Ninth Circuit to allow cites to unpublished opinions

The Ninth Circuit Court of Appeals will soon drop its longstanding prohibition against citation of unpublished opinions.  Proposed Circuit Rule 36-3 parallels proposed Federal Rule of Appellate Procedure 32.1, which provides for the first time that the circuits may not prohibit or restrict the citation of unpublished opinions. Both rules are expected to become effective December 1, 2006.  Circuit Rule 36-3 will allow lawyers to cite unpublished Ninth Circuit opinions -- but only those opinions issued on or after January 1, 2007.  The Ninth Circuit is one of four circuits that has until now banned citation to its unpublished cases.  Advocates should now be able to tap into a large pool of case law: according to estimates, some 80 percent of federal appellate cases nationwide are disposed of by unpublished opinions and orders.

Tobacco Class Action "Light" Certified

US District Judge Jack Weinstein certified a class action comprised of tens of millions of smokers of "light" cigarettes going back more than thirty years.  Unlike other unsuccessful tobacco class actions in which the plaintiffs seek damages for personal injuries and death, in this suit the plaintiffs seek damages based on the difference in value between the cigarettes they purchased and the allegedly safer cigarettes they thought they purchased.  The suit alleges that the tobacco companies perpetrated a fraud of massive scale on the American public when it marketed "light" cigarettes as a safer alternative, when it knew that "light" cigarettes in fact were no safer than the others.  Presumably, the plaintiffs believe they can prove that they would have paid less for the "light" cigarettes if they had known the health risks were the same, or, put another way, that the "light" cigarettes had more value to them.  They contend that surveys indicate that the vast majority of "light" cigarette smokers chose the products for health reasons.  Defendants contend that individual smokers choose their cigarettes for reasons so numerous that class action status is not appropriate.  While Judge Weinstein expressed skepticism about the plaintiffs' damages theory, he nonetheless concluded that the case should proceed to trial (set for January) as a class action.  Damages are estimated to be about $200 billion, and potentially tripled to $600 billion because the case was filed under the RICO statute.  An appeal of the class certification order is sure to follow.  A copy of the 540 page opinion and order can be found here.

401(k) Plan Fee Lawsuits Begin

Plaintiff's attorneys have begun filing ERISA class action lawsuits against Fortune 500 companies in the midwest.  The plaintiffs are participants in their employers' 401(k) or profit sharing plans that allow participant-directed investing among a menu of investment options.  Defendants are the plan sponsors, their directors, and individuals (usually high-level employees) serving as plan administrator or on a plan administrative or investment committee.  Plaintiffs allege that the defendants breached their duties under ERISA by causing the plans to pay excessive fees or expenses, unnecessarily reducing the participants' account balances. 

Plan fiduciaries are personally liable to plan participants for any improper or excessive fees paid by the plan, so the stakes in large plans such as these can be millions of dollars.  And recent investigations by the U.S. Securities and Exchange Commission and other regulatory agencies suggest that service providers often do not adequately disclose fees.  Plan fiduciaries are often not aware of all the expenses paid by the plan and therefore fail to ensure that those fees are reasonable or proper.  The large number of providers (third party administrators, investment providers or consultants, recordkeepers, trustees or custodians, etc.) makes tracking plan expenses difficult.   

Plan fiduciaries must be extremely diligent in monitoring all plan activities, including who the plan is paying for services and how much those services cost.  Although the first wave of lawsuits involve midwestern companies, it is simply a matter of time before local employers are named in similar actions.  Already, a well-known Seattle law firm is investigating this issue and inviting plan participants to contact them.

Plan fiduciaries are subject to very high standards of care in how they perform their duties and face personal liability for failing to properly do so.  Being ignorant of what those duties are or how much a plan is paying for the services it receives ensures a very painful and expensive learning experience.

