2016 trade law outline coverpages · originators and servicers, payday lenders, private student...

Presented by The Iowa State Bar Association's Corporate Counsel & Trade Regulation Sections

2016 Corporate Counsel/ Trade Regulation Seminar

Friday, September 23, 2016

ISBA Headquarters

CaveatThe printed materials contained in this book

and the oral presentations of the speakers arenot intended to be a definitive analysis of the

subjects discussed. The reader is cautioned that neither the program participants nor The IowaState Bar Association intends that reliance beplaced upon these materials in advising your

clients without confirming independent research.

2016 Corporate Counsel/ Trade Regulation Seminar

In-Person: 240570Live Webinar: 240569

CLE credit: 6.75 State CLE hours which includes 1.0 Ethics CLE hours and 5.50 Federal CLE hours.

ScheduleSchedule8:00-8:30 Registration

8:30-8:45 WelcomeSarah Crane, Trade Regulation Chair, Davis Brown Law Firm and Charlie Nichols, Corporate Counsel CLE Chair, Principal

8:45-9:30 An Introduction to the Consumer Financial Protection BureauProf. Cathy Mansfield, Drake Law School and Former Policy Analyst with the Consumer Financial Protection Bureau (CFPB)

9:30-10:15 Iowa Supreme Court Update Ryan Koopmans, Nyemaster Goode

10:15-10:30 Break

10:30-11:15 Surviving the Fire Swamp: I-9s, Immigration-related Anti-discrimination and Unexpected Challenges of Unusual SizeLori Chesser, Davis Brown Law Firm

11:15-11:45 Franchise Law UpdateMark Hamer, Hamer Law Office PLLC and Emily Alward, Attorney at Law

11:45-12:00 Lunch (provided with registration)

12:00-12:45 Antitrust Law UpdateJustice Edward Mansfield, Iowa Supreme Court

12:45-1:30 U.S. Supreme Court UpdateSamuel Langholz, Administrator, Administrative Hearings Division at Iowa Department of Inspections and Appeals

1:30-1:45 Break

1:45-2:30 Employment Law UpdateElizabeth Coonan, Brown Winick PLC and Ann Holden Kendall, Brown Winick

2:30-3:15 Current Topics in Corporate GovernanceDavid Repp, Dickinson Mackaman Tyler & Hagen PC

3:15-4:15 Ethics PanelPanelists: Tara van Brederode, Office of Professional RegulationCharlie Nichols, PrincipalProf. Maura Strassberg, Drake University


2016 Corporate Counsel and Trade Regulation Seminar

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An Introduction to the Consumer Financial Protection Bureau

8:45 a.m. - 9:30 a.m.

Presented byProf. Cathy Lesser MansfieldDrake University Law School

Phone: 515-271-2076



9/15/2016

1


PROFESSOR CATHY LESSER MANSFIELD

DRAKE UNIVERSITY LAW SCHOOL

SEPTEMBER 23, 2016

CreationDodd‐Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111‐203, 124 Stat. 1376 (July 21, 2010)◦ Title X – “Consumer Financial Protection Act”

July 21, 2011 – statutory “designated transfer date”. Date operations began.

Basic StructureHoused within the Federal Reserve with statutory autonomy from the Federal Reserve Board of Governors

Headed by Director, who is appointed by the President with the advice and consent of the Senate.◦ 5 Year term◦ Removable for “inefficiency, neglect of duty or malfeasance in office”◦ Current director is Richard Cordray.

◦ Washington Post, Senate confirms Cordray to head Consumer Financial Protection Bureau (July 16, 2013)

Funded through transfer of Federal Reserve System earnings and not reviewable by Congressional Appropriations with annual caps:◦ 2011 – capped at 10% of Fed’s FY 2009 budget◦ 2012 – capped at 11% of Fed’s FY 2009 budget◦ 2013 on ‐ capped at 12% of Fed’s FY 2009 budget subject to adjustments for inflation.

9/15/2016

2

Basic StructureCFPB organizational chart

Continuing Structural IssuesConstitutionality of structure of the CFPB being contested in case before the U.S. Court of Appeals for the D.C. Circuit.

PHH Corp. v. Consumer Financial Protection Bureau, Opening Brief for Petitioner

Regulatory AuthorityCFPB rulemaking must be consistent with the “purpose of ensuring that all consumers have access to markets for consumer financial products and services and the markets for consumer financial products and services are fair, transparent, and competitive.” 15 U.S.C. 5512(a).

CFPB generally engages in significant market research, field hearings, roundtables, and consultation with industry and consumer groups in its rulemaking process.

9/15/2016

3

Regulatory AuthorityRulemaking transferred from other Federal Agencies

Alternative Mortgage Transaction Parity Act (AMTPA)

Consumer Leasing Act

Electronic Funds Transfer Act

Equal Credit Opportunity Act

Fair Credit Billing Act

Fair Credit Reporting Act (with limited exceptions)


Fair Debt Collection Practices Act (new rule‐making authority)

Home Mortgage Disclosure Act (HMDA)

Home Ownership and Equity Protection Act (HOEPA)

Real Estate Settlement Procedures Act (RESPA)

S.A.F.E. Mortgage Licensing Act of 2008

Truth in Lending Act

Truth in Savings Act

Fair Housing Act stays with HUD

Regulatory AuthorityRulemaking –

Unfair, deceptive, and abusive Acts of Practices (UDAAP)

(12 U.S.C. 5531)

9/15/2016

4

Regulatory Authority ‐ Unfair, Deceptive or Abusive Acts and Practices

(a) In general

The Bureau may take any action authorized under part E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

(b) Rulemaking

The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.

Regulatory Authority ‐ Unfair, Deceptive or Abusive Acts and Practices – Unfairness

(c) Unfairness

(1) In general

The Bureau shall have no authority under this section to declare an act or practice in connection with a transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service, to be unlawful on the grounds that such act or practice is unfair, unless the Bureau has a reasonable basis to conclude that—

(A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

(2) Consideration of public policies

In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.”

Regulatory Authority ‐ Unfair, Deceptive or Abusive Acts and Practices – “Abusive”

(d) Abusive

The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

(1)materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of—(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

(e) Consultation

In prescribing rules under this section, the Bureau shall consult with the Federal banking agencies, or other Federal agencies, as appropriate, concerning the consistency of the proposed rule with prudential, market, or systemic objectives administered by such agencies.

9/15/2016

5

Regulatory AuthorityRegulations can cover all providers of consumer financial products and services, including banks, thrifts, credit unions, non‐banks.◦ Includes all sorts of consumer financial products◦ Credit providers (mortgages, payday, vehicle title lending, small dollar, credit cards, etc.)

◦ Lessors where lease is functional equivalent of a financed purchase

◦ Parties providing real estate settlement services

◦ Deposit accounts and payment systems, including stored value cards and check cashing services

◦ Credit bureaus

◦ Debt collectors

◦ Credit counselors and debt managers

Regulatory AuthorityExclusions for

◦ Merchants

◦ most motor vehicle dealers

◦ persons regulated by the SEC

◦ persons regulated by a state insurance regulator

◦ persons regulated by the Farm Credit Administration

◦ Real estate agents, brokers and appraisers

◦ Manufactured home retailers

◦ Accountants

◦ Tax preparers if no credit is extended)(so a company offering refund anticipation loans would be covered)

◦ Attorneys

◦ Employee benefit and compensation plans

◦ Tax exempt organizations

Regulatory AuthorityAll regulations can be vetoed by a 2/3 vote of the Systemic Risk Council if the Council determines that the rule would compromise the safety and soundness of the U.S. banking system or would put the stability of the U.S. financial system at risk.◦ Council is made up of Sec. of Treasury (Chair), FRB chair, Comptroller of the Currency, CFPB Director, SEC chair, FDIC Chair, CFTC Chair, FHFA director, NCUA Chair and an independent insurance expert, appointed by President and subject to confirmation.

Decision to veto a CFPB regulation is subject to APA judicial review.

9/15/2016

6

Regulatory AuthorityDodd‐Frank contained certain statutory mandates, including:◦ CFPB required to propose a single, integrated TILA/RESPA closing disclosure for real estate loans.◦ Final rule issued Nov. 20. 2013 and effective Oct. 3, 2015

◦ CFPB required to study pre‐dispute arbitration clauses before regulating.◦ Proposed rule issued May 5, 2016

◦ CFPB required to study reverse mortgages with authority to issue rules prior to study or as follow up.◦ Reverse Mortgage study issued June 4, 2015.

Dodd‐Frank also had certain statutory prohibitions:◦ No usury caps can be imposed by the CFPB.

Key Regulations ‐ FinalMortgage origination rules◦ Qualified mortgage and ability to repay rules

◦ Loan originator compensation

◦ Copies of appraisals

Integrated Mortgage Disclosures (TRID)

Mortgage Servicing and loss mitigation (and revisions issued in August 2016)

Home Mortgage Disclosure Act

International remittance transfers (Reg. E)

Key Regulations – Proposed or under developmentPayday Lending, Vehicle Title and other Small Dollar Lending

Arbitration Agreements

Pre‐paid cards

Debt Collection

Overdraft

9/15/2016

7

Supervisory PowersDepository Institutions (banks, thrifts and credit unions) with more than $10 billion in assets (including their affiliates) –supervisory power for compliance with federal consumer financial laws and assessing risk to consumers and markets.◦ Smaller depositor institutions (Less than $10 billion in assets) are supervised by their primary federal or state banking regulator.

Non‐bank providers of consumer financial services, including mortgage originators and servicers, payday lenders, private student loan lenders.

Large participants in other consumer financial markets, as defined by CFPB rules. Currently includes consumer reporting, consumer debt collection, student loan servicing, international money transfers, and auto financing.

CFPB maintains list of supervised entities.

Supervisory Highlights and Compliance GuidesCFPB shares findings from recent examinations.◦ Mortgage servicing

Compliance aids and official guidance available for rules supervised

Enforcement AuthorityLarge Depository institutions (<$10 Billion)– CFPB has primary authority to enforce federal consumer financial laws.

Smaller Depository institutions (>$10 Billion) – CFPB has does not have enforcement authority, but must notify the relevant federal banking regulator in writing if CFPB has reason to know of a material violation of a federal consumer financial law.

Non‐depository entities ‐ CFPB has exclusive enforcement authority except where shared with the FTC.

