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Federal Tax Proposal Would Adversely Affect Many Law Firms

Title: Federal Tax Proposal Would Adversely Affect Many Law Firms

Section 212 of the U.S. House of Representative’s Ways and Means Committee’s (“Committee”) discussion draft “Tax Reform Act of 2013” will require all law firms and other personal service businesses with annual gross receipts over $10 million to use the accrual method of accounting (“accrual method”) rather than the traditional cash receipts and disbursement method of accounting (“cash method”).  According to correspondence from the American Bar Association (“ABA”) President to the House Ways and Means Committee Chairman, this would result in negative unintended consequences and cause substantial cash flow hardships to, among others, many law firms and other personal service businesses by requiring them to pay taxes on income accrued, i.e. income that they have not yet received and may never receive, due to write-offs, etc.  The ABA has urged the Committee to remove this provision from the overall draft legislation. 

Under current law, businesses are permitted to use the simple, straightforward cash method of accounting—in which income is not recognized until cash or other payment is actually received and expenses are not taken into account until they are actually paid—if they are individuals or pass-through entities (e.g., professional corporations, partnerships or subchapter S corporations), or their average annual gross receipts for a three year period are $5 million or less.  In addition, all personal service businesses—including those engaged in the fields of law, accounting, engineering, architecture, health, actuarial science, performing arts, or consulting—whether organized as sole proprietorships, partnerships, limited liability companies, or S corporations, are exempt from the revenue cap and can use the cash method of accounting irrespective of their annual revenues, unless they have inventory.

Section 212 of the draft legislation would dramatically change current law by raising the gross annual receipts cap to $10 million while eliminating the existing exemption for personal service businesses, other partnerships and S corporations, and farmers.  Therefore, if this proposal is enacted into law, all law firms and other personal service businesses with annual gross receipts over $10 million would be required to use the accrual method of accounting, in which income is recognized when the right to receive the income accrues and expenses are recorded when they are fixed, determinable, and economically performed — both aspects of which present complications, given the often significant lag between billing and collections.

Although Section 212 would allow certain small business taxpayers with annual gross receipts in the $5 million to $10 million range to switch to — and thereby enjoy the benefits of—the cash method of accounting, the proposal would significantly complicate tax compliance for a far greater number of small business taxpayers, including many law firms and other personal service businesses, by forcing them to use the accrual method.  Partnerships, S corporations, personal service corporations and other pass-through entities favor the cash method because it is simple and generally correlates with the manner in which these business owners operate their businesses—i.e, on a cash basis.  The increased complexity associated with the accrual method will raise compliance costs for many law firms and other personal service businesses—as separate sets of records will be needed to reflect the accrual accounting—while greatly increasing the risk of noncompliance with the Code.

In addition to creating unnecessary complexity and compliance costs, Section 212 would lead to economic distortions that would adversely affect all personal service businesses that currently use the cash method of accounting and those who retain them, including many law firms and their clients, in several ways.  The proposal would place a new financial burden on millions of personal service businesses throughout the country—including many law firms—by requiring them to pay tax on income not yet received and which may never be received.

The existing cash method of accounting produces a sound and fair result because it properly recognizes that the cash a business actually receives in return for the services it provides—not the business’ accounts receivable—is the proper reflection of its true income and its ability to pay taxes on that income. While accounts receivable clearly are important to determining the overall financial condition of a business and assessing its future prospects, they do not accurately reflect its current disposable income or its present cash flow ability to pay taxes on that income.

The mandatory accrual accounting provisions in Section 212 of the draft bill would create unnecessary complexity in the tax law, increased compliance costs, and impose significant and unnecessary new financial burdens and hardships for many law firms and other personal service businesses throughout the country by requiring them to pay taxes on income not yet received, and that may never be received.

To avoid these harmful unintended consequences, the ABA has urged the Committee to remove  Section 212 from the draft bill or from any tax reform bill that may be approved by the Committee.  The ABA has recently asked state and local bar associations to join in the opposition of the proposal.  DRI, the Voice of the Defense Bar, also plans to oppose this legislation.  Law firms should monitor this legislation closely. 

Submitted By: Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes (Baltimore, Maryland)

Managing Ethical Risks -Part 4

Familiarity and complacency also cause lawyers to take a casual approach to checking and clearing conflicts associated with multiparty representations.