Senate Judiciary Committe holds hearing on Ninth Circuit split

Yesterday the Senate Judiciary Committee held a hearing on legislation to split the Ninth Circuit.  The current proposal would create new Twelfth Circuit consisting of Oregon, Washington, Alaska, Idaho, Montana, Arizona, and Nevada.  California, Hawaii and the Pacific Islands would remain in the new Ninth Circuit.  The Associated Press  reports that Sen. Dianne Feinstein characterized the Justice Department's new support of the split as political, and not arising from concerns about case backlogs or inconsistent rulings. The Seattle Times quotes Ninth Circuit Judge Richard Tallman as stating that he sees more support for the split in Congress now than in the past.   See the Oregon Business Litigation blog's previous coverage of the issue here. 

Don’t forget September 30 is the deadline for filing EEO-1 reports for 2006

Employers of 100 or more employees, and federal contractors with government contracts of $50,000 or more and 50 or more employees, must file an EEO-1 report each year. The EEO-1 Report is a government survey that requires employers to provide a head count of their employees by job category, and then by gender and designated race and ethnicity categories within each job category. The report must reflect employment numbers from any pay period in July through September of the reporting year.

Covered employers that have not received the EEO-1 packet should contact the EEO-1 Joint Reporting Committee Toll Free at (866) 286-6440, or by e-mail at e1.techassistance@eeoc.gov. General information about the EEO-1 Report is available at the EEOC’s web site at www.eeoc.gov. Aggregate EEO-1 data will be made available on the EEOC’s web site, in addition to being compiled in an annual public report.

January 2007 Deadline Looms For Health Care Employers

Any entity receiving (or making) annual payments under Medicaid of at least $5 million has until January 1, 2007 to comply with employment provisions contained in the Deficit Reduction Act of 2005. These provisions require covered entities to educate their workforce about the False Claims Act. The False Claims Act prohibits the submission of false claims to the government for payment and provides protection against retaliation to employees who report suspected violations.

Specifically, the Deficit Reduction Act requires covered entities to: (1) establish written policies for all employees, contractors and agents that provide detailed information about the federal False Claims Act and related administrative and state laws and whistleblower protections under such laws; (2) include in such written policies detailed provisions regarding the entity's policies and procedures for detecting and preventing fraud, waste, and abuse; and (3) include in any employee handbook a specific discussion of the False Claims Act and related laws and the rights of employees to be protected as whistleblowers and the entity's policies and procedures for detecting and preventing fraud, waste, and abuse.

Failure to implement these policies could disqualify a covered from eligibility for Medicaid payments.

Federal oversight in the corporate boardroom

Trouble in corporate boardrooms has been in the news this past week, beginning with the fallout from efforts to spy on members of the board at Hewlett-Packard.  Meanwhile, at Bristol-Myers there has been a management shake-up as the board fired CEO Peter R. Dolan for mishandling a patent dispute.  A key aspect of the Bristol-Myers story is its connection to the company's deferred prosecution agreement.  Last year, to avoid prosecution for an accounting scandal unrelated to the current patent matter, the company agreed with the U.S. Attorney in New Jersey to allow a federal monitor to oversee its operations.  That monitor, a former federal judge named Frederick B. Lacey, recommended that the board fire Mr. Dolan. 
Writing in the University of Chicago Law School faculty blog, Professor Todd Henderson questions the growing use of deferred prosecution agreements.  In the post-Arthur Andersen era, corporations may prefer to choose federal oversight instead of prosecution.  But it's unclear, for example, whether such oversight will necessarily lead to better corporate governance, and whether a board seeking to please the U.S. Attorney will at the same time be able to maximize shareholder value.

Corporate Prosecution Guidelines Under Review

The U.S. Justice Department announced this week that it was reviewing its guidelines for determining when to prosecute corporations for corporate wrongdoing.

The guidelines which were announced in 2003 describe nine factors that prosecutors must consider when weighing whether to indict a company for corporate misconduct.  One criterion is whether the company has cooperated with prosecutors by waiving the attorney-client privilege and disclosing confidential legal communications to investigators.  Another is whether the company has stopped paying legal fees of employees caught up in the investigation.

