Superior Court, State of Delaware Leonard L. Williams Justice Center 500 N. King. St., Suite 10400 Wilmington, DE 19801 (302) 255-0634 phone (302)255-2273 fax [email protected]
Carla M. Jones
Potter Anderson & Corroon LLP 1313 N. Market St., 6th Floor Wilmington, DE 19801-6108 (302) 984-6122 phone (302)658-1192 fax [email protected]
Jennifer C. Wasson
Potter Anderson & Corroon LLP 1313 N. Market St., 6th Floor Wilmington, DE 19801-6108 (302) 984-6165 phone (302)658-1192 fax [email protected]
Introduction
This chapter summarizes the significant case law developments from state and federal courts across the country in 2020 concerning directors’ and officers’ liability insurance coverage claims. Noteworthy decisions included the following:
In re Solera Insurance Coverage Appeals, 2020 WL 6280593 (Del. Oct. 23, 2020). The Delaware Supreme Court held that an appraisal action brought under 8 C. § 262 was not covered “Securities Claim” within the definition of that term in a D&O policy.
Arch Insurance Company v. Murdock, et al., 2020 WL 1865752 (Del. Super. Jan. 17, 2020). The Superior Court of Delaware held that the Larger Settlement Rule governs allocation disputes under Delaware law when the parties cannot agree on allocation between covered and uncovered claims.
Pfizer Inc. v. U.S. Specialty Insurance Company, 2020 WL 5088075 (Del. Super. Aug. 28, 2020). The Superior Court of Delaware held that a settlement for less than an insurer’s policy limit did not affect attachment of higher-level excess insurance.
Allocation
Arch Insurance Company v. Murdock, et al., 2020 WL 1865752 (Del. Super. Jan. 17, 2020). The Superior Court of Delaware held that the Larger Settlement Rule governs allocation disputes under Delaware law when the parties cannot agree on allocation between covered and uncovered claims. The court found that the Larger Settlement Rule best protects the economic expectations of the insured, consistent with Delaware courts’ interpretation of insurance policies as a whole, and applies even when the policy’s allocation provision references the relative legal and financial exposures of the insureds.
In this case, certain excess insurers filed a declaratory judgment action regarding, inter alia, their obligation to indemnify the insureds for settlement payments arising out of two shareholder litigations, one brought in the Delaware Court of Chancery (In re Dole Food Company, Inc. Stockholder Litigation, 2015 WL 5052214 (Del. Ch. Aug. 27, 2015) (“Dole”) and one brought in the District of Delaware (San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-01140 (D. Del. Dec. 9, 2015) (“San Antonio”). Both sides filed motions for summary judgment on the issue of which allocation theory applied to the policies, since the underlying cases involved uninsured parties. The insureds advocated for the Larger Settlement Rule. This rule dictates that allocation between covered and uncovered claims is appropriate only if acts of the uninsured parties caused the settlement costs to be higher than they would have been, had only the insured parties settled the actions. Under the Larger Settlement Rule, the insurers often are liable for the entire settlement unless they can demonstrate that the uncovered liability actually increased the amount of the settlement. In contrast, the insurers argued that the insureds bore the burden of proving that a loss relating to the settlement was a covered “Loss” under the policy.
The court first looked at the policy language and found it unambiguous but unhelpful to the question before it, because the allocation provision only addressed circumstances in which the parties agreed to an allocation. The provision did not contain a formula or any other methodology to apply in the event that the parties disagreed. The court also noted that Delaware case law provided no guidance on the question, but that other courts had employed the Larger Settlement Rule when adjudicating allocation disputes. Important to the court was the overarching rationale for the rule, which was to protect the economic expectations of the insured. The court reasoned that this rationale was consistent with the way that Delaware courts interpret policy language in other insurance disputes and consistent with the policy as a whole, which is designed to cover the insured’s compensable Loss regardless of whether others are at fault. The Court explained that the allocation provision should be read consistently with that expectation unless it expressly contained a different allocation method, such as pro rata.
Significantly, the court rejected the insurers’ argument that the reference to the “relative legal and financial exposure of the insureds” in the allocation provision dictated a different result, noting that this language contemplated situations in which the parties worked together to determine the proper allocation. In addition, the court did not believe that the “relative exposure” language was inconsistent with the economic rationale behind the Larger Settlement Rule. Finally, the court opined that because the San Antonio action was relatively simple, and damages were pled against all defendants jointly and severally, the Larger Settlement Rule was dispositive in favor of the insureds on the allocation issue. Because the Dole complaint and settlement were more complicated, however, the court was not willing to grant summary judgment based on the factual record before it.
Claim
ISCO Indus., Inc. v. Great Am. Ins. Co., 148 N.E.3d 1279 (2019). The Court of Appeals of Ohio upheld that the renewal of a D&O insurance policy does not extend the time by which an insured may report a claim. The policy at issue contained a notice provision in which the insured was required to notify the insurer as soon as possible, but no later than 90 days, after the end of the policy for the claim to be covered. The appellant argued that subsequent policy renewals extended the claim-reporting period and that a claim filed over a year and a half after receiving notice of litigation should be covered. The court rejected this argument finding the plain language of the provision did not support this argument.
The appellant also argued that the insurer must still provide coverage if it has not been prejudiced in any way by the late notice under the notice prejudice rule. Adopting reasoning from similar cases in which federal courts applied Ohio law, the court suggested the specific 90-day notice requirement was unambiguous and that adoption of the notice-prejudice rule would effectively rewrite the parties’ contract. The court determined the notice-prejudice rule did not apply to D&O insurance policies with specific notice requirement deadlines.
EurAuPair Int’l, Inc. v. Ironshore Specialty Ins. Co., 787 F. App’x 469 (9th Cir. 2019). The Court of Appeals for the Ninth Circuit, affirming the district court’s decision, found that under California law, the notice-prejudice rule does not apply to claims-made-and-reported policies. EurAuPair International Inc., one of several federally authorized au pair programs, purchased claims-made-and-reported policies for consecutive policy periods. The first policy required the company to report claims to Ironshore, its insurer, “as soon as practicable but in no event later than thirty (30) days after the end of the Policy Period.” Finding that this language was unambiguous as to its requirement that EurAuPair report all claims by a certain date, the court declined to grant relief to EurAuPair on equitable grounds, as the company knew of the claim within the policy period and had thirty days after the policy expired to report it yet waited sixteen months to do so.
Landmark Am. Ins. Co. v. Lonergan Law Firm, P.L.L.C., 809 F. App’x 239 (5th Cir. 2020). Applying Texas law, the United States Court of Appeals for Fifth Circuit, reversing the district court’s ruling, found that absent a showing of prejudice, an insurer, Landmark, was not permitted to deny coverage under a professional liability policy due to the insured’s failure to comply with “immaterial” conditions of notice, where she complied with her “material” obligation to report a claim.
In the underlying action, Gaylene Lonergan, a Texas attorney, had helped a group of investors close on a real estate deal. When the deal turned out to be a scam, the investors sued Lonergan in state court, who was covered by a Landmark policy. While the state court case was pending, Landmark filed suit against Lonergan seeking a declaration that it did not have a duty to defend Lonergan under the policy because, among other things, she failed to “report” the claim to it during the policy period, as she was obligated to do by the policy. As part of her application to renew her insurance policy with Landmark, a note in the claim supplement contained “a concise synopsis of the underlying dispute” herself and the investors. Landmark argued that the claim supplement was insufficient to satisfy her obligation to “report” the claim to Landmark and the district court agreed.
On appeal, the Court of Appeals found that Lonergan did in fact report the claim. The court focused on the fact that Landmark did not dispute that it received the claim supplement during the policy period. Landmark argued that because the “Notice of Claim” provision in its policy obligated Lonergan to “send all claim information to: Attention: Claims Dept. [address],” and she failed to send them to the correct department, that she failed to adequately report her claims. The court concluded that Landmark’s direction of notice to the claims department could not be considered a material condition. Given the immateriality of the notice condition, Landmark could only be relieved of its duty to defend and indemnify only upon a showing that it was prejudiced by the breach. Here, it could not make such a showing.
Protective Specialty Ins. Co. v. Castle Title Ins. Agency, Inc., 437 F. Supp. 3d 316 (S.D.N.Y. 2020). The United States District Court for the Southern District of New York granted Castle Title’s motion for summary judgment and denied the Protective Specialty’s cross-motion for summary judgment. Protective Specialty underwrote two claims-made-and-reported insurance policies for Castle Title for different periods of time. In 2015, Castle Title was served with a subpoena requesting documentation of transfers and mortgages. In 2016, Castle Title was named a defendant in a lawsuit alleging that it had delayed the submission of real estate documents.
The instant action commenced when Protective filed suit against Castle Title seeking a declaratory judgment that Protective has no duty to defend or indemnify Castle Title in the 2016 lawsuit. Protective alleged that the 2015 Subpoena was a “claim” under the terms of the Policies, and that Castle Title failed to report it. Protective alleged that the unreported 2015 Subpoena and the 2016 Lawsuit should be treated as “related claims,” therefore Protective had no obligation to Castle Title under the two policies. The court rejected this argument, stating that the 2015 Subpoena was not considered a “claim” as it was not issued in a “litigation or arbitration” involving professional services. Rather, the subpoena was for the purpose of receiving a judgment, not questioning Castle Title’s professional services. Because the 2015 Subpoena was not considered a “claim” for the purpose of “related claims,” the court dismissed this cause of action.
Protective’s second cause of action was a claim for warranty exclusion, alleging that Castle Title made a false statement on its Application for Policy (AIP), which the court dismissed because Castle Title had no reason to believe that a claim was pending against it. On its AIP, Castle Title stated that it was not aware “of any incident or circumstance which may result in a claim.” Protective alleges that Castle Title should have known that the 2015 Subpoena was a “claim,” therefore absolving Protective of any obligation to cover Castle Title. The court found that 2015 Subpoena was not a “claim” as defined by the Policy, nor that it met the definition of “claim” in the context of insurance contracts.
Exhaustion
Pfizer Inc. v. U.S. Specialty Insurance Company, 2020 WL 5088075 (Del. Super. Aug. 28, 2020). The Superior Court of Delaware’s Complex Commercial Litigation Division held that a settlement for less than an insurer’s policy limit did not affect attachment of higher-level excess insurance. The parties filed cross-motions for summary judgment seeking a determination of whether the excess insurer’s policy attached. The excess policy at issue contained an exhaustion clause providing that the policy “shall attach only after all Underlying Insurance has been exhausted by actual payment of claims or losses thereunder.” The Superior Court explained that Delaware consistently follows the “Stargatt Rule” that excess policies attach regardless of “whether the insured collected the full amount of the primary policies, so long as [the excess insurer] was only called upon to pay such portion of the loss as was in excess of the limits of those policies.”
The Superior Court contrasted the Stargatt Rule with an alternative approach, known as the “Qualcomm Rule.” Under the “Qualcomm Rule,” settlements below policy limits bar attachment of a higher-level excess policy when the excess policy requires exhaustion by “actual payment of a covered loss.” The Superior Court noted that Delaware precedent had expressly rejected the Qualcomm Rule as “contrary to the established case law” of Delaware. Accordingly, because the exhaustion clause in the excess policy required only that the underlying policies be “exhausted by actual payment of claims,” the Superior Court held that a settlement in which an insurer pays and the insured agrees that the payment fully satisfies the policy accomplishes exhaustion through “actual payment.”
Insured
Turner v. XL Specialty Ins. Co., 2020 WL 3547954 (W.D. Okla. June 30, 2020). A federal judge from the Western District of Oklahoma entered an order granting a defendant insurer’s motion for summary judgment, finding that a former company executive’s legal expenses incurred in a separate action filed by another company executive to determine rights under a profit-sharing agreement were not covered by the company’s liability insurance policy. The court determined that there was no coverage because the former executive, Ryan Turner, was not involved in the lawsuit in his corporate capacity and thus as an “Insured Person” under the insurance policy, but rather as an individual equity holder under the profit-sharing agreement. As such, XL Specialties, the defendant insurer, did not breach the insurance policy when it denied coverage.
The court also found that Mr. Turner did not qualify for coverage under the policy, because he did not suffer a covered “Loss.” Rather, even though he was named as a defendant in the declaratory judgment action, the legal fees for which he sought reimbursement did not qualify as “Defense Expenses,” finding that the claims asserted by another party in the lawsuit did not amount to Turner being in a defensive posture, but rather were asserted for the benefit of himself and another party. Specifically, Turner had not disputed or opposed any relief sought by another party in the lawsuit. Instead, he only asserted counterclaims and crossclaims. Functionally, the court found that his posture in the declaratory judgment action was only nominally that of a defendant, as Turner, in actuality, sought affirmative relief. The court noted that its conclusion was supported by numerous federal and states courts who have dealt with a similar issue: whether an insurer’s “duty to defend” includes an obligation to prosecute affirmative counterclaims and crossclaims. Most federal and state courts, it noted, have found that an insurer’s duty to defend does not include such an obligation.
Securities Claim
In re Solera Insurance Coverage Appeals, 2020 WL 6280593 (Del. Oct. 23, 2020). The Supreme Court of Delaware recently set forth its view of whether an appraisal action brought under 8 Del. C. § 262 is a covered “Securities Claim” within the definition of that term in a D&O policy—and the answer is no. The Supreme Court’s holding reversed the Delaware Superior Court’s conclusions that a “violation of law” need not include allegations of wrongdoing to come within the policy, and that an appraisal action is a claim for a “violation” because it necessarily alleges a wrong; i.e., that the surviving company contravened the dissenting shareholders’ rights to the fair value of their shares. The Supreme Court limited its holding to the “violation” issue and declined to rule on the other issues the parties briefed, including the insurers’ argument (raised for the first time on appeal) that an appraisal action does not “regulate securities.”
The Supreme Court accepted this appeal on an interlocutory basis, after the Superior Court denied the insurers’ motion for summary judgment on coverage for an appraisal petition brought by certain shareholders seeking a fair value determination of their shares of Solera. The Supreme Court focused on the definition of “Securities Claim” in Solera’s D&O policies—and specifically whether such claims were “violations” of law. In determining that appraisal actions were not claims for violations of law, the Court considered the historical context of Delaware’s appraisal process, the text of 8 Del. C. § 262, and the case law interpreting the statute.
The Supreme Court began its analysis by considering the plain meaning of the word “violation,” but reached a different conclusion in doing so than did the Superior Court. While both the Supreme Court and Superior Court cited various dictionaries for guidance on the term’s meaning, the Supreme Court concluded that “violation” “involves some wrongdoing, even if done with an innocent state of mind.” Because appraisal actions are intended to be a “limited legislative remedy developed initially as a means to compensate shareholders of Delaware corporations for the loss of their common law right to prevent a merger or consolidation by refusal to consent to such transactions,” the Court reasoned that these proceedings do not adjudicate wrongdoing. To support its view, the Court recited the history of appraisal rights in Delaware, explaining that actions under § 262 are “neutral” proceedings designed only to determine the fair value of a dissenting stockholder’s stock. The fair value can be deemed higher than the merger price, but frequently is found to be lower than the merger price, so both sides bear some risk. And because the statute imposes few duties on the surviving company, appraisal petitions frequently contain no allegations of wrongdoing against the surviving company, including the petition at issue in Solera.
Finally, the Supreme Court explained that a long-standing line of Delaware precedent confirms that appraisal proceedings do not include an inquiry into wrongdoing—the only issue is the value of the dissenting stockholder’s stock. The court rejected Solera’s argument that appraisal cases have evolved to the extent that an appraisal petitioner must “show deficiencies in the sale process in order to overcome the contention that the share price reflected fair value,” making clear that there is no such presumption. To the extent that wrongdoing relating to the transaction is relevant to the fair value determination, the court reasoned that it goes only to the deference, or weight, to be given to the merger price—allegations of wrongdoing are appropriately adjudicated through breach of fiduciary duty, fraud, or other claims, not through invocation of the statutory appraisal remedy.
Wrongful Acts
Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyds London, 2020 WL 5757341 (Del. Super. Sept. 25, 2020). The Superior Court of Delaware’s Complex Commercial Litigation Division granted an insured’s partial motion to dismiss, requiring the insurer to advance defense costs as the allegations presented in the counterclaim asserted a risk within the policy’s coverage. This action arose out of a lawsuit filed against Legion Partners Asset Management by a former employee, to which Legion responded with an arbitration action. In response, the former employee filed a counterclaim, at which time Legion notified the insurer, Underwriters, of their intent to seek coverage for defense costs. Underwriters denied Legion coverage.
The court first determined that Underwriters’ duty to advance was triggered. A policy that contains a duty to advance is implicated when “an action states a claim covered by the policy” and an insurer will be required to advance costs for any litigation that falls within the policy terms. The court also determined that Underwriters was required to indemnify Legion under the Policy because Legion sustained a “Loss” arising from a claim or counterclaim against the insured organization for a “Wrongful Act.” “Wrongful Acts” are broadly construed to include “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act committed” by the insured organization. The counterclaim filed by the former employee asserts that Legion “allegedly acted against its investors’ interests and violated federal laws and regulations by leaking material nonpublic information,” therefore constituting a “Wrongful Act” within the scope of the policy. Additionally, the court determined that Underwriters had to indemnify Legion under the policy for its defense of the organization’s directors, as Legion incurred the “Loss” of defending the factual allegations lodged against its named directors.
Other Miscellaneous Cases
Korn v. Fed. Ins. Co., 2019 WL 4277187 (W.D.N.Y. Sept. 10, 2019), appeal dismissed (Dec. 19, 2019). Applying New York law, the United States District Court for the Western District of New York held that Federal Insurance Company, an insurer, did not owe a fiduciary duty to Marc Irwin Korn, its insured, when Korn was represented by independent defense counsel in a criminal lawsuit. It also found that Federal Insurance Company did not breach its contractual duties to Korn in paying defense costs, an action that exposed the policy limits.
Korn argued that Federal owed him a fiduciary duty based on a special relationship of trust and confidence, and that Federal’s failure to monitor his criminal defense attorneys, audit the legal fees they incurred, and replace counsel when Korn informed Federal that the firm was wasting the finances available for coverage constituted a breach of that duty. Here, because Federal did not represent Korn in his criminal case, there was neither a legal nor factual basis to conclude that Federal assumed responsibility for his defense in any way. Even if Korn did establish that Federal brokered the attorney-client relationship in the criminal action, it was not a rare situation in which a fiduciary duty existed.
Korn also argued that his policy required Federal to ensure that his criminal lawsuit reached a final resolution before the policy limits were exhausted. The court found that he did not identify any language from his policy that established such a requirement, and instead held that the policy neither required Federal to ensure a swift resolution of Korn’s criminal litigation, nor could it reasonably impose such a burden unless Federal assumed responsibility for Korn’s criminal defense. The court also found that Korn identified no obligation in the policy requiring Federal to follow its own guidelines to keep track of legal fees and oversee work performed for Korn’s benefit, noting that New York courts have consistently rejected that a cause of action based on failure to follow internal guidelines.
Hughes v. Xiaoming Hu et al., 2020 WL 1987029 (Del. Ch. Apr. 27, 2020). The Delaware Court of Chancery denied director defendants’ motion to dismiss a derivative claim, while reinforcing that directors and officers who neglect their oversight responsibilities may be personally liable for the resulting harm to the company and its stockholders. The plaintiff asserted that the defendants: (1) breached their fiduciary duties by willfully failing to maintain an adequate system of oversight, disclosure controls, and internal controls over financial reporting, and (2) were unjustly enriched through their excessive compensation which was based on inaccurate financial statements.
With no demand for litigation made, the court had to determine if the omission was excused because of the directors’ inability to make an impartial decision regarding whether to pursue litigation. To answer this, the court applied the Rales demand futility test. Rales dictates that a director cannot exercise independent and disinterested business judgment regarding a litigation demand when potential litigation might expose the director to adverse personal consequences, including money damages. Directors and officers responsible could be held personally liable if oversight failures result in losses to the company.
The court held that the members responsible for ensuring proper internal controls and reporting systems faced a substantial likelihood of liability because the controls in place were not meaningful and demonstrated their failure to act in good faith towards their fiduciary duty of loyalty. In making its determination, the court emphasized that these members met minimally only to comply with federal securities laws and when they did meet, they did not discuss or implement any procedures despite having known of material weaknesses in the company’s internal controls. It found these deficiencies supported a reasonable inference that the defendants failed to provide meaningful oversight over the company’s financial statements and system of financial controls and that no disinterested and independent majority could have considered a demand, rendering demand futile.
Ferrellgas Partners L.P., et al., v. Zurich American Insurance Company and Beazley Insurance Company, 2020 WL 4908048 (Del. Super. Aug. 20, 2020). The Superior Court of Delaware’s Complex Commercial Litigation Division entered an order requiring an insurer to immediately advance and reimburse an insured’s past and ongoing defense costs prior to a final and non-appealable money judgment.
In this action, an insured sought a declaratory judgment for advancement of defense costs pursuant to insurance policies issued by two insurers. In a prior ruling, the court granted the insured’s motion for partial summary judgment on this issue, declaring that one of the insurers had a duty to advance defense costs. The insurer did not file an application for interlocutory appeal of the decision. Notwithstanding the summary judgment ruling, the insurer refused to pay the invoices that the insured submitted, arguing that the summary judgment order was not a final and non-appealable money judgment and it was unable to determine the reasonableness of the defense cost invoices because they were heavily redacted.
The court rejected the insurer’s argument, holding that the insurer must comply with the summary judgment order and immediately advance and reimburse the legal fees and costs submitted by the insured. The court also ordered the parties to follow the protocol established by the Court of Chancery in Danenberg v. Fitracks, Inc., 58 A.3d 991 (Del. Ch. 2012) for invoice submission, review, and dispute resolution. Finally, the court awarded the insured its fees-for-fees incurred in connection with preparing and prosecuting the enforcement motion, so as to “be made whole.”
Potter & Murdock, P.C. 252 N. Washington St., Ste. 2 Falls Church, VA 22046 (240) 994-3061 [email protected]
D.C. Circuit & Supreme Court
Andrew N. Knauss
Potter & Murdock, P.C. 252 N. Washington St., Ste. 2 Falls Church, VA 22046 (240) 994-3061 [email protected]
Canada
Michael C. Comartin
Ogletree Deakins International LLP 220 Bay St., Ste. 1100, PO Box 15 Toronto, Ontario M5J 2W4 (416) 637-9057 [email protected]
Michael F. Lee
Ogletree Deakins International LLP 220 Bay St., Ste. 1100, PO Box 15 Toronto, Ontario M5J 2W4 (416) 637-9071 [email protected]
§ 15.1 Introduction
UNITED STATES
§ 15.2 Disability Discrimination
§ 15.2.1 Burden of Proof / Evidentiary Standards
Nat’l Fed’n of Blind, Inc. v. Epic Sys. Corp., No. 18-12630-RWZ, 2020 BL 42492 (D. Mass. Jan. 31, 2020). The District of Massachusetts dismissed a claim by the National Federation of the Blind (“NFB”) against Defendant Epic Systems Corporation (“Epic”), a corporation that develops, sells, and licenses health-care software to medical providers and health-care institutions. NFB argued that Epic’s sale and licensing of software that is inaccessible to blind users violates § 4(4A) of the Massachusetts Fair Employment Practices Act (Mass. Gen. Laws. ch. 151B). According to the Court, the statue requires proof of two elements: (1) a defendant utilized specific employment practices or selection criteria knowing that the practices or criteria were not reasonably related to job performance; and (2) a defendant knew that the practices or criteria had a significant disparate impact on a protected class or group. The Court concluded that Plaintiff failed on the first prong as Epic did not utilize any specific employment practice or selection criteria because Epic only sold and licensed software. The Court acknowledged that courts have extended liability to non-employers who have caused employers to utilize specific employment practices or selection criteria that had a disparate impact, such as when a state division of human resources administered a problematic employment qualification exam or in instances of vicarious liability, when a general contractor is liable to the employee of a subcontractor. Here, however, the Court found that Epic’s knowing sale of software that is inaccessible to blind users is not enough to trigger liability for its customers’ treatment of their blind employees.
Clark v. Champion Nat’l Sec., Inc., 952 F.3d 570 (5th Cir. 2020). Plaintiff, an insulin-dependent Type II diabetic, worked as a personnel manager for Defendant. Plaintiff requested and was granted two accommodations for his diabetes. Plaintiff was terminated after violating Defendant’s “alertness” policy; however, Plaintiff maintained he passed out due to low blood sugar relating to his diabetes and was not asleep. Plaintiff sued under the ADA, alleging discrimination and harassment on the basis of disability, retaliation, failure to accommodate a disability, and failure to engage in the interactive process. The district court granted Defendant’s motion for summary judgment. The Fifth Circuit reviewed de novo and applied the same standard as the district court did. The Court found that Plaintiff was unable to provide direct evidence of disability discrimination to support his claim and failed to meet the standards for a disability harassment claim. The Court also affirmed the district court’s holding that Plaintiff was not “a qualified person under the ADA and even if he were, his failure to accommodate claim would still fail because he is unable to show that a reasonable accommodation would have allowed him to perform his job and he did not request an accommodation for loss of consciousness due to diabetes. Finally, the Fifth Circuit also affirmed the district court’s ruling that Plaintiff’s retaliation claim failed because he could not show that he would not have been terminated “but for” filing an internal harassment complaint eight months prior.
Pierri v. Medline Indus., Inc., 970 F.3d 803 (7th Cir. 2020). The Seventh Circuit affirmed an order of summary judgment in favor of a defendant-employer that held plaintiff could not establish a theory of associational discrimination because defendant had made repeated efforts to accommodate plaintiff’s need to care for a relative, including allowing plaintiff to work an alternate schedule. Plaintiff, a former chemist, was fired after he failed to return to work following approved leave under the Family and Medical Leave Act (FMLA). Plaintiff requested accommodation to care for his ailing grandfather (diagnosed with liver cancer), to which Defendant-employer was receptive, and offered a number of accommodations including approved FMLA leave one day per week. According to Plaintiff, upon commencement of the schedule, his supervisor began to harass Plaintiff, belittling him in front of others, and refusing to assign research and development work to him. Plaintiff filed complaints with HR and requested full-time leave, citing stress and anxiety. Defendant-employer granted Plaintiff full-time leave but Plaintiff never returned to work. The Defendant-employer eventually terminated Plaintiff’s employment for his failure to return to work or provide a return date. Plaintiff sued, alleging discrimination for association with his grandfather and retaliation for filing harassment complaints with HR. Plaintiff argued association discrimination under the theory of distraction, which arises when an employee becomes inattentive to work because of a family member’s disability that requires the employee’s attention, yet not to the extent that requires an accommodation. The District Court rejected plaintiff’s argument and the Seventh Circuit affirmed. Furthermore, the Seventh Circuit affirmed that even if the Plaintiff could prove some form of associational discrimination, he had not suffered an adverse employment action because, among other things, the complaints the Plaintiff made about his supervisor involved just “general rudeness,” which did not rise to the level of an adverse employment action.
Cook v. George’s, Inc., 952 F.3d 935 (8th Cir. 2020). Plaintiff alleged discrimination in hiring, and pled sufficient facts to show he was disabled under the ADA. Nonetheless, the District Court granted Defendant’s motion to dismiss and denied leave to amend on the grounds that Plaintiff had failed to state facts sufficient to establish a prima facie ADA claim in his complaint. Plaintiff had alleged that he was disabled, that he had previously worked for Defendant with reasonable accommodations, and that Defendant used a classification system to mark people with disabilities as ineligible for rehire. The Eighth Circuit reversed, holding that a plaintiff need not establish a prima facie case at the motion to dismiss stage. To state a claim, a plaintiff need only meet the plausibility pleading standard. For ADA cases, a plaintiff need only plausibly plead that (1) he can perform the essential functions of a job with reasonable accommodations, and (2) that he was discriminated against in a way prohibited by the ADA. The Court found that Plaintiff’s allegations were sufficient to state a claim for purposes of a motion to dismiss.
Anthony v. Trax Int’l Corp., 955 F.3d 1123 (9th Cir. 2020). The Ninth Circuit held that after-acquired evidence may be used to show that a person is not a “qualified individual,” and thus not within the protection of the ADA. Plaintiff alleged that she was fired from her job as a Technical Writer because of her PTSD. During the course of the litigation, it was discovered that Plaintiff lacked the bachelor’s degree required of all Technical Writers, contrary to her representation on her employment application. Under Defendant’s government contract, it could only bill for technical writer work done by technical writers with bachelor’s degrees. The Court affirmed the use of the EEOC’s two-step inquiry, which requires an individual satisfy the prerequisites of a job to be a “qualified individual” for ADA purposes. The Court found that the Supreme Court’s prohibition on the use of after-acquired evidence to establish a superseding, non-discriminatory justification for an employer’s challenged actions (McKennon v. Nashville Banner Publ’g Co., 513 U.S. 352 (1995)) did not prohibit the use of after-acquired evidence for other purposes, such as to show an individual was not qualified under the ADA.
Exby-Stolley v. Bd. of Cnty. Comm’rs, 979 F.3d 784 (10th Cir. 2020) (en banc). Plaintiff brought a discrimination claim against her former employer, alleging that it had failed to reasonably accommodate her disability under Title I of the ADA. The jury found that Plaintiff was a qualified individual with a disability, but ruled in the employer’s favor because Plaintiff had not proven that she suffered any adverse employment action on account of her disability. Plaintiff appealed, arguing that the district court erred in instructing the jury that she must establish an adverse employment action in her failure-to-accommodate claim. A Panel Majority affirmed the district court’s judgment, but then the Tenth Circuit agreed to rehear the case en banc. In its en banc rehearing, the Tenth Circuit reversed the district court’s judgment and remanded for a new trial. Relying upon Tenth Circuit precedent, EEOC guidance, and decisions of other circuit courts, the Tenth Circuit held that an adverse employment action is not a requisite element of a failure-to-accommodate claim. In order to establish an ADA discrimination claim, an employee must show: (1) that he or she is disabled within the meaning of the ADA; (2) that he or she is qualified to perform the essential functions of the job, with or without a reasonable accommodation; and (3) that he or she was discriminated against because of a disability. The issue in this case centered on the third element of an ADA discrimination claim, i.e., what constitutes discrimination in a failure-to-accommodate claim. The Tenth Circuit explained that unlike disparate-treatment claims under the ADA—wherein an employee alleges that an employer discriminated against the employee through its discriminatory actions—a failure-to-accommodate claim concerns an employer’s failure to act. Consequently, once an employee establishes that the employer is on notice of the employee’s disability but fails to reasonably accommodate his or her disability, the employee need not go any further to show that he or she suffered an adverse employment action.
Aubrey v. Koppes, 975 F.3d 995 (10th Cir. 2020). Plaintiff employee became unable to work for a period of time due to a rare medical condition. Plaintiff’s employer allowed Plaintiff to take several months off work beyond her FMLA leave, but she was eventually terminated from employment. Plaintiff claimed that she had recovered enough to return to work with a reasonable accommodation, but that her employer discriminated against her due to her disability; failed to accommodate her disability despite her requested reasonable accommodations; and fired her in retaliation for requesting an accommodation. Plaintiff brought claims under the ADA, Rehabilitation Act, and applicable state law. The Tenth Circuit relied on the ADA to resolve all claims and held that Plaintiff’s failure-to-accommodate and disability discrimination claims could survive summary judgment, but that her retaliation claim could not. First, the Tenth Circuit found that Plaintiff satisfied her burden of establishing a prima facie failure-to-accommodate claim by showing (1) that she was disabled for purposes of the ADA; (2) that she was qualified to perform the essential functions of the job with or without a reasonable accommodation; (3) that she requested a “plausibly reasonable” accommodation; and (4) that the County did not accommodate her disability. Although her employer presented evidence to challenge Plaintiff’s failure-to-accommodate claim, there were enough disputed issues of fact to preclude summary judgment. Second, the Tenth Circuit held that under the burden-shifting analysis of McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), Plaintiff had also sufficiently established a prima facie case of disability discrimination and that there was a remaining issue of fact regarding whether her employer’s proffered reason for terminating Plaintiff was mere pretext. Accordingly, Plaintiff’s disability discrimination claim could also survive summary judgment. However, the Tenth Circuit did not find sufficient evidence in the record to support a finding that Plaintiff was terminated in retaliation for requesting an accommodation, and therefore her retaliation claim was properly resolved by the lower court on summary judgment.
§ 15.2.2 Defining Disability
Melo v. City of Somerville, 953 F.3d 165 (1st Cir. 2020). The Court allowed a former police officer to pursue Americans with Disabilities Act claims against the City of Somerville, Mass. The officer was forced to retire after it was determined that his blindness in one eye rendered him unable to carry out car chases. However, the Court vacated the lower court’s summary judgment determination because such ability may not have been an essential job function, given its absence from the department’s list of duties and responsibilities of a patrol officer. The Court concluded that even if a jury were to find high-speed pursuits an essential function of his job, the officer still had a chance at prevailing because a jury could also find that he can perform that function based on a doctor’s testimony that individuals with monocular vision frequently learn to compensate for their disability.
Eshleman v. Patrick Indus., Inc., 961 F.3d 242 (3d Cir. (Pa.) 2020). William Eshleman, a former employee, sued Patrick Industries, Inc., his former employer, alleging that his termination violated the ADA. Eshleman had taken two months of medical leave for a lung biopsy procedure and two vacation days for an upper respiratory infection. The district court dismissed the action, and Eshleman appealed. In a matter of first impression, the Third Circuit found that the district court had improperly dismissed the suit, where it had only evaluated the “transitory” nature of Eshleman’s biopsy while failing to separately consider whether such a procedure was “minor.” The ADA excludes impairments that are “transitory and minor”; thus, the Court observed that “‘transitory’ is just one part of the two prong ‘transitory and minor’ exception.” “The district court should have considered such factors as the symptoms and severity of the impairment, the type of treatment required, the risk involved, and whether any kind of surgical intervention is anticipated or necessary—as well as the nature and scope of any post-operative care.”
Darby v. Childvine, Inc., 964 F.3d 440 (6th Cir. 2020). Plaintiff sued Defendant, her former employer, alleging discrimination based on her health condition. Plaintiff took time off to undergo a double mastectomy and was terminated upon her return to work. Plaintiff was never diagnosed with breast cancer but had a family history of cancer and a genetic mutation known as BRCA1 mutation. The district court granted the Defendant’s motion to dismiss, holding that Plaintiff failed to provide support showing that the BRCA1 mutation is a physical impairment and that her mutation is akin to the “absence of cancer.” Looking at Section 12012(1)(A), the Sixth Circuit focused on three major aspects of the ADA’s definition of disability: (1) “physical or mental impairment,” (2) “substantially limits,” and (3) “major life activities.” Using this framework, the Court found that Plaintiff plausibly alleged that her impairment due to the BRCA1 mutation substantially limits her normal cell growth when compared to the general population. It further held that Plaintiff successfully pled the remaining aspects of her claim—that she was qualified to perform the essential functions of her position with reasonable accommodation and that her termination would not have occurred but for her disability. Accordingly, the Fifth Circuit reversed and remanded the district court’s dismissal of Plaintiff’s claims.
Kotaska v. Fed. Express Corp., 966 F.3d 624 (7th Cir. 2020). Plaintiff, a former employee of FedEx, was fired when an injury limited her ability to lift up to 75 pounds, as required for the position. About a year later, she was hired “off the books” as a handler, which also required her to lift up to 75 pounds. This time, her restriction was lifted so that she could lift up to 75 pounds up to the waist. However, three weeks in, FedEx discovered that the amount of weight Plaintiff could lift was still limited and fired her again. Plaintiff sued, alleging disability discrimination and retaliation. The Seventh Circuit affirmed that Plaintiff failed to prove that she was a qualified individual (i.e., someone who could carry out the essential functions of the job without exceeding her medical restrictions). For the Court, while lifting 75-pound packages overhead is not specifically an essential function, it does not mean that someone who can lift only 15 pounds overhead, such as plaintiff, is qualified. The Court found that Plaintiff inevitably would run into packages at weights beyond her limited capabilities. Regarding the retaliation claim, the Seventh Circuit affirmed that the inevitable inference was that the second dismissal was simply a following through with the first termination, with no causation between the two incidents.
Rinehart v. Weitzell, 964 F.3d 684 (8th Cir. 2020). Plaintiff prisoner suffered from diverticulitis, and alleged that while it was active, he suffered through “difficult and time-intensive digestive symptoms.” Plaintiff alleged he was discriminated against on the basis of this disability: the prison denied him certain privileges, due to keeping him in a cell with an in-unit toilet. The prison argued that given the episodic nature of diverticulitis, the condition could not be a disability for ADA purposes. The Eighth Circuit reversed the District Court’s sua sponte dismissal for failure to state a claim, holding that the impact of a condition is to be determined when it is active, and that Plaintiff’s allegations surrounding diverticulitis were sufficient to allege a disability under the ADA.
§ 15.2.3 Reasonable Accommodations
Trahan v. Wayfair Me., LLC, 957 F.3d 54 (1st Cir. 2020). The First Circuit found that Wayfair Maine LLC was properly granted summary judgment on a call center worker’s claim that she did not receive reasonable accommodations under the ADA and was discharged because of her post-traumatic stress disorder disability. The Court saw this case as a balance between important workplace protections that Congress has put in place for disabled employees and the right of employers to discipline their employees. The Court ultimately found that Plaintiff failed to show that Wayfair acted with discriminatory intent, namely because Plaintiff committed fireable misconduct including repeatedly referring to two coworkers as “bitches,” reacting aggressively when she believed one snapped at her, and other unprofessional conduct. The Court also rejected Plaintiff’s claim that the employer failed to accommodate her disability because they did not move her desk assignment or allow her to work from home. In response to these allegations, the Court pointed out that Plaintiff made these requests after she had committed the fireable misconduct, which the Court said should not be seen as an accommodation proposal, but more as a desire for forgiveness or a second chance. Further, the Court concluded that these requests were unreasonable because Wayfair did not have a work from home program at the time and because moving her desk in no way demonstrated to Wayfair that she would be able to comport herself with Wayfair’s Conduct Rules.
Bey v. City of New York, 437 F. Supp. 3d 222 (E.D.N.Y. 2020). Salik Bey and other named Plaintiffs are African American men employed as firefighters by the Fire Department of the City of New York (FDNY) and suffer from Pseudofolliculitis Barbae (PFB)—a physiological condition that causes disfigurement of the skin in the hair-bearing areas of the chin, cheek, and neck. Plaintiffs alleged that they were “disabled” and their rights were violated when the FDNY rescinded an appropriate accommodation exempting them from the FDNY’s grooming policy. The district court granted summary judgment in favor of Plaintiffs on their “failure to accommodate” and disability discrimination claims under the ADA, holding that they were entitled to have the accommodation previously in effect reinstated. After determining that PFB is an ADA-qualifying disability, the district court affirmed that “a reasonable trier of fact could find that the FDNY refused to provide a reasonable accommodation.” The court determined that reassignment to “light duty” was not a reasonable accommodation for Plaintiffs, who were hired “to respond to fires and other emergencies—an admired position of service to the public.” Finally, the district court determined that it would not be an undue hardship on the FDNY to allow the accommodation requested by Plaintiffs, where Defendants had admitted that “no heightened safety risk to firefighters or the public was presented by the accommodation previously in effect [and] Plaintiffs continued to perform their jobs satisfactorily.” The court concluded that “[t]he FDNY’s decision to abandon the prior accommodation was not based on any actual safety risks to firefighters or the public. Rather, driving the calculus was bureaucracy.”
Elledge v. Lowe’s Home Ctrs., LLC, 979 F.3d 1004 (4th Cir. 2020). The Fourth Circuit affirmed the district court’s grant of summary judgment in favor of defendant on claims of disability and age discrimination, and retaliation for filing an EEOC charge of discrimination. Plaintiff’s job as a market director for 12 of defendant’s stores required him to work 50-60 hours per week, most of which was spent on his feet. Following knee replacement surgery, plaintiff’s physician determined that plaintiff’s work restrictions (eight-hour days and four of walking or standing) were permanent. Defendant could not accommodate plaintiff’s permanent restrictions and advised plaintiff that he could find a new job with defendant within 30 days, and take a leave of absence if he needed additional time to search for a job. Although plaintiff utilized leave for several months while he searched for other positions, he ultimately requested early retirement and filed an EEOC charge of discrimination. With respect to the plaintiff’s disability discrimination claim, the Fourth Circuit deferred to the defendant’s judgment as to the essential functions of plaintiff’s position, in particular the ability to walk 66% of the day and work over forty hours each week. According to the Fourth Circuit, “no reasonable accommodation could, ultimately, have sufficed.” The Fourth Circuit also addressed the defendant’s hiring policy in light of the ADA’s duty to reassign. In determining that the defendant’s hiring policy was “disability neutral,” the Court cited the Supreme Court’s decision in U.S. Airways v. Barnett, 535 U.S. 391, 122 S. Ct. 1516 (2002), explaining that “Barnett does not require employers to construct preferential accommodations that maximize workplace opportunities for their disabled employees. It does require, however, that preferential treatment be extended as necessary to provide them with the same opportunities as their non-disabled colleagues.” The Court went on to reject plaintiff’s age discrimination claim for failure to present sufficient evidence to establish a prima facie case.
Austgen v. Allied Barton Sec. Servs., 815 Fed. App’x 772 (5th Cir. 2020). Plaintiff sued his former employer under the ADA, alleging failure to accommodate, discrimination, and retaliation. Plaintiff, who worked for Defendant as a Licensed Security Officer, reported that he could no longer perform the duties of his position, where the daily climbing he had to do aggravated his chronic back pain. Defendant placed him on a leave of absence until he could provide a doctor’s recommendation on suitable activity. Upon return, Plaintiff was offered and accepted a supervisory position at a different worksite that could accommodate his physical limitations and provide equivalent compensation. However, Plaintiff later filed suit. The district court granted Defendant’s motion for summary judgment on all claims. The Fifth Circuit reviewed all claims de novo. In reviewing the reasonable accommodation claim, the Court found that even if Plaintiff could show he was disabled, his claim would fail because temporary unpaid leave is not unreasonable, and he was offered a supervisory position that accommodated his disability with no reduction in compensation. Finally, the court held that unpaid leave does not constitute adverse employment action in the retaliation context, and Plaintiff failed to satisfy the burden for a discrimination claim. It observed that the district court’s error in failing to discuss this claim was harmless because the claim was meritless. Thus, the Fifth Circuit affirmed the district court’s findings on all claims.
Youngman v. Peoria Cnty., 947 F.3d 1037 (7th Cir. 2020). Summary judgment affirmed in favor of employer for employee’s failure to establish a causal relationship between the employee’s disability and symptoms experienced pursuant to a temporary assignment. Plaintiff, a former counselor of the juvenile detention center, suffered from the disabilities of hypothyroidism and hypocalcemia. Upon temporary assignment to a position in the control room, he experienced motion sickness from the electronic equipment emitting various humming, beeping, or buzzing noises in the room and the movement required to quickly operate and monitor all the equipment simultaneously. After presenting a doctor’s note that stated that plaintiff should avoid working in the control room without certain restrictions, plaintiff asked not to be assigned to the control room in the future as an accommodation, and requested instead to be placed as security or as a floater. Defendant responded that this accommodation would not be possible as counselors were required to rotate between various positions. Defendant also told plaintiff that he could return to work when his condition improved. After his medical leave time expired, plaintiff’s position was filled, and he was discharged for insubordination for failing to comply with the weekly progress report requirement of the medical leave. Plaintiff sued his employer for failing to accommodate his disabilities. The Seventh Circuit affirmed the district court’s ruling of summary judgment in favor of the defendant not because plaintiff was responsible for the breakdown of the interactive process, but rather that a failure to accommodate claim requires an employee’s limitation to be caused by the disability and plaintiff failed to establish any causal relationship between his hypothyroidism and the motion sickness.
D’Onofrio v. Costco Wholesale Corp., 964 F.3d 1014 (11th Cir. (Fla.) 2020). A split Eleventh Circuit panel upheld a district court’s decision to overturn a $775,000 jury verdict in favor of a deaf former Costco employee, rejecting her allegations that Costco had failed to adequately accommodate her disability under the ADA. The dispute stemmed from a 2015 complaint, where following her termination the employee claimed that Costco had discriminated and retaliated against her. The jury did not find that the employee was discriminated or retaliated against when she was dismissed; however, they awarded her compensatory and punitive damages for her failure-to-accommodate claims. The district court overruled this decision and the Eleventh Circuit affirmed, observing that the employee could not point to a specific instance in which she needed an accommodation and was denied one. Costco provided the employee with on-demand access to live sign-language interpreters via remote interpreting equipment, provided on-site in-person interpreters for group meetings, and arranged a thorough training session on deaf culture. While these accommodations did not line up with the employee’s preferences, which included a request for in-person interpreters rather than remote-interpreting equipment, they nevertheless were examples of Costco accommodating the employee’s needs. “[T]here is simply no basis in the evidentiary record to conclude that Costco’s use of a supposedly less preferable medium—[remote interpreting equipment]—represented a failure to make reasonable accommodations.” The Court found that the only accommodation not provided to the employee was her request to transfer her manager to another Costco location, a request that the ADA did not obligate Costco to fulfill.
§ 15.2.4 Regarded as Disabled
Waithaka v. Amazon.com, Inc., et al., 966 F.3d 10 (1st Cir. 2020). The First Circuit ruled that delivery workers who locally transport goods on the last legs of interstate journeys are exempt from the Federal Arbitration Act (“FAA”). The Court found that the exemption for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” extends to transportation workers who participate in interstate commerce, regardless of whether they physically cross state lines in doing so. Plaintiff was an independent contractor located in Massachusetts who contracted with Amazon to perform local deliveries through Amazon’s smartphone application (“AmFlex”). The AmFlex terms of service included an arbitration agreement. Plaintiff filed suit against Amazon alleging: (1) misclassification of AmFlex drivers as independent contractors, (2) violation of the Massachusetts Wage Act by requiring AmFlex drivers to bear their own expenses, and (3) violation of the Massachusetts Minimum Wage Law. Amazon sought to compel arbitration or, in the alternative, to transfer the case to the Western District of Washington. The District Court concluded that the AmFlex agreement was exempt from the FAA, that Massachusetts law governed the enforceability of the arbitration agreement, and that the provision was unenforceable under Massachusetts law. In affirming the District Court’s order, the First Circuit focused on the meaning of the term “engaged in . . . interstate commerce.” Relying on precedent under the Federal Employers’ Liability Act and analyzing the text, structure, and purpose of the FAA, the Court concluded that delivery workers who operate solely within state lines to deliver goods in the final leg of their interstate journey fall within the transportation worker exemption from the FAA. The Court then assessed the conflict of law issue, finding that Massachusetts’ public policy would invalidate a class waiver in an employment contract not covered by the FAA and that Massachusetts’ interest in enacting said public policy outweighed Washington’s interest in the case.
Lyons v. Katy Indep. Sch. Dist., 964 F.3d 298 (5th Cir. 2020). Plaintiff, a former employee of the Katy Independent School District (ISD), sued under the ADA, alleging disability discrimination, retaliation, and harassment following surgery. Plaintiff alleged that her reassignment was based on her procedure. The district court granted summary judgment to Defendant on all claims, holding that Plaintiff could not establish the first element of her prima facie case of disability-based discrimination. Plaintiff maintained she was “regarded as” disabled and not actually disabled. Without determining the standard a plaintiff who is “regarded as” disabled must reach as part of the prima facie case, the Fifth Circuit affirmed dismissal of the disability-based discrimination claim, finding that there was no dispute that Plaintiff’s impairments were transitory and minor. Though the Court held that the district court erred in its reasoning, it was correct in the conclusion that Defendant is entitled to summary judgment on the unlawful retaliation claim. The Court did not focus on whether a “causal connection” between Plaintiff’s protected activity and Defendant’s alleged adverse employment action existed; instead, it held that Plaintiff failed to demonstrate that there was a dispute of fact as to whether the school’s district’s reasons for its actions were pretextual.
Fisher v. Nissan N.A., Inc., 951 F.3d 409 (6th Cir. 2020). Plaintiff worked as a production technician on Defendant’s factory line. He took an extended leave due to kidney problems and returned after a transplant. He continuously requested a transfer to easier positions due to fatigue and side effects of his transplant, but his requests were denied. He received a final warning from Defendant and was terminated. Plaintiff sued Defendant, alleging discrimination and failure to accommodate. The district court granted summary judgment to Defendant on all claims. On appeal, the Fifth Circuit found that Plaintiff adequately provided evidence of his disability, that he was qualified for a vacant inspection position, and that Defendant failed to accommodate his disability by granting his transfer request. The Court held that Defendant was not entitled to summary judgment on the failure to accommodate claim. Next, the Court determined that Defendant was unable to present evidence of good-faith participation in the interactive process or how the accommodations Plaintiff suggested would cause undue hardship. Thus, the Court found that Defendant was not entitled to summary judgment.
§ 15.2.5 Interactive Process
There were no qualifying decisions this year.
§ 15.2.6 Miscellaneous
Lestage v. Coloplast Corp., 982 F.3d 37 (1st Cir. 2020). In a case of first impression, the First Circuit ruled that the proper causation standard for retaliation claims under the False Claims Act (FCA) is “but-for” causation. Plaintiff was a key account manager at Coloplast, responsible for making sales to and managing some of Coloplast’s largest accounts. In 2011, Plaintiff and others filed a qui tam action under seal under the FCA against Coloplast and several competitors and clients, including some of her own accounts. Shortly after the complaint was unsealed, a large account that was named in the qui tam complaint sent an email to Coloplast requesting that she be removed from the account. Four days after receiving this request, Coloplast placed Plaintiff on administrative leave until after the qui tam suit was resolved. Upon returning to work, Coloplast assigned Plaintiff a new mix of accounts and refused to place her on certain accounts she requested. The District Court gave the jury instruction to use the substantial motivating factor test for determining whether Coloplast had retaliated against Plaintiff. The First Circuit reviewed this decision under a plain error standard, concluding that, while the proper standard is but-for causation, the District Court had not committed plain error because this circuit had never decided the question. Relying on Supreme Court precedent under the Age Discrimination in Employment Act and Title VII, the Court reasoned that the statutory language was “materially identical” and that the but-for causation standard applies to retaliation claims under the FCA. Despite the application of the wrong standard, the Court also found that the jury had relied on sufficient evidence in coming to its determination that Coloplast had retaliated against Plaintiff.
