Northwest Business Litigation

Employee benefit costs continue to grow

According to a recent U.S. Chamber of Commerce survey, employee benefits now constitute 44% of total payroll costs, a 4% increase over last year.  According to the survey, medical expenses totaled $5,924 per employee, or 14.5% of payroll, an increase from 11.9%.  Payments for time not worked (holidays, vacation or other leave) increased 0.6% to 11.1%.  Retirement plan contributions increased slightly to 8.6% of payroll, or $3,612 per employee.  Urban employers reported spending about $1,500 more than non-urban employers for each employee, and for-profit employers far outspent non-profits, which reported spending 34.8% of payroll on benefits.

Employers should be commended for continuing to shoulder an ever-increasing cost to provide their employees with benefits.  However, employers should also approach benefit expenses with the same strategic analysis they would any other expense: what critical business objective is advanced by offering this benefit (or level of benefit) to our employees?  And as benefit costs continue to increase, employers should consider alternative designs or approaches that might offer strategic advantages over competitors as well as lower costs. 

Wikis and the law

In this column about the phenomenal growth of on-line collaborative efforts, including Wikis and open-source projects, University of Chicago Law School Professor Cass Sunstein leads with an amazing fact:  online encyclopedia Wikipedia has been cited four times as often as the Encyclopedia Brittanica in judicial opinions in the past year.

Supreme Court answers the $79 million questions: No and no

Two cases making legal news have a few things in common:  they were both tried in Portland, the juries in each case punished the defendants by assessing $79 million in damages (give or take half a million), and today both cases were overturned by the U.S. Supreme Court.

In Philip Morris v. Williams, the products liability plaintiff obtained a $79.5 million punitive damages verdict against the cigarette manufacturer.  The Supreme Court voted 5-4 that the Due Process clause of the Constitution prohibits punitive damages awards that punish defendant for harm inflicted on any party other than plaintiff.  In a bit of constitutional hair-splitting, the Court stated that a plaintiff can offer evidence of harm to non-parties to show that the wrongful conduct was reprehensible, but the jury can't use that evidence to punish defendant for the harm caused to others.  How to ensure that juries don't cross the line?  It's up to the states to figure that out, according to the court, beginning with the Oregon Supreme Court as it will again take up the Williams case.  See the Oregon Business Litigation Blog's earlier coverage of the case here and here.

In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., the Supreme Court threw out a novel antitrust theory that had resulted in a verdict of $ 26 million, trebled by law to $79 million.  Plaintiffs claimed that Weyerhaeuser had engaged in an unlawful monopsony -- or buyer-side monopoly -- by bidding up the price of alder logs (as input for its mills) to levels higher than other mills could afford to pay, thereby putting those mills out of business.  This theory is called predatory bidding.  The unanimous court held that to prove predatory bidding, plaintiff must show that (1) bidding up the price of the input caused the price of the resulting output to exceed the revenues generated by the sale of that output, and (2) defendant has a dangerous probability of recouping the resulting losses  by exercising its monopsony power once competitors are run out of business. 

At trial, Judge Owen Panner did not require plaintiff to make such a stringent showing, instructing the jury that plaintiff was required to show only that Weyerhaeuser had bid the cost of logs above a "fair price."  The Supreme Court reversed the verdict resulting from that instruction.  See the Oregon Business Litigation Blog's earlier coverage of the case here, here,  and here.

Find other law blog coverage of today's rulings here and here.

Dissent highlights weaknesses in Wal-Mart class action

Last week the Ninth Circuit affirmed the creation of the largest class action in history:  1.5 million current and former female Wal-Mart employees claiming discrimination in promotions.  The ruling was hailed as a landmark, but it may be only a temporary one.  A strong dissent by Andrew Kleinfeld, one of the judges on the three-judge panel, raises questions about whether majority's ruling will survive later review, by either an en banc panel of the Ninth Circuit or the Supreme Court.  Judge Kleinfeld dissented on several grounds, including these:

1.  To proceed as a class action, a case must present issues of fact or law common to the class.  Judge Kleinfeld writes that the only issue shared by the huge class is whether Wal-Mart's promotion criteria are "excessively subjective."  He contends that this is too slim a reed on which to hang the case; the existence of subjective criteria is not the same as employment discrimination. 

2.  Plaintiffs claim that injunctive or declaratory relief is an appropriate remedy for the class as a whole, but in fact many class members no longer work for Wal-Mart and cannot benefit from an injunction requiring, for example, the adoption of objective criteria for promotions.

3.  The district court order requires that the jury, if it rules in favor of plaintiffs, may set a lump sum amount of punitive damages.  A special master would then devise a formula to distribute the funds to individual plaintiffs, without any adjudication as to whether each individual plaintiff was in fact injured by discrimination.  Judge Kleinfeld contends that this methodology violates Wal-Mart's due process rights.