How many times do you suppose this has happened:

Voicemail: "Jane? Bob here. I'm sending you over a new case. They sued the retailer in this one to avoid diversity, so we will need you to represent that company, too. Please run conflicts and let me know."

            Email response: "Bob, no conflicts. Send the file, and thanks again for        engaging us."

Jane sends engagement letter to Bob, receives and reviews the file, and files answer for company and retailer.

In my experience, this happens a lot, and it creates a lot of problems. Here are some of them, along with suggestions about how to avoid them.

Running the names of the plaintiff and your prospective clients through your conflict system does not tell you everything you need to know to determine whether you have a conflict that would preclude you from representing both defendants in a lawsuit.  Whether you can represent multiple defendants depends on a variety of factors that are listed in Model Rule 1.7 and its comments. In order to develop the information needed to make all these determinations, the lawyer has to have conversations with the client that asked her to undertake the representations and the other individual or entity she is being asked to defend. Only after the lawyer determines that the facts and her potential clients' positions allow her to do so may she agree to represent both of them.

As the Rule and common sense require, the lawyer must also talk to the other party she has been asked to represent to determine whether that party wants her to represent it at all, before ever getting to the question of whether conflicts would preclude her from doing so. A lawyer cannot simply make an appearance on a party’s behalf just because someone else has agreed to pay the lawyer to represent it, without first obtaining the party’s consent to be represented in this manner.

Finally, just as the lawyer should with respect to her "regular" client, the lawyer should send her other, new client an engagement letter, and otherwise treat that client in the very same way she treats her "regular" client. To even think of this client as a "secondary" client (and the regular client as the "primary" client) as some lawyers do is to invite breaches of duty to the “secondary” client that can result in malpractice claims.

The failure to correctly navigate the opportunity to undertake a multiparty representation may result in the lawyer finding herself in a conflicting representation from which she, at best, will have to withdraw from both representations or, at worst, may face a malpractice claim. Even the act of withdrawing will cause the lawyer's "regular" client to incur the additional expense of getting new counsel up to speed, which could be an expensive proposition. If this risk is not made part of the conversation going in, the lawyer's "regular" client may not remain such a client in the future. The circumstance of having represented clients with conflicting interests, however briefly, may also later lead to allegations that the lawyer placed one of those client’s conflicting interests ahead of the other, and harmed the other in doing so.

Next: Written Communications

U.S. Court of Appeals for Sixth Circuit dismisses claims

United States Court of Appeals for Sixth Circuit dismisses claims against generic drug manufacturers, and enters summary judgment in favor of brand name counterparts

In Strayhorn v. Wyeth Pharmaceuticals, Inc., Nos. 12-6195, et al. (6th Cir. Dec. 2, 2013), the United States Court of Appeals for the Sixth Circuit held: (1) that plaintiffs’ claims against generic manufacturers of the drug Reglan were preempted under the Federal Food, Drug, and Cosmetic Act (FDCA), 21 U.S.C. §§ 301–399f; and (2) that summary judgment in favor of the brand name Reglan manufacturers was appropriate because plaintiffs ingested only the generic form of the drug.  In reaching its decision, the Court affirmed the decision of the United States District Court for the Western District of Tennessee.  Importantly, the Court followed the Supreme Court’s decision in PLIVA, Inc. v. Mensing, - U.S. - , 131 S.Ct. 2567 (2011), and found that state law failure to warn claims based on generic drugs were preempted by the federal requirements that generic drug labels conform to the labels on their brand name counterparts.  Judge Jane B. Stranch concurred in part, and dissented in part.

Strayhornwas the consolidated product of seven (7) different cases arising under Tennessee state law, all of which had the same factual background.  Several people (“Plaintiffs”) alleged injuries arising from their long-term exposure to metoclopramide, the brand name of which is Reglan (the “Drug”).  Plaintiffs alleged that both generic and brand name manufacturers (collectively, “Defendants”) of the Drug knew that the warnings on under the law.  Plaintiffs maintained that Defendants failed to use reasonable care to communicate information that would constitute adequate warnings regarding the Drug’s long-term risks.  The District Court held that the Supreme Court’s decision in Mensing required Plaintiffs to abandon their failure to warn claims against the generic manufacturers.  Additionally, the District Court held that the Tennessee Products Liability Act (TPLA) allowed recover solely against the manufacturer or the seller of the product actually causing the harm.  Because Plaintiffs ingested only the brand name form of the Drug, the District Court entered summary judgment in favor of the brand name manufacturers. 