These two guidelines have been sharply criticized recently by a federal judge overseeing the trial of former KPMG employees, by the former director of the Justice Department's Enron task force, and by leaders of the American Bar Association.  Critics of these guidelines contend that they promote coercive practices and undermine long-established legal doctrines such as the attorney-client privilege, the work-product doctrine, the presumption of innocence, and the right to legal counsel.

Critics of the guidelines, including Senate Judiciary Committee Chairman Arlen Spector and the Committee's ranking Democrat Senator Patrick Leahy, have suggested that Congress may have to pass legislation eliminating these two guidelines if the Department of Justice itself is unwilling to modify them.

Court of Appeals fills in blanks to specifically enforce a contract

The Court of Appeals yesterday addressed an area of uncertainty in Oregon contract law: how definite and certain a contract's terms must be to support the remedy of specific performance.  In Earls v. Corning,the parties signed a preprinted form contract to sell real property, but left blank the date for closing the sale.  The purported seller passed away a few days after signing the document, and plaintiff purchaser sued the personal representative of her estate for specific performance of the agreement.  The trial court found, among other things, that the failure to agree on a closing date made the contract too indefinite to be specifically enforced.
The Court of Appeals reversed.  While a contract must be definite in all material respects to be subject to specific performance, there is conflicting case law on whether an agreed closing date is a prerequisite for that equitable remedy.  Judge Rosenblum, writing for the court, held that the failure to provide a closing date does not render the contract indefinite, and the court may specify a reasonable time for performance.

Pension Reform Finally Arrives

After months of political debate, last month the President signed the Pension Protection Act of 2006 (PPA).  It's 907 pages of new processes, new rules, and changes for employers to deal with; a copy of the PPA is available at http://www.aspa.org/government/gacpdf/HWC_373_xml.pdf.  Some of the more notable changes include:

• "Automatic Enrollment."  In most 401(k) plans, if the employee does not submit enrollment forms (and many do not) they do not participate.  To pass IRS required participation tests, employers wanted to create "opt-out" plans: unless the employee turn in a form saying they would not particate, they are in the plan.  The IRS approved such arrangements almost 10 years ago.  However, many states (including Oregon) have state wage laws that prohibit an employer from taking payroll deductions without written employee consent.  The PPA explicitly preempts such statutes, at least to the extent they would otherwise restrict automatic enrollment in a 401(k) plan.
• Investment Advice.  The PPA provides some additional ways for plans to provide investment advice to their participants without engaging in a prohibited transaction, or a violation of ERISA's strict fidcuairy rules.  The first is to utilize investment advisors that charge flat fees that do not vary based upon transactions.  The second is to use certain types of computer-modeling to develop a portfolio for a particular participant.
• Liberalized Plan Asset Rules.  ERISA has very draconian rules for anyone acting as a plan fiduciary.  A fiduciary includes anyone who has control of "plan assets."  If an entity has at least 25% of its equity controlled by IRAs or qualified plans, the entity's assets become plan assets.  The PPA carves out exceptions for certain types of plan sponsors (government, church or foreign plans) and reduces the likelihood that other types of plans still subject to the rules will become fiduciaries.

The PPA has literally dozens of other changes that affect nearly all types of retirement plans.  Most provisions are either effective immediately or for the 2007 plan year, so employers have very little time to get up to speed on the changes.

Lawyers Breathe Sigh of Relief

Recent decisions by the Oregon Court of Appeals had expanded potential liability for lawyers who were alleged to have aided their clients in breaching a fiduciary duty to a third party even if the lawyer was merely acting in his or her capacity as a lawyer.  The Oregon Supreme Court seems to have restored some sanity to this area of the law.

In a unanimous opinion written by Justice Thomas A. Balmer, the Supreme Court held that a lawyer, acting within the scope of the lawyer-client relationship, is not liable for assisting the client's breach of fiduciary duty to a third party. The Court expanded on prior cases that provided immunity from tort liability for conduct as an agent or on behalf of another that comes within the scope of a privilege. The Court concluded that a lawyer acting on behalf of a client and within the scope of the lawyer-client relationship is protected by such a privilege.

