American Bar Association Section of Public Utility, Communications and Transportation Law Report of the LABOR COMMITTEE Spring 2014 Council Meeting Chair Paul J. Ondrasik, Jr. This Report was prepared by John F. Ring Daniel P. Bordoni Paul J. Ondrasik, Jr. Eric G. Serron E. Thomas Veal Ryan T. Jenny © 2014 American Bar Association Section of Public Utility, Communications & Transportation Law I. EMPLOYMENT LAW DEVELOPMENTS A. Federal Rule of Civil Procedure 23 1. The Fourth Circuit Finds That Lower Court Erroneously Applied Dukes By Denying Motion for Leave to Amend In Scott v. Family Dollar Stores, Inc., a divided three-judge panel of the Fourth Circuit held that the lower court’s denial of plaintiffs’ motion for leave to amend their complaint alleging pay discrimination was based on an incorrect interpretation of the Rule 23 commonality standard as set forth in Wal-Mart v. Dukes.1 In reversing the denial of leave to amend, the Fourth Circuit remanded the case to the lower court for class certification purposes.2 The plaintiffs, all current or former female Family Dollar store managers, filed their original class action complaint prior to the Supreme Court’s June 2011 ruling in Wal-Mart v. Dukes.3 The complaint alleged that the company’s “centralized control of compensation for store managers at the corporate level of [] operations,” as well as pay decisions and/or a pay system that included “subjectivity and gender stereotyping,” created a disparate impact on women.4 After Family Dollar moved to dismiss or strike claims disallowed under Dukes, plaintiffs sought leave to amend their complaint and elaborate on their allegation regarding “centralized control of compensation for store managers at the corporate level.”5 The district court granted Family Dollar’s motion and denied plaintiffs’ motion for leave to amend, noting that the amended complaint’s allegation concerning discretionary pay for managers was insufficient under Dukes.6 The district court also found that granting leave to allege a “new theory” of the case three years after the filing of the original complaint would be prejudicial to the defendant.7 The Fourth Circuit focused on the lower court’s denial of leave to amend, which it held to be “erroneous and based on a misapprehension of the applicable law.”8 Specifically, while the majority did agree with the lower court as to the insufficiency of the original complaint,9 they held that Dukes does not preclude class certification based on plaintiffs’ “amplified allegations” as set forth in the proposed amended complaint.10 The majority noted two errors in the lower court’s application of Dukes. First, the lower court failed to consider whether “discretion was exercised in a common way under some common direction, or despite the discretion alleged, another company-wide policy of discrimination is also alleged.”11 Second, the lower court did 1 733 F.3d 105, 108 (4th Cir. 2013). Id. 3 Id. at 108-09; see also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). 4 733 F.3d at 108-09. 5 Id. at 109-10. 6 Id. at 110. 7 Id. 8 Id. at 112. 9 Id. at 116. 10 Id. at 116-17. 11 Id. at 116. 2 2 not consider whether the so-called discretionary authority was exercised by high-level or lowlevel managers.12 The Fourth Circuit further noted that, upon further development of the record underlying the amended complaint, the certification issue should be revisited by the lower court.13 The majority also found the lower court’s conclusion that granting leave to amend would be prejudicial to Family Dollar was clearly erroneous.14 The court explained that many of the alleged delays were caused by Family Dollar, and that the amended complaint did not allege a new theory, but instead “elaborate[d] on one of two allegations that were previously pled in the original complaint in a conclusory fashion.”15 B. Title VII 1. The Ninth Circuit Reduces Punitive Damages Award to Victim of Sexual Harassment on Due Process Grounds In Arizona v. ASARCO LLC, the Ninth Circuit held that a punitive damages award of $300,000 in a sexual harassment suit did not bear a reasonable relationship to compensatory damages and was constitutionally excessive, therefore violating due process.16 In so holding, the Ninth Circuit vacated the trial court’s damages award and directed a new trial unless the plaintiff accepted a reduction in the award to $125,000.17 The Ninth Circuit declined to follow the approach of circuits holding that when a plaintiff has established egregious conduct, a punitive damages award in the amount of the $300,000 statutory punitive damages cap under Title VII “obviates any due process concerns.”18 Angela Aguilar worked in various positions during her tenure at ASARCO LLC, a copper mining and refining company.19 While she was working as a car loader, Aguilar alleged that her supervisor subjected her to continuous romantic advances and fear of sexual assault.20 She further alleged that Human Resources was unresponsive to her complaints, and it was not until she contacted the facility manager that her supervisor was directed to discontinue his behavior to avoid disciplinary action.21 When Aguilar bid for and was promoted to another position, the “porta-potties” that she used (because the company did not have a functioning women’s restroom in the building) were repeatedly vandalized with “pornographic graffiti directed at her” despite her requests that the graffiti be removed.22 When Aguilar again transferred positions, she alleged that she was again subjected to harassment by her new indirect supervisor, which was also not 12 Id. Id. at 117. 14 Id. 15 Id. at 117-18. 16 733 F.3d 882 (9th Cir. 2013). 17 Id. at 892. 18 See 733 F.3d at 893 (Hurwitz, J., dissenting). 19 Id. at 883-84. 20 Id. at 884. 21 Id. 22 Id. 13 3 investigated or addressed by management.23 Shortly after returning from a leave of absence for personal reasons, Aguilar terminated her employment with ASARCO.24 Both Aguilar and the State of Arizona brought suits (which were ultimately consolidated) alleging sexual harassment, retaliation, and constructive discharge.25 At the conclusion of an eight-day jury trial, ASARCO was found liable only with respect to the sexual harassment claim.26 The jury awarded $868,750 in punitive damages and $1 in nominal damages, but did not award any compensatory damages.27 Based on the statutory caps on compensatory and punitive damages imposed by Title VII, which are based on the size of an employer’s workforce,28 the punitive damages award was reduced by the trial court to $300,000, the statutory maximum for an employer of ASARCO’s size.29 The district court did not, however, find it to be statutorily or constitutionally excessive.30 On appeal, the Ninth Circuit relied on BMW v. Gore31 and its progeny.32 In Gore, the Supreme Court held that a punitive damages award which was grossly excessive could violate “[e]lementary notions of fairness enshrined in our constitutional jurisprudence”33 and established a three factor test for determining excessiveness: (1) the degree of reprehensibility of the defendant's conduct; (2) the ratio to the actual harm inflicted on the plaintiff; and (3) civil or criminal penalties that could be imposed for comparable misconduct.34 Analyzing the first factor, the Ninth Circuit agreed with the district court’s finding that ASARCO was liable for a “very large punitive award.”35 In analyzing the second factor and recognizing that “the Supreme Court has repeatedly emphasized the importance of the ratio inquiry [which] cannot [be] cast [] aside,”36 the Ninth Circuit held that the absence of a reasonable relationship between the compensatory and punitive damages warranted a reduction.37 Under the third Gore factor, which compares the punitive damages award to civil or criminal penalties imposed for similar conduct, the Ninth Circuit agreed with the district court that the award was appropriately reduced to at least the statutory cap.38 23 Id. at 884-85. Id. at 885. 25 Id. 26 Id. 27 Id. 28 See 42 U.S.C. §1981a(b)(3)(D). 29 Id. at 885. 30 Id. 31 517 U.S. 559 (1996). 32 See 733 F.3d at 885-86. 33 Id. at 885 (quoting Gore, 517 U.S. at 574). 34 Id. (quoting Gore, 517 U.S. at 575-83 (internal quotations omitted)). 35 Id. at 886-88. 36 Id. at 889 (citing Gore, 517 U.S. at 583). 37 Id. at 889. 38 Id. at 890. 24 4 Disagreeing with the district court’s determination that the award was not constitutionally excessive and therefore did not warrant further reduction, the Ninth Circuit then discussed how to reduce the excessive award of $300,000, which raised “judicial eyebrows.”39 In the absence of any bright-line rule, the Ninth Circuit determined that the highest award which would preserve the reasonable relationship and therefore satisfy due process was $125,000, which was in line with the highest ratio of punitive to compensatory damages upheld in a discrimination case (125,000 to 1).40 Judge Hurwitz, dissenting in part, would have affirmed the lower court’s judgment in its entirety.41 He disagreed with the majority’s interpretation of a Fifth Circuit case,42 noting that both the Fifth and Second circuits have held that in cases involving egregious conduct, the $300,000 statutory cap does not violate due process.43 3. The Seventh Circuit Holds That the EEOC’s “Failure to Conciliate” Does Not Constitute An Affirmative Defense to a Title VII Suit In EEOC v. Mach Mining, LLC,44 the Seventh Circuit held that the Equal Employment Opportunity Commission’s (“EEOC’s”) alleged failure to engage in conciliation efforts with the employer before bringing suit is not an affirmative defense to a Title VII discrimination claim.45 The Seventh Circuit thus becomes the first federal circuit court of appeals to reject outright the failure-to-conciliate defense, a theory that already had divided circuit courts.46 The EEOC brought suit against Mach Mining on behalf of female applicants for mining positions at the company’s Illinois site.47 Before the district court, Mach Mining repeatedly asserted that the EEOC’s failure to engage in good-faith conciliation efforts, as required by Title VII,48 constituted both a defense to the discrimination claim and a basis for rejecting many of the EEOC’s discovery requests.49 The EEOC sought summary judgment on the single issue of whether failure to conciliate constitutes an affirmative defense to a discrimination suit.50 The district court, relying on authority from a number of other circuits, denied the EEOC’s motion 39 Id. at 890-91 (quoting Gore, 517 U.S. at 583). Id. at 891-92. 41 Id. at 892-93. 