Exclusive dealing contracts invite antitrust risk

Exclusive dealing contracts are a great tool for manufacturers, but a recent case from the Sixth Circuit shows that they create a risk of antitrust liability when they shut competitors out of the market.  In NicSand, Inc. v. 3M Co., NicSand was 3M's only competitor in the market for "DIY retail automotive coated abrasives".  NicSand claimed that 3M used its superior market power to enter into multi-year exclusive dealing contracts with four of the six largest retailers of those products, effectively shutting NicSand off from potential customers and sending it into bankruptcy.  3M was able to achieve that result in part by offering substantial discounts to the large retailers - and the court said those discounts "served no business purpose other than to exclude NicSand's products from the market."  While a dissenting judge argued that the discounts represented vigorous competition rather than illegal monopolization, the majority held that NicSand stated a valid antitrust claim and ordered the case to proceed to trial.  The lesson is that, when a manufacturer has a large presence in a product market, it must take care not to eliminate rivals' access to customers.

Loose Lips Still Sink Ships

An example of employee stupidity that keeps lawyers in business was highlighted in the case of Denny v. Elizabeth Arden Salons, Inc., No. 05-1228 (4th Cir.), decided August 9, 2006.  An African-American woman ordered a gift certificate for her mother.  She later went into the store to add a service to the gift, at which point she was told by the receptionist that there was "a problem" because the salon "did not do black people's hair."  Mother and daughter sued for civil rights violations for discrimination in a place of public accommodation and discrimination in the making and enforcement of contracts, along with a state law claim for intentional infliction of emotional distress.  The trial court granted summary judgment to the defendant salon.

The Fourth Circuit reversed in part, holding that the actions of the receptionist did constitute discrimination in the making and enforcement of contracts.  The court affirmed the dismissal of the public accommodation claim, holding that the salon did not fall within the legislative definition of a public accommodation.

Even in this day and age discrimination of this sort, whether intentional or merely thoughtless, occurs and creates liability for employers.  For employees who lack a keen sense of the obvious, this most basic of lessons bears repeating.

Full text of the opinion can be viewed at:  http://pacer.ca4.uscourts.gov/opinion.pdf/051228.P.pdf

New E-Discovery Rules Coming to a Federal Court Near You

Soon, Federal Rule of Civil Procedure ("FRCP") 26 will be amended to further address the parties' obligations for discovery of electronically stored information.  Essentially, the new Rule does three things:  (1) it specifies "electronically stored information" as discoverable under the initial disclosure requirements of FRCP 26(a)(1); (2) it distinguishes "readily accessible" electronically stored information (which must be produced without a showing of good cause) from such information which is not readily accessible "because of undue burden or cost"; and (3) it requires the parties to confer under FRCP 26(f) "as soon as practicable and in any event at least 21 days before a scheduling conference is held or a scheduling order is due . . . to discuss any issues relating to preserving discoverable information, and to develop a proposed discovery plan [which should deal with] * * * any issues relating to disclosure or discovery of electronically stored information, including the form or forms in which it should be produced." 

The pertinent sections with the new language are as follows:

"Rule 26. General Provisions Governing Discovery; Duty of Disclosure

(a) Required Disclosures; Methods to Discover Additional Matter.

(1) Initial Disclosures. Except in categories of proceedings specified in Rule 26(a)(1)(E), or to the extent otherwise stipulated or directed by order, a party must, without awaiting a discovery request, provide to other parties:

* * * * *

(B) a copy of, or a description by category and location of, all documents, electronically stored information, and tangible things that are in the possession, custody, or control of the party and that the disclosing party may use to support its claims or defenses, unless solely for impeachment;

* * * * *

(b) Discovery Scope and Limits. Unless otherwise limited by order of the court in accordance with these rules, the scope of discovery is as follows:

* * * * *

(2) Limitations.

* * * * *

(B) A party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost. On motion to compel discovery or for a protective order, the party from whom discovery is sought must show that the information is not reasonably accessible because of undue burden or cost. If that showing is made, the court may nonetheless order discovery from such sources if the requesting party shows good cause, considering the limitations of Rule 26(b)(2)(C). The court may specify conditions for the discovery.

