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Archive for July, 2014

Courts Continue to Question Protections Afforded By Iconic Business Judgment Rule – Georgia Joins the Trend

Posted on: July 21st, 2014

By: Michael Wolak, III

The business judgment rule is an iconic fixture in American corporate jurisprudence reflecting a strong judicial reluctance to question the business judgments of directors and officers.  In its classic form, the business judgment rule insulates a company’s directors and officers from liability for negligence in the discharge of their fiduciary duties for mistakes in the exercise of honest business judgment.  The rule’s underlying rationale is that it is not the function of courts to second guess the business decisions of those who are entrusted with management of the affairs of the corporation, if they arrive at a decision for which there is a reasonable basis, they act in good faith and exercise independent judgment, and are uninfluenced by any consideration other than what they honestly believe is in the best interests of the corporation.

Several cases over the past few years, however, reflect a judicial trend towards questioning, and in some instances diluting, the scope of the rule’s protections.  For example, while most jurisdictions have uniformly applied the business judgment rule to both directors and officers, federal district courts in California have continued to follow the 2011 decision in F.D.I.C. v. Perry, 2012 WL 589569 (C.D. Cal. Feb. 21, 2012), which held that California’s common law and statutory business judgment rule applies only to directors, not officers.  See, e.g., F.D.I.C. v. Faigin, 2013 WL 3389490 (C.D. Cal. July 8, 2013).  The Perry court observed that California’s statutory codification of the business judgment rule does not mention “officers” and concluded that the legislative history suggests that the exclusion of officers was intentional because officers are more knowledgeable of the company’s operations and affairs than directors.  The hallmark of the business judgment rule, however, is that courts are not equipped to second guess the business decisions made by those who manage the company’s affairs, which includes directors and officers.  Thus, the underlying rationale for the rule clearly applies to both directors and officers.

Other courts continue to clarify and limit the scope of protection afforded by the business judgment rule.  For example, directors and officers typically could prove that a challenged decision was made with the requisite due diligence with evidence that they engaged the advice of outside consultants or experts to assist them in making an informed decision.  The Third Circuit Court of Appeals, however, reversed the grant of summary judgment to directors of a failed non-profit based on application of Pennsylvania’s business judgment rule, despite similar evidence of due diligence.  In Official Committee of Unsecured Creditors v. Baldwin, et al., 659 F.3d 282 (3d Cir. 2011), the district court relied on evidence showing that the directors engaged the advice of outside counsel and considered several options before making the challenged decision to file bankruptcy.  While acknowledging that this evidence could support application of the business judgment rule, the Third Circuit reversed and held that plaintiffs presented evidence demonstrating that the Board received several red flags as to the diligence and competence of two senior officers it relied on in making the decision to file bankruptcy, and eschewed a viability study.  This opinion underscores the need for directors and officers to ensure that each and every component of their decision is fully informed by all material facts available to them.

Georgia has now joined this growing trend of judicial questioning and clarification of the business judgment rule’s protections.  On July 11, 2014, the Georgia Supreme Court in F.D.I.C. v. Loudermilk, et al., (Case No. S14Q0454) answered the following question certified by Judge Thomas W. Thrash of the Northern District of Georgia:  Does the business judgment rule in Georgia preclude as a matter of law a claim for ordinary negligence against the officers and directors of a bank in a lawsuit brought by the FDIC as receiver for the bank?  In a comprehensive opinion written by Justice Keith R. Blackwell, a unanimous Georgia Supreme Court answered this question with a qualified negative, holding that “the business judgment rule precludes some, but not all, claims against bank officers and directors that sound in ordinary negligence.”  In enunciating a more “modest” business judgment rule, the Court first reaffirmed that the business judgment rule is a settled part of Georgia common law and that the rule has not been abrogated by Georgia statutory law.  While the Court made clear that the business judgment rule precludes ordinary negligence claims against officers and directors concerning “only the wisdom of their judgment,” the rule is not an absolute bar to ordinary negligence claims alleging that the challenged decision was made without deliberation or requisite due diligence, or in bad faith, thereby overruling Flexible Products Co. v. Ervast, 284 Ga. App. 178, 643 S.E.2d 560 (2007) and Brock Built, LLC v. Blake, 300 Ga. App. 816, 686 S.E.2d 425 (2009), which recognized an absolute bar against all claims premised on a want of ordinary care.  Although Loudermilk involved only bank officers and directors, the Court emphasized its desire to avoid “needless uncertainty” and overruled Flexible Products and Brock Built as to bank and non-bank officers and directors.