42 Id. at 893 (citing Abner v. Kan. City S. R.R. Co., 513 F.3d 154, 157 (5th Cir.2008)). 43 Id. 44 738 F.3d 171 (7th Cir. 2013). 45 Id. at 184. 46 Id. at 182-83. 47 Id. at 173. 48 Under Title VII, following a reasonable cause determination, the EEOC is required to “endeavor to eliminate any such alleged unlawful employment practice by informal methods of conference, conciliation, and persuasion.” 42 U.S.C. § 2000e–5(b). It can bring a civil action only if it “has been unable to secure from the respondent a conciliation agreement acceptable to the Commission.” § 2000e–5(f)(1). 49 Id. 50 Id. 40 5 and certified for interlocutory appeal the questions of whether the EEOC’s conciliation efforts were judicially reviewable and, if so, what standard of scrutiny to apply.51 The Seventh Circuit reversed and remanded, holding that the EEOC’s failure to engage in conciliation efforts in good faith does not constitute an affirmative defense to a Title VII suit.52 The court first examined the statutory language, concluding that the statute’s failure to expressly include failure to conciliate as an affirmative defense, its clear grant of deference to the EEOC’s conciliation methods, and its requirement that the conciliation process be kept confidential, were logically inconsistent with a defendant’s ability to assert the EEOC’s failure to conciliate as an affirmative defense.53 Second, the court reasoned that Title VII does not provide standard for courts to use in evaluating whether the EEOC properly exercised its discretion in the conciliation process, making the conciliation requirement look “nothing like a judicially reviewable prerequisite to suit.”54 Third, the court evaluated Title VII’s statutory scheme as a whole, concluding that inserting a failure-to-conciliate affirmative defense would undermine enforcement of Title VII by giving employers an avenue to engage in “endless disputes” over presuit negotiations in hopes of obtaining a delay or dismissal.55 The court was not persuaded by Mach Mining’s argument that the defense is necessary to prevent the EEOC from abandoning conciliation or demanding unrealistic settlements. The court explained that the EEOC’s limited resources already act as a powerful incentive to conciliate and that the EEOC already is subject to oversight and scrutiny both from Congress and from executive branch officials.56 Finally, the court relied on its “consistent skepticism” in prior cases toward attempts to change the focus of a discrimination suit from the employer’s practices to the agency’s presuit processes.57 C. Fair Labor Standards Act 1. The Supreme Court Rules that the Donning and Doffing of Required Protective Gear Constitutes “Changing Clothes” Under the FLSA and May Therefore Be Excluded from Compensable Time By a Collective Bargaining Agreement In Sandifer v. United States Steel Corp., the Supreme Court unanimously held that the time employees spent “donning and doffing” their required protective gear was not compensable.58 The Court held that this time fell under 29 U.S.C. § 203(o), which allows the time spent “changing clothes” to be excluded from hours worked in accordance with the terms of a collective bargaining agreement. In so holding, the Court declined to treat protective gear required to perform a job differently from other forms of apparel. 51 See EEOC v. Mach Mining, LLC, 11-CV-879-JPG-PMF, 2013 WL 2177770, at *6 (S.D. Ill. May 20, 2013). Mach Mining, 738 F.3d at 184. 53 Id. at 174-75. 54 Id. at 175-78. 55 Id. at 178-80. 56 Id. at 179-80. 57 Id. at 180-82. 58 No. 12-417, 2014 WL 273241 (U.S. Jan. 27, 2014). 52 6 Employees of U.S. Steel filed suit in 2007, seeking back pay for time spent donning and doffing protective gear that included flame-retardant clothing, gloves, boots, safety glasses, earplugs, and respirators.59 Under the terms of its collective bargaining agreement with the employees’ union, U.S. Steel did not compensate employees for the time spent donning and doffing such equipment.60 The district court and the Sixth Circuit both held that the donning and doffing of protective gear was not compensable because it fell within Section 203(o)’s provision that time spent donning and doffing clothing is not compensable if excluded from hours worked under a collective bargaining agreement.61 On appeal, the Court briefly recounted the history of the FLSA and the Portal-to-Portal Act, which requires compensation for an employee’s principal activities.62 Under the Portal-toPortal Act, donning and doffing of protective gear typically is a principal activity and compensable unless excluded under Section 203(o).63 The Court then examined whether protective gear constituted “clothes” within the scope of Section 203(o), which allows parties to a collective bargaining agreement to exclude “time spent in changing clothes . . . at the beginning or end of each workday” from compensable time worked.64 The employees argued that donning and doffing protected gear did not qualify as “changing clothes” because the term “clothes” did not include “items designed and used to protect against workplace hazards.”65 The Court, however, looked to the “ordinary, contemporary, common meaning” of clothes.66 In so doing, the Court commented that “[d]ictionaries from the era of § 203(o)’s enactment indicate that ‘clothes’ denotes items that are both designed and used to cover the body and are commonly regarded as articles of dress.”67 The Court concluded that the statutory text was clear that “the ‘clothes’ referred to are items that are integral to job performance; the donning and doffing of other items would create no claim to compensation under the [FLSA], and hence no need for the § 203(o) exception.”68 Based on the fact that “protective gear is the only clothing that is integral and indispensable” to a host of occupations, the Court held that it was included in Section 203(o)’s definition of clothes.69 The Court also relied on the lack of any provision in the FLSA excluding protective gear from “clothes.”70 After determining the definition of “clothes,” the Court turned to the meaning of “changing.” The plaintiffs argued that “changing” clothes required substituting one article of clothing for another and therefore placing protective gear over street clothes did not constitute 59 Id. at *3. Id. 61 Id. 62 Id. at *4. 63 Id. 64 Id. 65 Id. at *5. 66 Id. 67 Id. 68 Id. at *6. 69 Id. 70 Id. at *7. 60 7 “changing.”71 The Court declined to adopt this interpretation. Although the normal meaning of “changing clothes” implies substitution, the broader context of Section 203(o)’s purpose of permitting “collective bargaining over the compensability of clothes-changing time” led the Court to hold that “time spent in changing clothes includes time spent in altering dress.”72 According to the Court, therefore, placing protective gear over other clothes fell within the definition of changing clothes.73 D. Family and Medical Leave Act (FMLA) 1. The Seventh Circuit Rules That the FMLA Covers Employee Caring for Parent Traveling Away from Home In Ballard v. Chicago Park District, the Seventh Circuit held that an employee’s request to take unpaid leave in order to accompany her terminally ill mother on a trip to Las Vegas was protected by the FMLA.74 The court concluded that the FMLA does not limit where an employee can provide care to a family member with a serious health condition to a “particular place or geographic location.”75 The court also held that the FMLA does not require that a family member must be receiving ongoing treatment when the employee provides away-fromhome care.76 The Seventh Circuit acknowledged that its ruling represented a split from decisions in similar cases where the First and Ninth Circuits declined to extend FMLA protection for employees on out-of-state trips.77 Plaintiff, Beverly Ballard, was employed by the Chicago Park District. 78 Plaintiff also served as the primary caregiver of her mother who was diagnosed with end-stage congestive heart failure.79 In 2007, a nonprofit organization that facilitated trips for terminally ill adults sponsored a six-day trip for Plaintiff’s mother to visit Las Vegas.80 Plaintiff made a request for unpaid leave in order to accompany her mother on the trip to Las Vegas.81 The Park District denied the Plaintiff’s leave request, although the Plaintiff stated that she was aware of the denial before she left for Las Vegas.82 Plaintiff continued to serve as her mother’s caregiver during the trip.83 Plaintiff was later terminated for the unauthorized absences that she accumulated while in Las Vegas.84 71 Id. at *7. Id. at *8. 73 Id. 74 No. 13-1445, 2014 WL 294550 at *5 (7th Cir. Jan. 15, 2014). 75 Id. at 2. 76 Id. 77 Id. at *4. 78 Id. at *1. 79 Id. 80 Id. 81 Id. 82 Id. 83 Id. 84 Id. 72 8 Plaintiff filed a lawsuit in district court alleging that the Chicago Park District violated her rights under the FMLA.85 The Park District moved for summary judgment, arguing that Plaintiff did not “‘care for’ her mother in Las Vegas” because the trip did not relate to a “continuing course of medical treatment.”86 The motion was denied and the Park District filed an interlocutory appeal.87 On appeal, the Seventh Circuit rejected the Park District’s argument that the FMLA required that the care Plaintiff provided to her mother in Las Vegas had to be connected to ongoing medical treatment.88 The court stated that, while the FMLA does not define “care,” the U.S. Department of Labor (“DOL”) regulations have interpreted a similar provision related to health-care provider certification that provides a broad definition that includes both psychological and physical care.89 The court explained that the DOL regulations do not include “location-specific” language or a provision that a family member must be receiving ongoing medical treatment to receive FMLA protection.90 Moreover, the relevant DOL rule provides that, “so long as the employee attends to a family member’s basic medical, hygienic, or nutritional needs, that employee is caring for the family member, even if that care is not part of ongoing treatment of the condition.”91 The court stated that basic medical and hygienic needs of the Plaintiff’s mother did not change while she was visiting Las Vegas, and Plaintiff continued to provide assistance to her mother during the trip.92 E. Americans with Disabilities Act 1. The Fourth Circuit Rules that a Temporary Impairment May Constitute an Actual Disability Under the ADAAA if Sufficiently Severe In Summers v. Altarum Institute Corp., the Fourth Circuit held that a temporary impairment lasting less than six months may constitute an actual disability under the ADA Amendments Act of 2008 (“ADAAA”) if sufficiently severe.93 In so holding, the Fourth Circuit became the first federal appellate court to apply the expanded definition of “disability” under the ADAAA. Plaintiff Carl Summers was employed as a research analyst for Altarum Institute and worked on-site at a client location.94 On October 17, 2011, Summers fell while exiting a commuter train on his way to work and suffered serious injuries to both legs.95 The injuries 85 Id. Id. 87 Id. 88 Id. at *3. 