Monday, December 19th, 2016
This is the second installment of a series of year-end alerts to employers. This alert is of particular interest to federal government contractors.
Part 1: OSHA Reporting Rules Effective December 1, 2016
Part 3: Paid Sick Leave for Federal Contractors Effective January 1, 2017
Part 4: Confidentiality Rules Under Fire – Be Warned!
On October 24, 2016, a Texas federal judge issued a nationwide injunction prohibiting the enforcement of certain portions of Fair Pay and Safe Workplace Rules.[1] These Rules would have required employers to disclose alleged but not fully adjudicated labor violations when bidding for contracting work. The judge found that this part of the new Rules was unenforceable. The injunction also stopped another portion of the new Rule that would have imposed a ban on the use of certain arbitration agreements. The Court, however, did not enjoin all parts of this new Rule. This Alert addresses the portions that are still scheduled to become effective January 1, 2017.
Under this portion of the new Rule, government contractors must provide specific wage statements and other information to workers.[2] It remains to be seen whether the incoming Trump Administration will make it a priority to rescind these requirements or whether additional legal action will be filed to challenge these new Rules.
Unless overturned, these “paycheck transparency” requirements take effect for bids and resulting contracts issued on or after January 1, 2017 if those contracts exceed $500,000.
The “paycheck transparency” provisions require contractors and subcontractors to provide three basic notices to employees:
(i) a notice to workers who are treated as independent contractors informing them of their independent contractor status;
(ii) a notice to workers of their FSLA exempt status if the employer is claiming an exemption; and
(iii) a detailed wage statement to all other workers providing information regarding hours worked and pay.
Notice to Independent Contractors
Contractors and subcontractors must now provide written notice to all individuals performing work under a covered contract who are treated as independent contractors that informs them of their status. FAR 52.222-60(e). For purposes of this notification, any worker who is classified as an independent contractor for tax purposes (provided a Form 1099-Misc) must receive one of these new notices. The notice must be in writing and be provided separately from any agreement that exists between the contractor and the individual. FAR 52.222-60(d)(1). This notice must be provided when the relationship is established or before the individual begins performing any work on the contract. Moreover, a new notice must be given each time a worker starts work on a different covered contract, regardless of whether the worker already performs the same type of work on another contract. Further, the notice may not suggest that any government agency or court has agreed with the company’s determination that the worker is an independent contractor. Id.
Notice of FSLA Exempt Status
Since exempt employees do not have to be paid overtime and may not receive a new wage statement of hours worked (see below), a contractor or subcontractor is required to notify employees of their “exempt” status either on their wage statement or in another document. FAR 52.222-60(b)(3). To meet this obligation, the contractor or subcontractor must provide written notice of the exemption; oral notice alone is not sufficient. The notice can be in a stand-alone document or it can be included in an offer letter, employment contract, position description or wage statement provided to the worker. Unlike independent contractor notice, it is sufficient to provide the notice to the employee one time, either before the worker performs work or in the first wage statement under the contract. It is up to the contractor to determine whether or not to claim an FLSA exemption. The notice cannot indicate that the Department of Labor or the courts have agreed with the company’s classification that the employee as exempt.
New Detailed Wage Statement
For each pay period, a contractor or subcontractor must provide a wage statement (paystub) to all workers performing services under the contract. This covers all employees where the company is required to maintain wage records under the FSLA, Davis-Bacon Act or the Service Contract Act. FAR 52.222-60(a). This includes workers subject to these laws, regardless of whether they are classified as an employee or an independent contractor.
The Rule requires that the wage statement contain the following information: (1) the total number of hours worked in that pay period; (2) the number of overtime hours worked in that pay period; (3) the rate of pay; (4) the gross pay; and (5) an itemization of any additions made to or deductions taken from the gross pay. If payday occurs only biweekly or semi-monthly, the employer must break down the hours worked and denote overtime hours in the wage statement that correspond to the period for which overtime was calculated and paid.
In terms of additions and deductions, contractors must consider whether to include bonuses and shift differentials. All deductions from pay certainly include deductions required by law as well as voluntary deductions approved by the worker. Each addition or deduction from gross pay must be listed separately along with the specific amount.
Two final points. First, all of these required notices must be provided to workers in English and in languages in which “a significant portion of the workforce is fluent.” FAR 52.222-60(e)(1). Contractors must determine when their workforce has enough workers fluent in a different language in order to trigger the translation requirement as DOL did not provide any bright-line test. Second, if the company regularly provides documents to its workers by electronic means, it can provide these required notices electronically so long as workers are able to access the documents through a computer, device system or network provided or made available by the contractor. FAR 52.222-60(e)(2).
Businesses that have questions regarding these new rules or other employment obligations of federal contractors or employers in general should contact members of Gentry Locke’s Employment Law Team.
[1] Executive Order 13673, certain Federal Acquisition Regulations (“FAR”) and corresponding guidance from the U.S. Department of Labor were at issue. See FAR, “Fair Pay and Safe Workplaces,” 81 Fed Reg. 58562 (Aug. 25, 2016); DOL Guidance, 81 Fed. Reg. 58654 (Aug. 25, 2016).
[2] These Rules are in addition to earlier OFCCP rules that became effective January 11, 2016 implementing Executive Order 13655, signed by President Obama on April 8, 2014, which protect employees from retaliation or discrimination because the employee discusses or discloses his or her own compensation, or the compensation of another employee.
Thursday, December 15th, 2016
This is the first installment of a series of year-end alerts for employers. This alert focuses on OSHA reporting rule changes.
Part 2: Paycheck Transparency Rules Effective January 1, 2017
Part 3: Paid Sick Leave for Federal Contractors Effective January 1, 2017
Part 4: Confidentiality Rules Under Fire – Be Warned!
A rash of lawsuits filed this fall challenged a number of new federal requirements imposed by the outgoing Obama Administration. Some of these court challenges have been successful, e.g., recent injunctions prohibiting enforcement of the new overtime regulations, and the new “persuader” rules. This Alert is the first of four year-end reminders to employers of other federal requirements that have recently become effective or will be effective as of January 1, 2017. Some of these federal requirements may be changed by the Trump Administration, but for the time being, employers need to assume that these federal rules apply.
Court Ruling on OSHA Rules. On November 28, 2016, a Texas federal court denied a request by trade groups to enjoin the new OSHA reporting requirements that limit the use of incident-based employer safety incentive programs and/or routine mandatory post-accident drug testing programs. [1] These OSHA rules became effective December 1, 2016.
The Challenge. The lawsuit challenged three new OSHA rules announced on May 11, 2016 (29 CFR § 1904.35(e)(1)):
(1) reporting procedures for workplace injuries by employees must be “reasonable;”
(2) employees must be informed of their right to report work-related injuries free from retaliation; and
(3) retaliation and discrimination against those who report workplace injuries or safety issues is prohibited.
While employers already had an obligation not to retaliate and discriminate against employees for reporting work-related injuries, the trade groups focused on examples listed in the Preamble to the new regulations that raised serious concerns. For example:
It is a violation . . . for an employer to take adverse action against an employee for reporting a work-related injury or illness, whether or not such adverse action was part of an incentive program. Therefore, it is a violation [of OSHA] for an employer to use an incentive program to take adverse action, including denying a benefit, because an employee reports a work-related injury or illness. This could include disqualifying an employee from monetary bonus or other action as this action could discourage or deter a reasonable employee from reporting the work-related injury or illness.
The trade group’s concern was that this language could be used to prohibit employers from continuing to use incentive bonus systems where bonuses are tied to no workplace injuries.