The impact on the legal profession is obvious, but the impact on clients is also important.  Expanding lawyer liability to third parties for the mere performance of legal services for a client, when the effect of the action is claimed to be a breach of fiduciary duty, risked a chilling effect on a lawyer's zealous representation, as well as increasing the potential transactional costs of such corporate legal services.

The case is Diane Reynolds v. Donna Schrock et al., (TC C9913S7CV)

(CA Al19200) (SC SS2503), opinion issued September 6, 2006.

OFCCP issues new standards for determining compensation discrimination

The OFCCP, the agency responsible for enforcing Executive Order 11246, the anti-discrimination law applicable to federal contractors, has issued new standards that address systemic compensation discrimination. The OFCCP will be applying these standards when it conducts compliance reviews to determine whether contractors’ pay practices are discriminatory.

The new interpretive standards represent a departure from OFCCP’s prior use of the controversial “pay grade theory” of analyzing compensation practices. Under the pay grade theory, OFCCP compared the compensation of employees who were in the same pay grade or range based on the assumption that by creating the pay grade, the employer either “recognized that certain jobs are essentially similar in terms of skill, effort and responsibility” or “already identified certain jobs as having similar value to the organization.” The new standards codify the adoption of the “similarly situated” standard from Title VII. Employees are deemed similarly situated if they perform similar work and occupy positions involving similar responsibility levels, skills, and qualifications.

The interpretive standards have three components, the first of which is the adoption of the similarly situated standard. The second component is the adoption of a statistical technique called “multiple regression analysis” to assess the combined effects of the multiple, legitimate factors that influence employers’ compensation decisions. OFCCP will compare the compensation of similarly situated employees, while controlling for legitimate factors that influenced employers’ pay decisions, such as education, experience, performance, productivity, etc. The third component is an emphasis on the importance of anecdotal evidence of discrimination for a determination of whether systemic compensation discrimination exists.

OFCCP intends to continue using analysis of pay grade information, supplemented by the cluster regression, as indicators of potential compensation discrimination. However, the pay grade analysis, the cluster regression analysis, and other generalized approaches are only indicators of potential compensation discrimination. These techniques fall far short of the type of fact-intensive investigation and tailored analysis required to make and sustain an allegation of systemic compensation discrimination under Executive Order 11246 and OFCCP regulations.

The OFCCP publication of the final interpretive standards includes a discussion of comments that the OFCCP received in response to proposed interpretative standards published in the Federal Register on November 16, 2004.

Class Action Smokers Denied "Medical Monitoring" and Treatment Costs

The Oregon Court of Appeals dismissed plaintiff's negligence claim in this Oregon state court putative class action on the basis that plaintiff alleged no present injury, but merely the costs of on-going "medical monitoring" and cessation treatment.  The case is:  Lowe v. Philip Morris USA, Inc., et al.

In this case of first impression in Oregon, the plaintiff smoked for several years, and her attempts to quit smoking failed.  Plaintiff did not allege lung cancer or any other physical injury from smoking cigarettes.  The Court noted that plaintiff's complaint rested on allegations of the need for monitoring and treatment "to redress the mere possibility of future harm."  The complaint "fail[ed] to include an allegation of actual, present harm of any sort, much less the physical harm that ordinarily is required to state a claim for negligence."  The only two exceptions to the physical harm requirement under Oregon law--economic loss and infliction of emotional distress--did not apply because, in the case of "economic loss," there was no "heightened duty of care" owed by the defendants, and, in the case of emotional distress, there likewise was no heightened duty, no "intentional conduct," and no physical impact.  Accordingly, plaintiff was unable to state an ordinary negligence claim.  On the other hand, the court left for another day, "whether a negligence claim predicated on different allegations as to the risk of future harm and the certainty of the need for treatment is cognizable under Oregon law," emphasizing that plaintiff alleged only a mere possibility of future harm.

Sustainability in Employment

If you missed my article entitled "Sustainability in employment: It's about achieving balance" in the Portland Business Journal last Friday, here is a link to it.