89 Id. at *2-3. 90 Id. at *3. 91 Id. at *4. 92 Id. at *3. 93 No. 13-1645, --- F.3d ----, 2014 WL 243245 (4th Cir. Jan. 23, 2014). 94 Id. at *1. 95 Id. 86 9 required Summers to undergo two surgeries.96 Doctors prohibited him from putting any weight on his left leg for six weeks and estimated that it would be at least seven months before he could walk normally.97 During his hospitalization, Summers contacted Altarum seeking advice about how to return to work and suggested that he would begin working remotely part-time and gradually increase his hours to full-time.98 Altarum failed to respond to Summers’ request to discuss how he could successfully return to work and terminated his employment on November 30, 2011 in order to place another analyst in his role.99 Summers filed suit alleging that Altarum terminated his employment because of his disability and failed to reasonably accommodate his disability.100 The district court granted Altarum’s motion to dismiss, concluding that Summers’ condition did not qualify as a disability because it was expected to last less than a year and that Summers had not requested a reasonable accommodation because his proposal to work remotely during his recovery was unreasonable.101 On appeal, the Fourth Circuit reversed and held that a temporary impairment could constitute a “disability” under the ADA.102 The Fourth Circuit first reviewed Congress’s purpose in enacting the ADAAA.103 The Fourth Circuit specifically pointed to the desire of Congress to “reinstat[e] a broad scope of protections to be available under the ADA” and to abrogate a series of Supreme Court decisions that Congress viewed as setting an “inappropriately high level of limitation necessary to obtain coverage under the ADA.”104 In so doing, Congress expressly provided that the definition of “disability” should be broadly construed “to the maximum extent permitted by [its] terms.”105 The Fourth Circuit also looked to regulations adopted by the EEOC implementing the ADAAA, which provided that although “[i]mpairments that last only for a short period of time are typically not covered,” they may be covered ‘if sufficiently severe.’”106 The Court found further support in a regulation including significant lifting restrictions lasting only several months as an example of a disability covered under the ADAAA.107 Additionally, the Fourth Circuit commented that whereas the ADAAA imposed a six-month requirement for “regardedas” disabilities to qualify for coverage, the Act did not impose any durational requirement for actual disabilities.108 Accordingly, the Fourth Circuit held that temporary impairments lasting 96 Id. Id. 98 Id. 99 Id. 100 Id. at *2. 101 Id. 102 Id. at *6. The Fourth Circuit did not consider the failure to accommodate claim because Summers did not contest its dismissal. Id. at *2. 103 Id. at *3. 104 Id. at *3 (quoting Pub. L. No. 110-325, §2(b)(1), (b)(5)). 105 Id. (quoting 42 U.S.C. § 12102(4)(A)). 106 Id. (quoting 29 C.F.R. § 1630.2(j)(1)(ix)). 107 Id. (citing 29 C.F.R. § 1630.2(j)(1)(ix)). 108 Id. at *5. 97 10 less than six months can qualify as an actual disability under the ADAAA if sufficiently severe.109 On the facts before it, the Fourth Circuit concluded that “Summers has unquestionably alleged a ‘disability’ under the ADAAA” by asserting that he would be unable to walk normally for seven months.110 The Court also rejected Altarum’s argument that the EEOC regulations did not cover temporary impairments resulting from injuries because the regulations provided no support for limiting the coverage of the ADAAA based on the underlying cause of an impairment.111 II. NATIONAL LABOR RELATIONS ACT DEVELOPMENTS A. The Seventh Circuit Rules That Wage Payments to Former Employees on Leaves of Absence for Union Business Violate Section 302 of the LMRA On November 1, 2013, the Seventh Circuit issued its decision in Titan Tire Corp. of Freeport, Inc. v. United Steel, Paper and Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Workers Int’l Union, holding that Titan Tire could not lawfully pay the salaries of two former employees who were on leaves of absence from the company and working full-time for the union.112 In so holding, the Seventh Circuit became only the third federal appeals court to consider the issue directly and the first to find such an arrangement unlawful. The Seventh Circuit explicitly disagreed with the rationale of the Third Circuit in Caterpillar,113 long viewed as the prevailing law in this area.114 The Titan Tire case arose after Titan unilaterally discontinued its practice of paying the union officials’ salaries in 2008, believing that the practice violated section 302 of the LMRA.115 After Titan stopped paying the salaries, the union officials filed a grievance against Titan, claiming the company’s actions violated various labor agreements.116 An arbitrator ruled in favor of the union, and Titan filed an action in federal court to vacate the arbitrator’s decision.117 The district court upheld the arbitrator’s decision and rejected Titan’s section 302 defense.118 An appeal to the Seventh Circuit followed.119 109 Id. at *3-4, 6. Id. at *3. 111 Id. at *5-6. 112 734 F.3d 708, 712 (7th Cir. 2013) . 113 Caterpillar, Inc. v. Int’l Union, United Auto., Aerospace & Agric. Implement Workers of Am., 107 F.3d 1052 (3d Cir. 1997). 114 Titan Tire, 734 F.3d at 711. 115 Id. at 710; Labor Management Relations Act (“LMRA”) § 302(a); 29 U.S.C. § 186(a) . 116 Id. at 711. 117 Id. 118 Id. 119 Id. 110 11 Section 302(a) of the LMRA broadly prohibits an employer from paying any money or other thing of value to any representative of its employees.120 The statute does, however, contain a series of exceptions, including one that covers certain employer payments to employees and former employees who are serving as union representatives.121 Specifically, section 302(c)(1) exempts the following: [A]ny money or other thing of value payable by an employer to . . . any representative of [its] employees, or to any officer or employee of a labor organization, who is also an employee or former employee of such employer, as compensation for, or by reason of, his service as employee of such employer[.]122 The courts in both Titan Tire and Caterpillar analyzed whether payments to former employees could be “by reason of” their prior service to the employer for purposes of section 302(c)(1).123 The Seventh Circuit in Titan Tire concluded that section 302(c)(1) did not cover the payments at issue in this case.124 Relying heavily on the dissenting opinion in Caterpillar, the court explained that the payments to the union officials must be “because of” their prior service to the employer.125 The payments Titan Tire made, in contrast, were “because of” the union officials’ service to the union.126 Although the union officials had become eligible for the right to receive continued wage payments because of their service to the employer, the right to the payments themselves only arose once union officials began working for the union and, therefore, did not vest while working for Titan.127 The Seventh Circuit further explained that the wage payments at issue in this case are different from a former employee’s ability to receive fringe benefits, such as vacation pay and pension benefits, because these benefits often vest while the employee is working for the employer.128 In its decision, the Seventh Circuit explicitly declined to adopt the analysis and conclusions of the Third Circuit in Caterpillar.129 In finding similar wage payments lawful, the Third Circuit relied on the argument that the payments arose out of a valid collective bargaining agreement and would not pose “the kind of harm to the collective bargaining process that Congress contemplated when it enacted the LMRA.”130 The Caterpillar majority also found no valid distinction between union officials who worked full-time performing union business and union officials who split their time working for the employer and the union and who continued to 120 121 122 123 124 125 126 127 128 129 130 LMRA § 302(a); 29 U.S.C. § 186(a). Id. at § 302(c); 29 U.S.C. § 186(c). Id. at § 302(c)(1); 29 U.S.C. § 186(c)(1). Titan Tire, 734 F.3d at 711. Id. at 712. Id. at 720. Id. Id. at 721-22. Id. at 721. Id. at 721-23, 727. Caterpillar, 107 F.3d at 1056-57. 12 be paid pursuant to a no-docking arrangement.131 The Seventh Circuit was not persuaded, finding inclusion in a collective bargaining agreement irrelevant and concluding that no-docking arrangements are distinguishable because the union officials in this case were not conferring with Titan or representing the union’s interest in the grievance process.132 B. Fifth Circuit Rules That Class Action Waivers Do Not Violate the NLRA; Rejects the National Labor Relations Board’s Controversial D.R. Horton Decision The Fifth Circuit in D.R. Horton, Inc. v. NLRB133 rejected the National Labor Relations Board’s (“NLRB’s” or “Board’s”) controversial and sweeping decision that the NLRA prohibits employers from requiring, as a condition of employment, that employees enter into arbitration agreements that restrict them from pursuing claims in a collective or class action.134 The Fifth Circuit’s holding joins dozens of federal district courts and three federal courts of appeal that have rejected, explicitly or implicitly, the Board’s broad application of the NLRA to the enforcement of mandatory arbitration agreements governed by the Federal Arbitration Act (“FAA”).135 The Fifth Circuit began its decision by confronting constitutional and quorum-related challenges to the D.R. Horton decision.136 The court first determined that it did not need to assess the constitutionality of the recess appointment of former NLRB Member Craig Becker, leaving that issue for the U.S. Supreme Court to decide in NLRB v. Noel Canning.137 The court also found that the Board implicitly delegated its authority to the Board members who issued the D.R. Horton decision.138 Turning to the underlying substantive issue, the Fifth Circuit acknowledged that there was “some support” for the Board’s conclusion that Section 7 of the NLRA requires that employees be allowed to engage in class or collective actions to adjudicate employment-related claims.139 The Fifth Circuit went on to explain, however, that the NLRA is not “the only relevant authority” and that the FAA is of “equal importance.”140 Caterpillar, 107 F.3d at 1057 (“Under a no-docking clause, the employer agrees that shop stewards may leave their assigned work areas for portions of a day to process employee grievances without loss of pay.”). 