9/15/2016

8

Enforcement AuthorityRelief can include:◦ Rescission or reformation of contracts

◦ Refund of money or return of property

◦ Restitution

◦ Disgorgement for unjust enrichment

◦ Damages

◦ Public notification of violation

◦ Limitation on future conduct

◦ Civil Penalty◦ Up to $5,000 per day for violation of rule, final order, or condition imposed in writing by the

CFPB

◦ Up to $25,000 per day for reckless violation of federal consumer financial law

◦ Up to $1 million per day for knowing violation of federal consumer financial law

EnforcementKey recent actions:◦ Unauthorized opening of deposit and credit card accounts incentivized by sales target and compensation structure◦ Wells Fargo Bank, N.A. (Sept. 8, 2016)

◦ Credit card add‐on products◦ First National Bank of Omaha (Aug. 25, 2016)

◦ Student Loan Servicing◦ Wells Fargo Bank, N.A. (Aug. 22, 2016)

◦ Illegal overdraft service practices◦ Santander Bank, N.A. (July 14, 2016)

◦ Discriminatory Lending Practices◦ Santander Bank, N.A. (mortgages) (July 14, 2016)

◦ Debt Collection◦ Pressler & Pressler, LLP and New Century Financial Servicers, Inc. (April 25, 2016)

Market monitoring and research functionsStatute creates research unit to research, analyze and report on consumer markets, access to credit, consumer awareness, understanding and behavior, and traditionally underserved consumers.

Often, studies are conducted before rule‐making.

9/15/2016

9

Market monitoring and research functionsMajor research papers:◦ Payday lending

◦ Online payday lending

◦ Single payment vehicle title lending◦ Arbitration 1 and 2◦ Credit Reporting and medical debt◦ Prepaid account agreements◦ Overdrafts data point and study

Annual Reports:◦ Annual Fair Lending Report◦ Fair Debt Collection Practices Act◦ College Credit Card Agreements◦ The state of the consumer credit market (every two years)◦ Student Loans

◦ Report to Congress issued July 19, 2012.

◦ 2015 Annual report of student loan ombudsman issued Oct. 14, 2015

Consumer ComplaintsStatute creates a consumer complaint unit that collects, monitors and responds to consumer complaints regarding consumer financial products.

Division is called “Consumer Response”

Complaints are forwarded to subject companies for response.◦ Complaint data are used in supervision, enforcement and rule‐writing

◦ Complaint data are shared with state and federal agencies

◦ Complaint data and outcomes are shared with the public through the complaint database.

Consumer ComplaintsMonthly complaint reports

Annual Report

Servicemembers complaint annual reports

9/15/2016

10

Consumer Education and EngagementDivision that interfaces directly with consumers.

Statutorily required to have the following divisions:◦ Office of Financial Education

◦ Service members

◦ Older Americans

Also has divisions for:◦ Consumer Engagement

◦ Students and Young Consumers

◦ Financial Empowerment

Products like ASK CRPB, Owning a home, Your money your goals.


PROFESSOR CATHY LESSER MANSFIELD

DRAKE UNIVERSITY LAW SCHOOL

SEPTEMBER 23, 2016

CreationDodd‐Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111‐203, 124 Stat. 1376 (July 21, 2010)◦ Title X – “Consumer Financial Protection Act”

July 21, 2011 – statutory “designated transfer date”. Date operations began.

Basic StructureHoused within the Federal Reserve with statutory autonomy from the Federal Reserve Board of Governors

Headed by Director, who is appointed by the President with the advice and consent of the Senate.◦ 5 Year term◦ Removable for “inefficiency, neglect of duty or malfeasance in office”◦ Current director is Richard Cordray.

◦ Washington Post, Senate confirms Cordray to head Consumer Financial Protection Bureau (July 16, 2013)

Funded through transfer of Federal Reserve System earnings and not reviewable by Congressional Appropriations with annual caps:◦ 2011 – capped at 10% of Fed’s FY 2009 budget◦ 2012 – capped at 11% of Fed’s FY 2009 budget◦ 2013 on ‐ capped at 12% of Fed’s FY 2009 budget subject to adjustments for inflation.

Basic StructureCFPB organizational chart

Continuing Structural IssuesConstitutionality of structure of the CFPB being contested in case before the U.S. Court of Appeals for the D.C. Circuit.

PHH Corp. v. Consumer Financial Protection Bureau, Opening Brief for Petitioner

Regulatory AuthorityCFPB rulemaking must be consistent with the “purpose of ensuring that all consumers have access to markets for consumer financial products and services and the markets for consumer financial products and services are fair, transparent, and competitive.” 15 U.S.C. 5512(a).

CFPB generally engages in significant market research, field hearings, roundtables, and consultation with industry and consumer groups in its rulemaking process.


Alternative Mortgage Transaction Parity Act (AMTPA)

Consumer Leasing Act

Electronic Funds Transfer Act

Equal Credit Opportunity Act

Fair Credit Billing Act

Fair Credit Reporting Act (with limited exceptions)


Fair Debt Collection Practices Act (new rule‐making authority)

Home Mortgage Disclosure Act (HMDA)

Home Ownership and Equity Protection Act (HOEPA)

Real Estate Settlement Procedures Act (RESPA)

S.A.F.E. Mortgage Licensing Act of 2008

Truth in Lending Act

Truth in Savings Act

Fair Housing Act stays with HUD

Regulatory AuthorityRulemaking –

Unfair, deceptive, and abusive Acts of Practices (UDAAP)

(12 U.S.C. 5531)

Regulatory Authority ‐ Unfair, Deceptive or Abusive Acts and Practices

(a) In general

The Bureau may take any action authorized under part E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

(b) Rulemaking

The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.

Regulatory Authority ‐ Unfair, Deceptive or Abusive Acts and Practices – Unfairness

(c) Unfairness

(1) In general

The Bureau shall have no authority under this section to declare an act or practice in connection with a transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service, to be unlawful on the grounds that such act or practice is unfair, unless the Bureau has a reasonable basis to conclude that—

(A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

(2) Consideration of public policies

In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.”

Regulatory Authority ‐ Unfair, Deceptive or Abusive Acts and Practices – “Abusive”

(d) Abusive

The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

(1)materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of—(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

(e) Consultation

In prescribing rules under this section, the Bureau shall consult with the Federal banking agencies, or other Federal agencies, as appropriate, concerning the consistency of the proposed rule with prudential, market, or systemic objectives administered by such agencies.

Regulatory AuthorityRegulations can cover all providers of consumer financial products and services, including banks, thrifts, credit unions, non‐banks.◦ Includes all sorts of consumer financial products◦ Credit providers (mortgages, payday, vehicle title lending, small dollar, credit cards, etc.)

◦ Lessors where lease is functional equivalent of a financed purchase

◦ Parties providing real estate settlement services

◦ Deposit accounts and payment systems, including stored value cards and check cashing services

◦ Credit bureaus

◦ Debt collectors

◦ Credit counselors and debt managers

Regulatory AuthorityExclusions for

◦ Merchants

◦ most motor vehicle dealers

◦ persons regulated by the SEC

◦ persons regulated by a state insurance regulator

◦ persons regulated by the Farm Credit Administration

◦ Real estate agents, brokers and appraisers

◦ Manufactured home retailers

◦ Accountants

◦ Tax preparers if no credit is extended)(so a company offering refund anticipation loans would be covered)

◦ Attorneys

◦ Employee benefit and compensation plans

◦ Tax exempt organizations

Regulatory AuthorityAll regulations can be vetoed by a 2/3 vote of the Systemic Risk Council if the Council determines that the rule would compromise the safety and soundness of the U.S. banking system or would put the stability of the U.S. financial system at risk.◦ Council is made up of Sec. of Treasury (Chair), FRB chair, Comptroller of the Currency, CFPB Director, SEC chair, FDIC Chair, CFTC Chair, FHFA director, NCUA Chair and an independent insurance expert, appointed by President and subject to confirmation.

Decision to veto a CFPB regulation is subject to APA judicial review.

Regulatory AuthorityDodd‐Frank contained certain statutory mandates, including:◦ CFPB required to propose a single, integrated TILA/RESPA closing disclosure for real estate loans.◦ Final rule issued Nov. 20. 2013 and effective Oct. 3, 2015

◦ CFPB required to study pre‐dispute arbitration clauses before regulating.◦ Proposed rule issued May 5, 2016

◦ CFPB required to study reverse mortgages with authority to issue rules prior to study or as follow up.◦ Reverse Mortgage study issued June 4, 2015.

Dodd‐Frank also had certain statutory prohibitions:◦ No usury caps can be imposed by the CFPB.

Key Regulations ‐ FinalMortgage origination rules◦ Qualified mortgage and ability to repay rules

◦ Loan originator compensation

◦ Copies of appraisals

Integrated Mortgage Disclosures (TRID)

Mortgage Servicing and loss mitigation (and revisions issued in August 2016)

Home Mortgage Disclosure Act

International remittance transfers (Reg. E)

Key Regulations – Proposed or under developmentPayday Lending, Vehicle Title and other Small Dollar Lending

Arbitration Agreements

Pre‐paid cards

Debt Collection

Overdraft

Supervisory PowersDepository Institutions (banks, thrifts and credit unions) with more than $10 billion in assets (including their affiliates) –supervisory power for compliance with federal consumer financial laws and assessing risk to consumers and markets.◦ Smaller depositor institutions (Less than $10 billion in assets) are supervised by their primary federal or state banking regulator.

Non‐bank providers of consumer financial services, including mortgage originators and servicers, payday lenders, private student loan lenders.

Large participants in other consumer financial markets, as defined by CFPB rules. Currently includes consumer reporting, consumer debt collection, student loan servicing, international money transfers, and auto financing.

CFPB maintains list of supervised entities.

Supervisory Highlights and Compliance GuidesCFPB shares findings from recent examinations.◦ Mortgage servicing

Compliance aids and official guidance available for rules supervised

Enforcement AuthorityLarge Depository institutions (<$10 Billion)– CFPB has primary authority to enforce federal consumer financial laws.

Smaller Depository institutions (>$10 Billion) – CFPB has does not have enforcement authority, but must notify the relevant federal banking regulator in writing if CFPB has reason to know of a material violation of a federal consumer financial law.

Non‐depository entities ‐ CFPB has exclusive enforcement authority except where shared with the FTC.

Enforcement AuthorityRelief can include:◦ Rescission or reformation of contracts

◦ Refund of money or return of property

◦ Restitution

◦ Disgorgement for unjust enrichment

◦ Damages

◦ Public notification of violation

◦ Limitation on future conduct

◦ Civil Penalty◦ Up to $5,000 per day for violation of rule, final order, or condition imposed in writing by the

CFPB

◦ Up to $25,000 per day for reckless violation of federal consumer financial law

◦ Up to $1 million per day for knowing violation of federal consumer financial law

EnforcementKey recent actions:◦ Unauthorized opening of deposit and credit card accounts incentivized by sales target and compensation structure◦ Wells Fargo Bank, N.A. (Sept. 8, 2016)

◦ Credit card add‐on products◦ First National Bank of Omaha (Aug. 25, 2016)

◦ Student Loan Servicing◦ Wells Fargo Bank, N.A. (Aug. 22, 2016)

◦ Illegal overdraft service practices◦ Santander Bank, N.A. (July 14, 2016)

◦ Discriminatory Lending Practices◦ Santander Bank, N.A. (mortgages) (July 14, 2016)

◦ Debt Collection◦ Pressler & Pressler, LLP and New Century Financial Servicers, Inc. (April 25, 2016)

Market monitoring and research functionsStatute creates research unit to research, analyze and report on consumer markets, access to credit, consumer awareness, understanding and behavior, and traditionally underserved consumers.