Schirnhofer v. Premier Comp Solutions, LLC, 832 Fed. App’x 121 (3d Cir. (Pa.) 2020). Beth Schirnhofer, a former billing assistant for Premier Comp Solutions, LLC, filed an ADA discrimination claim. The Third Circuit upheld the decision of the district court, which found that Schirnhofer could not receive damages. Even though a jury had found her termination was discriminatory and calculated her damages to be $285,000, the Third Circuit observed that she would have been terminated even without an illegal motive. “[A] plaintiff may not recover monetary damages for that violation if the defendant shows that it ‘would have taken the same action in the absence of the impermissible motivating factor.’” However, Court did deny Premier’s appeal of the district court’s finding that the company had to pay part of Schirnhofer’s expenses—$177,187 in attorney fees and $13,259 in costs. This award was not an abuse of discretion, as the jury had rejected Premier’s argument that the ADA does not recognize PTSD as a disability.
Tonyan v. Dunham’s Athleisure Corp., 966 F.3d 681 (7th Cir. 2020). Plaintiff, a former store manager at an athleisure retail store, suffered a series of injuries, requiring her to receive multiple surgeries and temporary restrictions to her shoulder, arm, and hands. As she accumulated injuries, her doctor imposed permanent restrictions, one of which prevented her from lifting more than two pounds with her right arm. As a result, defendant terminated plaintiff’s employment because she could not perform the physical tasks that were essential to her job. Plaintiff filed suit against the defendant for disparate treatment and failure to accommodate. The district court granted motion for summary judgment in favor of the defendant on the disparate treatment claim. On appeal, plaintiff challenged the disparate treatment claim, for which she is required to prove, in part, that she was capable of performing essential functions with or without reasonable accommodations. Plaintiff asserts that her role involved much less physical labor than the employer suggested, contending that her essential functions were customer service and sales. However, defendant presented the job description and supporting documentation showing that physical labor was a necessary part of the role of a store manager, and essential to defendants’ business model. The Seventh Circuit held in favor of the defendant, citing that the plaintiff could not complete the essential functions of her job. The Court also stated “[w]e usually do not ‘second-guess’ the employer’s judgment in describing the essential requirements for the job.”
Harris v. Union Pac. R.R. Co., 953 F.3d 1030 (8th Cir. 2020). Plaintiff railroad employees brought class action against their employer, alleging that Defendant employer’s fitness-for-duty policy violated the ADA. Under Defendant’s policy, employees in certain positions had to report certain health events so that Defendant could determine the employee’s fitness for duty, and whether to assign certain job restrictions. Such events included heart attack, stroke, and significant vision change. The Eighth Circuit assumed, without deciding, that the class action hybrid certification approach of International Bhd. of Teamsters v. U.S., 431 U.S. 324 (1977) was applicable to ADA cases. Drawing attention to the highly individualized application of Defendant’s policy, the Court found that these individualized inquiries predominated over any common question, and thus the class could not be certified under 23(b)(2) and (b)(3). However, the Court noted that it was not rejecting the possibility that a class, which brought an ADA claim through the Teamsters framework, could properly be certified under Rule 23.
§ 15.3 Age Discrimination
§ 15.3.1 Burden of Proof / Evidentiary Issues / Damages
Babb v. Wilkie, 140 S. Ct. 1168 (2020). In an 8-1 decision, the Court vacated an Eleventh Circuit ruling that federal employees must show that an adverse employment action would not have happened if they were younger to succeed under Section 633a(a) of the ADEA, which states that public-sector employees “shall be made free from any discrimination based on age.” The case centers around Norris Babb, a clinical pharmacist for the U.S. Department of Veterans Affairs (VA). Babb claimed that because she was a woman over 40, the VA stripped her of her advanced certification, denied her a transfer and training opportunities, and shorted her on holiday pay. The Eleventh Circuit affirmed the dismissal of her lawsuit, holding that her claims did not satisfy the but-for standard. However, writing for the majority of the Court, Justice Alito explained that “if age discrimination played a lesser part in the decision, other remedies may be appropriate,” such as an injunction or other “forward-looking relief” that a district court sees fit to impose. In other words, “[t]he statute does not require proof that an employment decision would have turned out differently if age had not been taken into account”; instead, the “plain meaning” of the statute “demands that personnel actions be untainted by any consideration of age.” While the Court had held in a prior case that the private-sector provision of the ADEA requires plaintiffs to show that age was a but-for cause of an adverse employment action, Justice Alito noted that the private- and public-sector provisions have different terms, with the federal government held to a stricter standard than private employers or state and local governments.
Stoe v. Barr, 960 F.3d 627 (D.C. Cir. 2020). Plaintiff, a female Department of Justice (DOJ) employee, sued the US Attorney General, alleging that the agency’s decision to deny her a promotion and to give the job to a younger man (two decades her junior) with less experience was based on gender and age discrimination, in violation of Title VII and the ADEA. The district court granted summary judgment in favor of DOJ, and Plaintiff appealed. The D.C. Circuit reversed and remanded, holding that Plaintiff presented sufficient evidence for jurors to reasonably decide that the rationale offered by the DOJ for why it passed Plaintiff over for promotion was pretextual. The Court observed that the “caliber and quality” of Plaintiff’s evidence “surely supports” her contention that she was more qualified for the job than the younger comparator, and that jurors could conceivably side with her because of her “superior qualifications” and thus infer gender bias.
Green v. Town of E. Haven, No. 18-0143, 2020 WL 1146687 (2d Cir. (Conn.) Mar. 10, 2020). Dyanna L. Green appealed from a district court ruling dismissing her action against defendant Town of East Haven (“Town”) for alleged age discrimination in terminating her employment, in violation of the ADEA and Connecticut state law. The district court granted summary judgment dismissing the action on the sole ground that Green had failed to make out a prima facie case of any adverse employment action, because she had chosen to retire rather than attend a scheduled disciplinary hearing—the only merits-based challenge presented in the Town’s summary judgment motion. On appeal, Green asserted that the court erred in failing to view her evidence that the retirement was not voluntary but was coerced by the threat of likely termination, and hence constituted a constructive discharge. She explained that she resigned prior to the disciplinary hearing only after her union representative, who had just met with town representatives, told her she would almost certainly be fired. The Second Circuit agreed, finding that the evidence, viewed in the light most favorable to Green, sufficed to present genuine issues of fact as to whether a reasonable person in Green’s shoes would have felt compelled to retire. Accordingly, the Second Circuit vacated the judgment and remanded for further proceedings.
Stokes v. Detroit Pub. Sch., 807 Fed. App’x 493 (6th Cir. 2020). Plaintiff sued Defendant-employer, alleging violations of Title VII and the ADEA. The district court granted summary judgment to Defendant on all claims. Plaintiff worked for Defendant as an Interim Executive Director and applied for a newly created position Executive Director-Talent Acquisition (EDTA) when his contract ended. However, a 28-year-old female external applicant was routed to and preselected for the EDTA position by the managers who prescreened her. In response, Plaintiff filed suit. The Fifth Circuit found that Plaintiff could present a prima facie case for discrimination. Though the Defendant’s proffered reasons for the inconsistencies in their interview processes were found not to be pretextual, Plaintiff’s evidence that the external candidate was preselected created a genuine dispute as to why Plaintiff was not selected for the position. Thus, the Court reversed and remanded summary judgment to the Defendants on the Title VII and ADEA claims.
Pelcha v. MW Bancorp, Inc., 988 F.3d 318 (6th Cir. 2021). Plaintiff, an employee at Watch Hill Bank, was terminated purportedly for insubordination. Plaintiff, who was 47 years old at the time of her termination, sued under the ADEA, alleging age discrimination. The district court held she could not establish a prima facie case of age discrimination and granted summary judgment to Defendants. The Fifth Circuit noted that to defeat summary judgment, Plaintiff had to show a genuine dispute of material fact that could persuade a reasonable juror that age was the but-for cause of her termination. However, Plaintiff contended that Bostock, a Title VII case, disrupts this framework, and that the ruling in Bostock should be extended to change the meaning of “because of” under the ADEA. The Fifth Circuit rejected this argument, finding that Bostock narrowly applied to Title VII claims. Consequently, the Fifth Circuit analyzed Plaintiff’s claim using the existing ADEA framework and held that Plaintiff could not provide evidence of age discrimination. Because Plaintiff was unable to show that insubordination was only a pretext to conceal the true motive for her termination, the grant of summary judgment was affirmed.
Tyburski v. City of Chicago, 964 F.3d 590 (7th Cir. (Ill.) 2020). Plaintiff, a 74-year-old employee of the City Water Department, was rejected for a promotion after failing a verbal exam. Plaintiff brought non-promotion and hostile work environment claims against the City under the ADEA. Plaintiff alleged that the City improperly scored his verbal exam, and that it used his failing grade as pretext to deny him the promotion. The Seventh Circuit held that an employer is permitted to set necessary qualifications for an employment position, including scoring metrics, and that Plaintiff had not presented any evidence of pretext to explain the grading other than the interviewer’s knowledge of his age, which by itself is insufficient. Regarding Plaintiff’s claim that he was subjected to a hostile work environment based on three to four comments about his age from coworkers over the course of many years, the Seventh Circuit held that even assuming that a plaintiff could bring hostile work environment claims under the ADEA, Plaintiff failed to provide evidence that the treatment he received rose to the level of a hostile environment. The comments were allegedly made by his coworkers, not his supervisors, which would require a finding that the employer was negligent in failing to prevent harassment. To the contrary, the Court noted that Plaintiff’s employer made arrangements to prevent such comments from his coworkers.
Starkey v. Amber Enters., Inc., 987 F.3d 758 (8th Cir. 2021). Court held under the shifting burdens test of the ADEA, a plaintiff must first make out a prima facie case of age discrimination. Once plaintiff has done this, then the burden is on the defendant to articulate a legitimate, nondiscriminatory reason for its challenged action. If defendant proffers such a reason, the burden shifts back to plaintiff to show that the proffered reason was “mere pretext for discrimination” and that “age was the but-for cause” of the challenged adverse employment action. Here, Court assumed Plaintiff met her initial burden, and found that Defendant articulated a non-discriminatory reason (relying on business judgment based on third-party consultant recommendations). Court held that Plaintiff failed to meet its evidentiary burden to show the justification was merely pretext. Court found that Plaintiff’s evidence about other older employees who had their employment terminated: (1) was insufficient for the Court to assess the circumstances surrounding other employees’ terminations; (2) did not show that other employees were similarly situated to Plaintiff; and (3) did not show that discrimination against these employees was relevant to Plaintiff’s claim.
Main v. Ozark Health, Inc., 959 F.3d 319 (8th Cir. 2020). Plaintiff was unable to show that Defendant’s proffered reason for her employment termination was mere pretext. Defendant stated he terminated Plaintiff’s employment because she was rude and insubordinate at a meeting. Plaintiff attempted to show this reason was pretext by showing that this account of the meeting was false. Court reaffirmed that simply showing an employer’s explanation is false is insufficient to show pretext; what is important is whether the employer actually believed it, even if he was incorrect. Court further reaffirmed that showing an employer’s action was pretext is not enough to succeed on a claim under the ADEA. The plaintiff also must present evidence that permits a reasonable inference to be drawn that the real reason for the adverse employment action was the plaintiff’s age.
§ 15.3.2 Reductions in Force / Restructuring
There were no qualifying decisions this year.
§ 15.3.3 Miscellaneous
There were no qualifying decisions this year.
§ 15.4 Arbitration
§ 15.4.1 Claims Subject to Arbitration
MZM Constr. Co. Inc. v. N.J. Bldg. Laborers’ Statewide Benefit Funds, 974 F.3d 386 (3d (N.J.) 2020). The Third Circuit held that courts, not arbitrators, decide whether disputes are subject to arbitration if a contract’s language is vague. Questions about whether issues belong in arbitration “are for the courts to decide unless the parties have clearly and unmistakably referred those issues to arbitration in a written contrac t.” The parties had disagreed on whether MZM Construction Co. Inc. was contractually obligated to contribute $230,000 to the funds to pay ERISA benefits to workers on a Newark Airport construction project. The district court had stopped arbitration between the parties in December 2018, doubting the existence of a valid arbitration agreement while refusing to rule on the question of the agreement’s applicability. Before determining whether the agreement applied, the district court had to decide whether an arbitrator or the court should answer that question. The district court ruled that a court must resolve the question of whether an arbitration agreement applies before referring a matter to arbitration. The Third Circuit agreed, relying on Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287 (2010).
Sabatelli v. Baylor Scott & White Health, 832 Fed. App’x 843 (5th Cir. 2020). After forcibly resigning from his job, Plaintiff sued Defendant in federal court, alleging that his forced resignation violated the ADEA and ADA. Sixteen months into the lawsuit, with summary judgment pending, Plaintiff filed an arbitration demand alleging Defendant breached the employment agreement. The district court granted summary judgment to the defendant on the discrimination claim and ruled that arbitration was no longer available for Plaintiff on his breach of contract claim. Using the McDonnell-Douglas framework, the Fifth Circuit reviewed the district court’s summary judgment dismissal of the discrimination claim and affirmed its dismissal. It found that there is not a factual dispute on whether Defendant’s reasons for Plaintiff’s termination were pretextual or on the question of causation. Next, the Fifth Circuit determined that a court decides whether Plaintiff can arbitrate his contract claim after pursuing his discrimination claims in federal court. The Court held that, because “the theory he seeks to arbitrate involves the same nucleus of operative facts as the ones pursued in federal court,” he is not permitted to “get a second bite at the apple through arbitration” after choosing to litigate his termination in federal court. The Fifth Circuit affirmed the district court’s decision on this issue.
Sun Coast Res., Inc. v. Conrad, 956 F.3d 335 (5th Cir. 2020). Plaintiff worked for Defendant Sun Coast Resources as an hourly fuel technician and driver. On behalf of a class of similarly situated employees and pursuant to an arbitration agreement, Plaintiff brought overtime claims against Defendant alleging violations of the FLSA. The arbitrator used the clause construction award and determined that the arbitration agreement provided for collective actions. The district court denied Defendant’s request to vacate the award and held that the arbitrator interpreted the agreement properly. The Fifth Circuit reviewed de novo and affirmed the district court’s decision. The Fifth Circuit agreed with the arbitrator and the district court that Defendant’s arbitration agreement covered a breadth of claims, and that Defendant’s decision not to exclude class arbitration was a conscious choice. Additionally, the Court agreed that the American Arbitration Association’s rules for employment would govern the arbitration and those rules permit class proceedings. Therefore, a class proceeding was appropriate in this case. Finally, the Court noted that Defendant twice forfeited the issue of whether the arbitrator determines class arbitrability by not challenging the issue to the arbitrator and not challenging the arbitrator’s authority in a timely manner to the district court. The Fifth Circuit held that the class action could proceed.
Krakowski v. Allied Pilots Ass’n, 973 F.3d 833 (8th Cir. 2020). Plaintiff pilot sued his union in state court. Defendant union argued that under the Railway Labor Act, these disputes must be made before an adjustments board. The Eighth Circuit held that claims between only the union and its members (without involving the employer) are not subject to the Railway Labor Act’s requirement that claims be arbitrated in front of an adjustment board.
§ 15.4.2 Enforceability
Teamsters Local 177 v. United Parcel Serv., 966 F.3d 245 (3d Cir. (N.J.) 2020). A labor union petitioned for an order confirming an arbitration award in the union’s favor, pursuant to the Federal Arbitration Act (FAA) and the Labor Management Relations Act with respect to work assignment grievances brought under a CBA. The district court denied the union’s motion to confirm and dismissed the case, and the union appealed. The Third Circuit reversed and remanded, ruling that the arbitration award must return to the district court for confirmation. This decision resolved a circuit split over whether district courts have jurisdiction over such awards when they are not disputed. Here, the Court rejected UPS’s argument that the FAA requires there to be a case or controversy over an award before a district court can get involved. “Confirmation is the process through which a party to arbitration completes the award process under the FAA, as the award becomes a final and enforceable judgment. The FAA not only authorizes, but mandates, that district courts confirm arbitration awards by converting them into enforceable judgments through a summary proceeding.”
Bigger v. Facebook, Inc., 947 F.3d 1043 (7th Cir. 2020). Plaintiff, an employee of Facebook, brought a putative collective action under the FLSA against Facebook, alleging that he was improperly classified as overtime exempt. One of the issues before the Seventh Circuit was whether the district court abused its discretion by authorizing notice of the class action to be sent to individuals who allegedly entered mutual arbitration agreements, waiving their right to join the action. Facebook argued that sending notice to such individuals would misinform them. Plaintiff countered that all employees in the proposed collective action are “potential plaintiffs” because they were all victims of a policy that violated the law. The Seventh Circuit vacated and remanded the district court’s authorization of notice. The Court justified not authorizing notice to individuals who have entered arbitration agreements based on (1) the risk of increasing pressure to settle by adding plaintiffs and (2) preventing the appearance of soliciting claims. The other issue before the Seventh Circuit was whether Plaintiff had a viable claim that she should not be overtime exempt. The Seventh Circuit affirmed that issues existed as to whether Plaintiff should be categorized as exempt. First, the Seventh Circuit affirmed that a genuine question of fact existed as to whether Plaintiff customarily and regularly performed administratively exempt duties. While her core function as a revenue generator through advertisements was an administratively exempt duty, her engagement in that function may not have been. Secondly, the Seventh Circuit affirmed that a genuine question of fact existed as to whether she had authority to make an independent choice, free from supervision, which would have made her overtime exempt.
In re Grice, 974 F.3d 950 (9th Cir. 2020). The Ninth Circuit affirmed a district court’s decision holding that rideshare drivers who pick up and drop off passengers at airports do not fall within arbitration exemption for workers engaged in foreign or interstate commerce. In doing so, the Court examined Section 1 of the Federal Arbitration Act, also referred to as the Act’s residual clause, which exempts from the Act’s coverage contracts of employment of workers engaged in foreign or interstate commerce. The Court acknowledged that the 3rd and 1st Circuits interpreted the residual clause to apply to those who transport passengers while engaged in interstate commerce. However, the Court noted that the critical factor was “the nature of the business for which a class of workers perform[ed] their activities.” In doing so, the Ninth Circuit noted that a district court had previously concluded that Lyft drivers were not engaged in interstate commerce because the company was primarily in the business of providing rides—most of which were intrastate—not offering interstate transportation to passengers. The Court concluded that because rideshare drivers “[were] not part of a group engaged in foreign or interstate commerce,” they do not fall within the FAA’s residual clause exemption.
Gherardi v. Citigroup Global Markets, Inc., 975 F.3d 1232 (11th Cir. (Fla.) 2020). The Eleventh Circuit reversed and remanded a district court decision that determined arbitrators “exceeded their powers” in awarding the plaintiff-employee nearly $4 million for wrongful termination. The employee had initiated arbitration against Citigroup, alleging that his termination had violated an anti-retaliation provision of his employment contract. Citibank countered that the employee was at-will and thus could be terminated for any reason. The Eleventh Circuit held that, because the discharged employee’s wrongful termination claim was “employment-related,” it was validly submitted to arbitrators pursuant to the terms of Citigroup’s arbitration policy specifying that the parties agreed to arbitrate all “employment-related disputes.” Accordingly, the district court erred by substituting its own legal judgment for that of the arbitrators. The Court emphasized that arbitrators do not exceed their authority by making an error, even a serious error. Rather, under the Federal Arbitration Act, 9 U.S.C. § 10(a)(4), the employee’s claim was “assigned by contract” to arbitrators, meaning that the courts had no power to rule on the merits of the underlying claim for wrongful termination, unless there is evidence that the arbitrators strayed from interpretation of the contract between the parties. “In short, if an agreement assigns a dispute to arbitration, the arbitrators do not exceed their authority when they resolve that dispute—regardless of the outcome.” Gherardi reflects a refusal by the Eleventh Circuit to expand Section 10(a)(4)’s “exceeded their powers” basis for vacating an arbitration award, even in situations where enforcement of the Federal Arbitration Act would result in clear legal error.
§ 15.5 Title VII
§ 15.5.1 Burden of Proof / Evidentiary Issues
Joll v. Valparaiso Cmty. Schs., 953 F.3d 923 (7th Cir. 2020). Plaintiff, an accomplished female runner and experienced runner, applied for two assistant coaching positions at Valparaiso High School, one for the girls’ cross-county team and one for the boys’ cross-country team. Plaintiff was not selected for either position and, in both instances, a younger male was hired. Plaintiff filed suit under Title VII and the ADEA. The district court granted summary judgment for the defendant concluding that plaintiff had not offered enough evidence of either form of discrimination to present the case to a jury. However, the Seventh Circuit reversed the district court’s grant of summary judgment in favor of defendants, reasoning that the district court failed to look at the totality of the circumstances. The Seventh Circuit held that a jury could reasonably find that the defendants skewed the rules in favor of the male candidates to the plaintiff’s detriment. The plaintiff had a more difficult time securing an initial interview than her male counterparts, and during her interview, plaintiff was asked if she was capable of committing to her job despite having children, while her male counterparts were asked about their past experiences. The Seventh Circuit found that this was suggestive of a sex stereotype that women should play a more domestic role than men. Also, defendants checked the plaintiff’s references immediately following her interview, rather than wait until after school officials decided to make a hiring recommendation to the school board, as was the defendants’ past practice and as they did with the male applicants. Also, despite receiving positive feedback from most of her references, defendants decided to turn her down based on one line from one reference that mentioned that plaintiff had a “dominant personality,” which the court also found suggestive of a sex stereotype that women should be more subordinate. Furthermore, the court found that the defendants’ stated reasons for hiring for these identical positions were inconsistent with each other, as they emphasized the importance of recent coaching experience for one position while not mentioning such a requirement for the other, instead mentioning that the male candidate was hired for having “rapport with the boys”. The Seventh Circuit remanded the case for trial on the sex discrimination claim.
Gibson v. Concrete Equip. Co., 960 F.3d 1057 (8th Cir. 2020). Plaintiff brought a sexual harassment claim, among others, against Defendant employer. The Eighth Circuit affirmed a district court grant of summary judgment in favor of Defendant on Plaintiff’s sexual harassment claim, finding that she failed to establish a prima facie case. The Court found that Plaintiff failed to establish that the harassment affected a term, condition, or privilege of Plaintiff’s employment. Specifically, the Court held that Plaintiff’s claim failed because she was unable to demonstrate that she subjectively perceived the alleged harassment as abusive. In support of this conclusion, the Court noted that Plaintiff had stated, in a letter to an individual investigating her post-termination complaint, that she loved working at the company, that her coworkers were akin to brothers and uncles that she had never had, and that she was rarely offended by her coworkers’ conduct. Furthermore, the Court cited evidence that Plaintiff engaged in behavior similar to that which she claimed was unwelcome or offensive on multiple occasions, “demonstrate[ing] that the behavior of the accused employees was not unwelcome.”
§ 15.5.2 Damages / Attorneys’ Fees
Sooroojballie v. Port Auth. of N.Y. & N.J., 816 Fed. App’x 536 (2d Cir. 2020). Plaintiff Neil Sooroojballie commenced a Title VII and Section 1981 suit against his former employer, The Port Authority of New York & New Jersey, and his supervisor Gary Frattali, alleging employment discrimination on the basis of his race and national origin. In 2018, a jury found in favor of Sooroojballie on his hostile work environment claim and awarded him $2,160,000 in compensatory damages and $150,000 in punitive damages. Defendants appealed. The Second Circuit determined that there “was more than sufficient evidence for the jury to find that Sooroojballie was subjected to a hostile work environment based upon his race and national origin, and thus the jury’s finding must not be disturbed.” However, the Court noted that Sooroojbalie’s “proof regarding emotional distress did not contain the evidence or prolonged mental harm or negative, long-term prognosis that is typically present in cases with awards around $500,000.” As a result, the Court determined that the jury’s $2,160,000 award for emotional distress damages “far surpasses the upper limit of the reasonable range and shock(s) the judicial conscience.” The Court set $250,000 as “the upper limit of the reasonable range for the significant emotional distress that was described in Sooroojballie’s testimony.” The Court also upheld the $150,000 punitive damages award.
§ 15.5.3 Gender / Equal Pay Act
Bostock v. Clayton Cty., 140 S. Ct. 1731 (2020). In a landmark opinion that consolidated three separate cases—EEOC v. R.G. & G.R. Harris Funeral Homes, 884 F.3d 560 (6th Cir. (Mich.) 2018); Bostock v. Clayton Cty. Bd. of Comm’rs, 723 Fed. App’x 964 (11th Cir. (Ga.) 2018); and Zarda v. Altitude Express, Inc., 883 F.3d 100 (2d Cir. (N.Y.) 2018)—the Supreme Court held that Title VII prohibits discrimination on the basis of sexual orientation, gender identity, and transgender status. According to the Court, “[b]ecause discrimination on the basis of homosexuality or transgender status requires an employer to intentionally treat individual employees differently because of their sex, an employer who intentionally penalizes an employee for being homosexual or transgender also violates Title VII.” The 6-3 decision, penned by Justice Gorsuch, resolved a contentious circuit split over how far Title VII’s prohibition on discrimination “because of sex” extends. Bostock came on the heels of several notable lower-court decisions that expanded the protections of Title VII, such as Hively v. Ivy Tech Cmty. Coll. Of Ind., 853 F.3d 339 (7th Cir. (Ind.) 2017) (holding that Title VII gives gay and lesbian workers the right to sue over what they perceive as discriminatory employment practices based on their sexual orientation). In Zarda, an en banc Second Circuit determined that the estate of a gay skydiving instructor had a viable claim against Altitude Express Inc. The same year, the Sixth Circuit in R.G. & G.R. Harris Funeral Homes revived the EEOC’s allegations that the employer had illegally fired its funeral director after she announced her gender transition. The funeral home and the skydiving company appealed their losses to the Supreme Court, along with gay former Georgia municipal worker Gerald Bostock, who had lost his unfair firing case at the Eleventh Circuit. The Court granted certiorari in April 2019 and heard the combined cases in October 2019. How the Bostock ruling applies to faith-based employers who believe that homosexuality and same-sex marriage run counter to their religious beliefs remains an open question. For his part, Justice Gorsuch wrote that the extent to which “these doctrines protecting religious liberty interact with Title VII are questions for future cases.”
Spencer v. Va.State Univ., 919 F.3d 199 (4th Cir. 2019). Plaintiff, a female sociology professor, argued that her position was substantially equal to that of two male professors who taught in completely different departments. According to the plaintiff, all professors, regardless of academic field, performed substantially equal work because they all prepared syllabi and lessons, managed their classrooms, instructed students, tracked student progress, and input grades. The district court disagreed and granted summary judgment in favor of the defendant. The Fourth Circuit affirmed the grant of summary judgment, in large part because plaintiff’s claim of “equal work” rested on a level of generality insufficient to sustain a prima facie case. In particular, the Court noted that plaintiff’s claims failed because they were so general in description as to be “shared by middle-school teachers and law-school professors, pre-algebra teachers and biomedical-engineering professors” alike. Essentially, plaintiff’s comparison failed because it relied on the “common title of professor” and “generalized responsibilities,” and did not account for differences in skill and market forces that compensate certain types of professors more highly.
Pribyl v. Cnty. of Wright, 964 F.3d 793 (8th Cir. 2020). The Eighth Circuit affirmed a district court grant of summary judgment in favor of Defendant employer, concluding that Plaintiff, a job candidate applying for employment with Defendant, failed to raise a genuine issue of material fact in support of her Title VII claim of sex discrimination. Among Plaintiff’s arguments was that a reasonable jury could find Defendant liable under a cat’s paw theory, under which an employer could be held vicariously liable for an adverse employment action if an agent—other than the ultimate decision-maker—was motivated by discriminatory animus and intentionally and proximately caused the action. The Eighth Circuit concluded that Plaintiff failed to provide any evidence that Defendant’s agents—an interview panel—harbored gender animus, particularly in light of the fact that the panel asked no gender-specific question and that the Plaintiff herself had introduced a gender-based issue through her answer. The Court further rejected Plaintiff’s contention that the ultimate decision-maker in the hiring process harbored gender animus sufficient to warrant liability under a cat’s paw theory, noting that the gender animus of a final decision-maker could not be the basis of a cat’s paw theory; rather, such animus was more properly classified as direct evidence of sex discrimination—an argument that Plaintiff had already waived.
Rizo v. Yovino, 950 F.3d 1217 (9th Cir. 2020). Plaintiff, a female county employee, filed suit against her employer under the Equal Pay Act. She argued that the county violated the EPA by using prior wages to calculate her starting salary as a math consultant, which resulted in a salary that was significantly lower than starting salaries for her male coworkers who performed the same work. The Ninth Circuit examined the scope of the EPA’s fourth exception, which allows a disparity in pay where such differential is “based on any other factor than sex.” After examining the text of the Act, considering the canons of statutory construction, and examining the EPA’s history and purpose, the Court ultimately concluded that this fourth exception to the EPA was limited only to job-related factors. The Court went further to overrule Kouba v. Allstate Ins. Co., 691 F.2d 873 (9th Cir. 1982), in which it had previously allowed the use of prior pay as an affirmative defense to an EPA claim. In light of its interpretation of the EPA’s fourth exception, the Court concluded that, because prior pay potentially carried the effects of sex-based pay discrimination, an employee’s prior salary did not qualify as a factor other than sex under the fourth exception.
Frappied v. Affinity Gaming Black Hawk, LLC, 966 F.3d 1038 (10th Cir. 2020). Plaintiffs were all employees of a casino who were laid off by Defendant. The eight female Plaintiffs brought sex-plus-age disparate impact and disparate treatment claims under Title VII, and all Plaintiffs brought disparate impact and disparate treatment claims under the ADEA. The district court granted summary judgment in favor of Defendant, and Plaintiffs appealed. The Tenth Circuit affirmed in part and reversed in part. First, in an issue of first impression, the Tenth Circuit recognized that Plaintiffs’ sex-plus-age disparate impact claims were cognizable under Title VII, and the district court had erred in dismissing such claims. However, because Plaintiffs had failed to allege or plausibly infer that Defendant had discriminated against them because of sex, their Title VII disparate treatment claims were properly dismissed. Next, the Tenth Circuit reversed the dismissal of Plaintiffs’ ADEA disparate impact claims, reasoning that Plaintiffs had sufficiently alleged that Defendant’s termination policies resulted in a disparate impact on workers who were forty or older. Finally, the Tenth Circuit held that there existed a genuine issue of fact regarding Plaintiffs’ ADEA disparate treatment claims, where there was sufficient evidence for a jury to conclude that Defendant lacked credibility regarding its purported non-discriminatory reasons for terminating Plaintiffs, and that these reasons were pretextual.
Durham v. Rural/Metro Corp., 955 F.3d 1279 (11th Cir. (Ala.) 2020). The Eleventh Circuit revived a pregnancy bias lawsuit by an EMT denied light-duty work while pregnant in the Circuit’s first application of Young v. UPS, 575 U.S. 206 (2015), which articulated the standard for establishing a prima facie case of pregnancy discrimination under the Pregnancy Discrimination Act. In 2015, Kimberlie Durham became pregnant while working as an emergency medical technician for Rural/Metro. Her physician instructed her not to lift more than 50 pounds during her pregnancy. When Rural/Metro denied her request for accommodation, Durham sued them in Alabama federal court, alleging discrimination. The district court granted Rural/Metro’s motion for summary judgment, concluding that Durham had failed to establish a prima facie case of discrimination under the Pregnancy Discrimination Act. Durham appealed, and the Eleventh Circuit held that the district court “mistakenly determined” that pregnant and non-pregnant employees in need of workplace accommodations could be treated differently. Under Young, a plaintiff need only show that (1) she is a member of the protected class, (2) she requested and was denied accommodation, and (3) her employer accommodated others “similar in their ability or inability to work.” Here, the district court erroneously factored into its analysis Rural/Metro’s purportedly legitimate reason for treating the EMT differently from non-pregnant workers, a factor that should be considered only after the prima facie analysis. The Court remanded the action to the district court for it to reevaluate “whether [Rural/Metro’s] stated reasons for treating Durham differently than other EMTs with lifting restrictions were pretextual.”
§ 15.5.4 Harassment / Reporting Harassment
Lewandowski v. City of Milwaukee, 823 Fed. App’x 426 (7th Cir. (Wis.) 2020). Plaintiff, a former police officer, alleged that the Milwaukee Police Department violated Title VII by discriminating against her on the basis of sex and retaliating against her. Plaintiff had helped another female officer obtain a temporary restraining order against her friend’s abusive partner, who was a high-ranking male police officer. Plaintiff alleged that her help and support of her friend angered the higher-ups within the department, where they began to retaliate against her. Following an on-duty incident, Plaintiff was suspended and then terminated for lying. The Seventh Circuit held that Plaintiff had not established a prima facie case of sex discrimination because she failed to show that a similarly situated male employee had been treated more favorably. Plaintiff asserted that male employees who had committed worse offenses had not been terminated, yet she failed to show evidence of a proper comparator similar in rank, dates of employment, and details as to the misconduct. Regarding the retaliation claim, the Seventh Circuit determined that Plaintiff had failed to show any statutorily protected activity, such as a formal complaint alleging sex discrimination. The Court noted that, despite Plaintiff’s complaints about her general mistreatment resulting from her helping her friend, not every complaint from a woman to management is protected under Title VII unless it specifically alleges sex discrimination.
Paskert v. Kemna-ASA Auto Plaza, Inc., 950 F.3d 535 (8th Cir. 2020). Plaintiff, a female employee, brought an action against employer and supervisors, asserting claim for hostile work environment based on sex, among other claims. The Eighth Circuit cited several cases within the circuit in which the Court held that the facts were not sufficiently severe or pervasive enough to establish a Title VII hostile work environment claim—McMiller v. Metro, 738 F.3d 185 (8th Cir. 2013); LeGrand v. Area Resources for Community and Human Services, 394 F.3d 1098, 1100-03 (8th Cir. 2005); and Duncan v. General Motors Corporation, 300 F.3d 928, 931-35 (8th Cir. 2002). Relying on precedent set by these cases, the Court concluded that the behavior of Plaintiff’s supervisor, “while certainly reprehensible and improper, was not so severe or pervasive as to alter the terms and conditions of [Plaintiff’s] employment,” which was required to support a claim for sexual harassment. The Court went further in distinguishing Plaintiff’s case from that of the plaintiffs in McMiller, LeGrand, and Duncan, noting that Plaintiff “only alleges one instance of unwelcome physical contact, one or two statements where [the offender] stated he could ‘have [her],’ and several statements about how he never should have hired a female and wanted to make [her] cry.’” Acknowledging that such behavior was inappropriate, the Court nevertheless concluded that it was “not nearly severe or pervasive as the behavior found” in the previously cited cases. As a result, the Eighth Circuit affirmed the district court’s grant of summary judgment in favor of Defendant.
Allen v. Ambu-Stat, LLC, 799 Fed. App’x 703 (11th Cir. (Ga.) 2020). The Eleventh Circuit affirmed a district court’s dismissal of a former employee’s Title VII sexual harassment claim. The employee had sued Ambu-Stat for sexual harassment and retaliation, negligent hiring, intentional infliction of emotional distress, invasion of privacy, and ratification. The district court granted summary judgment to Ambu-Stat on the employee’s federal claims and refused to exercise supplemental jurisdiction over her state law claims. According to the Eleventh Circuit, the employee’s action failed because no reasonable jury could have found the complained-of conduct—five crude, sexually charged comments made over a period of four months—to have been pervasive harassment under Title VII’s “severe or pervasive” standard. After determining that the conduct in question was not “pervasive,” the Court did not delve into whether the complained-of conduct was “severe,” finding that the employee’s counsel had abandoned such argument at oral argument. The Court further observed that these comments appeared to have been said in a joking manner. The Eleventh Circuit also upheld the dismissal of the employee’s Title VII retaliation claim, holding that she did not show that she engaged in statutorily protected activity prior to her termination. The employee did not identify any instance where she acted in opposition to an unlawful employment practice, and a single note written to Ambu-Stat did not constitute a protected activity since it was “unambiguously an extended apology” to the company. For employers in the Eleventh Circuit, Ambu-Stat is an additional guidepost to evaluate whether conduct is unlawfully “pervasive” harassment, and it holds that merely discussing an incident with a decision-maker does not necessarily constitute “opposition” for the purposes of Title VII.
§ 15.5.5 National Origin Discrimination
Vega v. Chicago Park District, 954 F.3d 996 (7th Cir. (Ill.) 2020). Plaintiff, a former Hispanic park district supervisor, sued the park district under Title VII, alleging national-origin discrimination for alleged timesheet falsification. The park district received an anonymous call accusing plaintiff of “theft of time”, which meant clocking in hours that plaintiff had not worked. In response, the park district hired an investigator to surveil plaintiff’s car. The park district soon hired another investigator and over the course of 56 days, plaintiff was surveilled over 252 times, often disrupting plaintiff during her work to ask investigative questions in front of coworkers. The investigators eventually met with plaintiff and her union representative but were allegedly dead set on their conclusion that plaintiff had violated the park district’s code of conduct. Without consulting plaintiff’s supervisor or recommending a progressive discipline, the park district fired plaintiff for timesheet falsification. The Seventh Circuit affirmed the district court’s denial of the employer’s motion for judgment as a matter of law under Title VII. Plaintiff had shown sufficient circumstantial evidence that she was an effective employee for over 20 years and was promoted several times. The sudden jump to termination despite her favorable record was probative of discriminatory intent. Plaintiff also exposed several material errors in the park district’s investigation, such as that they surveilled the wrong car. Plaintiff also provided testimony that the park district regularly mistreated Hispanic employees, such as by placing them in “rough” parks intentionally, imposing harsher discipline on them, and conducting harsher investigations on them. The Seventh Circuit also affirmed the district court’s decision to remit plaintiff’s compensatory award to $300,000, the statutory maximum for Title VII claims, based on plaintiff’s testimony detailing extensive distress.
Fernandez v. Trees, Inc., 961 F.3d 1148 (11th Cir. (Fla.) 2020). The Eleventh Circuit revived a Title VII hostile work environment case brought by Alexis Soto Fernandez, a Cuban tree trimming worker, who was terminated after trying to kill himself on the job. According to the Court, Fernandez “provided evidence sufficient to raise a material issue of fact whether the harassment was objectively severe or pervasive.” For example, Fernandez’s complaint alleged that his supervisor made derogatory comments about Cubans on an almost daily basis, including calling them “crying, whining Cubans” and declaring a “new policy in the company, no more Cuban people.” After two months of this hostility, Fernandez tried to take his own life at work; afterwards, he was terminated and his coworkers allegedly were forced to sign a statement disavowing that they had heard any discriminatory or harassing comments directed towards Trees, Inc. employees. Based on these allegations, the Eleventh Circuit held that Fernandez had demonstrated that the supervisor’s conduct was sufficiently humiliating to support his claim. The Court upheld the district court’s grant of summary judgment on Fernandez’s national origin discrimination claim, observing that the supervisor’s statements about Cubans were not direct evidence that Fernandez was fired because of his national origin.
§ 15.5.6 Race Discrimination
Comcast v. National Association of African American-Owned Media, 140 S. Ct. 1009 (2020). In a unanimous decision, the Court held that the but-for standard of causation applies to race discrimination claims under 42 U.S.C. § 1981. In other words, a claim of race discrimination under Section 1981 fails in the absence of but-for causation, a higher burden than the “motivating factor” standard that the Ninth Circuit Court of Appeals had permitted in its 2018 decision that cleared the bias case to proceed. The Court consistently has ruled that the but-for test is required to evaluate claims brought under anti-discrimination statutes, and it refused to recognize an exception for Section 1981 claims. The Court declined to address Comcast’s argument that the statute only protects against discrimination in a final contracting decision and does not cover earlier stages of the contract-formation process. The Court’s decision returned the $20 billion lawsuit to the Ninth Circuit, for it to determine whether discrimination was the defining feature in the disputed contracting decision between Comcast and Entertainment Studios, owned by African American comedian Byron Allen. Entertainment Studios alleged that Comcast has refused to carry its channels due to Allen’s race. Entertainment Studios ended up settling with Comcast in June 2020. However, the company also had filed a similar, $10 billion race bias lawsuit against Charter Communications Inc., alleging that the refusal to carry some of its channels was an example of “structural, systemic racism.” In August 2020, several months after the Comcast decision, the U.S. District Court for the Central District of California concluded that Entertainment Studios’ claims against Charter survived the heightened but-for standard, at least at the pleadings stage.
Jeffries v. Barr, 965 F.3d 843 (D.C. Cir. 2020). Plaintiff, an African American employee of the Department of Justice (DOJ), sued under Title VII, alleging race and sex discrimination and retaliation. Plaintiff claimed that his non-selection for seven different promotion opportunities within DOJ violated federal law. The district court denied Plaintiff’s motion to take discovery and granted DOJ’s motion for summary judgment. On appeal, the D.C. Circuit found that Plaintiff should have been allowed to take discovery for one of the seven instances in which he allegedly was wrongly passed over for promotion. Unlike with the other six instances—where Plaintiff failed to show that the legitimate, nondiscrimatory reasons proffered by the agency for not selecting him for certain positions were pretextual—for the seventh instance “the district court abused its discretion in denying the motion, as the denial was premised in part on an erroneous view that the discovery sought about the priority consideration was ‘irrelevant.’” The Court noted that there was an “unexplained deviation” from the agency’s standard practices in that first instance that could “justify an inference of discriminatory motive,” and that the district court’s error was not harmless given other evidence in the record.
Smith v. Sec’y U.S. Navy, 2021 U.S. App. LEXIS 2500 (3d Cir. (Pa.) Jan. 29, 2021). The Third Circuit rejected the appeal of an African American contractor, whose Title VII lawsuit claimed that the U.S. Navy’s logistics unit denied him training opportunities that were offered to other civilian workers and fired him because of his race. The Court agreed with the district court that the contractor had failed to show that non-African American employees received preferential treatment. In addition, the Court determined that the contractor “did not put forth evidence that his termination occurred under circumstances that give rise to an inference of unlawful race discrimination.” The Court also took issue with the examples that the contractor pointed to as evidence of disparate treatment, noting that two white coworkers who allegedly received more training were hired on a rotating shift and at different pay grades than the contractor. While the Third Circuit did agree that the contractor’s retaliation claim appeared plausible, it found that Navy Supply had initiated the process for terminating him at least two months before he raised his discrimination complaint. Finally, the Court dismissed the contractor’s allegation of hostile work environment, finding that at the time of the disputed incidents he had not alleged racial animus on the part of the employees assigned to train him, and that the contractor’s supervisor had tried to defuse the situation by reassigning the employees.
Sorto v. Autozone, Inc., 821 Fed. App’x 188 (4th Cir. 2020). Plaintiff worked for Defendant as a sales associate. Shortly after he began, the store was robbed while Plaintiff was working. The store manager accused Plaintiff of being a conspirator in the robbery. In the months that followed, the manager blamed Plaintiff when items were misplaced in the store, commenting, “I know how all you Latinos are.” Approximately six months later, another manager remarked that the plaintiff “stinks and smells like sheep,” which sparked a pattern of sheep-related mockery that continued throughout Plaintiff’s employment at the store. Plaintiff was later transferred to another store, where he also received insults from the other employees. Plaintiff reported the insults to the store’s assistant manager and to an HR representative, but Defendant took no action. A week after Plaintiff informed his managers that he would be absent to file a hostile work environment complaint with the EEOC, his employment was terminated. The Fourth Circuit affirmed the district court’s dismissal of Plaintiff’s complaint. The Court held that the isolated references to Plaintiff as a Latino—implying that he was untrustworthy—and Mexican—in regard to his long hair—were made over four years apart and in two different workplace locations, and thus cannot be the basis for a workplace “permeated with discriminatory intimidation.” Further, the Court held that the remaining insults could not be attributable to race-based discrimination; neither “sheep” nor “Hello Kitty” are commonly associated with people of Hispanic origin, and comments implying that he was effeminate or gay were unrelated to race.
Young v. Montgomery Cnty., No. CBD-18-2054, 2020 WL 5626583 (D. Md. Sep. 14, 2020). Plaintiff filed a complaint against Defendant-Employer alleging race and gender discrimination in violation of Title VII. Plaintiff, an African American correctional officer, alleged that Defendant discriminated against him when it reassigned him to a high-risk area while reassigning another, similarly situated and less-qualified white officer to a low-risk area. The District Court granted Defendant’s summary judgment motion, finding that the reassignment did not affect Plaintiff’s pay, grade, benefits, or responsibilities, and thus was not an adverse employment action. Plaintiff argued that the reassignment was more hazardous to his physical, mental, and emotional health. The Court rejected this argument, noting Plaintiff’s own testimony that, “When you walk into a correctional facility, it’s—once you step through the door, it’s very risky. So you always have a level [of] risk that you’re going to experience.” The Court reasoned that while it may have been true that the reassigned position was more stressful and carried a slightly higher degree of risk, it noted that certain occupations are expected to have a heightened degree of risk. When in these heightened risk occupations, reassignment to a position carrying a greater degree of risk that the employee has already agreed to tolerate, and has been trained to tolerate, is merely a foreseeable stage in the progression of the employee’s career and not an adverse employment action.
Barnes v. Bd. of Trs. of the Univ. of Ill., 946 F.3d 384 (7th Cir. (Ill.) 2020). Plaintiff, an African American engineer in the facilities management department of a university, applied for and was selected to interview for a promotion. A white engineer was selected for the position instead of plaintiff. Plaintiff sued the employer for non-promotion on the basis of race. Plaintiff argued that he was more qualified for the position because of his years of experience in engineering, customer service, and various mechanical systems. Plaintiff also argued that he had a higher performance review than the chosen candidate. The Seventh Circuit affirmed that the employer had provided a legitimate non-discriminatory reason for plaintiff’s non-promotion. The court found that the employer had considered only the interviews of the candidates, which it was entitled to do. The hired white candidate had come fully prepared to the interview with extensive materials and thoughtful answers, while plaintiff showed up empty handed and was not as specific in his answers. The court also found that plaintiff failed to show any evidence to suggest that the employer lied about its legitimate non-discriminatory reason, thereby failing to show pretext.
Carter v. Pulaski Cnty. Special Sch. Dist., 956 F.3d 1055 (8th Cir. 2020). Plaintiff, a black former cheerleading and dance teams coach, brought action against her former employer following non-renewal of her coaching contract, alleging claims of employment discrimination under Title VII, among other claims, on the basis of race. Plaintiff alleged that the circumstances gave rise to an inference of discrimination because a similarly situated white cheerleading coach was treated differently. However, the Eighth Circuit rejected this argument. It noted that Plaintiff was removed from her duties in part due to multiple complaints about her team’s routines being inappropriate, whereas there only was evidence of one complaint against the white coach’s routines. Furthermore, Plaintiff was removed based on two other reasons as well—low participation rates and team misconduct while traveling; on the other hand, there was no evidence that the white coach had similar issues. As a result, Plaintiff failed to show that she was similarly situated in all relevant respects to her white former coworker. The Eighth Circuit affirmed the district court’s grant of summary judgment in favor of Defendant.
Findlator v. Allina Health Clinics, 960 F.3d 512 (8th Cir. 2020). Plaintiff brought suit against her employer, alleging claims for discrimination on the basis of race and national origin. Plaintiff, who is black, developed conflict with her white coworker. The coworker made a comment about Plaintiff being in a gang, which comment Plaintiff reported to her supervisors. During a heated argument between Plaintiff and her coworker, the coworker threw her lab coat in Plaintiff’s direction twice. In response, Plaintiff placed her hands on her coworker’s shoulders and pushed her. Following a human resources investigation, Plaintiff was cited for violating three company policies, including the Violence-Free Workplace policy, and terminated. Her coworker was cited for violating two of the same policies and issued a suspension and a final warning. Because the investigation found that the coworker’s lab coat did not hit Plaintiff, she was not cited for violating the Violence-Free Workplace policy. Plaintiff argued that she presented direct evidence of discrimination, including: (1) Defendant employer’s consideration of Plaintiff’s race during its investigation; (2) Coworker’s comment that Plaintiff was in a gang; and (3) Defendant’s failure to cite the coworker for violation of the Violence-Free Workplace policy. The Eighth Circuit rejected Plaintiff’s arguments, noting that the record demonstrated that Defendant considered Plaintiff’s race only to ensure that any corrective action was not based on racial discrimination. Further, it concluded that the coworker’s comment about Plaintiff belonging to a gang was insufficient to demonstrate discrimination because she was merely a coworker with no authority to terminate Plaintiff. Lastly, the Court found that because Plaintiff and her coworker engaged in different types of misconduct and were not similarly situated, Defendant’s decision not to cite the coworker for violation of the Violence-Free Workplace policy did not constitute disparate treatment sufficient to sustain her claim for discrimination.
Gipson v. Dassault Falcon Jet Corp., 983 F.3d 377 (8th Cir. 2020). Plaintiff, a black senior manufacturing engineer, lost his job in a 2017 workforce reduction and brought race discrimination and retaliation claims against his former employer. Plaintiff claimed that a previous denial of promotion and eventual layoff were retaliation for lodging racial bias complaints in 2011 and 2015. The Eighth Circuit upheld a lower court decision granting summary judgment to Defendant, saying that Plaintiff failed to show a link between his complaints lodged with the EEOC and Defendant denying him a promotion or letting him go. The Eighth Circuit noted that the company’s extensive force reduction, objective methods used in paring down its work force, a lack of direct evidence tying Plaintiff’s EEOC complaint to his termination, and a failure to show a connection between events that occurred years apart, worked in Defendant’s favor.