* * * * *

(f) Conference of Parties; Planning for Discovery. Except in categories of proceedings exempted from initial disclosure under Rule 26(a)(1)(E) or when otherwise ordered, the parties must, as soon as practicable and in any event at least 21 days before a scheduling conference is held or a scheduling order is due under Rule 16(b), confer to consider the nature and basis of their claims and defenses and the possibilities for a prompt settlement or resolution of the case, to make or arrange for the disclosures required by Rule 26(a)(1), to discuss any issues relating to preserving discoverable information, and to develop a proposed discovery plan that indicates the parties' views and proposals concerning:

* * * * * *

(3) any issues relating to disclosure or discovery of electronically stored information, including the form or forms in which it should be produced[.]"

Unless Congress acts between now and then, the new rules will apply to cases filed after December 1, 2006, and to any other pending cases if "just and practicable." 

Now, more than ever, parties in litigation--and those anticipating litigation--will need to promptly establish a "litigation hold" on discoverable matter, including all "electronically stored information," as well as a policy to ensure no such information is destroyed or lost.

Taxpayer hits a home run, but the game is probably not over…

It came to only $20,665 in taxes for Marrita Murphy, but the decision of the Court of Appeals for the DC Circuit awarding her a full refund could cost the IRS millions.

Murphy sued the New York Air National Guard for whistleblowing and received an award of $70,000 for emotional distress and injury to her professional reputation. After paying taxes on the award, she applied for a tax refund based on IRC §104(2)(A), which provides an exclusion from gross income for damages received on account of physical injuries. Damages for emotional distress, humiliation, and other non-wage related injuries are not ordinarily within the scope of the exclusion under §104. When the IRS rejected her request, she sued. See Murphy v. Internal Revenue Service.

The case turned on the definition of the word “income.” The Sixteenth Amendment grants Congress the power to tax “incomes, from whatever source derived.” Murphy argued that as used in the Sixteenth Amendment, the term “income” is limited to accessions to wealth, and does not include compensatory damage awards received to restore the status quo. While §104 presumably provides an exclusion for damages received on account of personal injuries for this reason, the IRS nevertheless countered that Congress could elect to tax personal injury awards if it so desired, consistent with the Sixteenth Amendment. The Court didn’t buy that argument for one second:

We reject the Government’s breathtakingly expansive claim of congressional power under the Sixteenth Amendment -- upon which it founds the more far-reaching arguments it advances here. The Sixteenth Amendment simply does not authorize the Congress to tax as “incomes” every sort of revenue a taxpayer may receive. As the Supreme Court noted long ago, the “Congress cannot make a thing income which is not so in fact.” *** Indeed, because the “the power to tax involves the power to destroy,” *** it would not be consistent with our constitutional government, and the sanctity of property in our system, merely to rely upon the legislature to decide what constitutes income. Fortunately, we need not rely solely upon the wisdom and beneficence of the Congress for, when the Sixteenth Amendment was drafted, the word “incomes” had well understood limits. To be sure, the Supreme Court has broadly construed the phrase “gross income” in the IRC and, by implication, the word “incomes” in the Sixteenth Amendment, but it also has made plain that the power to tax income extends only to “gain[s]” or “accessions to wealth.”

The Court concluded that the damages had been awarded to make Murphy emotionally and reputationally “whole” after these attributes were diminished by her former employer. Consequently, “the compensation she received in lieu of what she lost cannot be considered income.”

While the Court’s opinion only affects Washington, D.C. and the IRS may appeal to the US Supreme Court, the case will likely have a significant and immediate impact on settlements and awards in employment cases nationwide.

Recitals in Contracts

In negotiating a contract, parties often spend little time contesting the language in the recitals.  In a hurry to get to the seemingly more significant terms of the agreement, the lines beginning with "Whereas" often receive less attention.  At one level, this is understandable since the recitals  appear to be a benign introduction to the actual agreement. 