132 Titan Tire, 734 F.3d at 727. 133 737 F.3d 344 (5th Cir. 2013). 134 Id. at 362. 135 See, e.g., Richards v. Ernst & Young, LLP, 11-17530, 2013 WL 6405045, at *2 n.3 (9th Cir. Dec. 9, 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297-98 n. 8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013); Morvant v. P.F. Chang’s China Bistro, Inc., 870 F. Supp. 2d 831, 845 (N.D. Cal. 2012); Jasso v. Money Mart Exp., Inc., 879 F. Supp. 2d 1038, 1046-49 (N.D. Cal. 2012); La Voice v. UBS Fin. Servs., Inc., No. 11 Civ. 2308(BSJ) (JLC), 2012 WL 124590, at *6 (S.D.N.Y. Jan. 13, 2012). 136 D.R. Horton, 737 F.3d at 349-54. 137 Id. at 351; see Noel Canning v. N.L.R.B., 705 F.3d 490 (D.C. Cir. 2013), cert. granted, 133 S. Ct. 2861 (U.S. June 24, 2013) (No. 12–1281). 138 D.R. Horton, Inc., 737 F.3d at 353-54. 139 Id. at 357. 140 Id. 131 13 The court explained that the FAA requires arbitration agreements to “be enforced according to their terms” and framed the analysis in terms of whether the Board’s rule was supported by either of the two exceptions to that statutory requirement.141 The court first considered whether the Board’s holding was a proper application of the FAA’s “saving clause,” which permits arbitration agreements to be found invalid on such “grounds as exist at law or in equity for the revocation of any contract.”142 Relying on the Supreme Court’s analysis in AT&T Mobility LLC v. Concepcion,143 the Fifth Circuit found the savings clause inapplicable, reasoning that reading the savings clause to require the availability of class actions would have the effect of creating “an actual impediment to arbitration” by discouraging employers from resolving claims individually.144 The Fifth Circuit also reviewed the NLRA’s language, legislative history, and statutory purpose for any “congressional command to override the FAA.”145 Given that the NLRA lacks any explicit reference to arbitration, the court commented that any command would have to be found in “the general thrust of the NLRA,” such as its goal to “protect[] the exercise by workers of full freedom of association.”146 It concluded, however, that such “general language” could not constitute a clear congressional command, particularly given that the Supreme Court previously has found other, far more explicit statutory language to be insufficiently commanding.147 The court similarly found no support for a relevant congressional command in the NLRA’s legislative history.148 Finally, the court analyzed whether any “inherent conflict between the FAA and the NLRA’s purpose” had created, by inference, a congressional command not to apply the FAA in this context.149 The court found no such inference, recognizing that “courts repeatedly have understood the NLRA to permit and require arbitration,” and that prior decisions in other statutory contexts had rejected any substantive right to proceed collectively. 150 It considered the fact that the NLRA was enacted after the FAA to be insignificant, noting particularly that the NLRA was passed before the proliferation of modern class action practice.151 The court concluded that because the NLRA supplied no clear command to override the FAA, the arbitration agreement should thus be enforced according to its terms, adding that every circuit to consider the issue had refused–implicitly or explicitly–to defer to the Board’s decision below.152 The Fifth Circuit did hold, however, that the agreement’s requirement that employees resolve through arbitration all employment-related claims, without excluding unfair labor practices from that requirement, violated section 8(a)(1) of the NLRA. The court explained that 141 Id. at 358. Id. at 358-59 (citing 9 U.S.C. § 2). 143 131 S.Ct. 1740, 1746 (U.S. 2011). 144 D.R. Horton, Inc., 737 F.3d at 359-60. 145 Id. at 360-62. 146 Id. at 360 (citing 29 U.S.C. § 151). 147 Id. 148 Id. at 361. 149 Id. at 361-62. 150 Id. at 361. 151 Id. at 361-62. 152 Id. at 362. 142 14 the requirement would lead a reasonable worker to believe he or she was precluded from filing an unfair labor practice charge.153 The company had argued that the agreement had no express or implied effect on administrative proceedings because the arbitration agreement referred to “court” actions rather than agency actions.154 The court disagreed, pointing to various references in the agreement to “court or agency” costs and remedies, as well as the agreement’s concluding acknowledgment that the employee waived the right to “file a lawsuit or other civil proceeding.”155 The court found that the agreement’s shifting, “seemingly incompatible” references to both courts and agency actions could lead a reasonable employee to believe that the waiver encompassed unfair labor practice charges.156 C. National Labor Relations Board Reissues Proposed Election Rules That Would Substantially Accelerate Existing Union Election Procedures On February 6, 2014, the National Labor Relations Board (“NLRB” or “Board”) published a Notice of Proposed Rulemaking in the Federal Register that would substantially accelerate the existing union election process.157 The proposed rules would also limit an employer’s ability to mount an effective communications campaign with its employees regarding whether to select union representation. The proposed rules published on February 6, 2014 are identical in substance to rules proposed by the NLRB in June 2011. Those rules were ultimately invalidated by the U.S. District Court for the District of Columbia on the basis that the Board lacked a quorum when it adopted the rules.158 In greater detail, the proposed rules would result in the following changes to the decadesold representation procedures under the NLRA: ï‚· Require that all preelection hearings take place seven days after the filing of a petition (absent special circumstances) and require that the election date be set at “the earliest date practicable.”159 ï‚· Require employers to provide unions, within seven days of the filing of a petition, with a list of employee names, work locations, shifts, and job classifications, and to provide, within two days of a direction of election, employee home addresses, telephone numbers, and, where available, email addresses.160 ï‚· Require employers to file a “Statement of Position”—a new requirement—that must be filed no later than the hearing date. It must set forth the employer’s 153 Id. at 363-64 Id. at 363. 155 Id. (emphasis added). 156 Id. at 364. 157 79 Fed. Reg. 7318-7364 (Feb. 6, 2014). 158 Chamber of Commerce v. NLRB, 879 F. Supp. 2d 18 (D.D.C. 2012) 159 79 Fed. Reg. at 7328. 160 Id. at 7326-27. 154 15 position on a host of legal issues. Any issues not identified in the Statement of Position would be deemed waived.161 ï‚· Significantly limit the scope of issues and the type of evidence that may be litigated before an election, including questions regarding the eligibility of particular individuals or groups of potential voters, and dispense with posthearing briefs unless “special permission” is granted by the hearing officer.162 ï‚· Eliminate an employer’s right to request preelection review of the Regional Director’s decision, leaving issues to postelection review, if at all.163 ï‚· Permit electronic filing of election petitions, and potentially allow the use of electronic signatures to support the “showing of interest”—in other words, possibly allowing employees to sign union authorization cards electronically via the Internet or email.164 Board Members Phillip Miscimarra and Harry Johnson, dissenting from the issuance of the proposed rule, described the proposed rules as “contrary to the Act and ill-advised,” creating a “vote now, understand later” scheme that “advocates a ‘cure’ that is not rationally related to the disease.”165 The Board will accept comments on the proposed rules until April 7, 2014 and will hold a public hearing on the proposed rules during the week of April 7, 2014. III. EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) UPDATE A. Supreme Court Upholds Plan’s Contractual Statute of Limitations Against DOL -Backed Challenge Resolving a split among the Circuits, the Supreme Court held, in Heimeshoff v. Hartford Life & Accident Insurance Co.,166 that an ERISA-covered plan’s contractual statute of limitations is enforceable even if it begins to run before the plan administrator renders its decision in the plan’s internal claims process. The case continues a trend toward upholding plan provisions against challenges based on alleged ERISA policies and equitable principles.167 On August 22, 2005, Julie Heimeshoff filed a claim for disability benefits under her 161 Id. at 7328-30. Id. at 7329. 163 Id. at 7329-32. 164 Id. at 7326, 7363. 165 Id. at 7337-38 (Members Miscimarra, Johnson, dissenting). 166 134 S. Ct. 604, 187 L. Ed. 2d 529 (Dec. 13, 2013). 167 See US Airways, Inc. v. McCutchen, 133 S. Ct. 1537, 185 L. Ed. 2d 654 (April 16, 2013) (plan may include “equitable lien by agreement” that is not subject to limitations that apply to noncontractual subrogation) and CIGNA Corporation v. Amara, 131 S. Ct. 1866, 179 L. Ed. 2d 843 (2011) (declining to give summary plan descriptions precedence over plan documents). 162 16 employer’s insured long-term disability plan. The claim was denied in December 2005 but was later reopened by the insurance company, which, after receiving further information from the claimant, denied it again in November 2006. She appealed to no avail, receiving a final rejection on November 26, 2007. Having exhausted her administrative remedies, she was now free to file suit for benefits, which she did on November 18, 2010. Her suit was dismissed as untimely. The plan included a provision specifying that “Legal action cannot be taken against The Hartford [the insurance company and plan administrator] . . . [more than] 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.” While there was some disagreement about the deadline for submitting “written proof of loss,” the plaintiff conceded that it could not have been later than September 30, 2007, the last day for filing an internal appeal from the claims denial. Thus, the insurer argued that because the lawsuit had been filed more than three years after that date, it was barred by the plan’s contractual statute of limitations. Both the District of Connecticut and the Second Circuit agreed, disposing of the issue in a summary fashion on the basis of settled law in the Second Circuit. 