Given the trend within the Ninth Circuit of deciding more cases en banc -- which means a rehearing by a 15-judge panel -- last week's decision may not be the final word from the Ninth Circuit.

See coverage of the Dukes v. Wal-Mart ruling here, here, here, and here.

Ninth Circuit upholds Oregon's split recovery law for punitive damages

The Ninth Circuit Court of Appeals yesterday upheld the constitutionality of Oregon's statute allocating a portion of punitive damage awards to the state.  The 'split recovery' statute, ORS 31.735, sends to the state's victim compensation fund 60 percent of any punitive damage judgment, while the plaintiff who is awarded the punitive damages receives 40 percent. 

In Engquist v. Oregon Department of Agriculture, plaintiff made various state and federal law claims against her former employer.  Under a state law claim for interference with contract, the jury awarded punitive damages.  The Ninth Circuit concluded that the law allocating 60 percent of those damages to the state did not violate the Fifth Amendment's Taking Clause or the Eighth Amendment's Excessive Fines Clause. 

In addition to her constitutional arguments, plaintiff made a creative 'judicial estoppel' argument, drawing on the fact that the state was both a defendant and the beneficiary of the split recovery.  The Justice Department, in defending the case, had naturally contended at trial that defendants did not act with willfulness or malice with regard to her employment.  Plaintiff claimed that, once the jury awarded punitive damages, the state was estopped from changing its position: the state could not accept the jury's conclusion that the agency was in the wrong and thereby claim 60 percent of the award.  The Ninth Circuit concluded that the operation of the split recovery statute was not the same as a flip-flop by the Department of Justice.

IRS Gives Employees Relief for Backdated Options

The Internal Revenue Service announced a program aimed at providing relief for rank-and-file employees affected by their companies’ issuance of backdated and other mispriced stock options.  While the program will be available to help these employees who may be unaware that they held backdated options, it is not available for backdated options exercised by most executives or other insiders.

Many companies have backdated or mispriced options, either issued intentionally or through sloppy option issue practices.   Some companies failed to disclose the practice to shareholders, as required by securities laws, or forged documents to hide the practice. 

Under a 2004 law, the tax consequences associated with backdated and other mispriced stock options issued at a discount affect most recipients who exercised their options in 2006 or later.  The law does not affect options that were earned and vested before 2005, however.  If an employee exercised a backdated stock option after 2004, the employee may owe an additional 20-percent tax, plus an interest tax, on all the employee's vested options, even if the other options were not backdated. 

If the option had been properly priced, the employee normally would only have owed income tax on the difference between the value at the date of grant and exercise for a nonqualified option.  A qualified or incentive option issued with the proper exercise price is not taxed at either grant or exercise.  Where an option has been backdated, the employee remains obligated to pay the full amount of income tax due upon exercise, including any additional gain realized from backdating, whether or not the employee was aware of the backdating.

The new program, described in Announcement 2007-18, allows companies to pay the additional 20-percent tax and any interest tax that employees owe.  The program does not permit the company to pay the additional tax for stock options exercised by its top executives or other insiders.  The IRS pointed out that for these individuals, the IRS was continuing its enforcement investigations and coordinating activities with the SEC and Dept. of Justice, and the program had no effect on any SEC or DOJ investigations.

Employers must notify the IRS of their intent to participate by Feb. 28, 2007.  The employers, in turn, are required to contact affected employees by Mar. 15, 2007 to inform them that the employer has applied to participate in the Compliance Resolution Program.

Affected employees who have not previously taken corrective action on their own will remain liable for the additional 20 percent tax and the interest tax if their employers do not participate in the program or fail to abide fully by its terms.  Importantly, the IRS allows companies until December 31, 2007 to correct unexercised backdated options for non-executive employees.  Companies should take corrective steps now to avoid having the employee or employer face the additional tax that occurs upon exercising a backdated option.

Corporations that elect to participate and relieve their affected employees will be required to provide the specific details about the options, including specifics on the tax calculation that will enable the IRS to ensure the U.S. Treasury has received the full amount of taxes owed.   

The taxes the companies will pay to relieve employee tax bills will be treated as additional 2007 compensation income for those employees in the 2007 tax year. 

Court of Appeals holds that protected areas in the Columbia River Gorge are exempt from Measure 37

The Oregon Court of Appeals today issued an opinion interpreting Measure 37, holding that land use regulations restricting development within the Columbia River Gorge National Scenic Area are not subject to the measure's compensation scheme.  Measure 37 (ORS 197.352) requires governments to compensate land owners for loss of value caused by land use regulations, or to waive those regulations.  Measure 37 expressly does not apply to regulations "required to comply with federal law."  In Columbia River Gorge Commission v. Hood River County, the court held that counties' land use ordinances implementing the federal Columbia River Gorge National Scenic Area Act fit within that exemption.