The trade groups also pointed to the following Preamble language and argued OSHA will take the position that mandatory drug testing is prohibited after a work-related accident.
Drug testing policies should limit post-incident testing to situations in which an employee’s drug use is likely to have contributed to the incident, and for which the drug test can accurately identify impairment caused by drug use. For example, you would likely not be reasonable to drug test an employee who reports a bee sting, or repetitive strain injury or an injury caused by a lack of a machine guarding or malfunction. A drug-testing policy [that mandates testing in that situation] is likely only to deter reporting without contributing to the employer’s understanding of why the injury occurred . . . . Employers need not specifically suspect drug use before testing, but there should be a reasonable possibility that drug use by the reporting employee was a contributing factor to the reported injury or illness in order for the employer to require drug testing. . . . Drug testing that is designed in any way that may be perceived as punitive or embarrassing to the employee is likely to deter injury reporting.
The trade groups argued that declaring these types of actions to be retaliatory will jeopardize the widespread use of incentive-based safety incentives as well as mandatory post-accident drug testing programs which are relied on by many employers to promote and help ensure workplace safety.
The Court found that the trade groups failed to prove that the use of mandatory post-accident drug testing programs dramatically reduce workplace injuries or that those injuries would increase if employers were required to eliminate or modify those programs. More importantly, the Court indicated that it agreed with OSHA that while the Preamble does reference criticisms of these safety programs, the Rule itself did not include a per se ban on post-accident drug testing or incident-based safety-sensitive programs. Instead, the Rules make it clear that such determination will require a case-by-case analysis of the specific programs used.
Action Items
Since the new OSHA Reporting Rules became effective on December 1, 2016, there are several key action items.
- Large employers and many others with more than 25 employees will need to be prepared to submit workplace injury and illness reports electronically – beginning July 1, 2017.
- Employers need to review their reporting policies for workplace injuries to ensure they will be viewed as “reasonable” under OSHA’s new rules.
- OSHA says employees must be given a “reasonable” time frame to report injuries or illnesses, especially those injuries or illnesses that develop over time. Policies that require “immediate” reporting of workplace accidents are likely to be found “unreasonable.”
- Employers must inform employees of the new reporting procedures and advise them of the protections from retaliation or discrimination provided when making a report.
- Company policies that mandate that employees must be drug tested after every workplace accident will likely be considered “unreasonable.” Drug-testing policies need to be reviewed and revised with these new Rules in mind.
- Company safety-incentive programs that reward employees for achieving low injury rates need to be reviewed to ensure that program does not have the effect of excluding (in a disciplinary way) a worker who reports a work-related injury.
Employers who have questions regarding their safety-incentive programs and drug-testing programs should contact members of Gentry Locke’s Employment Law Team.
[1] The case is Texo ABC/AGC IN, Inc., et al. v. Perez, et al. Case No. 3:16-cv-01998 (N.D. Texas, November 28, 2016).
Thursday, December 8th, 2016
So, what do your brewery, Facebook, and Google have in common? With Google and Facebook’s progressive offices there is probably some connection involving beer pong, but beyond that, intellectual property (“IP”) is a significant asset of each.
Brewery owners will spend countless hours and dollars investing in producing the best beer and marketing to build brand recognition, but will overlook protecting that intellectual property they spent so much effort building. Admittedly, Facebook and Google [and Anheuser-Busch and MillerCoors] are huge companies with in-house attorneys and legal budgets devoted to obtaining, licensing, and policing their intellectual property, which just doesn’t make sense for most other companies. So what can and should breweries, particularly smaller craft breweries, do?
First, value your company. Not necessarily from a balance sheet perspective, but identify the core, essential elements of your “brand.” When you think of your company and your products, and more importantly when the public thinks of your company and your products, what comes to mind? There’s no need to conduct a scientific poll or in-depth market study (although those are nice), just start looking for opportunities to have casual conversations to raise your awareness of your customers’ and the public’s perception of your company and your products.
Identifying your brand. In other words, you’ve spent those hours developing recipes and designing the space. What are the fruits of your labor, the elements that leave a lasting impression with your customers? Is it a certain beer that can’t be found anywhere else? A seasonal offering that folks mark on their calendars each year? A taproom and atmosphere that keeps people coming back? A catchy slogan or an image that is immediately recognized as being connected to you and your products? And if you haven’t yet opened your doors or produced your first beer, consider what you want the answers to these questions to be.
This process will help you identify your current brand and help you recognize something in your company you might have undervalued. It may help identify some areas where you need to invest more time and money.
Protect it! Now that you have an idea (and probably a list) of what is most valuable to your company and specifically your “brand,” what can you do to protect what you own? This is when a consult with an attorney can be most valuable. An attorney familiar with IP can help you analyze your intellectual property and help you perform a cost/benefit analysis on ways to protect your IP. Should you file trademark applications? What is the difference between a trademark and copyright? What information should be protected as confidential? These are all common questions discussed during an initial meeting with an IP attorney.
Whether you are investing in your company with the hopes to one day turn it over to a son or daughter or with an eye toward selling in the near future, taking an inventory of your IP and identifying ways to protect and increase the value of your IP is well worth the time and effort.
You can learn more about the ways Gentry Locke attorneys can help your brewery flourish on our Breweries, Wineries, and Distilleries page.
Thursday, December 1st, 2016
Did you know that almost 1/3 of the approximately 90,000 charges filed with the EEOC in fiscal year 2015 included an allegation of unlawful “harassment” in the workplace? Moreover, according to the EEOC’s latest research, 3 out of 4 persons who experience “harassment” at work never report it to anyone either internally (e.g., HR or a supervisor) or externally (e.g., EEOC charge). Simply stated, workplace harassment continues to be a significant problem.
Mindful of this problem, the EEOC convened a diverse and experienced Task Force to investigate, and to offer analysis and solutions. In June 2016, the EEOC Task Force published a lengthy, but helpful, report with the stated goal of “reducing the level of harassment in our workplaces to the lowest level possible.” They urged a “reboot” of our collective efforts towards this goal.
There is much to learn from this report. This article will focus on a few key takeaways for Virginia employers.
1. Is There a Compelling Business Case for Harassment Prevention?
There is no question that legal liability and related costs are significant factors impacting a company’s decision to emphasize its commitment to being an equal employment opportunity (EEO) employer. The Task Force opined, however, that these direct costs are “just the tip of the iceberg.” Their research demonstrated that unchecked harassment impacts all workers and often results in decreased productivity, increased turnover, and reputational harm. These additional “costs” also adversely impact a company’s bottom line.
2. What is the culture of your workplace?
Prevention efforts will fail unless there is proactive leadership and commitment by the company’s top executives. To this end, what is the level of discourse in your facility? Are all employees treated with civility and respect? Is profanity or crude conduct condoned? Is management held accountable for their own conduct as well as conduct of those persons they supervise? The Task Force report evaluates these questions. At a minimum, companies must hold their employees accountable to comply with their stated EEO policies and commitment. To be successful in minimizing improper harassment, a company must also ensure that its culture is not one that serves as a breeding ground for unacceptable conduct.
3. What year was your harassment policy last reviewed, and by whom?
In my experience, companies typically dust off their employee handbooks every few years, and then update them quickly so they can check this task off their “to do” list. When is the last time you updated your EEO, discrimination and harassment policy and complaint procedure? Who did the review? In the Task Force Report, the EEOC included a checklist of items that should be included in a harassment policy. While there is nothing “new” in this checklist, I still regularly see policies that are not compliant and/or are not well written. I have drafted a sample EEO policy and complaint procedure. If you would like to see it, please let me know and I would be happy to send you a copy.