Whether other jurisdictions will be informed by the Georgia Supreme Court’s decision remains to be seen, but we can likely expect the FDIC and other plaintiffs litigating outside of Georgia to urge their respective courts to adopt the Georgia decision or to look to it for persuasive authority and guidance.  Here in Georgia (or cases in which Georgia law governs), the immediate impact of the decision is that it will now be more difficult for directors and officers to have ordinary negligence claims dismissed at an early stage, especially since sophisticated plaintiffs will not likely challenge merely the wisdom of the business decision.  Directors and officers may feel pressured to settle early to avoid the expense of discovery and protracted litigation, as well as the related risk and uncertainty of defending against mere negligence claims, as opposed to the higher standard of gross negligence.  In the meantime, any future expansion of the protections afforded to officers and directors in Georgia will have to be provided by the Georgia legislature.

If the judicial trend towards limiting the business judgment rule’s protections continues, directors and officers will continue to face increased liability exposure.  Whether or not this trend is short-lived, directors and officers should take appropriate steps to maximize the applicability of the business judgment rule to their future decisions, with the view that every business decision will be scrutinized in the future by disgruntled shareholders or creditors.  These steps should include, but are not limited to:

  • Ensuring that each decision is made with due consideration of the interests of shareholders, creditors, and other interested parties
  • Ensuring that each decision has the benefit of outside expert or other professional advice
  • Ensuring that all available material facts are considered and the decision is informed by those facts
  • Ensuring active participation by all directors, especially independent/outside directors
  • Ensuring that all available options or alternative transactions are considered
  • Ensuring that each decision is the product of active and comprehensive deliberation
  • Ensuring that board minutes and other documents accurately memorialize the deliberations, considerations, judgment-calls, rejected alternatives, and written materials that inform the decision

Why Every Company Needs Form I-9 Training (P.S. It’s Free!)

Posted on: July 18th, 2014

By: Kelly Eisenlohr-Moul

Over the past two years, many of our clients have felt the effects of a federal enforcement shift: increased form I-9 and E-Verify audits, Office of Special Counsel complaints, and civil lawsuits focused on the alleged suppression of wages caused by the hiring of unauthorized workers.

The root cause of all these actions is the Form I-9. Mistakes or errors in completing an I-9 can result in administrative, civil and/or criminal penalties from various federal agencies. Even worse, an audit from one agency can result in a “referral” to another agency for additional penalties.

Filling out an I-9 is confusing. Until the federal government does a better job of drafting the Form I-9, however, training all employees who will have input into the I-9 process offers the following benefits:

• Reduces the likelihood of ignorant mistakes;
• Educates employees involved in the Form I-9 process about what the federal government is looking for;
• Increases awareness of red flag issues and online resources to address them;
• Places the employer in a more favorable light if an audit occurs.

There is no downside to training, and US Customs & Immigration Enforcement offers free, hour-long webinars on both Form I-9 completion and E-Verify use.

USCIS also offers a resource entitled I-9 Central, which addresses Frequently Asked Questions and provides examples of documents which prove identity and/or work authorization.

Commission Wages Are Only Attributable to the Pay Period In Which They Are Paid to Satisfy California Compensation Requirements

Posted on: July 17th, 2014

By: Sandra K. McIntyre

This week, in Peabody v. Time Warner Cable, the California Supreme court concluded that an employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings and an employer may not attribute commission wages paid in one pay period to other pay periods in order to satisfy California’s compensation requirements.

