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Archive for January, 2016

IRS Says Identity Theft Protection is No Longer Taxable

Posted on: January 22nd, 2016

By: David Cole

The Internal Revenue Service (IRS) recently announced that it will treat identity theft protection as a non-taxable, non-reportable benefit, even when offered proactively before any data breach, and regardless of whether it is offered by an employer to employees, or by other businesses (such as retailers) to their customers.

The announcement comes only four months after an earlier announcement by the IRS that it would take the same approach with regard to identity theft protection offered to employees or customers in the wake of a data breach.   In the earlier announcement, the IRS requested public comments from providers of identity protection services on whether they provide such services other than as a result of a data breach, and in response received comments indicating that businesses are proactively providing identity theft protection to employees as a benefit, because many businesses view a data breach as “inevitable” rather than as a remote risk.

As a result, businesses and employers that offer identity theft protection, either as a proactive benefit to employees or as a remedial measure to affected individuals after a data breach, do not have to report the value of such services on a Form W-2 (provided to an employee) or Form 1099-MISC (provided to a customer or other non-employee).  Similarly, individuals receiving such services do not have to report their  value in their gross income.  However, proceeds received under an identity theft insurance policy will be treated under existing tax provisions applicable to insurance benefits.  In addition, tax-exempt treatment will not apply to cash provided to an employee or customer in lieu of identity protection services.


The Gig Economy, Uber, and the Future of Worker Classification

Posted on: January 21st, 2016

By: Behnam Salehi and Allison Shrallow

The “gig economy” is a unique business model in which companies connect consumers to various services through internet platforms. Instead of hiring employees to perform the services, most “gig economy” employers hire independent contractors to perform the work.   As independent contractors, they enjoy flexible hours, and the ability to earn money quickly with little to no training time and work for more than one “gig economy” employer at any given time.  This model also appeals to businesses as they benefit from exponential profit growth while avoiding expenses traditionally associated with hiring employees, such as paying insurance premiums and overtime wages, filing payroll taxes and reimbursing workers for employment-related expenses. This model has expanded exponentially in recent years, in both worker participation and corporate growth, and a recent study suggests that nearly one in five adults either derive full or supplemental income through working “gig economy” jobs.

The major source of conflict surrounding the “gig economy” arises from whether “gig economy” workers qualify as independent contractors or employees. Many, if not most, “gig-economy” businesses, like Uber, view themselves as passive platforms that connect consumers with independent contractors to provide services, while maintaining little or no control over the workers.  In contrast, some workers have recently filed lawsuits alleging they are employees of a “gig economy” employer and therefore entitled to certain protections only afforded to employees.  To resolve this dispute, many courts and the U.S. Department of Labor (“DOL”) have used the following Economic Reality Test to determine whether an individual is an independent contractor or employee under the law:

  1. The extent to which the work performed is an integral part of the entity’s business,
  2. The worker’s opportunity for profit or loss depending on his or her skill,
  3. The extent of the relative investments of the employer and the worker,
  4. Whether the work performed requires special skills and initiative,
  5. The permanency of the relationship, and
  6. The degree of control exercised or retained by the employer.

On July 15, 2015, the DOL issued a memorandum expressing the department’s belief that “most workers [classified as independent contractors] are [in fact] employees under the FLSA’s broad definition [of an employee].” Most notably, the DOL expressed that the FLSA, which applies only to employees, applies to workers even if the employer does not exercise the requisite amount of control over the workers as long as they are economically dependent on the employer.

While no one factor in the Economic Realities Test is dispositive, the crux of the analysis seems to focus on factor number six, or the degree of control exercised or retained by the employer, in determining whether an employee-employer relationship exists. As discussed here, as of December 9, 2015, over 160,000 Uber drivers in California are entitled to join a misclassification class action lawsuit scheduled to go to trial in June 2016. While the workers’ ability to work flexible schedules and decide if and when to accept an assignment, weighs in favor of finding them to be independent contractors,  Uber’s right to withhold compensation for route deviations, train employees, and terminate drivers evidences a high degree of control which weighs in favor of finding the drivers to be employees.

While the California Uber drivers’ misclassification lawsuit is pending, other jurisdictions have dealt with this issue.  For example, Florida’s Department of Economic Opportunity found an ex-Uber driver to be an independent contractor holding Uber did not possess the requisite level of control over the worker as well as the performance of the work.   In contrast, however, a California Labor Commissioner of the Division of Labor Standards Enforcement found Uber improperly classified an Uber driver as an independent contractor, reasoning Uber was involved in every aspect of the operation and had the requisite amount of control over the worker to qualify as her employer.