4. How are you educating/training management and your employees?
Perhaps the most surprising conclusion of the EEOC Task Force is that corporate harassment training over the last 30 years has been largely ineffective. There are a number of reasons for this conclusion. Nevertheless, the Task Force still emphasizes that “training is an essential component of an anti-harassment effort.” The Task Force also has much to say as to the type of training provided. Moreover, SHRM recently posted an article by a management employment lawyer (and Task Force member) in which he articulated 17 tips for an employer’s training initiative. I attach a link to his article here. While the quote below states the obvious, the Task Force includes the following as one of its key recommendations:
Employers should dedicate sufficient resources to train middle-management and first-line supervisors on how to respond effectively to harassment that they observe, that is reported to them, or of which they have knowledge or information — even before such harassment reaches a legally-actionable level. (Task Force Report, p. 63)
As discussed above, however, such training must also be part of a larger commitment that includes the dynamics of company culture, leadership and accountability. Finally, while some of us still prefer reading handbooks in hard copy form, there is a new generation of workers who consume information electronically (or not at all). Accordingly, companies should also strongly consider making their policies available online and/or accessible from a mobile device.
Conclusion
I recently attended an employment law seminar in which Victoria Lipnic, a current Republican member of the EEOC and co-author of the Task Force Report, spoke passionately as to the significance of this report. I, too, am persuaded that companies should participate in the “reboot” of their harassment prevention efforts. I highly recommend that organizations devote the necessary time and resources to reassess their commitment to minimize harassment. Please let me know if we can help you in any way.
Todd Leeson regularly defends employment claims in Virginia courts and before agencies including the EEOC, National Labor Relations Board (NLRB), DOL and OSHA (whistleblower and retaliation claims). His experience includes the defense of companies as to alleged violations of Title VII, ADA, ADEA, FLSA, FMLA and the NLRA.
Tuesday, November 22nd, 2016
This article by Gentry Locke partner Christen Church was published to the website of ALM’s Inside Counsel Magazine on November 16, 2016. You may view a PDF of the article here.
The Affordable Care Act itself is 900+ pages, with the pages of regulation implementing the Affordable Care Act numbering in the thousands, so what would a “repeal” of Obamacare look like?
We now know the outcome of the 2016 election. On Jan. 20, 2017, Donald Trump will take office and a Republican majority will remain in both houses of Congress. What will this mean for the future of the Affordable Care Act?
At the end of October, then-candidate Trump released “Donald Trump’s Contract with the American Voter” outlining a plan for his first 100 days in office. Prominently listed among his objectives is to “Repeal and Replace Obamacare Act.”
Along the campaign trail Trump stressed his intent to work with Congress to repeal Obamacare and to enact regulatory reform. Both health care and regulatory reform had prominent positions on Trump’s transition website Greatagain.gov, with regulatory reform called a “cornerstone of the Trump Administration.”
The Patient Protection and Affordable Care Act, 42 U.S.C. §18001 et seq. (2010), (a/k/a The Affordable Care Act and Obamacare) was signed into law by President Obama on March 23, 2010. The statute itself is 900+ pages, with the pages of regulation implementing the Affordable Care Act numbering in the thousands, so what would a “repeal” of Obamacare look like?
When many think of Obamacare, largely two parts of the Affordable Care Act come to mind: 1) the individual mandate requiring individuals to have qualifying health insurance (or face a penalty); and 2) the employer mandate requiring many employers to offer affordable, qualifying health insurance coverage to their full-time employees (and their dependents) or face a penalty.
The Affordable Care Act goes beyond the individual and employer mandate, and includes many provisions that would be difficult to roll back completely. For example, the Affordable Care Act prohibits insurance companies from denying coverage for pre-existing conditions, permits dependents to remain on a parent’s insurance until their 26th birthday, and requires employers provide nursing mothers reasonable breaks and a location other than a bathroom to express milk during a child’s first year of life. These provisions of the Affordable Care Act were not the focus of Trump during the campaign and it may be his intent that they be left in place or replaced in substance if the portions of the Affordable Care Act conferring the protections are repealed.
It would be difficult if not impossible to repeal the entirety of The Affordable Care Act, even with a Republican majority in both houses of Congress, for a variety of procedural and political reasons. However, what is likely is that Trump, along with a Republican led Congress, will take action on key elements of Obamacare, including the individual and employer penalties, during Trump’s first days in office.
On Jan. 8, 2016, President Obama vetoed legislation that would have eliminated the individual and employer penalties under the Affordable Care Act. In response to President Obama’s veto, House Speaker Paul Ryan said in a statement: “The idea that Obamacare is the law of the land for good is a myth. This law will collapse under its own weight, or it will be repealed…We have now shown that there is a clear path to repealing Obamacare without 60 votes in the Senate. So, next year, if we’re sending this bill to a Republican president, it will get signed into law.”
On Nov. 9, 2016 Senate Majority Leader Mitch McConnell said repealing Obamacare is a “pretty high item on our agenda.”
To add another layer of complexity, open enrollment for 2017 Marketplace health insurance began on November 1, 2016 and the deadline to enroll or change a 2017 health plan is January 31, 2017. January 31, 2017 is also the deadline for employers to furnish ACA required information to employees, leaving six business days between inauguration and these upcoming deadlines. It remains to be seen if any repeal would impact 2017 or would be set to take effect in 2018.
Trump may begin releasing additional details on the timing and implementation of the objectives outlined in his 100-day action plan in the coming months leading up to his inauguration. One thing that is certain, individuals and employers will want to stay tuned, and Gentry Locke will continue to provide updates as we learn more.
Tuesday, November 15th, 2016
On November 14, 2016, the U.S. Citizenship and Immigration Services (USCIS) published a revised Form I-9, Employment Eligibility Verification. Satisfactory completion of a Form I-9 is required for every employee hired in the United States. These forms must be retained by employers forms for their active US workforce, as well as for terminated employees, pursuant to specific retention rules.
A link to the new form is here.
It is recommended that employers begin using the new Form I-9 now, however the last date employers can use the old form is January 21, 2017.
The revised Form I-9 includes several changes. For example, Section 1 asks for “other last names used” rather than “other names used,” and streamlines certification for certain foreign nationals. Other changes include:
- Instructions are now separate from the form itself
- Each form now includes a unique quick response (QR) code
- There is a new supplemental page for the preparer/translator
- Addition of a dedicated area for including additional information rather than having to add it in the margins
USCIS states that the revised Form I-9 is also easier to complete on a computer. When filling out the form on a computer using a standard PDF program such as Adobe Acrobat, the employer will be able to access drop-down lists and calendars for inputting dates, on-screen instructions for each field, easy access to the full instructions, and an option to clear the form and start over. When the employer prints the completed form, a QR code will automatically generate and appear on the form itself. Completing paper forms is still completely acceptable and employers may continue that practice if they wish.
Gentry Locke’s employment lawyers can help employers navigate and comply with the complexities of immigration related compliance for their employees. If you have any questions about the revised Form I-9 or any other employment related issue, please contact Brad Tobias or any member of Gentry Locke’s employment team.
Tuesday, November 15th, 2016
This article, co-authored by Gentry Locke attorneys Cynthia D. Kinser and John Reed Thomas, Jr., appeared in U.S. Law Week, published by Bloomberg BNA on November 3, 2016. You can view a PDF of the article here.
The False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733, is the United States’ primary statutory tool to combat fraud against the government. Congress enacted the FCA in 1863 in order to contend with widespread fraud in Civil War defense contracts. Since then, Congress has amended the FCA on several occasions to enhance the government’s ability to recover losses sustained as a result of fraud against it. The Department of Justice (“DOJ”) has applied the FCA to a broad array of fraudulent conduct, including pharmaceutical off-label marketing fraud, Medicare/Medicaid fraud, mortgage/financial fraud, and government procurement fraud.