Often, studies are conducted before rule‐making.

Market monitoring and research functionsMajor research papers:◦ Payday lending

◦ Online payday lending

◦ Single payment vehicle title lending◦ Arbitration 1 and 2◦ Credit Reporting and medical debt◦ Prepaid account agreements◦ Overdrafts data point and study

Annual Reports:◦ Annual Fair Lending Report◦ Fair Debt Collection Practices Act◦ College Credit Card Agreements◦ The state of the consumer credit market (every two years)◦ Student Loans

◦ Report to Congress issued July 19, 2012.

◦ 2015 Annual report of student loan ombudsman issued Oct. 14, 2015

Consumer ComplaintsStatute creates a consumer complaint unit that collects, monitors and responds to consumer complaints regarding consumer financial products.

Division is called “Consumer Response”

Complaints are forwarded to subject companies for response.◦ Complaint data are used in supervision, enforcement and rule‐writing

◦ Complaint data are shared with state and federal agencies

◦ Complaint data and outcomes are shared with the public through the complaint database.

Consumer ComplaintsMonthly complaint reports

Annual Report

Servicemembers complaint annual reports

Consumer Education and EngagementDivision that interfaces directly with consumers.

Statutorily required to have the following divisions:◦ Office of Financial Education

◦ Service members

◦ Older Americans

Also has divisions for:◦ Consumer Engagement

◦ Students and Young Consumers

◦ Financial Empowerment

Products like ASK CRPB, Owning a home, Your money your goals.

Iowa Supreme Court Update

9:30 a.m. - 10:15 a.m.

Presented byRyan Koopmans

Nyemaster Goode PC700 Walnut St

Suite 1600Des Moines, IA 50309Phone: 515-283-3173



9/15/2016

1

www.nyemaster.com2016

©2016 Nyemaster Goode, P.C.

IOWA SUPREMECOURT REVIEW

RYAN G. KOOPMANSDirect Number: (515) 283-3173 | E-Mail: [email protected]

700 Walnut, Suite 1600 | Des Moines, IA 50309-3899 | (515) 283-3100

Attorneys at Law | Offices in Des Moines, Ames and Cedar Rapids

OVERALL OPINION AUTHORSHIPName Total

OpinionsMajority Opinions

Concurring Opinions

Dissenting Opinions

Cady 16 10 5 1Wiggins 25 14 2 9Appel 21 15 2 4Hecht 18 13 1 4

Waterman 23 15 2 6Mansfield 26 14 2 10

Zager 15 10 2 3144 91 16 37

0 5 10 15 20 25 30

Zager

Cady

Hecht

Appel

Waterman

Wiggins

Mansfield

Majority Opinions

Concurring Opinions

Dissenting Opinions



DISSENTS



Term Total Non-unanimous % of Non-unanimous

2011 121 19 16%

2012 83 30 36%

2013 87 32 37%

2014 83 29 35%

2015 82 28 34%

9/15/2016

2

NUMBER OF DISSENTING OPINIONS: BY JUSTICE

2011 2012 2013 2014 2015 TOTAL

Cady 3 3 1 1 1 9

Wiggins 4 6 4 8 9 31

Appel 5 2 1 3 4 15

Hecht 3 2 5 5 4 19

Waterman 2 6 9 5 6 28

Mansfield 3 11 7 5 10 36

Zager 0 4 5 4 3 16

TOTAL 20 34 32 31 37 154



NUMBER OF DISSENTING VOTES: BY JUSTICE

2011 2012 2013 2014 2015 TOTAL

Cady 7 7 3 6 2 25

Wiggins 9 7 9 11 11 47

Appel 8 6 5 5 8 32

Hecht 12 4 8 9 8 41

Waterman 9 17 16 13 14 69

Mansfield 6 18 15 12 15 66

Zager 0 10 9 8 12 39

TOTAL 51 69 65 64 70 319



WHO DECIDES? (2015)



% in the majority

Cady 97

Wiggins 88

Appel 91

Hecht 91

Waterman 85

Mansfield 83

Zager 87

9/15/2016

3

WHO DECIDES? (2014)% in the majority

Cady 85

Wiggins 74

Appel 88

Hecht 76

Waterman 69

Mansfield 72

Zager 79




Cady 89

Wiggins 63

Appel 70

Hecht 60

Waterman 39

Mansfield 40

Zager 60



JUSTICE AGREEMENTNON-UNANIMOUS CASES 2015

Zag

er

Man

sfie

ld

Wat

erm

an

Hec

ht

Ap

pel

Wig

gin

s

Cad

y

Cady 54% 46% 46% 61% 61% 50%

Wiggins 32% 18% 18% 82% 89%

Appel 36% 14% 21% 93%

Hecht 29% 14% 21%

Waterman 64% 86%

Mansfield 64%

Zager



9/15/2016

4


Zag

er

Man

sfie

ld

Wat

erm

an

Hec

ht

Ap

pel

Wig

gin

s

Cad

y

Cady 48% 72% 69% 48% 62% 41%

Wiggins 34% 34% 31% 66% 66%

Appel 59% 41% 38% 86%

Hecht 56% 28% 24%

Waterman 59% 97%

Mansfield 56%

Zager




Zag

er

Man

sfie

ld

Wat

erm

an

Hec

ht

Ap

pel

Wig

gin

s

Cad

y

Cady 60% 40% 39% 60% 70% 63%

Wiggins 30% 13% 16% 90% 83%

Appel 40% 23% 19% 90%

Hecht 33% 17% 19%

Waterman 68% 90%

Mansfield 63%

Zager



REVERSAL RATES

Court of Appeals

Decided Affirmed %

Reversed %

Mixed %

47 26 53 21

District Court

Decided Affirmed

%

Reversed

%

Mixed

%

Other

%

79 39 39 18 4



9/15/2016

5

SOURCE OF JURISDICTION2015 – 2016 2014 – 2015

34%

49%

11%

3%2% 1%

Direct

Further Review

Attorney Discipline

Judicial Discipline

Certiorari

Certified Question

45%

40%

12%

1%1% 1%





IOWA SUPREMECOURT REVIEW

RYAN G. KOOPMANSDirect Number: (515) 283-3173 | E-Mail: [email protected]

700 Walnut, Suite 1600 | Des Moines, IA 50309-3899 | (515) 283-3100

Attorneys at Law | Offices in Des Moines, Ames and Cedar Rapids

OVERALL OPINION AUTHORSHIPName Total

OpinionsMajority Opinions

Concurring Opinions

Dissenting Opinions

Cady 16 10 5 1Wiggins 25 14 2 9Appel 21 15 2 4Hecht 18 13 1 4

Waterman 23 15 2 6Mansfield 26 14 2 10

Zager 15 10 2 3144 91 16 37

0 5 10 15 20 25 30

Zager

Cady

Hecht

Appel

Waterman

Wiggins

Mansfield

Majority Opinions

Concurring Opinions

Dissenting Opinions



DISSENTS



Term Total Non-unanimous % of Non-unanimous

2011 121 19 16%

2012 83 30 36%

2013 87 32 37%

2014 83 29 35%

2015 82 28 34%

NUMBER OF DISSENTING OPINIONS: BY JUSTICE

2011 2012 2013 2014 2015 TOTAL

Cady 3 3 1 1 1 9

Wiggins 4 6 4 8 9 31

Appel 5 2 1 3 4 15

Hecht 3 2 5 5 4 19

Waterman 2 6 9 5 6 28

Mansfield 3 11 7 5 10 36

Zager 0 4 5 4 3 16

TOTAL 20 34 32 31 37 154



NUMBER OF DISSENTING VOTES: BY JUSTICE

2011 2012 2013 2014 2015 TOTAL

Cady 7 7 3 6 2 25

Wiggins 9 7 9 11 11 47

Appel 8 6 5 5 8 32

Hecht 12 4 8 9 8 41

Waterman 9 17 16 13 14 69

Mansfield 6 18 15 12 15 66

Zager 0 10 9 8 12 39

TOTAL 51 69 65 64 70 319



WHO DECIDES? (2015)



% in the majority

Cady 97

Wiggins 88

Appel 91

Hecht 91

Waterman 85

Mansfield 83

Zager 87


Cady 85

Wiggins 74

Appel 88

Hecht 76

Waterman 69

Mansfield 72

Zager 79




Cady 89

Wiggins 63

Appel 70

Hecht 60

Waterman 39

Mansfield 40

Zager 60




Zag

er

Man

sfie

ld

Wat

erm

an

Hec

ht

Ap

pel

Wig

gin

s

Cad

y

Cady 54% 46% 46% 61% 61% 50%

Wiggins 32% 18% 18% 82% 89%

Appel 36% 14% 21% 93%

Hecht 29% 14% 21%

Waterman 64% 86%

Mansfield 64%

Zager




Zag

er

Man

sfie

ld

Wat

erm

an

Hec

ht

Ap

pel

Wig

gin

s

Cad

y

Cady 48% 72% 69% 48% 62% 41%

Wiggins 34% 34% 31% 66% 66%

Appel 59% 41% 38% 86%

Hecht 56% 28% 24%

Waterman 59% 97%

Mansfield 56%

Zager




Zag

er

Man

sfie

ld

Wat

erm

an

Hec

ht

Ap

pel

Wig

gin

s

Cad

y

Cady 60% 40% 39% 60% 70% 63%

Wiggins 30% 13% 16% 90% 83%

Appel 40% 23% 19% 90%

Hecht 33% 17% 19%

Waterman 68% 90%

Mansfield 63%

Zager



REVERSAL RATES

Court of Appeals

Decided Affirmed %

Reversed %

Mixed %

47 26 53 21

District Court

Decided Affirmed

%

Reversed

%

Mixed

%

Other

%

79 39 39 18 4



SOURCE OF JURISDICTION2015 – 2016 2014 – 2015

34%

49%

11%

3%2% 1%

Direct

Further Review

Attorney Discipline

Judicial Discipline

Certiorari

Certified Question

45%

40%

12%

1%1% 1%



Surviving the Fire Swamp: I-9s, Immigration-related Anti-discrimination and Unexpected

Challenges of Unusual Size

10:30 a.m. - 11:15 a.m.

Presented byLori Chesser

Davis Brown Law Firm215 10th St, Suite 1300

Des Moines, IA 50309Phone: 515-288-2500



#2767545

If we consider compliance the way we navigate potential hazards along the journey of operating a business, employment verification may seem like a small, if muddy, puddle. Yes, we have to complete the I-9, but after all, how many mistakes can one make on a (now) two-page1 form?2 And who is going to look at it?3 And really, what can go wrong?4 This outline is not arguing that I-9 compliance is the raging river of tax or environmental regulations. However, it is a place surprisingly fraught with dangers. Some of these are eminently avoidable, while others are less subject to our control. Understanding that they exist will help us when confronting them. Therefore, rather than thinking in terms of a muddy puddle, a better comparison is the Fire Swamp in the droll movie that has become something of a cult classic, The Princess Bride.5.