§ 15.5.7 Retaliation Claims
Simmons v. UBS Fin. Servs., 972 F.3d 664 (5th Cir. 2020). Plaintiff sued Defendant UBS Financial Services under Title VII, alleging retaliation. Plaintiff was employed by Prelle Financial Group, a client of Defendant, and frequently worked out of its offices. His daughter, who was employed by Defendant, submitted an internal complaint of pregnancy discrimination and filed a charge with the EEOC. She eventually resigned and settled her claims with Defendant. Plaintiff alleged Defendant retaliated against him and revoked his right of access to its offices and forbade him from doing business with its clients following his daughter’s complaints. The district court agreed with Defendant’s assertion that Plaintiff could not sue Defendant under Title VII because he was not an employee of Defendant and dismissed the Plaintiff’s suit. The Fifth Circuit reviewed the dismissal de novo. The Court used Thompson v. N. Am. Stainless, LP, 562 U.S. 170, to determine whether Plaintiff was a proper Title VII plaintiff, even though he did not engage in protected activity. The Court determined that Plaintiff lacked Title VII standing because unlike Thompson, he was not and never was an employee of the company he sued. The Court stated that allowing Plaintiff to sue under Title VII would be “a remarkable extension” of Title VII since its purpose is to protect employees from their employers’ unlawful actions. In affirming the district court’s ruling, the Fifth Circuit held that the non-employees are not protected from mistreatment from a different employer under Title VII.
Berry v. Sheriff’s Office Ouachita Par., 834 Fed. App’x 843 (5th Cir. 2020). Plaintiff sued Defendants under Title VII, alleging race discrimination and retaliation. Plaintiff worked as a corporal and requested a transfer to a different role for a more stable work schedule. He alleged that after transferring to the role of deputy, he was assured there would be no pay decrease despite the demotion in rank. He filed an EEOC complaint after discovering that Defendant allowed white employees to transfer while maintaining their rank and pay. Plaintiff later ran for and won a position on the city council and was terminated before being sworn into office and without the opportunity to decline his elected position. He alleged he was terminated in retaliation for his EEOC complaint. Plaintiff moved for summary judgment on his retaliation claim and Defendants moved for summary judgment on both claims. The district court denied Plaintiff’s motions and granted the Defendants’ motion. On appeal, the Fifth Circuit agreed with the district court that Plaintiff failed to establish a prima facie case of discrimination, and that even if he did, he was unable to show Defendants’ given reason for his termination was pretextual. With respect to the retaliation claim, the Fifth Circuit held that the timing of his firing, Defendant’s inconsistent explanations of his termination, and the inconsistent application of its policy regarding the holding of public office created a genuine issue of material fact. Thus, the Court reversed the grant of summary judgment for the Defendants on Plaintiff’s retaliation claim.
Robertson v. Wis. Dep’t of Health Servs., 949 F.3d 371 (7th Cir. (Wis.) 2020). Plaintiff, a state agency employee, reported the director of the agency for making a discriminatory remark. The director was terminated. Plaintiff took the place of acting director until the agency held an open recruitment for the position. Plaintiff applied for the position, but was ultimately not promoted. Plaintiff sued her employer for retaliation. She argued that by failing to promote her, her employer retaliated against her for complaining about the former director’s discriminatory conduct. Plaintiff argued that she was “objectively the most qualified candidate.” She also argued that the decision makers of her promotion had close relationships with the former director. The Seventh Circuit affirmed that plaintiff failed to prove a causal link between her reporting of the discriminatory conduct and her not being promoted. The court held that the employer presented a non-retaliatory reason for not promoting her, which was that they simply felt that there was a better candidate based on interviews and education credentials, among other things. The court held that plaintiff failed to establish that this proffered reason was pretext for retaliation. Plaintiff also argued that the new director antagonized and undermined her, which should constitute retaliation. The Seventh Circuit affirmed that plaintiff failed to show that the new director’s actions constituted materially adverse action. The court held that snubbing and rudeness from a coworker are not actionable.
Monaghan v. Worldpay US, Inc., 955 F.3d 855 (11th Cir. (Ga.) 2020). Addressing Susan Monaghan’s Title VII race retaliation claim, the Eleventh Circuit reversed the ruling of the trial court, finding that it had erred in granting Worldpay US summary judgment. Monaghan, who is white, alleged that her African American supervisor had commented that she needed a “suntan,” that “this little white woman is giving me drama over here,” that “you white girls kill me,” and had berated and threatened her for 45 minutes after she raised her complaint. According to the Eleventh Circuit, the evidence, viewed in the light most favorable to Monaghan, satisfied Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006), where the complained-of conduct “well might have dissuaded a reasonable worker from making or supporting a charge of discrimination.” Here, the supervisor’s statements threatened both termination and possible physical harm, which might have dissuaded a reasonable worker from making or supporting a charge of discrimination. The Court acknowledged that it had deviated from the Burlington Northern standard in a subsequent case, Gowski v. Peake, 682 F.3d 1299 (11th Cir. 2012)—requiring evidence that a supervisor’s misconduct was “severe and pervasive”—and reestablished the correct standard as articulated by the Supreme Court. The Court decided on its own that Monaghan had satisfied the Burlington Northern standard, observing that (1) Worldpay terminated Monaghan, (2) Monaghan allegedly was told that she was being terminated for complaining, and (3) a jury could infer that Monaghan’s termination was in reference to the discrimination complaint she raised to her supervisor. The Monaghan decision creates a lower, more easily-satisfied standard for plaintiffs bringing Title VII retaliation claims in the Eleventh Circuit.
§ 15.5.8 Religion
Horvath v. City of Leander, 946 F.3d 787 (5th Cir. 2020). Plaintiff sued Defendant-Employer, alleging discrimination and retaliation in violation of Title VII and his First Amendment right to freely exercise his religion under Section 1983. Plaintiff worked for Defendant as a firefighter and objected to vaccinations as a tenet of his religion. He previously sought and received exemptions for mandated flu vaccines but was denied an exemption for the mandated TDAP vaccine. Defendant offered him two options as alternatives to receiving the vaccine: (1) reassignment to a new role with the same pay and benefits or (2) remain in his current role and wear personal protective equipment, including a respirator, at all times. Plaintiff rejected both proposals and filed suit. The district court granted Defendant’s request for summary judgment. The Fifth Circuit reviewed de novo and affirmed the district court on all claims. The Court found that while the Plaintiff could establish a prima facie case of religious discrimination, the claim failed because he was offered two reasonable accommodations and Title VII does not require the accommodations to be preferred by the employee. The Court further determined that the Defendant proffered a legitimate, non-discriminatory reason for terminating Plaintiff; namely, failure to obey a direct order from his superiors. Finally, the Fifth Circuit held that the respirator mask requirement in lieu of the vaccine did not violate Plaintiff’s right to freely exercise his religious beliefs.
§ 15.5.9 Miscellaneous
Our Lady of Guadalupe Sch. v. Morrissey-Berru, 140 S. Ct. 2049 (2020). The Court heard the appeal of two cases from the Ninth Circuit—Morrissey-Berru v. Our Lady of Guadalupe Sch., 769 Fed. App’x 460 (9th Cir. (Cal.) 2019), and Biel v. St. James Sch., 911 F.3d 603 (9th Cir. (Cal.) 2018)—involving the scope of the “ministerial exception.” Both cases involved elementary school teachers at Catholic schools. In one case, Agnes Morrissey-Berru argued that the school had violated the ADEA when it demoted her, failed to renew her contract, and replaced her with a younger teacher. In the other case, the late Kristen Biel had filed a charge with the EEOC alleging that she was discharged after requesting a leave of absence to obtain treatment for breast cancer. In both cases, the Ninth Circuit had ruled in favor of the plaintiffs. However, in a 7-2 decision, the Court reversed these rulings and took a broad view of the ministerial exemption. Specifically, the Court held that the First Amendment bars courts from considering the federal employment discrimination claims of the two teachers because they performed “vital” religious duties. According to Justice Alito, “[w]hen a school with a religious mission entrusts a teacher with the responsibility of educating and forming students in the faith, judicial intervention into disputes between the school and the teacher threatens the school’s independence in a way that the First Amendment does not allow.” The Court first recognized this exception about a decade prior in Hosanna-Tabor Evangelical Lutheran Church & Sch. v. EEOC, 565 U.S. 171 (2012). In the present case, Justice Alito wrote that “[t]he Ninth Circuit mistakenly treated the circumstances the court found relevant in Hosanna-Tabor as a [rigid] checklist of items to be assessed and weighed against each other,” which “produced a distorted analysis.” The Court further specified that whether an employee is considered a “minister” for purposes of the exemption is not based upon the employee’s label but on the work the employee performs. This holding suggests that not every employee of a religious institution will fall within the exception; rather, the test will focus on the employee’s actual day-to-day responsibilities.
Jackson v. Modly, 949 F.3d 763 (D.C. Cir. 2020). Plaintiff, a former US Marine Corps service member, brought a pro se action against the Secretary of the US Department of the Navy, alleging employment discrimination based on race, color, and sex in violation of Title VII. The district court dismissed the action, and the D.C. Circuit affirmed. Breaking with other circuits, the D.C. Circuit held, as a matter of first impression, that the protections afforded by Title VII do not extend to uniformed members of the armed forces. The Court concluded that service members are excluded from the federal definition of “employee” under Title 5, which specifies how laws apply to government employees. Further, as a matter of first impression, the Court held that statutes of limitations requiring all civil actions against the federal government be filed within six years of the date on which the action accrued was not a jurisdictional requirement. Consequently, because the alleged discrimination occurred over 20 years prior, Plaintiff was not entitled to equitable tolling of the limitations period for bringing his claims. Plaintiff argued that this decision was inconsistent with the Supreme Court’s recent holding in Bostock, which found that Title VII protects individuals on the basis of sexual orientation and gender identity. However, in November 2020, the Supreme Court denied Plaintiff’s petition for certiorari.
Lemon v. Myers Bigel, P.A., et al., — F.3d –, 2021 WL 161978 (4th Cir. 2021). The Fourth Circuit affirmed the lower court’s dismissal of Plaintiff’s race and gender discrimination claims under Title VII and Section 1981 because she was not an “employee” of the firm. In 2001, Plaintiff joined Myers Bigel (MB) as an associate practicing patent law and signed an employment agreement that, in part, identified her employment as “at will.” In 2007, she became a shareholder in MB, signed a shareholder agreement, and purchased 5,000 shares in the firm. In 2011, Plaintiff became eligible to serve on the Board’s Management Committee, and in 2016 she held the roles of Secretary and Vice President. In 2016, MB hired an outside attorney to investigate claims of gender discrimination. Plaintiff requested to see the findings of this report, which was denied by the Board. Upon learning that Plaintiff had talked privately with the investigator, the Board’s relationship with Plaintiff soured. Later that year, Plaintiff submitted a request for short-term leave, which was voted down by the other Board members. Plaintiff alleged that this denial was in retaliation for her comments to the investigator; she then resigned from MB and filed suit. The Fourth Circuit agreed with the finding of the district court that Plaintiff was not an employee of MB and thus not covered by Title VII’s protections. According to the Court, “[a]s a partner and co-equal owner of [MB], with an equal vote on all matters substantively impacting the firm, [Plaintiff] was not an employee.”
§ 15.6 Retaliation
§ 15.6.1 Protected Activity
Agosto v. N.Y.C. Dep’t of Educ., 982 F.3d 86 (2d Cir. 2020). High School of Art and Design teacher Jason Agosto alleged that he suffered retaliation through disciplinary letters and poor evaluations in violation of the First Amendment after filing union and employment grievances critical of Principal Manuel Ureña. His complaints alleged that Ureña had not followed proper collective-bargaining procedures before changing options available for teachers to use during their “professional period” each day, had not turned over budget documents that Agosto requested, had recruited another teacher to report what he heard at a teachers’ union meeting, and had retaliated against Agosto for his actions within the union. However, the Second Circuit affirmed the district court’s decision to grant summary judgment to the principal and New York City Department of Education, finding that the teacher’s First Amendment retaliation claims failed because his complaints were not protected as matters of public concern. The Second Circuit explained further that the principal’s “alleged actions fall within the category of behavior that is ‘obviously offensive and inappropriate’ but did not ‘alter the conditions of [the teacher’s] employment’ such that it was actionable.” The Second Circuit also ruled that the principal’s alleged behavior did not go far enough to constitute a hostile work environment and retaliation based on sex under Title VII of the Civil Rights Act. “His sex-based hostile work environment claim fails because he has not demonstrated severe or pervasive hostility in the workplace, and his retaliation claim fails because he has not demonstrated a causal link between protected activity and any allegedly adverse action.”
Liscomb v. Boyce, 954 F.3d 1151 (8th Cir. 2020). The Eighth Circuit held that the FLSA does not protect prospective employees. Plaintiff was discharged from the Lawrence County Sheriff’s Office (“LCSO”) where he served as a canine officer for more than three years prior to his termination. After his discharge, Plaintiff hired an attorney and began negotiating with the LCSO for overtime compensation. At the same time, Plaintiff learned that the Drug Task Force at LCSO was seeking a canine officer and applied for the position. Plaintiff claims that Defendant retaliated against him by denying him employment, and alleges that Defendant said the “lawsuit was holding [Defendant] back from employing [Plaintiff] with the Drug Task Force.” The Court affirmed the lower court’s decision that Plaintiff, as a prospective employee for the new position in the Drug Task Force, was not entitled to coverage under the FLSA.
Gogel v. Kia Motors Mfg. of Ga. Inc., 967 F.3d 1121 (11th Cir. (Ga.) 2020). In a sharply divided en banc decision, the full Eleventh Circuit upheld the grant of summary judgment to Kia Motors in a Title VII action. In reversing the earlier panel ruling, Gogel v. Kia Motors Mfg. of Ga., 904 F.3d 1226 (11th Cir. (Ga.) 2018), the Court held that Andrea Gogel, a former HR manager who was fired for helping a colleague file a race discrimination suit, cannot sue the car maker for retaliation. Gogel’s suit alleged that the Korean car maker had discriminated against her as a white woman and had fired her for filing race bias claims with the EEOC. Conversely, Kia argued that it had appropriately fired Gogel for disloyalty. Seven of twelve circuit judges determined that Gogel did not have a retaliation claim under Title VII’s so-called opposition clause, where she lost legal protection when she encouraged her colleague to sue the company. The opposition clause prevents employers from punishing employees who allege discrimination; however, under circuit precedent, employees lose this protection when their opposition “so interferes with the performance” of their job duties that they become ineffective. Gogel’s attempts “to recruit an employee to sue the company so clearly conflicted with the performance of her job duties . . . that it rendered her ineffective in that position and reasonably prompted Kia to conclude that it could no longer trust her to do the job for which she was being paid.” For the majority, Gogel filing a charge of discrimination on her own behalf would be protected activity under Title VII, but her solicitation of another employee to sue Kia rendered her ineffective in her position as a matter of law. Thus, an employee tasked with investigating employee complaints, such as an HR manager, cannot encourage employees to sue their employer and maintain his or her protected status under Title VII’s opposition clause.
§ 15.6.2 What Is a Sufficient Adverse Job Action to Support a Retaliation Claim?
Menoken v. Dhillon, 975 F.3d 1 (D.C. Cir. 2020). Plaintiff, who worked as an attorney at the EEOC, alleged that the agency engaged in a multi-year campaign of retaliation in response to complaints she had raised, subjecting her to a hostile work environment. Plaintiff filed action against the EEOC, bringing claims under Title VII and the Rehabilitation Act. The district court dismissed Plaintiff’s complaint for failure to state a claim and denied her motion for reconsideration. On appeal, the D.C. Circuit found that it was error for the district court to dismiss Plaintiff’s retaliation claims on the ground that they occurred while she was on paid leave. The Court noted that court precedent “explicitly rejected” the idea that a hostile work environment cannot be implemented while an employee is out of the office. “[An] employer’s deliberate attempts to affect an employee’s finances and access to health care strike us as precisely the type of conduct that ‘might have dissuaded a reasonable worker from making or supporting a charge of discrimination.’” The lower court also erred in dismissing Plaintiff’s claims that the EEOC violated the Rehabilitation Act by denying her reasonable accommodation request related to the “physical and mental” injuries sustained due to the hostile work environment. Specifically, the Court found that the EEOC had failed to provide documentation supporting its argument that Plaintiff had requested only paid leave as a reasonable accommodation.
§ 15.6.3 Retaliatory Intent
Couch v. Am. Bottling Co., 955 F.3d 1106 (8th Cir. 2020). Plaintiff, an operations manager at Dr. Pepper who received positive reviews from his supervisors for many years, brought a retaliation claim under Title VII and the Iowa Civil Rights Act, alleging that he was terminated because the company discovered that he had filed a charge of discrimination against a new supervisor. Plaintiff claimed that he received his first-ever negative review just three days after Dr. Pepper learned of an EEOC discrimination charge against his new supervisor. They waited only 15 days to suspend him, and then fired him 15 days later. The Court found that, although Plaintiff was terminated within a month of the charge, Plaintiff failed to show that Dr. Pepper’s proffered legitimate nondiscriminatory reasons for its actions (that Plaintiff had difficulty adjusting to new management expectations, was unwilling to be coached, and was becoming “combative” in meetings) were pretextual.
§ 15.7 Wage Hour Issues
§ 15.7.1 Exemptions
Hewitt v. Helix Energy Sols. Grp., 983 F.3d 789 (5th Cir. 2020). Plaintiff sued Defendant-employer Helix Energy Solutions Group under the FLSA, alleging overtime violations. Plaintiff worked as a tool pusher and was paid a daily rate—his pay was computed on a daily basis rather than a weekly, monthly, or annual basis. To qualify for an FLSA exemption, Defendant attempted to characterize Plaintiff as either an executive or a highly compensated employee. The district court agreed with Defendant’s characterization and granted summary judgment to Defendant. The Fifth Circuit reviewed the interpretations of the applicable regulations de novo. For Defendant to prevail, it had to show Plaintiff was paid on a salary basis as required by the FLSA, despite being paid a daily rate. Looking at § 541.694(b), the Court determined that an employer can pay an exempt employee an amount computed on a daily basis without violating the salary basis requirement if two conditions are met: (1) for the employer to offer a minimum weekly required amount that is paid regardless of the number of hours, days, or shifts worked; and (2) to meet the reasonable relationship test that sets a ceiling on how much the employee can expect to work in exchange for the normal paycheck. The Fifth Circuit held that Defendant could not meet the two conditions to show Plaintiff is paid on a salary basis despite being a daily rate employee. It also held that Defendant could not establish Plaintiff was a highly paid employee because his total annual compensation did not meet the minimum requirement paid on a salary basis. Accordingly, the Fifth Circuit reversed the grant of summary judgment to Defendant.
§ 15.7.2 Joint Employment
State of New York v. Scalia, 2020 U.S. Dist. LEXIS 163498 (S.D.N.Y. Sept. 8, 2020). The district court struck down a substantial portion of the recently promulgated Final Rule issued by the Department of Labor (DOL) regarding the standard for establishing joint-employer liability under the Fair Labor Standards Act (FLSA). The Rule replaced the standard from 1958 that said a joint employer relationship is one in which “employment by one employer is not completely disassociated from employment by the other employer.” Under the new Rule, DOL stated that the proper focus is on “the potential joint employer’s exercise of control over the terms and conditions of the employee’s work.” The Rule enumerated a four-factor balancing test that sought to assess whether the alleged joint employer: (1) hires/fires the employee; (2) supervises and controls the employee’s work schedules or conditions of employment; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records. DOL further concluded that an entity may qualify as a joint employer only if it actually “[takes actions] with respect to the employee’s terms and conditions of employment,” rather than merely possessing the “theoretical ability” to do so. In February 2020, attorneys general on behalf of 18 states sued to have the Rule vacated. The district court concluded that while the Rule’s interpretation of horizontal joint employer liability was severable, its interpretation of vertical joint employer liability conflicts with the FLSA’s broad definitions of “employer,” “employee,” and “employ.” In addition, the court observed that the Rule’s test for joint employment is impermissibly narrow, with the four factors serving as “a proxy for control” in a manner that is inconsistent with DOL’s previous interpretive guidance and a significant body of case law. And, the court held the Rule to be arbitrary and capricious because DOL failed to adequately explain why it departed from its prior interpretations, failed to consider consistency within its existing regulations, and did not consider the Rule’s cost to workers. Based on the court’s decision, within the Southern District of New York, the joint-employer analysis will continue to be guided by various, preexisting federal court standards. In November 2020, the Trump administration appealed the decision to the Second Circuit Court of Appeals.
Talarico v. Public P’ships LLC, 2020 U.S. App. LEXIS 38027 (3d Cir. (Pa.) Dec. 7, 2020). In a nonprecedential opinion, the Third Circuit reversed and remanded a district court ruling that had held that Public Partnerships LLC (PPL) was not a joint employer to Medicaid-funded home care workers and thus could avoid class claims brought under the FLSA for failure to pay overtime. Ralph Talarico sued PPL in 2017, alleging it had violated the FLSA and Pennsylvania wage laws by paying overtime only when direct care workers spent more than 40 hours a week with one client. Relying on the four-factor test articulated in In re Enter. Rent-A-Car Wage & Hour Emp’t Practices Litig., 683 F.3d 462 (3d Cir. 2012), the Third Circuit determined that two of the four factors supported the conclusion that PPL is a joint employer: (1) establishing rules for the direct care workers and setting their working conditions, and (2) maintaining their records, including tax forms, time sheets, and an employment enrollment packet. Consequently, “[w]hether PPL is Talarico’s employer is a genuine dispute as to a material fact because the evidence—viewed in the light most favorable to the nonmoving party, Talarico—does not so favor PPL that no reasonable juror could render a verdict against it.” While the other two factors weighed against concluding that PPL is a joint employer, the Court observed that there is “no specific number or combination of Enterprise factors that conclusively determines whether an alleged employer is a joint employer,” and that the “total employment situation” indicates Talarico is PPL’s employee.
§ 15.7.3 Miscellaneous
Scott v. Chipotle Mexican Grill, Inc., 954 F.3d 502 (2d Cir. (N.Y.) 2020). The Second Circuit affirmed a lower court’s decision to deny class certification to Chipotle workers in six states claiming they were denied overtime pay. However, the Court vacated the court’s decision to decertify more than 500 management trainees’ collective action in Colorado, Illinois, Missouri, New York, North Carolina, and Washington during various time periods, on the grounds that their work responsibilities differed too much. The Second Circuit remanded the district court order decertifying the collective action consisting of seven named plaintiffs who sued the burrito chain and 516 opt-in plaintiffs who joined the FLSA suit after the lower court conditionally certified it. On remand, the district court was directed to reconsider whether the named plaintiffs and opt-in plaintiffs are “similarly situated” because they share questions of law or fact material to their FLSA claims. According to the Second Circuit, the district court erroneously assumed that the size of the FLSA collective action required greater scrutiny mirroring Federal Rules of Civil Procedure Rule 23 standards for class certification and thus led the lower court to decertify the collective. The Second Circuit explained, “This was error. In effect, the district court held that collective plaintiffs could not be similarly situated because class plaintiffs’ common issues did not predominate over individualized ones. It is simply not the case that the more opt-ins there are in the class, the more the analysis under [FLSA Section] 216(b) will mirror the analysis under Rule 23.”
Tom v. Hosp. Ventures LLC, 980 F.3d 1027 (4th Cir. 2020). Defendant-employer was an upscale sushi restaurant operating its business in Cary, North Carolina. Plaintiffs were tipped servers who sued under the FLSA and the North Carolina Wage and Hour Act, alleging that the defendant violated the FLSA’s minimum-wage and overtime requirements by operating a tip pool that unlawfully included employees who did not customarily and regularly receive tips and were, thus, ineligible. The district court granted summary judgment for the employer. On appeal, the Fourth Circuit affirmed in part and reversed in part. The Fourth Circuit agreed with the district court that the servers’ receipt of automatic gratuities did not count as “tips” under the FLSA because the automatic gratuity was not discretionary—the amount was set by Defendant and the customers lacked any ability to remove or modify it. However, the Fourth Circuit found that the district court did not properly consider whether the automatic gratuities qualified as commissions under the FLSA’s Section 7(i) exemption, which exempts employers from paying overtime to employees who make a majority of their earnings from commissions. The Fourth Circuit found that the district court failed to include tips when determining whether the automatic gratuities constituted more than half of the employees’ compensation for a representative period. Next, the Fourth Circuit held that even if the servers qualified for the Section 7(i) exemption, this did not answer the question as to the legality of Defendant’s tip pooling system. The Fourth Circuit held that there were genuine issues of material fact as to whether certain employees included in the tip pool had more than de minimis interactions with customers and directed the district court to review this on remand.
Swales v. KLLM Transp. Servs., L.L.C., 985 F.3d 430 (5th Cir. 2021). Plaintiffs requested certification to bring a collective action claim under the FLSA against Defendant KLLM Transport Services. Plaintiffs brought a minimum-wage dispute alleging that the Defendant misclassified them and all other truck drivers as independent contractors when they are, in fact, employees entitled to the minimum wage. Applying the widely used Lusardi test, a two-step method for certifying a collective action, the district court granted the Plaintiffs’ certification request. Reviewing de novo, the Fifth Circuit declined to delineate the district court’s notice-sending discretion within Lusardi and rejected Lusardi as the method for certifying a collective action. The Court reasoned that the Lusardi test frustrates the notice process and diverges from the FLSA’s text because “certification” and “conditional certification” do not appear in the text. The Court articulated a new legal standard: the district court should identify what facts and legal considerations are material in determining whether a group of “employees” are similarly situated. The district court then should dictate the amount of discovery needed to determine if and when to send notice to potential opt-in plaintiffs. After considering all available evidence, the district court should determine whether the group is “similarly situated” and thus may proceed on a collective basis. By announcing this new framework and rejecting the Lusardi test, the Fifth Circuit vacated the district court’s order granting the Plaintiff’s motion for conditional certification.
Torres v. Vitale, 954 F.3d 866 (6th Cir. 2020). The Fifth Circuit reversed the district court’s dismissal of a claim for damages under RICO brought by Plaintiff. The Court held that the district court improperly dismissed the claim by asserting that FLSA precluded RICO claims based on lost wages. Plaintiff was a longtime employee at Defendant’s restaurant and alleged he and other employees often worked more than 40 hours per week and were not paid overtime rates for those hours. Plaintiff alleged he was paid cash for the overtime hours, did not pay taxes on the cash payment, and was deprived of overtime pay. The district court dismissed his complaint, asserting that the FLSA’s remedial scheme precluded the RICO claim. On appeal, the Fifth Circuit held that the FLSA precludes RICO claims to the extent that the damages sought are for unpaid minimum or overtime wages. However, if a RICO claim alleges damages that are distinct from unpaid wages, FLSA does not preclude it even if the conduct arises from conduct that also violates the FLSA. The Fifth Circuit instructed the district court to determine whether Plaintiff adequately pleaded a RICO claim that resulted in damages other than lost wages.
Viet v. Le, 951 F.3d 818 (6th Cir. 2020). Plaintiff sued under the FLSA, alleging Defendant wrongfully failed to pay him overtime despite typically working 60 hours per week. Plaintiff bought used copiers for Defendant—who shipped them to Vietnam for resale—and was paid commission based on the purchase price of the copier. The district court granted Defendant’s request for summary judgment. It assumed Plaintiff qualified as an employee under FLSA and held that the evidence presented to support the allegation that he worked more than 40 hours per week did not suffice to withstand summary judgment. Though the Fifth Circuit did not think it was clear that Plaintiff qualified as an employee covered under FLSA, it made the same assumption as the district court. Using Rule 56 of the FLSA, the Fifth Circuit decided whether Viet’s evidence could permit a reasonable jury to conclude he worked more than 40 hours per week during any given week during his employment with Defendant. The Court held that Plaintiff’s evidence was inconsistent, providing no specific facts that would allow a jury to determine whether he worked beyond 40 hours in any specific week. Thus, the Court affirmed the district court’s ruling.
Herrera v. Zumiez, Inc., 953 F.3d 1063 (9th Cir. 2020). Plaintiff filed a class action lawsuit against Defendant-employer, alleging that Defendant failed to provide reporting-time pay to employees at its California retail stores for their “Call-In” shifts. Employees scheduled for a Call-In shift were required to make themselves available to work during the shift and then call their manager 30 to 60 minutes before the beginning of their shift; or, if they worked a shift immediately before the Call-In shift, contact their manager at the end of that shift. At the time of the contact, the manager would tell the employee whether s/he was required to work during the shift. If the employee was not required to work, Defendant would not pay the employee. Defendant filed a motion for judgment on the pleadings, which the district court denied. The Ninth Circuit affirmed the denial of the employer’s motion based on the California Court of Appeal’s recent ruling in Ward v. Tilly’s, Inc., 31 Cal. App. 5th 1167 (2019), holding that an employee need not physically report to work in order to be eligible for reporting-time pay. The Ninth Circuit also affirmed denial of Defendant’s motion to dismiss the claim for “hours worked” associated with the time spent by employees calling in three to four times each week. Finally, the Court reversed the denial of Defendant’s motion to dismiss the claim for indemnification for the telephone expenses incurred in calling in, but ordered that Plaintiff be allowed to amend the complaint to include more specific allegations.
Ridgeway v. Walmart Inc., 946 F.3d 1066 (9th Cir. 2020). The Ninth Circuit held that (1) employers must pay minimum wages for time spent on mandated layovers where the employer’s policy imposes constraints on employees’ movements during breaks, and (2) California’s minimum wage laws for transportation workers are not preempted by the Federal Aviation Administration Authorization Act. The Court upheld a $54.6 million judgment after evaluating that the written policies in Defendant’s pay manual would amount to an exercise of control over drivers during layover periods if implemented as written, as a matter of California law. Assessing whether Defendant exercised control of its employees during layovers, the Court stated that the question of control boiled down to whether the employee might use break or non-work time however s/he would like. The manual required drivers to gain preapproval from management before taking a layover at home, as well as to record the break, and the approving manager, on the trip sheet. Finally, drivers could be subject to disciplinary action, up to and including “immediate termination,” for taking an unauthorized layover at home. In its review of the class certification and damages analysis of the trial court, the Ninth Circuit agreed with the district court finding that common issues predominated. Rejecting Defendant’s argument that Plaintiffs could not use representative evidence to prove the elements of their case, the Court held that liability was suitable for class treatment on the basis of substantial supporting evidence showing that Defendant owed class members minimum payment during layovers. And, once the jury found that minimum wages were owed, the varying amount of time spent on each task “went to the question of damages.”
Scalia v. Emp’r Sols. Staffing Grp., Ltd. Liab. Co., 951 F.3d 1097 (9th Cir. 2020). In an action alleging that Defendant failed to pay overtime to employees who worked more than 40 hours in a workweek, in violation of the FLSA, the Ninth Circuit affirmed the lower court’s summary judgment in favor of Plaintiff. Defendant-employer contracted with other companies, including Sync Staffing, to recruit employees and place them at jobsites for which Defendant handled administrative tasks, including payroll. In this case, Sync Staffing placed the recruited employees at a jobsite run by TBG Logistics and instructed one of Defendant’s employees, who was responsible for payroll processing, to pay the employees’ overtime hours as “regular” hours. To comply with Sync Staffing’s instruction, Defendant’s employee had to dismiss numerous error messages from Defendant’s payroll software. Defendant’s employee later admitted that she knew the recruited employees were not being paid correctly for the overtime they had worked. The Ninth Circuit noted that a two-year statute of limitations ordinarily applies to claims brought under FLSA, but the limitations period extends to three years for a “willful violation.” Because Defendant, through its agent, recklessly disregarded the possibility that it was violating the FLSA, the three-year statute of limitations applied, and the affected employees were entitled to approximately $78,500 in unpaid overtime wages, and an equal amount in liquidated damages. The Court also rejected Defendant’s cross-claims against the other defendants, holding that “the FLSA does not provide a right to contribution or indemnification for liable employers.”
Aguilar v. Mgmt. & Training Corp., 948 F.3d 1270 (10th Cir. 2020). Plaintiffs, officers of a prison, alleged that their employer, Management and Training Corporation (MTC), failed to pay them for certain activities they performed prior to arrival, at arrival, and after leaving their posts. The activities included: undergoing security screenings, receiving pre-shift briefings, checking equipment and keys in and out, walking to and from their posts, and conducting passdown briefings. Plaintiffs alleged that their pre- and post-shift activities were compensable work, and that MTC’s compensation system deprived the officers of overtime pay in violation of the FLSA. The lower court granted summary judgment in favor of MTC, but the Tenth Circuit reversed. The Tenth Circuit held that the officer’s pre- and post-shift activities did constitute compensable work, reasoning that these pre- and post-shift activities were integral and indispensable to the officers’ principal activities. In so holding, the Tenth Circuit expressly rejected MTC’s argument that these tasks were de minimis, instead concluding that the time at issue could reasonably be recorded and/or estimated by MTC; that the aggregate amount of compensable time was substantial; and, that the officers regularly performed the work at issue. The Tenth Circuit also rejected MTC’s argument that it was not required to pay for activities of officers for which MTC was not previously aware, primarily because MTC actually required that the officers complete many of the tasks at issue. And finally, Plaintiffs presented evidence suggesting that MTC did not neutrally apply its ten-minute adjustment rule, and therefore their time-rounding claim could proceed.
Scalia v. Paragon Contractors Corp., 957 F.3d 1156 (10th Cir. 2020). Over the course of several years, Defendant had employed hundreds of children to help harvest pecans at a local ranch. Defendant was eventually enjoined from using child labor in violation of the FLSA, and was held in contempt for subsequently violating the injunction. Defendant was then ordered to establish a fund to be used by the Secretary of Labor in accordance with a claims process for the benefit of children who performed work for Defendant without pay. After the claims process was concluded and a payment schedule was proposed, the district court ordered that Defendant replenish the fund in the amount calculated by the Secretary. Defendant challenged this order on the grounds that (1) the Secretary failed to establish a prima facie case regarding the time worked and amount owed; (2) the district court imposed an improperly high burden for rebutting inferences drawn from the available evidence; and (3) the district court erred in declining to apply an FLSA statutory exemption. The Tenth Circuit did not find merit to any of Defendant’s claims. First, the Tenth Circuit held that the Secretary established a prima facie case by using representative evidence from a sample of employees. This was particularly necessary because Defendant did not keep records of the work performed by children at the ranch. Second, the Tenth Circuit rejected Defendant’s contention that the burden for rebutting the Secretary’s case was too high. Because Defendant failed to keep records, the burden was on Defendant to “specifically and expressly” rebut the reasonable inferences drawn from the employee’s evidence. Defendant failed to do so here. And finally, the Tenth Circuit held that the statutory exemption of 29 U.S.C. § 213(c)(1)(B) did not apply. Section 213(c)(1)(B) provides an exemption for 12 and 13-year-olds who work outside of school hours and are either employed on the same farm as their parents or are working with parental consent. Defendant failed to provide sufficient evidence to establish that this exemption applied, and therefore Defendant was not entitled to deduct any hours under this provision.
Lewis v. Governor of Ala., 944 F.3d 1287 (11th Cir. (Ala.) 2019). In a split en banc decision, the full Eleventh Circuit held that two African American workers who stood to make $10.10 an hour under Birmingham’s minimum wage ordinance could not bring a claim against the office of Alabama Attorney General Steve Marshall over the purported enforcement of a law mandating a single, statewide minimum wage set at $7.25. In 2016, a district court had dismissed the complaint, which had been joined by the NAACP and civil rights groups, alleging that Alabama had violated the Constitution’s Equal Protection Clause by enacting its minimum wage preemption law shortly after Birmingham lifted its wage floor to $10.10 per hour. The law voided any local law that required employers to provide benefits or wages not otherwise mandated by state or federal law. The subsequent panel ruling, Lewis v. Governor of Ala., 896 F.3d 1282 (11th Cir. 2018), had partially revived the workers’ claims that Alabama’s law discriminated against Birmingham’s African American majority. However, in a seven-to-five decision, the full Eleventh Circuit held that the two workers had failed to show that any monetary injuries they suffered as a result of being paid at the lower wage rate were “fairly traceable” to the attorney general’s conduct, or that such injuries would be remedied if their suit succeeded. The majority found that such a conclusion would be “impermissibly speculative,” particularly since the contested law did not require affirmative enforcement by the Alabama Attorney General (and, in fact, contained no enforcement provision at all). Consequently, because the Court resolved the case on the standing issue, it declined to address the merits of the workers’ Constitutional claims.
§ 15.8 FMLA
Gomes v. Steere House, C.A., No. 20-270-JJM-PAS, 2020 WL 6397930 (D.R.I. Nov. 2, 2020). The District of Rhode Island permitted an employee’s claim for retaliation under the Family Medical Leave Act (“FMLA”) to move forward despite not being eligible for the requested FMLA leave. Plaintiff contracted COVID-19 and requested FMLA leave under the Emergency Paid Sick Leave Act (“EPSLA”). Subsequently, Plaintiff was terminated from her employment. The Court first determined that EPSLA has no connection to the FMLA and does not modify the leave available under that Act. However, the Court also reasoned that Plaintiff may have stated sufficient facts to satisfy the first element of a retaliation claim under the FMLA, which requires a showing that the plaintiff “availed himself of a protected right under the FMLA.” The Court relied on dicta from McArdle v. Town of Dracut/Dracut Pub. Sch., 732 F.3d 29 (1st Cir. 2013), to find that a plaintiff may be able to allege retaliation under the FMLA for attempting to exercise a right despite being ineligible for such leave. In so finding, the Court denied Steere House’s motion to dismiss and permitted the Plaintiff’s retaliation claim to proceed.
New York v. United States Dep’t of Labor, No. 20-CV-3020 (JPO), 2020 WL 4462260 (S.D.N.Y. Aug. 3, 2020). In response to the coronavirus pandemic, Congress enacted the Families First Coronavirus Response Act (FFCRA), providing employees impacted by COVID-19 with paid emergency sick leave and paid emergency family leave in certain circumstances. The portion of the FFCRA that relates to paid emergency sick leave is referred to as the Emergency Paid Sick Leave Act (EPSLA) and the portion that relates to paid emergency family leave is known as the Emergency Family and Medical Leave Expansion Act (EFMLEA). The Department of Labor (DOL) was charged with administering the law. In April 2020, DOL enacted a final rule which set parameters about how the FFCRA would be implemented (Final Rule). In response, the State of New York (NYS) sued DOL, claiming the Final Rule was improper. The United States District Court for the Southern District of New York issued a ruling in favor of NYS, striking down critical parts of the Final Rule. For example, the court overturned the Final Rule’s definition of “health care provider,” finding that it was overbroad because it hinged on the nature of the services the employer provides rather than the services provided by the employee. The Court upheld the prohibition on the use of intermittent leave where an employee is at risk of spreading COVID-19 to other employees; however, where intermittent leave is available, the Court determined that the Final Rule is unreasonable to the extent it allows employers to refuse to agree to provide intermittent leave to care for a child. Finally, due to conflict between the EFMLEA and EPSLA, the Court held that the documentation requirement is invalid to the extent it requires documentation to be submitted before leave is taken.
Lutes v. United Trailers, Inc., 950 F.3d 359 (7th Cir. 2020). Plaintiff, former employee of a manufacturing company, suffered a hip injury and called in absent to work for several days, citing his rib injury. Plaintiff’s rib injury was cited as the reason for his absence on only some of those days. After a couple weeks, Plaintiff stopped calling in absent and stopped showing up to work altogether. Having violated the company’s attendance policy, defendant terminated plaintiff’s employment. Plaintiff filed suit against the defendant alleging that they had failed to properly notify him of his rights under the Family Medical Leave Act and that he was fired in retaliation for attempting to exercise his right to seek leave under the Act. The Seventh Circuit analyzed his first claim of interference. In deciding whether plaintiff’s rib injury entitled him to FMLA leave and whether he provided notice of his intent to take leave, the Seventh Circuit held that his rib injury was a serious health condition entitling him to FMLA leave. Regarding whether he provided notice of his intent to take leave, the Seventh Circuit considered that the defendant knew of his rib injury as shown by the call-in log, but remanded the case to decide whether the nature and amount of information that the plaintiff conveyed about his intent to seek leave put the defendant on notice of that intent. Furthermore, the Seventh Circuit remanded the issue of whether the plaintiff’s failure to follow the defendant’s attendance policies foreclosed his interference claim. The Seventh Circuit also remanded the issue of whether the plaintiff could show not just that the employer was out of compliance with FMLA for not notifying him of his right to take leave, but that this interference injured him. The court noted that if he can prove that he would have taken the leave if he had known about it, he can sufficiently show prejudice and therefore injury. Regarding plaintiff’s retaliation claim, the Seventh Circuit affirmed that plaintiff had failed to show any discriminatory or retaliatory intent or that he had even engaged in a protected activity.
Scalia v. Dep’t of Transp. & Pub. Facilities, 985 F.3d 742 (9th Cir. 2021). The Ninth Circuit held that under the FMLA, a “workweek” does not revolve around an individual employee’s own work schedule. Instead it is simply a weeklong period, designated in advance by the employer, during which the employer is in operation, consistent with the definition of “workweek” under the FLSA. The Secretary of Labor, Scalia, brought suit against the State of Alaska’s Department of Transportation and Public Facilities, Alaska, alleging that Alaska was miscalculating the amount of FMLA leave that certain employees of the Alaska Marine Highway System (“AMHS”) were entitled to take. AMHS had a number of rotation employees who worked a regular schedule of seven days on followed by seven days off, that is 80 hours one work week, and zero hours the next. Scalia alleged that those rotational employees who took continuous leave under the FMLA need not return to work for 24 weeks rather than 12, because a rotational employee’s off weeks could not be counted as “workweeks of leave” under the FMLA. The Ninth Circuit overturned the district court’s decision which agreed with the Secretary, holding that “workweek” refers to “time that an employee is actually required to be at work.
Simmons v. William B. Henghold, M.D., P.A., 803 Fed. App’x 356 (11th Cir. (Fla.) 2020). The Eleventh Circuit revived an FMLA claim brought by a nurse who alleged that the Florida dermatology practice at which she worked improperly changed her job duties after she took leave to manage the “mental anguish” that resulted from her affair with the practice’s founder. During the nurse’s absence, the practice hired a replacement who took on many of the nurse’s administrative duties. Furthermore, the replacement’s testimony indicated that she understood she would be in charge of the nurse, and that the replacement did not expect the nurse to return to work after her FMLA leave. The Court found that there was sufficient evidence supporting the nurse’s claims that she had been stripped of several of her responsibilities upon her return to work, where a reasonable jury could conclude that her post-FMLA leave job was not equivalent to her pre-FMLA leave job. For the Court, this factual dispute had to be resolved by the trier of fact. In addition, there were disputed material facts as to the employer’s defense that the employer would have hired a replacement for the nurse even if she had not taken FMLA leave.
§ 15.9 Terminations / Settlement
Piron v. Gen. Dynamics Info. Tech., Inc., No. 3:19-cv-709, 2020 WL 1159383 (E.D. Va. Mar. 10, 2020). Plaintiffs filed a putative class action on behalf of themselves and approximately 1,500 similarly situated employees, alleging that they had been terminated in violation of the Worker Readjustment and Retraining Notification Act (WARN Act). Plaintiffs alleged that the employees all worked “remotely” from their homes but reported to, and received assignments from, two managers who were located in Defendant’s Falls Church, Virginia office. Plaintiffs alleged that, in terminating them, Defendant violated the WARN Act by failing to provide sixty days’ advance written notice of terminations. The District Court granted Defendant’s motion to dismiss, noting that the WARN Act’s limitation applies to an “employment loss at a single site of employment during any 30-day period for . . . at least 50 employees.” 29 U.S.C. § 2101(a)(3)(B)(i)(II). For the Court, the question was whether Plaintiffs had adequately alleged that they and the putative class were all employed at a “single site of employment.” Plaintiffs argued that they all worked at a single site of employment pursuant to a DOL regulation. However, that regulation applied only to “workers whose primary duties require travel from point to point, who are outstationed, or whose primary duties involve work outside any of the employer’s regular employment sites.” In reviewing the regulation, the Court determined that the regulation could apply only to “truly mobile” employees, and that Plaintiffs had failed to allege facts sufficient to show that the employees were “truly mobile.” Accordingly, the Court held that Plaintiffs did not all work at a “single site of employment,” and therefore dismissed their WARN Act claim.
Button v. Dakota, Minn. & E. R.R. Corp., 963 F.3d 824 (8th Cir. 2020). In affirming an order for summary judgement, the Eighth Circuit held that a remark will only constitute direct proof of discrimination when it is made by a decision-maker, and when the alleged discriminatory remark can be linked to the challenged adverse job action. Employee-Plaintiff filed a sex discrimination claim against employer-Defendant when Plaintiff was laid off during a reduction in force. Plaintiff, a train dispatching supervisor, principally relied on a comment made by the director of train dispatching, who was female, who allegedly said that the train dispatching desk “wasn’t a place for a woman” while visiting the desk. However, the director of train dispatching was not involved in the reduction in force decision-making and was not Plaintiff’s supervisor.
§ 15.10 Uniformed Services Employment
There were no qualifying decisions this year.
§ 15.11 Miscellaneous
§ 15.11.1 Benefits / ERISA / COBRA
Belknap v. Partners Healthcare Sys., Inc., No. 19-11437-FDS, 2020 WL 4506162 (D. Mass. Aug. 5, 2020). The District of Massachusetts permitted a putative class action under the Employee Retirement Income Security Act (“ERISA”) to proceed, finding that the term “actuarial equivalent” in ERISA § 1054(c)(3) has not been defined and that there is no agreement in the courts as to its meaning. Plaintiff alleges that the way in which Partners calculates the value of his joint and survivor annuity benefit violates ERISA. Defendants moved to dismiss the claims arguing, among other things, that § 1054(c)(3) does not require that actuarial equivalence be calculated using reasonable assumptions. The Court agreed with Defendants that there is no reasonableness requirement, given that ERISA provisions expressly indicate where reasonableness is required. However, the Court also found that there was no clear definition of what it means for two retirement benefit forms to be actuarial equivalents. The term is not defined anywhere in ERISA and courts have not agreed to the definition. Given the lack of clarity in the statute and case law, the Court denied Defendant’s motion to dismiss.
Evans v. Diamond, 957 F.3d 1098 (10th Cir. 2020). Plaintiff Estate (“Estate”) of Decedent brought an action against the former wife of Decedent, arguing that Defendant improperly retained monies she received from Decedent’s Thrift Savings Plan account (“TSP account”) because she had waived her interest in the account through a divorce decree. Defendant moved to dismiss the Estate’s complaint, arguing that the Estate’s claims were preempted by federal law. The lower court agreed and held that the Federal Employee Retirement Systems Act (“FERSA”) preempted any conflicting state property rights, and dismissed the Estate’s complaint. The Tenth Circuit affirmed, reasoning that FERSA sets forth an express order of precedence regarding distributions of account proceeds. Under this order of precedence, which applied to the TSP account at issue, a decedent’s benefits “shall be paid” to the designated beneficiary and recovery by any other individual is barred. Based on this language and similar language addressed by the United States Supreme Court in Hillman v. Maretta, 569 U.S. 483 (2013), the Tenth Circuit held that any order requiring Defendant to hold monies from the TSP account in a constructive trust would frustrate the distribution scheme set forth by Congress in FERSA. Accordingly, the relief sought by the Estate under state law would interfere with FERSA and was thus preempted.
Mickell v. Bell, 2020 U.S. App. LEXIS 32516 (11th Cir. (Fla.) Oct. 15, 2020). In an ERISA action brought by a former NFL player, the Eleventh Circuit reversed and remanded the trial court’s order that had granted summary judgment to the Bert Bell/Pete Rozelle NFL Players Retirement Plan. In his suit, Mickell detailed a lengthy series of denials, appeals, reapplications and conflicting physicians’ evaluations that led him to finally sue the Plan’s retirement board in 2015. The Eleventh Circuit held that the board abused its discretion when it denied Mickell’s application for total and permanent disability benefits for injuries that occurred during his football career. According to the Court, the board had “wholly failed to consider” the player’s medical records and reports from his treating physicians that contradicted the findings of the board’s physicians. Furthermore, the board had not considered the cumulative effects of the player’s various impairments on his ability to work, an inquiry that was an “important consideration in the question of whether he was disabled.” In January 2021, the Eleventh Circuit issued an order declining to rehear its decision.
§ 15.11.2 Hostile Work Environment
Rasmy v. Marriott Int’l, Inc., 952 F.3d 379 (2d Cir. 2020). Plaintiff Gebrial Rasmy, a banquet server at JW Essex House, appealed from a judgment that granted Defendant Marriott International, Inc.’s motion for summary judgment, thereby dismissing Rasmy’s claims brought under Title VII and Section 1981 alleging a discriminatory hostile work environment and discriminatory retaliation. The Second Circuit reversed. On the harassment claims, the Second Circuit held that the district court misperceived and overstated the importance of certain elements of proving a hostile work environment. The Second Circuit agreed “it was error for the District Court to conclude as a matter of law that certain Defendants calling Rasmy a ‘rat’ or allegedly filing false workplace complaints against him did not constitute discriminatory actions. Likewise, the district court erred in dismissing as “stray remarks,” “comments that Rasmy overheard that were not directed at him but allegedly were purposefully made to others in his presence.” The Second Circuit explained that “conduct not directly targeted at or spoken to an individual but purposefully taking place in his presence can nevertheless transform his work environment into a hostile or abusive one, and summary judgment for Defendants on this basis was unwarranted.” The district court also put improper weight on the absence of physical contact to conclude the harassment Rasmy faced was not severe and had little impact on his job performance. “Although the presence of physical threats or impact on job performance are relevant to finding a hostile work environment, their absence is by no means dispositive. Rather, the overall severity and pervasiveness of discriminatory conduct must be considered.” On the retaliation claim, the Second Circuit found a genuine dispute of material fact about whether Rasmy’s filing of a claim with the EEOC caused his termination, as Rasmy asserted that the head of HR verbally abused him and threatened to fire him if he disclosed anything that happened at the hotel.