Writing the opinion of the United States Court of Appeals for the Sixth Circuit, Judge Thomas Anderson affirmed the District Court’s decision.  Following the Supreme Court’s ruling in Mensing, the Court of Appeals held that implied warranty claims premised on a failure to warn theory were preempted by the FDCA.  Under federal law, the generic manufacturers had to mirror their warnings regarding the long-term use of the Drug after those warnings distributed by the brand name manufacturers.  Therefore, Plaintiffs could not maintain a claim that the warnings distributed by the generic manufacturers were insufficient under the TPLA, as any alleged necessity for a more stringent warning would be preempted by federal law.  While Plaintiffs’ TPLA claims against the brand name manufacturers were not preempted, the brand name manufacturers were nevertheless entitled to summary judgment because Plaintiffs alleged that they ingested the generic form of the Drug only.  Therefore, the Court held that the lower court properly dismissed Plaintiffs claims against the generic manufacturers, and entered summary judgment in favor of the brand name manufacturers.  The Court did acknowledge, however, that “[a]lthough we feel compelled to affirm the judgment below in light of the controlling case law, we cannot help but note the basic unfairness of this result.”  Strayhorn, slip op. at 38–39.  Writing separately from the Court, Judge Stranch concurred with the majority’s decision that Plaintiffs could not bring design defect or failure to warn claims against generic manufacturers, and acknowledged that Mensing barred any such state law claim.  Judge Stranch dissented, however, as to the brand name manufacturers, finding that Tennessee state law could impose liability upon brand name manufacturers for failing to produce an adequate drug label, which necessarily had to be mirrored by their generic counterparts.

Submitted by: Marisa A. Trasatti & Wayne C. Heavener, Semmes, Bowen & Semmes (Baltimore, MD)


Managing Ethical Risks Part 3

The Hazards of Close Attorney-Client Relationships 

The benefits of having close friendships with your clients are obvious and need not be listed here. The hazards of such relationships are less obvious. For purposes of this paper, the primary hazards associated with attorneys’ close friendships with clients are familiarity and complacency

Familiarity: the quality or state of being familiar: having a good knowledge of something; natural and unstudied; arrogantly self-confident. 

Complacency: satisfaction or contentment, especially when coupled with an unawareness of trouble or controversy; smug self-satisfaction. 

-Webster's II New College Dictionary, Third Edition. 

The familiarity and complacency that – unless guarded against - are natural byproducts of close friendships with clients cause lawyers to do things they should not do, and not do things they should.  These acts and omissions place both the client and the lawyer at risk: the client for a disappointing outcome, and the lawyer for becoming a party to a lawsuit rather than counsel for a client in one. 

Familiarity and complacency cause lawyers not to do certain things that they should and to do things that they should not. Most commonly, they cause lawyers not to send engagement letters. 

The engagement letter is a basic and critical risk management tool. A good engagement letter will specify precisely who the client is, what services the client has asked the attorney to perform, the terms under which the lawyer will provide those services (including terms of payment), and how any actual or potential conflicts have been addressed and resolved. If there is ever a question about who the lawyer was supposed to represent or what the lawyer was supposed to do (which are, surprisingly, frequently issues in legal malpractice cases), the engagement letter should contain the answer. 

Lawyers who get a lot of cases from a single client often elect not to write engagement letters for each new matter. They may instead rely on the terms of a "preferred counsel" agreement, a single engagement letter that is intended to address all matters the firm is engaged to handle, or some other "master" understanding or agreement, whether written or unwritten. While it is perfectly fine to incorporate the terms of a master agreement or master engagement letter in a matter-specific letter, lawyers should always prepare a separate engagement letter that addresses the particulars of each new matter. 

Writing an engagement letter requires you to correctly identify your client. Correctly identifying the client is important for any number of reasons, not the least of which is to obtain an accurate result when running a conflict check. Complacent lawyers may not be careful about understanding or specifying the identity of the client, whether it is a subsidiary or affiliate of the attorney's "regular" client, a partnership or other business entity rather than the individual or company with whom the attorney has a relationship, and so on.  This may cause the lawyer to end up in a conflicted relationship even though the lawyer performed a conflict check. All of this can be avoided by confirming the identity of the client in an engagement letter. 