California Court of Appeals rejects exception to ban on noncompetes

On August 30, 2006, the California Court of Appeals ruled in Edwards v. Arthur Anderson LLP, 2006 WL 2498013, that there is no “narrow restraint exception” to California’s Business and Professions Code section 16600, which prohibits most noncompetition agreements. The court left intact the statutory and “trade secret” exceptions to section 16600.

The case was brought by Raymond Edwards, an employee in Arthur Anderson’s (AA’s) Los Angeles office. When he was hired in 1997, Edwards signed a noncompete that precluded him from soliciting or working for certain AA clients for 18 months following the termination of his employment. AA sold the tax practice for which Edwards worked to HSBC, which extended offers of employment to AA’s Los Angeles office personnel. However, as a condition of employment with HSBC, AA allegedly required its managers to sign a Termination of Non-Compete Agreement (TONC) that contained a broad release of claims against AA. When Edwards refused to sign the TONC, HSBC withdrew its offer and AA withheld severance benefits. Edwards sued AA for intentional interference with a prospective economic advantage, among other things.

Until now, two Ninth Circuit opinions, General Commercial Packaging v. TPS Package Engineering, Inc., 126 F3d 1131 (9th Cir 1997) and International Business Machines v. Bajorek, 191 F3d 1033 (1999), allowed narrow exceptions to California’s ban on noncompetition agreements under section 16600. In TPS, the Ninth Circuit upheld a contract prohibiting TPS from directly soliciting work from General Commercial Packaging’s (GCP’s) major client, for whom TPS worked indirectly through a contract with GCP. In Bajorek, the Ninth Circuit upheld a stock option agreement that required the employee to repay gains from and payments made on the exercise of his stock options if he worked for a competitor within six months of exercising the options. Reiterating California’s broad prohibition under section 16600, the court rejected these exceptions:

We believe the Ninth Circuit’s “narrow restraint” gloss on section 16600 is a misapplication of California law when applied to an employee’s noncompetition agreement. In our view, section 16600 prohibits noncompetition agreements between employers and employees even when the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.

The court also held that AA’s insistence on a broad release as a condition of employment with HSBC violated public policy because it purported to waive Edward’s statutory right to indemnity under Labor Code Sections 2802 and 2804. Section 2802 requires employers to indemnify employees for liability arising from employees’ acts within the course and scope of their employment and section 2804 renders void any purported waiver of rights under section 2802. By conditioning employment on signing the release, the court found that AA committed a wrongful act in violation of public policy, further supporting Edwards’ interference claim.

It remains to be seen whether other California courts of appeal adopt the holding in Edwards. In the meantime, employers may want to re-evaluate any agreements they have with California employees that impose any kind of post-termination restrictions on competition.

Dreyer vs. PGE

In 1993 PGE decided to close its Trojan nuclear power plant.  Since then, the company has been mired in both litigation and administrative proceedings over whether its customers or its shareholders have to bear the consequences of that decision.

Yesterday, the Oregon Supreme Court issued a decision which at first blush appears to be a victory for PGE's customers and a defeat for its shareholders.  In Dreyer v. PGE the Supreme Court refused to issue an order directing Marion County Circuit Court Judge Lipscomb to dismiss a customer class action for damages against PGE.  The suit had alleged that PGE had illegally charged customers for a return on PGE's investment in Trojan in violation of the decision by the Oregon Court of Appeals in Citizens' Utility Board v. PUC, 154 Or App 702, 962 P2d 744 (1998).  By refusing to dismiss this customer class action, the Supreme Court rejected PGE's argument that ORS 756.518, as interpreted by the Circuit Court, was inconsistent with the "filed rate doctrine."

The Supreme Court did, however, save PGE--at least for now--by not remanding the case to the Circuit Court so that the litigation could be brought to trial.  Rather, the Supreme Court found that the Circuit Court should have abated the case pending completion of the PUC's administrative proceeding on this same controversy.

Thus, the ball is now in the PUC's court to try to determine who has to bear the costs of closing Trojan.  Once the PUC determination has been made, there is no doubt the parties will be back in court on these same issues.