In Peabody, a commissioned account executive selling advertising on cable television channels received biweekly paychecks in the amount of $769.23 for hourly wages (the equivalent of $9.61 per hour assuming a 40 hour work week) and the last paycheck of each month also included her commission wages earned during the month.[1]  Peabody regularly worked 45 to 48 hours per week and was paid no overtime, as Time Warner claimed that she fell within California’s “commissioned employee” exemption and was not entitled to overtime compensation.  (Cal. Code Regs., tit.8 §11040, subd. 3(D).)  After Peabody stopped working for Time Warner, she brought suit alleging failure to pay minimum wage,  failure to pay overtime, paystub violations, and waiting time penalties .

Time Warner argued in determining whether the commissioned employee exemption applied, Peabody’s commission wages should be attributed not to just the final biweekly pay period in which they were paid, but instead to the corresponding weeks of the monthly period in which they were earned.  In which case, Peabody’s compensation would have satisfied the exemption’s minimum earnings prong and would also necessarily mean Peabody’s compensation was at all times higher than the applicable minimum wage.

The court held that Labor Code section 204(a) requires that all wages, including commissions, must be paid no less frequently than semimonthly and that commissions are owed only when they have been earned, even if it is on a monthly , quarterly, or less frequent basis.  They further held that in determining whether the commissioned employee exemption is applicable and/or whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period and that an employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.

 


[1] Time Warner’s commission plan which provided that an account executive earned a commission only upon the occurrence of three events (1) procurement of the order; (2) broadcast of the advertising; and (3) collection of the revenue from the client and Peabody’s commission wages had been paid in accordance with the plan.

The Un-American Rule Puts California Employers at Risk

Posted on: July 16th, 2014

By: Lisa R. Gorman

Many of my initial conversations with clients begin with them – shocked and outraged at the allegations – declaring their disinterest in settling.  Of course we take these denials with a grain of salt, but frequently after investigating the facts we find they’re right – the claims are meritless.  In a recent case, for example, the plaintiff alleged harassment on the basis of gender, perceived sexual orientation and religion, as well as retaliation and failure to accommodate  a mental disability she allegedly suffered from the harassment.  To give you an idea of how baseless the claims were, plaintiff and the alleged harasser were both women, rendering gender-based harassment highly unlikely.  As far as perceived sexual orientation harassment, plaintiff openly talked to her co-workers about her boyfriend, as well as her affair with a married man she met through work.  There is no indication anyone perceived plaintiff to be a lesbian.  During her employment, plaintiff sent six detailed emails to human resources complaining the alleged harasser picked fights with her about work-related issues.  Plaintiff never mentioned harassment on the basis of religion, perceived sexual orientation, gender or any other protected category in her detailed email complaints, nor did she do so verbally.

What drives an individual to sue her employer for meritless claims?  It turns out this plaintiff sued a prior employer as well, with the same attorney representation.  They settled that case, and we settled ours.  I hear my clients when they say they don’t want to throw money at meritless claims, and I agree, but our choices are limited.  In this case, the factual issues would have precluded summary judgment.   We could have taken the case to trial, and we would almost certainly have won.  And there’s the rub.  We never know with certainty how a jury would rule, even when a female plaintiff who spoke openly about her heterosexual love life alleges another woman harassed her on the basis of her gender and perceived sexual orientation.  If by chance the jury were to find this plaintiff was unlawfully harassed or terminated, or not reasonably accommodated, she would have recovered minimal lost wages, as she earned only $11 per hour and worked at the company for a mere 8 months.  However, in addition to paying its own defense fees, my client would have also owed Plaintiff hundreds of thousands of dollars in attorneys’ fees.