168 The leading case to the contrary was the Fourth Circuit’s decision in White v. Sun Life Assurance Co. of Canada.169 White did not reject out of hand the permissibility of a planestablished statute of limitations. Its objection was to a limitation period that began running before the claimant had the right to file suit. The court regarded that feature as inconsistent with ERISA’s “interlocking remedial structure,” which requires the plaintiff’s exhaustion of the plan’s internal review process prior to any lawsuit. This interlocking remedial structure does not permit an ERISA plan to start the clock ticking on civil claims while the plan is still considering internal appeals. Courts have required exhaustion in light of the symbiotic relationship between ERISA civil suits and internal review, but Sun Life would allow one remedy to undercut the other. Benefit plans would have the incentive to delay the resolution of their participants’ claims, because every day the plan took for its decision-making would be one day less that a claimant would have to review the plan’s final decision, decide whether to challenge it in court, and prepare a civil action if need be. Indeed, a plan that did not reach a final decision until after the statute of limitations had run would deprive a participant of the right to file a civil claim at all. These incentives to delay would undermine internal appeals processes as mechanisms for “full and fair review,” . . . and undermine the civil right of action as a complement to internal review. . . .170 The Fourth Circuit did not believe that these problems could be solved by reviewing, case-by-case, whether the claimant in fact had a reasonable opportunity to file suit. Indeed, in its 168 E. g., Burke v. PriceWaterhouseCoopers LLP Long Term Disability Plan, 572 F.3d 76, 81 (2d Cir., 2009) (per curiam). 169 488 F.3d 240, 245-248 (4th Cir.), cert. denied sub nom. Sun Life Assurance Co. of Canada v. White, 552 U.S. 1022, 128 S. Ct. 619, 169 L. Ed. 2d 394 (2007). 170 488 F.3d at 247-8. 17 view, such a case-by-case approach provided “no basis for a workable rule” and would create “as many problems as it would solve.”171 In Heimeshoff, the Supreme Court, in a unanimous opinion authored by Justice Thomas, sided with the Second Circuit, holding that: Absent a controlling statute to the contrary, a participant and a plan may agree by contract to a particular limitations period, even one that starts to run before the cause of action accrues, as long as the period is reasonable.172 In reaching this conclusion, the Court rejected the arguments that the Fourth Circuit had found persuasive in White as well as those advanced by the Solicitor General and the Department of Labor in an amicus brief supporting the plan participant. It was simply unwilling to read into ERISA constraints that address remote and speculative risks of abuse. The Court began its analysis with a basic principle – “[I]n the absence of a controlling statute to the contrary, a provision in a contract may validly limit, between the parties, the time for bringing an action on such contract to a period less than that prescribed in the general statute of limitations, provided that the shorter period itself shall be a reasonable period.” 173 This basic rule, in the Court’s view, “necessarily allows parties to agree not only to the length of a limitations period but also to its commencement. The duration of a limitations period can be measured only by reference to its start date. Each is therefore an integral part of the limitations provision, and there is no basis for categorically preventing parties from agreeing on one aspect but not the other.”174 The Supreme Court found nothing in ERISA that would cause it to depart from this wellestablished principle. Nor could it agree with the participant’s argument, supported by the DOL, that a limitations period that began to run before the right to sue accrued would have dire consequences for ERISA’s claims review process even if that period was otherwise reasonable.175 In this regard, the Court quickly dismissed arguments that “participants will shortchange their own rights during that process in order to have more time in which to seek judicial review” or that “administrators may attempt to prevent judicial review by delaying the resolution of claims in bad faith.”176 As to the first, the Court viewed the gain of an extra few months in which to decide whether the file a lawsuit as an extremely weak incentive for failing 171 Id. at 248. 134 S. Ct. at 610. 173 Id. at 611, quoting Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586, 608, 67 S. Ct. 1355, 91 L. Ed. 1687 (1947). 174 Id. at 611. 175 In Heimeshoff, the plaintiff and the Department of Labor did not argue that the plan’s limitation period was unreasonably short per se. And it appears that the participant had approximately 10 months to file suit after the exhaustion of the plan’s internal claims process. 176 134 S. Ct. at 613-4. 172 18 to create a good administrative record. As to the second, the Court pointed out that the plan administrator’s ability to stall proceedings is limited by the rule that judicial review becomes immediately available if the plan does not render a decision on claims or appeals within the time frames set forth in the applicable ERISA regulations. The Court further noted that if the plan administrator is somehow able to contrive an unreasonable delay, “courts are well equipped to apply traditional doctrines [e. g., waiver, estoppel and equitable tolling] that may nevertheless allow participants to proceed.”177 Finally, a survey of past ERISA litigation turned up “no significant evidence that limitations provisions like the one here have . . . thwarted judicial review.”178 Heimeshoff once again demonstrates the importance of the written plan document in ERISA’s regulatory scheme. Early in his opinion, Justice Thomas linked the case to the concept, expressed in other recent ERISA decisions, that courts must, except where ERISA compels a different result, respect the choices of plan sponsors reflected in plan documents: The principle that contractual limitations provisions ordinarily should be enforced as written is especially appropriate when enforcing an ERISA plan. “The plan, in short, is at the center of ERISA.”. . . This focus on the written terms of the plan is the linchpin of “a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place.” 179 The primacy of the plan document, more than anything else, may explain the decision’s outcome. B. The D.C. Circuit Clarifies When ERISA Permits Plan Fiduciaries to Act in Reliance on the Advice of Counsel. In Clark v. Feder Semo and Bard, P.C.,180 the U.S. Court of Appeals for the District of Columbia Circuit affirmed the dismissal of an ERISA breach of fiduciary duty action brought by a plan participant who claimed that, due to the decisions of plan fiduciaries, she was not awarded sufficient money upon the termination of her firm’s underfunded pension plan. The defendant fiduciaries had relied upon the advice of plan counsel in determining that the plaintiff belonged to a group of employees whose share was based on the firm’s annual contribution to the plan of 10% of their salary, rather than, as the plaintiff believed, a group whose share was based on the firm’s annual contribution of 20% of salary. The D.C. Circuit affirmed the district court’s holding that the fiduciaries’ reliance on counsel was justified under the circumstances, but found it necessary to write further “to clarify when ERISA permits plan fiduciaries to act in reliance on the advice of counsel.”181 177 Id. at 615. Id. 179 Id. at 612-13 (citations omitted). 180 739 F.3d 28 (D.C. Cir. 2014). 181 Id. at 31. 178 19 The Court explained that ERISA’s fiduciary standard – Section 404(a) – adopted much of the common law of trusts: “rather than explicitly enumerating all of the powers and duties of trustees and other fiduciaries, Congress invoked the common law of trusts to define the general scope of their authority and responsibility.”182 While ERISA’s standards are not identical to those in trust law, treatises on the law of trusts are often relied upon as a starting point in determining the scope of ERISA duties. Reviewing such sources, the Court found “that it is a principle firmly rooted and founded in the common law of trusts that a fiduciary may rely on the advice of counsel when reasonably justified under the circumstances. The propriety of that reliance must be judged based on the circumstances at the time of the challenged decision.”183 While reliance on advice of counsel would be warranted where a hypothetical “prudent trustee in those particular circumstances would have acted in reliance on counsel’s advice,” such reliance “would be improper if there were significant reasons to doubt the course counsel suggested.”184 The D.C. Circuit concluded that nothing in ERISA suggested that Congress displaced the common law principle. The Court thus joined other Circuits in holding that “ERISA’s adoption of the common law’s standard of fiduciary care in [§ 404(a)(1)(B)] permits prudent fiduciaries making important decisions to rely on the advice of counsel in appropriate circumstances.”185 Under the facts presented, the defendants had no reason to know or suspect that counsel had made a factual mistake – they employed the plan’s long-term counsel, had no reason to believe he was unfamiliar with the factual details, and his recommendation “appeared to be based on a reasonable investigation, was accompanied by supporting documentation, and was consistent with the understanding that [the defendants] had about the way the plan’s groups were structured.”186 Thus, the defendant-fiduciaries’ reliance on the advice of counsel without further investigation did not violate ERISA’s fiduciary standard. C. Second Circuit Holds that ERISA Preempts a State Law Requiring Administrators of Self-Insured Plans to Report Health Care Related Information to State Regulators In Liberty Mutual Insurance Company v. Donegan,187 the Second Circuit held that ERISA § 514(a) preempts a Vermont law requiring health insurers to file regularly with the 182 Id. (quoting Cent. States, Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 570, 105 S. Ct. 2833, 86 L. Ed. 2d 447 (1985)). 