Legg v. Ulster Cty., 979 F.3d 101 (2d Cir. 2020). Female employees of the Ulster County Jail alleged they faced a hostile work environment based on sex (i.e., sexual harassment), in violation of Title VII and Section 1983. The case went to trial, where the jury found in favor of one of the three plaintiffs, Patricia Watson, and awarded her $400,000. The Second Circuit affirmed, finding that the district court carefully considered the evidence in the trial record and found that the testimony given by the three plaintiffs concerning the pervasive presence and use of pornographic magazines and screensavers (including by supervisory officers), sexual comments made by various officers about Watson’s body, and several specific incidents with one officer were sufficient for a reasonable jury to conclude that Watson was subjected to a hostile work environment. The Court noted that it has “repeatedly held that the presence of pornography in a workplace can constitute a hostile work environment.” The Court also rejected the jail’s claims that the incidents took over a prolonged period of time.
§ 15.11.3 Jurisdiction
Urquhart-Bradley v. Mobley, 964 F.3d 36 (D.C. Cir. 2020). Plaintiff, a former executive employee who is African American and female, sued her employer and the CEO who resided in Illinois, claiming race and gender discrimination in violation of § 1981 and the D.C. Human Rights Act. The district judge granted the CEO’s motion to dismiss for lack of personal jurisdiction and, subsequently, granted Plaintiff’s unopposed motion to enter final judgment on her claims against the CEO. On appeal, the D.C. Circuit found that Plaintiff had not forfeited her appellate challenge to the fiduciary shield doctrine. Consequently, the Court determined that the fiduciary shield doctrine did not apply, and that Plaintiff had justified her request for jurisdictional discovery with respect to the CEO’s contacts with the District of Columbia. Thus, the Court reversed and remanded the case to district court.
Harris v. KMI Indus., Inc., 980 F.3d 694 (9th Cir. 2020). Plaintiff brought a putative class action complaint against Defendant in state court, alleging that Defendant failed to provide required meal and rest breaks. Defendant invoked the Class Action Fairness Act of 2005 (“CAFA”) to remove the case, and it introduced a declaration from its human resources director to show that the jurisdictional amount was satisfied. The district court granted Plaintiff’s motion for remand to state court, finding that Defendant relied on unreasonable assumptions to reach the required $5 million threshold. The Ninth Circuit affirmed, holding that Plaintiff successfully made a “factual” rather than a “facial” attack on Defendant’s amount-in-controversy calculations, because he contested the truth of Defendant’s factual allegations—specifically, that Defendant failed to demonstrate in its calculations that class members worked shifts long enough to qualify for meal and rest periods.
Salter v. Quality Carriers, Inc., 974 F.3d 959 (9th Cir. 2020). Plaintiff brought a putative class complaint against Defendant, alleging that it underpaid California truck divers by misclassifying them as independent contractors. The Ninth Circuit ruled the district court erred in granting the Plaintiff’s motion to remand the action to state court, because it applied the wrong standard regarding proof of the $5 million jurisdictional threshold under the CAFA. The Ninth Circuit explained that only when a plaintiff mounts a “factual,” as opposed to a “facial,” attack on a defendant’s jurisdictional allegations, does the burden shift to the defendant to produce proof supporting its amount-in-controversy allegations. Here, the Court erred in treating Defendant’s attack on Plaintiffs’ amount-in-controversy presentation as factual, when the attack was purely facial.
§ 15.11.4 Protected Speech
La Liberte v. Reid, 966 F.3d 79 (2d Cir. 2020). The Second Circuit split with the Ninth Circuit, concluding that California’s statute to avoid strategic lawsuits against public participation (i.e., anti-SLAPP statute) does not apply in federal court. Serving as somewhat of a hybrid motion to dismiss/motion for summary judgment, California’s anti-SLAPP statute provides defendants a procedural device with which to obtain early dismissal of a plaintiff’s claim that targets conduct implicating the defendant’s constitutional rights of speech and petition. If the defendant proves that the complaint targets such “protected” conduct, then the plaintiff must make a showing sufficient to defeat a motion to dismiss or a motion for summary judgment. If the plaintiff cannot, the claim is dismissed. In reaching its decision, the Second Circuit concluded the California’s anti-SLAPP statute is entirely inapplicable in federal court because it conflicts with the Federal Rules of Civil Procedure governing motions to dismiss and motions for summary judgment. The Court reasoned that a motion under the anti-SLAPP statute serves the same purpose as a motion to dismiss or a motion for summary judgment under the Federal Rules of Civil Procedure (i.e., dismissal of a claim prior to trial); however, the anti-SLAPP statute requires the plaintiff to make a showing higher than that required under the federal rules in order for the claim to survive to trial.
Bennett v. Metro. Gov’t of Nashville & Davidson Cnty., 977 F.3d 530 (6th Cir. 2020). Plaintiff, a former employee for the City of Nashville, sued after she was terminated for using a racial slur when discussing politics on Facebook. Defendant charged Plaintiff with violating three policies of the Metropolitan Government Civil Service and terminated her following paid administrative leave and a due process hearing. Plaintiff brought suit alleging retaliation under the First Amendment. Following a jury trial, the district court found in favor of Plaintiff. The Fifth Circuit applied the Pickering balancing test to Plaintiff’s First Amendment retaliation claim to determine whether an employee’s free speech interests outweigh the efficiency interests of the government as an employer. The Court found that the Pickering factors weighed in favor of Defendant and reversed the jury ruling, asserting that Defendant’s interest in maintaining an effective workplace outweighs Plaintiff’s interest in using racially offensive language.
Curtis v. Christian Cnty., 963 F.3d 777 (8th Cir. 2020). Plaintiffs, a pair of former deputy sheriffs, brought First Amendment retaliation claims against a newly-elected sheriff who fired them for supporting one of his political opponents in the election. The Eighth Circuit reversed the district court’s denial of qualified immunity to Defendant, finding that a deputy sheriff is in a “policy-making position for which political loyalty is necessary to an effective job performance,” as sheriffs are liable for their deputies’ actions, and deputies are “at-will employees who serve at the pleasure of the sheriff.” Thus, Defendant was entitled to fire Plaintiffs without violating their constitutional rights.
Henry v. Johnson, 950 F.3d 1005 (8th Cir. 2020). Plaintiff, a former police sergeant, brought a First Amendment retaliation claim against members of Missouri State Highway Patrol (“MSHP”), after suffering adverse employment actions for criticizing MHSP’s handling of a drowning incident. Plaintiff testified before a state legislative committee and in a litigation hearing about the drowning, and spoke to media and the victim’s family, and made social media posts about the possibility of corruption. The Eighth Circuit held that Defendants were properly granted summary judgment. The Court found that members of MHSP were entitled to qualified immunity from Plaintiff’s claim, because much of Plaintiff’s speech was unprotected due to the fact that it was more likely than not impeding his ability to perform his job duties as a police officer. His protected speech was not a substantial factor in the adverse actions against him, as MSHP demonstrated a deterioration in trust within Plaintiff’s troop, and that Plaintiff engaged in unprofessional behaviors that violated general orders.
Nagel v. City of Jamestown, 952 F.3d 923 (8th Cir. 2020). Plaintiff, a former city police officer, brought a First Amendment retaliation claim against the city and police chief, after being discharged for false statements made to an anonymous local television hotline, alleging misuse of government property by the Sheriff’s Department. The Eighth Circuit held that Defendants were properly granted summary judgment. Plaintiff failed to prove his speech as a public employee was protected by the First Amendment. Plaintiff’s statements to media made clear that his appearance was within the scope of his duties as a member of the police department, his speech was not a matter of public concern, and the city’s interest in preventing disruption and disharmony in the workplace outweighed the officer’s interest.
Tracy v. Fla. Atl. Univ. Bd. of Trs., 2020 U.S. App. LEXIS 35951 (11th Cir. (Fla.) Nov. 16, 2020). The Eleventh Circuit upheld a jury ruling that Florida Atlantic University fired James Tracy, a media professor, for violating his union contract. The Court affirmed the district court’s denial of a new trial on Tracy’s First Amendment retaliation claim. Tracy sued Florida Atlantic, a public college, for unfair termination in April 2016, alleging that it had violated his constitutional rights by firing him because he blogged conspiracy theories, including his belief that the Sandy Hook school shooting was a government hoax. Florida Atlantic claimed it fired Tracy for insubordination because he refused to follow its conflict-of-interest policy, which requires faculty to report non-school speech activities related to their “professional practice, consulting, teaching or research.” The district court granted Florida Atlantic summary judgment on five claims, and a jury ruled for the school on Tracy’s retaliation claim. The Eleventh Circuit determined that Florida Atlantic’s policy was not facially overbroad and did not constitute a content-based restriction on speech, and that Tracy had failed to present evidence showing arbitrary enforcement of the policy. Ultimately, the Court found there was “more than sufficient evidence to support the jury’s verdict.”
§ 15.11.5 Statute of Limitations
Thompson v. Fresh Prods., LLC, 985 F.3d 509 (6th Cir. 2021). Plaintiff brought an employment-discrimination action against her former employer under the ADA, ADEA, Title VII, and state law, alleging disability, age, and race discrimination. Upon her hire, Plaintiff signed a “Handbook Acknowledgment” that limited the time to file any claim or lawsuit arising out of her employment to no more than six months after the action took place. After being terminated, Plaintiff filed her lawsuit against Fresh Products. The district court granted summary judgment to Defendants on all claims, asserting that Plaintiff’s ADEA, ADA, and Title VII claims were untimely because of the signed Handbook Acknowledgement. Additionally, the district court found that Plaintiff failed to establish a prima facie case of discrimination on any of her claims. On appeal, the Fifth Circuit found that the limitation periods articulated in the ADA, ADEA, and Title VII give rise to substantive, non-waivable rights; thus, the contractual limitation did not render her claims untimely. Conversely, the Court did find that the handbook limited her state law claims. Next, using the McDonnell-Douglas framework to examine her discrimination claims, the Court found that Plaintiff had not established the prima facie case to show she was terminated due to her disability, age, or race. The district court’s grant of summary judgment was affirmed.
Olson v. U.S., 980 F.3d 1334 (9th Cir. 2020). Plaintiff contracted to work as a Reasonable Accommodation Coordinator at Defendant Bonneville Power Administration, and eventually went on leave under the FMLA due to increasing anxiety. Defendant did not provide Plaintiff notice of her FMLA rights. Plaintiff sued under the FMLA, arguing that Defendant willfully interfered with her FMLA rights by failing to provide her notice of them. The relevant statute of limitations under the FMLA is two years after the date of the last alleged violation, but the limitation is extended to three years for a “willful violation,” which the FMLA does not define. Plaintiff filed her complaint more than two years, but less than three years, after the last alleged violation, and she accordingly was required to show that Defendant’s conduct was willful to avoid the statutory time bar. The Ninth Circuit followed a number of circuits in ruling that the standard for “willful” violations under the FMLA is the same as that for willful violations under the FLSA—whether the employer knows, or shows reckless disregard, as to whether its conduct violated the act. Here, the Court did not find that Defendant acted willfully, as there was a “serious question” as to whether Defendant was required to provide notice. Defendant consulted with its legal department concerning Plaintiff’s status, attempted to bring Plaintiff back to work, and paid Plaintiff for hours worked while she was out on FMLA leave. Thus, the three-year statute of limitations did not apply, and Plaintiff’s suit was time-barred.
Hickey v. Brennan, 969 F.3d 1113 (10th Cir. 2020). Plaintiff, a former employee of the United States Postal Service (USPS), brought a discrimination claim against the Postmaster General on the grounds that USPS failed to accommodate her disability. Plaintiff was terminated for misconduct, after which she initiated a grievance procedure pursuant to a collective bargaining agreement. The grievance was referred to an arbitrator, who denied the grievance on the grounds that USPS had just cause to terminate Plaintiff. Plaintiff then contacted an Equal Employment Office (EEO) counselor and filed a formal complaint of discrimination. The agency dismissed Plaintiff’s claim on the ground that it constituted an inappropriate collateral attack on the union grievance procedure. Plaintiff appealed to the EEOC, which upheld the agency’s decision. Plaintiff then initiated her federal complaint of discrimination pursuant to the Rehabilitation Act. The district court granted summary judgment in favor of USPS on the grounds that Plaintiff failed to timely exhaust her administrative remedies, and the Tenth Circuit affirmed. Under 29 C.F.R. § 1614.105(a), which is applicable to certain government employers such as USPS, Plaintiff was required to initiate contact with an EEO counselor within 45 days of the alleged discriminatory action, regardless of whether she was also pursuing a union grievance. Plaintiff argued that her untimeliness should be excused and/or that USPS should be estopped from raising timeliness as an affirmative defense because the EEO counselor failed to advise Plaintiff of her rights and responsibilities. The Tenth Circuit found Plaintiff’s arguments unavailing because (1) Plaintiff was already beyond the 45-day time period when she contacted the EEO counselor, and (2) Plaintiff failed to show that the information she received from the EEO counselor was incorrect or otherwise prejudiced her ability to pursue her claims.
Rivero v. Bd. of Regents of Univ. of New Mexico, 950 F.3d 754 (10th Cir. 2020). Plaintiff brought a discrimination claim against his former employer, University of New Mexico Hospital (UNMH), alleging that it violated the Rehabilitation Act by (1) requiring that Plaintiff undergo psychiatric evaluations and (2) constructively discharging him based on a perceived disability. The district court granted summary judgment in favor of UNMH on all claims, and the Tenth Circuit affirmed. To establish an unlawful medical examination or disability inquiry claim under the Rehabilitation Act, Plaintiff was required to demonstrate that UNMH required Plaintiff to undergo a medical examination or that it made a disability-related inquiry. Plaintiff was aware of UNMH’s examination requirements more than three years prior to bringing his claim. Plaintiff argued that his claim was not untimely because he needed to first see his personnel file to determine whether UNMH’s examination request was consistent with business necessity. The Tenth Circuit rejected this argument, reasoning that business necessity is an affirmative defense for the employer, and therefore Plaintiff could bring his claim without first investigating this potential affirmative defense. As for his constructive discharge claim, Plaintiff was required to show that he was a qualified individual with a disability and that he suffered an adverse employment action because of his disability. Here, Plaintiff’s claim failed because he presented no evidence that UNMH discriminated against him due to a perceived disability. Accordingly, the Tenth Circuit affirmed summary judgment on both of Plaintiff’s Rehabilitation Act claims.
§ 15.11.6 Unfair Labor Practices / National Labor Relations Act
Napleton 1050 v. NLRB, 976 F.3d 30 (D.C. Cir. 2020). A split D.C. Circuit held that a Cadillac dealer violated the National Labor Relations Act (NLRA) when it “scapegoated” two mechanics as punishment for their colleagues’ decision to unionize, determining that the dealer’s knowledge of the mechanics’ union views was not necessary to establish their terminations as illegal. According to the Court, “[i]ntentional discrimination against the statutorily protected collective actions of employees remains discrimination even when it takes the form of scapegoating.” Under prior precedent, the NLRB’s general counsel must show that protected activity motivated an employer’s adverse employment action; however, the general counsel need not prove that the employer knew each affected employee’s union views if it intended to punish the workers as a whole. The Court rejected the dealer’s argument that the NLRA requires evidence of mass layoffs, finding that “[t]here is no two-free-bites rule under Section 8(a)(3)” of the NLRA. The majority also rejected Napleton Cadillac’s assertion that it couldn’t have retaliated against its workers for engaging in a strike by removing their toolboxes from the work site, noting that a key decision maker at the dealer specifically said that the workers were treated differently because they chose to participate in the strike. In December 2020, the full D.C. Circuit declined to review the decision en banc.
Doughty v. State Emps. Ass’n of N.H., 981 F.3d 128 (1st Cir. (N.H.) 2020). The First Circuit affirmed the District Court ruling that a backwards-looking Janus-based claim for damages under 42 U.S.C. § 1983 is not cognizable. Plaintiffs are New Hampshire state employees who were required to pay agency fees to the State Employees’ Association of New Hampshire (“the Union”) as a condition of their employment with the state. After the Supreme Court’s ruling in Janus v. American Federation of State, County, & Municipal Employees that it was unconstitutional for such fees to be required of non-union employees, the Union stopped its practice of collecting agency fees from non-members. Plaintiffs filed suit after Janus and after the Union stopped collecting agency fees claiming that, based on Janus’ retroactive application, they were entitled to compensatory damages, refunds, or restitution under § 1983. In affirming the District Court decision, the Circuit Court looked to a body of precedent under § 1983 dealing with protection of reliance interests. The Court found that these Janus-based damages claims closely parallel common-law torts providing relief for a defendant’s misuse of official governmental processes. Such tort claims require a plaintiff to show malicious or improper use of process by the defendant. Considering that, prior to Janus, the practice of requiring agency fees from non-union employees was expressly permissible under Supreme Court precedent, the Court found that plaintiffs could not satisfy that malicious or improper use requirement. This ruling brings the First Circuit in line with other circuits that have addressed this issue since the Janus ruling.
Rizzo-Rupon et al. v. Int’l Ass’n of Machinists and Aerospace Workers, AFL-CIO Dist. 141, 822 Fed. App’x 49 (3d Cir. (N.J.) 2020). In an unpublished opinion, the Third Circuit held that the Railway Labor Act authorizes a union representing United Airlines workers to charge fees to nonmembers. The Third Circuit relied on the Supreme Court’s ruling in Ry. Emps. Dep’t v. Hanson, 351 U.S. 225 (1956), holding that if Hanson “remains good law, it bars appellants’ First Amendment challenge.” The workers challenging the union’s collection of fees pointed to Janus v. AFSCME, 138 S. Ct. 2448 (2018), in which the Supreme Court concluded that requiring agency fees from individuals who do not want to be union members violates their First Amendment rights. However, the Third Circuit distinguished the Janus decision, observing that “the ‘private-sector union shops’ analyzed in Hanson presented ‘a very different First Amendment question’ than the public-sector unions at issue in Janus.” In an order issued on November 2, 2020, the Third Circuit denied the worker’s en banc hearing request.
Diamond v. Pa. State Educ. Ass’n and Wenzig v. Serv. Emps. Int’l, 972 F.3d 262 (3d Cir. (Pa.) 2020). In a consolidation of two cases, a split Third Circuit held that public sector unions can keep the dues paid by nonunion members while the so-called fair share practice was still backed by the U.S. Supreme Court. The decision was in line with the decisions of four other circuit courts on the issue, determining that the public sector unions are afforded the “good faith” defense because they took the money when the fair share fees were still legally valid (i.e., prior to the Supreme Court’s holding in Janus v. AFSCME, 138 S. Ct. 2448 (2018)). The two judges in the majority were divided on their reasoning, with one judge echoing the Second, Sixth, Seventh, and Ninth Circuits that Section 1983 affords parties a good faith liability shield. The other judge supported the result but argued that the good faith defense is not part of Section 1983; instead, she relied on 19th century precedent to conclude that the public sector employees seeking to recoup the money they paid had failed to show their payments were made involuntarily or fraudulently. The dissent rejected the reasoning of both judges in the majority and called for the employees’ cases to be reinstated.
United Gov’t Sec. Officers of Am. Int’l Union v. Am. Eagle Protective Servs. Corp., 956 F.3d 1242 (10th Cir. 2020). A security officers’ union sued its member’s employer under Section 301 of the Labor Management Relations Act for declaratory relief under the union’s collective bargaining agreement and to compel arbitration of the employee’s grievance. The suit was brought nearly two years after the employer’s final refusal to arbitrate the employee’s grievance, and therefore the district court held that the union’s action was time barred. The primary issue was whether the court should apply the six-month statute of limitations applicable to unfair labor practices brought pursuant to the National Labor Relations Act (“NLRA”), or whether the Court should apply the six-year statute of limitations for breach of contract actions under state law. The Tenth Circuit held that the NLRA’s statute of limitations should apply, reasoning that the union’s claim to compel arbitration was more analogous to a labor dispute brought under the NLRA than it was to a state law claim for breach of contract. The Tenth Circuit further reasoned that there is a federal interest in the quick resolution of labor disputes, and that applying the NLRA limitation period to suits to compel arbitration in these circumstances would help ensure uniformity among the federal circuits. Accordingly, the six-month NLRA statute of limitations applied to the union’s claims in this case.
§ 15.11.7 Admissibility of Evidence
EEOC v. Performance Food Grp., Inc., 2020 U.S. Dist. LEXIS 46974 (D. Md. Mar. 18, 2020). The District Court found reports and testimony from experts from both parties to be relevant and denied the parties’ motions to exclude them. The EEOC alleged that a food distribution company engaged in a pattern or practice of gender discrimination in hiring for certain positions at its distribution centers. Defendant moved to exclude the EEOC’s expert reports and testimony, and the EEOC moved to exclude the testimony and reports of Defendant’s rebuttal expert. Applying Daubert, the Court analyzed the experts’ reports and testimony and found them to be relevant and reliable. In analyzing the motion to exclude the EEOC expert’s report and testimony, the Court stated that even if Defendant’s rebuttal expert’s criticism was valid, it did not require exclusion of the EEOC’s expert testimony and reports because she used accepted statistical methods. Whether a different statistical analysis was more appropriate would be a question of fact for the jury. The Court further explained that Defendant could address criticisms as to methodology on cross-examination. The criticism of the EEOC’s expert report and testimony, even if valid, did not reflect on the ultimate question. With respect to the EEOC’s motion to exclude the rebuttal expert reports and testimony, the Court denied the motion, holding that standards of relevance and reliability were met and that it would be helpful for the jury to hear about limitations on the EEOC expert witness’s methodology. Further, the rebuttal witness sufficiently explained his criticisms to be reliable, including that his methodology was clearly noted in his report.
§ 15.11.8 Determination of Employee Status
Cunningham v. Lyft, Inc., No. 1:19-cv-11974-IT, 2020 WL 2616302 (D. Mass. May 22, 2020). The District Court denied Plaintiffs’ Emergency Motion for a Preliminary Injunction, in light of the extraordinary circumstances caused by the COVID-19 pandemic, because Plaintiffs had not shown irreparable harm. Plaintiffs, drivers of Lyft, Inc., sued Lyft for misclassification as independent contractors under Massachusetts Law, and for expense reimbursement, minimum wages, overtime and earned sick time. The Court considers four factors when determining whether a preliminary injunction is warranted: (1) whether the applicant has made a strong showing of success on the merits; (2) whether issuance of the stay will injure other parties; (3) where the public interest lies, and (4) whether the applicant will be irreparably harmed absent a stay. Here, the Court found that: Plaintiffs demonstrated a substantial likelihood that Lyft drivers would be considered employees under the Massachusetts Independent Contractor Law; the balance of equities would favor the Plaintiffs because Lyft would suffer no meaningful harm if they provided the requested sick leave benefits; and, the public interest favored Plaintiffs because there is a strong public interest in the proper classification of workers and because Lyft drivers provide an “essential service” under Massachusetts law. However, the Court rejected Plaintiffs’ argument that they would suffer irreparable harm by contracting and infecting passengers with the coronavirus and contributing to the spread of the disease in the general public. The Court suggested that it could not find that Defendants would be the cause of that harm, especially considering that Lyft had not threatened to terminate drivers if they did not drive and had encouraged them not to drive if they were sick. Further, the Court distinguished harm to the public and harm to the Plaintiffs, and ultimately found that Plaintiffs themselves would suffer no irreparable injury as a result of misclassification.
Franze v. Bimbo Bakeries USA, Inc., 826 Fed. App’x 74 (2d Cir. 2020). Delivery drivers brought proposed collective and class action against Bimbo Bakeries USA, Inc. and Bimbo Foods Bakeries Distribution, LLC (“Bimbo”), alleging that Bimbo misclassified the drivers as independent contractors. The district court granted summary judgment to Bimbo, and the drivers appealed. The Second Circuit held that the record supported the district court’s determination that, under the five-factor test set forth in Brock v. Superior Care, 840 F.2d 1054 (2d Cir. 1988), the drivers were not Bimbo’s employees under the FLSA. For example, under the first factor, the Court agreed that Bimbo “did not control [the drivers] directly and closely enough to render their relationship an employer-employee relationship,” noting that the drivers (1) controlled the overall scope of their delivery operations, (2) were not required to deliver Bimbo products personally and could hire employees to substitute for them as needed, and (3) had no minimum-hour requirements and were free to set their weekly schedules. Similarly, the Court agreed that the drivers were independent contractors under the test outlined in Bynog v. Cipriani Group, Inc., 1 N.Y.3d 193 (2003), noting that the drivers set their own schedules and worked at their own convenience. While they did not work for any other companies, their distribution agreements made clear they were free to do so, and Bimbo exercised a minimal “degree of control” over the drivers’ day-to-day operations.
Razak v. Uber Techs., Inc., 951 F.3d 137 (3d Cir. (Pa.) 2020). Philadelphia-based UberBlack drivers filed a class action against Uber under the FLSA and Pennsylvania labor laws, alleging that the company misclassified them as independent contractors to deny them proper minimum and overtime wages. UberBlack is a higher-end service offered by Uber, where customers can select rides in luxury sedans or SUVs. A district court granted Uber summary judgment, determining that the drivers could not show that they were employees. However, the Third Circuit unanimously vacated and remanded the lower court’s decision, finding that the question of employment status is unclear and thus should be allowed to go to trial. The Court relied on Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376 (3d Cir. 1985), which articulates the standard for determining whether a worker is an employee under the FLSA. While the district court had found that Uber had the edge in four of the six Donovan factors, the Third Circuit held that the remaining two factors—whether Uber exerted enough of a “right to control” its drivers and whether the drivers had “opportunity for profit or loss depending on [their] managerial skill”—were still open for debate and must be resolved by either a jury or the district court through a Rule 52 proceeding. On November 5, 2020, the full Third Circuit issued an order declining to reconsider the panel decision.
Henry v. Adventist Health Castle Med. Ctr., 970 F.3d 1126 (9th Cir. 2020). Plaintiff, a general and bariatric surgeon, filed a Title VII complaint against the health center at which he performed surgeries for racial discrimination and retaliation. The Ninth Circuit affirmed the district court ruling in finding that Plaintiff was not entitled to Title VII protections, because he was an independent contractor and not an employee. The Court noted Plaintiff was “paid, taxed, and received benefits like an independent contractor,” he ran his own separate practice, and he had a degree of professional freedom and flexibility that pointed toward independent contractor status. The Court further found that, although Plaintiff was held to strict regulations in his work, which normally would weigh in favor of employee status, the regulations in the physician-hospital context were a “shared professional responsibility,” and therefore consistent with an independent contractor relationship.
§ 15.11.9 Punitive Damages
Ward v. AutoZoners, LLC, 958 F.3d 254 (4th Cir. 2020). Plaintiff Keith Ward sued his former employer for violation of Title VII and North Carolina law, alleging sexual harassment. A jury found AutoZone liable for creating a hostile work environment and for intentional infliction of emotional distress, and awarded Ward compensatory and punitive damages. AutoZone and Ward cross-appealed. With respect to the award of punitive damages, AutoZone argued that it was improper because traditional principles of agency did not apply to the managers’ conduct so as to make AutoZone vicariously liable. Consequently, the Fourth Circuit reversed and remanded. The Court reiterated that determining managerial capacity is a fact-intensive inquiry and involves examining the type of authority given to the employee and the amount of discretion the employee has. However, for liability to attach to AutoZone, one of Ward’s supervisors had to have acted with malice or reckless indifference. The Court found in AutoZone’s favor because Ward did not present sufficient evidence that the supervisors themselves engaged in intentional discrimination. Instead, at worst, they failed to adequately respond to discrimination by a lower-level employee, and they did not engage in the discriminatory conduct themselves.
§ 15.11.10 Miscellaneous
Little Sisters of the Poor v. Pennsylvania, 140 S. Ct. 2367 (2020). In a 7-2 decision, the Court held that private employers with religious or moral objections to birth control may be exempt from the contraceptive mandate of the Affordable Care Act (ACA). According to Justice Thomas, the ACA laid the groundwork for the Trump administration to issue exemptions to the contraception mandate, by delegating great authority to a U.S. Health and Human Services unit called the Health Resources and Services Administration (HRSA). Specifically, “[t]he ACA gives HRSA broad discretion to define preventive care and screenings and to create the religious and moral exemptions.” Justice Kagan filed a concurrence, joined by Justice Breyer, that agreed the exemptions complied with the ACA but suggested the “moral” exemption could be challenged on the grounds that it is “arbitrary and capricious.” The ruling upheld two regulations issued in 2018 that let employers avoid the ACA’s requirement to cover workers’ birth control by saying that they oppose contraception on moral or religious grounds. The regulations had been challenged by Democratic attorneys general in California and Pennsylvania, with district courts in both states enjoining the regulations nationwide. The contraceptive mandate has been heavily litigated over the past decade, with cases reaching the Court previously in 2014 (exempting closely held for-profits) and 2016 (failing to reach a compromise over an opt-out process for religious nonprofits and punting the issue back to lower courts). Following the Little Sisters of the Poor decision, on January 19, 2021, the U.S. District Court for the District of Massachusetts rejected Massachusetts’ claims that HRSA failed to follow proper Administrative Procedure Act requirements in promulgating the regulations. The district court also dismissed the state’s remaining constitutional and statutory claims, finding that the government “came to the reasonable conclusion that broader exemptions were appropriate to address sincere religious objections to the contraceptive mandate.” Similarly, the court concluded that the state had not established that the government failed to (1) consider alternatives, or (2) assess whether the hardships suffered by women denied contraceptive coverage outweigh the benefits offered by the regulations.
Woodlands Senior Living, LLC v. MAS Med. Staffing Corp., No. 1:19-cv-00230-JDL, 2020 WL 6875213 (D. Me. Nov. 23, 2020). The District Court found that a Maine statute prohibiting restrictive employment agreements does not violate the Contract Clause of the Maine Constitution and is applicable to contracts between an employer and a staffing agency. Woodlands Senior Living entered into a staffing agreement with MAS that established placement fees for temporary workers. In addition, the agreement prohibited MAS from recruiting or soliciting employees of Woodlands until 90 days after their last day of employment with Woodlands. Woodlands alleged that MAS violated said agreement, and MAS asserted that the newly enacted Act to Promote Keeping Workers in Maine, 26 M.R.S.A. §§ 599-A, 599-B, prohibited the enforcement of their agreement. Woodlands argued that MAS was not an “employer” within the meaning of that statute and that, even if MAS was an employer, the statute violated the Contract Clause of the Maine Constitution. The Court found that MAS (and staffing agencies generally) was an employer within the meaning of that statute. Further, the Court found that while the statute did substantially impair the parties’ contractual relationship, it was necessary to serve the important public policy of protecting workers, and prohibiting non-compete and anti-poaching agreements was a reasonable means of implementing said policy.
CVS Pharmacy, Inc. v. Lavin, 951 F.3d 50 (1st Cir. 2020). The First Circuit held that CVS Caremark, a subsidiary of CVS Pharmacy, was entitled to a preliminary injunction enforcing a covenant not to compete against a former longtime CVS executive hired by PillPack LLC, a direct competitor. When deciding whether the non-compete was enforceable, the First Circuit was faced with two competing views of reasonableness under Rhode Island law: a facial review of the covenant or an as-applied view of the covenant. Though the Court suggested that the as-applied approach may be a quicker and thus more workable view for courts, the Court did not take a position on which view was correct because, here, the outcome would be the same under either analytical framework. The Court ultimately held that the executive had extensive knowledge of CVS’s strategic planning and contracts with retail pharmacies and payors, and it was unlikely that he wouldn’t use this confidential information in his new job. Thus, barring his employment with PillPack for 18 months was reasonable, whether the trial court used an as-applied or a facial approach to assessing the reasonableness of the non-compete agreement.
Greater Phila. Chamber of Commerce v. City of Phila., 2020 U.S. App. LEXIS 3598 (3d Cir. Feb. 6, 2020). The Third Circuit upheld a Philadelphia law designed to close pay gaps by banning employers from asking questions about a job applicant’s salary history. Specifically, the Court lifted an injunction, issued in April 2018 by the lower court, that had frozen the law. The Court also affirmed the district court’s decision not to block the law’s “reliance” provision, which bars employers from using applicants’ wage histories to set new salaries. The Third Circuit rejected arguments advanced by the Chamber of Commerce for Greater Philadelphia that the law violates the First Amendment, finding that the city had provided ample evidence that banning salary history questions would help women and minority job applicants by remedying historic discriminatory wage gaps. “The city merely ‘dr[ew] reasonable inferences based on substantial evidence’ that the inquiry provision would address the wage gap, and the district court erred when it ‘reweigh[ed] the evidence’ and ‘replace[d] [the city’s] factual predictions with [its] own.’”
Druding et al. v. Care Alternatives, 952 F.3d 89 (3d Cir. (N.J.) 2020). The Third Circuit ruled that a district court erred when it granted summary judgment in favor of a hospice-care provider in a qui tam False Claims Act (FCA) action brought by former employees of the provider. Importantly, the Court reversed the district court’s requirement for the plaintiff-employees to show an “objective falsehood” to proceed with their FCA claims, instead holding that a subjective medical judgment can be deemed false for purposes of establishing liability under the law. “Regarding the element of falsity, the district court adopted a standard not previously embraced or established by this court, which required appellants to show evidence of ‘an objective falsehood,’ that the physician’s prognosis of terminal illness was incorrect, in order to prevail on the element of falsity.” The Third Circuit rejected the district court’s “bright-line rule that a doctor’s clinical judgment cannot be ‘false,’” finding this requirement to be “inconsistent with the statute and contrary to this court’s interpretations of what is required for legal falsity.” The Third Circuit observed that in the context of FCA falsity, its case law simply asks “whether the claim submitted to the government as reimbursable was in fact reimbursable, based on the conditions for payment set by the government.” The decision created a circuit split with the Eleventh Circuit, which held in United States v. AseraCare, Inc., 938 F.3d 1278 (11th Cir. 2019), that a difference of reasonable physicians’ opinions on a terminal patient’s prognosis alone does not constitute falsity under the FCA. The Supreme Court denied the petition for certiorari filed by Care Alternatives. Druding et al. v. Care Alternatives, 2021 U.S. LEXIS 915 (U.S. Feb. 22, 2021).
Ezell v. BNSF Ry. Co., 949 F.3d 1274 (10th Cir. 2020). Plaintiff was employed as a conductor for BNSF Railway Company. Plaintiff sued BNSF pursuant to the Federal Employers’ Liability Act (“FELA”), alleging that BNSF was negligent by requiring Plaintiff to climb railcar ladders to check whether the railcars were loaded. BNSF moved for summary judgment, arguing that its railcars complied with all applicable safety regulations and that Plaintiff failed to offer any evidence of negligence. Plaintiff responded by claiming that BNSF could have provided safer alternatives to climbing the railcars, and that BNSF’s failure to do so was negligent. The district court granted summary judgment for BNSF, and the Tenth Circuit affirmed. The Tenth Circuit explained that there are four elements to a FELA claim: “(1) the employee was injured within the scope of his employment, (2) the employment was in furtherance of the employer’s interstate transportation business, (3) the employer was negligent, and (4) the employer’s negligence played some part in causing the injury for which the employee seeks compensation under FELA.” In affirming summary judgment in favor of BNSF, the Tenth Circuit reasoned that while BNSF owed Plaintiff a duty to use reasonable care in furnishing a safe workplace, the requirement that employees climb railcar ladders was reasonable and did not create an unsafe workplace. Plaintiff then argued that BNSF was required to provide the safest alternative available. The Tenth Circuit swiftly rejected this argument, reasoning that railroad negligence under FELA required Plaintiff to show that BNSF provided an unsafe workplace, not that it failed to provide the safest possible workplace.
Ruckh v. Salus Rehab., LLC, 963 F.3d 1089 (11th Cir. (Fla.) 2020). The Eleventh Circuit partially reinstated a whistleblower’s $348 million False Claims Act (FCA) jury verdict. Angela Ruckh had alleged that her employers, two skilled nursing facilities, were providing more care than patients actually needed or received. The jury had sided with Ruckh in February 2017, marking one of the largest FCA jury verdicts in history, but the district judge had overturned the verdict in January 2018, citing the Supreme Court’s holding in Universal Health Servs. v. Escobar, 136 S. Ct. 1989 (2016). Under Escobar, an alleged FCA violation must be “material” to the government’s decision to pay. Here, the district judge found that the government had not recouped claims or punished the nursing facilities even though it was aware of the disputed billing practices, showing that it did not consider the violations material. However, the Eleventh Circuit disagreed, holding that Ruckh had adequately shown the materiality of the facilities’ Medicare overbilling, where “[t]his plain and obvious materiality went to the heart of the [facilities’] ability to obtain reimbursement from Medicare.” The Court restored the jury’s verdict covering just over $85.1 million in Medicare claims, trebled under the FCA to $255.4 million, with statutory penalties also to be added. But the panel preserved the district court’s decision to overturn the jury’s verdict on Medicaid fraud claims, which comprised the remainder of the original verdict. According to the Court, Ruckh had failed to show that the alleged failure to prepare and maintain comprehensive care plans for residents was material, and to connect the lack of care plans to “specific representations about the . . . services provided.” The full Eleventh Circuit declined to rehear the case en banc.
CANADA
§ 15.12 Notice and Damages
§ 15.12.1 Bad Faith and Consequential Damages
Porcupine Opportunities Program Inc. v Cooper, 2020 SKCA 33. This case summarizes an employer’s duty of good faith and fair dealing. Mr. Cooper had been employed for 33.5 years when he was terminated without cause. He brought a successful claim for wrongful dismissal and moral damages against his former employer. The employer appealed, arguing that the trial judge erred by awarding Mr. Cooper $20,000 in moral damages. The Saskatchewan Court of Appeal dismissed the appeal and outlined the legal principles that apply to moral damages. First, an employer has a duty to engage in good faith and fair dealing during the dismissal process, which requires the employer to be candid, reasonable, honest and forthright and to refrain from untruthful, misleading or unduly insensitive behavior. This applies to the employer’s pre- and post-termination conduct. However, the normal distress and hurt feelings resulting from dismissal are not compensable. The Court of Appeal concluded that the trial judge’s award of $20,000 for moral damages was justifiable because the employer: (i) falsely accused Mr. Cooper of committing theft, (ii) falsely claimed that Mr. Cooper communicated in an inappropriate and threatening manner with some of his former colleagues after he was terminated, and (iii) dishonestly alleged that the true reason for Mr. Cooper’s termination was that his position had been eliminated.
§ 15.12.2 Punitive Damages
There were no qualifying decisions this year.
§ 15.13 Costs
§ 15.13.1 Quantum
There were no qualifying decisions this year.
§ 15.13.2 Special Costs
There were no qualifying decisions this year.
§ 15.14 Human Rights
§ 15.14.1 Disability
Int’l B’hood of Elec. Workers, Local 1620 v Lower Churchill Transmission Constr. Emp’rs Ass’n Inc., 2020 NLCA 20. The union appealed a decision of Nova Scotia Superior Court which found that the employer could not accommodate an employee who was medically prescribed cannabis without suffering undue hardship. A grievance was filed on behalf of a union member who applied for two positions on the Lower Churchill Project, but was denied both positions when his approval for medical cannabis use came to the employer’s attention. The arbitrator found that since there is no scientific or medical standard from which it may be determined whether the grievor was impaired by cannabis, the employer could not accommodate the employee in a safety sensitive position without undue hardship. Upon judicial review, the Newfoundland Superior Court found that the arbitral decision was reasonable. However, the Newfoundland Court of Appeal disagreed. The Court held that the arbitrator’s decision was unreasonable because the employer failed to provide evidence necessary to discharge onus of demonstrating that accommodation of the grievor on an individual basis would result in undue hardship. It was unreasonable for the arbitrator to simply rely on the difficulties for assessing cannabis impairment on a medical or scientific standard, to conclude the employer could not accommodate the individual grievor. Accordingly, the matter was remitted for a determination as to whether there is another way to individually assess the grievor’s ability to perform the job safely, which might provide an option for accommodation without undue hardship.
§ 15.14.2 Sexual Orientation
There were no qualifying decisions this year.
§ 15.14.3 Government Programs
There were no qualifying decisions this year.
§ 15.14.4 Accommodation
There were no qualifying decisions this year.
§ 15.15 Contracts
§ 15.15.1 Calculation of Reasonable Notice
Matthews v Ocean Nutrition Canada, 2020 SCC 26. Mr. Matthews was constructively dismissed and argued that upon dismissal, he was entitled to the payments under the employer’s long-term incentive plan (LTIP) because the company was sold during the period of reasonable notice which Matthews claimed he was entitled to. The agreement provided that it was of no force and effect if the employee ceased to be a full-time employee on the date of the sale. The trial judge found that the employee was constructively dismissed and entitled to a reasonable notice period of 15 months. Further, the trial judge found that since the employee would have been a full-time employee at the time the business was sold (had he not been constructively dismissed) and that the LTIP did not unambiguously remove or limit his common law right to damages, the employee was awarded damages equivalent to what he would have received under the LTIP. The Nova Scotia Court of Appeal allowed the appeal in part, finding that the employee was not entitled to damages in relation to the lost LTIP payment because he was not an active full-time employee on the date of the sale, and the LTIP clearly limited entitlement to those who were full-time employees on the date of the sale. The Supreme Court reinstated the trial judge’s decision. The Court clarified that determining whether damages for the failure to provide reasonable notice includes bonus payments, courts must consider (i) whether, but for the termination, the employee would have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period, and (ii) if so, whether the terms of the employment contract or bonus plan unambiguously take away or limit that common law right. In this case, had Matthews been given reasonable notice, he would have been a full-time employee on the sale date and, therefore, his damages reflected the loss of the opportunity to receive the payments under the LTIP.
Waksdale v Swegon N.A., 2020 ONCA 391. Mr. Waksdale was dismissed without cause after working for the employer for just over ten months. He then sued for wrongful dismissal. The employer conceded that the “termination for cause” provision in the employment agreement was void because it violated the Employment Standards Act, 2000 (ESA). Likewise, Mr. Waksdale acknowledged that the “termination without cause” provision complied with the minimum requirements of the ESA. The employer argued that it could rely on the “termination without cause” provision because it was not alleging that the employee was dismissed for cause. The motion judge agreed with the employer, holding that the “termination without cause” clause was a stand-alone, unambiguous, and enforceable clause. The Ontario Court of Appeal disagreed. It stated the motion judge erred in his interpretation of the employment contract by failing to read termination provisions as a whole and instead applying a piecemeal approach without regard to their combined effect. It found that when read as a whole, this termination clause was contrary to the ESA and therefore void. The Supreme Court of Canada denied the employer’s leave to appeal.
Bank of Montreal v Li, 2020 FCA 22. Ms. Li was terminated after working for the employer for almost six years. When her employment was terminated, Ms. Li signed a settlement agreement, which provided that she would accept a lump sum payment in exchange for releasing the employer from any and all claims arising out of the termination of her employment. However, shortly thereafter, she filed an unjust dismissal complaint under section 240 of the Canada Labour Code (“Code”). Under section 240, if the appointed adjudicator finds that the dismissal was unjust, he or she has broad remedial powers, which include awarding compensation and ordering reinstatement. Bank of Montreal argued that the arbitrator lacked jurisdiction, given the terms of the settlement agreement. However, the arbitrator held that section 168(1) of the Code prohibits employees from contracting out of their statutory right to bring an unjust dismissal complaint under section 240. This meant that even an employee who signs a full and final release may bring an unjust dismissal complaint within 90 days of their dismissal. The arbitrator’s decision was upheld by the Federal Court and Federal Court of Appeal, both of which found it to be a reasonable interpretation of section 168(1) based on existing jurisprudence from which the Federal Court of Appeal declined to depart. Leave to the Supreme Court was refused.
Abrams v RTO Asset Management, 2020 NBCA 57. In this case, a 29.5 year employee sued his former employer for wrongful dismissal after being dismissed without cause. The termination clause in the employee’s employment agreement provided that the employer “shall not be obliged to make any further payments” once it provides written notice or pay-in-lieu of notice. The Court held that this clause is void because it frees the employer from making “any further payments” to the employee once it had provided written notice or pay-in-lieu of notice. It noted that upon the cessation of employment, employees are entitled to vacation pay and accrued wages. The employee’s termination clause violates the Employment Standards Act (“ESA”) by absolving the employer from these obligations once it provides notice or pay-in-lieu of notice. The Court affirmed that if a part of a termination clause contracts out of a benefit under the ESA, the entire clause is void. Accordingly, the termination clause was found to be void and the employee was entitled to damages for common law reasonable notice.
Manthadi v ASCO Mfg., 2020 ONCA 485. The Ontario Court of Appeal clarified the common law approach to calculating the reasonable notice period for an employee hired by a successor employer. In this case, the employee had worked for the predecessor employer for 36 years when it was purchased by the defendant successor employer in an asset purchase transaction. The employee signed a release with the predecessor employer and was hired by the successor employer. A few months later, the employee was dismissed without cause. The employee sued for wrongful dismissal. The summary judgment motion judge held that the employee’s entire service for the predecessor corporation must be taken into account when calculating reasonable notice. The Ontario Court of Appeal overturned the motion judge’s decision on the basis that summary judgment was inappropriate in this case because the question of whether the employee was hired on an indefinite basis or a fixed-term basis had to be determined, since the notice obligation depended on this finding. The Court also clarified the relevant legal principles concerning reasonable notice for employees of the vendor hired by the purchaser on an indefinite basis following an asset sale. First, a court may recognize an employee’s service with the predecessor employer to determine the reasonable notice period; however, the appropriate notice period is assessed by taking into consideration all of the circumstances. Second, the common law recognizes an employee’s prior service with the predecessor employer when: (i) the successor employer buys the predecessor employer as a going concern, (ii) the employee enters into a new employment contract with a new employer, and (iii) their connection to the ongoing business undertaking is continuous. Third, the factual matrix surrounding any settlement agreement entered into by the employee and the predecessor employer—including its terms and conditions—may also be taken into consideration.
Battiston v Microsoft Canada Inc, 2020 ONSC 4286. Mr. Battiston was dismissed without cause after working for Microsoft for 23 years. As part of his compensation, he received stock awards each year based on his performance. The terms of the Stock Award Agreements stated that awarded but unvested stock would become void once an employee is terminated without cause. When his employment was terminated, Microsoft informed him that pursuant to the terms of his Stock Award Agreements, all of his unvested stock awards were now null and void. The employee sued, arguing that he was entitled to his awarded but unvested stock. The Ontario Superior Court of Justice held that an employer must take reasonable measures to draw an employee’s attention to harsh and oppressive terms in an employment related contract. It found that termination provisions found in the Stock Award Agreements were harsh and oppressive as they precluded the employee’s right to have unvested stock awards vest if he was terminated without cause. The Court also accepted that the employee was unaware of the stock award termination provisions, and that these provisions were not brought to his attention by the employer. It found that an annual email communication about the notice of stock awards provided each year did not amount to reasonable measures to draw the termination provisions to Battiston’s attention. Accordingly, the termination provisions in the Stock Award Agreements were unenforceable and the employee was entitled to damages in lieu of the awarded but unvested stock.
§ 15.15.2 Changes to Contractual Terms—Constructive Dismissal
Quach v Mitrux Servs. Ltd., 2020 BCCA 25. This decision is a reminder of the general principle that modification of a pre-existing contract will not be enforced unless there is a further benefit to both parties. In this case, the employee signed a fixed-term contract with the employer, which provided that upon termination by employer, the balance of salary owed for the remaining portion of the term would be payable to the employee. The parties later signed a second month-to-month contract to replace the first contract. The employer then dismissed the employee before his employment began. The employee successfully sued for damages under the first contract. The trial judge held that the employer failed to establish fresh consideration for the second contract and awarded the employee damages for his lost salary under the first contract. The trial judge awarded $15,000 in aggravated damages based on the employer’s bad faith conduct and the impact it had on the employee. The employer appealed. The British Columbia Court of Appeal held that the trial judge correctly found that the second contract failed for lack of consideration. However, the Court overturned the aggravated damages award based on the lack of evidence that the employee suffered any harm beyond the “normal stress and hurt feelings” associated with termination of employment.
§ 15.15.3 Fixed vs. Indefinite Term Employment
There were no qualifying decisions this year.
§ 15.15.4 Codes of Conduct
There were no qualifying decisions this year.
§ 15.15.5 Pensions
There were no qualifying decisions this year.
§ 15.16 Definition of Employee
§ 15.16.1 Determination of Employee Status
CUPW v Foodora Inc., 2020 CLLC 220-032. The Union filed an application for bargaining rights over the employer’s food delivery couriers in Toronto and Mississauga for Foodora Inc. At issue was whether the couriers were “dependent contractors” under the Ontario Labour Relations Act (“LRA”), and therefore able to unionize. The employer took the position that Foodora’s couriers were independent contractors and could not unionize. The Ontario Labour Relations Board (the “Board”) held that Foodora couriers are “dependent contractors” because they more closely resemble employees than independent contractors. Foodora’s couriers were selected by Foodora and required to deliver food on the terms and conditions determined by Foodora in accordance with Foodora’s standards. The Board noted that: (i) Foodora’s app was the central “tool” used in the work, over which Foodora had full control, (ii) Foodora couriers did not have the opportunity to increase their compensation through anything other than their labour and skill, and (iii) Foodora exerted control over when and where couriers work. This was the Board’s first decision with respect to “gig economy” workers.
Leena Iyar, chief brand officer at OneStop platform Moxtra, discusses how small legal firms are still struggling to adjust to the barriers of remote work environments and why the adoption of digital tools creates a more positive client experience.
For law firms, what are the new challenges due to the pandemic?
Remote work environments have become the new “norm,” and with that, many new challenges have risen due to the pandemic for small and large law firms alike. For one, COVID-19 upended business as usual and magnified the new challenge of a rapid transition to digital business operations. Most law firms were grappling with incorporating digital communications with their high touch clients even before the pandemic. In such a high touch industry, expectations for digital engagements were rising even before the pandemic. Remote work exposed the increasing need for an entirely digital office with secure and streamlined options for communication, like video chat, direct messaging and secure file sharing between clients and legal professionals in one controlled environment. Naturally, resilient businesses are the ones that are adjusting to the extinction of the standard business hours model and offering a way for clients to reach in when it’s convenient for them, and for their legal teams to have digital tools that allow for that and create a strong, supportive customer experience. However, many law firms are still stuck at the beginning of their digital transformation journeys without a plan in place to prepare their businesses for the next shift in digital needs.
What are common barriers legal professionals face as it relates to digital adoption?