In essence, the FCA prohibits the submission of a false claim for payment of federal funds. Thus, in an archetypical FCA action, such as the submission of a bill to the government for goods or services never provided, the claim for payment is itself false or fraudulent. The FCA’s development, however, has ushered in a variety of more nuanced theories of liability – one of these is implied false certification. The implied false certification theory of liability posits that a claim for payment is false if it rests on an implied false representation of compliance with material contractual terms, statutes, regulations, or administrative policies. For example, when a government contractor submits a claim for payment, it impliedly certifies compliance with relevant contractual, statutory, or regulatory provisions – even if those provisions are not express conditions of payment. If, however, the contractor has violated a particular requirement and fails to disclose or misrepresents its noncompliance in submitting the claim, FCA liability may attach. See, e.g., United States ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015) (alleging that the company submitted false claims to the Government when it billed for guard services and withheld its knowledge that the guards had failed to comply with a marksmanship requirement), vacated by, remanded by, Triple Canopy, Inc. v. United States ex rel. Badr, 136 S. Ct. 2504 (2016).
Prior to this summer, federal circuit courts were split about the viability of the implied false certification theory, with the majority of circuits recognizing implied false certification as a valid theory of FCA liability. In June, the Supreme Court of the United States ended the debate over implied false certification with Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). The Court held that the implied false certification theory can provide a basis for FCA liability. The Court’s decision broadened the range of instances in which defendants may face FCA liability. Adopting the implied false certification theory was, in fact, sweeping in favor of the government and relators. Beyond upholding the theory generally, the Court went so far as to eliminate the “condition of payment” limitation that had existed in some circuits.
Despite this clear decision on implied false certification, the Supreme Court sowed a degree of uncertainty on a separate issue: materiality. Many commentators perceive Escobar’s materiality requirement as a more stringent test than was previously used. The Court, however, was unclear about whether its materiality standard applies to all FCA claims or only to those brought under 31 U.S.C. § 3729(a)(1)(A). Thus, the decision actually may prove to be the catalyst for more debate about materiality. But, there can be little doubt that the materiality standard for § 3729(a)(1)(A) claims will require a case-by-case, fact-intensive analysis, resulting in a greater number of cases to be tried.
THE ESCOBAR DECISION
The facts underlying the Escobar case are tragic. In 2009, a young Medicaid patient in Massachusetts died of a seizure while being treated at Universal Health Services, Inc. (“Universal Health”). As it turned out, the Universal Health staff members caring for the patient were not properly licensed or supervised pursuant to Massachusetts law. The parents of the deceased brought a qui tam action against Universal Health under the implied false certification theory of liability. They alleged that Universal Health violated the FCA by submitting reimbursement claims under the Medicaid program that included representations about specific medical services and the professionals providing those services. Universal Health failed, however, to disclose its violations of regulations governing the staff qualifications and licensing requirements for the medical services rendered to the relators’ daughter. The relators alleged that Universal Health defrauded the Medicaid program because the government would not have paid the reimbursement claims if it had known that Universal Health billed for medical services provided in violation of regulatory requirements.
The DOJ did not intervene in the case, and the United States District Court dismissed the complaint because none of the regulations that Universal Health allegedly violated, with one exception, was a “condition of payment.” United States ex rel. Escobar v. Universal Health Servs., Inc., No. 11-11170-DPW, 2014 U.S. Dist. LEXIS 40098 (D. Mass. Mar. 26, 2014). The United States Court of Appeals for the First Circuit disagreed and reversed in part. United States ex rel. Escobar v. Universal Health Servs., Inc., 780 F.3d 504 (1st Cir. 2015). The court held that each time Universal Health submitted a claim for reimbursement, it “implicitly communicated that it had conformed to the relevant program requirements, such that it was entitled to payment.” Thus, the relevant question was “whether [Universal Health], in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment.” Noting that “[p]reconditions of payment, which may be found in sources such as statutes, regulations, and contracts, need not be ‘expressly designated,’” the court concluded that the regulatory provisions at issue “clearly impose[d] conditions of payment.” The court further held that the “express and absolute language of the regulation in question, in conjunction with the repeated references to supervision throughout the regulatory scheme,” constituted “dispositive evidence of materiality.”
The Supreme Court granted certiorari to answer two questions: (1) whether the implied false certification theory can be a basis of liability under the FCA; and (2) whether FCA liability attaches only if a defendant fails to disclose its violation of a contractual, statutory, or regulatory provision that the government has expressly designated a “condition of payment.”
On the first question, the Court held that the implied false certification theory can provide a basis for liability when “a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements.” If the omissions or “half-truths” render the defendant’s representations misleading with respect to the goods or services provided, FCA liability may attach.
As to the second question, the Court held that FCA liability “for failing to disclose violations of legal requirements does not turn upon whether those requirements were expressly designated as conditions of payment.” Whether a requirement is labeled a condition of payment is relevant, but the dispositive inquiry is “whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” Under this standard, a defendant must “knowingly” violate a requirement and also “know” that the requirement is material.
The Court described two circumstances in which a misrepresentation would be material: (1) when a reasonable person would attach importance to the matter in determining a choice of action or in manifesting assent; or (2) when the defendant knows or has reason to know that the recipient of the representation attaches importance to the matter or that the representation will likely induce the particular recipient to manifest assent. The first circumstance describes an objective test; whereas, the second employs a subjective determination.
POST-ESCOBAR MATERIALITY
The Supreme Court undoubtedly recognized that its adoption of the implied false certification theory expanded the scope of FCA liability. The Court took pains, therefore, to dispel concerns about fair notice to defendants and open-ended liability by emphasizing that the FCA’s scienter and materiality requirements should be strictly enforced. Its analysis of materiality, however, leaves courts and litigants with much fodder for debate.
Prior to 2009, the FCA did not have an express materiality requirement. Many courts had found an implied materiality requirement, however, and had employed differing standards of materiality. In the Fraud Enforcement and Recovery Act of 2009, which amended the FCA, Congress defined the term “material” as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. § 3729(b)(4). Materiality is now a specific requirement for liability under §§ 3729(a)(1)(B) and (G) of the FCA. Those sections expressly require that a false record or statement be “material” to a false claim, or to any obligation to pay money or property to the Government, respectively. In contrast, § 3729(a)(1)(A) does not contain an explicit materiality requirement. That section imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment.”
Notably, the Supreme Court’s materiality discussion in Escobar focused on claims under § 3729(a)(1)(A). The Court stated that it was not deciding “whether § 3729(a)(1)(A)’s materiality requirement is governed by” the definition of materiality in § 3729(b)(4) or “derived directly from the common law.” (Emphasis added.). Instead, the Court concluded that materiality under § 3729(a)(1)(A) “‘look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.’”
As to the explicit materiality requirement for claims under §§ 3729(a)(1)(B) and (G), the Court did not expressly reject the statutory, objective test. So, uncertainty about materiality remains. Will similar yet somewhat different materiality standards apply depending on the sections of the FCA under which claims are brought? If the Court intended for the materiality requirement in all FCA claims to be judged by its objective/subjective materiality standard in lieu of the statutory, objective test, then the Court judicially amended the FCA.