I. I-9s I-9s are the like the “flame spurt” in Fire Swamp6, they can cause pain (fines or the occasional criminal penalty) but can be avoided with some effort. Unlike the fire spurt, following the I-9 rules requires more attention than listening for a popping sound. The I-9 rules are found in Immigration & Naturalization Act (“INA”) §274A(a)(4) and 8 CFR Part 274a. U.S. Citizenship & Immigration Service (“USCIS”) maintains resources for employers including the Handbook for Employers: Guidance for Completing the Form I-9 (M-274),7 and a website called “I-9 Central.”8 It also conducts periodic webinars and provides other educational resources.9 Penalties for I-9 violations include civil fines, criminal penalties (when there is a pattern or practice of violations), debarment from government contracts, court-ordered back pay (in the case of discrimination) and court-ordered hiring (in the case of discrimination). Civil fines range from $110 per form for “paperwork” violations to $16,000 per worker for third offense unlawful discrimination or third offense “knowing hire” of an unauthorized worker.10

1 The I-9 was a one page form until the most recent version revised March 8, 2013. See https://www.uscis.gov/i-9. 2 The current form has 66 blanks, all of which are potential errors that could lead to a fine, not to mention other errors in failing to provide or providing too much information. 3 I-9s can be audited by Immigration & Customs Enforcement or Department of Labor, Wage & Hour Division. 4 I won’t spoil the suspense here. Read on. 5 To wit: [after Westley rescues her from the lightning quicksand]: Buttercup: We'll never succeed. We may as well die here. Westley: No, no. We have already succeeded. I mean, what are the three terrors of the Fire Swamp? One, the flame spurt - no problem. There's a popping sound preceding each; we can avoid that. Two, the lightning sand, which you were clever enough to discover what that looks like, so in the future we can avoid that too. Buttercup: Westley, what about the R.O.U.S.'s? Westley: Rodents Of Unusual Size? I don't think they exist. [Immediately, an R.O.U.S. attacks him]. See http://www.imdb.com/title/tt0093779/quotes. 6 See note 1, supra. 7 See https://www.uscis.gov/sites/default/files/files/form/m-274.pdf. 8 See https://www.uscis.gov/i-9-central. 9 See https://www.uscis.gov/i-9-central/learning-resources. 10See https://www.uscis.gov/i-9-central/penalties. See also 8 CFR §274a.10. Note that a proposal is pending for a fine increase.

The criminal penalties under the INA apply for “engaging in a pattern or practice of hiring, recruiting or referring for a few unauthorized aliens” and can result in up to six months in prison.11 Most I-9 rules are related to keeping employers from hiring unauthorized workers. However, the other side of the regulatory coin is keeping employers from engaging in unlawful discrimination.12 This section will refer to discrimination, but also it will be discussed in the “Unlawful Immigration-Related Employment Discrimination” section. Although not an I-9 training, the following are highlights of I-9 completion considerations:

A. Complete an I-9 for all employees who need one. An employer should have an I-9 for any employee hired after November 6, 1986, who is either still working for the company or is within the retention period (one year after termination or three years after hire, whichever is longer).13. 1. I-9s are required for “employees,” which are defined as “individual[s] who

provides services or labor for an employer for wages or other remuneration but does not mean independent contractors . . . or those engaged in casual domestic employment.”14

a. “Independent contractors” are defined as “individuals or entities who carry on independent business, contract to do a piece of work according to their own means and methods, and are subject to control only as to results. Whether an individual or entity is an independent contractor, regardless of what the individual or entity calls itself, will be determined on a case-by-case basis. Factors to be considered in that determination include, but are not limited to, whether the individual or entity: supplies the tools or materials; makes services available to the general public; works for a number of clients at the same time; has an opportunity for profit or loss as a result of labor or services provided; invests in the facilities for work; directs the order or sequence in which the work is to be done and determines the hours during which the work is to be done.”15

b. Note, however, that using an independent contractor known to be working without authorization will result in the person or entity being considered to have hired the unauthorized worker for the purposes of immigration law enforcement.16

11 8 CFR §274a.10(a). 12 See INA §274B. 13 8 CFR §274a.1(c). 14 8 CFR §274a.1(f). 15 8 CFR §274a.1(j). 16 See Immigration & Naturalization Act (“INA”) §274A(a)(4) and 8 CFR §274a.5.

B. Complete I-9s at the right time. Completing too soon or too late can result in a fine or an allegation of discrimination. 1. The I-9 must be completed upon “hire”. “Hire” means “the actual

commencement of employment of an employee for wages or other remuneration.”17 The key is whether offer and acceptance has occurred.

2. The employee must complete Section 1 upon hire (i.e., after offer and acceptance, but not later than the first day of employment).18

3. The employer has three day to complete Section 219 (unless the employment will be for a period of less than three days, in which case the I-9 must be completed upon hire).20

C. Adhere to the documentation guidelines (if you can figure them out). The I-9 requires that employees present documents to prove identity and work authorization. This can be in the form or one or several documents. “List A” documents are those that prove both identity and work authorization in one document, except when the List A document is actually two or even three documents taken together. You will note that List A in Section 2 of the I-9 has space for three documents.21 “List B” documents prove identity and “List C” documents prove authority to work in the United States. If the employee is not presenting a List A document, she must present both a List B and List C document. Common mistakes include: 1. Not collecting enough documents. If the documents collected do not show the

employee’s authority to work the employer can be fined for the “paperwork” violation and may be employing unauthorized workers. If Immigration & Customs Enforcement (“ICE”), the agency that inspects I-9s and issues fines, believes this was intentional, fines are elevated and criminal penalties could apply if it is found to be “pattern or practice”.22

2. Collecting too many documents. If the employer is found to have required employees to present excess documents, that practice may be classified as “document abuse” by the Office of Special Counsel for Immigration-Related Unfair Employment Practices (“OSC”).23

3. Accepting expired documents. No can do.24

17 8 CFR §274a.1(c). 18 8 CFR §274a.2(b)(1)(i)(A). 19 8 CFR §274a.2(b)(1)(ii)(B). 20 8 CFR §274a.2(b)(1)(iii). 21 See I-9 blank form at the end of this outline. 22 See 8 CFR §274a.10. 23 See https://www.justice.gov/crt/office-special-counsel-immigration-related-unfair-employment-practices. 24 See M-274 p. 5.

4. Refusing to accept documents with a future expiration date.25 This rule is more nuanced. Refusing to accept a document that expires in the future can be unlawful discrimination. However, in certain situations the employer may inquire into immigration status. If hiring would mean immigration sponsorship, that is never required and the employer may refuse to hire.26

5. Not recording all the information about a document.27 If the document is not correctly identified, ICE will consider it to not have been collected. Employers may keep copies of documents, so long as they do so in a way that does not violate the anti-discrimination provisions.28 If the employer kept a copy of the document, information missing on the form may be provided as a technical correction.29

6. Failing to assure that the employee completes Section 1 fully, and signs and dates the form. Although the employee must complete Section 1, the employer may be fined if Section 1 is incomplete. If Section 1 is not signed, then there is no way to prove the date it was completed, and it will be considered to be completed untimely.

7. Failing to sign and date Section 2. Again, without a date, ICE will consider the I-9 to not have been completed timely.

D. Reverify employment authorization correctly. 1. Some work authorization documents have a limited duration. The employer is

responsible for calendaring expirations and discontinuing employment (whether by unpaid leave or termination) when work authorization ends. If the employer continues employment after the expiration of a work authorization document, that is considered a “knowing hire” violation, and will give rise to higher penalties or possibly criminal penalties if it is a pattern or practice.30

a. In certain instances, the filing of an extension request or other action will automatically extend work authorization.31 The Employer Handbook (M-274) provides guidance for annotating the I-9 to show that the employer was aware of the expiration and acted properly. Terminating an employee who should have benefitted from an automatic extension could be a discriminatory practice.32

25 See M-274 p. 12. 26 See OSC Technical Assistance letter issued June 15, 2016, https://www.justice.gov/crt/file/867386/download. 27 The form requires document title, issuing authority, document number and expiration date. 28 8 CFR §274a.2(b)(3). 29 See generally https://www.ice.gov/factsheets/i9-inspection. 30 8 CFR §§ 274a.3 and 274a.10. 31 Filing an extension of a “non-immigrant” work authorization, such as H-1B or L-1, will automatically extend the work authorization for 240 days. Temporary Protected Status (“TPS”) is usually extended by action of USCIS when close to expiration for a period of time to allow a new EAD to be issued. 32 See, e.g., the initiative of the U.S. Department of Justice collaborating with the government of El Salvador to combat employment discrimination because of the long-standing El Salvadoran TPS grant. https://www.justice.gov/opa/pr/justice-department-partners-republic-el-salvador-combat-employment-discrimination.

b. Other documents are never to be reverified. For instance, List B (identity) documents are not to be reverified. “Green cards” (I-551s) are also not to be reverified. Doing so is a discriminatory practice.33

2. Another problem with reverification is the lack of clarity of the form. Re-verifications are to be completed on Section 3. However, Section 3 has space for only one document. Often more than one document is presented. Employers may use a new I-9 to re-verify but that is confusing. The lack of space can lead to employers collecting too few documents. Section 3 may also be used for re-hires in certain situations. This is even more confusing. Don’t get me started.

3. Finally, employers may unlawfully discriminate if they require the employee present the same type of document for reverification that was originally presented. Employees may present any document or combination of documents to satisfy the I-9 requirements upon reverification.34 This is in contrast to the rule for receipts, wherein most instances the employee must present the same document for which a receipt was provided.35

E. Determine how much document training is needed. Another conundrum in the I-9 process is the standard to which employers will be held. The form requires employers to sign under penalty of perjury that the representative has reviewed the documents presented, they appear to be genuine and to relate to the employee named, and to the best of the representative’s knowledge the employee is authorized to work.36 While employers are not required to be document experts, USCIS does provide examples of valid documents in the Employer Handbook (M-274) and makes other resources for determining the validity of documents available.37 Employers must decide how much training is in their best interest depending on their particular situation.