The legal sector deals in high stakes interactions and has continued to rely on face-to-face interaction to provide clients with the level of personalized service they expect from the field. Legal professionals fell behind many industries when it came to the shift to digital, fearing not only the loss of personalization their clientele count on them to provide, but also the fear surrounding security issues. Due to the sensitive nature of legal engagements, it is critical that firms invest in a digital tool that values top-of-the-line security features in order to provide a sense of ease for clients and professionals. There is also the fear of lost productivity when trying to integrate digital tools into legal practices, though many digital solutions today can be leveraged with minimal to no loss of productivity and proper training of employees leading up to a launch. The pressure to provide high touch support to clientele under resource-constrained remote operations has been a challenge for many law firms. However, digital solutions complement the expectations clients have for legal professionals’ services by providing a means to maintain continuous interaction across space and time in a familiar and on-demand fashion. The challenges of remote operations have provided a silver lining for legal professionals who must now shift their focus toward the long-term evolution of changing client expectations and behavior.
What would you say to legal professionals that are hesitant to digitally transform their business?
Strong relationships with clients are crucial to a successful law firm, and nowadays, digital tools are an essential ingredient to that success. Digital tools have emerged as an extension of the in-person experiences that are not always possible in the current environment, but the on-demand value they provide clients will remain in the post-COVID work landscape. Along with this, one beneficial aspect of a digital office is the ease of taking on more accounts and clients at a time, allowing law firms to increase revenue due to the digital efficiency created. Digital solutions will only become more prevalent as consumers continue to prioritize solutions that enable them to engage anytime, anywhere. Without a digital means of translating these benefits, legal professionals will lose their edge.
How do you see the future of legal professionals changing as remote work becomes more common?
The legal industry is steadily adapting to provide more digital and engaging experiences for clients, which should continue on an upward trend for professionals as remote work becomes a more permanent work solution long term. Even those who do return to the office will see different internal and external communication styles than before the pandemic. The expectation for engaging digital experiences was born out of necessity and isn’t going anywhere. Post-pandemic, in order to maintain continuous conversations around pressing legal proceedings, it will become increasingly crucial for legal professionals to engage clients in their own app in a secure, dedicated channel. As industries shift towards heavier digital practices, increased flexibility will also result. That flexibility is for both the client and legal professional, as they will experience a greater quality of life when more options available allow them to check-in and work from anywhere, at any time.
What are the new business opportunities small firms can leverage moving forward?
While all generations are receptive to engaging with legal firms digitally, the three youngest generations — Gen Z, millennials and Gen Xers — are particularly keen on engaging with legal organizations exclusively digitally even after the pandemic has subsided. With that, a much wider demographic range is available to leverage with just the lift of a finger. As client behavior changes, so should your digital business strategy. Small firms that fail to adapt will continue to see the gap widen between them and their peers. It is crucial to stay on top of current business trends to tackle opportunities that come into play.
What are the keys to success when creating a satisfactory digital experience for legal professionals and their clientele?
According to our 2020 Small Business Digital Resilience Report, when asked how important digital tools were for improving customer engagement during the pandemic, 65% of legal personnel surveyed said “extremely important.” However, a digital experience needs to mirror the firm practice virtually in order to properly manage the personal, high touch, collaborative relationship and paperwork heavy workflow in order to have a cohesive strategy.
Over the past several years, the Democratic commissioners of the U.S. Federal Trade Commission (FTC) have voiced their dissatisfaction with the agency’s historic treatment of pharmaceutical mergers. And as a result, the FTC has now launched a process aimed at changing the way in which pharmaceutical M&A transactions are analyzed and ultimately resolved.
Past dissenting statements issued by now-Acting FTC Chair Rebecca Kelly Slaughter and Commissioner Rohit Chopra criticized the traditional antitrust analysis applied to pharmaceutical transactions. Slaughter and Chopra urged the FTC to file litigation challenging such mergers rather than resolving competition-related concerns through divestitures of overlapping drugs either on the market or in the development pipeline of the merging parties.[1] In fact, in a late 2020 joint statement, they wrote that “[t]he FTC’s record when it comes to reviewing pharmaceutical mergers suggests that the agency will simply never seek to block a merger.”[2]
In its March 16, 2021 press release, the FTC announced that it has initiated a working group with several other competition enforcement agencies to “update their approach to analyzing the effects of pharmaceutical mergers.”[3] For this project, the FTC is joining forces with the Canadian Competition Bureau, the European Commission Directorate General for Competition, the U.K.’s Competition and Markets Authority, the U.S. Department of Justice, and the offices of several state attorneys general.[4]
According to Acting FTC Chair, “it is imperative that [the FTC] rethink [their] approach toward pharmaceutical merger review” because of the “high volume of pharmaceutical mergers in recent years, amid skyrocketing drug prices and ongoing concerns about anticompetitive conduct in the industry.”
The acting chair further announced that the FTC intends to “take an aggressive approach to tackling anticompetitive pharmaceutical mergers,” while “[w]orking hand in hand with international and domestic enforcement partners.”[5] A cross-border effort makes particularly good sense in an industry like pharmaceuticals, where the larger established companies are global or at least international in scale.
The FTC’s press release notes that the working group will consider the following key questions:
How can current theories of harm be expanded and refreshed?
What is the full range of a pharmaceutical merger’s effects on innovation?
In merger review, how should the FTC consider pharmaceutical conduct, such as price fixing, reverse payments, and other regulatory abuses?
What evidence would be needed to challenge a transaction based on any new or expanded theories of harm?
What types of remedies would work in the cases to which those theories are applied?
What has the FTC learned about the scope of assets and characteristics of firms that make successful divestiture buyers?
None of the involved agencies has provided a timetable, nor have they explained what the final work product will look like. Further, given the of the two current Republican commissioners who have supported the current analysis applied in pharmaceutical mergers, the two FTC commissioner seats, pending and suggested proposed federal fixes to the treatment of all mergers,[6] and uncertainty as to the position that the new Biden administration might take, this international working group will be worth following.
[2] Statement of Commissioner Rohit Chopra Joined By Commissioner Rebecca Kelly Slaughter, In the Matter of Pfizer Inc. / Mylan N.V. Commission File No. 1910182.
[6] See, e.g., Trust-Busting For the 21st Century Act; Competition and Antitrust Law Enforcement Reform Act of 2021 (S.225 — 117th Congress (2021-2022)); and Anticompetitive Exclusionary Conduct Prevention Act of 2020 (S.3426 — 116th Congress (2019-2020)).
Cozen O’Connor 601 S. Figueroa Street, Suite 3700 Los Angeles, CA 90017 (213) 892-7954 phone (213) 892-7999 [email protected]
Brandon King
Massumi + Consoli LLP 2029 Century Park E, Suite 280 Los Angeles, CA 90067 (310) 984-1323 phone [email protected]
Boris Lubarsky
Paul Hastings LLP 1117 S. California Avenue Palo Alto, CA 94304 650.320.1803 650.320.1903 [email protected]
Julia Mix
Paul Hastings LLP MetLife Building 200 Park Ave New York, NY 10166 1(212) 318-6786 1(212) 230-7786 [email protected]
Isabella Pitts
Paul Hastings LLP 101 California Street Forty-Eighth Floor San Francisco, CA 94111 (415) 856-7002 phone (415) 856-7102 fax [email protected]
Hilliary Powell
Packer, O’Leary, & Corson 505 N Brand Blvd #1025 Glendale, CA 91203 1(818) 796-4156 phone [email protected]
Sara Rogers
Seyfarth Shaw LLP 560 Mission Street Suite 3100 San Francisco, California 94105-2930 1-415-544-1044 [email protected]
Joshua Salinas
Seyfarth Shaw LLP 2029 Century Park East, Suite 3500 Los Angeles, California 90067-3021 1-310-201-1514 1-310-551-8334 [email protected]
Anna Skaggs
Paul Hastings LLP 101 California Street Forty-Eighth Floor San Francisco, CA 94111 1(415) 856-7083 1(415) 856-7183 [email protected]
Beau Stockstill
Paul Hastings LLP 695 Town Center Dr #17th Costa Mesa, CA 92626 1(714) 668-6204 1(714) 668-6304 [email protected]
Joyce Tseng
Paul Hastings LLP 515 South Flower Street Twenty-Fifth Floor Los Angeles, CA 90071 (213) 683-6164 phone [email protected]
Sara Turk
Paul Hastings LLP 2050 M St NW Washington, DC 20036 1(202) 551-1915 phone 1(202) 551-0415 [email protected]
David Valente
Paul Hastings LLP 2050 M St NW Washington, DC 20005 1(202) 551-1871 phone 1(202) 551-0371 fax [email protected]
Jaqui Walters
Paul Hastings LLP 117 S. California Avenue Palo Alto, CA 94304 (650) 320-1815 phone (650)320-1915 fax [email protected]
§ 1.1 Introduction
The ongoing COVID-19 pandemic has brought about a shift to remote work, and with it, a change to the legal obstacles employers have faced in recent months.
Remote work may be the “new normal” for the foreseeable future, and employers trying to protect trade secrets are faced with unprecedented risks, including employees’ use of unsecure networks, printing and storing materials on personal rather than company property, and even conference calls hacked by third parties. The unique challenges associated with remote work seem poised to bring about significant changes in the legal standards for the protection of trade secrets.[1]
Further, the use of restrictive covenants has continued to come under attack in recent years. Over the past year, many states have introduced statutes restricting the use of employee non-compete agreements. Given the Biden Administration’s pledge to eliminate non-compete agreements altogether, this trend is likely to continue in the coming years. Across the country, recent state restrictive covenant statutes have imposed enhanced notice and consideration requirements for non-compete and non-solicit agreements, have limited the duration of such agreements, or have prohibited such restrictive covenants with regard to low wage employees. In addition to legislation, in recent years, courts have continued call into question the viability of non-compete and non-solicit agreements,[2] and have readily held unenforceable such agreements as overbroad, vague, or otherwise invalid.
The use of choice-of-law provisions, which allow a party to select a particular state’s law to apply to a contract, has similarly come under attack. In recent years, several states have enacted statutes prohibiting the enforcement of forum-selection and choice-of-law clauses that designate another state’s forum or law against their citizens. Even in the absence of such statues, courts have continued to find such provisions unenforceable where they might conflict with state public policy considerations.[3]
Despite these changes, however, courts around the country have continued to see a sustained pace of new filings of employee mobility and trade secret cases over the past few years. This Chapter provides an overview of recent developments in case law, and will serve as a practical guide for business law practitioners navigating new changes in employee mobility issues and the protection of trade secrets.
§ 1.2 Employee Mobility: Breach of the Duty Of Loyalty; Breach of Fiduciary Duties
§ 1.2.1 United States Supreme Court
There were no qualifying decisions within the United States Supreme Court.
§ 1.2.2 First Circuit
There were no qualifying decisions within the First Circuit.
Additional Cases of Note
T.H. Glennon Co. v. Monday, No. 18-cv-30120-WGY, 2020 U.S. Dist. LEXIS 45917 (D. Mass. Mar. 17, 2020) (court found a duty of loyalty existed when the employee occupies a position of trust and confidence, which existed where the former employee during his employment had authorized access to a corporation’s in-depth proprietary client information and technical information and had signed a non-disclosure agreement).
§ 1.2.3 Second Circuit
There were no qualifying decisions within the Second Circuit.
§ 1.2.4 Third Circuit
There were no qualifying decisions within the Third Circuit.
Additional Cases of Note
Heartland Payment Sys., LLC v. Carr, No. 3:18-cv-9764, 2020 U.S. Dist. LEXIS 15302 (D.N.J. Jan. 27, 2020) (denying motion to dismiss claim for breach of fiduciary duty and loyalty on the basis they sounded in contract because Carr, as chairman and CEO of Heartland, was bound by duties that existed before and extended beyond the contractual agreements, but granting motion to dismiss claims for fraud based on the same conduct as barred by the economic loss doctrine) (applying Delaware law); Ilapack, Inc. v. Young, 2020 U.S. Dist. LEXIS 94550 (E.D. Pa. May 29, 2020) (granting motion for preliminary injunction where former employees attempted to induce clients of their former employer while in possession of the former employer’s confidential information).
§ 1.2.5 Fourth Circuit
There were no qualifying decisions within the Fourth Circuit.
Additional Cases of Note
Big Red Box, LLC v. Square, Inc., 2020 U.S. Dist. LEXIS 16008, at *19 (D.S.C. 2020) (dismissing plaintiff’s claim for aiding and abetting breach of fiduciary duty because no South Carolina court has recognized a fiduciary relationship based on a standard at-will employment or contract arrangement, even in cases where the employee is alleged to have been entrusted with the employer’s credit cards); Dao v. Faustin, 402 F. Supp. 3d 308, 322 (E.D. Va. 2019) (dismissing plaintiffs’ claims for breach of fiduciary duty against defendant because Virginia courts have held that an employer owes no fiduciary duty to its employees; “while an employee owes a fiduciary duty to an employer, no corresponding duty is imposed on the employer”) (citations omitted); Legree v. Hammett Clinic, LLC, 2020 U.S. Dist. LEXIS 46967, at *7-15 (D. S.C. March 18, 2020) (unpublished) (stating that while “South Carolina courts have, in limited cases, ‘recognized a tort action for breach of the duty of loyalty’ in the employment context . . . South Carolina courts have not recognized a cause of action—tort, contract, or otherwise—in relation to any other alleged duty owed by an employee to an employer, and that “the at-will nature of [p]laintiff’s employment does not in and of itself transform the relationship from contractual to ‘special’” to warrant finding a fiduciary duty of care exists) (citations omitted); United States v. Snowden, 2019 U.S. Dist. LEXIS 229931, at *21-22 (E.D. Va. 2019) (granting summary judgement to the United States Government because both the CIA and NSA Secrecy Agreements signed by defendant prohibit unauthorized publication of certain information, and defendant breached those agreements and their attendant fiduciary duties by disclosing the information through his speeches and visual aids).
§ 1.2.6 Fifth Circuit
There were no qualifying decisions within the Fifth Circuit.
Additional Cases of Note
Melito v. Hopkins, 2020 U.S. Dist. LEXIS 79467 (E.D. La. May 6, 2020) (holding that Louisiana courts and statutes recognize the duty of loyalty, good faith, and a fiduciary duty in the context of “various relationships, not only for officers and directors of corporations,” and specifically, maintaining that Louisiana courts “enforce these duties in the context of employers and employees”).
§ 1.2.7 Sixth Circuit
There were no qualifying decisions within the Sixth Circuit.
§ 1.2.8 Seventh Circuit
Costello v. Bd. of Trs. of the Flavius J. Witham Mem. Hosp., 2019 U.S. Dist. LEXIS 203174 (S.D. Ind. November 22, 2019) (applying Indiana law) (The Southern District court granted summary judgment against plaintiff’s breach of fiduciary duty claim, holding while an employer has a “special duty” to employees under Indiana law, this does not rise to a fiduciary duty, when the required specificity of misrepresentation or intentional material omission has not been pled under the Fed. Rules Civ. Proc. Rule 9(b) or 12(b)(6) standard.); Indeck Energy Servs. v. DePodesta, 2019 IL App (2d) 190043[4] (applying Illinois law) (the Second District Appellate court reversed and remanded the trial court’s directed verdict in defendant company officer’s favor, when defendant breached his fiduciary duty to company by usurping a corporate opportunity and not disclosing the opportunity to company, but instead forming a new competing company that is “reasonably incident to [plaintiff company’s] present or prospective line of business.); Oliver v. Isenberg, 2019 IL App (1st) 181551-U[5] (the Seventh Circuit held that the plaintiff, as an employee, did not breach his fiduciary duty when he contacted his former clients after his resignation from the company; however, the same plaintiff, as corporate officer and one-third shareholder, did breach his fiduciary duty to his corporate employer when there is sufficient evidence that the plaintiff “undertook actions before he ceased being a corporate officer, and that he exploited his position as an officer” to steer clients away from the company before leaving.
§ 1.2.9 Eighth Circuit
Key Outdoor, Inc. v. Briggs, 2020 U.S. Dist. LEXIS 143170 (S.D. Iowa 2020) (unpublished). Briggs sold the outdoor advertising business that he had owned and operated to Key Outdoor, Inc. As part of that transaction, Briggs signed a noncompete agreement in which he promised to not engage in the outdoor advertising business for a period of 15 years in any of the counties where his prior business had done business. The noncompete agreement did not prevent Briggs from engaging in outdoor advertising business in other areas. Also as part of that transaction, Briggs began working as an employee of Key Outdoor. While an employee of Key Outdoor, Briggs started another outdoor advertising business, Motion Media. Motion Media provided outdoor advertising business services only in counties that were not covered by Briggs’s noncompete agreement, but the business was incorporated in and managed from counties that were covered by the noncompete agreement. Key Outdoor sued Briggs and Motion Meida on a number of theories, including breach of the duty of loyalty and breach of the noncompete agreement. As to the breach of the duty of loyalty claim, the court found that the noncompete agreement was inconsistent with the common law duty of loyalty, and so it superseded and modified that duty. In particular, the common law duty of loyalty prohibits an employee from competing with their employer at all, but the noncompete agreement prohibited Briggs from competing only in certain counties and did not prevent him from competing in others. The court thus granted summary judgment in favor of Briggs on Key Outdoor’s fiduciary duty claims.[6]
Additional Cases of Note
Yant Testing, Supply & Equip. Co. v. Lakner, 2020 U.S. Dist. LEXIS 38005 (D. Neb. 2020) (unpublished) (finding likelihood of success on the merits and granting preliminary injunction as to claim for breach of fiduciary duty and duty of loyalty where employee engaged in covert actions to take and utilize employer’s confidential information and solicit employer’s customers before and after leaving employment).
§ 1.2.10 Ninth Circuit
There were no qualifying decisions within the Ninth Circuit.
§ 1.2.11 Tenth Circuit
There were no qualifying decisions within the Tenth Circuit.
Additional Cases of Note
Aaron v. Rowell, 2019 U.S. Dist. LEXIS 179467 (D. Colo. 2019) (unpublished) (order granting summary adjudication in favor of defendant on claim for breach of duty of loyalty where plaintiff failed to raise a triable issue of fact on element of damages. The court found that the breaches of confidentiality allegedly committed by defendant did not cause plaintiff to incur any damages because breaches occurred after deal at issue had already been terminated, and therefore, did not result in any monetary loss to plaintiff);[7]Atlas Biologicals Inc. v. Kutrubes, 2019 U.S. Dist. LEXIS 161501 (D. Colo. 2019) (unpublished) (trial court finding after five-day bench trial that defendant employee and director breached his fiduciary duties to plaintiff (bovine-serum producer) by making misrepresentations to plaintiff’s customers and prospective customers about product offerings and by soliciting their business on behalf of defendant’s contemplated new venture in direct competition with plaintiff’s business);[8]ATS Grp., LLC v. Legacy Tank & Indus. Servs., LLC, 407 F.Supp.3d 1186 (W.D. Okla. 2019) (plaintiff alleged facts sufficient to overcome 12(b)(6) motion to dismiss as to cause of action for breach of fiduciary duty, “because the existence of a fiduciary duty is generally an issue of fact.” The district court therefore found the allegations sufficient to avoid dismissal at the pleading stage) (applying Oklahoma law as to definition of “duty” and applying federal pleading standards);[9]DTC Energy Grp., Inc. v. Hirschfeld, 420 F. Supp.3d 1163 (D. Colo. 2019) (after weighing the three Jet Courier factors as provided under Colorado law, the court found the complaint failed to allege sufficient facts to state a claim for breach of the duty of loyalty as to former HR employee where the allegations pertaining to her alleged solicitation of customers for a rival competitor were conclusory and unsupported by specific factual allegations) (applying Colorado law);[10]Freebird Communs., Inc. v. Roberts, 2019 U.S. Dist. LEXIS 196668 (D. Kan. 2019) (unpublished) (order granting summary judgment in favor of defendants on plaintiffs’ claim for aiding and abetting breach of fiduciary duty where plaintiffs failed to produce any evidence in their opposition papers establishing the prima facie elements of claim, specifically that defendants “knowing” and “substantially assisted” in any alleged breach of co-defendants’ breach of his fiduciary duty to plaintiff) (applying Kansas law).[11]
§ 1.2.12 Eleventh Circuit
There were no qualifying decisions within the Eleventh Circuit.
§ 1.2.13 D.C. Circuit
Democracy Partners v. Project Veritas Action Fund, 453 F. Supp. 3d 261 (D.D.C. Mar. 31, 2020). Plaintiff, a consulting group that serves liberal political organizations, brought, among other claims, a claim of breach of fiduciary duty against defendant, an organization that investigates political campaigns. The United States District Court for the District of Columbia denied Defendant’s motion for summary judgment on the breach of fiduciary duty claim. Defendant enlisted an activist to assume a false identity, infiltrate Plaintiff’s offices, and record all of her activities there. The activist secured work as an unpaid intern and was granted access to confidential strategy discussions. She was not required to sign a nondisclosure agreement. The activist secretly recorded footage that was used as part of a YouTube series titled “Rigging the Election” – a reference to the 2016 presidential campaign. Plaintiff claimed that it lost consulting clients as a result of the series and brought suit. The court found that the “types of services” provided weighed against granting summary judgment as the activist was granted access to conference calls and briefings that Defendant could not have accessed otherwise. Additionally, the court found that the “legitimate expectations of the parties” weighed against granting summary judgment as the creation of a false identity tended to show that Defendant knew the activist would have fiduciary obligations to safeguard confidential information. Additionally, that the activist was given unrestricted access to Plaintiff’s office spaces indicated the trust placed in the activist.
§ 1.2.14 State Cases
Texas Reeves v. Harbor Am. Cent., Inc., No. 14-18-00594-CV, 2020 Tex. App. LEXIS 3533 (Tex. App. Apr. 28, 2020). William Reeves began working for Harbor America Central, Inc. (“Harbor America”) in 2006. Reeves resigned in 2016 to start a competing company, Harvest Works. Reeves sued Harbor America for breach of contract, alleging that Harbor America owed him over $1.6 million in commissions. Harbor America asserted counterclaims for misappropriation of trade secrets, breach of fiduciary duty, and breach of duty of loyalty, alleging that Reeves misused confidential information to develop Harvest Works, and that he solicited Harbor America’s customers in violation of Reeves’s obligations under his employment agreement with Harbor America. Reeves filed a motion to dismiss Harbor America’s counterclaims under the Texas Citizens Participation Act (“TCPA”), arguing that the counterclaims implicated his right of association. The lower court rejected Reeves’s motion, holding that the TCPA “categorically does not apply to non-compete, non-solicitation, or trade-secret claims.” The appellate court reversed, however, finding that Harbor America’s counterclaims allege conduct or communications implicating Reeves’s exercise of his right of association, such as soliciting Harbor America’s customers, converting Harbor America’s customer lists, and breaching his fiduciary duty by forming a competing business. The appellate court determined that Reeves’s conduct, and Harbor America’s corresponding counterclaims, “are based on, relate to, or are in response to Reeves’s endeavor with others [] to collectively express, promote, pursue, or defend a moon interest, the common interest being the competing business of Harvest Works.”
Additional Cases of Note
Plank v. Cherneski, 2020 Md. LEXIS 307, at *4 (Md. Ct. App. July 14, 2020) (under Maryland law, a breach of fiduciary duty may be actionable as an independent cause of action).
§ 1.3 Restrictive Covenants: Covenants Not to Compete
§ 1.3.1 United States Supreme Court
There were no qualifying decisions within the United States Supreme Court.
§ 1.3.2 First Circuit
Russomano v. Novo Nordisk Inc., 960 F.3d 48 (1st Cir. 2020). Court of Appeal affirmed the District Court’s conclusion that former employer was not likely to succeed on its claim for breach of noncompete provision and denied the former employer’s motion for temporary restraining order and preliminary injunction against plaintiff and his present employer because the one year non-compete agreement was triggered by company’s letter to employee eliminating his position and had expired long before he changed employers. The Court also concluded that the non-compete agreement was not reinstated when the former employer rehired the plaintiff in a new role after eliminating his earlier role because plaintiff was not required to sign a new non-compete agreement when he was rehired.
Additional Cases of Note
T.H. Glennon Co. v. Monday, No. 18-cv-30120-WGY, 2020 U.S. Dist. LEXIS 45917 (D. Mass. Mar. 17, 2020) (holding that a former employee who incorporated a business which sold products that were similar to the products sold by his employer was not in violation of a non-compete agreement because the employer effectively blocked the employee from actually carrying out his competitive plans by his timely request for a Temporary Restraining Order); Townsend Oil Co., Inc. v. Tuccinardi, 2020 Mass. Super. LEXIS 12, Nos. 144242, 1984CV04024-BLS2 (Jan. 13, 2020) (holding that employer was not entitled to preliminary injunction to enforce non-competition agreement against a former employee because the employer did not show that mailers with the former employee’s name on them constituted solicitation by the former employee, any economic loss to the employer from losing customers to the competitor as a result of the former employee’s new employment was not very large and was readily quantifiable, and the employer failed to show that the former employee took any customer lists or other confidential information with him, or that he has used or disclosed any of the employer’s confidential information); Genzyme Corp. v. Hanglin, 2019 Mass. Super. LEXIS 1202, *1-2, 2019 WL 7496271 (employer was not entitled to a preliminary injunction preventing a former employee from starting work for a competitor in breach of a noncompetition agreement because protection of the employer from ordinary competition was not a legitimate business interest, the employer did not show that the employee was in possession of or had access to confidential information or that enforcement of the agreement was necessary to protect the employer’s goodwill, and, given the employer’s inability to identify with any specificity the confidential information that the employee could exploit, the harm can hardly be said to be significant.)
§ 1.3.3 Second Circuit
Flatiron Health, Inc. v. Carson, 2020 U.S. Dist. LEXIS 48699 (S.D.N.Y. March 20, 2020) (unpublished). Plaintiff claimed that a former employee physician anticipatorily repudiated the terms of a noncompete agreement when he took a job at a competitor company and began working there immediately. Plaintiff sought a declaratory judgment and injunction, arguing that the agreement barred plaintiff from working for the competitor for one year. After a bench trial, the court denied the request. It found that the noncompete provision was unenforceable, since its blanket prohibition against engaging in business “similar to” plaintiff’s was impermissibly vague and overbroad. Additionally, the prohibition on working for a “competing business” encompassed entities with which plaintiff did not compete. Since the provision was unenforceable, defendant had not anticipatorily breached the agreement. The court later denied plaintiff’s motion for a temporary restraining order and injunction against defendant working for the competitor while the case was on appeal. Flatiron Health, Inc. v. Carson, 2020 U.S. Dist. LEXIS 58086 (S.D.N.Y. Apr. 1, 2020) (unpublished). [12]
Additional Cases of Note
Testing Servs., N.A. v. Pennisi, 2020 U.S. Dist. LEXIS 40476 (E.D.N.Y. March 9, 2020) (unpublished) (holding that a five-year noncompete clause was reasonable in the context of the sale of a business, especially since it was limited to two states and only prohibited activities directly performed by the prior business).
§ 1.3.4 Third Circuit
Cabela’s LLC v. Highby, 801 Fed. Appx. 48 (3rd Cir. (W.D. Pa.) 2020). Cabela’s appealed the district court’s order denying its motion for preliminary injunction, which sought to enjoin Matthew Highby, Molly Highby, and Highby Outdoors, LLC’s alleged violations of certain non-compete, non-solicitation, and confidentiality provisions in their agreements. The court affirmed the district court’s denial of preliminary injunction. The appellate court held that the district court correctly identified a conflict between Delaware’s fundamental policy in upholding the freedom of contract and Nebraska’s fundamental policy of not enforcing contracts that prohibit ordinary competition. Because the agreements were executed in Nebraska between Nebraska citizens, the alleged breaches occurred in Nebraska, and Cabela’s claims are partially based upon Nebraska law, Nebraska has materially greater interest in applying its laws to the agreements if the agreements prohibit ordinary competition. Further, the court held that the district court correctly determined that the agreements constrained ordinary competition because they prohibited the Highbys from using the general skills and training they acquired while they were employed at Cabela’s in any retail space selling hunting, fishing, and other outdoor products with a reach outside of Nebraska.
Because of the unenforceability of the non-compete provision, the nonsolicitation provision in the agreements was also void. The court held that the covenant and noncompetition provisions formed one integrated covenant not to compete that constituted an unenforceable restraint on trade under Nebraska law. Under Nebraska law, where multiple provisions in an agreement form one covenant not to compete, any void provision invalidates the remainder of the agreement. Thus, because Cabela’s failed to show a likelihood of success on the merits for its breach of contract claims, the court affirmed the district court’s denial of preliminary injunction.
Tilden Rec. Vehicles, Inc. v. Belair, 786 Fed. Appx. 335 (3rd Cir. (E.D. Pa.) 2019). When George Belair joined Tilden Recreational Vehicles, Inc. d/b/a/ Boat-N-RV Superstore (“BNRV”) as a sales representative, he signed an employment non-compete agreement stating he could not work in recreational vehicle sales within fifty miles of BNRV for a year after his employment. When Belair left BNRV for its competitor Chesaco, BNRV sued for breach of contract. The district court granted BNRV’s request for a preliminary injunction enforcing a modified, less-restrictive version of the agreement. The appellate court held that the district court did not abuse its discretion in concluding BNRV was entitled to preliminary relief. Because Belair received significant training specific to RV sales, including confidential information regarding BNRV’s pricing and sales strategies relative to competitors, BNRV showed it likely had several legitimate protectable interests in restraining Belair’s employment. However, the district court was required to consider a bond under Federal Rule of Civil Procedure 65(c) before issuing the preliminary injunction. Because the district court did not consider a bond, the appellate court is vacated the preliminary judgement, without disturbing the district court’s other holdings, remand with instructions to consider an appropriate bond should the district court reissue the preliminary injunction.
Additional Cases of Note
ADP, LLC v. Trueira, No. 18-cv-3666, 2019 U.S. LEXIS 181537 (D.N.J. Oct. 18, 2019) (granting preliminary injunction where the plaintiff and defendant were competitors, and such harm consists of potential misuse of confidential information, loss of business opportunities, and impairment of business goodwill); ADP, LLC v. Pittman, No. 19-cv-16237, 2019 U.S. Dist. LEXIS 181274 (D.N.J. Oct. 18, 2019) (enjoining former ADP employee Pittman from working at an competitor after finding her noncompete and nonsolicitation agreements with ADP were unduly burdensome because they prohibited her from participating “in any manner” with a competing business and “blue-penciling” the agreements to only prohibit solicitation of ADP’s actual clients, prospective clients the former employer learned of while at ADP, and competition within certain geographical limits); Ardurra Grp., Inc. v. Gerrity, No. 19-3238, 2019 U.S. Dist. LEXIS 211177 (E.D. Pa. Dec. 9, 2019) (granting preliminary injunction to enforce “worldwide” noncompete provisions in a purchase agreement and an employment agreement because the relevant geographic scope, where the acts complained of occurred, was reasonable) (applying Delaware law); Citizens Bank, N.A. v. Baker, No. 2:18-cv-00826-RJC, 2020 U.S. Dist. LEXIS 44845 (W.D. Pa. Mar. 16, 2020) (granting defendant’s motion to modify preliminary injunction enforcing noncompete agreement due to a “change in circumstances” where the contractual noncompete duration was 12 months but the injunction had been enforced for 17 months); Lvl Co. v. Atiyeh, No. 19-cv-3406, 2020 U.S. Dist. LEXIS 114282 (E.D. Pa. June 30, 2020) (granting preliminary injunction where a non-convenantor who benefits from the covenantor’s relationship with a competition business must abide by the same restrictive covenant agreed to by the covenantor under Pennsylvania law) (applying Pennsylvania law); Revzip, LLC v. McDonnel, No. 3:19-cv-191, 2019 U.S. Dist. LEXIS 225648 (W.D. Pa. Nov. 14, 2019) (issuing temporary restraining order to stop McDonnell, former owner and employee of Power House, from continuing to breach his noncompete and nondisclosure agreements by working for a competing sandwich); Yost v. Mid-West Hose & Specialty, Inc., No. 18-cv-311, 2019 U.S. Dist. LEXIS 164417 (W.D. Pa. Sept. 25, 2019) (denying a preliminary injunction where the alleged harm will occur only in the indefinite future and the plaintiff did not establish a likelihood of success where it did not show the existence of an enforceable agreement).
§ 1.3.5 Fourth Circuit
Software Pricing Partners, LLC v. Geisman, 2020 U.S. Dist. LEXIS 105310 (W.D.N.C. 2020) (unpublished). Software Pricing Partners, LLC (SPP) alleged that former member and manager, James Geisman, “misappropriated confidential information and trade secrets from SPP and used such information and trade secrets to solicit business in competition with SPP,” in breach of the Member Exit Agreement (MEA) he executed upon leaving SPP. In response to Geisman’s motion to dismiss, the court held the noncompete provision vastly overbroad and unenforceable as a matter of law where the geographic restriction at issue extended to any country where plaintiff “in the future does business or has a customer.” The court stated, “[e]ven if the Court could use its limited blue pencil authority to narrow the geographic restriction to the United States, the nationwide restriction coupled with the five-year time restriction would still be unreasonable.” The court further held that the noncompete provision was unenforceable since it was an unreasonably broad restriction on indirect ownership because it prohibited Geisman from “indirectly owning an interest in any non-public entity that engages directly or indirectly in providing products or services directly or indirectly related to” plaintiff’s line of business. Lastly, the court held the purported nondisclosure provision was more appropriately characterized as a noncompete provision and must be reasonable as to time and territory where it prevented “use or disclosure of all information related to SPP’s business, as well as all contacts and relationships related to SPP’s business—except in connection with performing services for SPP”.
Additional Cases of Note
Allegis Grp., Inc. v. Jordan, 951 F.3d 203, 209-11 (4th Cir. (Md.) (2020) (holding the customer and employee nonsolicitation and noncompete provisions in employer’s Incentive Investment Plan enforceable against employees who elected to participate in the Plan in exchange for 30 months of payments following separation from service because the relevant provisions were conditions precedent, not restrictive covenants subject to a reasonableness standard or forfeiture of benefits accrued during employment, “inasmuch as the Plan explicitly used words indicative of conditionality”); Lumber Liquidators, Inc. v. Cabinets To Go, LLC, 415 F. Supp. 3d 703, 716 (E.D. Va. 2019) (where there are restrictive covenants between two businesses as opposed to between employer and employee, both the Supreme Court of Virginia and the Fourth Circuit have made clear that courts should apply the less-restrictive Merriman factors: “restraint of trade will be held void as against public policy if it is [1] unreasonable as between the parties or [2] is injurious to the public”) (citations omitted).
§ 1.3.6 Fifth Circuit
Kamel v. Avenu Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391 (E.D. Tex. May 5, 2020) (unpublished). Avenu Insights & Analytics (“Avenu”) employed Ted Kamel as a client services manager interacting with Avenu’s Texas clients. In March 2018, Kamel ended his employment with Avenu and began working with Avenu’s competitor. Kamel brought a state action seeking declaratory judgment that his agreement with Avenue, which included non-disclosure, non-solicitation, and non-competition clauses, was unenforceable. The non-compete provision was for a period of twelve months following termination and limited the geographic area to thirteen named states. Avenu removed the case to district court and sought summary judgment that the agreement was enforceable. The district court first found that since Kamel only worked for Avenu in Texas serving Texas client, the thirteen state restriction was overbroad and unreasonable. The district court reformed the contract, holding the reasonable restriction would be to limit Kamel from competing with Avenu in Texas only. The district court then granted Avenu’s motion for summary judgment and found that under Texas law the non-compete agreement, as reformed, was valid and enforceable as it was ancillary to an otherwise enforceable agreement and was reasonably limited to be enforceable in Texas only.
Additional Cases of Note
Hydroprocessing Assocs., LLC v. McCarty, 2019 U.S. Dist. LEXIS 145108 (S.D. Miss. Aug. 23, 2019) (granting preliminary injunction to enforce non-compete clause against former employees, holding a 12–18 month non-compete/recruitment period limited to “covered client[s]” is reasonable and does not impose an undue hardship); Marquis Software Sols., Inc. v. Robb, 2020 U.S. Dist. LEXIS 33385 (N.D. Tex. Feb. 27, 2020) (granting a temporary restraining order to enforce non-compete clause against former employee – after reforming the non-compete clause to be reasonably limited to employee’s scope of activity for former employer); Realogy Holdings Corp. v. Jongebloed, 957 F.3d 523, 526 (5th Cir. 2020) (affirming district court entering a preliminary injunction to enforce on-compete agreement and its holding that the non-compete agreement was enforceable).
§ 1.3.7 Sixth Circuit
There were no qualifying decisions within the Sixth Circuit.
§ 1.3.8 Seventh Circuit
Oliver v. Isenberg, 2019 IL App (1st) 181551-U[13] (The Seventh Circuit held that restrictive covenants unreasonable and unenforceable, when it prevents shareholders from “working at any manufacturer’s representative company in any manner whatsoever” for a period of five years, and a court’s use of the “blue pencil doctrine” is discretionary.)
§ 1.3.9 Eighth Circuit
Key Outdoor, Inc. v. Briggs, 2020 U.S. Dist. LEXIS 143170 (S.D. Iowa 2020) (unpublished) (applying Illinois law as to breach of noncompete agreement claim). Briggs sold the outdoor advertising business that he had owned and operated to Key Outdoor, Inc. As part of that transaction, Briggs signed a noncompete agreement in which he promised to not engage in the outdoor advertising business for a period of 15 years in any of the counties where his prior business had done business. The noncompete agreement did not prevent Briggs from engaging in outdoor advertising business in other areas. Also as part of that transaction, Briggs began working as an employee of Key Outdoor. While an employee of Key Outdoor, Briggs started another outdoor advertising business, Motion Media. Motion Media provided outdoor advertising business services only in counties that were not covered by Briggs’s noncompete agreement, but the business was incorporated in and managed from counties that were covered by the noncompete agreement. Key Outdoor sued Briggs and Motion Meida on a number of theories, including breach of the duty of loyalty and breach of the noncompete agreement. The breach of noncompete agreement claim was based solely on the fact that Briggs incorporated Motion Media in, and managed it from, counties covered by the noncompete agreement (because Motion Media’s actual services were not provided in covered counties, those services were not the basis for the breach of noncompete agreement claim). Applying Illinois law, the court held that the noncompete agreement was unenforceable to the extent it barred Briggs from merely incorporating and managing an outdoor advertising business in any of the covered counties (where no actual services were provided in those covered counties). The court explained that Key Outdoor failed to show how that specific restriction would be necessary to protect its interest in goodwill, particularly given that the agreement permitted Briggs to conduct business in all non-covered counties with any customers (including Key Outdoor’s customers). The court thus granted summary judgment in favor of Briggs on Key Outdoor’s breach of noncompete agreement claim.[14]
Perficient, Inc. v. Munley, 2019 U.S. Dist. LEXIS 152026 (E.D. Mo. 2019) (unpublished). Munley had been an employee of Perficient, Inc. (Perficient), a digital transformation consulting firm specializing in the sale and implementation of customized third-party software, including Salesforce, among others. Munley had direct responsibility for Perficient’s Salesforce practice and five other business units, and he also served for a time as the acting general manager of the Salesforce practice. Munley executed multiple contracts with Perficient containing restrictive covenants, including a covenant not to work for a competing business or perform competitive duties for 24 months following his departure, a covenant not to use or disclose Perficient’s trade secrets or other proprietary information, and a covenant not to solicit Perficient’s clients or employees for a period of 12 or 24 months following his departure. Munley subsequently left Perficient and joined another company to oversee the operation of its pre-existing Salesforce business unit according to the new company’s proprietary internal processes and strategies. Perficient sued Munley and the new company on a number of theories, including breach of contract (for breach of each of the restrictive covenants to which Munley agreed) and trade secret misappropriation. As to the restrictive covenants not to compete, the court first recognized that employers have legitimate protectable interests in trade secrets and customer contacts. The court nevertheless found that the restriction against working for any competing business was broader than necessary to protect Perficient’s interests and was therefore unenforceable. The court emphasized that Perficient failed to show how performing work for the new company relating to products for which Perficient does not provide consulting services would implicate its protectable interests, and so the blanket prohibition of this covenant was unenforceable. However, the court found that the narrower covenant not to perform competing duties was enforceable because it related directly to the customers and trade secrets put at risk by Munley’s inside knowledge. Accordingly, the court granted an injunction enjoining Munley from performing services on behalf of the new company relating Salesforce products.[15]
Signature Style, Inc. v. Roseland, 2020 U.S. Dist. LEXIS 1098 (D. Neb. 2020) (unpublished). Roseland had been an employee of Signature Style, Inc. (Signature Style), which designs, manufactures, and sells championship and class rings nationwide. While an employee of Signature Style, and as a condition of his continued employment, Roseland signed a noncompete agreement in which he promised he would not set up his own competing business within 50 miles of any Signature Style location, for a period of 3 years. Roseland subsequently notified Signature Style that he would be resigning and starting his own jewelry design and sales business. Signature Style sued Roseland on a number of theories, including breach of the noncompete agreement. Roseland moved to dismiss, arguing that the noncompete provision was unenforceable as a matter of Nebraska law. The court agreed, holding that while an employer has a legitimate business interest in protection against a former employee’s competition by improper and unfair means, the employer is not entitled to protection against ordinary competition from a former employee. The court found that because the noncompete agreement did not merely restrict Roseland from unfairly competing by soliciting customers with whom he had actually done business while at Signature Style, but instead broadly restricted him from competing at all, it was unenforceable as a matter of law. The court thus granted Roseland’s motion to dismiss the breach of contract claim as to the noncompete provision.
Additional Cases of Note
CRST Expedited, Inc. v. TransAm Trucking, Inc., 960 F.3d 499 (8th Cir. (Iowa) 2020) (in context of intentional interference with a contract claim by one trucking company against competitor hiring the first company’s truck drivers, finding noncompete provision with a term of only the portion of a ten-month restrictive period that remained as of the employee’s departure to be short and reasonable and thus not void in violation of public policy); Farm Credit Servs. of Am., FLCA v. Mens, 456 F. Supp. 3d 1173 (D. Neb. 2020) (finding employee’s covenant not to compete was valid and enforceable because employer had protectable interest in customers that employee had brought with her upon joining employer)[16]; Goff v. Arthur J. Gallagher & Co., 2020 U.S. Dist. LEXIS 79437 (W.D. Ark. 2020) (unpublished) (finding, where the plaintiff had sold his business to the defendant and been retained as an employee of the defendant, that the plaintiff had failed to prove that a five-year, geographically-limited noncompetition provision he had entered into as part of sale and employment was unreasonable, invalid, and unenforceable); H&R Block Tax Servs., LLC v. Cardenas, 2020 U.S. Dist. LEXIS 36307 (W.D. Mo. 2020) (unpublished) (granting temporary restraining order and preliminary injunction against former franchisee based on violation of noncompete and nonsolicitation covenants, finding the covenants (which were for two-years and limited to the former franchise territory) appropriately protected legitimate interests and were appropriately narrow in both time and geographic reach); Parameter LLC v. Poole, 2019 U.S. Dist. LEXIS 211459 (E.D. Mo. 2019) (unpublished) (where the defendant former employee had signed agreements promising that for one year after termination he would not compete with plaintiff former employer or solicit its customers, but had then joined a competitor and solicited the plaintiff’s customers, granting preliminary injunction enjoining the defendant from (i) maintaining employment with the competitor in a capacity that would be competing and (ii) soliciting customers that he had solicited or contacted during final 12 months of prior employment); Sterling Computs. Corp. v. Fling, 2019 U.S. Dist. LEXIS 177168 (D.S.D. 2019) (unpublished) (granting temporary restraining order and preliminary injunction against former employee who breached agreement to not compete with former employer or solicit their clients for one year following termination of employment).
§ 1.3.10 Ninth Circuit
There were no qualifying decisions within the Ninth Circuit.
§ 1.3.11 Tenth Circuit
There were no qualifying decisions within the Tenth Circuit.
Additional Cases of Note
Biomin Am. V. Lesaffre Yeast Corp., 2020 U.S. Dist. LEXIS 54647 (D. Kan. 2020) (unpublished). (Denial of TRO seeking enforcement of individual defendant Bell’s noncompete provisions for failure to establish likelihood of success on breach of noncompete provision claim where plaintiff Biomin failed to show that the two entities were competitors. Where there was a seven-month delay between the time Bell left his employment with Biomin and when Biomin began investigating whether Bell was in violation of his noncompetition agreement; where Biomin voiced no objection to Bell accepting employment with Lesaffre; and where Bell even met with his replacement at Biomin while already employed at co-defendant Lesaffre Yeast to help the transition process, these facts suggested that Biomin did not view Lesaffre as a competitor and tipped the scales in Bell’s favor at this preliminary stage);[17]CGB Diversified Servs. v. Adams, 2020 U.S. Dist. LEXIS 45729 (D. Kan. 2020) (unpublished) (order denying plaintiff’s motion for expedited discovery in action alleging unlawful competition using proprietary trade secrets where motion not supported by objective factual submissions, but rather relied entirely on conclusory allegations); Email on Acid, LLC v. 250ok, Inc., 2020 US Dist. LEXIS 10301 (D. Colo. 2020) (unpublished) (denial of preliminary injunction where breach of noncompete clause was established but there was no evidence in the record of any past, current or future irreparable harm. “[T]he Court will not presume irreparable harm based solely on an alleged breach of a non-compete provision. Instead, the Court must find evidence in the record establishing irreparable harm resulting from such a breach”).
§ 1.3.12 Eleventh Circuit
There were no qualifying decisions within the Eleventh Circuit.
§ 1.3.13 D.C. Circuit
There were no qualifying decisions within the D.C. Circuit.
§ 1.3.14 State Cases
Arkansas Lamb & Assocs. Packaging, Inc. v. Best, 595 S.W.3d 378 (Ark. Ct. App. 2020). Best was employed as an officer manager for Lamb & Associates Packaging, Inc. (Lamb), a corrugated box converter. As a condition of his employment at Lamb, Best signed an agreement with noncompete, nondisclosure, and nonsolicitation provisions. Lamb discovered that, while employed at Lamb, Best had shared some of Lamb’s confidential information (including plans to add a new high-speed digital printer to its process) with his uncle, who had used the information to establish a new digital printing business for corrugated board that might work with competing corrugated box converters. Lamb terminated Best and sued him on a number of theories, including breach of his noncompete agreement. The court held that the noncompete provision was unenforceable and affirmed the lower court’s denial of injunctive relief. The court acknowledged (i) that the standard for an enforceable noncompete covenant includes that it be designed to defend an employer’s protectable business interest, and (ii) that protectable business interests include an employer’s trade secrets and other confidential business information. The court nevertheless held the noncompete provision at issue unenforceable on the grounds that Lamb did not have a protectable business interest in its confidential information, including because it did not take steps to prevent other employees with access to confidential information from using it to compete with Lamb post-employment. In particular, other employees with access to confidential information had not been required to enter into agreements like Best’s with noncompete, nondisclosure, and nonsolicitation provisions. The court additionally held the noncompete provision was unenforceable because the information at issue was readily ascertainable and thus not confidential, and so it could not be used by Best to gain an unfair competitive advantage.
lowa Cedar Valley Med. Specialists, PC v. Wright, 940 N.W. 2d 442 (Iowa Ct. App. 2019). Wright was a cardiothoracic surgeon who was an employee of Cedar Valley Medical Specialists (CVMS). His employment contract with CVMS included: (i) a noncompete provision in which he agreed that for two years following the end of his employment with CVMS, he would not engage in any business or practice related to medicine within 35 miles of Black Hawk County, Iowa; and (ii) a liquidated damages provision for any breach of the noncompete provision (in the amount of the greater of $100,000 or the amount of Wright’s compensation from CVMS during the final six months of his employment). Wright retired from CVMS on December 31, 2017 and began working full time for another hospital on January 1, 2017. CVMS sued for breach of the employment contract’s noncompete provision and sought to enforce the liquidated damages provision. Wright argued that the noncompete provision was unenforceable and prejudicial to the public interest and that the liquidated damages provision constituted an unenforceable penalty. The court disagreed and affirmed the lower court’s judgment in favor of CVMS against Wright. The court found the noncompete provision enforceable because (i) it was necessary to protect CVMS’s business because the Black Hawk County area could only support one cardiothoracic surgeon and Wright would be directly competing with any replacement surgeon CVMS hired, (ii) the terms of the noncompete (i.e., two years and 35 miles) were facially reasonable under Iowa law and not unduly restrictive as to time or area, and (iii) the restriction was not contrary to public policy because the record indicated there were only limited emergent surgeries in the area, community needs were being accommodated by hospitals in the wider area around the county, and CVMS was seeking only to enforce the liquidated damages provision rather than enjoining Wright from continuing to practice.[18]
Pennsylvania Rullex Co., LLC v. Tel-Stream, Inc., 232 A.3d 620 (Pa. 2020). Rullex sought a preliminary injunction to prevent Karnei from continuing to work for a competitor in alleged violation of a noncompete agreement (“NCA”) that Karnei signed at least two months after he began working for Rullex. The Superior Court panel and trial court held that because Karnei executed the NCA after commencing working for Rullex, it needed to be supported by new and valuable consideration, beyond mere continued work. The Supreme Court rejected the lower courts’ bright-line rule. Instead, it held that “for a restrictive covenant executed after the first day of employment to be enforceable absent new consideration, the parties must have agreed to its essential provisions as of the beginning of the employment relationship.” Because Karnei started working for Rullex before signing the NCA, and Rullex failed to prove the parties agreed to its substantive terms at the outset of Karnei’s employment, the NCA was not enforceable.