Despite this confusion, it is clear that for § 3729(a)(1)(A) claims, the materiality of a misrepresentation must now be judged by an objective test and/or a subjective test. Courts can no longer merely determine whether a particular requirement was likely to influence or was capable of influencing the government’s payment decision. Evidence showing a defendant’s knowledge about the materiality of a particular requirement is now relevant. Likewise, evidence about the government’s knowledge that a requirement is being violated and how it handles claims when it has such information is relevant.
For relators and relators’ counsel, the subjective test means that facts pled with sufficient particularity and plausibility showing, for instance, that the government routinely refuses to pay claims due to noncompliance with a particular statutory, regulatory, or contractual requirement should withstand motions to dismiss and for summary judgment. For example, one federal district court recently held that a relator sufficiently pled materiality by alleging that the government had “with some frequency” prevented law enforcement agencies from receiving particular grants because the agencies violated certain requirements. United States ex rel. Williams v. City of Brockton, Civil Action No. 12-cv-12193-IT, 2016 U.S. Dist. LEXIS 103409 (D. Mass. August 5, 2016).
Similarly, whether the government has expressly designated a requirement as a condition of payment is relevant along with why the designation was or was not made. The presence or absence of this designation, however, is not dispositive. If the government identifies a provision or requirement as a condition of payment but routinely pays claims with full knowledge that the requirement was violated, evidence about why the government paid will be relevant to the materiality analysis. Courts will seek to answer several factual questions: (1) what exactly did the government know about the violation; (2) was the violation trivial or significant; and (3) was a contract so advantageous to the government that the government decided to pay a false claim rather than contest the violation of a requirement that the government would otherwise view as material. Clearly, these questions will require a case-by-case, fact-based analysis.
The Supreme Court attempted to alleviate concerns that its fact-intensive materiality test would result in more trials. The Court asserted that its standard for materiality remained “familiar and rigorous” and that plaintiffs must plead claims with plausibility and particularity, including facts to support materiality allegations. While all these assertions are correct, the Court’s test for materiality under § 3729(a)(1)(A), nevertheless, will turn on contested facts that only a fact-finder can resolve.
For litigants in Virginia, the Virginia Fraud Against Taxpayers Act, Va. Code §§ 8.01-216.1-216.19, is identical to the FCA in many important aspects. No Virginia court has addressed the viability of the implied false certification theory of liability under the Virginia act or its materiality requirement. Given the similarity between the Virginia act and the FCA, however, Virginia courts should find the Escobar decision persuasive.
CONCLUSION
The Supreme Court’s decision in Escobar accomplished three things. First, it increased a defendants’ exposure to FCA liability by adopting the implied false certification theory. Second, the decision created uncertainty about whether materiality for all FCA claims will now be judged by the Court’s objective/subjective materiality standard or whether certain claims will continue to be judged under the statutory definition of materiality. Finally, despite the Court’s assertions to the contrary, materiality in § 3729(a)(1)(A) claims will require a fact-intensive, case-by-case analysis, resulting in more trials. So, the conclusion is – stay tuned for the next chapter of FCA litigation.
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Wednesday, November 2nd, 2016
This article by Gentry Locke partner Todd Leeson was published in the Opinion section of The Roanoke Times on November 2, 2016. To see the published version, click here.
Virginia has been a “right to work” state since 1947. In the upcoming election, Virginia voters will decide whether to include “right to work” protection in our state constitution. For reasons I will explain, I encourage a “Yes” vote. To understand this issue better, it is important to know the meaning of the term “right to work.”
Assume that Sara lives in New York. She accepts a job with the ABC Company as a production employee, and is paid $20 an hour. ABC’s hourly production employees are represented by a labor union. This means that at some point (perhaps decades ago), a majority of the production employees working at ABC at that time selected a union to represent their interests. The union negotiates with ABC management as to the terms and conditions of employment for all the production employees.
The union advises Sara that she must become a union member. Among other things, she is required to pledge her allegiance to the union, and is subject to fines and trials if she breaches the union’s rules. The union also tells Sara her monthly dues to be paid to the union are $51, which equates to $612 per year, and this money will be automatically deducted from her paychecks.
New York is a state that allows “union shop” or “forced unionization” agreements. So what happens when Sara responds that she is not interested in paying union dues? Because she works in New York and it is likely that there is a union shop agreement in place, the union can require that ABC terminate Sara’s employment.
Virginia is a “right to work” state. Thus, if Sara does not believe there is value in paying the union over $600 a year in dues, she retains the “right to work” for the ABC Company in Virginia. (Sarah is, however, required to accept the terms of her employment as negotiated by the union). It is my judgment that most persons do not believe they should be forced to pay union dues in order to take or keep a job.
There are currently 26 states with “right to work” security for employees. Of the 26 states, 10 of them include right to work protection in their constitutions. As you may recall, West Virginia, Wisconsin, Michigan, and Indiana have all recently become right to work states. The forced unionization states are primarily located in the northeast (e.g., New York, Massachusetts) or on the West coast (e.g. California, Oregon, Washington).
Not surprisingly, unions are opposed to right to work protection for employees and have been advancing a variety of inaccurate arguments. For example, in an article published in the Roanoke Times on October 10, 2016, a local union president was quoted as saying right to work means the “right to exploit working folks.” I disagree. In my experience, employers have every incentive to treat their employees well and pay them properly. Employees who are not satisfied with their jobs are not as productive and/or will leave to accept other jobs. Moreover, there are dozens upon dozens of state and federal laws that provide legal protection to employees in the workplace.
The reality is that Virginia employees no longer see the need to have a union represent their interests. The Bureau of Labor Statistics reports that in 2015 only 5.4% of workers in Virginia were members of a union.
As a labor lawyer in Virginia for over 25 years, it is my experience that companies seeking to locate their business strongly prefer to be in a “right to work” state. A “yes” vote for the amendment would send a clear message that Virginia is a great place to work (and play!).
In sum, Virginia citizens should vote “yes” to make “right to work” a part of Virginia’s Constitution.
Written by Todd A. Leeson. Todd is a partner with the Gentry Locke law firm in Roanoke. His focus is employment and labor law.
Thursday, August 25th, 2016
This article by Gentry Locke Partner Kevin Holt regarding Interpleader actions and ERISA was published in DRI — The Voice of the Defense Bar, August 2016, Volume 11, Issue 2.
Most lawyers, including ERISA practitioners, likely think interpleader actions are unappealing because they are easy and boring. They involve situations in which there are two or more competing claimants or beneficiaries to the same insurance policy proceeds. Rather than pay one claimant and risk being sued by the other, carriers typically prefer to bring an interpleader action, naming all claimants or beneficiaries as defendants and then paying the policy proceeds into court. Thereafter, the carrier requests, and typically receives, an injunction against future claims to the proceeds and some portion of its attorney’s fees and costs incurred from the proceeds. The carrier is then discharged from the case. In the second stage of the proceedings, the competing claimants litigate their entitlement to the funds.
In reality, at least based on my recent experience and a number of recent rulings, interpleader actions, especially those involving ERISA-governed policies, are anything but easy and boring. This article attempts to highlight some of the recent decisions and difficult issues ERISA practitioners may face when dealing with interpleader actions.
The more complicated cases tend to occur in the contexts of death and divorce, or, as a certain commercial tag line would describe such events – “mayhem.” Having suffered through my share of it, I offer some advice.
Interpleader Jurisdiction
The first issue to consider when filing an interpleader action is jurisdiction. You need it. Do you have it?
Section 1335 of Title 28 of the United States Code provides for Federal jurisdiction over interpleader actions. However, under the statute, all claimants to the funds must be diverse from one another. This requirement may be lacking in the frequent situation in which the competing claimants to life insurance proceeds, for example, are members of the same family who reside in the same state.