In many cases, it is equally important to clarify in an engagement letter who the attorney is not being retained to represent, such as another defendant in a multiparty case (like a retailer the plaintiff sued to defeat diversity jurisdiction). Putting this information in the engagement letter will either memorialize correctly that the attorney has not been retained to represent the stray party, or bring to the surface a misunderstanding that the client can correct by expressly asking the attorney to represent the stray party.

Similarly, lawyers that regularly get certain types of cases from a client may not discuss with the client or specify in an engagement letter what aspects of a multifaceted situation the lawyer is, and is not, being retained to address. For example, in cases in which claimants file a lawsuit but also involve a regulatory proceeding, the client might typically hire the lawyer to defend the lawsuit, but handle the regulatory proceeding in house. How the client and lawyer allocate these responsibilities should be memorialized in an engagement letter. If a ball gets dropped, this will make it clear whose responsibility it was to keep that ball up in the air. Also, if the client wants the lawyer to handle both proceedings in a particular situation, but this is not clearly communicated, the lawyers’ engagement letter stating otherwise will give the client the opportunity to correct this misunderstanding. 

The bottom line is that lawyers are frequently sued for malpractice by people or companies that they did not represent, and for not doing things they were not hired to do.  Engagement letters help avoid the circumstances that give rise to those claims, and help lawyers defend such claims if and when they do arise.

Next: Checking and Clearing Conflicts in Multiparty Representations

Fetus Allegedly Injured In Utero

Fetus Allegedly Injured In Utero Is Patient For Purposes of Application of Virginia’s Statutory Cap on Damages in Med Mal Cases  

In Simpson v. Roberts, No. 121984 (Supreme Court of Virginia, Jan. 10, 2014), available at:, the Supreme Court of Virginia recently examined whether a fetus was a “patient” for purposes of application of Virginia’s statutory cap on damages.  The Court concluded that the fetus became a patient when she was born and so the cap applied. 

In Simpson, a minor brought a medical malpractice suit through her father and next friend for injuries sustained during a doctor's attempt to extract amniotic fluid from her mother by an amniocentesis procedure.  The appellate court held that the circuit court did not err in reducing a $7 million jury verdict to the applicable amount of the statutory cap on damages imposed by the Virginia Medical Malpractice Act, Code § 8.01-581.1, et seq.  It was correctly determined that the unborn child was a patient of the defendant doctor and that her claim relating to injuries sustained when she was a fetus in utero was subject to the Act's statutory cap on recoverable damages. 

The Plaintiff’s mother was referred to the defendant doctor during the third trimester of her pregnancy because the mother had developed gestational diabetes. The defendant doctor performed an amniocentesis to determine whether the Plaintiff’s lungs were mature enough to induce early labor. When the defendant doctor performed the procedure, bleeding occurred. Complications arose from the unsuccessful amniocentesis. Another physician from that practice performed a caesarean section later that day to deliver Plaintiff.  Plaintiff was born with damaged kidneys and cerebral palsy. The jury returned a $7 million verdict in Plaintiff’s favor against both physicians and their practice. 

The defendants filed a motion to reduce the jury verdict pursuant to Virginia's statutory cap under the Act.  Plaintiff opposed the motion as to the amniocentesis doctor and his employer.  Plaintiff argued that when the amniocentesis was performed, and when the standard of care was breached, Plaintiff was not a “natural person” because she had not yet been born, and therefore was not a “patient” as defined by the Act.  Plaintiff argued that a common law cause of action, rather than a statutory cause of action, against the amniocentesis doctor was proper, and that the statutory cap should not apply.  The trial court disagreed.  It concluded that the cap applied and reduced the award to $1.4 million under the cap.  The trial court held that Plaintiff was the amniocentesis doctor’s patient because at the time she was born alive, she became a “patient” under the Act. 

