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Archive for April, 2018

SEC Proposed Fiduciary Rules Proceed to Public Comment on Split Vote

Posted on: April 19th, 2018

By: Theodore C. Peters

The Securities and Exchange Commission (“SEC”) conducted a public hearing on April 18, 2018 to address a series of SEC proposals governing securities professionals.  Recall that the Department of Labor previously sought to promulgate a “fiduciary rule” which encountered numerous legal hurdles and ultimately was struck down by the Fifth Circuit.  Concurrently, over the last 11 months, the SEC has been working on its own set of rules to provide the securities industry with more clarity concerning advice standards.  After a two hour hearing, the SEC Commissioners split over whether to proceed with the next step in the rule making process.  Chairman Jay Clayton and Commissioners Michael S. Piwowar, Robert J. Jackson Jr. and Hester M. Peirce voted in favor of the proposals; Commissioner Kara M. Stein vociferously rejected the proposals.

At issue were three proposals: (1) a rule to establish a standard of conduct for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer; (2) a rule requiring registered broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors; and (3) a formal SEC interpretation of the standard of conduct applicable to investment advisers.  Various SEC staffers introduced each of the proposals with candid remarks, tacitly admitting that there was room for improvement with respect to each component of the proposal package.

The so-called “Regulation Best Interest” would mandate that broker-dealers and their registered representatives who make recommendations to a retail customer act in the best interest of the customer at the time the recommendation is made, without putting the financial or other interest of the broker-dealer ahead of the retail customer.  To comply with this obligation, a broker-dealer would need to do three things: (1) disclose key facts about the relationship (including material conflicts of interest); (2) exercise reasonable diligence/care/skill to i) understand the product, ii) have a reasonable basis to believe that the product is in the customer’s best interest, and iii) have a reasonable basis to believe that a series of transactions is in the customer’s best interest; and (3) establish/maintain/enforce policies and procedures designed to identify and disclose and then mitigate or eliminate material conflicts of interest.

The Form CRS (customer relationship summary) rule would require investment advisers and broker-dealers (and their associated persons) to provide retail investors with a short-form (4 pages maximum) disclosure summary that would identify key differences in the principal types of services offered, the legal standards of conduct that apply to each, applicable fees and conflicts of interest.

In connection with the proposal regarding a Commission interpretation of the standard of conduct for investment advisers, the SEC seeks a Commission-sanctioned interpretation as to the duty owed by an investment adviser to his/her clients.  The proposed interpretation reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty owed by an investment adviser.

Republican Commissioner Michael Piwowar candidly admitted that the failed DOL Fiduciary Rule was “terrible,” “horrible,” and “very bad.”  He expressed greater faith in the SEC proposals, though he said that the proposals could be improved in several respects.  He stated that the proposed Regulation Best Interest represented a “solid building block,” but noted that there was much room for improvement.  As for the proposed Form CRS template, Piwower suggested that it was “as comprehensible as Herman Melville’s Moby Dick.”  Despite having misgivings as to all three proposals, he voted in favor of them.

Democratic Commissioner Robert Jackson, who admitted being an advocate of the DOL Fiduciary Rule, also professed to have concerns over the proposals.  He stated that the standard set forth in Regulation Best Interest was too ambiguous and he feared that such ambiguity would be used by lawyers to defend transgressing brokers.  As for the proposal concerning mitigation of conflicts of interest, Jackson stated that “some conflicts should simply be banned outright.”  Despite his concerns, Jackson stated that he was “reluctantly voting to open the proposals for comment.”

Republican Commissioner Hester Peirce concurred with many of the prior comments concerning clarity (or the lack thereof) of the proposals.  She stated that “disclosure should be the centerpiece of reform,” and that she was in favor of requiring brokers to provide more details in connection with their disclosures of services offered and fees charged. Peirce believes that the proposed Regulation Best Interest was mislabeled, stating that it would be more accurate to call it a “suitability-plus” standard.  Lack of clarity in the proposal leads to increased cost of compliance, Peirce said, and suggests an “impossible standard” to satisfy which could lead to a decline in the number of registered broker-dealers. Commissioner Peirce stated that the proposals were an “excellent start toward reform,” and voted in favor of them.