F. A word about audits. 1. Government audits: A government audit of the I-9s usually starts with a three-

day Notice of Inspection (“NOI”). However, ICE can obtain a subpoena to seize documents if warranted. While rare, I-9 audits are not unheard of, although they are generally focused on high-risk industries (where unauthorized employment is more pervasive) or based on a tip. The I-9 inspection process is outlined on the ICE website.38 If a business is audited, counsel with knowledge of the I-9 rules should be

33 See https://www.uscis.gov/i-9-central/complete-correct-form-i-9/completing-section-3-reverification-and-rehires. 34 See M-274 p. 12 et seq. for reverification rules. 35 See M-274 p. 7 for receipt rules. 36 See I-9 form Section 2 Certification. 37 E.g., Guide to Selected U.S. Travel and Identity Documents (M-396), published by USCIS and prepared by the Forensic Laboratory. 38 See https://www.ice.gov/factsheets/i9-inspection.

engaged, preferably the day the NOI is received and immediately if ICE shows up with a subpoena. The government is not here to help. Additionally, time to respond, documents subject to inspection, and fines can all be negotiated in many cases. The process does allow for correction of technical errors and that process must also be done correctly.

2. Internal audits: Employers may (and should) conduct internal audits to determine if they are in compliance. ICE and OSC recently published guidance for employers undertaking this process.39 An important component of an internal audit is I-9 training, which is considered a showing of good faith by the employer in attempting to comply with the I-9 process. An I-9 training can uncover systemic problems, such as hiring procedures that prevent timely completion of the form (either too early or too late), violations in remote hiring (the person signing the I-9 must have inspected the original document), or misconceptions about what documents are acceptable.

G. A word about E-Verify. E-Verify is the U.S. government’s attempt at an electronic “solution” to avoid hiring people who are not authorized to work. It does not replace completing an I-9. It is an additional process that is that optional unless the employer is doing business in a State that requires E-Verify or is subject to the federal contracting rules that require using E-Verify.40 1. General process: The employer enters certain information about the employee

from the I-9 (after I-9 completion), including the employee’s name, date of birth and Social Security number41 and views a photo ID42 to compare it with the on-line “photo tool” that may be available. If the data does not match the government’s records, a “tentative non-confirmation” (“TNC”) will be issued. The employee may challenge the TNC by visiting the designated government office. If the employee challenges, the employment continues unless a “final non-confirmation” is received.43 Refusing to allow an employee to challenge a TNC is a discriminatory practice.44

2. Downsides: E-Verify is not a perfect system. Use of a stolen identity often goes undetected. False negatives are also possible. The main downside is that the employer must sign a memorandum of understanding that basically waives any

39 See https://www.ice.gov/sites/default/files/documents/Document/2015/i9-guidance.pdf. 40 See Executive Order 12989 (June 11, 2008), and Federal Acquisition Regulation (“FAR”) rule (FAR case 2007-013, Employment Eligibility Verification, issued Nov. 14, 2008). 41 If the employer uses E-Verify, the Social Security number is a required field on the I-9. See E-Verify User Manual for Employers (June 2014), https://www.uscis.gov/sites/default/files/files/nativedocuments/E-Verify_Manual.pdf. 42 If the employer uses E-Verify, the List B document must contain a photo. See E-Verify User Manual, supra. 43 Id. 44 See https://www.justice.gov/sites/default/files/crt/legacy/2015/03/20/Empl.Avoid.Discrim.I-9andE-V.pdf.

objections to search and seizure related to E-Verify compliance.45

3. Benefits: Besides assisting in the detection of unauthorized employment and showing good faith, participating in E-Verify benefits employers who hire temporary workers who have graduated from U.S. colleges and universities. The student visa program allows a period of work authorization that can be extended from one year to three years if the student graduated in a STEM46 field and the employer uses E-Verify. With the dearth of employment visas available, this benefit can outweigh other concerns with the program.

II. Unlawful Immigration-Related Employment Discrimination

Like the “lightening sand” in Fire Swamp, failing to recognize unlawful immigration-related discrimination may result in an unpleasant experience, but you can avoid it once you know what it looks like. A recent example of what it looks like is the following:

Justice Department Settles Immigration-Related Discrimination Claim Against San Diego Staffing Company

The Justice Department reached an agreement today with TEG Staffing Inc., also known as Eastridge Workforce Solutions, a temporary staffing agency headquartered in San Diego, to resolve allegations that their Mira Mesa, California, office discriminated against work-authorized non-U.S. citizens in violation of the Immigration and Nationality Act (INA). The department’s investigation found that from at least March 2014 until at least September 2015, Eastridge had a pattern or practice of requesting specific immigration documents from non-U.S. citizens for the Form I-9 and E-Verify processes. In contrast, Eastridge allowed U.S. citizens to present whichever valid documents they wanted to present to prove their work authorization. Under the INA, all workers, including non-U.S. citizens, must be allowed to choose whichever valid documentation they would like to present from the Lists of Acceptable Documents to prove their work authorization, such as a driver’s license and unrestricted Social Security card. It is unlawful for an employer to limit employees’ choice of documentation because of their citizenship or immigration status. Under the terms of the settlement agreement, Eastridge will pay $175,000 in civil penalties, and among other provisions, will undergo department monitoring and review of its processes for verifying the work authorization of newly hired employees.

45 See https://www.uscis.gov/sites/default/files/USCIS/Verification/E-Verify/E-Verify_Native_Documents/MOU_for_E-Verify_Employer.pdf. 46 Science, technology, engineering and math.

“Staffing agencies and employers must comply with federal law to ensure they don’t discriminate against lawful, authorized U.S. workers,” said Principal Deputy Assistant Attorney General Vanita Gupta, head of the Justice Department's Civil Rights Division. “Workers who get a job through a staffing agency should not confront unfair and unlawful barriers to joining the workforce and contributing to our economy.”47

More specifically, the following types of discrimination are unlawful per OSC:

1) Citizenship or immigration status discrimination with respect to hiring, firing, and recruitment or referral for a fee by employers with four or more employees. Employers may not treat individuals differently based on citizenship or immigration status. U.S. citizens, recent permanent residents, temporary residents, asylees and refugees are protected from citizenship status discrimination. Exceptions: permanent residents who do not apply for naturalization within six months of eligibility are not protected from citizenship status discrimination. Citizenship status discrimination which is otherwise required to comply with law, regulation, executive order, or government contract is permissible by law. 2) National origin discrimination with respect to hiring, firing, and recruitment or referral for a fee, by employers with more than three and fewer than 15 employees. Employers may not treat individuals differently because of their place of birth, country of origin, ancestry, native language, accent, or because they are perceived as looking or sounding "foreign." All U.S. citizens, lawful permanent residents, and work authorized individuals are protected from national origin discrimination. The Equal Employment Opportunity Commission has jurisdiction over employers with 15 or more employees. 3) Unfair documentary practices related to verifying the employment eligibility of employees. Employers may not request more or different documents than are required to verify employment eligibility, reject reasonably genuine-looking documents, or specify certain documents over others with the purpose or intent of discriminating on the basis of citizenship status or national origin. U.S. citizens and all work authorized individuals are protected from document abuse. 4) Retaliation/Intimidation. Individuals who file charges with OSC, who cooperate with an OSC investigation, who contest action that may constitute unfair documentary practices or discrimination based upon citizenship or immigration status, or national origin, or who assert their rights under the INA's anti-discrimination provision are protected from intimidation, threats, coercion, and retaliation.48

47 See https://www.justice.gov/opa/pr/justice-department-settles-immigration-related-discrimination-claim-against-san-diego-0. 48 See https://www.justice.gov/crt/types-discrimination.

OSC also provides webinars and other educational materials to employers, employees and the public.49 OSC is an active agency that takes the initiative in rooting out discrimination in addition to acting quickly on tips. It publishes its settlement agreements and complaints on its website50 and will provide technical assistance51. It is an agency under the Department of Justice, rather than the Department of Homeland Security, where other I-9-related agencies reside.

III. Unexpected Challenges of Unusual Size Like the R.O.U.S.'s in the Fire Swamp, it is hard to believe the type and scope of compliance conundrums that exist in employment verification. Being on the look-out for them can help in avoiding them or fighting them back. Most of these challenges have to do with the tension between vigilance against employing persons who are not authorized to work and the anti-discrimination provisions, as well as the concept of “constructive knowledge” of unauthorized employment.

A. “Constructive knowledge” An employer cannot “knowingly” hire a person not authorized to work.52 Such “knowing” includes:

[N]ot only actual knowledge but also knowledge which may fairly be inferred through notice of certain facts and circumstances which would lead a person, through the exercise of reasonable care, to know about a certain condition. Constructive knowledge may include, but is not limited to, situations where an employer: ... (ii) Has information available to it that would indicate that the alien is not authorized to work, such as Labor Certification and/or an Application for Prospective Employer; or (iii) Acts with reckless and wanton disregard for the legal consequences of permitting another individual to introduce an unauthorized alien into its workforce or to act on its behalf.53

In 2012, the Executive Office for Immigration Review, Office of the Chief Administrative Hearing Officer (“OCAHO”) addressed the concept of constructive knowledge in its order in the matter of United States v. Associated Painters, Inc., 10 OCAHO no. 1151 (May 30, 2012). In this case, Associated Painters had been inspected by the former Immigration & Naturalization Service (“INS”) and 34 of its employees had been found to have data not matching government databases. The company was instructed that unless the employees could resolve such discrepancy, the company would be considered to be knowingly employing unauthorized workers. The employer

49 See https://www.justice.gov/crt/osc-webinars. 50 See https://www.justice.gov/crt/osc-cases-and-matters. 51 See https://www.justice.gov/crt/hotline-technical-assistance-referral-agencies. 52 See 8 CFR §274a.1.

53 See 8 CFR §274a.1(l)(1).

discharged the 34 employees. INS provided instruction to the company that any of the workers so terminated would need to complete I-9 compliance steps with documents other than those presented at the inspection to be rehired. An inspection of the company about nine years later revealed that three of the terminated employees had been rehired four to eight years after the initial inspection using the same Social Security number as originally presented. The government alleged that the company had constructive knowledge that they were not authorized to work. OCAHO noted that, “It is well established, however, that constructive knowledge may be found when an employer receives specific information from a governmental enforcement agency that casts doubt on the employment authorization of an employee, and the employer subsequently continues to employ the individual without taking adequate steps to reverify the individual’s employment eligibility.”54 However, it also noted precedent55 that the doctrine of constructive knowledge must be applied sparingly to preserve the “delicate balance” struck when the law requiring I-9s was enacted.56 The order expressed the need to look to the totality of the circumstances to determine if the employer “cultivated deliberate ignorance”57 or whether the re-hiring was an unintentional error. In this case, the evidence did not support a finding of constructive knowledge. While the decision makes sense and is helpful, we are left with a standard that is a bit like the one for obscenity: We are supposed to know it when we see it.58

B. Recent practice challenge example

A recent example of this conundrum is the challenged raise by a confluence of Affordable Care Act (“ACA”),59 employment law and immigration-related compliance. The following information is taken from a blog written in conjunction with a health law attorney and tax attorney in our firm, and later discussions with some of our other employment and health lawyers.60

54 See United States v. Candlelight Inn, 4 OCAHO no. 611, 212, 223-24 (1994); United States v. Noel Plastering & Stucco, Inc., 3 OCAHO no. 427, 296, 298-300 (1992), aff’d, 15 F.3d 1088 (9th Cir. 1993); United States v. New El Rey Sausage Co., 1 OCAHO no. 66, 389, 408-11 (1989), modified on other grounds by the Chief Administrative Hearing Officer, 1 OCAHO no. 78, 542 (1989), aff'd, 925 F.2d 1153 (9th Cir. 1991); United States v. Mester Mfg. Co., 1 OCAHO no. 18, 53, 76-77 (1988), aff’d, 879 F.2d 561 (9th Cir. 1989). See generally, John B. Kaiser, Note, IRCA’s Employer Sanctions Provisions Under Mester v. INS: Constructing a Constructive Knowledge Standard, 4 Geo. Immigr. L.J. 681 (1990). 55 See Collins Food International, Inc. v. INS, 948 F.2d 549, 555 (9th Cir. 1991). 56 The Immigration Reform and Control Act of 1986 (“IRCA”). 57 See Associated Painters, p. 6 58 See Jacobellis v. Ohio, 378 U.S. 184 (1964). 59 Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 et seq. (2010). 60 To give credit where credit is due, the attorneys are Susan Freed, Michael Gilmer, Jo Ellen Whitney, Ken Watkins and Becky Knutson.