This neglect, however, can have serious consequences.  For example, in Miller v. Miller, 276 Or. 639, 647 (1976), the Oregon Supreme Court held that where the recital clause of a contract is inconsistent with an operative provision of the contract, the contract as a whole is ambiguous.  Moreover, ORS 42.300 provides that "[e]xcept for the recital of a consideration, the truth of facts recited from the recital in a written instrument shall not be denied by parties thereto, their representatives or successors in interest by a subsequent title." 

Simply, since the recitals cannot later be denied, parties must carefully analyze them before entering into the contract.  This examination, ideally by a litigator, should not only include a review of the accuracy of the facts recited, but also include a review of how the recitals interact with the more heavily-negotiated terms of the agreement. 

Misappropriation of Trade Secret Law Casts a Broad Net of Potential Liability

Most states have either adopted the Uniform Trade Secret Act, or enacted statutes that are very similar to the Act, which makes the misappropriation of trade secrets unlawful.  Misappropriation can occur by improper use, disclosure, or acquisition of a trade secret.  A court recently held that improper use of a trade secret may happen even where the alleged perpetrator does not know the trade secret. 

In Cognis Corp. v. ChemCentral Corp., No. 05-C-6344 (N.D.Ill. 2006), a developer of a chemical used as a curing agent for adhesive sued a distributor of chemical products for misappropriation.  The defendant distributor had previously distributed products for plaintiff and now distributed a curing agent from a former employee of plaintiff who was alleged to have misappropriated plaintiff's secret formula for its curing agent.  In another state, Plaintiff had sued the former employee for misappropriation.  Although the distributor did not know the secret formula of the curing agent, it knew that plaintiff had sued the former employee for misappropriation of the secret formula, and the distributor priced the product alleged to have been developed from the secret formula 10% below plaintiff's price to attract plaintiff's customers.  The court held that these alleged facts were sufficient to state a claim for misappropriation of trade secrets against the distributor. 

Securities Fraud Provisions Apply to Settlement Agreements

In settling disputes with shareholders or former employees, businesses often repurchase the stock in the company owned by the settling shareholders or former employees.  When entering into these settlements, business lawyers need to remind themselves that these settlements are subject to the securities fraud provisions in state securities laws, and that the settlement transaction may result in future litigation if there is a significant increase in the value of the company shortly after these shares have been repurchased.

In Oregon, the key statute is ORS 59.115 which imposes liability for selling stock by means of an untrue statement or omission of material fact.  The key case is Towery v. Lucas, 128 Or App 555, 876 P2d 814 (1994), holding that the antifraud provisions apply to settlement agreements to the same extent as any other transaction that involves the sale of securities.

While Washington's securities antifraud states are different from those in Oregon, Washington courts also recognize that in certain circumstances a misrepresentation or omission in settlement negotiations can be actionable under its statutes.  In Guarino v. Interactive Objects, Inc., 122 Wash App 95, 86 P3d 1175 (2004), the dispute involved a claim to severance benefits by former officers of the company.  The company repurchased stock owned by the former officers as part of the settlement of the severance benefits claim without disclosing that the company had signed a letter of intent to merge with another company.  When that merger occurred, the value of the company's stock increased dramatically.  The appellate court found the failure to disclose the possible merger to be actionable under Washington's securities laws.

Proposal to split the Ninth Circuit moves to the Senate Judiciary Committee

The decades-long controversy over whether to divide the federal Ninth Circuit Court of Appeals is expected to move to a hearing before the Senate Judiciary Committee after the August recess.   
The pending proposal, S. 1845, would create a new Twelfth Circuit comprising Alaska, Arizona, Idaho, Montana, Nevada, Oregon and Washington.  California, Hawaii and the Pacific Islands would remain in the Ninth Circuit. 
The long-simmering dispute over the split has gained a higher profile now that Senate Judiciary Committee Chair Arlen Specter has come out in favor of it.
Supporters of the split invoke concerns about ideology -- that a split would alleviate the perceived liberalness of the Ninth Circuit -- and judicial administration -- that with some 50 judges the circuit is just too large to be manageable.  The current bill would address the case backlog at least in part by adding five new judgeships to the reconstituted Ninth Circuit.   But as for political concerns, opponents say a Ninth Circuit dominated by California is not likely to have a different ideological bent. 
For more discussion of the history of, and policies underlying, proposals to split the circuit, see my Oregon State Bar Bulletin article on the topic.