The appellate court agreed.  As to whether Plaintiff was a “patient,” the evidence presented at trial was that the amniocentesis was performed, at least in part, for the child’s benefit to determine whether her lungs were developed enough that she could be safely delivered. When the doctor performed this procedure, he was providing health care to Plaintiff and her mother. If Plaintiff had never been born alive, her mother would have been able to recover for the physical and emotional injuries associated with a stillbirth.  However, once Plaintiff was born alive, she became a natural person under the Act.  Upon birth, she became a patient of the amniocentesis doctor under the Act and had her own claim against the doctor.  Under the Act, her claim for negligence included health care provided in utero consistent with the statutory definition.  In addition, the definition of “health care” under the Act was sufficient to encompass the medical services that the doctor provided to Plaintiff while she was in utero.

In a concurring opinion, Justice McClanahan agreed that the Act applied to the Plaintiff’s claim against the amniocentesis doctor, but would have held that the Plaintiff became a “patient” as defined by the Act when the doctor performed the alleged negligent amniocentesis—not at the time of birth. 

Submitted By: Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes (Baltimore, Maryland)

Dissolved Delaware Corp. amenable to suit

Dissolved Delaware Corporation amenable to suit at any time, and requires appointment of receiver for all claims made three (3) years after dissolution.

In a case of first impression, the Delaware Supreme Court held that: (1) contingent contractual rights were property of a dissolved corporation, so long as those rights were capable of vesting; (2) that a dissolved corporation’s contingent rights under insurance policies were capable of vesting; and (3) the appointment of a receiver was required in order for the corporation to participate in litigation.

In the matter of In re Krafft-Murphy Co., Inc. --- A.3d --- (2013)(not yet published), the Delaware Supreme Court reviewed the denial of a petition to appoint a receiver for the purposes of allowing the petitioners to seek recovery against the dissolved corporation’s insurers.  The petitioners were plaintiffs in asbestos cases filed in Maryland, in which Krafft-Murphy Co. (“KM”) was a defendant.  KM was formed in 1952 and formerly dissolved in 1999.  During their operation, KM supplied and installed a Spray Limpet Asbestos, allegedly creating a risk of asbestos exposure.  In 2010, KM began to file motions to dismiss in the asbestos cases, claiming that it had been dissolved for more than three (3) years and therefore, was no longer amenable to suit as a matter of Delaware law.  In response, the petitioners filed a petition to appoint a receiver for KM in the Delaware Court of Chancery.  KM opposed, arguing that for claims filed within ten (10) years of dissolution, the corporation would continue to defend the claims.  For claims filed over ten (10) years, after the dissolution, however, there were no corporate assets, the corporation was no longer amenable to suit and a receiver was not appropriate.  The trial court accepted KM’s argument and granted its motion for summary judgment.  The petitioners appealed.

The Delaware Supreme Court first observed that Delaware law extended the corporate life for three (3) years after dissolution, but a receiver could be appointed “at any time” for specific purposes.  As such, as long as there was property held by the dissolved corporation, a receiver could be appointed.  The Court then analyzed whether contingent property rights could be considered property for purposes of appointing a receiver.  Relying on prior case law, the court held that contingent insurance contract rights could vest and were property, much like contingent real property rights.  The Court then observed that KM and the trial court had misread the Delaware statutes on post-dissolution actions, noting that the statutes did not act to bar a claim after three (3) or ten (10) years, except in limited circumstances not at issue.  A claim could be brought at any time if the corporation still had property.  Finally, the Court held that the trial court should have appointed a receiver for all claims that were filed more than three (3) years after dissolution, as the corporation only existed for three (3) years after dissolution, and all other property claims required the appointment of a receiver.  The Supreme Court remanded the matter to the Court of Chancery to conduct further proceedings in accordance with its opinion.

Submitted by: Marisa A. Trasatti, Gregory S. Emrick, and Semmes, Bowen & Semmes, Baltimore, Maryland.

Damages-Fees Aborted-Go Figure

Damages:  $27,280; Fees Aborted $697,972; Go Figure

Employers’ counsel regularly warn clients that seemingly “small” cases can still pose enormous risk because plaintiff’s who prevail on statutory claims are entitled to recover “reasonable” attorney fees.  Now where is that better illustrated than in Muniz v. United Personal Service, Inc., (2013) U.S. APP. LEXIS 24189 handed down by the Ninth Circuit Court of Appeals on December 5, 2013. 