Additional Cases of Note
Andy-Oxy Co., Inc. v. Harris, 834 S.E.2d 195 (N.C. Ct. App. 2019) (finding that the noncompete covenant was overly broad because it effectually precluded the defendant from having any association with a business in the same field as the plaintiff, even future work distinct from his duties as an outside salesman; North Carolina’s ‘blue pencil’ rule allows a court to at most, choose not to enforce a distinctly separable part of a covenant and because the covenant was not distinctly separable, the entire covenant was rendered unenforceable)[19]; Special Servs. Bureau, Inc. v. Vollmerhausen, 2019 W. Va. LEXIS 401, at *4-5 (W.Va. 2019) (affirming the circuit court’s holding that the employee’s skills acquired during her employment – responding to calls, owning a cell phone, digital camera, and fax machine, attending all show cause, forfeiture, and any other hearings requiring attendance, requiring all persons on bond to call in on a monthly basis, ensuring payments were collected weekly for accounts that had premiums extended on credit, and ensuring that all bail contracts are completely filled out within a week – were of a general managerial nature, and therefore the restrictive covenant in her employment agreement would not be enforced because such skills and information are not protectable employer interests); Arvidson v. Buchar, 72 V.I. 50 (Super. Ct. 2019) (refusing to certify an interlocutory appeal because, even though the Virgin Islands Supreme Court has not yet ruled on the validity of covenants not to compete, the jurisprudence on covenants was largely consistent and thus there was not a substantial ground for difference in opinion with regard to the law); Zanella’s Wax Bar, LLC v. Trudy’s Wax Bar, LLC, 291 So. 3d 693, 699 (La. Ct. App. 2019) (holding a non-competition agreement, which purported to establish non-competition territory as 50-mile radius of any of plaintiff’s locations without identifying or defining the parishes or municipalities in which plaintiff had locations, was invalid and unenforceable under La. Rev. Stat. Ann. § 23:921).
§ 1.4 Customer and Employee Non-solicitation Agreements
§ 1.4.1 United States Supreme Court
There were no qualifying decisions within the United States Supreme Court.
§ 1.4.2 First Circuit
NuVasive, Inc. v. Day, 954 F.3d 439 (1st Cir. 2020). In Nuvasive, the court of appeals found that in issuing a preliminary injunction enforcing an employment contract’s non-solicitation clause, the lower court properly applied Delaware law under the employment contract’s choice of law provision because there was no basis for finding that the fundamental public policy exception to Massachusetts’ choice of law rules did not apply, such that the choice of law clause selecting Delaware law should not be given effect, since an employee’s voluntary decision to leave a job was not a qualifying change under Massachusetts’ material change doctrine.
§ 1.4.3 Second Circuit
There were no qualifying decisions within the Second Circuit.
Additional Cases of Note
Flatiron Health, Inc. v. Carson, 2020 U.S. Dist. LEXIS 48699 (S.D.N.Y. March 20, 2020) (unpublished) (declining to enforce nonsolicitation provision that made no distinction between customers defendant interacted with and those he did not).[20]
§ 1.4.4 Third Circuit
There were no qualifying decisions within the Third Circuit.
§ 1.4.5 Fourth Circuit
There were no qualifying decisions within the Fourth District.
Additional Cases of Note
ABC Phones of N.C., Inc. v. Yahyavi, 2020 U.S. Dist. LEXIS 59047, at *8 (E.D.N.C. 2020) (unpublished) (denying grant of preliminary injunction, holding the non-monetary harms alleged—loss of employees and employee morale—were “blanket assertions devoid of any justification for relief,” where “[w]ithout factual enhancement, it [was] not clear to the court that they [were] harms that once lost, are lost in perpetuity”); ABC Phones of N.C., Inc. v. Yahyavi, 2020 U.S. Dist. LEXIS 128867, at *16 (E.D.N.C. 2020) (unpublished) (denying defendant’s motion to dismiss, holding “the terms recruit, solicit, or induce, are not impermissibly vague by their plain meaning or as applied to the Agreement as a whole, because this clause applies only to employees, which is a clear, finite number of people”); Allegis Grp., Inc. v. Jordan, 951 F.3d 203, 209-11 (4th Cir. (Md.) 2020) (holding that the customer and employee nonsolicitation provisions in employer’s Incentive Investment Plan were not subject to a reasonableness standard since the provisions were conditions precedent for payment to employees who elected to participate in the Plan following separation of service)[21]; GMS Indus. Supply v. G&S Supply, LLC, 441 F. Supp. 3d 221, 227-28 (E.D.V. 2020) (rejecting the magistrate judge’s report and recommendation concluding that enforcing the employee nonsolicitation clause would require “blue penciling”, impermissible under Virginia law, because although the unenforceable customer nonsolicitation clause and supplier non-disclosure clauses were in the same paragraph, the employee nonsolicitation clause could instead be “severed” and construed independently since they were “separate clauses that impose distinct duties”); GMS Indus. Supply v. G&S Supply, LLC, 441 F. Supp. 3d 221, 230-31 (E.D.V. 2020) (holding that the customer nonsolicitation clause was overbroad and unenforceable because it prohibited soliciting a customer or prospective customer to “refrain from establishing or expanding a relationship with the Company” which the court said could be interpreted to prohibit “soliciting a company to purchase goods that do not even compete with [the plaintiff]’s products”); inVentiv Health Consulting, Inc. v. French, 2020 U.S. Dist. LEXIS 24352, at *14 (E.D.N.C. 2020) (unpublished) (limiting discovery of the identities of the defendant’s employer’s employees to those who were once employed by the plaintiff, reasoning that the identities of any of the employees who were never plaintiff’s employees are likely not relevant to plaintiff’s claims for breach of the nonsolicitation provision of the employment agreement); Software Pricing Partners, LLC v. Geisman, 2020 U.S. Dist. LEXIS 105310, at *21 (W.D.N.C. 2020) (unpublished) (holding the nonsolicitation provision at issue unreasonable because it went so far as to prohibit defendant from soliciting any person with whom plaintiff may potentially do business)[22].
§ 1.4.6 Fifth Circuit
Brock Serv., L.L.C. v. Rogillio, 936 F.3d 290 (E.D. Tex. Feb. 21, 2020). Richard Rogillio began working for Brock Services, L.L.C. (“Brock”) in 2010. When he joined, Rogillio signed an Employment and Non-Competition Agreement (“Agreement”), requiring that he not solicit Brock employees or compete with Brock within a “Restricted Area.” The Agreement defined the “Restricted Area” as a “100 mile radius of any actual, future or prospective customer, supplier, licensor, or business location of the Company,” and listed specific “parishes” that fell under the provision. The Agreement also contained a “severability provision,” saving the Agreement should a court find any part of the Agreement invalid. Rogillio resigned from Brock in 2018, and went to work for a direct competitor. As part of his new employment, Rogillio was assigned to manage employees in some of the parishes listed in the “Restricted Area,” and met with Brock customers in some of the listed parishes. Brock sued Rogillio for violating his employment agreement’s non-compete provision, and requested a preliminary injunction. In response, Brock argued that the Agreement was overbroad because it was not limited to specified parishes and municipalities, as required by Louisiana law. The lower court reformed the Agreement to only list the specified parishes, and granted the preliminary injunction. The appellate court affirmed, holding that the lower court properly reformed the overboard provisions. The appellate court rejected Rogillio’s argument, finding that the trial court did not err when it excised “the offending language.” The resulting Agreement was valid because it “specified particular parishes and the municipality of New Orleans. The court concluded that the lower court’s reformation “served only to narrow the provision’s scope by removing catch-all clauses that went beyond the listed parishes.” Rogillio knew that he could be prohibited from working in the identified parishes when he signed the Agreement, and therefore the injunction was proper.
Zywave, Inc. v. Cates, 2020 U.S. Dist. LEXIS 44082 (E.D. Tex. Feb. 21, 2020). Justin Cates was a sales representative for Zywave, Inc. (“Zywave”), and supervised a number of employees as part of his role with the company. At the outset of his employment, Cates signed a Non-Solicit and Non-Compete Agreement (“Agreement”). Cates resigned in August 2017, and joined ThinkHR Corporation. Zywave sued Cates and ThinkHR, alleging that Cates recruited Zywave employees to work with ThinkHR, and alleged that ThinkHR tortuously interfered with the Non-Solicit and Non-Compete Agreement between Cates and Zywave. With respect to the tortious interference allegation, ThinkHR admitted that it intentionally interfered with the Agreement, but asserted the defense of “justification” and “good faith,” claiming that it discussed the Agreement with their legal counsel before recruiting then-Zywave employees. However, when asked to produce evidence of such communications with its legal counsel, ThinkHR stated that no written legal opinion exists in support of its defense, and that it would not disclose the name of the attorney that it allegedly consulted regarding the Agreement. Because ThinkHR could not, or would not, produce evidence of its “good faith and honest assertion of a right,” the court found that it was liable for tortious interference of the Agreement.
§ 1.4.7 Sixth Circuit
There were no qualifying decisions within the Sixth Circuit.
§ 1.4.8 Seventh Circuit
There were no qualifying decisions within the Seventh Circuit.
§ 1.4.9 Eighth Circuit
Beef Prods., Inc. v. Hesse, 2019 U.S. Dist. LEXIS 197236 (D.S.D. 2019) (unpublished). Hesse was an employee of Beef Products, where he served as head of sales and oversaw a fourteen-person sales group for more than a decade. In connection with transitioning from full time employment to on-call employment with Beef Products, Hesse signed an agreement with Beef Products that included a nonsolicitation provision in which Hesse promised that for one year following his on-call employment, he would not directly or indirectly solicit for employment any Beef Products employee with whom he had personal contact in the prior twelve months. Hesse then began working for another company and solicited several of Beef Products’ sales employees to work at that new company. When Beef Products sued Hesse on a number of theories, including breach of contract, Hesse counterclaimed and, inter alia, requested a declaratory judgment that the nonsolicitation provision was per se unenforceable. The court held that the nonsolicitation provision was enforceable because it was not a general restraint on trade, as it only prohibited Hesse from soliciting Beef Products’ employees. The court emphasized that it did not (i) restrain Hesse from exercising a lawful profession, trade, or business; (ii) restrain Hesse generally from recruiting personnel for his new company in any manner except as to the small group of employees at Beef Products that Hesse willingly agreed to not solicit; or (iii) restrain the new company from recruiting personnel from Beef Products, so long as Hesse was not involved in such recruitment. Thus, the court denied Hesse’s request for declaratory judgment.
Farm Credit Servs. of Am., FLCA v. Mens, 456 F. Supp. 3d 1173 (D. Neb. 2020). Mens was hired as a crop insurance agent by Farm Credit Services of America, FLCA (Farm Credit). Prior to being hired by Farm Credit, Mens had sold crop insurance for more than a decade and had developed business relationships with many customers through her personal contacts and community connections. When Mens joined Farm Credit, approximately 50 of her existing customers followed her, transferring their business to Farm Credit. During her employment at Farm Credit, Mens entered into an agreement with Farm Credit in which she agreed that for a period of two years following the end of her employment, she would not seek or accept employment with or solicit the business of or sell to any of the Farm Credit customers with whom Mens did business or had contact while employed at Farm Credit. Mens subsequently left Farm Credit and joined a competitor selling the same or similar products within the same geographic area. Upon learning of her move to the competitor, some of Mens’s 50 prior existing customers who had previously followed her to Farm Credit now followed her to her new employer, insisting that she continue to serve as their crop insurance agent. Farm Credit sued Mens and sought an injunction. Mens argued that the restrictive covenant agreement she had signed was unenforceable because Farm Credit had no legitimate interest in the customers that she had developed prior to working for Farm Credit. The court disagreed, holding that notwithstanding her prior relationships with the customers, once Mens joined Farm Credit and the customers transferred their business to Farm Credit, those customers were new business for Farm Credit and Mens’s work with them was for the sole benefit of Farm Credit, such that Farm Credit had a protectable interest in those transferred customers.
Additional Cases of Note
Farm Credit Servs. of Am., FLCA v. Tifft, 2019 U.S. Dist. LEXIS 234158 (D. Neb. 2019) (unpublished) (finding nonsolicitation provision restricting employee, for period of two years following termination, from soliciting customers with whom she worked was enforceable because two-year period was reasonable under the circumstances to protect the employer’s interest in maintaining its customer relationships and goodwill, the restriction was not unduly harsh and oppressive (even though it lacked a geographic limitation, because it was limited to customers with whom employee actually worked), and the restriction was not injurious the public interest); H&R Block Tax Servs., LLC v. Cardenas, 2020 U.S. Dist. LEXIS 36307 (W.D. Mo. 2020) (unpublished) (granting temporary restraining order and preliminary injunction against former franchisee based on violation of noncompete and nonsolicitation covenants, finding the covenants (which were for two years and limited to the former franchise territory) appropriately protected legitimate interests and were appropriately narrow in both time and geographic reach); Kistco Co. v. Patriot Crane & Rigging, LLC, 2019 U.S. Dist. LEXIS 198759 (D. Neb. 2019) (unpublished) (granting in part preliminary injunction against former employee who had agreed to restrictive covenant prohibiting, for one year following termination, solicitation or service of former employer’s custom but who had joined a competitor and proceeded to service former employer’s customers); Parameter LLC v. Poole, 2019 U.S. Dist. LEXIS 211459 (E.D. Mo. 2019) (unpublished) (where the defendant former employee had signed agreements promising that for one year after termination he would not compete with plaintiff former employer or solicit its customers, but had then joined a competitor and solicited the plaintiff’s customers, granting preliminary injunction enjoining the defendant from (i) maintaining employment with the competitor in a capacity that would be competing and (ii) soliciting customers that he had solicited or contacted during final 12 months of prior employment).
§ 1.4.10 Ninth Circuit
There were no qualifying decisions within the Ninth Circuit.
§ 1.4.11 Tenth Circuit
There were no qualifying decisions within the Tenth Circuit.
Additional Cases of Note
Biomin Am. V. Lesaffre Yeast Corp., 2020 U.S. Dist. LEXIS 54647 (D. Kan. 2020) (unpublished). (Denial of TRO to enforce nonsolicitation of customer provision in employment contract where insufficient evidence that plaintiff Biomin and defendant Lesaffre Yeast were competing entities, particularly where plaintiff’s submitted affidavits were based entirely on hearsay. Defendant’s counter-affidavits were based on personal knowledge, and the court therefore afforded those more weight and reliability than the evidence submitted by plaintiff. On balance, the court found that Biomin did not meet its burden of demonstrating a likelihood of success on its claim for breach of the customer nonsolicitation provision, because the record also established that the alleged “solicited” employee first resigned from her position at Biomin, and then she subsequently contacted co-defendant Bell inquiring about employment opportunities at Lesaffre (and not the other way around).)[23]
§ 1.4.12 Eleventh Circuit
There were no qualifying decisions within the Eleventh Circuit.
§ 1.4.13 D.C. Circuit
There were no qualifying decisions within the D.C. Circuit.
§ 1.4.14 State Cases
Indiana Heraeus Med., LLC v. Zimmer, Inc., 135 N.E.3d 150 (Ind. 2019). After being promoted to a director role, Zimmer employee Kolbe signed a nonsolicitation agreement with the relevant term stating “employee will not employ, solicit for employment, or advise any other person or entity to employ or solicit for employment, any individual employed by company.” (emphasis in original). The agreement also contained a reformation clause, allowing the court to modify unenforceable provisions. Zimmer was the then-exclusive distributor for Heraeus. Heraeus created an affiliate company, Heraeus Medical, which Kolbe began working at and filled some positions with former Zimmer employees. When The Indiana Supreme Court was tasked with determining whether the court of appeals properly modified the agreement under the “blue pencil doctrine” when it added language modifying the scope to only “those employees in which [Zimmer] has a legitimate protectable interest.” The Supreme Court held that the “blue pencil doctrine” may only act as “an eraser—providing that reviewing courts may delete, but not add, language to revise unreasonable restrictive covenants. And parties to noncompetition agreements cannot use a reformation clause to contract around this principle.” Otherwise, reformation clauses may promote employers to create unenforceable agreements.
Additional Cases of Note
Andy-Oxy Co., Inc. v. Harris, 834 S.E.2d 195 (N.C. Ct. App. 2019) (holding that the nonsolicitation covenant was unenforceable because it was overly broad and did not protect a legitimate business interest because it vaguely referred to all of the plaintiff’s customers within the restricted area without any limitations in scope to customers with whom the defendant had material contact during his employment and position);[24]SourceOne Grp., LLC v. Ray Gage & Myers & Gage, Inc., 138 N.E.3d 994 (Ind. Ct. App. 2019) (unpublished) (finding nonsolicitation agreement with a term of 30 months enforceable and not overly broad when defendant had access to plaintiff’s entire book of business, “customer” was reasonably defined and limited to only those during defendant’s tenure, and defendant’s position gave him “a unique competitive advantage”).
§ 1.5 Misappropriation of Trade Secrets
§ 1.5.1 United States Supreme Court
There were no qualifying decisions within the United States Supreme Court.
§ 1.5.2 First Circuit
There were no qualifying decisions within the First Circuit.
Additional Cases of Note
Allstate Ins. Co. v. Fougere, No. 16-11652-JGD, 2019 U.S. Dist. LEXIS 168577 (D. Mass. Sept. 30, 2019) (unreported) (Defendants were liable for misappropriating customer information pursuant to the Defend Trade Secrets Act of 2016, in part, because their employment agreement stipulated that the information was confidential and belonged to Allstate Ins. Co.); Viken Detection Corp. v. Videray Techs., Inc., No. 19-10614-NMG, 2020 U.S. Dist. LEXIS 2138 (D. Mass. Jan. 7, 2020) (unpublished) (Plaintiff sufficiently pled trade secret misappropriation by alleging a former director of engineering started his own company with undisclosed product development information).
§ 1.5.3 Second Circuit
Capricorn Mgmt. Sys. v. Gov’t Emples. Ins. Co., 2020 U.S. Dist. LEXIS 45301 (E.D.N.Y. March 16, 2020) (unpublished). Plaintiff agreed to provide medical bill review software designed specifically for defendant. Plaintiff sent source code to defendant and otherwise provided the services for approximately six years before defendant implemented a new claims management platform utilizing software from another company. Plaintiff alleged that this new software and system had been designed and developed using plaintiff’s operations and technology and brought claims for misappropriation of trade secrets and confidential information under the federal Defend Trade Secrets Act and the Maryland Uniform Trade Secrets Act. The court affirmed a magistrate judge’s grant of summary judgement for defendants on those counts, finding that the “modules and methods” of plaintiff’s software were not a trade secret. Plaintiff simply listed the functions of the software and failed to present evidence of how they functioned together in a unique way. Furthermore, the software’s functionality was dictated by defendant and its proprietary business requirements. Finally, plaintiff did not redact its copyright filings regarding the software, which “vitiates a trade secret claim.”
KCG Holdings, Inc. v. Khandekar, 2020 U.S. Dist. LEXIS 44298 (S.D.N.Y. March 12, 2020) (unpublished). A financial services firm brought trade secret and other claims after defendant—a quantitative analyst for plaintiff—viewed and copied market “predictors” created by fellow analysts while he was applying for a job at a competitor. There was no dispute that the predictors were trade secrets that defendant was told not to view. However, defendant claimed that he did not improperly “use” the trade secrets, since he viewed the predictors only to improve his own personal knowledge and work for plaintiff. The court disagreed, holding that “reviewing another’s trade secrets to develop one’s personal knowledge constitutes use, and therefore misappropriation—even if that review is ostensibly for the trade secret owner’s benefit.” In reaching this decision, the court looked at the language of the statute, the Restatement (Third) of Unfair Competition, and case law, all of which supported that the defendant “used” a trade secret, even if it was for his own benefit and to develop his own knowledge and expertise. The court acknowledged that the case “touches on the outer reaches of the definition of ‘use’” under federal and New York trade secret law, but the definition was meant to be broad.
Parchem Trading, Ltd. v. DePersia, 2020 U.S. Dist. LEXIS 25970 (S.D.N.Y. Feb. 14, 2020) (unpublished). Defendant was a former sales employee of plaintiff. Shortly before her departure, she sought from plaintiff a list of historical sales by product to Bristol-Myers Squibb. She did not return the list prior to her departure. Upon her departure, a contact from Bristol-Meyers Squibb wrote to her on LinkedIn, “You can’t leave Parchem! This is unacceptable.” In response, defendant wrote, in part, “It was an absolute pleasure working with you. I will be starting at Charkit in Newark, CT on May 9th. Please contact me if there is anything I can help with . . . and hope to talk soon.” Plaintiff alleged that defendant revealed proprietary information in that meeting and later diverted sales from plaintiff to defendant’s company. The court disagreed and granted summary judgment to defendant. Defendant had not signed a noncompete or nonsolicitation agreement with plaintiff and was free to pursue the meeting with Bristol-Meyers Squibb. Even assuming that the purchase history list constitutes a trade secret, there was no evidence defendant misappropriated the list. Nothing in the LinkedIn exchange implicated the use of any trade secret, and “the record demonstrates none of the unlikely-to-be-coincidental circumstances that typically create the possibility of such reasonable inferences.”
Additional Cases of Note
Iacovacci v. Brevet Holdings, LLC, 437 F. Supp. 3d 367 (S.D.N.Y. 2020) (explaining that while the Defend Trade Secrets Act only applies to acts of misappropriation occurring on or after its enactment in May 2016, counterclaim defendants specifically alleged that the unlawful activity continued until plaintiff’s termination in October 2016, and they did not have to specify exactly what unlawful activity he committed post-May 2016 to survive a motion to dismiss); Kraus USA, Inc. v. Magarik, 2020 U.S. Dist. LEXIS 83481 (S.D.N.Y. May 12, 2020) (unpublished) (holding that plaintiff’s conversion claim could proceed, since the trade secrets plaintiff alleged defendant converted—technical product specifications, information on upcoming designs, sales data, e-commerce know-how and data, customer lists, vendor relationships, the identity of contractual counterparties, and internal cost structure and operating expenses—“were stored on the computer but likely shared in some tangible, documentary form”); Pauwels v. Deloitte LLP, 2020 U.S. Dist. LEXIS 28736 (S.D.N.Y. Feb. 19, 2020) (unpublished) (granting motion to dismiss misappropriation of trade secrets claim where the only steps plaintiff took to maintain secrecy of his financial model were to initial “most” of the spreadsheets, and he did not otherwise mark them as confidential or have an agreement with defendants to keep them secret); Smart Team Global, LLC v. HumbleTech, LLC, 2020 U.S. Dist. LEXIS 95452 (S.D.N.Y. June 1, 2020) (unpublished) (applying Virginia law) (holding that plaintiff’s common law claims were not preempted by the Virginia Uniform Trade Secrets Act, since plaintiff’s unfair competition, breach of loyalty, tortious interference, and unjust enrichment claims were not premised entirely on the alleged misappropriation of trade secrets).
§ 1.5.4 Third Circuit
Advanced Fluid Sys. v. Huber, 958 F.3d 168 (3rd Cir. (Pa.) 2020). Huber worked for Advanced Fluid Systems (“AFS”), a company that distributes, manufactures, and installs hydraulic components and hydraulic systems. In 2009, AFS entered into a three-year contract with the Virginia Commonwealth Space Flight Authority (the “Space Flight Authority”) to build, install, and maintain a hydraulic system for the NASA rocket launch facility on Wallops Island, Virginia. AFS supplied Space Flight Authority with a package of confidential engineering drawings. In 2012, Space Flight Authority was acquired by Orbital. AFS did not execute a non-disclosure agreement with Orbital, but Orbital maintained a practice of only disclosing AFS’s drawings on a need-to-know basis. During this time, Huber began sending various confidential AFS internal documents and engineering drawings to Livingston. At issue was whether AFS, by virtue of its Agreement with the Space Flight Authority—a contract that explicitly designates the confidential information at issue in this case as the Space Flight Authority’s “exclusive property”—can maintain a trade secret misappropriation claim under Pennsylvania law.
The court held that lawful possession of a trade secret can be sufficient to maintain a misappropriation claim, even absent ownership. In other words, it is the secret aspect of the knowledge that provides value to the person having the knowledge. While the information forming the basis of a trade secret can be transferred, as with personal property, its continuing secrecy provides the value, and any general disclosure destroys the value. Further, the court held that ownership of a trade secret—or any intellectual property for that matter—undoubtedly imbues the owners with the authority to give other lawful possession, including by merely consenting to that possession. Such possessory rights were given to AFS, even if a full ownership interest was not. The course of conduct is evidence because it shows that AFS clearly had permission to hold and use the secrets. While Space Flight Authority did not contractually bind itself to preserve confidentiality of AFS’s designed, it nevertheless believed it had such an obligation and conducted itself in a manner consistent with that belief.
PPG Indus. v. Jiangsu Tie Mao Glass Co., No. 2:15-cv-00965, 2020 U.S. Dist. LEXIS 55687 (W.D. Pa. 2020). In February 2015, PPG Industries, Inc. (“PPG”) learned that one its former employees stole and then sold multi-million-dollar trade secrets to Jiangsu Tie Mao Glass Company (“TMG”), a Chinese competitor of PPG. PPG learned that TMG engaged in a years-long effort to obtain its proprietary information from the former employee in exchange for tens of thousands of dollars funneled to the employee via a TMG representative’s bank account. The Federal Bureau of Investigation (“FBI”) arrested the former PPG employee. PPG moves for default judgment on its trade secrets misappropriation claim. Defendant moves to set aside the default. Defendants’ motion to set aside default is based entirely on the argument that the court lacks personal jurisdiction over all three defendants. PPG provided evidence to establish the court’s personal jurisdiction over all three defendants. The Third Circuit’s usual standard for assessing a motion to set aside a default requires the Court to examine three factors. However, when the default is void, the court need not invoke the three factors. Instead, when the entry of default is void, it would be legal error for the court to deny defendant’s motion to set it aside. Because defendants do not make any arguments under the three-prong test, the court denied the defendants’ motion because it determined it had personal jurisdiction, and thus the default judgment was not void.
The court further granted a permanent injunction to protect against defendants’ use or threatened use of the misappropriated trade secrets. The court found that there was an Erie doctrine problem, but determined that permanent injunctions were substantive law, which would be governed by state law. Thus, the court applied Pennsylvania law to determine whether a permanent injunction should be granted. In order to obtain a permanent injunction, the plaintiff must show: (1) the existence of a trade secret; (2) the communication of the trade secret pursuant to a confidential relationship; (3) the use or threatened use of the trade secret in violation of that confidence; and (4) harm. The court found the PPG established each of these four parts, and granted a permanent injunction.
Additional Cases of Note
Revzip, LLC v. McDonnell, No. 3:19-cv-191, 2019 U.S. Dist. LEXIS 211836 (W.D. Pa. Dec. 9, 2019) (denying preliminary injunction where the plaintiff did not establish that the balance of equities favored granting a preliminary injunction because there was no evidence that restraining competition by the defendants would prevent plaintiff’s alleged harm stemming from disclosure of trade secrets); Schuylkill Valley Sports, Inc. v. Corporate Images Co., No. 5:20-cv-02332, 2020 U.S. LEXIS 103828 (E.D. Pa. June 15, 2020) (holding that the plaintiff was not entitled to a preliminary injunction for trade secret misappropriation where it had not shown that the customer list that it alleged was a trade secret was ever used or disclosed where the only evidence presented was two emails sent by the two former employees with the customer list to their personal emails).
§ 1.5.5 Fourth Circuit
There were no qualifying decisions within the Fourth District.
Additional Cases of Note
Albert S. Smyth Co. v. Motes, 2020 U.S. Dist. LEXIS 138631, at *8-12 (D. Md. 2020) (unpublished) (holding plaintiff employer, Smyth, failed to produce sufficient evidence to support a Dropbox account containing “49 folders, 603 subfolders, 4.8 gigabytes of data, and 10,323 files which together represented virtually all of the business records of the Smyth entities” met the definition of a trade secret (except for the customer lists), where plaintiff failed to produce any documents found in the 49 folders that allegedly contained trade secrets and merely provided the names of the folders which “offer[ed] limited insight into their contents”); Id.at *14 (holding that mere retention of access to the plaintiff’s customer lists in violation of the plaintiff’s document policy did not alone amount to misappropriation within the meaning of the DTSA and the MUTSA); Brightview Grp., LP v. Teeters, 441 F. Supp. 3d 115, at 130-31 (D. Md. 2020) (finding the plaintiff was likely to succeed in showing that “the confidentiality policy contained in its handbook, coupled with its restriction of access to the underwritings to approximately three percent of all Brightview employees,” constituted reasonable security measures to protect its underwritings as trade secrets, even though defendants argued it did not require its employees to sign employment agreements or covenants, or that employees could copy underwritings onto a personal storage device); Id. at 137-38 (stating that although the Second Circuit’s holding in Faiveley Transp. Malmo AB v. Wabtec Corp., 559 F.3d 110, 118 (2d Cir. 2009), aligns it with other courts that employ a rebuttable presumption of irreparable harm in trade secret misappropriation cases, “[w]hile the Fourth Circuit has not affirmatively staked a position on this precise issue, it appears to require an individualized analysis of irreparable harm on a case-by-case basis”); Md. Physician’s Edge, LLC v. Behram, 2019 U.S. Dist. LEXIS 163536, at *15-16 (D. Md. 2019) (unpublished) (denying defendant’s motion for summary judgment because misappropriation of trade secrets can occur if the employee knows or has reason to know that he or she acquired them by improper means; the expiration of a nonsolicitation agreement does not constitute the expiration of a party’s obligation not to misappropriate trade secrets).
§ 1.5.6 Fifth Circuit
There were no qualifying decisions within the Fifth Circuit.
Additional Cases of Note
Cajun Servs. Unlimited, LLC v. Benton Energy Serv. Co., 2020 U.S. Dist. LEXIS 11247 (E.D. La. Jan. 23, 2020) (granting injunction against defendant from further misappropriating plaintiff’s trade secrets after jury verdict found defendant had misappropriated plaintiff’s trade secrets under both the Defend Trade Secrets Act and the Louisiana Uniform Trade Secrets Act); Comput. Scis. Corp. v. Tata Consultancy Servs., 2020 U.S. Dist. LEXIS 51594 (N.D. Tex. Feb. 7, 2020) (granting in part defendant’s motion to dismiss plaintiff’s state law claims for unfair competition as preempted by the Texas Uniform Trade Secrets Act but denying defendant’s motion under the Defend Trade Secrets Act, finding plaintiff had pled sufficient facts to state a plausible claim for relief); Keurig Dr Pepper Inc. v. Chenier, 2019 U.S. Dist. LEXIS 142649 (E.D. Tex. Aug. 22, 2019) (granting temporary restraining order from any party using or disclosing plaintiff’s trade secret information and ordering the return of all files, documents, and devices containing plaintiff’s trade secrets).
§ 1.5.7 Sixth Circuit
There were no qualifying decisions within the Sixth Circuit.
§ 1.5.8 Seventh Circuit
Motorola Sols. v. Hytera Communs. Corp., 436 F. Supp. 3d 1150 (N.D. Ill. 2020). Plaintiff Motorola alleged that defendant Hytera stole several of its employees in Malaysia, who then stole documents containing trade secrets, and then developed an almost identical radio to plaintiff’s, and sold it in the United States. The trial court went through an extensive legal analysis to determine whether the Defend Trade Secrets Act of 2016 (DTSA) and the Illinois Trade Secret Act (ITSA) applied extraterritorially in a private cause of action. The court analyzed the DTSA in context with its neighboring statute, 18 U.S.C. § 1837, and determined that if either prong of section 1837 is met, then the statute could apply extraterritorially in a civil context. Defendants met prong two, because they committed “an act in furtherance of the offense” in the United States. However, the court found that the ITSA did not “clearly express an intent by the legislature for extraterritorial reach” because the language relating to “geographical limitation” related to the “analysis of the reasonableness of restrictive covenants.”
§ 1.5.9 Eighth Circuit
Cambria Co. LLC v. Schumann, 2020 U.S. Dist. LEXIS 11373 (D. Minn. 2020) (unpublished). Schumann was an employee of Cambria Company LLC (Cambria), a quartz surface manufacturer. Cambria considered its recipes and manufacturing processes for making quartz surfaces, including modifications to the machines used in manufacturing quartz surfaces, to be proprietary, confidential, and trade secrets. Because Cambria believed Schumann’s role exposed him to its secret information, it had him sign a confidentiality agreement and a two-year noncompete agreement. Schumann resigned in December 2017 and went to work for a wood products manufacturer for the two-year duration of his noncompete agreement. Schumann then joined a competing quartz surface manufacturer. Cambria requested assurances from Schumann and the competitor that Schumann would not violate his confidentiality agreement. The competitor assured Cambria it was hiring Schumann for his general knowledge and expertise and that he could perform his job duties without violating the confidentiality agreement; it further offered to instruct Schumann that it did not want to receive any confidential information or trade secrets in breach of any obligation to Cambria. The competitor had Schumann sign an agreement to that effect. Cambria nevertheless sued Schumann and the competitor on a number of theories, including trade secret misappropriation, arguing Schumann would inevitably breach the confidentiality agreement. Cambria moved for a preliminary injunction to enjoin Schumann from working at the competitor while the case proceeded. The court denied the injunction.
While accepting the proposition that Cambria had trade secrets, the court nevertheless found that Cambria had failed to identify them with sufficient specificity for the court to fashion an injunction. The court emphasized as to this point that Cambria’s definition of the trade secrets at issue was a shifting target, and that the requirement of sufficiently identifying the trade secrets at issue was particularly important here because there was no allegation that Schumann had taken anything with him or behaved inappropriately when he left Cambria. Next, the court found that Cambria did not establish a likelihood of success on its “inevitable disclosure” theory of misappropriation. The court noted that Minnesota courts and the Eighth Circuit have neither accepted nor rejected the “inevitable disclosure” doctrine. It then assumed, without deciding, that the doctrine could be applied in the correct case, but then held that this was not such a case. The court explained that the burden is higher under the “inevitable disclosure doctrine,” requiring demonstrating a high probability of inevitable disclosure, and that the evidence and assertions Cambria proffered, which were contradicted and/or undermined by other evidence proffered by the defendants, failed to satisfy this heightened burden.
Perficient, Inc. v. Munley, 2019 U.S. Dist. LEXIS 152026 (E.D. Mo. 2019) (unpublished). Munley had been an employee of Perficient, Inc. (Perficient), a digital transformation consulting firm specializing in the sale and implementation of customized third-party software, including Salesforce, among others. Munley had direct responsibility for Perficient’s Salesforce practice and five other business units, and he also served for a time as the acting general manager of the Salesforce practice. Munley executed multiple contracts with Perficient containing restrictive covenants, including a covenant not to work for a competing business or perform competitive duties for 24 months following his departure, a covenant not to use or disclose Perficient’s trade secrets or other proprietary information, and a covenant not to solicit Perficient’s clients or employees for a period of 12 or 24 months following his departure. Munley subsequently left Perficient and joined another company to oversee the operation of its pre-existing Salesforce business unit according to the new company’s proprietary internal processes and strategies. Perficient sued Munley and the new company on a number of theories, including breach of contract (for breach of each of the restrictive covenants to which Munley agreed) and trade secret misappropriation. As to the trade secret misappropriation claim, the court noted the absence of evidence of specific trade secrets Munley might have misappropriated other than information he included in an email to Perficient’s CEO and CFO proposing a business deal between Perficient and the new company. As to the information in that email, though, the court found that Munley used that information without Perficient’s consent and that Munley’s use of the information to broker a deal demonstrated that it has value to both companies. The court nevertheless found no evidence of damages caused by the email, as it was sent only to Perficient (the owner of the trade secret information) and was not shared with anyone else. The court thus concluded that Perficient could not succeed on its trade secret misappropriation claims.[25]
Smithfield Packaged Meats Sales Corp. v. Dietz & Watson, Inc., 2020 U.S. Dist. LEXIS 109309 (S.D. Iowa 2020) (unpublished). Dietz & Watson, Inc. (Dietz), a seller of packaged deli products, hired Conrad, a former employee of Smithfield Packaged Meats Sales Corp. (Smithfield), another seller of packaged deli products, as part of Dietz’s effort to build a Midwest sales team and increase its Midwest sales. Smithfield sued Dietz and Conrad on a number of theories, including trade secret misappropriation, and moved for a preliminary injunction on its trade secret misappropriation claims. Smithfield identified the terms of its customer program agreements as the trade secret at issue. At Smithfield, Conrad had served as Deli Sales Director for the central and southern regions of the United States, and in that position he had negotiated and supervised the performance of many of Smithfield’s programs with customers and was responsible for managing client relationships and training retail customers on deli industry knowledge. Around the time Conrad left Smithfield to join Dietz, he downloaded various files from his Smithfield laptop to a USB drive and retained approximately 1,300 pages of hard copy documents. The documents included information about Smithfield’s customer program terms. The court found that the customer program terms were trade secrets. It found they had independent economic value and were not generally known or readily accessible. It further found that they were the subject of reasonable efforts to maintain their secrecy, because while Smithfield did not require most of its customers to sign confidentiality agreements, it took other reasonable steps to protect the confidentiality of its program terms. The court further found that Smithfield had presented compelling evidence of threatened misappropriation, including based on Conrad’s actions prior to leaving Smithfield and the fact that Dietz appeared to be targeting Smithfield’s largest customers after hiring Conrad. The court thus found a likelihood of success and granted a preliminary injunction.
Additional Cases of Note
Yant Testing, Supply & Equip. Co. v. Lakner, 2020 U.S. Dist. LEXIS 38005 (D. Neb. 2020) (unpublished) (finding likelihood of success on the merits and granting preliminary injunction as to trade secret misappropriation claim, finding that customer list with not just client names but also private and direct email addresses, preferences, equipment costs, bid information, pricing information, and other financial information was protectable trade secret).
§ 1.5.10 Ninth Circuit
There were no qualifying decisions within the Ninth Circuit.
§ 1.5.11 Tenth Circuit
There were no qualifying decisions within the Tenth Circuit.
Additional Cases of Note
Aaron v. Rowell, 2019 U.S. Dist. LEXIS 179467 (D. Colo. 2019) (unpublished) (denial of defendant’s summary judgment motion as to misappropriation of trade secrets claim brought under the Defend Trade Secrets Act (DTSA) and the Colorado Uniform Trade Secrets Act (CUTSA) where plaintiff’s evidence in opposition thereto raised enough of a factual dispute as to whether defendant disclosed the existence of proprietary deal);[26]Atlas Biologicals Inc. v. Kutrubes, 2019 U.S. Dist. LEXIS 161501 (D. Colo. 2019) (unpublished) (After five-day bench trial, trial court found in favor of plaintiff (a bovine serum-based product producer) against former employee for claim for misappropriation of trade secrets under CUTSA);[27]ATS Grp., LLC v. Legacy Tank & Indus. Servs., LLC, 407 F.Supp.3d 1186 (W.D. Okla. 2019) (order granting 12(b)(6) motion to dismiss plaintiff’s federal and state law claims for misappropriation of trade secrets arising under both DTSA and the Oklahoma Uniform Trade Secrets Act (OUTSA) where plaintiff did not sufficiently allege that the information designated as trade secrets “derived independent economic value” from remaining confidential);[28]Biomin Am. v. Lesaffre Yeast Corp., 2020 U.S. Dist. LEXIS 54647 (D. Kan. 2020) (unpublished) (denial of TRO where plaintiff set forth no facts or evidence showing defendants used its trade secrets or confidential information in soliciting customers, and where plaintiff did not identify any specific trade secret or other confidential information allegedly used);[29]Biomin Am. v. Lesaffre Yeast Corp., 2020 U.S. Dist. LEXIS 93197 (D. Kan. 2020) (unpublished) (dismissal of claim brought under DTSA where complaint was devoid of factual allegations and relied primarily on legal conclusions, and therefore could not plausibly state a claim under DTSA against any defendant. The court further declined to exercise supplemental jurisdiction over remaining state law claims where DTSA claim provided only anchor for federal jurisdiction); CGB Diversified Servs.v. Adams, 2020 U.S. Dist. LEXIS 64132 (D. Kan. 2020) (unpublished) (order granting 12(b)(6) motion to dismiss claim for misappropriation of trade secrets under DTSA where allegations in complaint at most alleged that defendant had access to trade secrets as part of his employment, that he accessed that information, and that he went to work for a competitor. The court declined to infer any wrongdoing from those facts alone, noting that doing so “would throw the plausibility standard out the window.” The court further declined to exercise supplemental jurisdiction over plaintiff’s remaining state law claims for misappropriation of trade secrets under Kansas Uniform Trade Secrets Act (KUTSA) and breach of fiduciary duties where DTSA claim provided only anchor for federal jurisdiction); CGB Diversified Servs.v. Forsyth, 2020 U.S. Dist. LEXIS 84013 (D. Kan. 2020) (unpublished) (plaintiff agriculture and crop insurance underwriter alleged facts sufficient to defeat 12(b)(6) motion to dismiss claims for misappropriation of trade secrets under DTSA and KUTSA where complaint alleged that defendant used or provided to a third party confidential customer lists and information, types and levels of crop insurance coverage and insurance policy numbers. Plaintiff further sufficiently alleged that its trade secrets “derive independent economic value” by remaining confidential by expressly pleading that the secrecy of its confidential and proprietary information provides it a competitive advantage); Cypress Advisors, Inc. v. Davis, 2019 U.S. Dist. LEXIS 223518 (D. Colo. 2019) (unpublished) (denial of defendant’s summary judgment motion on plaintiff’s cause of action for misappropriation of trade secrets under CUTSA where triable issue existed as to whether security over database was sufficient to be considered a trade secret) (applying Colorado law); DTC Energy Grp., Inc. v. Hirschfeld, 420 F. Supp.3d 1163 (D. Colo. 2019) (motion to dismiss claim for misappropriation of trade secrets under DTSA and CUTSA granted as to HR employee where allegations of soliciting customers did not require any use of identified “trade secrets,” and also granted as to corporate officer defendants where allegations at most showed that defendants knew that their rival company would attempt to compete for plaintiff’s business, not steal its trade secrets. Motion to dismiss denied as to fourth defendant where complaint sufficiently alleged that he obtained confidential financial information and a Profit Calculator, and knew or had reason to know that the disclosure of trade secrets violated co-defendants’ duty of loyalty to plaintiff, sufficient to state a claim under both DTSA and CUTSA);[30]Franchising v. Richter, 2020 U.S. Dist. LEXIS 113018 (D.N.M. 2020) (unpublished) (granting in part and denying in part defendant’s motion to compel discovery requests tailored at producing and identifying the proprietary information allegedly misappropriated by defendant); Freebird Communs., Inc. v. Roberts, 2019 U.S. Dist. LEXIS 196668 (D. Kan. 2019) (unpublished) (order granting summary judgment in favor of defendants on misappropriation of trade secrets claims brought under DTSA and KUTSA where plaintiffs’s opposition failed to produce any evidence showing any “reasonable measures” to maintain the information’s secrecy and where plaintiffs admitted they could not identify specific names, contact information, or specific documents that were allegedly misappropriated);[31]Genscape, Inc. v. Live Power Intelligence Co. NA, LLC, 2019 U.S. Dist. LEXIS 151735 (D. Colo. 2019) (unpublished) (order granting plaintiff’s motion to restrict in part access to plaintiff’s notice of identification of representative trade secrets in action asserting claims of violations under DTSA, CUTSA and Kentucky Uniform Trade Secrets Act, where sufficient argument was made that granting defendant party access to the restricted information (as opposed to their counsel as provided under the protective order) would cause competitive injury to Plaintiff); M.M.A. Design, LLC v. Capella Space Corp., 2020 U.S. Dist. LEXIS 26963 (D. Colo. 2020) (unpublished) (refusal of district court to exercise supplemental jurisdiction over defendant’s state law counterclaims where inadequate showing that the counterclaims derived from the same “nucleus” of operative facts as plaintiff’s direct claims sounding in misappropriation of trade secrets and common-law unfair competition.)
§ 1.5.12 Eleventh Circuit
There were no qualifying decisions within the Eleventh Circuit.
§ 1.5.13 D.C. Circuit
There were no qualifying decisions within the D.C. Circuit.
§ 1.5.14 State Cases
Gaskamp v. WSP USA, Inc., 596 S.W.3d 457 (Tex. App. 2020) (en banc). WSP USA (“WSP”) sued former employees related to their alleged misappropriation of WSP’s trade secrets. Trial court denied defendants’ motion to dismiss under the Texas Citizens’ Participation Act (“TCPA”) alleging the suit related to the defendants’ exercise of free speech. The court of appeals affirmed, holding communications between defendants through which they allegedly misappropriated and used WSP’s trade secrets are not protected under the TCPA. The court of appeals noted a split in case law regarding whether TCPA’s right of association protecting “common interest” applies to communications between, and to the sole benefit of, the alleged tortfeasors. The court held that the state legislature’s 2019 amendment of the TCPA elected to limit the scope of “common interest” to matters of public concern. Therefore the alleged conduct, communications solely between the five defendants, did not relate to matters of public concern and was not protected under the TCPA.
Additional Cases of Note
Johnston v. Vincent, 2020 La. App. LEXIS 769, 19-55 (La. App. 3 Cir May 20, 2020) (reversing trial court’s judgment granting involuntary dismissal, holding that the record established that the defendant was aware of the continued use of plaintiff’s trade secrets; did not stop that use; and continued to financially benefit); SciGrip, Inc. v. Osae, 373 N.C. 409, 420-22 (N.C. February 28, 2020) (upholding the trial court’s use of the lex loci test in the misappropriation of trade secrets context, which applies the substantive law of the state “where the injury or harm was sustained or suffered,” rather than the most significant relationship test which applies a totality of the circumstances test to determine the state that has the most significant relationship to the claim).
§ 1.6 Damages
§ 1.6.1 United States Supreme Court
There were no qualifying decisions within the United States Supreme Court.
§ 1.6.2 First Circuit
There were no qualifying decisions within the First Circuit.
§ 1.6.3 Second Circuit
There were no qualifying decisions within the Second Circuit.
§ 1.6.4 Third Circuit
There were no qualifying decisions within the Third Circuit.
Additional Cases of Note
Revzip, LLC v. McDonnel, No. 3:19-cv-191, 2019 U.S. Dist. LEXIS 225648 (W.D. Pa. Nov. 14, 2019) (issuing temporary restraining order to stop McDonnell, former owner and employee of Power House, from disclosing or using any of Power House’s trade secrets in violation of his nondisclosure agreement, including secret recipes and customer information to a competing sandwich shop).[32]
§ 1.6.5 Fourth Circuit
There were no qualifying decisions within the Fourth District.
Additional Cases of Note
Movement Mortg., LLC v. Franklin First Fin., Ltd., 2019 U.S. Dist. LEXIS 166766, at *10-11 (W.D.N.C. 2019) (applying North Carolina and Florida law) (holding that the plaintiff is entitled to $1,142,431.00 in lost profit damages for proving damages with reasonable certainty by: 1) submitting profit and loss data for the region over which its former employee was a market leader during his employment and the twelve-month time period during which he was prohibited from soliciting employees, customers, and referral sources; and 2) an affidavit from the employee’s manager, detailing the previous year’s and expected Net Income Before Taxes (NIBT) for the employee’s region where the manager avers that he would have expected the NIBT to either remain the same or increase if its former employee and his team had not left to work at the defendant’s company).
§ 1.6.6 Fifth Circuit
There were no qualifying decisions within the Fifth Circuit.
Additional Cases of Note
StoneCoat of Tex., LLC v. Proposal Stone Design, LLC, 426 F. Supp. 3d 311 (E.D. Tex. Sept. 12, 2019) (holding that plaintiff was not entitled to damages because it did not retain an expert on economic damages) (“Estimation of damages should not be based on sheer speculation. If too few facts exist to permit the trier of fact to calculate proper damages, then a reasonable remedy in law is unavailable.”).
§ 1.6.7 Sixth Circuit
There were no qualifying decisions within the Sixth Circuit.
§ 1.6.8 Seventh Circuit
Indeck Energy Servs. v. DePodesta, 2019 IL App (2d) 190043[33] (the Seventh Circuit ruled that the trial court did not err in denying disgorgement of defendant corporate officer’s management fees earned after resignation from plaintiff company or a constructive trust on profits because “their breaches…ended with their employment” with plaintiff company, and any future profits were “speculative at best”); NuVasive Clinical Servs. v. Neuromonitoring Assocs., LLC, No. 18 C 4304, 2020 U.S. Dist. LEXIS 64996 (N.D. Ill. Apr. 14, 2020) (when defendants hired plaintiff’s former employees via a staffing agency, in violation of a settlement agreement that prohibited them from hiring any employees employed by plaintiff for a one-year period, the trial court held the proper remedy was attorneys’ fees and for defendant to 1) cease employment of any former employee if their employment was continuous, and 2) bar any employee from working after March 11, 2020 for the same amount of time that employee worked prior to March 11, 2020).
§ 1.6.9 Eighth Circuit
There were no qualifying decisions within the Eighth Circuit.
§ 1.6.10 Ninth Circuit
There were no qualifying decisions within the Ninth Circuit.
§ 1.6.11 Tenth Circuit
There were no qualifying decisions within the Tenth Circuit.
Additional Cases of Note
Atlas Biologicals Inc. v. Kutrubes, 2019 U.S. Dist. LEXIS 161501 (D. Colo. 2019) (unpublished). (Award of $1,363,893.62 plus attorney’s fees found for plaintiff in connection with claim for misappropriation of trade secrets under CUTSA after five-day bench trial. Amount did not reflect compensatory damages as they were found duplicative of the actual damages awarded in connection with its claim under the Lanham Act for trademark infringement, but included award of $681,946.81 for unjust enrichment and an additional $681,946.81 in exemplary damages in light of evidence of defendant’s “willful and wanton disregard” of plaintiff’s rights. Award of $30,618.09 in damages awarded to plaintiff in connection with “breach of fiduciary duty” claim, which reflected the amount of compensation plaintiff paid defendant during time period of fiduciary breach.)[34]
§ 1.6.12 Eleventh Circuit
There were no qualifying decisions within the Eleventh Circuit.
§ 1.6.13 D.C. Circuit
There were no qualifying decisions within the D.C. Circuit.