Democratic Commissioner Kara Stein blasted the proposals as too weak.  She said the Commission had the opportunity to propose meaningful proposals, but failed to do so.  Critically, Stein said the Regulation Best Interest provided broker-dealers with a safe harbor and did nothing to require that they put customers’ interests first.  Noting that the proposed regulation lacked any definition of “best interest,” Stein said the proposal might mislead investors and might as well be called “Regulation Status Quo,” because it simply reaffirms that broker-dealers are required to meet their suitability obligations.  Not surprisingly, Commissioner Stein voted against the proposals.

Chairman Jay Clayton acknowledged his fellow Commissioners’ comments and stated that “much work” was still needed before the proposals could be adopted as final rules.  Calling for a vote, Commissioners Piwower, Jackson, Peirce and Clayton voted in favor; Commission Stein voted against.  With majority approval, the SEC’s rule package will now be submitted for a 90-day public comment period.

If you have questions or would like more information, please contact Ted Peters at [email protected].

New Clarity for California CCP 998 Offers

Posted on: April 18th, 2018

By: Gretchen S. Carner

California Code of Civil Procedure section 998 settlement offers (“998 offer”) are valuable settlement tools, often under-utilized in prevailing party attorneys’ fees cases.  The California Court of Appeal has bolstered defendants’ ability to confidently make valid 998 offers, exclusive of attorneys’ fees, so that a motion for attorneys’ fees can be brought after acceptance of the offer.

The California Court of Appeal recently held that a defendant’s 998 offer to pay the plaintiff $12,500 “exclusive of reasonable costs and attorney[ ] fees, if any” was clear and unambiguous.  (Timed out LLC v. 13359 Corp. (Feb. 27, 2018, No. B280301) ___Cal.App.5th___ [2018 Cal. App. LEXIS 262].)  In Timed Out LLC v. 13359 Corp., plaintiff sued defendant for misappropriation of a model’s right of publicity under Civil Code section 3344 (section 3344).  Section 3344(a) provides for “prevailing party” attorneys’ fees and costs.  After trial, the court awarded plaintiff $4,483.30 “exclusive of any costs [or] attorneys’ fees that may be set by noticed [m]otion.”

Defendant submitted a cost bill that included post-offer attorneys’ fees and costs.  Plaintiff moved to strike the cost bill on the grounds, among others, that the 998 offer was invalid because the terms “exclusive of attorneys’ fees, if any” was ambiguous.  The Court of Appeal concluded that the usual and ordinary meaning of the term “exclusive of” in this context is that the settlement amount did not include fees and costs, and that one could not fairly interpret the phrase “if any” to require a concession that plaintiff may not be entitled to any attorney fees if it accepted the 998 offer.  The 998 offer did not deny Plaintiff’s right to recover attorneys’ fees and costs, nor could it have reasonably been interpreted to do so.  The offer provided that Defendant would pay $12,500, which was ‘exclusive of,’ meaning not including, reasonable costs and attorneys’ fees.  Where a 998 offer does not expressly preclude the recovery of fees and costs, a prevailing party may seek them.  Defendant was awarded its post-offer attorneys’ fees and costs.

The take away here is that defendants in any case where statutory attorneys’ fees and costs are at stake, should think about serving early 998 offers to cut off and limit their potential liability for significant attorneys’ fees that quickly add up during protracted litigation.  In addition, if the plaintiff does not obtain an award greater than defendant’s 998 offer (plus plaintiff’s actual award of attorneys’ fees and costs), the defendant is entitled to recover its post-offer attorneys’ fees and costs.  This should give great pause to plaintiff’s counsel who have weak or meritless cases.

If you have any questions or would like more information, please contact Gretchen Carner at [email protected].

Ordinarily, Is It Professional Negligence? The Georgia Supreme Court Thinks So In Its $22 Million Reversal

Posted on: April 17th, 2018

By: Shaun Daugherty

The Georgia appellate courts have addressed the issues between claims of ordinary and professional negligence in medical malpractice cases for a number of years.  The standards for liability are distinctly different, but in certain factual scenarios there may be a fine line drawn between the two.  The Georgia Supreme Court made a clear distinction on the issue last month in reversing a $22 million dollar compensatory verdict awarded in Southeastern Pain Specialists v. Brown.  This was after the same verdict had been affirmed by the Court of Appeals that found no error in the trial court charging the jury on both ordinary and professional negligence.

