun Capital Advisors, Inc.  The multiemployer pension plan assessed withdrawal liability against both SBI and the Sun Funds on the grounds that the Sun Funds were a partnership exercising common control over SBI.

Under ERISA, as amended by the Multiemployer Pension Plan Amendments Act of 1980, when an employer exits a multiemployer pension plan, the plan may assess withdrawal liability on the employer for the employer’s share of unfunded vested benefits.  ERISA provides that, when “trades or businesses” are under “common control,” they are treated as a single employer.  It follows, then, that trades or businesses under common control are jointly and severally responsible for any withdrawal liability incurred by one of the trades or businesses.  With respect to “common control,” for purposes of withdrawal liability, the Pension Benefit Guaranty Corporation (PBGC) adopted regulations that generally mirror IRS controlled group regulations: common control exists if there is individual or aggregated ownership of at least 80%.

In 2013 and 2016, the District Court of Massachusetts found that the Sun Funds were not only “trades or businesses,” but also a partnership-in-fact (i.e., a partnership under common law) acting under “common control” with SBI.  Sun Fund III and Sun Fund IV had individual investment stakes in the portfolio company of only 70% and 30%, respectively, so the strict common control ownership threshold was not met.  However, the critical partnership-in-fact finding meant those individual ownership stakes were nevertheless aggregated for determining common control.  Narrowly, those rulings meant the Sun Funds were jointly and severally liable for SBI’s withdrawal liability.  More broadly, those rulings threatened the fundamental way private equity funds are established, funded, and operated.

Because the First Circuit had previously ruled that Sun Fund III was a trade or business (and, on remand, the lower court found the same for Sun Fund IV), the outstanding issue on appeal was whether the Sun Funds had indeed formed a partnership-in-fact that caused the Sun Funds’ individual ownership stakes in SBI to be aggregated.  In the absence of formal guidance from the PBGC on determining when separate entities are considered to be a partnership-in-fact, the First Circuit turned to the partnership factors articulated in an old tax court case, Luna v. Commissioner¹ for its analysis.  Those factors are:

1. The agreement of the parties and their conduct in executing its terms;
2. The contributions, if any, which each party has made to the venture;
3. The parties’ control over income and capital and the right of each to make withdrawals;
4. Whether each party was a principal and co-proprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income;
5. Whether business was conducted in the joint names of the parties;
6. Whether the parties filed Federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers;
7. Whether separate books of account were maintained for the venture; and
8. Whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.

Applying these Luna factors, the First Circuit noted that some facts supported a partnership-in-fact between the Sun Funds.  For instance, the Sun Funds scouted potential portfolio companies, and essentially the same two individuals ran both the Sun Funds.  However, the First Circuit found facts supporting the opposite finding more compelling.  That is, the Sun Funds expressly disclaimed any sort of partnership with each other in their respective limited partnership agreements and each was created as a separate LLC; they filed separate tax returns and maintained separate books and bank accounts; most of the 230 limited partners in Sun Fund IV were not also limited partners in Sun Fund III; and the Sun Funds did not invest in parallel in the same portfolio companies.

In the end, the First Circuit recognized conflicting policy goals—on the one hand, the need “to ensure the viability of existing pension funds,” and, on the other hand, the need “to encourage the private sector to invest in, or assume control of, struggling companies with pension plans[.]” The court also stated it was reluctant to impose withdrawal liability on the Sun Funds when there was neither clear congressional intent to do so nor formal guidance from the PBGC.

While this is certainly a positive outcome for private equity funds, the First Circuit’s decision was very narrow and fact specific—the court did not reverse the district court’s earlier decision that the Sun Funds were “trades or businesses,” and the court noted that it did not “reach other arguments that might have been available to the parties.” This suggests that had the facts been different, the court could have ruled the other way.

Bryan M. O’Keefe, Ronald Kramer, and Samuel Rubinstein