More often than not, California courts set the trend for the rest of the nation’s laws.  Thus, if a California court finds Uber’s workers to be employees, then such a decision would likely affect similar “gig economy” businesses nationwide, which in turn would present economic, regulatory, structural, and financial ramifications for this business model.

SCOTUS Holds that Unaccepted Offer of Judgment Does Not Moot Plaintiff’s Case

Posted on: January 21st, 2016

By: Matt Foree

Yesterday, the Supreme Court of the United States issued its opinion in the Campbell-Ewald Co. v. Gomez case.  In that opinion, the Court held that an unaccepted settlement offer or offer of judgment does not moot a plaintiff’s case, such that the District Court retained jurisdiction to adjudicate the plaintiff Gomez’s complaint after he did not accept a settlement offer and offer of judgment in satisfaction of his Telephone Consumer Protection Act claims.  The six-to-three decision was delivered by Justice Ginsburg with Justices Kennedy, Breyer, Sotomayor and Kagan joining in the opinion of the Court.  Justice Thomas filed an opinion concurring in the judgment.  Chief Justice Roberts filed a dissenting opinion in which Justices Scalia and Alito joined.  Justice Alito filed a separate dissenting opinion.

In its opinion, the Court determined that, under its Article III case law, a case becomes moot only when it is impossible to grant any effectual relief to the prevailing party. The Court ultimately adopted Justice Kagan’s analysis in her dissent in the Genesis Healthcare case, noting that every Court of Appeals ruling on the issue since Genesis also ruled that way.  In that dissent, Justice Kagan asserted that an unaccepted settlement offer, like any unaccepted contract offer, is a legal remedy with no operative effect.  She stated that nothing in Rule 68 alters that basic principle and noted that the Rule specifies that an unaccepted offer is considered withdrawn.  In sum, the Court held that, under basic principles of contract law, defendant Campbell-Ewald Co.’s (“Campbell”) settlement bid and offer of judgment, once rejected, had no continuing efficacy.  So, without Gomez’s acceptance, the settlement offer remained only a nonbinding proposal such that the District Court retained jurisdiction to adjudicate Gomez’s complaint.

Chief Justice Roberts’s dissent echoed his tough questioning during oral argument.  He states that Campbell offered to pay Gomez the maximum amount that he could recover under the TCPA, but it turns out that Gomez wants more: “he wants a federal court to say he is right.”  The Chief Justice continued by stating that “[t]he problem for Gomez is that federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking.”  He concludes that if there is no actual case of controversy, the lawsuit is moot and the power of the federal court to declare the law has come to an end.

Chief Justice Roberts specifically took issue with the majority’s placing responsibility of whether a case is moot in the hands of the plaintiff. He states that a plaintiff is not the judge as to whether or not federal litigation is necessary.  He observed that, although Gomez was offered full relief as the District Court found, Gomez nevertheless wants to continue litigating.  But the issue, he states, is “not what the plaintiff wants, but what the federal courts may do.”  He continues, stating, “It is up to the courts to decide whether each party continues to have the requisite personal stake in the lawsuit, and if not, to dismiss the case as moot.”  He argues that the Court “takes that important responsibility away from the federal courts and hands it to the plaintiff.”

The majority opinion specifically notes that it does not decide “whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount,” as this question is reserved for another time. Chief Justice Roberts considers this good news, as the majority’s analysis may have come out differently if Campbell had deposited the funds that it offered to Gomez with the District Court.

As reported previously, TCPA defense attorneys anxiously awaited the Court’s decision in this matter in hopes that it would provide an additional defense to TCPA claims.  It remains to be seen whether TCPA defendants will take the Court’s cue and deposit funds in accounts as part of settlement offers and whether such action will actually result in a different result.  Until then, defenses to TCPA claims remain very limited.

MDL Procedures At-Risk For Closer Scrutiny Going Forward

Posted on: January 21st, 2016

By: Ryan Babcock

For years, the resolution of large-impact product defect and personal injury litigation has been shifting away from class actions in favor of Multidistrict Litigation cases that are consolidated in front of one judge in the federal and state systems.  