The Cost of Going Green

Several employers have recently begun offering various benefits to employees to offset the rising cost of gasoline.  http://www.shrm.org/hrnews_published/ARCHIVES/CMS_017366.asp.  Locally, one company's incentive costs the employer almost $5,000/year.   http://www.oregonlive.com/weblogs/atwork/index.ssf?/mtlogs/olive_atwork/archives/2006_07.html#166529.  Gas cards or subsidized automobiles are allowable employee benefits.  But employers considering such programs should consider the following.

First, these benefits, like any other, are taxable income to the employee and considered wages.  So that $100 gas card needs to be included on the employees W-2, and is subject to FICA and FUTA.  For large subsidies, such as the $400/month hybrid car payment, the employee will have to consider adjusting their income tax withholding amounts to ensure that the proper amount is withheld.  The employer will have to ensure that its payroll staff considers the subsidy when computing FICA, FUTA and other wage-based taxes.  The IRS recently issued a press release reminding employers of these issues.  http://www.irs.gov/newsroom/article/0,,id=160030,00.html

Second, programs requiring on-going benefit administration or claims processing are likely to be subject to ERISA, unless sponsored by a governmental or church entity.  That may trigger discrimination or eligibility rules, disclosure requirements such as Summary Plan Descriptions or fiduciary duties and compliance with the U.S. Dept. of Labor's claims processing regulations.

Finally, the employer should consider what strategic business objective any of its benefit programs advance, and whether the perceived value of the benefit to the employees will exceed its cost.  With the rising cost of gas for employees, perhaps these types of programs will become more common and valuable as a retention tool.

Prompt Response to Discovery Requests Required to Preserve Privilege

Document discovery, particularly in complex business cases, is time-consuming, oftentimes tedious, and generally expensive.  Procrastinating in the face of discovery requests, however, may result in the unintended waiver of the attorney-client privilege.

In Burlington Northern and Santa Fe Ry. Co. v. U.S. Dist. Ct. for Dist. of Mont., 408 F3d 1142 (9th Cir 2005), the Ninth Circuit held that failure to produce a detailed privilege log within the 30-day time period for responding and objecting to document requests constituted a waiver of the attorney-client privilege.  The court did not make the 30-day period a bright line rule, although it did recognize that serving a proper privilege log within that time cannot result in a waiver.  The court said that timeliness determinations must be made on a case-by-case basis, analyzing 1) the degree to which the assertion of the privilege is detailed enough to allow opposing counsel and the court to evaluate the assertion of privilege; 2) timeliness of the objection and production of a detailed log; and 3) the scope of the document production and or other circumstances that make responding difficult (or, for that matter, make it easier).

Why care?  Waiver of the attorney-client privilege can have a devastating impact on litigation.  This is another example of an ounce of prevention being preferable to a pound of cure.  Parties to complex litigation need to recognize that prompt compilation and analysis of requested documents is a high priority, not something to be ignored or delayed.

Oregon Court of Appeals finds that letter of intent has teeth

In business transactions, the parties may enter into a letter of intent to negotiate further.  If no final contract results after further negotiations, the parties often have no recourse against each other.  However, the Oregon Court of Appeals recently enforced a letter of intent and awarded damages to the buyer caused by the loss of the deal.  In Logan v. Sivers Co., C-31283CV (August 2, 2006), the parties entered into a letter of intent to negotiate the sale of commercial real estate.  The letter of intent included a term, referred to as a "non-shop" provision, that prohibited the seller from soliciting offers or a contract to sell the property for a period of 60 days.  Twenty-one days after the parties entered into the letter of intent, the seller entered into a sales agreement with a third party to sell the property and the first buyer sued.  The seller countered by arguing that the letter of intent was unenforceable as merely an "agreement to agree."   