Kim Muniz sued UPS in California State Superior Court for claims arising under the state’s Fair Employment and Housing Act.  UPS removed the case to federal court on the basis of diversity of citizenship.  Muniz claimed that her employer had wrongfully demoted her in violation of FEHA on the basis of her age and gender and for retaliatory purposes. 

Ultimately the case was tried on the basis of gender discrimination only, and the jury found that the plaintiff’s gender had motivated UPS to demote her, that it was a substantial factor in causing her harm, and that UPS would not have demoted her for a nondiscriminatory reason.  The jury awarded her a total of $27,280 which was the sum of $9,990 for lost earnings, $7,300 for past medical expenses, and $9,990 for her past non-economic loss.  The opinion reflects that at the close of trial, she had asked the jury for damages totaling over $700,000. 

Over UPS’s objection, the district court determined the plaintiff to be prevailing party and thereupon considered her requested fees under the Lodestar method.[1]  The plaintiff also sought a 1.5 Lodestar multiplier.  The plaintiff asked for the rather astonishing amount of $1,945,726.50. 

In considering the amount sought, the district court largely agreed with UPS’s “vigorous” objections to the hours claimed and arrived at a Lodestar award of $773,514.20.  It then reduced that amount to reflect the plaintiff’s limited success (the amount of damages awarded) and the disproportionate fee request resulting in an adjusted fee award of $696,162.78. 

UPS appealed the fee award only, and not the jury award.  Its primary argument related “to the court’s treatment of Muniz’s limited success and its inflated fee request, which UPS contends required a substantially greater downward adjustment.” 

The Ninth Circuit pointed out that under both California and federal law, a fee award must be adjusted to reflect limited success.  That determination has two components:  First, that the court must deduct from the Lodestar hours spent exclusively on unrelated, unsuccessful claims; and second that the court must evaluate the remaining hours to determine if they were reasonably necessary to achieve the result obtained. 

With respect to the first component, the court cited Hensley v. Eckerhart, (1983) 461 U.S. 424, at 440 for the proposition that before hours may be deducted specifically for unsuccessful claims, the claims have to be suitable for entirely separate lawsuits on the basis of both fact and law, and that to deduct time, the court must find that the time deducted did not aid in proving the successful claims.  UPS however did not attempt to estimate the actual number of hours that counsel had spent on those unsuccessful claims, and simply assumed that the lawyers had spent an equal amount of time on each claim, whether successful or unsuccessful.  The District Court properly rejected that contention.  While California law is more open to percentage adjustments of the Lodestar up and down that is federal law, the Ninth Circuit could not find that the District Court was clearly wrong in failing to deduct further for the prosecution of the unsuccessful claims, “particularly where it does not appear that either party could segregate hours and exclusively on the unsuccessful claims.”

The Appellate Court then turned to the second component of the limited success inquiry as to whether the hours allowed were reasonably necessary to achieve the result reached.  It noted that the plaintiff had prevailed in establishing that UPS had made an adverse employment decision by demoting plaintiff on the basis of unlawful discrimination.  It is not entirely clear how the Ninth Circuit came to the conclusion that the District Court had not abused its discretion in awarding the plaintiff less in fees that it awarded.

What can employers take away from this case?  The result of this case underscores the concept that plaintiff fees must be a key component of evaluating the case’s exposure.  Secondarily, attacks on fee awards at the trial court level must be specific inasmuch as wildly disproportionate fee claims will not be disallowed on the basis of disproportionality alone. 

[1]Reasonably hourly rate times reasonable hours billed. 

New California Employment Laws for 2014: A Primer for Californians and Non-Californians-Part 2


In my first blog on new California legislation for 2014, I addressed some of the issues that California lawyers and employers – and employers and lawyers outside of California who might be dealing with California businesses – might want to know.  I continue with some changes to California’s Fair Employment and Housing Act, and with some potentially draconian anti-retaliation legislation.