A recent scholarly article authored by University of Georgia law professor Elizabeth Chamblee Burch, Judging Multidistrict Litigation, 90 N.Y.U. L. Rev. 71 (2015), offers some empirical evidence that supports many anecdotal stories and apparent trends regarding the management and resolution of these types of cases, and points to the likely need for additional future regulation of these kinds of cases, especially in the federal system.

The MDL process was set up and is used for the pretrial management of similar cases, and typically, a steering committee of experienced plaintiffs lawyers are appointed by the MDL judge to help manage discovery, and usually, to guide the case toward settlement.  As Professor Burch’s research indicates, those panels are overwhelming stocked with repeat players from the plaintiff’s bar, both individually and from a select group of firms. 

There are some practical reasons why we see so many repeat players from the plaintiffs’ bar, and why there likely will not be a sea change in that practice going forward.  When determining leadership positions, and presence on these committees, the MDL judge has many considerations in mind, but one is that the judge will usually need counsel from a plaintiff’s firm that has the financial resources to manage the case and see it through discovery, and potentially settlement or one or more bellwether trials, which can be an expensive proposition when dealing with the vagaries of discovery and cutting-edge tort suits that may not have a ready “play book,” as is often the case in this type of litigation.  That factor tends to guarantee that a relatively small number of firms and lawyers will tend to receive more appointments in these sorts of cases.

Nonetheless, that same MDL system creates financial disincentives and ethical pitfalls that often leave individual plaintiffs with different interests than their counsel, and the lead plaintiffs’ counsel, may have.  Corporate defendants are then placed in the often awkward position of trying to resolve those cases, even when confronted with these professional hurdles and conflicting interests, which can impact the ultimate value of the case at settlement.  Meanwhile, MDL judges are struggling with reigning in felt excesses, all without a solid basis for doing so under the Federal Rules of Civil Procedure, or federal statutory law, as contrasted with their considerable authority in the class action setting, as set forth in Rule 23 of the Federal Rules of Civil Procedure.  And all of this is done without meaningful appellate review, as these cases are usually settled before these cases make it that far in the process.  In total, these circumstances point to the potential for new rulemaking in this area to help address some of these systemic issues going forward.

Several MDL actions are winding their way through the federal courts, including in Georgia, and many of those cases impact product liability claims in the health care industry.  Given the complexities and shifting landscape in this kind of litigation, it is important for medical companies, and others facing the potential consolidation of personal injury suits, to stay abreast of these developments, and to consult with counsel as needed.


Insurance Application Omissions Not Enough to Rescind Policy

Posted on: January 19th, 2016

By: Kristian Smith

Insurers may need to pay closer attention to insurance applications. A Pennsylvania jury recently ruled that an insurer knew (or should have known) about omissions on an insurance application, preventing the insurer from rescinding the policy.

In May 2015, H. J. Heinz Co. filed suit against Starr Surplus Lines Insurance Co. for breach of contract, declaratory judgment and bad faith, arising from Heinz’s claim for coverage under a Starr product contamination policy for losses Heinz incurred when its baby cereal product was recalled for lead-contamination. Heinz made claims for $25 million involving baby cereal that Heinz sold in China. Starr denied coverage for the claim, and Heinz filed suit.

Starr responded with a counterclaim seeking rescission of the policy. Starr claimed that Heinz’s applications for the product contamination policy, submitted in May and June 2014, failed to disclose four accidental contamination losses Heinz suffered in early 2014, misstated the value of a loss for a 2008 contamination incident and failed to disclose a 2013 fine by the Chinese food safety agency. One of the 2014 incidents that Starr contends Heinz failed to disclose was a $12 million loss related to production and sale of baby cereal in China that was contaminated with high levels of nitrite. Starr claimed that if Heinz had accurately disclosed these losses and recalls in its policy application, Starr would not have issued the policy or would have issued it with substantially different terms.  In response, Heinz claimed that Starr should have done more due diligence regarding Heinz’s application. Heinz also claimed that these omissions were not “material” to constitute rescission.

In regards to Starr’s counterclaim, a jury ruled on December 16, 2015 that although Heinz made misrepresentations in its application, Starr knew about the misrepresentations and sold the policy anyway.

There was also a noteworthy discovery ruling in this case – the judge ruled that Starr must produce to Heinz information from its underwriting files for similar product contamination policies that Starr issued to other insureds, in order for Heinz to test Starr’s claim of materiality.