The Georgia Supreme Court had some clear leanings regarding the quality of care that was provided in the underlying lawsuit according to the evidence presented at trial.  The case involved an epidural steroid injection procedure where a pulse oximeter and blood pressure cuff were placed on the patient for monitoring while she was administered anesthesia face down.  During the procedure, the evidence was that the pulse oximeter read 0% and the blood pressure cuff registered no reading for a significant amount of time.  The evidence was that the defendant doctor, with knowledge of the readings, continued the procedure insisting that everything was fine.  After the 18-minute procedure, the patient was repositioned on her back and did not recover as expected.  She was taken to the local ER for further care and the defendant doctor indicated to the medical personnel that the patient was having complications from the anesthesia.  He failed to provide any information regarding the intra-procedure pulse oximeter or blood pressure readings. The patient was found to have suffered brain damage and ultimately died from the same.

At trial, the court charged the jury on both ordinary negligence, over objection by the defense, and professional negligence.  The plaintiff argued that the ordinary negligence charge was warranted due to the obvious obligation to save someone if they are not breathing and the misrepresentations made by the defendant doctor to the other healthcare providers.  The court provided no guidance as to which facts and circumstances in the case may apply to which theory of negligence. Further, the plaintiff appears to have argued in closing that the ordinary negligence standard was to be applicable generally to the defendants.

The Georgia Supreme Court made it clear that even “a very strong case of medical malpractice does not become a case of ordinary negligence simply due to the egregiousness of the medical malpractice.”  It was recognized that medical providers could be held to the ordinary negligence standard under the right circumstances, but primarily only in those cases where there was no need to exercise medical judgment.  Multiple times in the Court’s reversing opinion, it was highlighted that the facts of the case involved medical data provided by medical equipment during a medical procedure and the proper response to the same.  It was found that this required the exercise of medical judgment.

In cases involving claims of medical malpractice, the defendant is provided a presumption of due care which must be overcome by expert testimony by the plaintiff.  In cases involving ordinary negligence, no such presumption is given.  The Court found that the Court of Appeals erred in finding that a lay person would not need expert testimony to understand the meaning of the data provided from the medical machines and the proper method of response during the medical procedure.  The “trust” of the plaintiff’s argument was that the defendant doctor failed to properly respond to the data that was being provided by the machines.  This was information that required expert judgment and decision making which was outside the scope of ordinary negligence.

The Court determined that providing the jury with an ordinary negligence instruction, without clarification as to which facts and claims it may apply, invited them to decide the medical liability outside the boundaries for claims of professional negligence.  Primarily the need for expert testimony to overcome the presumption of due care.  This was compounded by the plaintiff’s counsel’s arguments in closing which made no distinction and appeared to encourage the ordinary negligence standard to all claims.  The jury verdict in favor of the plaintiff was a general form and did not allow the Court to determine whether the verdict was based on the application of the appropriate standard.  Because it was error to provide the ordinary negligence charge without further clarification or instruction, the Court reversed and remanded the matter to the Court of Appeals with a direction to send it back to the trial court for a full retrial as to the appealing parties, including the issue of punitive damages to which the plaintiff had previously been awarded $0.

So what does this opinion tell us?  It tells us that ordinary and professional negligence claims can live in the same case, but it is essential that they be clearly defined for the jury.  The trial court’s vague instruction, coupled with the plaintiff’s counsel’s closing argument, invited the reversal in this instance.  As the Court indicated many times, medical data from medical machines during a medical procedure require the exercise of expert medical judgment in determining the proper response.  The failure of the trial court and attorney to set this apart from any ordinary duty of care in defendant’s communications to other medical providers was harmful error which required the retrial.

If you have any questions or would like more information, please contact Shaun Daugherty at [email protected].

Lions, Tigers, and… Peacocks? Oh My! How to Handle Requests for Emotional Support Animals

Posted on: April 16th, 2018

By: Christopher M. Curci

Many HOA’s with a “no pets” policy struggle to properly handle requests from unit owners to have emotional support animals at the property.  Governing Boards have to balance the needs of the unit owner making the request with the competing desire of other unit owners to enforce the Association’s “no pets” policy.  We are often asked questions such as, “Do we have to allow this?” “What information can we request from the unit owner?” and, “Can we impose limitations on where the animal can go?”  Complicating matters is that the law regarding emotional support animals is broadly written and largely unsettled by the courts.

To start, emotional support animals (or “ESA’s”) are different than service animals.  A service animal is a dog that has been specifically trained to perform tasks for an individual with a disability, such as a seeing eye dog.  By contrast, ESA’s provide emotional support and are not required to have any specific training.  Any animal can be considered an ESA.  In one extreme example, an airline passenger attempted to bring her emotional support peacock on an airplane.  This ruffled United Airlines feathers, who refused to allow the peacock on the plane.