While the Oregon Court of Appeals acknowledged that certain terms in the letter were too indefinite to be enforceable, it found that the non-shop provision was sufficiently definite and the parties manifested their intent to be bound by it.  Accordingly, the court held that the seller breached the non-shop provision and turned to the issue of whether plaintiff was entitled to damages.  Plaintiff had attempted to purchase the property for purposes of a 1031 like kind exchange to avoid tax liability from her prior sale of other commercial property.  She sought damages in the amount of her tax liability as result of losing the purchase.  Although the seller argued that such damages were consequential losses that were not reasonable foreseeable, the jury found that the damages were foreseeable and the court of appeals held that the verdict was supported by the evidence.  Consequently, the court awarded the damages amounting to plaintiff's tax liability.

New EEOC Q&A on Employment Rights of People with Hearing Loss

The Equal Employment Opportunity Commission ("EEOC") occasionally issues guidance on the employment rights of individuals with certain disabilities.  Late last month, the EEOC announced the release of the sixth publication in this series: Questions and Answers about Deafness and Hearing Impairments in the Workplace and the Americans with Disabilities Act.  This publication includes, among other things, a discussion of the EEOC's view about when a hearing impairment constitutes a disability, when and how an employer can obtain or use medical information relating to a hearing impairment, and when certain accommodations may be required for a hearing impaired employee or applicant. 

Washington Supreme Court adopts new definition of "disability"

The Washington Supreme Court recently resolved years of confusion surrounding the definition of the term "disability" under the state's Law Against Discrimination (LAD).  In McLarty v. Totem Electric, the court discarded the inherently circular definition in WAC 162-22-020, under which a person is considered "disabled" by a sensory, mental, or physical condition if he or she is discriminated against because of the condition and the condition is abnormal.  This regulation effectively requires an employee to prove he or she has been discriminated against because of an abnormal condition to prove the existence of a "disability." The court also rejected a previously applied definition of "disability" that included any medically cognizable abnormality because this interpretation was far broader than the plain meaning of the term and not supported by the statutory text.  The court adopted a single definition of "disability" for use throughout all portions of the LAD that is consistent with the ADA definition of disability under federal law.  A Washington employee who brings suit under the LAD may now establish that or she is disabled by proof of (1) a physical or mental impairment that substantially limits one or more major life activities, (2) a record of such an impairment, or (3) being regarded as having such an impairment.

Merck Wins Vioxx Case

The score is now Merck 5, plaintiffs 3 in the ongoing battle over the safety of Merck's drug, Vioxx.  Vioxx is one of many prescription "NSAID" (non-steroidal anti-inflammatory) medications, used to treat certain kinds of pain including arthritis. In the first of the California cases, the jury rendered a verdict for the defense, finding that the 71-year-old plaintiff did not prove that his use of Vioxx caused his heart problems.  With thousands of similar cases pending, Merck has vowed to continue to fight them in court one at a time.  For more coverage, see the AP article at:  http://www.law.com/jsp/article.jsp?id=1154509541613

Politics and Oregon's Courts

The Oregon Election Division certified an initiative yesterday for the November ballot that would change dramatically how Oregon's appellate judges are selected. Link: OregonLive.com.  The ballot measure would require that the justices of the Oregon Supreme Court and Oregon Court of Appeals live in, and be elected from, geographic districts.  At present all seventeen appellate judges live within commuting distance of Salem and are elected statewide.

A similar measure was defeated by less than 15,000 votes in 2002.

The outcome of this year's gubernatorial race is also likely to have a significant effect on the State's judiciary, especially the Multnomah County Circuit Court.  This is the court that hears most of the complex business litigation in Oregon.  According to the presiding judge of that court, as many as twelve judges are planning to retire in the next year.  Many if not most of these vacancies are likely to be filled by appointment by whichever candidate is elected Governor.