Effective 2014, the California Fair Employment and Housing Act (“FEHA”) was amended to specify that sexual harassment does not need to be motivated by sexual desire to be unlawful.  This amendment is largely unnecessary as existing case law makes it clear that harassment motivated “because of” the victim’s gender is unlawful and harassment motivated by sexual interest is only one type of sexual harassment.  [Senate Bill 292]

Military and veteran status will be added to the list of classifications protected by the FEHA.  However, this will not prevent an employer from asking about military or veteran status in order to provide a preference as permitted by law.  [Assembly Bill 556]

Labor Code section 98.6 prohibits an employer from discharging or discriminating against an employee for engaging in certain conduct.  Effective 2014, Section 98.6 has been amended to clarify that an employer is also prohibited from retaliating or taking any adverse employment action against an employee who engages in the protected conduct, and adds making a written or oral complaint for unpaid wages as protected conduct.  In addition to reinstatement and reimbursement for lost wages and benefits, remedies will include a civil penalty of up to $10,000.

 Labor Code section 1102.5 currently prohibits an employer from retaliating against an employee for disclosing information to a government or law enforcement agency which the employee reasonably believes discloses a violation of state or federal statute or violation or noncompliance with a state or federal rule or regulation.  The 2014 amendments expand these protections to reports made to persons who have authority over the reporting employee or the authority to investigate or correct the violation or noncompliance, as well as to employees who provide information to or testify before a public body.  The amendments also add reports of violations of local rules or regulations.

By contrast, new Labor Code section 244 will make it an “adverse action” to report or threaten to report an employee’s (or an employee’s family member’s) suspected citizenship or immigration status to a public agency because the employee has exercised a right under the Labor, Government or Civil Codes.  This new legislation raises troubling questions, seeming to undermine the absolute privilege associated with making reports to the police or other law enforcement agencies; it also creates an stark anomaly:  under Labor Code § 1102.5, employees can disclose information to government and law enforcement agencies with near-absolute impunity, but employers who reasonably believe a violation of federal law has occurred face a possible lawsuit for reporting potential violations under § 244.  Expect some challenges to this new legislation. 

New Labor Code section 1019 will make it unlawful for an employer to engage in certain “immigration-related practices” in retaliation for any person exercising rights protected by the Labor Code or local ordinance.  “Unfair immigration-related practices” include: (a) Requesting more or different documentation than required to complete the Form I-9 or refusing to honor such documents that on their face appear to be genuine; (b) Using the E-Verify system to check employment authorization status of a person at a time or in a manner not authorized by federal law; (c) Threatening to file or filing a false police report; or (d) Threatening to or contacting immigration authorities.  Again, expect some challenges to some portion or all of this new legislation, especially those portions which propose to penalize employers for merely contacting immigration authorities.  In a “Simons says” exception, however, “unfair immigration-related practices” do not include conduct expressly and specifically directed or requested by the federal government.

 Engaging in an “unfair immigration-related practice” within 90 days of a person exercising his/her rights under the Labor Code or local ordinance creates a rebuttable presumption of retaliation.  The new section authorizes a civil action and prevailing plaintiffs will be entitled to attorneys’ fees and costs, including expert costs.  It also authorizes the court to suspend licenses held by the violating party.

Labor Code sections 230 and 230.1, which provide protections to victims of domestic violence and sexual assault, are amended to add the same protections to victims of stalking.  In addition to extending employment protections to victims of stalking, the amendments make it unlawful for employers to discriminate against any of these victims because of their status and create obligations similar to those owed to employees with disabilities. 

Employers will be required to provide reasonable accommodation when requested by an employee for safety reasons.  “Reasonable accommodation” may include implementing safety measures such as a transfer, reassignment, modified schedule, changed work telephone, changed work station, installing a lock, assistance in documenting domestic violence, sexual assault or stalking occurring at work, implementing a safety procedure or other adjustment to the job structure, workplace or work requirement, or referral to a victim assistance organization.

Employers will also be required to engage in an interactive process with these employees to determine an effective reasonable accommodation.  Employers will not be required to provide an accommodation that constitutes an undue hardship or that would violate their obligation to provide a safe and healthful workplace for all employees.

The 2014 amendments also add victims of stalking to the protections of Labor Code section 230.1, which currently prohibits employers with 25 or more employees from discriminating against an employee who is a victim of domestic violence or sexual assault from taking time off to: (a) Seek medical attention for injuries; (b) Obtain services from a domestic violence shelter or rape crisis center; (c) Obtain psychological counseling; or (d) Participate in safety counseling or take other actions to increase safety, including relocation.