Denying a Measure 37 waiver requires notice and hearing, Oregon Court of Appeals holds

Measure 37 meets the U.S. Constitution in a case decided by the Oregon Court of Appeals last week.  In Corey v. Department of Land Conservation and Development, the court addressed a limited question:  did it have jurisdiction to review an agency's refusal to waive certain land use regulations in response to a Measure 37 claim?  But the answer to the question required a detour into the law of governmentally-created property interests protected by the Due Process Clause of the Fourteenth Amendment.

Measure 37, codified at ORS 197.352, requires, under defined circumstances, that the government either compensate property owners for loss of value caused by land use regulations, or waive those regulations.  In response to the Corey's Measure 37 claim, the DLCD waived certain regulations but concluded that it was not required to waive others. 

Corey sought review in the Court of Appeals of the refusal to waive.  According to the court, it has jurisdiction if the DLCD proceeding was a contested case under the Administrative Procedures Act.  And the matter was a contested case if, for example, the claimant had a protected property interest would could be taken by the government only after notice and a hearing.  After reviewing U.S. Supreme Court precedent on constitutionally-protected interests, the court concluded that the DLCD created an entitlement to benefits when it accepted the Measure 37 claim, and that Corey was entitled to notice and a meaningful hearing before DLCD could refuse to waive any of the regulations.  Accordingly, the Court of Appeals had jurisdiction to review the matter as a contested case.

Punitive damages in Oregon are measured against potential harm and not actual harm

The Oregon Court of Appeals this week weighed in on the debate over when punitive damages are so grossly excessive as to violate the US Constitution.  The US Supreme Court, Oregon Supreme Court, and Oregon Court of Appeals have previously ruled that reviewing courts must determine whether an award of punitive damages is excessive under the Due Process Clause of the Constitution, and in doing so must consider, among other things, the ratio between punitive and compensatory damages.  There has been much debate regarding the appropriate ratio, and the US Supreme Court has noted that few punitive damage awards exceeding a single-digit multiple of compensatory damages will satisfy due process. 

The case decided this week involved predatory lending practices.  The the jury awarded $500,000 in punitive damages, 15 times the amount of compensatory damages of approximately $32,000.  The Oregon Court of Appeals ruled that, in determining whether a punitive damages award is excessive, the ratio of punitive damages to compensatory damages may be based upon the harm likely to result from defendant's actions, as opposed to harm actually caused.  Vasquez-Lopez v. Beneficial Oregon, Inc.  In other words, the amount of punitive damages should not be compared to the actual compensatory damages awarded in the case, but rather to the potential compensatory damages that would have likely resulted from defendant's actions.  Although the jury awarded plaintiffs only about $32,000 in compensatory damages, plaintiffs presented evidence that the potential damages from defendant's conduct exceeded $325,000, the amount of interest which defendant would have charged over the life of the predatory loans.  The ratio between the punitive damages and potential damages was only 1.53 to 1, which the court upheld as not excessive.

This ruling means that plaintiffs seeking to recover punitive damages will in the future litigate not only actual damages, but also the scope of potential damages.

In addition to its analysis of punitive damages, the Vasquez-Lopez case has an important impact on the interpretation of arbitration clauses, as noted in this previous post to the Oregon Business Litigation blog.

Ninth Circuit revisits employees' expectation of privacy in workplace computers

Earlier this week, the Ninth Circuit revised its opinion in United States v. Ziegler, 456 F.3d 1138 (9th Cir. 2006), in which it held that an employee had no objectively reasonable expectation of privacy in his workplace computer.  On reconsideration, the court concluded that the employee did have a reasonable expectation of privacy - at least with respect to government intrusion under the Fourth Amendment's prohibition on unreasonable search and seizure - because his computer was password protected and kept in a locked office that was not shared with others.  United States v. Ziegler, Case No. 05-30177(9th Cir., Jan. 30, 2007).  However, the court also concluded that, although the employee had an expectation of privacy vis-a-vis the government, the employer was not prevented from giving valid consent to a government search of the employee's computer as a "third party with common authority" over its office space and equipment.  The court relied heavily on the fact that the employer "had complete administrative access to anybody's machine," routinely monitored Internet traffic, and apprised its employees of its monitoring through training and an employment manual.

Although the new Ziegler decision represents a retreat from the Ninth Circuit's earlier position that an employer's computer-use policy could absolutely preclude an employee's expectation of privacy in his or her workplace computer with respect to government warrantless searches, it recognizes that the employer's rights under such a policy as a "third party with common authority" can effectively defeat an employee's Fourth Amendment objection to a search by the government.