§ 1.6.14 State Cases
Indiana Am. Consulting, Inc. v. Hannum Wagle & Cline Eng’g, Inc., 136 N.E.3d 208 (Ind. 2019) (holding liquidated damages provisions in several employees’ nonsolicitation agreements were actually intended to punish the breaching employees by making them pay more than their actual salaries, or were not tied to actual losses, but instead tied to a percentage of the prior year’s revenue, or were variable depending on which employee breached).
lowa Cedar Valley Med. Specialists, PC v. Wright, 940 N.W. 2d 442 (Iowa Ct. App. 2019). Wright was a cardiothoracic surgeon who was an employee of Cedar Valley Medical Specialists (CVMS). His employment contract with CVMS included: (i) a noncompete provision in which he agreed that for two years following the end of his employment with CVMS, he would not engage in any business or practice related to medicine within 35 miles of Black Hawk County, Iowa; and (ii) a liquidated damages provision for any breach of the noncompete provision (in the amount of the greater of $100,000 or the amount of Wright’s compensation from CVMS during the final six months of his employment). Wright retired from CVMS on December 31, 2016 and began working full time for another hospital on January 1, 2017. CVMS sued for breach of the employment contract’s noncompete provision and sought to enforce the liquidated damages provision. Wright argued that the noncompete provision was unenforceable and prejudicial to the public interest and that the liquidated damages provision constituted an unenforceable penalty. The court disagreed and affirmed the lower court’s judgment in favor of CVMS against Wright. The court found the liquidated damages provision was not an unenforceable penalty because it was reasonable as it did not exceed the anticipated losses from Wright’s breach of the noncompete and because Wright is an intelligent and sophisticated surgeon who negotiated the terms of his employment with the liquidated damages in mind.[35]
Wisconsin Sanimax LLC v. Blue Honey Bio-Fuels, Inc., 945 N.W.2d 366 (Wis. Ct. App. 2020) (affirming award of attorney fees to defendants, under Wis. Stat. § 134.90(4)(c), under the Uniform Trade Secrets Act (UTSA), when 1) plaintiff’s claims were “objectively specious” because customer lists in the grease collection industry are not trade secrets when they contain names and collector’s internal pricing, and 2) there is subjective bad faith when “it is basically retribution” because the employer is mad and has no evidence of misappropriation).
Additional Cases of Note
Prime Communs., L.P. v. Spring Bus. Solutions, 202 Tex. Dist. LEXIS 2346 (Tex. 400th Jud. Dist. Mar. 25, 2020) (granting temporary restraining order and enjoining former employees from disclosing or making use of Prime’s confidential, proprietary, and trade secret information to assist or benefit any competitor of Prime, including but not limited to recruiting and hiring employees and offering products and services to customers) (“The Court is of the opinion that . . . Prime will suffer irreparable and immediate harm unless the Agreement between Prime and [former employee] is enforced and Defendants are enjoined from soliciting for employment individuals bound by noncompetition agreements with Prime and misappropriating Prime’s trade secrets. Specifically, Prime will suffer immediate and irreparable harm to its business, its reputation, and its ability to compete.”).
[1]See, e.g.,Smash Franchise Partners, LLC v. Kanda Holdings, Inc., No. 2020-0302-JTL, 2020 Del. Ch. LEXIS 263 (Ch. Aug. 13, 2020) (finding no trade secret protection for information disclosed on Zoom calls where a company “freely gave out Zoom information for [its calls],” “used the same Zoom meeting code for all of its meetings,” and “did not require that participants enter a password and did not use the waiting room feature to screen participants”); API Ams., Inc. v. Miller, 380 F. Supp. 3d 1141, 1149-50 (D. Kan. 2019) (finding that an employer took reasonable efforts to protect its trade secrets despite a remote working arrangement, because it required employees to sign confidentiality agreements and provided a network address, which “obivat[ed] any need to transmit messages and documents containing [the employer’s] trade secret information to [the employee’s] personal account).
[2]See e.g.AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., 28 Cal. App. 5th 923 (2018) (questioning the “continuing viability” of precedent allowing for reasonable employee non-solicitation agreements, given the clearly “settled legislative policy in favor of open competition and employee mobility”).
[3]See, e.g., Cabela’s v. Highby, 801 Fed. Appx. 48 (3d Cir. Apr. 14, 2020) (holding that a Delaware choice-of-law provision was unenforceable because the agreement was negotiated in Nebraska between Nebraska citizens, and the alleged breaches occurred in Nebraska, and thus, Nebraska had the “materially greater interest” in the litigation.).
[4]See Section 1.6.8 for a summary of the court’s ruling on the issue of remedies.
[5]See Section 1.3.8 for a summary of the court’s ruling on the issue of the restrictive covenant.
[6]See Section 1.3.9 for a summary of the court’s ruling on the issue of the noncompetition provision.
[7]See Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim.
[8]See Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim and Section 1.6 for a summary of the court’s assessment of damages.
[9]See Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim.
[10]See Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim.
[11]See Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim.
[12] See Section 1.4.3 for a summary of the court’s ruling on the issue of the customer nonsolicitation provision.
[13]See Section 1.2.8 for summary of the court’s ruling on the issue of fiduciary duty.
[14]See Section 1.2.9 for a summary of the court’s ruling on the issue of the duty of loyalty.
[15]See Section 1.5.9 for a summary of the court’s ruling on the issue of trade secret misappropriation.
[16]See Section 1.4.9 for a summary of the court’s ruling on the restrictive covenant, which included a prohibition against soliciting customers.
[17]See Section 1.4 for a summary of the court’s ruling on the issue of employee nonsolicitation claim, and Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim.
[18]See Section 1.6.14 for a summary of the court’s ruling on the issue of the liquidated damages provision.
[19]See Section 1.4.14 for a summary of the court’s ruling on the issue of Customer and Employee Nonsolicitation Agreements.
[20] See Section 1.3.3 for a summary of the court’s ruling on the issue of the noncompete provision.
[21]See Section 1.3.5 for an additional case of note on the issue of Covenants Not to Compete.
[22]See Section 1.3.5 for a summary of the court’s ruling on the issue of Covenants Not to Compete.
[23]See Section 1.3 for a summary of the court’s ruling on the issue of noncompete covenants and Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets claim.
[24]See Section 1.3.14 for the court’s ruling on the issue of Covenants Not to Compete.
[25]See Section 1.3.9 for a summary of the court’s ruling on the issue of the noncompetition restrictive covenants.
[26]See Section 1.2 for a summary of the court’s ruling on the issue of breach of duty of loyalty claim.
[27]See Section 1.2 for a summary of the court’s ruling on the issue of breach of fiduciary duty and Section 1.6 for a summary of the court’s assessment of damages.
[28]See Section 1.2 for a summary of the court’s ruling on the issue of breach of fiduciary duty claim.
[29]See Section 1.3 for a summary of the court’s ruling on the issue of noncompete covenants and Section 1.4 for a summary of the court’s ruling on the issue of employee nonsolicitation claim.
[30]See Section 1.2 for a summary of the court’s ruling on the issue of breach of loyalty claim.
[31]See Section 1.2 for a summary of the court’s ruling on the issue of breach of fiduciary duty claim.
[32]See Section 1.3.4 for a summary of the court’s ruling on the issue of covenants not to compete.
[33]See section 1.2.8 for the court’s ruling on defendant’s breach of fiduciary duty.
[34]See Section 1.2 for a summary of the court’s ruling on the issue of breach of fiduciary duty and Section 1.5 for a summary of the court’s ruling on the issue of misappropriation of trade secrets.
[35]See Section 1.3.14 for a summary of the court’s ruling on the issue of the noncompete provision.
Creation of a Federal Database of Beneficial Ownership Information
Regulation of Applicants Instead of Formation Agents
Reporting Company, Defined
Beneficial Owner, Defined
The Corporate Transparency Act Included in the NDAA
What is a Reporting Company?
What Information Must be Reported?
Who is a Beneficial Owner?
When Must Beneficial Ownership Information be Reported?
To Whom is Beneficial Ownership Information Available?
What are the Penalties for Violating the Corporate Transparency Act?
Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act
Reporting Companies
-Other Similar Entity that is Created by the Filing of a Document with a Secretary of State or Similar Office
-Exemption for Entities Owned or Controlled by One or More Exempt Entities
Identification of Beneficial Owners
-Substantial Control
-25% of the Ownership Interest
-Treatment of Creditors
Who is an Applicant?
Conclusion
The Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) and includes the Corporate Transparency Act, became law effective with Congress’ override on January 1, 2021 of former President Trump’s veto of the NDAA.[2] The Corporate Transparency Act requires certain business entities (each defined as a “reporting company”) to file, in the absence of an exemption, information on their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury (“Treasury”). The information will not be publicly available, but FinCEN is authorized to disclose the information:
to U.S. federal law enforcement agencies,
with court approval, to certain other enforcement agencies,
to non-U.S. law enforcement agencies, prosecutors or judges based upon a request of a U.S. federal law enforcement agency, and
with consent of the reporting company, to financial institutions and their regulators.
The Corporate Transparency Act represents the culmination of more than a decade of congressional efforts to implement beneficial ownership reporting for business entities. When fully implemented in 2023, it will create a database of beneficial ownership information within FinCEN. The purpose of the database is to provide the resources to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.”[3] Prior to the implementation of the Corporate Transparency Act, the burden of collecting beneficial ownership information fell on financial institutions, which are required to identify and verify beneficial owners through the Bank Secrecy Act’s customer due diligence requirements.[4] The Corporate Transparency Act will shift the collection burden from financial institutions to the reporting companies and will impose stringent penalties for willful non-compliance and unauthorized disclosures.
The Secretary of the Treasury is required to prescribe regulations under the Corporate Transparency Act by January 1, 2022 (one year after the date of enactment). It is expected that any implementing regulations will be promulgated by FinCEN pursuant to a delegation of authority from the Secretary of the Treasury. The effective date of those regulations will govern the timing for filing reports under the Corporate Transparency Act.[5]
This article describes the proposed federal legislation that evolved into the Corporate Transparency Act, summarizes the terms of the Corporate Transparency Act, and discusses points that should be considered in prescribing the regulations under the Corporate Transparency Act.
Background
Legislative proposals relating to the reporting of beneficial ownership information for entities have a lengthy history. In June 2006, the Financial Action Task Force (“FATF”)[6] issued a report that criticized the United States for failing to comply with a FATF standard on the need to collect beneficial ownership information and urged the United States to correct this deficiency by July 2008.[7] In May 2008, Senators Levin, Coleman and Obama introduced the Incorporation Transparency and Law Enforcement Assistance Act in response to this criticism.[8] The stated purpose of the bill was to “ensure that persons who form corporations in the United States disclose the beneficial owners of those corporations, in order to prevent wrongdoers from exploiting United States corporations for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations, and for other purposes.”[9] The Incorporation Transparency and Law Enforcement Assistance Act would have amended the Homeland Security Act of 2002 to require those forming business entities to document, verify, and make available to law enforcement authorities the record of beneficial ownership of those business entities, putting the burden of collecting the information on the states and regulating the “formation agents”[10] of business entities, including subjecting formation agents to anti-money laundering obligations. Congress never acted upon the Incorporation Transparency and Law Enforcement Assistance Act.
In the decade that followed, criticism of the lack of beneficial ownership reporting continued[11] and various versions of proposed federal legislation providing for the reporting of beneficial ownership information were introduced in Congress, including:
The Closing Loopholes Against Money-Laundering Practices (“CLAMP”) Act,[12] introduced in 2016 by Senators Carper, Coons[13] and Heller, which would have amended the Internal Revenue Code to require that every “United States entity” obtain an employer identification number, or EIN, and to submit IRS Form SS-4, which would have included the name of a “responsible party” within the business, and would have made that information available to federal law enforcement agencies for use in anti-money laundering and counterterrorism prosecutions and investigations. No action was taken with respect to the CLAMP Act.
The Counter Terrorism and Illicit Finance Act,[14] which would have required corporations and limited liability companies, and many of their lawyers, to submit extensive information about the companies’ beneficial owners to FinCEN and which would have required FinCEN to disclose the information to other federal and foreign governmental agencies and financial institutions upon request. A version of the Counter Terrorism and Illicit Finance Act, which lacked the beneficial ownership requirement, was referred to the House Financial Services Committee, but no further action was taken.
The True Incorporation Transparency for Law Enforcement (“TITLE”) Act,[15] introduced in 2017 by Senators Whitehouse, Feinstein and Grassley, which would have required businesses and their lawyers to gather and maintain beneficial ownership information on new corporations and limited liability companies and would have made the information available to Federal law enforcement authorities. No action was taken with respect to the TITLE Act.
The Corporate Transparency Act (2017),[16] which was introduced by Representatives Maloney, King, Waters, Royce and Moore in the House and Senators Wyden and Rubio in the Senate, similarly would have required businesses and their lawyers to gather and maintain beneficial ownership information on new corporations and limited liability companies and would have made the information available to Federal law enforcement authorities. No action was taken with respect to the Corporate Transparency Act (2017).[17]
During the same period, while proposed federal legislation was introduced but never acted upon, other efforts were implemented to collect beneficial ownership information to carry out the purposes of the Bank Secrecy Act. Specifically, in May 2016, FinCEN issued the FinCEN CDD Requirements, with compliance required in May 2018. The FinCEN CDD Requirements require covered financial institutions (banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities) to collect identification information for the identity of beneficial owners[18] of legal entity customers when a new account is opened. In addition, the FinCEN CDD Requirements require covered financial institutions to maintain records of the beneficial ownership information obtained. Around the same time, beginning in July 2016, FinCEN issued the first of its “geographic targeting orders,” which required title insurance companies to collect and report beneficial ownership information[19] of entities purchasing residential real property in identified markets (including New York City, Southern Florida, California, Honolulu, Las Vegas, Seattle, Boston, Chicago, Dallas and San Antonio) if the purchase was made without a bank loan or other similar form of external financing.[20]
The Corporate Transparency Act of 2019
In May 2019, Representative Maloney introduced the Corporate Transparency Act of 2019 (the “2019 Transparency Proposal”),[21] which formed the basis for the Corporate Transparency Act that has now become law as part of the NDAA. The 2019 Transparency Proposal differed in a number of significant ways from previously introduced federal legislation providing for the collection of beneficial ownership information. Those differences are summarized below.
Creation of a Federal Database of Beneficial Ownership Information
Significantly, the 2019 Transparency Proposal for the first time contemplated that all beneficial ownership information reports would be filed with FinCEN. Previously, proposed federal legislation (including the Corporate Transparency Act (2017)) had focused on state “formation systems” as the principal repository for beneficial ownership information and put the burden of collecting beneficial ownership information and making it available to parties entitled to have access on the states. In fact, the 2008 Incorporation Transparency and Law Enforcement Assistance Act required states receiving federal funding under the Homeland Security Act of 2002 to establish compliant formation systems. Under that template, information would only have been reported to FinCEN by an entity if the state of formation did not have a compliant formation system.[22] In considering proposed federal legislation contemplating reliance on state formation systems, many states indicated that their reporting systems were not designed to collect the beneficial ownership information contemplated and that they lacked enforcement resources to pursue delinquent and deficient reporting. The 2019 Transparency Proposal removed the primary responsibility for collecting beneficial ownership information from the states and introduced the federal database for beneficial ownership information that has been implemented by the NDAA.[23]
Regulation of Applicants Instead of Formation Agents
Prior to the introduction of the 2019 Transparency Proposal, proposed federal legislation regarding beneficial ownership information reporting (including the Corporate Transparency Act (2017)) had provided for the regulation of formation agents. The Corporate Transparency Act (2017) defined a formation agent as “a person who, for compensation, (A) acts on behalf of another person to assist in the formation of a corporation or limited liability company under the laws of a State; or (B) purchases, sells, or transfers the public records that form a corporation or a limited liability company.”[24] This legislation would have required persons who assisted in the formation process, including lawyers and filing agents, to report their clients’ beneficial ownership information and to be classified as financial institutions under the Bank Secrecy Act with the consequent obligation to file suspicious activity reports against their clients. The 2019 Transparency Proposal did not refer to formation agents and instead defined an applicant as “any natural person who files an application to form a corporation or limited liability company under the laws of a State or Indian Tribe.”[25] A reporting company was required to include information (full legal name, date of birth, residential or business street address and unique identifying number from an acceptable source, such as a passport, driver’s license or other government issued identifying number) regarding its applicant in its report to FinCEN, but the applicant did not have specific obligations under the 2019 Transparency Proposal aside from being permitted to file an exempt entity report on behalf of the reporting company.
Reporting Company, Defined
The two most significant definitions in the 2019 Transparency Proposal were the definitions of “reporting company” and “beneficial owner,” both of which had continued to evolve from the formulations in previously proposed federal legislation. Consistent with previously proposed federal legislation, the 2019 Transparency Proposal required reporting of beneficial ownership information with respect to corporations and limited liability companies,[26] with those terms having the meanings given to those terms under the laws of the applicable states.[27] But, in the 2019 Transparency Proposal, those terms were expanded to include any non-United States entity eligible for registration or registered to do business as a corporation or limited liability company under the laws of a state.[28] On the other hand, the 2019 Transparency Proposal also expanded the list of entities exempt from its reporting requirements to include: (i) a more extensive list of entities otherwise subject to a Federal regulatory regime; (ii) any business concern that employs more than 20 employees on a full-time basis in the United States, files income tax returns demonstrating more than $5,000,000 in gross receipts or sales, and has an operating presence at a physical office within the United States; (iii) any corporation or limited liability company formed and owned by an entity that is otherwise identified as an entity not subject to the reporting requirements of the 2019 Transparency Proposal;[29] and (iv) other business concerns designated as exempt entities by the Secretary of the Treasury and the Attorney General of the United States.
Beneficial Owner, Defined
The definition of “beneficial owner” in federal legislation providing for the reporting of beneficial ownership information has been a topic of significant debate. The 2008 Incorporation Transparency and Law Enforcement Assistance Act defined a beneficial owner as “an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.”[30] Subsequent definitions of beneficial owner in proposed federal legislation and rules providing for the reporting of beneficial ownership information have been drafted in a manner that provides greater clarity for an entity in identifying its beneficial owners. For example, the FinCEN CDD Requirements define a beneficial owner as (i) each individual, if any, who directly or indirectly owns 25% or more of the equity interests of a legal entity customer (the ownership prong); and (ii) a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions (the control prong). Even more specific is the definition of beneficial owner in the geographic targeting orders, which includes “each individual who, directly or indirectly, owns 25% or more of the equity interests” of the purchaser.[31]
The 2019 Transparency Proposal drew on the framework from previous proposed legislation as well as the FinCEN CDD Requirements and defined a beneficial owner as “a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise”:
(i) exercises substantial control over a corporation or limited liability company;
(ii) owns 25% or more of the equity interests of a corporation or limited liability company; or
(iii) receives substantial economic benefits from the assets of a corporation or limited liability company.[32]
The 2019 Transparency Proposal went on to provide exclusions from the definition, including minors, nominees and agents, employees in their status as such, and creditors unless they meet the requirements of one of the clauses of the definition.[33]
The Corporate Transparency Act Included in the NDAA
The following is a summary of the principal terms of the Corporate Transparency Act included in the NDAA that relate to the reporting and use of beneficial ownership information.[34]
What is a Reporting Company?
A reporting company is a corporation, limited liability company or other similar entity that is created by the filing of a document with a secretary of state or similar office under the law of a state, or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a state.[35]
A reporting company does not include the following entities (the “exempt entities”):
an issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or that is required to file supplementary and periodic information under Section 15(d) of the Exchange Act;
an entity established under the laws of the United States, a state, or a political subdivision of a state, or under an interstate compact between two or more states and that exercises governmental authority on behalf of the United States or any such state or political subdivision;
a bank;
a Federal or state credit union;
a bank or savings and loan holding company;
a registered money transmitting business;
a broker or dealer registered under Section 15 of the Exchange Act;
an exchange or clearing agency registered under Section 6 or Section 17A of the Exchange Act;
any other entity registered with the Securities and Exchange Commission (the “SEC”) under the Exchange Act;
an investment company or investment adviser registered with the SEC;
an investment adviser that has made certain required filings with the SEC;
an insurance company as defined in the Investment Company Act of 1940;
an insurance producer that is authorized by a state and subject to supervision by the insurance commissioner or a similar official or agency of a state and has an operating presence at a physical office within the United States;
certain entities registered with the Commodity Futures Trading Commission under the Commodity Exchange Act;
a public accounting firm registered under the Sarbanes-Oxley Act of 2002;
a public utility that provides telecommunication services, electrical power, natural gas, or water and sewer services within the United States;
a financial market utility designated by the Financial Stability Oversight Council;
a pooled investment vehicle that is operated or advised by certain entities described in other clauses above;
a tax-exempt Section 501(c) corporation, political organization, charitable trust or split-interest trust exempt from tax;
certain corporations, limited liability companies or other similar entities that operate exclusively to provide financial assistance to, or hold governance rights over, tax-exempt Section 501(c) corporations, political organizations, charitable trusts or split-interest trusts exempt from taxation;
an entity that: (i) employs more than 20 employees on a full-time basis[36] in the United States; (ii) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States;[37]
a corporation, limited liability company or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by one or more aforementioned exempt entities (“exempt subsidiaries”);
a corporation, limited liability company or other similar entity: (i) in existence for over one year; (ii) that has not engaged in active business; (iii) that is not owned, directly or indirectly, by a foreign person; (iv) that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and (v) that does not otherwise hold any kind or type of assets,[38] including an ownership interest in any corporation, limited liability company or other similar entity (an “exempt grandfathered entity”); and
any entity or class of entities that the Secretary of the Treasury has determined by regulation, with the written concurrence of the Attorney General of the United States and the Secretary of Homeland Security, should be exempt because requiring beneficial ownership information would not serve the public interest and would not be highly useful in national security, intelligence and law enforcement efforts to detect, prevent or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud or other crimes.[39]
Generally, exempt entities are not required to report information to FinCEN, subject to the following exceptions:
a pooled investment vehicle formed under the laws of a foreign country must file a written certification with FinCEN that provides the identification information of an individual who exercises substantial control over the pooled investment vehicle;
an exempt subsidiary that no longer meets the criteria necessary to qualify as an exempt subsidiary must submit beneficial ownership information to FinCEN; and
an exempt grandfathered entity that no longer meets the criteria necessary to qualify as an exempt grandfathered entity must submit beneficial ownership information to FinCEN.[40]
What Information Must be Reported?
A reporting company must provide the following information for each beneficial owner and each applicant[41] with respect to the reporting company (“beneficial ownership information”):[42]
full legal name;
date of birth;
current residential or business street address; and
a unique identifying number from an acceptable identification document (passport, driver’s license or other government issued identification document) or a FinCEN identifier.[43]
If an exempt entity has a direct or indirect ownership interest in a reporting company, the reporting company or the applicant must only report the name of the exempt entity instead of the beneficial ownership information set forth above.[44] The Corporate Transparency Act does not quantify the level of ownership by an exempt entity that requires reporting. In prescribing regulations under the Corporate Transparency Act, Treasury should set forth a minimum level of ownership (such as 25%) that would give rise to a reporting obligation by the reporting company or an applicant.
Who is a Beneficial Owner?
A beneficial owner of an entity is an individual[45] who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity;[46] or (ii) owns or controls not less than 25% of the ownership interests of the entity.[47]
A beneficial owner does not include: (i) a minor child if the information of the child’s parent or guardian is reported; (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an individual acting solely as an employee of the entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (iv) an individual whose only interest in the entity is through a right of inheritance;[48] or (v) a creditor of the entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.[49]
When Must Beneficial Ownership Information be Reported?
The Secretary of the Treasury is required to prescribe regulations under the Corporate Transparency Act by January 1, 2022, one year after the date of enactment.[50] The effective date of those regulations governs the timing for filing reports under the Corporate Transparency Act.
A reporting company that has been formed or registered after the effective date of the regulations must submit a report to FinCEN containing the beneficial ownership information with respect to the reporting company at the time of its formation or registration. A reporting company that has been formed or registered before the effective date of the regulations must submit a report to FinCEN no later than two years after the effective date of the regulations. If there are changes in reported beneficial ownership information, a reporting company must submit to FinCEN an updated report no later than one year after the date of the change.[51] The Corporate Transparency Act allows the Secretary of the Treasury, in consultation with the Secretary of Homeland Security, to evaluate the need to have reports updated within a shorter period of time and incorporate any changes into the regulations not later than two years after the enactment of the Corporate Transparency Act.[52]
To Whom is Beneficial Ownership Information Available?
Except as authorized under the Corporate Transparency Act or protocols promulgated thereunder, beneficial ownership information is confidential and may not be disclosed.[53] FinCEN may disclose beneficial ownership information only upon receipt of:
a request from a federal agency engaged in national security, intelligence or law enforcement activity for use in furtherance of such activity;
a request from a state, local or tribal law enforcement agency, if authorized by a court of competent jurisdiction to seek the information in a criminal or civil investigation;
a request from a federal agency on behalf of a foreign law enforcement agency, prosecutor or judge under an international treaty, agreement or convention or upon an official request made by law enforcement, judicial or prosecutorial authorities in a trusted foreign country when no treaty, agreement or convention is available if certain conditions are met;
a request made by a financial institution subject to customer due diligence requirements with the consent[54] of the reporting company to facilitate the institution’s compliance with customer due diligence requirements under applicable law; or
a request made by a federal functional regulatory agency[55] or other appropriate regulatory agency[56] if the agency: (i) is authorized by law; (ii) uses the information solely as authorized; and (iii) enters into an agreement with the Secretary of the Treasury providing appropriate protocols governing the safekeeping of the information.[57]
The Corporate Transparency Act requires the Secretary of the Treasury to establish protocols to protect the security and confidentiality of beneficial ownership information.[58]
What are the Penalties for Violating the Corporate Transparency Act?
It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN, or willfully fail to report complete or updated beneficial ownership information to FinCEN. Any person violating the reporting requirements of the Corporate Transparency Act is liable for civil penalties of not more than $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000.[59]
Section 5336(h)(3)(C) of the Corporate Transparency Act contains a safe harbor from the civil and criminal penalties if a person submitting incorrect information submits a report containing corrected information not later than 90 days after the date on which the person submitted the report originally, provided that the person was not acting to evade the reporting requirements and did not have actual knowledge that information contained in the original report was inaccurate. In prescribing regulations under the Corporate Transparency Act, Treasury should clearly define the standards for coming within the safe harbor, including how “evasion of the reporting requirements” and “actual knowledge of inaccuracies” will be interpreted.
Unauthorized knowing disclosure or use of beneficial ownership information is punishable by civil penalties[60] of $500 for each day the violation continues and criminal penalties of imprisonment of up to 10 years and fines of up to $500,000.[61]
Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act
Many topics for regulation are specifically identified in the Corporate Transparency Act, including:
regulations designating any entity or class of entities as exempt under Section 5336(a)(11)(xxiv);
regulations regarding submission of beneficial ownership information reports to FinCEN under Section 5336(b)(1)(A);
regulations regarding submission of beneficial ownership reports to FinCEN by reporting companies formed or registered before the effective date of the regulations under Section 5336(b)(1)(B);
regulations regarding submission of beneficial ownership reports to FinCEN by newly formed or registered reporting companies under Section 5336(b)(1)(C);
regulations regarding submission of beneficial ownership reports to FinCEN that update the information related to the change under Section 5336(b)(1)(D);
regulations regarding the delivery and contents of beneficial ownership information reports under Section 5336(b)(2)(A);
regulations relating to reporting requirements for exempt subsidiaries under Section 5336(b)(2)(D);
regulations relating to reporting requirements for exempt grandfathered entities under Section 5336(b)(2)(E);
regulations prescribing procedures for FinCEN identifiers under Section 5336(b)(4);
regulations prescribing the form of and manner in which information shall be provided to financial institutions under Section 5336(c)(2)(C);
regulation protocols to protect the security and confidentiality of beneficial ownership information under Section 5336(c)(3);
regulations governing agency coordination under Section 5336(d); and
regulations regarding submitting reports to correct inaccurate information under Section 5336(h)(3)(C)(i)(I)(bb).
Beyond the topics for regulation specifically identified in the Corporate Transparency Act, there are a number of terms and phrases used in the Corporate Transparency Act that could be clarified in regulations prescribed by Treasury. The Corporate Transparency Act does not contain a mechanism for Treasury to modify the terms of the statute, but Treasury would have the authority through regulation to interpret the meanings of the constituent parts of the statute, including the definitions of “reporting company,” “beneficial owner” and “applicant.” Those regulations would provide reporting companies, beneficial owners and practitioners with guidance in complying with the requirements of the Corporate Transparency Act.
Focusing on the definitions of reporting company, beneficial owner and applicant, following is a discussion of some of the terms and phrases that could be clarified by regulation.
Reporting Companies
Other Similar Entity that is Created by the Filing of a Document with a Secretary of State or Similar Office. It is clear that the term “reporting company” includes corporations and limited liability companies. It is also clear that the term does not include general partnerships, which are formed by agreements among partners, and donative trusts, which are traditional estate planning and property-owning vehicles and are not required to register with any state or territory.[62] It is not clear whether certain other entities, such as limited partnerships, business trusts, testamentary trusts, and non-U.S. entities similar to corporations and limited liability companies, are reporting companies under the Corporate Transparency Act.
Proposed federal legislation, beginning with the Incorporation Transparency and Law Enforcement Assistance Act and continuing through the 2019 Transparency Proposal, contemplated that the reporting requirements would apply to corporations and limited liability companies formed under the laws of a state based on the meaning given to those terms under the laws of the applicable state. Limited partnerships and other business entities would not have been made subject to the legislation. Commentators discussing that proposed federal legislation noted that the proposed legislation should apply to all types of business entity structures. It has been argued that the basic elements of a system of reporting beneficial ownership information will only be effective if those elements cover all forms of business entities.[63]
Although those observations did not lead to an expansion of the Corporate Transparency Act specifically to identify business entities other than corporations and limited liability companies, they (along with a desire to cover the non-U.S. entities that are similar to corporations and limited liability companies) likely did lead to the language in the Corporate Transparency Act definition of “reporting company” which provides that a reporting company would include an:
other similar entity that is (i) created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe.[64]
The language employed in the Corporate Transparency Act is open to at least two interpretations. Is a “similar entity” to be determined by comparing its characteristics to those of a corporation or limited liability company (e.g., limited liability and continuity of life) or is it merely enough that the entity is created by a filing with the Secretary of State or similar office? In this respect, it should be noted that there are state law distinctions between organizations with similar monikers. For example, while the formation of a statutory trust in the State of Delaware requires the filing of a Certificate of Trust with the Delaware Secretary of State,[65] no similar filing is required in the Commonwealth of Massachusetts in order to bring a business trust into existence.[66]
The FinCEN CDD Requirements and the related adopting release are instructive in adding clarity to universe of covered entities. The FinCEN CDD Requirements define “legal entity customer” to mean “a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office; a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.”[67] The adopting release goes on to clarify, among other distinctions, that the defined term would include business trusts that are created by a filing with a state office and would not include trusts (other than statutory trusts created by a filing with a Secretary of State or similar office).
Exemption for Entities Owned or Controlled by One or More Exempt Entities. Section 5336(a)(11)(xxii) of the Corporate Transparency Act exempts from the definition of reporting company “any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities” described in certain specified clauses of the exemptions from the definition of reporting company. This exemption has been referred to as an “exemption for subsidiaries of an exempt entity.”[68]
The exemption in the statute is logical – if the parent entity that owns or controls the subject entity is exempt under the specified clauses of Section 5336(a)(11), the subject entity should not have to report the beneficial ownership information of the parent entity, which itself does not need to report beneficial ownership information of its own beneficial owners. The language, however, could be clarified with respect to the degree or ownership or control that is required for an entity to be eligible for the exemption. Although it appears that the exemption was intended to capture subsidiaries of certain exempt entities, the reference to “owned or controlled” could be read to imply that the subject entity must be wholly-owned or wholly-controlled by one or more exempt entities. Alternatively, it could be asserted that control, which is achieved at a level below that necessary to treat the subject entity as a subsidiary, is sufficient to satisfy that requirement that the ownership interests of the subject entity are controlled by an exempt entity.
In prescribing regulations under the Corporate Transparency Act, Treasury should provide clarity regarding the level of ownership or control necessary to consider an entity that is owned or controlled by an exempt entity to be an exempt subsidiary.
Identification of Beneficial Owners
As described above, the identification of beneficial owners is at the heart of the Corporate Transparency Act. There are several aspects of the definition of the term “beneficial owner” where Treasury should prescribe regulations that provide guidance in order to make the definition of “beneficial owner” clear enough that entities can determine what information to collect and report.
While the Corporate Transparency Act requires each reporting company to report beneficial ownership information for its beneficial owners, there is no corresponding affirmative obligation that the beneficial owners furnish that information to the reporting company. In prescribing regulations under the Corporate Transparency Act, Treasury should provide relief for reporting companies who fail to report beneficial ownership information despite their best efforts to obtain it.
Substantial Control. The first clause of the definition of “beneficial owner” includes an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity. The term “substantial control” is not defined in the Corporate Transparency Act and without further guidance is inherently unclear. For example, should substantial control focus on day-to-day decision-making, strategic oversight or major decision consent rights (or vetoes)?[69] Similarly, could a third-party manager, a lender or an important customer be considered to exercise substantial control through contractual rights or other arrangements or relationships? Can more than one person exercise substantial control? Could officers of an entity who are otherwise exempt but who own more than 25% of the ownership interests of a reporting company be seen to exercise substantial control?[70]
Although Treasury could refer to the concepts of “control” and “affiliate” status under the securities laws, those provisions are not particularly helpful in providing the type of clarity that is needed to determine beneficial ownership under the Corporate Transparency Act where the term used is “substantial control.” Rule 405 under the Securities Act of 1933 (the “Securities Act”) defines control to mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. Since at least 1980, the staff of the Division of Corporation Finance of the SEC has declined to respond to requests for “no‑action” letters regarding the question of control inasmuch as such determination involves “factual questions which the staff is not in a position to resolve.”[71]
In prescribing regulations under the Corporate Transparency Act, Treasury should provide clarity regarding the meaning of “substantial control,” including by making it clear that only one person can exercise substantial control,[72] so that entities can determine what information to collect and report.
25% of the Ownership Interests. The second clause of the definition of “beneficial owner” includes an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, owns or controls not less than 25% of the ownership interests of the entity. At one end of the spectrum, applying that clause to a corporation with one class of ownership interests is fairly straightforward. At the other end of the spectrum, applying that clause to a limited liability company with multiple classes of interests, consent or veto rights, and negotiated distribution priorities will create a compliance challenge. Reporting companies will have to determine how to deal with promote interests, payment waterfalls, contingent payment rights, and agreements between or among equity holders.[73]
In prescribing regulations under the Corporate Transparency Act, Treasury should provide interpretive guidance in determining when an interest constitutes 25% of the ownership interests of an entity. In addition, regulatory clarity could be provided with respect to what constitutes a “contract, arrangement, understanding, relationship, or otherwise” that would cause a person to be deemed to own or control a 25% ownership interest. Will the principles applied under the federal securities laws be applicable?[74] Although many of the components of the definition of “beneficial owner” need clarity, this component seems to be among the most challenging to tackle.
Treatment of Creditors. Subparagraph (B)(v) of the definition of “beneficial owner” states that a creditor of a corporation, limited liability company or similar entity will not be considered a beneficial owner “unless the creditor meets the requirements of subparagraph (A).” One of the requirements of subparagraph (A) is that an individual, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity. Read together, the language could be considered to be circular – that is, if a creditor in its capacity as such, including through the covenants in its credit agreement or other contract, exercises substantial control over the entity, that creditor would meet the requirements of subparagraph (A). However, it seems that the exclusion was likely only meant to be inapplicable if the creditor exercised substantial control in a non-creditor capacity, such as being both a creditor and holder of more than 25% of the ownership interests.
In prescribing regulations under the Corporate Transparency Act, Treasury should provide clarity for reporting companies and creditors as to the nature of this exclusion.
Who is an Applicant?
The Corporate Transparency Act defines the term applicant to mean “any individual who (A) files an application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe or (B) registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under the laws of a State or Indian Tribe.”[75] The term “applicant” is used twice in the Corporate Transparency Act. First, information for each applicant (along with each beneficial owner) must be reported to FinCEN – i.e., a report must identify each applicant with respect to a reporting company by setting forth the beneficial ownership information with respect to the applicant.[76] Second, the applicant has a reporting obligation – i.e., if an exempt entity has or will have a direct or indirect ownership interest in a reporting company (regardless of the amount of the ownership interest), the reporting company or the applicant is required to report the name of the exempt entity.[77]
Considering the compliance burdens applicable to providing beneficial ownership information and the penalties for failure to report that information, clear guidance regarding how to interpret the term “applicant” is critical. Many individuals can be involved in the filing of an application to form a reporting company or the registration of a reporting company. For example, a lawyer or law firm employee could prepare the documentation for electronic submission or submission via filing agent, which could file the documentation personally or via messenger; and one or more of those parties may be the incorporator or organizer. Regardless of the process, in that example, the reporting company needs to identify who among those parties is an “applicant” and obtain their beneficial ownership information.
In prescribing regulations under the Corporate Transparency Act, Treasury should provide interpretive guidance on the definition of “applicant,” including:
Should lawyers or law firm personnel be considered applicants when acting on behalf of a client? For example, is a lawyer or law firm employee acting on behalf of a client an applicant if the lawyer or employee: (i) acts as an incorporator or organizer; (ii) files or electronically transmits formation documents; or (iii) coordinates with a service company to file or transmit documents with a secretary of state or similar office?[78]
Similarly, are filing agents or employees of registered agents, service companies or messenger services considered applicants if they file, deliver or electronically transmit formation documents on behalf of others?
The regulations promulgated by Treasury should make it clear that the applicant is the person on whose behalf the entity is being formed and not the individual or entity that effects the drafting of the organizational document and its submission to the secretary of state for filing. Further, the requirement to file information as to the applicant should be only with respect to entities organized after the effective date of the regulations (i.e., it should not apply to reporting companies whose existence pre-dates the effective date of the regulations) when the reporting company had no awareness of the need to capture information on incorporators and organizers and those incorporators and organizers had no awareness of the future filing obligation with respect to personal information.
Conclusion
The Corporate Transparency Act represents a significant development in the responsibility for collecting and reporting beneficial ownership information. While this new law is intended to provide law enforcement with beneficial ownership information for the purpose of detecting, preventing and punishing terrorism, money laundering and other misconduct accomplished through business entities, it places a significant burden on small businesses. Treasury’s recent Advance Notice of Proposed Rulemaking is a welcome first step to solicit input to achieve the clarity needed for compliance by reporting companies and applicants, including clarification of many of the points raised herein. In light of the criminal and civil penalties associated with lack of compliance and the challenges and burdens facing business entities in complying with the Corporate Transparency Act, it is in everyone’s interest to provide clarity and precision with respect to the requirements, thereby reducing the burden on reporting companies and applicants as well as increasing compliance and the value of the information reported.
[1] The authors are members of the Corporate Laws Committee and/or the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association and have followed issues related to beneficial ownership transparency as members of task forces formed by those committees. Ms. Smiley, Chair of the Corporate Laws Committee, and Mr. Downes have co-chaired the Corporate Laws Committee’s Task Force on Beneficial Ownership Transparency, and Messrs. Ludwig and Rutledge have co-chaired the LLCs, Partnerships and Unincorporated Entities Committee’s task force. The views expressed in this article reflect views of the individual authors and not the views of the American Bar Association, the Business Law Section of the American Bar Association or the Corporate Laws Committee or the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association.
[2] The full name of the NDAA is the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub.L. No. 116-283 (H.R. 6395), 134 Stat. 338, 116th Cong. 2d Sess. Congress’ override of the President’s veto was taken in Record Vote No. 292 (Jan. 1, 2021). The anti-money laundering provisions are found in §§ 6001-6511 of the NDAA. The Corporate Transparency Act consists of §§ 6401-6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’ findings and objectives in passing the Corporate Transparency Act, and § 6403 contains its substantive provisions, primarily adding § 5336 to Title 31 of the United States Code.
[3] Office of Representative Carolyn Maloney, Press Release, “Maloney Celebrates Inclusion of Corporate Transparency Act in FY2021 NDAA” (Nov. 19, 2020).
[4] FinCEN’s Customer Due Diligence Requirements for Financial Institutions (the “FinCEN CDD Requirements”) require covered financial institutions to collect identification information for the identity of beneficial owners of legal entity customers when a new account is opened. The Corporate Transparency Act mandates that the Secretary of the Treasury revise the FinCEN CDD Requirements to bring them into conformance with the Corporate Transparency Act and to “reduce any burdens on financial institutions and legal entity customers that are, in light of the enactment of [the Corporate Transparency Act], unnecessary or duplicative.” 31 U.S.C. § 5336(d)(1).
[5] On April 1, 2021, the Treasury released an Advance Notice of Proposed Rulemaking, Beneficial Ownership Information Reporting Requirements (the “ANPR”), soliciting comments on a wide variety of questions pertinent to the Corporate Transparency Act and its implementation. See Financial Crimes Enforcement Network, “Beneficial Ownership Information Reporting Requirements,” 86 Fed. Reg. 17557 (April 5, 2021). Comments on the ANPR are due prior to May 5, 2021.
[6] The Financial Action Task Force is a global inter-governmental body established in 1989 with the objective of setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. FATF currently comprises 37 member jurisdictions and two regional organizations.
[7]See Financial Action Task Force, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism (23 June 2006), table 2, ¶¶ 5.1, 5.2; see also id., chapter 5 (pp. 226-249).
[10] The Incorporation Transparency and Law Enforcement Assistance Act broadly defined a “formation agent” as a person who, for compensation, acts on behalf of another person to assist in the formation of a corporation or limited liability company under the laws of a State. As such, the term formation agent broadly covered attorneys assisting in the formation of an entity, as well as service providers preparing and filing documents on behalf of an entity.
[11] In 2016, FATF described the lack of beneficial ownership disclosure requirements as a “significant gap” and a “serious deficiency” in the United States’ anti-money laundering and countering the financing of terrorism regime. See FATF, Anti-money laundering and counter terrorist financing measures – United States, Fourth Round Mutual Evaluation Report (2016).
[13] Senators Carper and Coons represent the State of Delaware, the leading state for the organization of publicly-traded entities.
[14] The Counter Terrorism and Illicit Finance Act was an unnumbered draft bill, which included beneficial ownership provisions in Section 9. On June 12, 2018, Representatives Pearce and Luetkemeyer introduced a version of the bill, not including Section 9, as H.R. 6068. H.R. 6068 was referred to the House Financial Services Committee, but there was no further action taken on the bill.
[16] H.R. 3089, 115th Congress, 1st Sess. and S. 1717, 115th Congress, 1st Sess.
[17] Even as these federal requirements were being considered, various states and local jurisdictions considered and adopted requirements as to disclosure, typically in the public record, of the beneficial ownership/control (however defined) of various business entities. See, e.g., Ariz. Rev. Stat. § 29-3201(B)(4)(a); id. § 29.3201(B)(4)(b); D.C. Code § 29-102.01(a)(6); id. § 29-102.11(a); Kan. Stat. Ann. § 17-76, 139(a)(2); Nev. Rev. Stat. § 86.263(1)(c),(d). Some of the enhanced disclosure requirements are triggered when an entity is engaged in a particular industry. See, e.g., Mo. Rev. Stat. § 347.048(1).
[18] Under the FinCEN CDD Requirements, “beneficial owner” is broadly defined by two prongs: (i) the ownership prong (each individual, if any, who directly or indirectly owns 25% or more of the equity interests of a legal entity customer); and (ii) the control prong (a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions). Under the FinCEN CDD Requirements, at least one individual must be identified under the control prong while zero to four individuals can be identified under the ownership prong.
[19] Under the geographic targeting orders, “beneficial owner” is defined to mean “each individual who, directly or indirectly, owns 25% or more of the equity interests” of the purchaser.
[20] Geographic targeting orders were first issued in 2016. The current (as of this writing) geographic targeting order was issued on November 4, 2020, and is available at https://www.fincen.gov/sites/default/files/shared/508_Real%20Estate%20GTO%20Order%20FINAL%20GENERIC%2011.4.2020.pdf.
[22] S. 2956, Section 3(a)(1) (adding § 2009(a)(1) to Section 6 of the United States Code).
[23] Even though states do not have responsibility for collecting beneficial ownership information under the Corporate Transparency Act, states are required to notify filers of the requirements of the Corporate Transparency Act, provide those filers with a copy of or link to the forms created by the Secretary of the Treasury, and update their websites, incorporation forms and physical premises to notify filers of the requirements of the Corporate Transparency Act. 31 U.S.C. § 5336(e)(2). The Corporate Transparency Act also provides that “the Secretary of the Treasury shall, to the greatest extent practicable, establish partnerships with State, local and Tribal government agencies [and] collect information . . . through existing Federal, State and local processes and procedures.” 31 U.S.C. § 5336(b)(1)(F)(i);(ii).
[24] H.R. 3089, Section 3(a)(1) (adding § 5333(d)(3) to Title 31 of the United States Code). As such, the term formation agents broadly covered attorneys assisting in the formation of an entity as well as service providers filing documents on behalf of an entity. See note 6, supra.
[25] H.R. 2513, Section 3(a)(1) (adding § 5333(d)(1) to Title 31 of the United States Code). The definition of the term “applicant” as used in the Corporate Transparency Act is discussed further below under “Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act—Who is an Applicant?”
[26] As discussed below, the term “reporting company” was introduced after the introduction of the 2019 Transparency Proposal.
[27] The Corporate Transparency Act generally refers to states and Indian tribes. For purposes of this article, when discussing the Corporate Transparency Act, references to “states” will generally mean states and Indian tribes unless otherwise indicated. The term “State” as used in the Corporate Transparency Act means “any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the United States Virgin Islands, and any other commonwealth, territory, or possession of the United States.”
[28] The Corporate Transparency Act of 2019 did not specifically provide for reporting by partnerships, trusts or other entities. The Corporate Transparency Act included in the NDAA expanded the entities required to report beyond corporations and limited liability companies to cover other similar entities “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe.” 31 U.S.C. § 5336(a)(11)(A)(i). This provision is discussed further below under “Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act – Reporting Companies – Other Similar Entity that is Created by the Filing of a Document with a Secretary of State or Similar Office.”
[29] This provision is discussed further below under “Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act – Reporting Companies – Exemption for Entities Owned or Controlled by One or More Exempt Entities.”
[30] S. 2956, 110th Cong. 2d Sess., Section 3(a) (adding § 2009(e)(1) to the Homeland Security Act of 2002).
[31] Formulations of beneficial ownership that have an ownership prong but not a control prong have been criticized given the ability to establish ownership structures where no person owns in excess of the requisite percentage.
[32] As described below, the “substantial economic benefits” prong was not included in the Corporate Transparency Act included in the NDAA.
[33] The circularity of the creditor exclusion as it relates to the exercise of substantial control is discussed further below under “Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act – Identification of Beneficial Owners – Treatment of Creditors.”
[34] The legislative finding set forth in § 6402(5)(A) of the Corporate Transparency Act provides that federal legislation providing for the collection of beneficial ownership information is needed to “set a clear, Federal standard for incorporation practices.” The authors believe that this legislative finding, in the context of the collection of beneficial ownership information, is not to mandate federal requirements of incorporation, but rather to specify common information for federal data collection.
[36] The Corporate Transparency Act does not define how an entity determines who are its “employees” and whether an employee is on a “full-time basis.” In prescribing regulations under the Corporate Transparency Act, Treasury should assess who is an employee (e.g., does the term include contract employees (so-called “gig workers”) or members of a limited liability company or partners in a firm) and defining how a full-time basis should be determined, including whether part-time employees count on a full-time equivalent basis, whether seasonal employees are considered employees for purposes of the determination, and when the determination should be made.
[37] Although this exemption is intended to exempt operating businesses, according to 2014 U.S. Census Bureau data, 88% of the United States’ 28.7 million business firms had fewer than 20 employees.
[38] If the clause “hold any kind or type of asset” is applied literally, this exemption will be rendered essentially meaningless. In prescribing regulations under the Corporate Transparency Act, Treasury should exclude intangible assets (such as goodwill or contract rights) and/or de minimis non-operating assets.
[41] An applicant is “any individual who (A) files an application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe or (B) registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under the laws of a State or Indian Tribe.” 31 U.S.C. § 5336(a)(2). The definition of the term “applicant” is discussed further below under “Discussion of Clarifying Points to be Considered in Regulations under the Corporate Transparency Act – Who is an Applicant?”
[42] Beneficial ownership information does not include either (i) the reason why the person is identified as a beneficial owner; or (ii) the amount of ownership interest or other ownership attributes of the beneficial owner. As a result, changes to the amount or nature of beneficial ownership are not required to be reported.
[43] 31 U.S.C. § 5336(b)(2)(A). An “acceptable identification document” is a defined term. See 31 U.S.C. §5336(a)(1). A “FinCEN identifier” means the unique identifying number assigned by FinCEN to a person under § 5336. See 31 U.S.C. §5336(a)(6). Section 5336(b)(3)(B) provides that any person required to report information with respect to an individual may report the FinCEN identifier of the individual. In prescribing regulations under the Corporate Transparency Act, consistent with § 5336(b)(3)(B), Treasury should provide interpretive guidance to make it clear that the full legal name, date of birth and residential or business street address do not need to be provided if the FinCEN identifier is provided.
[45] Consistent with prior legislative efforts, the Corporate Transparency Act focuses on an individual who controls the entity “directly or indirectly,” requiring the reporting company to ascertain the identity of an individual regardless of the number of intermediate entities through which that individual owns an interest or otherwise exercises control. As described below, the requirement to report beneficial ownership information for indirect beneficial owners poses significant uncertainty and burden for reporting companies.
[46] The vague wording of this clause stands in clear opposition to the clarity in the control prong of the FinCEN CDD Requirements, which requires identification of “a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions.”
[47] 31 U.S.C. § 5336(a)(3)(A). The third prong of the definition of beneficial owner from the 2019 Transparency Proposal, which defined a beneficial owner to include an individual who “receives substantial economic benefits from the assets of a corporation or limited liability company,” was not included in the Corporate Transparency Act included in the NDAA.
[48] The Corporate Transparency Act does not set out the parameters of what is meant by “a right of inheritance.”