The Affordable Care Act (ACA) requires employers with 50 or more employees to provide certain employees with a Form 1095-C, a copy of which must also be provided to the IRS. This form reports the health insurance coverage offered to the employee in the prior year.61 It is used by the IRS to assess the employer’s compliance with the ACA’s employer shared responsibility provision, as well as to determine whether the employee qualifies for a federal subsidy for coverage purchased through the Health Insurance Marketplace. When reporting the offer of coverage, employers must list the employee’s name, birth date and Social Security Number (SSN). Employers with self-insured plans must also provide this information for any spouse or dependents with coverage under the employer’s plan through the employee. Upon receipt of the Form 1095-C, the IRS verifies whether the individual’s name and tax identification number is correct by matching it against a file containing all SSNs and all identification numbers issued by the IRS. If a match is not found, the IRS may issue a Notice 972CG proposing the imposition of penalties for failure to timely file a correct information return. To avoid the penalty, an employer has 45 days to respond with information or show that any failure to provide correct information is due to “reasonable cause” (rather than willful neglect) to have the penalty waived. To demonstrate “reasonable cause,” an employer must show that it acted in a “responsible manner” by following specific procedures, and that the failure was either a result of significant mitigating factors or was due to events beyond the employer’s control. The IRS regulations include specific actions the employer must take to avoid the fines listed above if the information to correct the error cannot be obtained. If the reason the employer cannot provide a correct SSN is that the employee has failed to provide it, the employee may be subject to his or her own $50 fine for each failure. The employer may demonstrate reasonable cause and avoid the fines listed above, by:

1. Making the initial request for the SSN timely; 2. Making subsequent annual requests no later than December 31 in the year in which the

Notice 972CG is received; 3. Making subsequent annual requests in a manner dictated by the regulations; and 4. If a corrected SSN is received as a result of the request, using the corrected number

starting with the first information report due after receipt of the corrected number. The Form I-9 must be completed by all employers after each hire to confirm the employee’s authority to work in the United States. The employer is responsible for determining if documents presented satisfy the I-9, appear to be genuine, and relate to the employee. Even when the I-9 was completed correctly and original documents were reviewed, if the employer becomes aware of information that would create “constructive knowledge” that the employee is not authorized to work, steps to confirm work authorization – or to terminate

61 Note that references for tax or ACA will not be provided as these laws exceed the scope of the outline. This example is offered for illustrative purposes only.

employment if the employee is not authorized to work – must be taken to avoid potential liability. These steps must be also taken in a manner that avoids unlawful discrimination. The SSN is not a required data point for an I-9 unless the employer is enrolled in E-Verify. However, some employees do present a Social Security card as part of I-9 compliance, in which case the SSN would be recorded on the I-9. The first question for both benefits and I-9 compliance is whether the notice is based on the correct SSN, employee name and birth date. The Notice 972CG may be issued in error. Complying with the IRS process will provide an employee the chance to correct the error. If the employee does not respond to employee requests for a corrected SSN, we are faced with a potentially difficult question for I-9 compliance: Does the lack of response by the employee amount to “constructive knowledge” that she is not authorized to work or give rise to a duty to investigate further? No direct guidance to answer these questions has been provided by either ICE or OSC. The scenario is strikingly similar to one that arose several years ago when the Social Security Administration (SSA) issued “no-match letters” to companies to assist in cleaning up payroll withholding accounts. If the SSN, name, and birth date do not match SSA records, the withheld payments go to the “suspense fund” rather than into the employee’s account. The no-match letters were an attempt to correct these records and credit the employees’ accounts accurately. ICE initially took the position that these no-match letters created a duty to investigate on the part of the employer regarding work authorization of the employees listed in the letters. ICE tried to promulgate regulations to this effect, but never finalized them because of public comments pointing out the many reasons why such rules would be unworkable. The guidance from ICE after the failed regulation was that a no-match letter alone was not constructive knowledge for I-9 compliance purposes. The no-match letter guidance is the closest we have to inform the Form 1095-C scenario. SSN mismatches may result from numerous causes, such as number transpositions in birth dates (month/year is listed in a different order in many countries) or name changes (including marriage or “Americanization”). The process to correct an SSN mismatch can take a long time. Also, unless the employer gives paid time off to go to the Social Security office, employees may be unable to afford to correct the error. Other compliance questions have arisen out of this scenario, such as whether the employer should check the I-9 when a Notice 972CG is received or whether doing so would start down the road to an unlawful discrimination allegation, since it is more likely that such notices will be issued to non-native born employees.

IV. Conclusion While this outline is certainly not an exhaustive treatment of the subject, perhaps it will provide some warnings that will help you, like Wesley and Buttercup, emerge from the Fire Swamp relatively unscathed.

Franchise Law Update

11:15 a.m. - 11:45 a.m.

Presented by

Mark HamerHamer Law Office PLLC

2710 N Dodge St Suite 5Iowa City, IA 52245

Phone: 319-248-4870

Emily AlwardAlward Law Office

2710 N. Dodge St. Suite 5Iowa City, Iowa 52245

Phone: 319-248-4870 ext 103



Annual Franchise Update

September 23, 2016

Mark T. Hamer Hamer Law Office, PLLC

[email protected] www.hamerlawoffice.com

Emily Alward

Alward Law Office [email protected]

2710 N. Dodge Street, Suite 5 Iowa City, IA 52245

Telephone: 319/248-4870 Fax: 319/338-0834

2

Franchise Update Trade Regulation/Corporate Counsel Joint Seminar

FRANCHISE CASE UPDATE

I. There were no new franchise decisions from the United States Supreme Court, Iowa

Supreme Court, or Iowa Court of Appeals in the past year.

II. 8th Circuit Court of Appeals

a. Nissan North America, Inc. v. Wayzata Nissan, LLC, 792 F.3d. 921, (July 2, 2015).

i. Issue was whether Nissan was encroaching on a franchisee territory in

establishing a new dealership.

ii. Minnesota motor vehicle dealer law.

iii. Federal Court properly dismissed the declaratory action brought by

Nissan in favor of a pending state court action to decide the same issues.

b. Don’s Crumble Beef Sandwich Shoppe, LLC, et al., v. Maid-Rite Corporation, et al., U.S.

Court of Appeals, Eighth Circuit, CCH ¶15,742 (Mar. 11, 2016).

i. Overturning a magistrate and district court to allow for franchisor

counsel to withdraw from the case.

ii. Franchisor failed to pay attorneys or provide certain information related

to its defense.

iii. Attorney’s provided adequate notice; there was adequate time to secure

new counsel; and, court found no prejudice to third parties.

III. Federal Agencies—U.S. Department of Labor (DOL)

a. January 2016: the DOL released an opinion and related Q & A explaining the

DOL’s new joint employer analysis under the FLSA.1

1 Administrator’s Interpretation No. 2016-1, Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act, Jan. 20, 2016, available at: https://www.dol.gov/whd/flsa/Joint_Employment_AI.htm.

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i. Multi-factor joint employment test based on the facts of each situation

and “economic realities”. In the franchise context, this would include an

analysis of whether the employee of the franchised business was

economically dependent on the franchisor, and thus jointly employed by

the franchisor.

ii. “The form of business organization, such as a franchise, does not

necessarily indicate whether joint employment is present. Indeed, the

existence of a franchise relationship, in and of itself, does not create joint

employment.”

b. The joint employment analysis applicable under the FLSA is not the same as the

analysis applied by the National Labor Relations Board (NLRB).

IV. Federal Agencies-- National Labor Relations Board (NLRB)

a. McDonald’s case still pending

i. On July 29, 2014, the NLRB General Counsel determined that McDonald’s was a joint employer with its franchisees.

ii. The General Counsel’s argument centers around the level of control McDonald’s exerts over its franchisees in all areas of operations, including staffing.

iii. Classification of McDonald’s as a joint employer could have vast, negative consequences by setting a precedent that could reach far beyond McDonald’s.

iv. In December 2014 the NLRB Office of the General Counsel issued 86 complaints against McDonald’s franchisees and their franchisor McDonald’s USA, LLC, as joint employers.

1. Complaints allege violations of employee rights at various locations around the country by making statements and taking actions against them for engaging in activities aimed at improving their wages and working conditions.

2. Office of General Counsel is working with the parties in an effort to settle many of the complaints.

3. Complaints from six NLRB regions have proceeded to a consolidated litigation, which commenced on March 30, 2015 and is ongoing.

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b. NLRB has asserted that optional tools provided by the franchisor are indicative

of a joint employer relationship.

FRANCHISE ISSUES: 2015-2016

V. New FDA Menu Labeling Rules

a. Enforcement to begin on May 5, 2017

b. Applies to restaurants/retail food chains with 20+ locations (targets franchises)

c. Requires clear and conspicuous statement of nutritional information (calorie

count) for most menu items.

d. Substantiation and documentation required to support nutritional information.

e. Positive aspect: allows franchisors to maintain uniformity in menus and menu

boards. Federal rules preempt state and local rules.

f. Negative aspect: additional costs for franchises

g. New rules may affect those franchise restaurants that have allowed individual

franchisees to vary their menu or food suppliers more than less flexible systems.

This flexibility would likely be eliminated.

VI. Data Privacy and Security

a. Breaches of consumer data continue to occur at an alarming rate and on a large

scale. For example, in July of 2016 over 1,000 Wendy’s locations had customer

debit and credit card information stolen.

b. Average cost of a data breach to a company is over $4 million2, this includes the

costs associated with identifying and remedying the breach as well as lost

business revenues.

c. Section 5 of the FTC Act gives the Federal Trade Commission (FTC) broad

authority concerning privacy and data security.

d. The FTC has not given notice of standards for data security, and indicates that it

will not do so. However, recent decisions give a very limited degree of guidance.