In the United States, the general rule (called the American Rule) is each party pays only their own attorney’s fees, regardless of whether they win or lose.  Under California’s Fair Employment and Housing Act (“FEHA”), however, prevailing plaintiffs recover their attorneys’ fees and costs, but prevailing defendants do not.  In December 2013, the Ninth Circuit Court of Appeals held the district court properly awarded a demoted female employee $697,971.80 in attorneys’ fees on her FEHA claim against her employer, even though the jury only awarded her $27,280 in damages and she only prevailed on 1 of her 3 claims.  (Muniz v. United Parcel Service, Inc. (9th Cir., December 15, 2013) 2013 U.S. App. LEXIS 24189.) 

Given the potential for an attorneys’ fee award to bankrupt the company, my client couldn’t take the risk of going to trial, even on a meritless case with minimal damages.  He ultimately realized he had no choice but to settle, despite his indignation.  Plaintiffs’ attorneys certainly know small business owners can’t afford to go to trial and risk paying plaintiffs’ attorneys’ fees in addition to their own.  When we see individuals sue multiple employers, we get the feeling they know it too.  Even the most meritless employment cases settle because the law does not give employers any other feasible choice.  Our system, which rewards individuals and their attorneys for filing meritless claims, puts all employers at risk and creates an overly-litigious environment.

Are We Speaking the Same Language?

Posted on: July 15th, 2014

By: Seth F. Kirby

When describing insurance coverage analysis to individuals unfamiliar with the nature of my practice, I often compare it to assembling a puzzle.  Coverage counsel has to examine the claim presented to determine if it fits within the framework of coverage set forth in the insurance contract.  Of course, the puzzle pieces that we are examining, and the framework in which they are placed, are not three definitional objects with tangible shapes.  The puzzle pieces that we use to define coverage and set forth claims are words.  Unfortunately, words are imprecise and frequently fail to adequately express our desires.  The scope of coverage provided by a policy, the nature of a claim asserted by a plaintiff and the applicability of a policy exclusion can turn on the interpretation of a single word or phrase.

In cases involving the interpretation of insurance policies, courts across the nation will frequently cite the maxim that words are to be given their common and ordinary meaning.  Nevertheless, convincing a court what a particular word means is always a difficult proposition, and if an ambiguity exists, then it will be construed in favor of coverage.  A carrier can legitimately believe that a word or phrase is crystal clear, only to be told that its interpretation is flawed.  Why does this happen?

A recent article published on Slate.com may provide some insight regarding this question.  In “Why Do You Think You’re Right About Language?  You’re Not.” author Gretchen McColloch investigates a concept known as “micro-language.”  In short, she explains that “micro-language” is the intuitive sense of what sounds like proper use of the English language and what doesn’t.  The intuition is developed based upon the listeners’ interactions with other speakers throughout their life.  It is shaped by geography, education, age, gender, level of education, family influence and other factors.  “A doctor who watches a lot of sci-fi will have a slightly different vocabulary than a lawyer who reads a lot of historical fiction, and both of them will have a slightly different vocabulary from their neighbor who’s a birdwatcher. Just as no two people live the same life, no two have the same set of linguistic influences. In other words, no two people end up speaking the same language.”

Ms. McColloch’s article is a fascinating exploration of what it means to use “proper” English.  For instance, in the South it would be “proper” to tell someone that you “might could” pick them up from the airport, while the phrase “could might” would be rejected as inappropriate.  Why?  Because that is the way we say it.  Understanding these differences and adapting to your audience can be the key to effective communication.

From an insurance coverage perspective, we must continually remind ourselves that our puzzle pieces may not convey the meanings that we ascribe to them.  If we forget that words and phrases can mean different things to different people, we run the risk of walking into surprise outcomes.  One such surprise outcome that turns on the interpretation of a phrase will be addressed in an upcoming blog post.  In the interim, to the extent that you are interested in “micro-language,”  Ms. McColloch’s article can be found at: http://www.slate.com/blogs/lexicon_valley/2014/05/30/arguing_over_language
_everyone_has_an_idiolect_standard_english_prescriptivism.html