[51] 31 U.S.C. § 5336(b)(1)(A) – (D). The requirement to report changes in reported beneficial ownership information (which includes a current address and an identifying number) poses a significant burden for reporting companies. There can easily be changes in the beneficial ownership information of indirect beneficial owners of which a reporting company is unaware.
[54] The Corporate Transparency Act does not define “consent” for purposes of this requirement. In prescribing regulations under the Corporate Transparency Act, Treasury should address whether consent needs to be clear and specific or whether, for example, it would be sufficient if the standard customer materials of a financial institution include a consent for purposes of the Corporate Transparency Act, such that an account with a financial institution could not be opened without a consent.
[56] The Corporate Transparency Act does not define “other appropriate regulatory agency” for purposes of this requirement. In prescribing regulations under the Corporate Transparency Act, Treasury should specify that appropriate regulatory agencies are those engaged in national security, intelligence or law enforcement activity.
[60] Although the Corporate Transparency Act is clear that the civil penalties are payable to the United States, it is not clear who has the right to bring an action for civil penalties for unauthorized disclosure of information.
[62] The Corporate Transparency Act directs the Comptroller General to submit a report to Congress studying whether the lack of beneficial ownership information for trusts, partnerships and other legal entities presents money laundering and terrorism financing risks, suggesting that these entity types do not fall within the definition of reporting company contemplated by Congress. See § 6502(d) of the NDAA. Regardless of the scope of entities covered, the coverage of general partnerships may be problematic due to the informal nature of their formation.
[63] For example, in the United Kingdom, press reporting outlined how the Scottish limited partnership (“SLP”) corporate form had been used in money laundering, in part because SLPs were not covered by the UK’s beneficial ownership disclosure regime until June 2017. See “Crackdown Plan on Scottish limited partnerships,” BBC (April 29, 2018).
[64] The scope of entities covered under this clause seems similar to the scope of entities that are “registered organizations” under the Uniform Commercial Code, where a registered organization means “an organization organized solely under the law of a single State or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or the United States.”
[66] Although the trustees of a Massachusetts business trust are required to file a copy of the declaration of trust with the secretary of state and the clerk of every city or town where the trust has its usual place of business, the filing of the declaration of trust is not a condition precedent to the existence of the trust. See Mass. G.L.c. 182, § 2 and Mass. DOR Letter Ruling 91-2.
[67]See Financial Crimes Enforcement Network, “Customer Due Diligence Requirements for Financial Institutions,” 81 Fed. Reg. at 29412 (effective July 11, 2016).
[68] 31 U.S.C. § 5336(b)(2)(D), which provides for reporting if the subject entity no longer meets the criteria described in the exemption, is labelled “Reporting Requirement for Exempt Subsidiaries.” That reference is the only instance of the use of the term “subsidiar[y]” in the Corporate Transparency Act.
[69] Consider, for example, a limited liability company having three members holding, respectively, a 20%, a 40% and a 40% interest therein and with an operating agreement that provides that the company may act only by the unanimous consent of the members. Does the holder of the 20% interest have “substantial control” over the company by virtue of the ability to prevent an action from being taken?
[70] In many cases, as described above, such a compliance challenge would be exacerbated by the reporting company’s lack of a contractual right to require a third party to provide the required beneficial ownership information.
[71] Procedures Utilized by the Division of Corporation Finance for Rendering Informal Advice, Securities Act Release No. 6253, 1 Fed. Sec. L. Rep. (CCH) ¶ 373 at 1255 (Oct. 28, 1980). Among the facts and circumstances that the courts, the SEC and commentators have considered relevant to a determination of the existence or absence of control under the securities laws are: (i) the power to select a majority of a board of directors; (ii) the owner of a substantial block of securities; (iii) a position as a director or officer; (iv) involvement in day-to-day management; (v) the existence of historical, familial, business or contractual relationships as a result of which control may be exercised; and (vi) the power to cause a registration statement under the Securities Act to be filed by the issuer in the absence of a contractual right to cause such filing.
[72] Providing that no reporting company can have more than one beneficial owner who is considered to be in substantial control of a reporting company would be consistent with the FinCEN CDD Requirements, which require identification of “a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions.”
[73] It is not clear from the statute whether “group” concepts and attribution rules applicable in other situations (such as under § 13(d) of the Exchange Act) will be applicable. The ANPR (see supra note 5), at page 17562 (question 3(a)) asks “To what extent should FinCEN’s regulatory definition of beneficial owner in this context be the same as, or similar to, the current CDD rule’s definition or the standards used to determine who is a beneficial owner under 17 CFR 240.13d–3 adopted under the Securities Exchange Act of 1934?”
[74]See Rule 13d-3(a) promulgated under the Exchange Act.
[78] Among the practical complications of a broad definition of “applicant” is identifying the applicant(s) for existing entities. Reporting companies formed before the effective date of the Corporate Transparency Act are required to file beneficial ownership information not later than two years after the regulations are promulgated, but a corporation that has existed for a number of years may not be able to obtain beneficial ownership information for its incorporator, who is often a law firm employee, much less others who were involved in the incorporation process. And even if that person could be identified, they may be unresponsive to a request for the personal information responsive to 31 U.S.C. § 5336(b)(2)(A)(i) – (iv).
The ABA Business Law Section’s Legal Analytics Committee will meet on Friday, April 23 from 10:00 am to 12:00 pm EST during its Virtual Spring Meeting. If the contents of this article interest you, you may be interested in attending. The meeting is free for ABA Business Law Section members—register here.
“All this automation and effective software is all going to happen, but it is unbelievably difficult” with respect to legal technology, remarked legendary value investor Charlie Munger at the 2020 annual meeting of the Daily Journal Corporation, which he chairs.
Though traditionally a legal publications house, the Daily Journal has, somewhat discretely, evolved into a Legal technology (“LegalTech”) company, with over 70% of revenues generated by the court case management-focused Journal Technologies unit.
Though specific to that business, Charlie Munger’s commentary in many ways captures the zeitgeist for LegalTech more broadly. While in the long run, automation and innovation represent the logical state of affairs for the legal world, that does not imply an easy path – and the ‘long run’ could still be a long ways away.
Legal technology is at an interesting inflection point. On the one hand, sector maturation appears to be accelerating, as evidenced by rising valuations, capital inflows and even LegalTech-specific SPACs. Yet, due to a host of sector-specific factors, challenges remain and are likely to persist. “Hardware is hard” is an old investor adage to explain their preference for asset-light software businesses, and while substantively distinct, LegalTech’s innate challenges may be of similar magnitude.
The Daily Journal’s development and Charlie Munger’s insights at its annual meeting provide a unique lens for assessing LegalTech’s challenges, while also highlighting its opportunities. Though, as Munger insightfully cautioned, success is “not going to be easy and it’s not going to be fast.”
Daily Journal: Background & Overview
The Daily Journal, as Charlie Munger explained, “started as a public notice rag . . . and morphed into a very successful legal daily newspaper” focused on publishing appellate opinions – “an ideal niche. . . [for a] small but very profitable paper.”
Currently, the Daily Journal publishes 10 newspapers. The largest are the Los Angeles Daily Journal and San Francisco Daily Journal, established in 1888 and 1893, respectively, with 6,300 subscribers between them as of September 30, 2020. The company’s other major titles include Daily Commerce, The Daily Recorder and the Inter-City Express. The revenue model is roughly 67% subscriptions and 33% advertising.
Secular shifts have put pressure on this business model and readership has declined. “Technological change is destroying the daily newspapers in America . . . The revenue goes away and the expenses remain and they’re all dying,” Munger explained at the annual meeting.
Along with an enviable portfolio of marketable securities, the Daily Journal has addressed these challenges by developing “a second business . . . to replace the economic strength of the newspaper that is imperiled and that’s Journal Technologies.” Munger described Journal Technologies as “a computer software business that helps courts and government agencies replace human error-prone inefficient procedures with simpler and better procedures run by software.”
Specifically, the unit “provides case management software and related services to courts and other justice agencies,” which “use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including a secure website to pay traffic citations online, and bar members.” The product suite is organized into three core “eSeries” products, of which the best known is eCourt®.
Journal Technologies was developed through a disciplined M&A strategy, followed by extensive ongoing investment and R&D. The business was built through three primary transactions, as shown in the table below:
Late 2012 and 2013, as it happens, were the optimal time to purchase a LegalTech business. Those years marked the low point in LegalTech investment, but closely preceded a boom in innovation and tech maturation. In other words, a quintessential value investment.
New Dawn, for instance, generated 2013 annualized revenue of about $12.7 million, with a small operating loss, implying a purchase price of around 1.1x forward revenues. In contrast, some LegalTech companies with comparable revenues have recently been reported to be valued at 50x their top line.
Business Evolution
The decade between 2011 and 2020 was a period of vast transition for the Daily Journal. The two critical, interrelated themes were the decline of the traditional business – where revenues shrank 53%, from 31.5 million to $14.7 million – and the ascendancy of Journal Technologies, which saw revenues grow 1082%, from $2.98 million to $35.25 million.
These themes are displayed in the chart below, which shows revenues for the Daily Journal’s two reporting segments: (i) the Traditional Business, composed of the newspaper operations and (ii) Journal Technologies.
As shown above, until the 2012 and 2013 transactions, Journal Technologies represented only 9% of revenues. Subsequently, the Daily Journal’s business mix rapidly and dramatically changed, with Journal Technologies unit’s revenue overtaking the traditional business segment by 2014.
The chart below shows Daily Journal total revenues, as well as the proportion coming from Journal Technologies. There are two notable takeaways. First, despite the continued deterioration of the traditional business, the company’s total revenues ended the period higher. Second, as Journal Technologies’ share of revenues grew to 71% by 2020, the Daily Journal evolved into a LegalTech-focused company.
The growth of Journal Technologies was hardly linear or uncomplicated, however. The unit’s top line actually shrank in the four years following the New Dawn and ISD acquisitions, before experiencing strong growth in 2019 and 2020.
Journal Technologies’ revenue mix may help explain the uneven trajectory. The chart below shows the three segment revenue drivers – (i) licensing and maintenance fees (the SaaS business); (ii) consulting fees; and (iii) other public service fees. The purple line shows the revenue percentage from recurring licensing fees, relative to more volatile consulting and public service fees.
An important takeaway is that despite the lower predictability, consulting and public service fees have been crucial top-line drivers, averaging 34% of total revenues and as much as 44% in some years. LegalTech companies often debate whether to offer consulting-like services to supplement a core SaaS offering. A potential lesson from the Daily Journal’s experience is that, despite a revenue profile distinct from SaaS ARR, the approach can have merits, in part because complex products can require a higher touch.
Indeed, for LegalTech companies, the human capital-intensive dimension of the business may also be a function of the underlying technology, which often leverages AI. As the venture capital firm Andreesen Horowitz observed, “we have noticed in many cases that AI companies simply don’t have the same economic construction as software businesses. At times, they can even look more like traditional services companies.”
Daily Journal’s Strategy & Lessons for LegalTech
The Daily Journal’s successful transition from a newspaper group to a LegalTech platform provides several important insights for players across the LegalTech ecosystem.
First, the Daily Journal did not start from scratch by entering a wholly unfamiliar technology sub-vertical. Instead, the company leveraged its existing strengths and relationships with respect to the judiciary and governmental agencies, allowing the business to evolve without completely changing its core.
Second, the strategy was highly forward looking – not reactive. The Daily Journal made its first acquisition in 1999, long before “LegalTech” was a term. It followed up with subsequent deals precisely when everyone else was selling, allowing it to acquire high quality assets at favorable prices with a large margin of error.
Finally, due to a nuanced appreciation for the complexity of the space, the Daily Journal has been patient and disciplined in building out Journal Technologies. As Charlie Munger explained, unlike traditional SaaS businesses – which can be “a gold mine because it’s just standard and you crank it out and everybody uses it” – their business is “a branch of the software that is intrinsically very, very difficult where everything takes forever, is very hard to do.” Because of this complexity, “[a] lot of people just totally avoid it . . . They just want to crank out a few bits of software and where just everything is on the cloud – whatever they do – and count the money.”
Distinctions Between SaaS and LegalTech
Charlie Munger’s remarks at the Daily Journal’s 2020 Annual Meeting hit the nail on the head with respect to some of the distinctions between LegalTech and other SaaS products.
Journal Technologies’ customer base is comprised of governmental units, which “all have special requirements and they’re almost all quite bureaucratic.” While this set of challenges may be more acute for Journal Technologies, highly complex customers and procurement processes are generally inherent to LegalTech.
At the same time, its bespoke and detail-oriented work requires “armies of people.” Further, because the company’s work concerns processes that are integral to the administration of justice, quality matters from both a commercial and normative perspective. The business has little resemblance to an app; it can’t be plug and play with 80% operating margins – mistakes matter.
As a consequence of these sector-specific complexities, Charlie Munger aptly stated that scaling a LegalTech business is “not going to be easy and it’s not going to be fast.”
This facet is also not unique to the Journal Technologies business. COVID-era stock market darling, DocuSign, for instance, did not generate significant revenues for nearly its first decade, from 2003 through 2010, though subsequently experienced extremely fast growth, as per its 2018 Form S-1.
Yet, the success of companies like the Daily Journal and DocuSign also illustrates the vast potential of the LegalTech space. Journal Technologies is steadily growing with high revenue quality, a strong customer base and vast green fields at home and abroad.
It is “a big market” and Journal Technologies “may end up with a big share of it,” according to Charlie Munger.
“[W]e can’t guarantee that we will succeed but I consider it likely. I just think it will be slow and awful.”
Like it or not, the real estate market relies on mortgage lenders trading mortgage loans like kids used to trade baseball cards.* And large companies, like kids who traded baseball cards in the days of yore, sometimes lose things. Luckily, the drafters of the Uniform Commercial Code (UCC) understood this, and built in provisions that allow lenders to enforce lost instruments. Unluckily, at least for mortgage lenders trying to foreclose in Massachusetts these days, case law interpreting the version of the UCC adopted by Massachusetts unnecessarily complicates the foreclosure process when it involves a lost mortgage note.
In Zullo v. HMC Assets,[1] the Massachusetts Land Court ruled that a lender who purchased a mortgage note after a prior entity lost the note cannot foreclose by showing that the prior entity assigned the lender its entitlement to enforce the lost note. Since the Zullo opinion, the notion that Massachusetts law imposes a potentially insurmountable hurdle on a lender seeking to foreclose after a prior lender lost the note appears to be taking hold as commonly accepted wisdom.
Yet a closer look at Massachusetts Supreme Court precedent and the state’s UCC shows why courts should reject this commonly accepted wisdom. As discussed below, a mortgage secures the borrower’s obligation to repay the debt, not the lender’s ability to enforce the note serving as evidence of the debt. Accordingly, the Massachusetts statutory power of sale should allow lenders who can prove that they own a lost mortgage note to foreclose even if they cannot show that the UCC would allow them to enforce the lost note.
Massachusetts’ Foreclosure Process
Under Massachusetts law, “a mortgage and the underlying note can be split”[2]—meaning that different entities can have an interest the mortgage and the note. For example, if a lender purchases a mortgage loan and the seller delivers a properly indorsed note but neglects to assign the mortgage, then the lender holds the note while the seller continues to hold the mortgage. In this situation, “the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage.”[3]
Lenders typically foreclose in Massachusetts through the statutory power of sale, which allows mortgagees to auction mortgaged property after giving proper notice if the borrower defaults.[4] The Massachusetts Supreme Court construes the term “mortgagee” in the state’s foreclosure statutes to “refer to the person or entity then holding the mortgage and also either holding the mortgage note or acting on behalf of the note holder.”[5] Importantly, the Court specifically clarified that it used the term “note holder” in the decision “to refer to a person or entity owning the mortgage note.”[6]
Massachusetts’ Lost Note Requirements
Under Massachusetts’ version of the UCC, mortgage notes typically qualify as negotiable instruments.[7] Accordingly, the “[p]erson entitled to enforce” a mortgage note means “(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 3-309 or subsection (d) of section 3-418.”[8]
For an entity to show that it is entitled to enforce the note under Massachusetts’ version of section 3-309 addressing lost notes, the entity must demonstrate that:
(i) [it] was in possession of the instrument and entitled to enforce it when loss of possession occurred,
(ii) the loss of possession was not the result of a transfer by the [entity] or a lawful seizure, and
(iii) the [entity] cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.[9]
UCC § 3-309 Amendment
In the late 1990s, a federal court in the District of Columbia interpreted the language of the first requirement for enforcing lost notes to preclude any entity who obtained its interest in the loan after the note was lost from showing it could enforce the note.[10] The D.C. federal court held that the entity necessarily could not show entitlement to enforce the note when the loss of possession occurred, because it obtained its interest in the note after the loss of possession.[11] The UCC drafting committee then convened to amend the UCC to allow an entity to enforce a lost note if it “directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when the loss of possession occurred.”[12] Massachusetts has not yet adopted the amended provision, despite it having been added to the UCC in 2002.[13]
The Zullo Opinion
Analyzing these requirements, the Massachusetts Land Court ruled in Zullo that an entity who acquired its interest in the loan after the note was lost lacks standing to foreclose.[14] In Zullo, the lender argued that it acquired its interest from the entity who possessed the note when it was lost, and it therefore stood in that entity’s shoes by virtue of standard contract assignment law.[15] The Land Court rejected the creditor’s argument.[16]
Notably, the Massachusetts Land Court is a lower court, and it does not appear that the Massachusetts Supreme Court or Appeals Court have yet weighed in on the issue of whether a lender can assign its entitlement to enforce a lost note after the note is lost. Relatedly, the Land Court in Zullo acknowledged the disagreement among other state courts on this issue, and it even acknowledged that the judge who wrote the opinion came to a different conclusion earlier in the case.[17] Nevertheless, absent further guidance from the Massachusetts Supreme Court or Appeals Court on this issue, the Zullo opinion appears to be turning into commonly accepted wisdom on the question of enforcing lost notes in Massachusetts.
Ownership of the Note vs. Entitlement to Enforce the Note
Although the common practice for foreclosing with lost notes in Massachusetts (or not foreclosing, as it were) seems to be solidifying around Zullo, courts should not treat the Zullo opinion’s analysis as the final word on the issue. Indeed, to the extent the analysis focused on a lender’s ability to assign its entitlement to enforce a lost note under principles of contract law rather than its ability to transfer ownership of the note under property law, Zullo may have misapplied Eaton altogether.
As noted above, the Massachusetts Supreme Court in Eaton confirmed that when it used the term “note holder” in the decision, it “refer[red] to a person or entity owning the ‘mortgage note.’”[18] It defined “mortgage note” as “the promissory note or other form of debt or obligation to which the mortgage provides security.”[19] This definition tracks with Eaton’s holding and discussion throughout the Court’s ruling, where the Court focused on the nature of a mortgage as security for a debt rather than focusing on a narrow application of terms removed from their overall statutory context. Indeed, the Eaton Court expressly described its interpretation as “the one that best reflects the essential nature and purpose of a mortgage as security for a debt.”[20]
The Court’s ruling predominantly focused on the longstanding and nearly universal recognition that a mortgage is an incident to the debt.[21] The Court discussed the need for a mortgagee exercising the statutory power of sale to maintain an interest in the underlying debt in terms of holding the note or acting for the note’s holder, but it expressly advised that it used the term “note holder” to encompass more broadly the “entity owning the mortgage note.”[22]
Importantly, the comments to Massachusetts’ UCC specify that “[t]he right to enforce an instrument and ownership of the instrument are two different concepts.”[23] The comment further provides that “ownership rights in instruments may be determined by principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203.” Entities can “claim [ ] ownership of an instrument” even when they may not qualify as “a person entitled to enforce the instrument.”[24] Likewise, an entity can qualify as “a person entitled to enforce the instrument even though [it] is not the owner of the instrument or is in wrongful possession of the instrument.”[25]
Thus, properly harmonizing Eaton with the Massachusetts UCC should allow a lender who can demonstrate that it owns a lost mortgage note using “principles of the law of property” to exercise the statutory power of sale.[26] If the lender could not demonstrate its entitlement to enforce the lost note under Massachusetts’ UCC, it presumably could not collect any deficiency after the sale or otherwise obtain a judgment on the note, but reading Eaton together with the Massachusetts UCC should allow the lender to foreclose under the statutory power of sale as long as it can demonstrate that it owns the mortgage note.
Distinguishing the Note from the Debt
This analysis also tracks commonly accepted principles of Massachusetts law distinguishing between the ability to enforce a note and the underlying debt’s continued existence. Massachusetts has long recognized that the debt continues to exist even when the lender cannot enforce the note against the borrower, and Massachusetts courts acknowledge that a borrower’s moral obligation to repay a debt survives even when the lender cannot obtain judgment on the note. [27] The court in Nims v. Bank of New York Mellon[28] recently held that “[a] mortgage continues to be enforceable in a proceeding in rem against the security, separate and apart from an action in personam against the debtor on the note. . . . For this reason, for example, the mortgage remains enforceable in rem even when personal liability on the note has been discharged fully in bankruptcy.” Put differently, the mortgage secures the debt, not the note.
Similarly, consider the express language in Fannie Mae’s model Massachusetts mortgage,[30] which is commonly used throughout the state. The mortgage defines the term “Note” to mean “the promissory note signed by Borrower.” The term “Loan” means “the debt evidenced by the Note, plus interest, any prepayment charges and late fees due under the Note, and all sums due under [the mortgage], plus interest.” The mortgage secures both of the following to Lender: “(i) the repayment of the Loan, and all renewals, extensions and modifications of the Note, and (ii) the performance of Borrower’s covenants and agreements under [the mortgage] and the Note.”
In other words, the mortgage secures the borrower’s obligation to repay the loan, not the lender’s ability to enforce the promissory note the borrower gave as evidence of the debt. Accordingly, the court in Bishay v. US Bank[31] held that “[a]s long as the debt evidenced by the note remains unpaid, the mortgagee can foreclose, even if the note is otherwise unenforceable under the statute of limitations.”[32]
Thus, if the lender can demonstrate that it is entitled to enforce the note under the UCC, then it can show that the borrower owes the lender her obligation to repay the loan.[33] But the borrower’s obligation to repay the loan should survive even if the lender cannot enforce the note under the UCC, and the mortgage secures that obligation by its own express terms. Again, this analysis is consistent with Eaton’s explanation that it used the term “note holder” to refer to the note’s owner and the comments to the Massachusetts UCC specifically distinguishing between owning the note and being entitled to enforce the note.[34]
Pegging the Power of Sale to Entitlement to Enforce Harms Borrowers
Importantly, any analysis of Massachusetts law that pegs the statutory power of sale to entitlement to enforce the note rather than ownership of the note would also harm borrowers. Consider the following scenarios.
Bank loans Homeowner money to purchase a home. Homeowner executes a promissory note to Bank memorializing the loan’s terms, and gives Bank a mortgage securing her obligation to repay the debt. Bank loses Homeowner’s promissory note and later sells the lost note to Creditor. Bank assigns Creditor the mortgage. Homeowner defaults.
If Zullo correctly concluded that the Massachusetts UCC does not allow Bank to contractually assign Creditor its entitlement to enforce the note, then Bank remains the only entity entitled to enforce the note even though Creditor now owns the note. The Massachusetts UCC unquestionably distinguishes between entitlement to enforce the note and ownership of the note, and it confirms that an entity who does not own the note can still qualify as the person entitled to enforce the note.[35]
This means that if Massachusetts courts peg the statutory power of sale to entitlement to enforce the note rather than ownership of the note, then Bank—as the entity entitled to enforce the note—can foreclose under the statutory power of sale even though it no longer owns the note. It further means that despite Creditor remaining the entity who reviews Homeowner for loss mitigation options and otherwise works with Homeowner to try to save her home, Bank—who no longer has any interest in the underlying debt—may legally decide whether and when to sell the home in foreclosure.
Notably, as the entity entitled to enforce the note, Bank could even demand that Creditor, who properly and rightly owns the note, assign the mortgage back to Bank, because despite Creditor owning the note, Creditor would only hold the mortgage in trust for Bank as the entity entitled to enforce the note. Creditor could likely recover the proceeds of the foreclosure sale from Bank under UCC section 3-306, but Creditor would have no power to stop Bank from foreclosing on Homeowner, or to voluntarily delay the foreclosure while Creditor reviewed workout solutions with Homeowner.
In fact, legally savvy and ethically lacking operators could take the situation even further. Let’s change the hypothetical to say that Bank never lost the note and never sold it to Creditor. Instead, Bank indorsed the note in blank as a matter of routine practice and continued to hold it. Homeowner then defaults, and Bank delivers the blank-indorsed note to Attorney to begin the foreclosure process in Bank’s name. Attorney—having read Zullo and the Massachusetts UCC but having failed Professional Responsibility in law school—instead decides to foreclose in his own name as the holder of the note.
Bank would have the same legal recourse against Attorney that Creditor had against Bank in the first scenario, but Homeowner would be stuck in the middle of the two without any grounds to stop Attorney’s foreclosure. Attorney has possession of the note indorsed in blank, which makes him the note’s holder under the UCC. Thus, according to any legal analysis where entitlement to enforce the note overrides ownership of the note for statutory power of sale purposes, Attorney may exercise the power of sale as the note’s holder. Massachusetts courts should not interpret Massachusetts foreclosure law to countenance such absurd results.
Indeed, the Massachusetts Supreme Court expressly rejected a similar scenario when analyzing these exact types of concerns in Eaton. More specifically, the Court discounted the lender’s position that a mortgagee who holds the mortgage but cannot show ownership of the note can foreclose in its own name and “thereafter account to the note holder for the sale proceeds.”[36] Pegging the statutory power of sale to entitlement to enforce the note instead of ownership of the note would result in nearly the exact scenario Eaton rejected. It would allow, or even require, an entity without an interest in the underlying debt to foreclose in its own name and then account for the sale proceeds to the note’s true owner. This is not the correct result under Massachusetts law.
Assigning Contract Rights Versus Selling the Note
Notably, none of this analysis directly conflicts with Zullo’s ruling that parties cannot contractually assign their entitlement to enforce lost notes under the Massachusetts UCC. The Land Court in Zullo focused on the narrow issue of whether a prior lender could assign its entitlement to enforce the lost note, rather than the current lender’s ability to prove ownership of the lost note.
Reasonable minds can disagree about whether Zullo correctly concluded that lenders cannot assign their entitlement to enforce lost notes under contract law. However, even if Zullo reached the right answer to that question, Massachusetts courts properly applying the relevant standards should treat the issue of whether a lender can assign its entitlement to enforce the note differently than they treat the issue of whether a lender can demonstrate it owns the note when determining whether the lender may foreclose under Massachusetts’ statutory power of sale.
The Massachusetts UCC specifically distinguishes between entitlement to enforce the note and ownership of the note, and the standard under Eaton allows the lender to foreclose if it shows that it owns the note.[37] The legal question of whether a lender can assign its entitlement to enforce a lost mortgage note is not relevant to the distinct question of whether the lender owns the lost mortgage note. Nothing in Eaton requires lenders to show they can enforce the note. Rather, the decision allows foreclosure under the statutory power of sale if the lender shows it owns the note.
Notably, courts may require lenders to present similar (or maybe even identical) evidence to show they own the note as courts would require them to submit to prove assignment of a contract right, but the legal questions remain distinct. Even if a lender cannot contractually assign its entitlement to enforce a lost note, ownership of the note—not entitlement to enforce the note—is the standard the Massachusetts Supreme Court set for exercising the statutory power of sale to foreclose.[38]
Conclusion
Losing a promissory note changes the lender’s process for demanding repayment on a loan, but it does not relieve the borrower from having to pay the money back. Nor should it cancel the lender’s security for the loan, even if the lender acquired its interest after the note was lost. To the extent the current practice in Massachusetts may tend to accept otherwise, local practitioners should re-examine the analysis. The borrower remains obliged to repay his debt even if the note is missing. Massachusetts lenders should not have to lose their mortgage over a lost note.
* This article is not intended as and should not be considered legal advice.
[21]Id. at 578 n.11 (harmonizing on-point Massachusetts case law through “the general principle . . . that a mortgage ultimately depends on the underlying debt for its enforceability”) (emphasis added).
[26] Compare Eaton, 462 Mass. at 517 n.2 with ALM GL ch. 106, § 3-203, cmt. 1.
[27]See, e.g., Wash. Mut. v. DeMello, 14 LCR 374, 376 (Mass. 2006) (“A moral obligation to pay the debt survives the [bankruptcy] discharge.”) (quoting Groden v. Kelley, 382 Mass. 333, 336 (1981)); Wexler v. Davis, 286 Mass. 142, 144 (1934) (acknowledging the “moral[ ] obligation” to repay a debt even when “[t]he remedy upon the debt . . . is at an end.”).
[32] Cf. Duplessis v. Wells Fargo, 16-P-1040, 2017 Mass. App. Unpub. LEXIS 586 *5-*6 (May 30, 2017) (“A mortgage is not a negotiable instrument, and is not a note . . . Article 3 of the UCC, as adopted in Massachusetts, does not govern mortgages.”).
Digital art represented by NFTs (non-fungible tokens) made a spectacular arrival in March with the $69.3 million (in Ether) auction sale by Christie’s of a collage by digital artist Beeple.[1] The buyer is founder of an NFT fund in Singapore. In the scramble to get up to speed on the phenomenon, NFTs have been denounced as a scam based on blockchain hype, advocated as a way to improve the economic standing of struggling non-celebrity artists[2], or heralded as a sign that the ‘Metaverse’ depicted in Neal Stephenson’s 1992 novel Snow Crash is fast becoming a reality. Regardless of the varied reactions to NFTs, it seems inevitable that financial institution lenders will be approached by customers seeking to put up newly minted NFT-linked art collections as collateral.
Real-world art loans most often take the form of revolving lines of credit using works of creative visual art as collateral. These loans use a number of techniques to mitigate the art world’s perennial issues with authentication, changes in market value, the need to obtain a first-priority security interest in the artwork, and the risk of theft or casualty loss. Historically, the default risks on these loans have been generally perceived to be relatively low in view of the affluent nature and often prominent identity of the borrowers under these credit facilities.
For institutional lenders to achieve a sufficient comfort level to consider making NFT-secured loans, a number of real-world techniques for evaluating requests for an extension of credit will need to be rethought and somehow accommodated. These considerations include ways to address risks related to provenance and authenticity, periodic appraisals to monitor changes in value, perfection of security interests, and insurance for theft or loss.
First, as to authentication, real-world certifications will be of little use. An NFT is by definition a unique “crypto asset,” but this does not mean that each NFT represents a unique work of art – indeed, multiple NFTs may be sold based on a single work, just as a real-world artist may authorize and sign a limited number or prints of an original work.[3] To authenticate an NFT, the artist may include an e-signature in the software code that is the basis of the NFT.[4] It is also important to keep in mind that an NFT is not itself the digital artwork, but it is instead a crypto asset consisting of a “smart contract” based on a specified blockchain which “points to” the asset, which may be a JPEG or other image file or a video recording. Many NFTs do not include any ownership interest in the underlying work, and do not transfer copyright, although they may include rights to non-commercial display on the web. In the case of Cristie’s Beeple sale, the artwork itself, in the form of a JPEG of the collage artwork, was transferred to the purchaser.[5] Tokens generally provide a kind of verifiable provenance only of the NFT itself, but not of the underlying artwork. An NFT may also impose licensing conditions on the NFT purchaser, such as a 10% royalty payable to the artist on any future resales of the NFT at a profit. The specific “bundle of rights” and obligations transferred by an NFT will have to be parsed by a lender with specificity.
Second, appraisals of NFT assets will likely be a challenge, in view of the volatility of prices in the crypto environment. Offsetting this is the possibility that rapidly expanding secondary markets for trading NFTs may be useful in establishing a “market” price.
Third, as to perfection of a security interest in NFT collateral, a lender may choose to perfect by treating an NFT as a “general intangible” under a local enactment of the Uniform Commercial Code (UCC) and filing a UCC-1 Financing Statement. Where a proposed borrower reaches out to a lender on the web or a blockchain, it may be challenging to identify a debtor’s precise location for purposes of a UCC filing. In addition, enforcement of a security interest perfected only by filing is less certain: Because an NFT lives only on a blockchain where the guiding principle is that “code is law,” an irreversible on-chain transfer by the borrower, even if done in violation of the terms of a security agreement, may put a crypto asset effectively beyond the reach of a conventional UCC foreclosure action on general intangibles. (Terms used here have their common meaning under most local enactments of UCC Articles 2, 8 and 9.) In addition, a security interest perfected only by filing will be inferior in priority to a security interest perfected by “control,” as discussed below.
Lenders do have other options under Articles 8 and 9 of the UCC for perfecting and enforcing a security interest in an NFT, drawing on techniques originally devised for investment securities and more recently applied to cryptocurrency and other digital assets. The lender could for instance have the crypto asset registered in the lender’s name under the terms of a security agreement, but this is often not acceptable to borrowers.
A lender may wish to consider an approach currently in use for loans secured by cryptocurrency collateral. Looking to procedures originally devised for equity securities in the indirect holding system, a lender may require a proposed borrower to transfer the NFT or other digital asset to a “securities account” with a “securities intermediary,” generally a bank or trust company. Under a three-way account control agreement (ACA) between the lender, securities intermediary, and borrower, the securities intermediary agrees to treat the NFT as a “financial asset” under Article 8 (usefully, any property, including a real-world asset, may be a “financial asset” under Article 8 if the securities intermediary expressly so agrees). With an ACA in place, a security interest in the account and/or the financial assets held in it can be perfected in favor of the lender where the securities intermediary agrees that it will comply with orders (“entitlement orders”) from the lender “without further consent,” thus giving the lender “control” within the meaning of Articles 8 and 9. Perfection by “control” will generally provide a secured lender with priority over any other security interest perfected by filing. In addition, the risk of an irreversible transfer of the asset on-chain may be mitigated by undertakings from the securities intermediary in the tripartite agreement that it will not transfer the asset (in our example an NFT) except in strict accordance with the terms of the ACA.[6]
As for casualty loss, theft, and the other vicissitudes that may befall works of art, it may be noted that in the case of the $69.3 million Christies/Beeple sale, instead of being locked up in a museum vault, the “original” JPEG was stored on the blockchain-based Interplanetary File System (IPFS). The NFT itself resides on an Ethereum blockchain maintained by the platform that generated it for the creator of the work, and there are already reports that some other platforms have disappeared from the Web inexplicably.[7] There are also reports of NFT art heists on a popular platform[8], and a new industry of fraudsters has sprung up to form and sell NFTs based on works of art in which the NFT minters themselves have no ownership interest.[9] There will likely be a need for new and expanded types of cyber insurance to insure against such contingencies. The Metaverse may indeed be closer, but the hazards that attend the glamor and brilliance of the existing art world will find undoubtedly find new expression in the new one.
[1] An NFT is a digital asset existing on a blockchain. A blockchain is a digital ledger verified by the consent of its users without the need for a trusted authority. Most digital assets, including cryptocurrencies like Bitcoin, are fungible in the sense that units representing equivalent value are widely accepted in exchange, just as five pennies may be exchanged for a nickel. By contrast, each NFT has unique characteristics and is marked by a specific digital signature from the originator which is embedded in its underlying code. Please see, e.g., “Explainer: NFTs are hot. So what are they?” and The Atlantic, “What Critics Don’t Understand About NFTs” (comparing valuations of NFT and traditional artwork).
[6] This article does not address a range of other issues that should be considered in connection with digital asset collateral. There are reports that tokens representing fractional interests in some art-linked NFTs are in some instances held by other persons. Such transactions raise, inter alia, a number of legal and compliance concerns relating to offers and sales of securities under US or foreign law, regulation of exchanges if traded assets are deemed be “securities,” investment company regulation, broker-dealer and investment adviser regulation, tax, and BSA/KYC/AML compliance.
For many decades, the law of closely-held businesses was the law of closely-held corporations.[1] For entrepreneurs and attorneys, the corporate liability shield was the key desideratum, and before the advent of limited liability companies the corporation was essentially the only game in town.[2] Unfortunately, for many decades the liability shield came with a potentially dangerous price for minority owners.[3] The traditional corporate norms of majority rule, coupled with the minority shareholders’ inability to exit the enterprise, empowered majority shareholders to “oppress” minority shareholders or defeat such shareholders’ “reasonable expectations.”[4] The “lock-in” phenomenon compounds the minority’s vulnerability; it is typically impossible for a minority shareholder to exit the enterprise except on terms dictated by the majority.
Today, in almost all U.S. jurisdictions special rules protect minority shareholders from outright expropriation;[5] in accord with these rules controlling shareholders must avoid abusing their co-owners. Corporate law recognizes what was many years ago described as an “incorporated partnership”[6] – i.e., “an intimate business venture [in which] stockholders … occupy a position similar to that of joint adventurers and partners”[7] and, concomitantly, have important duties inter se. The two most prominent terms of art – often used interchangeably – are “oppression” and “reasonable expectations.”
However, today the closely-held corporation is no longer the only game in town. Far from it – in every U.S. jurisdiction, formations of limited liability companies far exceed new incorporations,[8] and for some jurisdictions a better verb choice than “exceed” might be “dwarf.”[9] Every year, the percentage of closely held businesses formed as limited liability companies rises as the percentage for corporations falls.[10]
As with corporations, the overwhelming majority of limited liability companies are closely held. As a result, disputes about power abuses within closely-held businesses increasingly occur in the context of LLCs rather than corporations; and the terms “oppression” and “reasonable expectations” increasingly appear in cases involving limited liability companies.
This development is natural. Although LLC and corporate law differ in some fundamental ways,[11] the dangers of oppression arise from a combination of business considerations and human nature. “Choice of entity” has little impact on these factors nor on the way in which they combine.[12]
Thus, as was foreseeable,[13] “oppression” and “reasonable expectations” have migrated into the world of LLCs. However, it has not been a simple matter to determine what these terms of art mean in the LLC context. Even in the now-mature case law on closely-held corporations, jurisdictions vary in defining “oppression” and determining what shareholder expectations are “reasonable.” A fortiori the LLC case law is also varied.
No single LLC case can control this determination, but a recent decision from the Connecticut Court of Appeals provides much useful guidance. The case, Manere v. Collins, involved a dispute between the two members of a Connecticut limited liability company that operated a cafe.[14] The minority member sought a court order dissolving the LLC. He invoked Conn. Gen. Stat. § 34-267(a)(5)(B) of the Connecticut Uniform Limited Liability Act, which comes essentially verbatim from the Revised Uniform Limited Liability Company Act (2006, Last Amended 2013).[15] The Connecticut version states:
On application by a member, the entry by the Superior Court for the judicial district where the principal office of the limited liability company is located, of an order dissolving the company on the grounds that the managers or those members in control of the company: … have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant ….[16]
Although “oppressive” is obviously a key term in this provision, the Connecticut statute, like its uniform progenitor, “does not define ‘oppression.’”[17] Moreover, until Manere, neither the court of appeals nor the Connecticut Supreme Court had “had the opportunity to define oppression as that term has been utilized in § 34-267 since its inception.”[18]
Manere provided the court of appeals its first opportunity on the subject, and the court provided an analysis that is instructive in several ways. Most categorically, for the 21 jurisdictions that have adopted the Revised Uniform Limited Liability Act,[19] the decision is precedential. As a uniform act, “CULLCA” [the court’s acronym] by its terms “requires considering the need to promote uniformity with other states regarding LLC law when applying and construing its provisions.”[20] And in Manere, the court does just that. In particular, the court delineates the pivotal yet undefined concept of oppression by quoting and relying on the uniform act’s official comments.[21]
Additionally, Manere will be useful beyond the realm of uniform enactments. Given the quality of the court’s analysis, the decision is likely to be persuasive even where not formally precedential. For example, in addition to holding that corporate precedent is relevant to the LLC context and vice versa,[22] the court “walks the walk” by using corporate cases to make specific points about oppression in LLCs. For instance, the Manere court stated that, “in assessing a minority member’s reasonable expectations, courts have noted the relevance of the operating agreements of LLCs (or other written and oral agreements).” Then, for authority, the opinion directs the reader solely to a corporate case.[23]
More broadly, i.e., whatever the jurisdiction, Manere’s greatest impact will come from the decision’s core analysis. That analysis:
identifies and distinguishes the two main approaches close corporation law has taken in defining oppression, i.e.:
the fair dealings standard, which assesses alleged majoritarian misconduct against norms of business conduct stated in general terms – for example:
burdensome, harsh and wrongful;
evidencing a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members;
a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely;[24] and
the reasonable expectations standard, which examines alleged majoritarian misconduct from the perspective of the complaining member:
occasioning a fact-intensive inquiry into the particulars of the case; and
assessing those facts under the objective standard of reasonableness; and
adopts the reasonable expectations standard:
relying on the official comments to the uniform act; and
stating that the court views the “guidance [in the official commentary] as a tacit adoption of the ‘reasonable expectations’ standard for oppression claims under the RULLCA [Revised Uniform Limited Liability Company Act].”[25]
The court quotes the guidance at length:
[A] court considering a claim of oppression by an LLC member should consider, with regard to each reasonable expectation invoked by the plaintiff, whether the expectation:
(i) contradicts any term of the operating agreement or any reasonable implication of any term of that agreement;
(ii) was central to the plaintiff’s decision to become a member of the limited liability company or for a substantial time has been centrally important in the member’s continuing membership;
(iii) was known to other members, who expressly or impliedly acquiesced in it;
(iv) is consistent with the reasonable expectations of all the members, including expectations pertaining to the plaintiff’s conduct; and
(v) is otherwise reasonable under the circumstances.[26]
These factors recognize and respect the contract-based nature of the limited liability company. The first factor is simply the contract – i.e., the operating agreement. The third and fourth factors reflect that norms within a contract-based organization must be shared to be enforceable.[27] This approach is especially important in the oppression context, because “reasonable expectations” can bring relief even as to conduct that the operating agreement does not forbid.[28]
Having adopted the commentary’s five factors, Manere then takes a further step (albeit one based on the commentary). Noting that the “ULLCA factors…indicate…that the reasonableness of a member’s expectation at the inception of an LLC may prove unreasonable over time and under particular circumstances.”[29]Manere adds a sixth factor – namely, how a plaintiff’s misconduct should figure into a “reasonable expectations” analysis.
This situation can be quite complicated, especially in one of the classic oppression scenarios – i.e., when the majority terminates a minority owner from a full-time, paid position within the enterprise and thereby cuts off the member’s only significant source of remuneration.[30] According to Manere, even assuming minority misconduct justified the termination (i.e., any expectation of employment was no longer reasonable), some other reasonable expectation may remain. Indeed, in Manere, while it was “the plaintiff’s own misconduct which prompted the complained of acts he has alleged as oppressive,”[31] nonetheless:
That misconduct does not obviate the need for the court to consider whether he continued to have reasonable expectations as a minority member. See Gimpel v. Bolstein, supra, 125 Misc. 2d at 53, 477 N.Y.S.2d 1014 (although minority shareholder embezzled company funds, “it does not necessarily follow that the majority shareholders may treat him as shabbily as they please”). While the plaintiff cannot establish oppression based on his termination of employment—or based on his being prevented from unfettered access to the cafe or [the LLC] bank accounts—we emphasize that the plaintiff cannot be marginalized to the extent that he would be precluded from realizing what reasonable expectation he still maintains as a minority member.[32]
This proposition seems logical in theory and with regard to nonfinancial expectations can often be achieved – e.g., appropriate access to company information, opportunity to have one’s views at least considered in good faith before major company decisions.[33] When money is involved, however, there may be no middle ground. The company may be cash poor, and the money formerly paid for member’s work may be needed to pay a replacement.
For that situation, the ULLCA commentary attempts no answer, and Manere provides guidance only in terms of a dispute in litigation:
[A] court should take into account not only the reasonable expectations of the oppressed minority [member], but also the expectations and interests of others associated with the company. To do so necessarily requires a balancing of factors to make an equitable determination, and, therefore, is left to the sound discretion of the trial court.[34]
What does this approach mean for litigators seeking to avoid litigation? Or for transactional lawyers seeking to predetermine the outcome? For the answer to these questions, one must look beyond Manere or the Uniform Law Commission’s official comments. A future column will do so.
[1] A.B. Harvard (1972); J.D. Yale (1979). This article reflects joint research and multiple exchanges of views with Professor Douglas K. Moll. Any errors, however, are solely the author’s responsibility.
[2] Eventually full-shield limited liability [general] partnerships and limited liability limited partnerships became available as well. Daniel S. Kleinberger, “Sorting through the soup: How do LLCs, LLPs and LLLPs fit within the regulations and legal doctrines?” Business Law Today, Vol. 13, No. 2 (November/December 2003), pp. 14-19. However, limited liability companies far outnumber both LLPs and LLLPs as vehicles for closely held businesses. For example, for 2020 the Office of the Minnesota Secretary of State reported the formation of 47,464 limited liability companies, 192 limited partnerships, and 470 limited liability partnerships. https://www.sos.state.mn.us/business-liens/business-liens-data/new-business-filings-2020/?searchTerm=filings, last visited 4/2/21. (The dataset does not distinguish between limited partnerships and limited liability limited partnerships.) For 2019, the Delaware Division of Corporations reported the formation of 165,910 new LLCs and 13,513 new “LP/LLPs”. Annual Report (2019); https://corp.delaware.gov/stats/, last visited 4/2/21.
[3] The shield also posed tax issues for minority and majority owners alike. See Carter G. Bishop and Daniel S. Kleinberger, Limited Liability Companies, (WG&L 1994; RIA Supp. 2021-1) (“Bishop & Kleinberger”), ¶1.01[2]. (The Need for Limited Liability Companies: The Tax-Shield Conundrum).
[4]See, e.g., Minority Oppression & the Limited Liability Company: Learning (or Not) from Close Corporation History, 40 Wake Forest L. Rev. 883, 896–907 (2005).
[5] Delaware is the most notable exception. See Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993). Delaware’s corporate statute does have an opt-in close corporation subchapter, 8 Del. Code subch. XIV, but anecdotal evidence suggests that the subchapter is invoked infrequently. A statistical review would likely confirm the suggestion. (For example, a learned and experienced Delaware attorney, referring to information available from the Delaware Division of Corporations, recently told that author that – in November, 2020 – only 15 of 3973 new Delaware incorporations were for closed corporations.)
[6]See, e.g., George D. Hornstein, Stockholders’ Agreements in the Closely Held Corporation, 59 YALE LJ. 1040, 1040 (1950) (stating that “stock-holders [in a closely held corporation] … generally prefer certain of the attributes of partnership” and that “[i]n effect, they want an ‘incorporated partnership’”).
(stating that “a minority shareholder of a close corporation and a minority member of an LLC share many traits which make them vulnerable to oppression”).
[13]See, e.g., Bishop & Kleinberger, ¶ 10.09 Special Fiduciary Duties in Closely Held Limited Liability Companies; Douglas K. Moll, Minority Oppression & the Limited Liability Company: Learning (or Not) from Close Corporation History, 40 Wake Forest L. Rev. 883 (2005).
[14] Manere v. Collins, 241 A.3d 133 (Conn. App. 2020).
[15] Connecticut adopted the uniform act in 2016. Connecticut Public Act No. 16-97 (2016).
[16]Id. at 150 (quoting Conn. Gen. Stat. § 34-267 (a)(5)(B)).
[17]Id. at 150. The court added that “[t]he term ‘oppression’…does not appear in any [other] section” of the Connecticut LLC act.
[20]Id. at 151 (quoting Office of Legislative Research, Bill Analysis, Substitute House Bill No. 5259, An Act Concerning Adoption of the Connecticut Uniform Limited Liability Company Act (April 28, 2016); citing the identical language in Conn. Gen. Stat. § 34-283).
[21]Id. at 152 (“Because the legislature substantially adopted the major provisions of the RULLCA, we may look to the commentaries of that uniform act for further guidance in ascertaining the legislature’s intent.”). Of course, even within the realm of uniform enactments, a comment is not by itself precedential, See, e.g., Simmons v. Clemco Indus., 368 So. 2d 509, 514 (Ala. 1979) (stating that, “[t]hough the official comments are a valuable aid in construction, official comments have not been enacted by the legislature and are not necessarily representative of legislative intent”). However, with that realm a court’s adoption of a comment is as much precedential as any other holding of the court.
[22] Manere v. Collins, 241 A.3d 133, 153 n. 20 (2020) (“Given that a minority shareholder of a close corporation and a minority member of an LLC share many traits which make them vulnerable to oppression, and mindful of the commentary’s guidance, we believe that the governing principles of close corporation law are instructive for our interpretation of the term ‘oppression’ as it appears in the CULLCA. For purposes of convenience, we use the terms “LLC” and ‘close corporation’ interchangeably.”).
[23]Id. at 156 (citing solely Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d [173], 185 [2001]); For practitioners unfamiliar with the oppression construct, Manere provides another benefit – i.e., a cogent introduction made by succinctly canvassing the relevant corporate case law.
[27] Evidence of shared norms can be found in conduct as well as words. Acquiescence may occur “expressly or impliedly.” Id.
[28] When the majoritarian misconduct seems authorized by the operating agreement, an oppression claim might still work, but the implied contractual covenant of good faith and fair dealing is the more targeted weapon. The uniform act’s official commentary discusses the applied covenant in depth. ULLCA (2013) § 701, cmt. See also Daniel S. Kleinberger, “Delineating the Implied Covenant and Providing for ‘Good Faith,’” BUSINESS LAW TODAY (May 2017); “In the World of Alternative Entities – What Does ‘Good Faith’ Mean?” BUSINESS LAW TODAY (March 2017).
[30] In the close corporation context, the cases refer to expectations of employment. Manere does so as well, noting that “employment by an LLC is typically the main source of income to members in an LLC.” Id. However, the word “employment” jars any LLC lawyer familiar with K-1 forms, guaranteed payments, and other nuances of income tax law.
[32]Id. This passage is another example of the interchangeability of corporate and LLC precedent, discussed in the text above, at nn. 22-23. The court’s sole authority is Gimpel v. Bolstein, a case involving a close corporation.
[33] Each of these examples presupposes appropriate behavior by minority owner (e.g., safeguarding confidential information, not being abusive to individual providing information or taking note of the minority owner’s views), and the second example presupposes practicability (e.g., that timing and other circumstances make consultation possible).