Fortunately, in addition to the Federal statute, there is also “rule interpleader.” Rule 22 of the Federal Rules of Civil Procedure permits an interpleader action to be brought in Federal Court, provided that subject matter jurisdiction is based on a general jurisdictional statute. Thus, if you have either Federal question jurisdiction or diversity jurisdiction in your case, an interpleader action under Rule 22 will be proper. Diversity among all claimants is not required for rule interpleader.
Of course, if the policy at issue is part of an employer-sponsored ERISA plan, Federal question jurisdiction will be conferred. If the policy is not subject to ERISA, you must have diversity jurisdiction, including the $75,000.00 amount in controversy requirement. The dollar requirement may bar the doors to the Federal courthouse in the case of a modest life or accidental death and dismemberment policy, for example, in which case you would have to bring your interpleader action in state court, likely the second choice forum of most carriers.
Standing under ERISA
An insurance company usually qualifies as a claims fiduciary under ERISA when it has some discretionary authority over the benefit plan or the determination of the entitlement to benefits under the policy. Standing as a “fiduciary” under ERISA is typically liberally construed, particularly for jurisdictional purposes.
Most policies governed by ERISA include express grants of authority to the insurance carrier designating it as the claims fiduciary with full discretion and authority to determine eligibility for benefits and to construe and interpret all terms and provisions of the policy. If the clause grants the carrier discretion over the administration and management of the benefit plan, particularly whether benefits will be paid under the policy, the carrier will have standing to bring an interpleader action as an ERISA fiduciary. See Metro. Life Ins. Co. v. Marsh, 119 F.3d 415 (6th Cir. 1997); Aetna Life Ins. Co. v. Bayona, 223 F.3d 1030 (9th Cir. 2000); Metro Life Ins. Co. v. Bigelow, 283 F.3d 436, 439-40 (2nd Cir. 2002); Metro Life Ins. Co. v. Price, 501 F.3d 271, 276-77 (3rd Cir. 2007).
Equitable Relief and Defenses
Federal courts have generally held that a Rule 22 interpleader action is one seeking “other equitable relief” under 29 U.S.C. §1132(a)(3). “[I]nterpleader is ‘fundamentally equitable in nature.’” Marsh, 119 F.3d at 418 (citing Commercial Union Ins. Co. v. United States, 999 F.2d 581, 588-89 (D.C. Cir. 1993)). “The remedy in an interpleader action by an insurance company with limited contractual liability draws upon equitable principals and common sense, namely that the court will distribute the limited fund of assets on some sort of ratable basis.” Guardian Life Ins. Co. of America v. Spencer, Civil Action No. 5:10CV004, 2010 U.S. Dist. LEXIS 93405 (W.D. Va. Sept. 8, 2010).
Because an interpleader action is an equitable proceeding, equitable defenses apply. U.S. Fire Ins. Co. v. Abestospray, Inc., 182 F.3d 201, 208 (3rd Cir. 1999); United States v. Hightech Prods., Inc., 487 F.3d 637, 641-42 (6th Cir. 2007); Farmers Irrigating Ditch & Reservoir Co. v. Kane, 845 F.2d 229, 232 (10th Cir. 1988) (explaining that “[t]he typical plaintiff in an interpleader is an innocent stakeholder who is subject to competing claims”). As we will see below, because equitable defenses apply, the carrier-plaintiff, in some cases, can be denied discharge from the case and forced to defend a counterclaim, including one alleging breach of fiduciary duty, or some other violation of ERISA.
“Competing Claims”
Sometimes a threshold issue will arise about whether, in fact, there are competing claims. If two claimants have each filed a written claim for benefits with the carrier, the answer is easy. There may be situations, however, in which, for instance, a husband has filed a written claim to the proceeds of a policy insuring the life of his deceased wife, and he is charged with having killed her. Her contingent beneficiary may be another family member or her estate under either a beneficiary designation form or the terms of the policy. But if the husband is merely suspected of involvement in his wife’s death and has not been charged or convicted and if the relative has not filed a formal claim with the carrier, a more difficult question is presented.
These were the facts in a recent interpleader case of mine. The wife died in a homicide committed in the family home. All evidence pointed to the woman’s husband as the killer. The husband was the named beneficiary of an ERISA-governed life policy insuring the wife. For whatever reason, years after the wife’s death, the husband remained the sole suspect, but had never been charged with any crime. The husband had filed a written claim under the policy, but the carrier had not paid it.
The carrier decided it could wait no longer and elected to file an interpleader action in Federal court invoking Rule 22 and ERISA jurisdiction. Application of Virginia’s slayer statute, now codified at Va. Code § 64.2-2500, et seq., barred the husband from taking under the policy, assuming he were determined to be his wife’s slayer. At the first court appearance, I was challenged by the judge about whether there truly were competing claims to the proceeds. The judge admonished that he lacked jurisdiction to render “advisory opinions” and wanted to be satisfied that we were not improperly asking the court to substitute itself for the carrier in administering the husband’s claim and the policy.
The court’s initial reaction was not unlike that of other judges who can be critical of interpleader actions when they believe they are being asked to essentially do the carrier’s job administering claims. See Metro. Life Ins. Co. v. McNatt, Case No. CIV-13-474, 2015 U.S. Dist. LEXIS 70950 (E.D. Ok. June 2, 2015). We had sued both the husband and the deceased wife’s elderly mother, who would take as a contingent beneficiary if the husband were found to be the slayer.
The mother never answered the Complaint and was in default. She was, however, also in the courtroom that day observing the proceedings. When the judge asked me what the mother’s position in the case was, I mentioned that the mother was sitting in the back of the courtroom (she had introduced herself to me before the hearing began). I indicated that she had not filed a formal claim to the proceeds or an Answer, but, because she was here, she could tell the court herself what her position was. The judge then asked her and, after being sworn, she shouted, “I don’t think he should get anything because he killed Ann!” At that point, turning to me, the judge declared, “I’ll take that as a claim.”
The court ultimately found that our case was brought properly. The court held that under Rule 22, an interpleader plaintiff has standing to bring an interpleader case if it faces claims that “may” expose it to “double or multiple liability….” Fed. R. Civ. P. 22(a)(1). The rule does not require there to actually be competing claims at the time the interpleader Complaint is filed, only that competing claims “may” arise, exposing the carrier to multiple liability. The judge was ultimately satisfied that we were not asking him for an advisory opinion or to administer the policy – but who knows if the result would have been the same had the mother not come to court that day.
ERISA and Slayer Statutes
As with my case several years ago, ERISA interpleader cases frequently occur in the context of murder. All but a handful of states have enacted statues that bar “slayers” from receiving benefits under a policy. In addition, Federal common law has long precluded beneficiaries from profiting from their own wrongdoing. See New York Mut. Life Ins. Co. v. Armstrong, 117 U.S. 591 (1886). But does ERISA preempt state slayer acts?
The United States Supreme Court has suggested, in dicta, that ERISA does not preempt state slayer statutes. Egelhoff v. Egelhoff, 532 U.S. 141, 152 (2001)(“[b]ecause the [slayer] statutes are more or less uniform nationwide, their interference with the aims of ERISA is at least debatable.”). Some district courts have echoed this belief that preemption is doubtful. See, e.g., Admin. Comm. for the H.E.B. Inv. & Ret. Plan v. Harris, 217 F.Supp.2d 759, 761 (E.D. Tex. 2002) New Orleans Elec. Pension Fund v. Newman, 784 F.Supp. 1233, 1236 (E.D. La. 1992); Mendez-Bellido v. Bd. of Tr. of Div. 1181, 709 F.Supp. 329, 333 (E.D. N.Y. 1989). Other courts have held that slayer statutes are preempted either by ERISA or Federal common law. Mitchell v. Robinson, Case No. 1-11cv130, 2011 U.S. Dist. LEXIS 147226, at *12 (E.D. Mo. 2011); Addison v. Metro. Life Ins. Co., 5 F. Supp. 2d 392 (W.D. Va. 1998). Most courts, however, have declined to decide the issue, concluding that Federal common law, which includes the equitable principal that a person should not benefit from his wrongs, would invariably yield the same result that slayer statutes would. Nale v. Ford Motor Co. UAW Plan, 703 F. Supp. 2d 714, 722 (E. D. Mich. 2010) (citing New York Mutual Life Ins. Co., 117 U.S. at 600).