The nuances of the law can be difficult to follow.  A unit owner is not required to produce a doctor’s note to verify his or her medical needs – even a letter from a social worker could suffice.  But, if a disability is “readily apparent,” then the Association cannot ask the unit owner to provide any documentation at all.  Further, while an HOA can adopt formal procedures for requesting an ESA, it cannot deny a unit owner’s request merely because he or she failed to follow those formal procedures.  The Association cannot charge a fee to the unit owner for having an ESA, but the unit owner is responsible for any financial damage caused by the animal.  Maybe the ESA can go in common areas, but maybe not.  Confused?  You should be.

There is no “one size fits all” answer to these questions.  We have successfully defended HOA’s that have denied requests for an ESA or have imposed various restrictions on where an ESA can go.  But, each situation is unique and depends on the specific facts and circumstances of the situation.  HOA’s should be mindful that ESA requests can be legal landmines if not handled properly.  The Department of Justice has fined HOA’s $25,000 – $45,000 for Fair Housing Act violations.  Lawsuits and fines can and should be avoided with proper legal advice.

Christopher M. Curci, Esq. is member of Freeman, Mathis, & Gary’s HOA Practice Group and regularly advises and defends HOA’s in housing related disputes.  He can be reached at [email protected] or by phone at 267-758-6013.

To Bonus or Not to Bonus? Departing from the FLSA, the California Supreme Court Clarifies Calculation of Overtime Including Flat Sum Bonuses

Posted on: April 16th, 2018

By: Christine C. Lee

Calculating the correct overtime pay rate for non-exempt employees just got a little more complicated for California employers who elect to pay bonuses.  In the recent case of Alvarado v. Dart Container Corporation of California, plaintiff Hector Alvarado, a non-exempt warehouse worker, was paid a flat “attendance bonus” of $15 per day in addition to his hourly rate if he worked a full shift on a Saturday or Sunday.  Because there was no California statute, regulation or wage order directing how employers should calculate the rate of pay for overtime purposes when such non-discretionary flat sum bonuses are paid, the employer, Dart Container Corporation of California, followed the methodology set forth in the federal Fair Labor Standards Act (FLSA).

Dart calculated the overtime pay rate by taking Mr. Alvarado’s total earnings in the relevant pay period, which included the attendance bonuses, and dividing that figure by all hours worked in the pay period including overtime.  Using this figure, Dart paid Mr. Alvarado 1.5 times this rate for every overtime hour worked.

To thank his employer for the bonuses, Mr. Alvarado sued Dart in a wage and hour class action alleging Dart miscalculated the overtime rate of pay.  He argued Dart should have divided the period’s earnings and attendance bonuses only by the amount of non-overtime hours worked which would have resulted in a marginally higher overtime rate of pay.  In support of his position, Mr. Alvarado relied on the California Division of Labor Standards Enforcement’s (DLSE) Enforcement Policies and Interpretations Manual which states that when employees earn a flat sum bonus, their overtime rate is determined by dividing the regular and bonus earnings only by the regular non-overtime hours worked during the relevant pay period.  The case reached the California Supreme Court for guidance.

There, Dart argued because its formula complied with the federal FLSA when California law gave no guidance, its methodology was lawful.  Dart also argued the DLSE Manual was merely an underground regulation and interpretation of the law and therefore was not entitled to any special deference.  The Court agreed the DLSE manual was not entitled to special deference.  Nevertheless, the Court held “[W]e are obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors the protection of the employee’s interests.”  The Court found Mr. Alvarado’s method was “marginally more favorable to employees” and should now be the law of California.  To add further ambiguity to its ruling, the Court cautioned this methodology only applied to non-production related flat sum bonuses and not necessarily to production-based bonuses such as piece rate or commission-based bonuses.

Dart requested only prospective application of the Court’s rulings since California law had been unclear up to that point.  The Court refused the request, leaving Dart on the hook for 4+ years’ worth of unpaid overtime, penalties for inaccurate wage statements, penalties under Labor Code §203 and California’s Private Attorney General Act, and attorney’s fees and costs.

The unfortunate result of this decision is that employers may stop bonusing non-exempt employees and/or flee California to avoid this kind of catastrophic litigation.

If you have any questions or would like more information, please contact Christine Lee at [email protected].