There is also no “undue hardship” limitation on the obligation to permit an employee to take time off under section 230.1.  Although the leave may not exceed the 12 weeks permitted under the FMLA, section 230.1 applies to employers who have half the number of employees required for FMLA leave.  [Senate Bill 400].

California has always presented unique challenges to employers trying to conduct business in the State.  2014 continues the trend.




Nebraska SC Finds Exclusions Trump Severability Clause

Last week, the Nebraska Supreme Court handed down an insurer-favorable decision concerning the interplay between exclusions and severability clauses.  American Family Mutual Insurance Co. v. Wheeler, 287 Neb. 250 (Jan. 24, 2014).

The facts were sad, but straightforward.  A young man sexually assaulted a minor.  The minor’s parents sued both the young man and his father.  Plaintiffs alleged that the father was negligent by failing to warn the plaintiffs and failing to supervise the son. 

The insurance company disclaimed based upon exclusions for sexual abuse and intentional injuries.

The father argued that the exclusions did not apply because of the “severability of insurance” clause.  Specifically, this clause stated that: “[t]his insurance applies separately to each insured.”  The father conceded that absent the severability clause, the exclusions applied to bar coverage.

The court applied an interesting analysis to find for the insurance company.  The court noted that the exclusions applied to “any” insured.  Thus, the court said that the conclusions applied despite the severability clause.  The court noted, however, that it would have found for the policyholder if the exclusions applied to “the insured.”

The court explained its reasoning as follows:

[Our decision] is consistent with our oft-stated approach to give language in an insruance contract its plain meaning.  We have in the past concluded that the “an insured” language, and implicitly the “any insured” language, is clear and unambiguous.  Such language means what it says, and the severability clause does not operate to override this clean and unambiguous language.  In other words, applying  the insurance separate to each insured, as the severability clause requires, does not change the exclusions reference “an insured” or “any insured.”

2014 New CA Legislation

Most FDCC members aren’t California lawyers or businesses based in California.  Many are happy to keep it that way.  However, for all its perceived social silliness and public finance profligacy, California, the 12th largest economy in the world (, still beckons. 

As a result, it’s the rare lawyer and the rare client who won’t, at some point, do business with a California entity, or have a customer, vendor, or representative in California.  For better or worse, California also is viewed as a trend-setter in labor and employment matters, often initiating legislation that other states later adopt. 

So, for those who are thinking about dipping a big toe into California’s economy this year, and for those FDCC lawyers to whom non-California clients will turn for guidance (or to find out whether or not they need local guidance) as they enter California, I thought we’d blog a bit over the course of the next week about what’s new in California employment legislation for 2014. 

One of the biggest items is an increase in the California State Minimum Wage.  The California State minimum wage increased to $9.00 per hour effective July 1, 2014 and to $10.00 per hour effective January 1, 2016.  This also necessarily increases the minimum salary that must be paid to exempt employees, who must receive a monthly salary of no less than two times the minimum wage for full time employment.  [Assembly Bill 10]. 

But note!  Cities and counties in California may establish their own, higher, minimum wage rates.  San Francisco’s minimum wage for 2014, for example, is $10.74/hour!  So check not only the statewide minimum wage, but also local minimum wage ordinances, before advising clients about California minimum wage rates. 

In other legislation going into effect in 2014, California again tipped the playing field in favor of employees, this time in favor of those who sue to recover unpaid wages (including unpaid minimum wages or unpaid overtime).  Previously, Labor Code § 218.5 provided only that the “prevailing party” in a suit to recover unpaid wages was entitled to attorneys’ fees.  That meant that a wrongfully-sued employer was entitled to an award of attorneys’ fees if the employer merely “prevailed” in the action.  No more.  Now, a prevailing employer may only recover attorneys’ fees if the employer prevails AND establishes that the employee’s claim was brought in bad faith.  In essence, for wage claims the Legislature adopted the standard applied by the U.S. Supreme Court in Christiansburg Garment Co. v. EEOC (1978) 434 U.S. 412 in determining whether an employer who prevails in a Title VII action can recover fees from the Plaintiff.  Anyone who’s tried to recover fees on behalf of a prevailing employer knows how difficult it is to make the required showing.


Next, I’ll talk about amendments to the California Fair Employment and Housing Act, and some dramatic new anti-retaliation legislation.

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