Frequently, the issue in slayer cases is how and when a claimant or beneficiary is determined to be a slayer and, considering this, when an interpleader case should be brought.
Some statutes, like my native Virginia’s, provide that a person can be adjudicated a slayer in a civil proceeding, including an interpleader action, by a preponderance of the evidence. See Va. Code § 64.2-2500. Just across the state line in West Virginia, however, the statute explicitly requires the person to be “convicted of feloniously killing another” to be established as a slayer. W. Va. Code § 42-4-2 (emphasis added). At the time your client asks you about filing an interpleader case in the Mountain State, there may not yet be a conviction.
This statute did not abrogate West Virginia common law, however. West Virginia common law (like that of many other states) similarly bars a killer from obtaining property as a result of the killing. Metropolitan Life Ins. Co. v. Hill, 115 W. Va. 515, 177 S.E. 188 (1934). Under the common law, when there is no conviction for a felonious killing, the burden is on the insurance company to demonstrate that the beneficiary has committed an unlawful and intentional killing. McClure v. McClure, 184 W.Va. 649, 403 S.E.2d 197 (1991). An unlawful and intentional killing may be proven in a civil action by a preponderance of the evidence. Id.
Thus, in a jurisdiction like West Virginia, a conviction will conclusively preclude the claimant or beneficiary from taking under the policy. Nevertheless, if your client wants to file an interpleader action prior to a conviction, it could do so if it is willing to accept the burden of proving that the beneficiary is the slayer under the greater weight of the evidence standard. My usual advice to clients in this situation is to wait for the conviction after the criminal trial or, more likely, the guilty plea. Better to let the criminal justice system take on the heavy lifting at taxpayer expense.
Interpleader and Divorce
Another frequent source of interpleader litigation is divorce. Typically, the insured dies without having changed the original beneficiary from his or her spouse and there was an intervening divorce. A majority of states provide that divorce does not alter a spouse’s status as a beneficiary to proceeds of a policy. See O’Toole v. Cent. Laborers Pension & Welfare Funds, 299 N.E.2d 392, 394 (Ill. App. Ct. 1973).
Other states, including Virginia, void any existing beneficiary designation upon divorce. Va. Code § 20.111.1. An interesting case decided earlier this year in the Eastern District of Virginia illustrates the interplay between ERISA, the Virginia statute and interpleader.
In Metropolitan Life Ins. Co. v. Gorman-Hubka, Case No. 1:15-CV-1200, 2016 U.S. Dist. LEXIS 13900 (E.D. Va. Feb. 3, 2016), the court found against the decedent’s ex-wife and in favor of his sisters, even though the decedent had intended to make his ex-wife his beneficiary again after their divorce.
The Virginia statute provides that “upon the entry of a decree of annulment or divorce from the bond of matrimony…, any revocable beneficiary designation contained in a then existing written contract owned by one party that provides for the payment of any death benefit to the other party is revoked.”
As a threshold matter, the court determined that ERISA did not preempt the Virginia statute. The life insurance policy fell under the “safe harbor” regulation, 29 C.F.R. § 2510.3-1(j). Had ERISA applied, the Virginia statute would have been preempted under the U.S. Supreme Court’s decision in Egelhoff v. Egelhoff, 532 U.S. 141, 146 (2001) (holding that a similar Washington state statute was preempted because it had “a prohibited connection with ERISA plans because it interfere[d] with nationally uniform plan administration….”). Since ERISA did not apply, the decedent’s pre-divorce designation of his ex-wife as the beneficiary was automatically revoked by Va. Code § 20.111.1.
Prior to his death, however, in telephone conversations with “Operator Ben,” a representative of the carrier, the decedent attempted to confirm verbally that his ex-wife remained the beneficiary. The decedent asked Operator Ben what steps he needed to take to keep his ex-wife as the beneficiary. Operator Ben advised decedent that he could keep his ex-wife as the beneficiary. The decedent then asked, “So I don’t need to do any paperwork or anything like that to keep her the same?” Operator Ben replied, “Right. If she is already the beneficiary, then there is nothing you need to do.”
There were over $281,000.00 in life benefits under the policy.
The policy required the submission of a written beneficiary designation form to change the beneficiary. Decedent, of course, did not complete one; he merely spoke by telephone with Operator Ben. Although the equitable principal of “substantial compliance” applies to give effect to the demonstrated intent of an insured in designating a beneficiary, it requires the policy owner to do “everything within his power to effectuate the change.” Dennis v. Aetna Life Ins. and Annuity Co., 873 F. Supp. 1000, 1006 (E.D. Va. 1995).
The court in Gorman-Hubka found that the decedent had not substantially complied with the terms of the policy because he had not done everything in his power to re-designate his ex-wife as the policy beneficiary. The court acknowledged that the decedent had clearly demonstrated his intent to re-designate his ex-wife as the beneficiary during the telephone call. The Court found that while Operator Ben’s advice was “misleading, to be sure,” he did not instruct decedent “in absolute terms that no additional steps were required.” Rather, Operator Ben stated that “[i]f she is already the beneficiary, then there is nothing you need to do.” Because the ex-wife was not the designated beneficiary at the time due to the Virginia statute, the decedent could have done more, like sending a letter following the call to confirm his wishes.
This case, including the “misleading, to be sure” advice from Operator Ben, highlights one final minefield in ERISA interpleader actions—determining the scope of the discharge of the carrier, particularly in situations when the carrier’s alleged errors caused the competing claims.
Scope of Discharge and Injunctive Relief
In any interpleader action, the plaintiff will request injunctive relief and a discharge. Pursuant to 28 U.S.C. § 2361, “In any civil action of interpleader… a district court may … enter its order restraining [all claimants] from instituting or prosecuting any proceeding in any state or United States court affecting the property, instrument or obligation involved in the interpleader action….” The statute entitles an interpleader plaintiff to a discharge from further liability after paying the policy proceeds into court and a permanent injunction restraining all claimants from instituting or prosecuting any proceeding affecting the policy proceeds which have been interplead.
As discussed above, an interpleader action is an equitable proceeding. Equitable defenses, including unclean hands, can be asserted by a claimant/defendant. A defendant may also bring a counterclaim, arguing that the dispute over the ownership or entitlement to the policy proceeds was the carrier’s fault. In such a case, the claimant/defendant may assert a counterclaim for failure to follow the written plan document, breach of fiduciary duty, or to recover benefits or to enforce his rights under the terms of the plan under 29 U.S.C. § 1132(a)(1)(B) or 29 U.S.C. § 1132(a)(3). How far do the interpleader injunction and discharge extend in such circumstances?