Two examples would be:

2 2016 Ponemon Cost of Data Breach Study, IBM Security, http://www-03.ibm.com/security/data-breach/

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i. Franchisors may be vicariously liable for acts committed by franchisees.

See In Re Aaron’s3 (franchisees breached customer privacy and security).

ii. Franchisors may be liable for failure to create adequate information

security programs to guard against franchisee breach of franchisor

systems– Wyndham Worldwide Corp.4

VII. Defend Trade Secrets Act of 2016 (“DTSA”)

a. Relevance to franchising:

i. Franchisors own trade secrets, often the franchised business model is

built upon trade secrets.

ii. Franchisors/Franchisees are often employers

b. The DTSA became effective on May 11, 2016.

c. What is the DTSA?

i. Creates a federal private right of action for trade secrets in addition to

existing state laws. Trade secret owners now have the choice to pursue

relief in federal or state court.

ii. Federal remedies may include:

1. Injunctive relief

2. Damages

3. Possibility of double damages for willful and malicious

misappropriation.

iii. The DTSA allows for new recovery mechanisms.

iv. The DTSA creates stronger protections for trade secrets during litigation.

v. The DTSA contains new provisions addressing unique digital issues that

arise in trade secret cases.

d. DTSA Whistleblower Immunity Provision and Disclosure Requirement

i. The DTSA contains a whistleblower immunity provision concerning the

employee disclosure of trade secrets to law enforcement officials for the

purpose of reporting or investigating possible violations of law.

3 Docket No. C-4442 (Fed. Trade Comm’n Mar. 11, 2014), http://www.ftc.gov/enforcement/cases-proceedings/122-3256/aarons-inc-matter. 4 Wyndham Worldwide Corp., 10 F. Supp. 3d 602 (D.N.J. 2014), motion to certify appeal granted (June 23, 2014).

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ii. Provides for immunity from civil and criminal liability under both federal

and state trade secret laws for whistleblowers who disclose trade secrets

“in confidence” to a federal, state or local government official.

iii. Disclosure must be for sole purpose of “reporting or investigating a

suspected violation of law.”

iv. It also provides immunity for disclosures made in a “lawsuit or other

proceeding,” so long as that filing is made under seal.

v. Whistleblower immunity provision disclosure required by the DTSA can

be achieved by a disclosure provision in contracts or a cross-reference to a

policy document.

vi. The failure to provide notice to employees will bar exemplary damages or

attorney fees against an employee who did not receive notice.

vii. Noncompliance (strategic or otherwise) with the whistleblower disclosure

requirement still allows for injunctive relief and compensatory damages.

e. DTSA Best Practices

i. Update all employee contracts that relate to trade secrets with

whistleblower immunity disclosure.

ii. Update company policy on whistleblower procedure.

iii. Establish and maintain a formal trade secret inventory system– that does

not disclose the secret.

iv. Assess whether sufficient “reasonable measures” are in place to protect

the trade secrets.

v. Trade Secrets Golden Rule – keep them SECRET

FRANCHISING AND ALTERNATIVES

VIII. There are various methods of distribution a business may choose when expanding.

These methods include:

a. Company-Owned Stores

b. Distributorships & Dealerships

c. Single Trademark or Service Mark Licenses

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d. Joint Ventures / Partnerships

e. Cooperatives

f. Employees

g. Internet / Catalog Sales

h. Franchising

IX. Company-Owned Stores

a. Advantages

i. Company maintains total control

ii. More flexibility and speed of response generally better

iii. Company receives all profits (not just royalties)

iv. No franchise regulation or risk of being an “inadvertent franchise”

b. Disadvantages

i. Company must fund entire cost of development

ii. Company bears entire loss of risk

iii. Time consuming – company personnel doing all the work

iv. Management lies solely with the company

v. Managers typically less motivated and more inefficient than franchisee /

entrepreneurs

vi. More liability (no insulation from direct liability)

X. Distributorships & Dealerships

a. Distributorships & Dealerships vs. Franchises

i. Distributors and dealers are not licensed to use the company’s trademark

or service mark to identify the business (may be authorized to use the

phrase “authorized dealer” or “authorized distributor” of the company’s

products).

ii. Distributorships and Dealerships do not pay the manufacturer or

supplier any consideration other than the bona fide wholesale price for

goods or services (In other words, there is no fee).

b. Advantages

i. Substantially less regulation

ii. Less paperwork as “fees” are based on product sales and not gross sales

8

iii. Less chance of vicarious liability, including tortious acts of

distributorship’s employees

c. Disadvantages

i. No royalty payments based on gross revenues

ii. Substantially less control over distributors and dealers than over

franchisees

iii. Usually relationship is terminable upon a short notice period

XI. Single Trademark or Service Mark License

a. Owner of a mark licenses another party to use the mark in commerce.

b. The trademark or service mark license defines the scope of the license (duration

and territory) and associated fees.

c. License agreement stipulates quality controls to maintain value to mark.

d. Danger of creating an inadvertent franchise.

XII. Joint Ventures / Partnerships

a. Characteristics

i. Joint venture should be owner of trademark, or should have a royalty free

license to use the marks in connection with the goods being distributed

by the joint venture.

ii. Joint venturers should not receive compensation other than as profit

participant or employee.

iii. All know-how, trade secrets, marketing plans and other intellectual

property should be owned by the joint venture.

iv. All joint venturers should be engaged in management of venture affairs.

b. Disadvantages

i. Franchisor gives up sole control over trademarks, know-how and trade

secrets that makes the system unique.

ii. Trademark and trade secrets must be turned over to entity that is the

joint venture.

iii. All involved share in profits and losses Franchisee may view

characteristics as a positive whereas Franchisor may view characteristics

more negatively.

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iv. “Franchisee” obtains ownership interest in trademarks and other

intellectual property.

XIII. Cooperatives

a. Definition: An organization operated on a cooperative basis by and for

independent retailers which wholesales goods or furnishes services primarily to

its member-retailers is exempted from the FTC Rule. If a cooperatives association

is structured to benefit someone other than the member-retailers, there is a

serious risk that the cooperative association will be deemed not operating by and

for its member-retailers.

b. Characteristics

i. Members are independent retailers who share equally in the ownership

and control of the cooperative.

ii. Cooperative furnishes goods/services primarily at wholesale to its

members; members get volume discounts achieved through the collective

buying power of the membership.

iii. Refunds of any annual surplus are distributed to members at the end of

the year.

iv. Cooperative may adopt a trademark.

v. Ownership and transfer of ownership by members is generally restricted.

c. Advantages

i. Promotional strength of a common trademark.

ii. Volume discounts from coop buying power.

d. Disadvantages

i. Vulnerable to antitrust claims because horizontal competitors are

working together.

ii. Lack of uniform training and ongoing supervision of a franchise.

iii. By its nature, a traditional franchisor would not be interested in this type

of arrangement.

XIV. Franchising

a. Franchising is a method of market expansion utilized by a business entity

wanting to expand its distribution of services or products through retail entities

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owned by independent operators using the trademarks or service marks,

marketing techniques and controls of the expanding business entity in return for

the payment of fees and royalties from the retail outlet.

b. Advantages

i. Less capital needed by the principle to expand the business.

ii. Franchisees more motivated than managers because of their personal

investment.

iii. Less direct supervision required

iv. Limited liability

v. Insulates franchisors from the “hidden cost of inefficiency”

vi. Franchisee is generally a local entrepreneur, hopefully more in tune with

the franchised market.

vii. Spread of risk due to the assumption of risk by the franchisees.

viii. Allows for accelerated system expansion.

c. Disadvantages

i. Federal and state regulations

ii. Pre-sale franchise disclosure document (“FDD”)

iii. State FDD registration

iv. Dilution of control over individual outlets

v. Lower per unit profit

vi. Vicarious liability

vii. Joint employer liability

d. Elements of a Franchise

i. First Element: Substantial Association with a Trademark

1. A trademark is a word, phrase, symbol or design, or combination

of words, phrases, symbols or designs which identifies and

designates the sources of the goods or services of one party from

those of others

2. Can be as broad as a color, scent, single letter or number

ii. Second Element: Significant Control or Assistance (Per FTC Rule

Compliance Guide)

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1. Franchisor has the right to exercise significant control over or

provide significant assistance with Franchisee’s method of

operation

2. “Significant” means the Franchisee’s reasonable reliance on

Franchisor’s control over or assistance with Franchisee’s overall

method of operation

3. Marketing plan

iii. Third Element: Fee

1. Within first six months from the commencement of business

2. Greater than $500.00

3. May include payments characterized as an initial franchise fee as

well as certain payments characterized as royalties, rent, or fees

for training, manuals, promotional materials, or other products or

services

4. Inventory Exemption: Does not include amounts paid for

purchase of a reasonable amount of inventory at bona fide

wholesale prices, for resale or lease

e. Franchise Disclosure Document (“FDD”)

i. The FDD contains disclosures on nearly all aspects of franchise written in

“plain language”.

ii. Required to be given to a prospective franchisee at least fourteen days

before a prospective franchisee makes any payment to franchisor or signs

any contracts, whichever is first (or earlier, upon the reasonable request of

a prospective franchisee).

iii. Uniform format governed by FTC.

1. State regulators may have specific additional (non-contradictory)

requirements

2. State cover pages and addendums may be necessary to meet a

specific states regulations

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THE FRANCHISE SALES PROCESS

XV. Franchise sales is a regulatory tightrope—Federal and State regulations a. Sales Agents

i. A franchisor must designate specific individuals to be sales agents

ii. Registration states often require detailed background information on

sales agents

iii. Brokers must be registered (with a fee) in registration states; may need to

be included in the FDD

b. Disclosing a Prospect

i. Must be 14 days before any payments or binding agreements signed

ii. Possible additional 7 days for unilateral substantive changes to the

franchise agreement

iii. It is absolutely essential that the franchisor get a signed and dated receipt

from each disclosed prospect

c. Best Practices:

i. Disclose any prospect as soon as discussions become serious.

1. Serious means any details are discussed (fees, territory, etc.).

2. Serious also means before an offer to sell is made to the prospect.

ii. Franchisor must comply with all registration state requirements before a

disclosure can be made. Some states require that a franchisor is registered

in that state in order to disclose a resident of that state, regardless of

where the franchise will be located.