183 Id. at 31-32 (citations omitted). 184 Id. at 32. 185 Id. (citing Howard v. Shay, 100 F.3d 1484, 1489 (9th Cir. 1996); Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 918 (8th Cir. 1994); cf. Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 300-01 (5th Cir. 2000); Gregg v. Transp. Workers of Am. Int'l, 343 F.3d 833, 841 (6th Cir. 2003)). 186 Id. at 33. 187 No. 12-4881-cv, 2014 U.S. App. LEXIS 2088 (2d Cir. Feb. 4, 2014) 20 State’s Department of Banking, Insurance, Securities and Health Care Administration reports containing medical claims data, pharmacy claims data, member eligibility data, provider data and other information related to health care. Based on the Vermont law’s definition of “health insurer” to include any administrator of a self-funded health care benefit plan offered by a private entity, the state subpoenaed the third-party administrator (“TPA”) of a self-insured health plan sponsored by Liberty Mutual, demanding that the TPA provide the plan’s eligibility files, medical claims files, and pharmacy claims files. Liberty Mutual then filed suit seeking a declaration that ERISA preempts the Vermont law and an injunction against its enforcement. The district court held that Liberty Mutual had Article III standing, but that ERISA did not preempt the Vermont law. All three members of the Second Circuit panel agreed with the district court’s holding that Liberty Mutual had demonstrated a sufficient, redressable injury-in-fact to establish Article III standing under Lujan,188 and that “it was of no moment that the subpoena was issued directly to [the TPA] and not directly to Liberty Mutual.”189 However, with one judge dissenting, the panel majority reversed the district court’s ruling on the merits, holding that the Vermont law had an impermissible “connection with” ERISA plans and was therefore preempted by § 514(a).190 The majority acknowledged the “starting presumption” against preemption in areas of traditional state regulation, but concluded that state health data collection laws were not “among the states’ historic police powers,” and even if they were, the presumption had been overcome because the Vermont law “upset[] the deliberate balance central to ERISA” by undermining the nationally uniform plan administration Congress sought to achieve.191 In particular, the majority emphasized that § 514(a) was intended to insulate plans from “potentially inconsistent and burdensome state regulation” of “core ERISA functions,”192 which have long been recognized as including “reporting and disclosure.”193 The majority rejected the dissenting judge’s attempt to distinguish the reporting required by the Vermont law from the reporting required by ERISA,194 reasoning that “[a] hodge-podge of state reporting laws, each more onerous than ERISA’s uniform federal reporting regime, and seeking different and additional data, is exactly the threat that motivates ERISA preemption.”195 The majority likewise rejected Vermont’s argument that Congress’s contemporaneous passage of the National Health Planning and Resources Development Act of 1974 (“NHPRDA”) evidenced an intent to permit state imposition of recordkeeping and reporting requirements on self-funded ERISA plans.196 The majority explained that the state data collection encouraged by NHPRDA could be obtained from health care providers and payers other than ERISA plans, and that any 188 Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). Liberty Mutual, 2014 U.S. App. LEXIS 2088, at **9-10. 190 Id. at *27. 191 Id. at **21-22. 192 Id. 193 Id. at **15-25. 194 Id. at **45-46. 195 See id. at **35-36; see also id. at **45-46 (noting the Department of Labor’s contention as an amicus curiae supporting Vermont that the “focus and purpose of Vermont’s data collection is different from the reporting requirements in ERISA”). 196 Id. at **13-15. 189 21 “tension between NHPRDA and ERISA … was relieved in 1986 when the NHPRDA was repealed.”197 Finally, the majority distinguished two cases 198 in which state laws imposing “slight” reporting burdens had been allowed to withstand preemption, explaining that the state laws addressed in those cases created “no impediment to an employer’s adoption of a uniform benefit administration scheme” and that the effect of those laws on ERISA plans was “too tenuous, remote, or peripheral” to trigger preemption.199 In contrast, Vermont was requiring ERISA plans to “record, in specified format, massive amounts of claims information and to report that information to third parties, creating significant (and obvious) privacy risks and financial burdens that will be passed from the TPA to the Plan and from the Plan to the beneficiaries.”200 D. First Circuit Agrees with PBGC’s Position that Private Equity Funds can be ERISA “Trades or Businesses” Reversing the most important holding in a closely watched District Court decision, the First Circuit in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund201 held that a private equity fund is a “trade or business” and could be financially responsible for the withdrawal liability that one of its portfolio companies incurred when it ceased contributing to a multiemployer pension plan. The court endorsed the position of the Pension Benefit Guaranty Corporation, embodied in a 2007 administrative decision, that a “trade or business” (a term used frequently in ERISA and the Internal Revenue Code but nowhere defined) can arise from an investment for profit plus some additional factors indicating that the investment is not merely passive. The court saw “no need to set forth general guidelines for what the ‘plus’ is”; taking “a very fact-specific approach,” it concluded – by what might be called a “we know it when we see it” test – that one of the funds involved in the litigation was a “trade or business,” while the record was insufficient to decide about the other. If characterized as a “trade or business,” a private equity fund is jointly and severally liable for the withdrawal liability of any portfolio company in which it has an 80 percent or greater ownership interest. The District Court had held that the Sun Capital funds were not “trades or businesses,” so it did not consider whether they met the ownership test. At least on the surface, it seems unlikely that they did, since the withdrawn employer was owned by two funds that split ownership 70/30, but the plan has not yet had the opportunity to present its argument in full, and the question will have to be resolved on remand. The case was a sequel to a private equity failure. In early 2007, two Sun Capital private equity funds, Sun Capital Partners III and Sun Capital Partners IV, bought all of the stock of Scott Brass, Inc., taking a 30 percent and 70 percent ownership interest, respectively. By the end of 2008, Scott Brass was in bankruptcy, and the New England Teamsters & Trucking Industry 197 Id. at **14-15. HMI Mech. Sys., Inc. v. McGowan, 266 F.3d 142 (2d Cir. 2001); Burgio & Campofelice, Inc. v. NYS Dep’t of Labor, 107 F.3d 1000 (2d Cir. 1997). 199 Liberty Mutual, 2014 U.S. App. LEXIS 2088, at **25-26; see also id. at *29. 200 Id. at *34 n.13. 201 724 F.3d 129 (1st Cir., July 24, 2013) 198 22 Pension Fund, a multiemployer pension plan to which it had been a contributing employer, sent demands for payment to the Sun Capital funds. The funds reacted by bringing a declaratory judgment action to establish that they had no liability for Scott Brass’s obligations to the plan. The District of Massachusetts, in concluding that the funds were not trades or businesses and therefore could not be members of a controlled group, attached considerable weight to their structure and their precise relationship to other Sun Capital entities.202 Sun Capital Partners III and IV are limited partnerships, each with one general partner. A separate entity, Sun Capital Advisors, Inc., finds investors and potential deals for the funds but is not a partner. The two entrepreneurs who own Sun Capital Advisors have about a 60% profits interest in the funds’ general partners, along with full management control of the funds. Finally, each general partner owns a subsidiary that provides management services to portfolio companies. Despite the overlap, the District Court saw the funds as no more than investors. They had no employees and did nothing except buy stock, vote it as directed by their general partners, collect dividends, and look forward to capital gains after the company was turned around and sold for a profit (an unrealized hope in this instance). Those were all activities of an investor rather than a manager. It was true that subsidiaries of the general partners had management contracts with Scott Brass, but the court declined to attribute those activities to the funds. The First Circuit looked in a different direction, regarding the following facts as indicative of a trade or business, without assigning decisive weight to any of them:203 1. “The Sun Funds’ limited partnership agreements and private placement memos explain that the Funds are actively involved in the management and operation of the companies in which they invest.” 2. “[T]he general partners [of the Sun Funds] are empowered through their own partnership agreements to make decisions about hiring, terminating, and compensating agents and employees of the Sun Funds and their portfolio companies.” 3. “It is the purpose of the Sun Funds to seek out potential portfolio companies that are in need of extensive intervention with respect to their management and operations, to provide such intervention, and then to sell the companies. . . . Involvement can encompass even small details, including signing of all checks for its new portfolio companies and the holding of frequent meetings with senior staff to discuss operations, competition, new products and personnel.” 4. “[T]he Sun Funds' controlling stake in [Scott Brass] placed them and their affiliated entities in a position where they were intimately involved in the management and operation of the company. . . . ” 202 203 903 F. Supp. 2d 107 (D. Mass., 2012). 724 F.3d at 142-3. 23 5. “Through a series of service agreements [with the funds’ general partners] . . . , [Sun Capital Advisors] provided personnel to [Scott Brass] for management and consulting services.” 