Generally, courts have held that where the carrier/stakeholder bears no blame for the existence of the ownership controversy and the counterclaim is directly related to the stakeholder’s failure to resolve the underlying dispute in favor of one of the claimants, discharge will be granted. See, e.g., Prudential Ins. Co. of Am. v. Hovis, 553 F.3d 258 (3rd Cir. 2009) (“it is a general rule that a party seeking interpleader must be free from blame in causing the controversy, and where he stands as a wrongdoer with respect to the subject matter of the suit…, he cannot have relief by interpleader.”); ReliaStar Life Ins. Co. v. Lormand, Action No. 3:10-cv-540, 2011 U.S. Dist. LEXIS 25397 (E.D. Va. 2011).
When a claimant brings an “independent counterclaim” against the stakeholder, the stakeholder will be kept in the litigation to defend against the counterclaim, rather than being dismissed after depositing the disputed funds with the court. See, e.g., United States v. Hightech. Prods., Inc., 497 F.3d 637, 641-42 (6th Cir. 2007); Wayzata Bank & Trust Co. v. A&B Farms, 855 F.2d 590, 593 (8th Cir. 1988); Libby, McNeil & Libby v. City National Bank, 592 F.2d 504, 507 (9th Cir. 1978); J.G. Wentworth Originations, LLC v. Mobley, Civil Action No. 11-CV-1406, 2012 U.S. Dist. LEXIS 150157 (D. Md. 2012) (“interpleader was never intended… to be an all-purpose ‘bill of peace.’”). The counterclaim, however, must be separate from the interpleader action itself. Where a stakeholder is allowed to bring an interpleader action instead of choosing among adverse claimants, its failure to choose among the adverse claimants “cannot itself be a breach of a legal duty.” Hovis, 553 F.3d at 265 (citing Lutheran Bhd. v. Comyne, 216 F. Supp. 2d 859, 862 (E.D. Wisc. 2002); Metro. Life Ins. Co. v. Barretto, 178 F. Supp. 2d 745, 748 (S. D. Tex. 2001)).
One can imagine a case in which a claims administrator honors a beneficiary designation change request that does not strictly comply with the requirements of the policy. The designation change eliminates or reduces a previous beneficiary’s entitlement to proceeds under the policy. The stakeholder carrier, later faced with competing claims, decides to bring an interpleader action naming both beneficiaries. The original beneficiary takes the position that the claims administrator changed the designation improperly thereby causing the underlying dispute between the competing claimants. In such a situation, the original beneficiary may have a counterclaim against the stakeholder for breach of fiduciary duty or failure to follow the written plan or policy documents. Such a counterclaim would likely be an “independent counterclaim” which would survive an interpleader discharge and injunction, forcing the carrier to remain in the case to defend the counterclaim.
Attorney’s Fees
Although there is not express statutory authority to do so, courts often award reasonable attorney’s fees and costs to a stakeholder when an interpleader action is successful. The decision to do so is discretionary. Banner Life Ins. Co. v. U.S. Bank, NA, 931 F. Supp. 2d 629 (D. Del. 2013). The theory behind such an award is that by seeking resolution of multiple claims to policy proceeds, the plaintiff stakeholder benefits the claimants and it should not have to absorb its attorney’s fees in avoiding the possibility of multiple litigation.
Courts may take into account a number of factors in deciding the amount of attorney’s fees to award, including:
- Whether the case is simple;
- Whether the stakeholder performed any unique services for the claimants or the court;
- Whether the stakeholder acted in good faith or with diligence;
- Whether the services rendered benefited the stakeholder; and
- Whether the claimant improperly protracted the proceeding.
Charles A. Wright, Arthur R. Miller & Mary K. Kane, FEDERAL PRACTICE AND PROCEDURE, § 17-19 (3d ed. 2001). Wright and Miller continue:
Any attorneys’ fees awarded to the stakeholder in an interpleader action should be modest. Recoverable expenses in an interpleader action are limited to the attorneys’ fees billed to prepare the complaint, obtain service of process on the claimants to the fund, and secure the plaintiff’s discharge from liability and dismissal from the lawsuit; an interpleader plaintiff is, thus, not entitled to an attorneys’ fee reimbursement for any additional professional services rendered by the plaintiff’s attorney.
Id. (citing Fresh Am. Corp. v. Wal-Mart Stores, Inc., 393 F.Supp.2d 411 (N.D. Tex. 2005; Dusseldorp v. Ho, 4 F.Supp.3d 169 (S.D. Iowa 2014)).
This view of recoverable attorneys’ fees, while perhaps historically justified, does not reflect the current challenges in interpleader actions, particularly those involving ERISA. As seen above, these cases are often difficult and complicated. The case law concerning the recovery of attorneys’ fees would appear to need to “get with the times”—such as they are.
Conclusion
The next time you are faced with an interpleader case involving an ERISA-governed policy, I encourage you to consider these thorny issues. You are likely to find that the case is more complicated and interesting than you originally thought. Good luck!
Monday, August 22nd, 2016
Most people have been called for jury service at one time or another. Some will see the requirement of jury service as a time-consuming imposition, while others not only readily accept this obligation as a basic requirement of citizenship, but find the experience to be interesting and even ennobling.
The right to a jury trial in criminal cases is guaranteed by the Sixth Amendment to the United States Constitution, while the Seventh Amendment provides for jury trials in most civil cases. Obviously, we cannot have jury trials without jurors. So, who is subject to the requirement of jury service and who is not?
Under the Code of Virginia, subject to certain exceptions and qualifications, all citizens over 18 years of age who have been residents of the Commonwealth for one year, and of the locality of where they reside for six months, shall be liable to serve as jurors. No person is deemed incompetent to serve as a juror in Virginia because of blindness or partial blindness. United States military personnel are not considered residents of the Commonwealth by reason of their being stationed in Virginia.
Some categories of persons are statutorily disqualified from serving as jurors in Virginia, including persons adjudicated as being incapacitated and convicted felons. With regard to convicted felons, the issue of restoration by the Governor of the political rights of felons who have completed their sentences has been in the news in Virginia recently, with the emphasis being on the question of the restoration of voting rights. Another of the political rights that are subject to restoration by the Governor under appropriate circumstances is the right to serve on juries.
Certain persons are exempt from serving on juries in civil and criminal cases in Virginia by virtue of the offices they hold, including the President and Vice President of the United States; Governor, Lieutenant Governor, and Attorney General of the Commonwealth; the members of both houses of Congress, and the members of the Virginia General Assembly while in session; the judges of any Court in Virginia; law enforcement officers; and the superintendents of penitentiaries and jails. Also exempt from jury service are licensed practicing attorneys.
Finally, there are categories of persons who may serve on juries but who shall be exempt from jury service upon request, including any person over 70 years of age and persons who are legally, necessarily and personally responsible for a child or children 16 years of age or younger who require continuous care during normal court hours.
Virginia law establishes jury commissioners for each Circuit Court who are responsible for preparation of a master jury list. The law directs the jury commissioners to utilize random selection techniques, using current voter registration lists and, where feasible, a list of persons who have been issued Virginia driver’s licenses. If approved by the Chief Judge of the Circuit, other lists may be utilized by the jury commissioners, including telephone books and personal property tax rolls.
The objective of the jury commissioners is, by statute, “…to select the jurors representative of the broad community interests.” Interestingly, while Virginia law provides an exemption from jury service for licensed practicing attorneys, it does not bar lawyers from serving on a jury when a lawyer is willing to waive the exemption. The ability of a licensed practicing attorney to waive the exemption and qualify for jury service is somewhat controversial, since some are concerned that a lawyer on a jury will have an untoward influence on the jury’s decision in the case.
Jury service is an obligation of citizenship shared by most people. Our system of justice, based upon resolution of disputes and questions of guilt or innocence by one’s peers would come to a grinding halt without the service of citizen jurors.