This is an unsually high number of vacancies.  In Governor Kulongoski's first three years in office he filled four vacancies on the Multnomah County Circuit Court, and this year he will make two or perhaps three appointments to that Bench.  The candidate who gets to make ten to twelve appointments in a single year will have the ability to influence greatly the most important trial court in Oregon.

 

Blog as persuasive authority in the Ninth Circuit?

A judge on the Ninth Circuit Court of Appeals has ventured into new territory, finding persuasive authority in the blogosphere.  On Monday Judge Diarmuid O'Scannlain of Oregon, dissenting from a denial of rehearing en banc in a First Amendment case, cited a blog post on The Volokh Conspiracy  as support for his position.  That blog post criticized the three-judge panel's decision in the same case from April of this year.

HP's victory on retirement benefit comes at a high price

A recent case reminds employers of the importance of complying with ERISA's claims procedures.  A case seeking $7,000 in benefits ended up costing HP a trip to the Ninth Circuit because of a poorly prepared claim denial letter. 

Kenneth Chuck resigned from Hewlett-Packard in 1980 and received a distribution of his retirement plan.  He objected that the amount was less than the plan owed him.  The plan disagreed in a series of letters exchanged with Chuck.  Over ten years later Chuck again exchanged several letters with the plan about the benefit, with the plan ultimately telling Chuck in 1992 that "[n]o further retirement benefits are payable from our U.S. plans."  Chuck continued a sporadic letter writing campaign until filing a lawsuit in 2003, over 23 years after last working for HP.  The trial court upheld HP's position and Chuck appealed.

The Ninth Circuit focused on HP's core argument: the statute of limitations barred Chuck's claim.  ERISA does not impose its own statute of limitations on claims for benefits, such as the one brought by Chuck, but looks to the most analogous state law statute.  The Ninth Circuit decided that is Oregon's six-year statute applied to breach of contract claims (ORS 12.080(1)).  Since Chuck received a distribution in early 1981 and brought his suit in 2003 HP thought it was pretty clear that the lawsuit was filed far too late.  But Chuck made an interesting argument: HP's denial of his claim failed to comply with the U.S. Dept. of Labor's (DOL) regulations that require the plan to provide specific information when it denies a participant's claim.  Chuck argued that if the plan failed to provide the correct information and explanations required by the DOL, the statute of limitations did not begin to run, so his claim was timely.

The Court agreed that if a plan provided a shorter limitation period, failure to substantially comply with the claims denial regulations would not trigger the plan's period for bringing suit.  However, as for the statutory limit, "a plan's violation of its notification and review obligations under ERISA is a highly significant factor, but not a dispositive one, in determining whether a claim has accrued for benefits under ERISA."

The court then considered whether Chuck "could have reasonably believed his benefits had not been finally denied, or whether instead he had reason to know of a clear and continuing repudiation of his claim."  The court held that although HP's explanation "came nowhere close to complying" with ERISA's requirements, the various explanations provided by HP were sufficient to cause Chuck to know that the plan would not pay him the benefit he sought by 1992 when it said no further benefits were payable.  As a result, the court upheld the summary judgment awarded HP.

Two lessons from the case: first, in Oregon ERISA retirement plan participants have six years to bring a claim under ERISA.  In California, it is four years.  The plan can shorten that period and make it uniform regardless of what states the plan covers by imposing its own, shorter period of time.  The only limitation that courts have placed on a shorter limitations period is the period must be "reasonable."  Courts have upheld periods as short as six months as "reasonable."

Second, plan administrators must know, understand and scrupulously comply with the DOL's ERISA claims regulations.  Although HP's response to Chuck was not compliant it was specific enough that this court found it triggered the running of the statute.  A different court might have concluded differently.  Rather than taking that risk, plans may decide to have plan counsel draft claims denials to ensure that the Notice is fully compliant with ERISA.  Although HP was ultimately successful in this case, its attorney's fees surely far exceeded the $7,000 in benefits that Chuck sought to obtain.  Chuck v. Hewlett-Packard Co., et.al.