6. “Moreover, the Sun Funds’ active involvement in management under the agreements provided a direct economic benefit to at least Sun Fund IV that an ordinary, passive investor would not derive: an offset against the management fees it otherwise would have paid its general partner” (because management fees paid by Scott Brass to the general partner’s management subsidiary were credited toward the general partner’s compensation from the fund). The First Circuit was unimpressed by what the District Court had regarded as crucial: that all of the management activities were carried out by Sun Capital Advisors pursuant to agreements between Scott Brass and subsidiaries of the funds’ general partners. All of those activities could, in the First Circuit’s view, be attributed to the funds on the theory that the general partners were acting as the funds’ agents. In essence, the Court ignored the formal boundaries of the Sun Capital entities and treated them as a single enterprise. The Court likewise was unswayed by the argument, suggested by Supreme Court decisions,204 that activities aimed at generating dividends and capital gains are “distinctive to the process of investing and [are] generated by the successful operation of the corporation’s business as distinguished from the trade or business of the taxpayer himself.”205 The First Circuit responded, The Sun Funds say that, because they earned no income other than dividends and capital gains, they are not “trades or businesses.” But the Sun Funds did not simply devote time and energy to SBI, “without more.” Rather, they were able to funnel management and consulting fees to Sun Fund IV’s general partner and its subsidiary. Most significantly, Sun Fund IV received a direct economic benefit in the form of offsets against the fees it would otherwise have paid its general partner.206 Indeed, the Court regarded this putative benefit so significant that it remanded, rather than reversed the District Court’s decision that Sun Capital Partners III was not a “trade or business,” because the record didn’t show whether that fund had the same fee offset arrangement as Sun Capital Partners IV. The other aspect of the case was more straightforward. In putting together the Scott Brass acquisition, the Sun Capital funds knew that they were buying a troubled company that could wind up with a large liability to the New England Teamsters plan. That was the admitted reason why one fund purchased 30 percent of the stock and the other 70 percent. Thus neither met the 80 percent threshold for forming a controlled group with Scott Brass. 204 See Higgins v. Commissioner, 312 U.S. 212 (1941) and Whipple v. Commissioner, 373 U.S. 193 (1963). 373 U.S. at 202. 206 724 F.3d at 144. 205 24 The plan offered a theory for ignoring this inconvenient fact, without success in either court. ERISA contains an anti-abuse rule aimed at devices to escape withdrawal liability: Transactions to Evade or Avoid Liability. – If a principal purpose of any transaction is to evade or avoid liability under this part, this part shall be applied (and liability shall be determined and collected) without regard to such transaction.207 There was no real doubt that a principal purpose of the 70/30 ownership split was to avoid potential future withdrawal liability. The way to apply the withdrawal liability rules “without regard to such transaction,” the plan maintained, was to treat the Sun Brass acquisition as if one of the funds had been the sole purchaser. The District Court rejected that idea, because it did not believe that stock purchasers could be prevented from arranging their affairs so as to avoid assuming a liability that they had never previously borne. The First Circuit took a different path to the same conclusion: If the actual transaction were disregarded, the court would have no authority to replace it “with a transaction that never occurred.” The language of § 1392(c) instructs courts to apply withdrawal liability “without regard” to any transaction the principal purpose of which is to evade or avoid such liability. . . . The instruction requires courts to put the parties in the same situation as if the offending transaction never occurred; that is, to erase that transaction. It does not, by contrast, instruct or permit a court to take the affirmative step of writing in new terms to a transaction or to create a transaction that never existed. 208 One must wait for the remand to find out whether the plan has any better arguments on this issue. If it does not, the case’s lesson for private equity firms will be to keep individual funds’ ownership of portfolio companies below the 80 percent threshold whenever there is a risk of future liability to a multiemployer plan (or to the PBGC, where identical rules would apply to liability following the termination of an underfunded pension plan). Sun Capital Partners is one of several recent cases making it easier for multiemployer plans to expand the list of parties responsible for paying withdrawal liability. The First Circuit, for example, took particular note of two Seventh Circuit decisions holding that individuals who owned rental properties were engaged in a trade or business.209 Since the rental “businesses” were unincorporated, their owners faced unlimited personal liability to the plans from which their wholly owned corporations had withdrawn. Such decisions undoubtedly will encourage multiemployer plans to attempt to expand the liability net still further. At the same time, such 207 ERISA, §4212(c), 29 U.S.C., §1392(c). 724 F.3d at 149. 209 Central States Southeast and Southwest Areas Pension Fund v. Messina Products, LLC, 706 F.3d 874 (7th Cir., Feb. 8, 2013) and Central States Southeast and Southwest Areas Pension Fund v. SCOFBP, LLC, 668 F.3d 873 (7th Cir., 2011), cert. denied, 132 S. Ct. 2688 (2012). 208 25 expansions may not ultimately redound to the plans’ benefit. Certainly, the prospect of such potential liability will make these plans even more unattractive to employers, deterring employers from joining them in the first instance and encouraging existing employers to withdraw at times when they are relatively well-funded. E. The Seventh Circuit Holds Non-Employers Cannot Be Held Liable Under ERISA § 510 for Unlawful Discharge. The Seventh Circuit in Teamsters Local Union No. 705 v. Burlington Northern Santa Fe, LLC,210 clarified the theories of liability that may be asserted against employers and nonemployers in ERISA § 510 claims. Most significantly, the Court rejected the assertion of unlawful discharge claims against non-employers. The underlying facts involved railway companies that owned a rail yard that was, for more than a decade, operated by an independent contractor, RTS, whose employees were represented by a Teamsters local union and covered by the union’s health and pension plan. The railway companies decided to bring the RTS work in-house, ending the relationship with RTS and entering into a labor agreement with another union. RTS terminated its rail yard employees, who were free to reapply for jobs with the railway companies under a less generous wage and benefits package. The Teamsters local union and employees brought suit against the railway companies, RTS, and the new union, alleging unlawful interference with the attainment of retirement benefits in violation of Section 510, among other claims. The Seventh Circuit affirmed the dismissal of the ERISA claim. Section 510 makes it unlawful for “any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant” in an employee benefits plan for the purpose of interfering with his attainment of benefits under the plan.211 The plaintiffs in this action alleged only an unlawful discharge claim. The Seventh Circuit observed that such a theory “presupposes an employment relationship” and “[o]nly RTS was in an employment relationship with the members of Local 705.”212 The claims against the non-employer defendants – the railway companies and new union – were therefore properly dismissed. The Court also refused to recognize a cause of action for conspiracy to violate Section 510 because ERISA does not expressly contain such a cause of action and the Court did not have the authority to augment ERISA’s remedial provisions by recognizing a new action under federal common law.213 Furthermore, any conspiracy claim premised on state law would be preempted.214 The Seventh Circuit also upheld the dismissal of the claim against RTS. The Court observed: “The complaint alleges that RTS discharged the employees because it lost its contract to perform the work at [the rail yard], not for the purpose of interfering with their attainment of 210 No. 11-3705, 2014 U.S. App. LEXIS 1476 (7th Cir. Jan. 24, 2014). 29 U.S.C. § 1140. 212 2014 U.S. App. LEXIS 1476, at *3-4. 213 Id. at *10-12. 214 Id. at *17. 211 26 pension benefits.”215 These allegations did not state a cognizable Section 510 claim, which “requires a showing of specific intent to interfere with the participant’s attainment of benefits.”216 F. More Post-Amara Fallout in the Area of ERISA Remedies Although the Supreme Court’s decision in CIGNA Corporation v. Amara,217 formally addressed only the status of summary plan descriptions vis-à-vis plan documents, the Court’s remand of the case for consideration of the plaintiffs’ possible claims for equitable relief under section 502(a)(3) of ERISA and, in particular, the majority opinion’s extended dictum on remedies available in the pre-merger equity courts have sparked the creativity of lower court judges. Two recent appellate decisions address aspects of this expanding sphere of jurisprudence without definitive result. 1. The Second Circuit Reverses and Remands the Dismissal of a Plan Reformation Claim Osberg v. Foot Locker Inc.,218parallels the facts of the more famous Amara litigation and is being contested in the same Circuit, but its progress so far has been far different. While the latest round of Amara took an expansive view of the equitable relief available to ERISA plaintiffs,219 the District Court in Osberg granted summary judgment for the defendant employer in a decision that implied strong doubt about much post-Amara judicial theorizing. The Second Circuit was not satisfied, however, and reversed and remanded for further proceedings. In Osberg, the plaintiff’s employer converted its traditional defined benefit plan into a cash balance plan. Unlike the conversion in Amara, which was designed to be cost-neutral, this one had the objective of cost saving – Foot Locker was suffering a business downturn and taking steps to slash expenses. As permitted by law at the time, the transition was handled by a “wearaway” formula: Post-conversion, participants were entitled to the greater of their cash balance benefits (which included an “opening balance” based on their benefits accrued to date) or their accrued benefits under the old formula as of the date of the conversion. For many, the latter would be more valuable for several years after the switch to the new formula, thus resulting in a period during which they accrued no additional benefits. The plaintiff fell into that group. When he terminated employment in 2002, Mr. Osberg had a choice between his accrued benefit as of January 1, 1996 (the conversion date), which was payable only as an annuity, or his current cash balance benefit, payable as either an annuity or a lump sum. Taken as an annuity, the cash balance benefit was smaller than the grandfathered benefit, but Osberg preferred the lump sum. Some years later, he brought a putative class action against Foot Locker, alleging 215 216 Id. at *4. Id. at *17 (citation omitted, emphasis added). 217 131 S. Ct. 1866, 179 L. Ed. 2d 843 (2011). 907 F. Supp. 2d 527 (S.D. N.Y., 2012), aff’d in part and rev’d in part, 2014 U.S. App. LEXIS 2692 (2d Cir., Feb. 13, 2014) (summary order) 219 See Amara v. CIGNA Corporation, 925 F. Supp. 2d 242 (D. Conn., 2012). 218 27 inter alia that its summary plan description and other disclosures about the conversion misleadingly failed to disclose the hiatus in benefit accrual resulting from wearaway. After some preliminary skirmishing, the plaintiff fastened onto Amara as a basis for relief that he characterized as either reformation or surcharge. He didn’t distinguish carefully between them, nor did the District Court. As the judge skeptically summarized the theory behind the suit: According to plaintiff, had the changes been fully explained, employees would have understood that the Plan would “freeze” their benefits for at least some period of time, there would have been an employee rebellion, the rebellion would have led management to adopt some other plan (or somehow maintain the status quo despite the company’s financial difficulties), and the employees would now be better off (or would not have suffered “harm”).220 **** Osberg, however, presents no evidence as to what type of pension plan would have been adopted as an alternative to the cash balance plan had participants known of a “wear-away” period and, further, whether those plans would have necessarily been better than the lump sum he received. Because the lump sum option was part of the conversion package and might not have been included in any alternative plan, the Court rejects plaintiff’s argument that any ERISA-compliant plan would have been better than the one actually adopted. . . . In addition, there is also no evidence that had plaintiff known in late 1995 or 1996 that the change to the cash balance formula had a wear away, that employee discontent would in fact have caused management to choose an alternative that would have been better for this plaintiff.221 Much of the plaintiff’s evidence was directed at buttressing his contention that the company’s benefits department had misled the board of directors about the effect of wearaway. With better information, he maintained, the directors would have rejected that plan and adopted something more palatable to employees. The court dismissed such notions as too speculative to be viable.222 Accordingly, it ultimately ruled in the employer’s favor, finding that “[t]he evidence of plaintiff's economic harm is too speculative for a reasonable jury to award him relief.”223 On appeal, the Second Circuit reversed and remanded. The District Court’s conclusion with respect to the absence of harm was sufficient to affirm summary judgment on the plaintiff’s surcharge claim. As the Supreme Court made clear in Amara, “a fiduciary can be surcharged under §502(a)(3) only upon a showing of actual harm.”224 However, while a good argument 220 907 F. Supp. 2d at 529. Id. at 534. 222 Id. at 529. 223 Id. at 534. 224 131 S. Ct. at 1881. 221 28 against surcharge, it was insufficient as to the plaintiff’s reformation claim: To obtain contract reformation, equity does not demand a showing of actual harm. See Restatement (Second) of Contracts §155 cmt. e (1981) (stating that party seeking reformation “need not show that the mistake has resulted in an inequality that adversely affects him”). Indeed, Foot Locker does not attempt to defend the award of summary judgment on Osberg’s reformation claim on “actual harm” grounds.225 The Second Circuit therefore remanded to the district court to address the reformation claim. Whether the plaintiff can meet its burden, and, in particular, satisfy reformation’s causation requirement, remains to be seen. However, it seems unlikely that he could do so, given the highly speculative nature of his claim as already determined by the District Court. 2. In Killian v. Concert Health Plan, the Seventh Circuit Punts on the Question of the Equitable Relief Available Post-Amara. In its recent en banc decision in Killian v. Concert Health Plan,226 a divided Seventh Circuit avoided a ruling on the forms of equitable relief available following the Supreme Court’s Amara decision. However, the majority, concurring and dissenting opinions, while hinting at the varying approaches that judges of that Circuit might advance if required to address the question, make clear that they do not relish taking on the issue. While Killian has a complex factual and procedural history, the central facts involve a plan participant who learned that she had cancer requiring brain surgery and was advised that she had five days to live without removal of the largest of her tumors. Because the participant’s hospital could not perform the operation, her husband (the Plaintiff) sought confirmation from her health plan that she could be admitted to a different hospital, Rush University Medical Center. The guidance that he received via calls to the telephone number on his wife’s insurance card was vague – including a representative saying “Okay” when informed that the participant was proceeding with the surgery but not indicating whether services at Rush were in or out of network or whether there would be any limits to coverage. Although the surgery successfully removed the most serious tumor, the participant died a few months later. The plan ultimately denied coverage or paid only a small part of the bill because Rush was out of network. Plaintiff brought an ERISA action against the plan, the insurance company that served as the plan’s claims administrator, and his wife’s employer, which served as plan administrator, under a number of theories, including breach of fiduciary duty for failure to inform. In the instant decision, the en banc court reversed a judgment of the district court and earlier panel decision granting summary judgment to the defendants on the fiduciary claim. Killian is perhaps most significant for presenting an opportunity for the Seventh Circuit to analyze and apply Amara’s dicta on the availability of monetary relief under ERISA Section 225 2014 U.S. App. LEXIS 2692 at *7. 226 No. 11-1112, 2013 U.S. App. LEXIS 22657 (7th Cir. Nov. 7, 2013). 29 502(a)(3) under surcharge, estoppel and reformation theories. While the Killian decision passed on deciding the remedies issue, the majority opinion and concurring and dissenting opinions give insight into the judges’ views. The majority in one instance suggests the questions left open in Amara might be avoided altogether in Killian, as monetary relief would not be needed if “meaningful declaratory relief” in the form of “payment of medical bills, attorney’s costs and fees and ‘such other legal or equitable relief as the court deems appropriate’” may be awarded.227 Thus, the majority dismissed the issue as premature,228 and minimizes its discussion of Amara to a footnote: On remand, the district court also must address the type of remedy available under ERISA. ERISA provides for equitable relief for breach of fiduciary duty claims, see 29 U.S.C. § 1132(a)(3); the Supreme Court recently has suggested that equitable relief can include monetary payments through estoppel and “surcharges,” see CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880, 179 L. Ed. 2d 843 (2011).229 In a concurring opinion, Judges Posner and Easterbrook also were reluctant to address the Section 502(a)(3) remedies question, and suggest avoiding it by casting the claim as one for breach of contract rather than breach of fiduciary duty. In so doing, the plaintiff would seek “‘a contract remedy under the terms of the plan,’” and “there is no need, or occasion, to decide whether the plan administrator violated a fiduciary duty.”230 Therefore, much like the majority, Judges Posner and Easterbrook find the Amara issue one to be avoided: To treat the present case as charging breach of a fiduciary obligation creates uncertainty as to remedy – uncertainty we don’t need. ERISA provides only equitable relief to a participant complaining of a violation of such an obligation, . . . whereas all that the plaintiff in this case seeks is simple damages. Monetary relief is sometimes permissible in equitable cases, but why enter that briar patch?231 Finally, in an opinion dissenting in part and concurring in part, Judges Manion and Sykes opined that the remedies question need not be decided because the breach of fiduciary duty claim had no merit. However, in dicta these judges suggest that monetary relief would not be allowable under Amara. They write: 227 Id. at *31 and *32 n.27. Id. at *33 (“On remand, the district court must deal with the questions of liability and, if it reaches the question, remedy. This latter issue will require the district court to resolve many factual and legal matters on which the present record now permits only speculation.”). 229 Id. at *53 n.50. 230 Id. at *60 (citations omitted). 231 Id\. at *61-62 (citations omitted). 228 30 But even if James could succeed on Susan’s estate’s breach of fiduciary duty claim, whether monetary payments (which Cigna Corp. v. Amara, 131 S. Ct. 1866, 1880, 179 L. Ed. 2d 843 (2011), held could be an appropriate equitable remedy), are appropriate in this case is questionable. See generally Kenseth v. Dean Health Plan, Inc., 722 F.3d 869, 892 (7th Cir. 2013) (Manion, J., concurring).232 Thus, Killian underscores the uncertainties on this contentious issue, which will be monitored and reported on in future ABA reports. 232 Id. at *140-141 at n.30. 31