XVI. Financial Performance Representations (“FPR”)—Item 19 a. What every prospect wants to know, ‘How much money will I make?’

b. Arguably the item requiring the most attention to wording.

c. Franchisors want to give out financial information – makes sales easier

d. Franchisors can choose to not make an FPR. Then the franchisor must include

standard language and sales agents must not make an FPR. If no FPR is in the

FDD the following are still allowed:

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i. If the sale is of a specific outlet the franchisor can give historical

information for that outlet.

ii. Refer franchise prospect to existing franchisees for information (without

coaching the existing franchisee on what to say).

iii. Help them conduct research into the industry from publically available

independent sources.

iv. Give information directly to the franchisee’s lender.

e. What is an FPR?

i. Any representation that expressly or impliedly states or suggests “a

specific level or range of actual or potential sales, income, gross profits or

net profits.”5

ii. Puffery is allowed.

iii. FPRs outside of the FDD (e.g., advertising) must not exceed or contradict

the FPRs in the FDD.

iv. Can include cost information but not as a percentage of sales—most cost

information is already disclosed in items 5, 6, and 7.

f. Characteristics of any allowable FPR

i. Must be reasonable

ii. Must include bases and assumptions

iii. Must have written substantiation

g. Historical Data vs. Projections6

i. General Historical FPRs must include information on:

1. The group measured (“all franchised locations”)

2. The time period measured (“years 2010-2015”)

3. Number of outlets measured (“55 units”)

4. Number of outlets reporting (“55 units”)

5. Number and percentage of outlets achieving the stated level of

performance (“40% of the units (22 units) achieved the stated level

of performance”).

5 16 CFR 436.1(e) 6 FTC Franchise Rule Compliance Guide, May 2008, pages 87-92, available at: https://www.ftc.gov/system/files/documents/plain-language/bus70-franchise-rule-compliance-guide.pdf.

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6. Distinguishing characteristics of the measured group (“all located

in Iowa towns of 3,000 people or less”).

ii. Projected Performance

1. “Must include sufficient facts to enable a prospective franchisee to

make an independent judgment as to the validity of the

projection.”7

2. Must disclose any characteristics of the outlets the projection is

based upon which differ from the outlets being offered for sale.

3. Highly fact dependent and open for scrutiny

7 Id. at 91.

Antitrust Law Update

12:00 p.m. - 12:45 p.m.

Presented by

Justice Edward MansfieldIowa Supreme Court

1111 East Court AvenueDes Moines, IA 50319



9/15/2016

1

Ed Mansfield, Iowa Supreme Court

[email protected]

ANTITRUST IN 2015‐16 Antitrust is an interesting area of law. You have ½ the cases (per se) where conduct is king. ½ the cases (rule of reason) where structure is king.

Analyzing structure is harder than analyzing conduct, so there is a tendency to emphasize the latter rather than the former.

This is not necessarily a plaintiff vs. defendant issue. You can have a pro‐plaintiff approach to structure or a pro‐defendant approach to structure.

You can have a pro‐plaintiff approach to conduct or a pro‐defendant approach to conduct.

I am seeing a shift to emphasis on conduct both in the courts and in enforcement.

TODAY’S AGENDA We will cover:

The US Supreme Court

Some interesting federal appellate court decisions

The NCAA (a regular installment in this presentation)

Antitrust enforcement activities

9/15/2016

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THE SUPREME COURT IN 2015‐16 The Supreme Court did not decide any antitrust cases this past term but has one already on the 2016‐17 docket.

Osborn v. VISA, Inc., 797 F.3d 1057 (D.C. Cir. 2015).

OSBORN v. VISA, INC.

OSBORN v. VISA, INC. Both Visa and MasterCard have required ATM operators to give

them MFN status. That is, if you want to accept their cards, you can’t charge a higher access fee than for other cards. However, Visa and MasterCard charge higher network service fees to the operators, so the operator gets less $ on a Visa or MasterCard transaction than on another network transaction.

No claim that Visa and MasterCard have conspired with each other. The claim is that the member banks in Visa and in MasterCard have conspired among themselves. Visa and MasterCard are both publicly held companies today, but the rules in question were adopted when they were owned by the member banks.

ATM operators and consumers sued, alleging violations of § 1 of the Sherman Act.

9/15/2016

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OSBORN v. VISA The district court dismissed the case on a 12(b)(6) motion, but the 2nd Circuit reversed.

“The Plaintiffs have adequately alleged an agreement that originated when the member banks owned and operated Visa and MasterCard and which continued even after the public offerings of these associations.”

The Supreme Court has granted cert.

OSBORN v. VISA, INC. The defendants argue mere membership in an association can’t be enough to make you a conspirator even if the association has an anticompetitive rule.

The argument seems to have several different strands: (1) Under Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), you need to allege enough detail to demonstrate that an antitrust conspiracy is plausible. Here there is no allegation that any bank communicated with any other bank.

(2) When a joint venture acts as a joint venture and pursues the interest of that venture as a whole, that cannot be the basis for a § 1 claim.

(3) A § 1 complaint challenging a joint venture must plausibly suggest that the venture’s members were pursuing separate economic interests.

OSBORN v. VISA, INC. So this is a case where a couple of trouble spots in the law intersect: Twombly. Joint venture law. The Supreme Court has decided a couple of joint venture cases in recent years – American Needle, Inc. v. Nat’l Football League and Texaco Inc. v. Dagher. It’s not clear that the law has been made clearer. This will be the 3rd such foray.

Remember the case involves a motion to dismiss, not summary judgment or a trial. The Court could use the case to clarify “Twiqbal.”

The Supreme Court may take additional antitrust cases this term. They are steering away from some of the big constitutional and civil rights cases until they have 9 justices.

9/15/2016

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OSBORN v. VISA, INC. From a structural standpoint, you might think about what the industry looks like. Visa and MasterCard compete with each other. Also, there are an increasing number of ways today to “visit your money.”

From a conduct standpoint, it seems unfair for Visa and MasterCard to pay less to the ATM operator than competitors but to demand that the ATM operator not offer a lower fee to customers using a different network.

GELBOIM v. BANK OF AMERICA


9/15/2016

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GELBOIM v. BANK OF AMERICA 823 F.3d 759 (2nd Cir. 2016) LIBOR – a price‐fixing conspiracy waiting to happen… “The daily USD LIBOR was set as follows. All 16 banks were

initially asked: ‘At what rate could you borrow funds, were you to do so by asking for and then accepting inter‐bank offers in a reasonable market size just prior to 11 a.m.?’ Each bank was to respond on the basis of (in part) its own research, and its own credit and liquidity risk profile. Thomson Reuters later compiled each bank's submission and published the submissions on behalf of the BBA. The final LIBOR was the mean of the eight submissions left after excluding the four highest submissions and the four lowest. Among the many uses and advantages of the LIBOR‐setting process is the ability of parties to enter into floating‐rate transactions without extensive negotiation of terms.”

GELBOIM v. BANK OF AMERICA “Three key rules governed the LIBOR‐setting process: each panel bank was to independently exercise good faith judgment and submit an interest rate based upon its own expert knowledge of market conditions; the daily submission of each bank was to remain confidential until after LIBOR was finally computed and published; and all 16 individual submissions were to be published along with the final daily rate and would thus be ‘transparent on an ex post basis.’ Thus any single bank would be deterred from submitting an outlying LIBOR bid that would risk negative media attention and potential regulatory or government scrutiny. Collectively, these three rules were intended as ‘safeguards ensuring that LIBOR would reflect the forces of competition in the London interbank loan market.’”

GELBOIM v. BANK OF AMERICA “Although LIBOR was set jointly, the Banks remained horizontal competitors in the sale of financial instruments, many of which were premised to some degree on LIBOR.”

The allegation is that the banks conspired to corrupt the LIBOR rate‐setting process and artificially lower LIBOR.

Various holders of debt instruments sued, alleging that the banks’ conspiracy cheated them out of interest in violation of Sherman § 1.

The banks’ response was that LIBOR was just a benchmark. Each instrument had a competitively set price: “[A]ppellants remained free to negotiate the interest rates attached to particular financial instruments.”

9/15/2016

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GELBOIM v. BANK OF AMERICA The district court dismissed the case.

The 2nd Circuit reverses.

(1) Horizontal fixing of a price component (even if not the final price) is a per se violation. See Catalano v. Target Sales, 446 U.S. 643 (1980).

(2) No need to allege anticompetitive effects when there is a per se violation.

The 2nd Circuit focuses on conduct, but to my mind, does so correctly. It is a per se violation. Also, ask yourself, if you are a banker, why bother with this elaborate conspiracy if it isn’t going to benefit you and affect what you have to pay in interest?

But let’s turn to what is really important: How good is the food?


GELBOIM v. BANK OF AMERICA “After the belt‐driven introduction to the food, we decide to branch out and order hot food from the kitchen. I opt for the gothic‐sounding black cod, which arrives sizzling on a little bed of leaves, and my accomplice has heard good things about the soft‐shell crab.”

“It’s worth noting that these dishes are the most expensive items on a very modestly priced menu, coming in at a very reasonable £7.50 each. Lord Libor was a remarkably cheap date, it would seem.”

9/15/2016

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HANOVER 3201 REALTY v. VILLAGE SUPERMARKETS 806 F.3d 162 (3rd Cir. 2015)

The Third Circuit seems to be the brewhouse for a lot of antitrust law these days. Perhaps this is due to an active plaintiffs’ antitrust bar in the Philadelphia/NJ area.

Hanover, a real estate developer, had a lease and site‐development agreement with Wegman’s, a supermarket chain.

Shoprite was the incumbent local supermarket. It began an allegedly sham petitioning campaign with various state and local entities to block Hanover from getting required government permits. Hanover sued for violations of Sherman § 2.

The district court dismissed, finding no antitrust standing because Hanover was neither a consumer nor a competitor in the relevant market (supermarkets). Hanover was just a developer.

HANOVER 3201 REALTY v. VILLAGE SUPERMARKETS The 3rd Circuit reverses, “Had Wegmans purchased the property from Hanover Realty and itself applied for the permits, the costs imposed by Defendants’ challenges would have qualified as antitrust injuries. It should make no difference that the parties’ lease shifted these costs to Hanover Realty. Regardless of who bore these costs, Defendants’ objective remained the same: to keep Wegmans out of the relevant market.”

HANOVER 3201 REALTY v. VILLAGE SUPERMARKETS A dissenting judge notes that the defendant’s “alleged attempted monopolization of the relevant markets hurts Wegmans, a full‐service supermarket, and it hurts consumers who would prefer a choice among supermarkets… [I]t is hard to see why Hanover is a proper antitrust plaintiff even if it has valid tort claims arising out of otherwise anticompetitive conduct. In short, because the anticompetitive effects of [ShopRite’s] allegedly illegal activity have not caused any injury to Hanover, it does not have an antitrust claim.”

This is a close case for me but I tend to agree with the dissent.

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WOODMAN’S FOOD MARKET v. CLOROX

2016 WL 4394564 (7th Cir. 2016)

Clorox sells its largest packages which give you most bang for the buck only to discount warehouses like Sam’s and Costco.

Woodman’s, a smaller grocery store, sued Clorox under the Robinson‐Patman Act for unlawful price discrimination.

The district court denied Clorox’s motion to dismiss. On interlocutory appeal, the 7th Circuit reverses.


WOODMAN’S FOOD MARKET v. CLOROX Woodman’s dropped its basic § 13(a) price discrimination claim.

Pursued a claim under § 13(e) that Clorox was offering “services or facilities” to the discount warehouses that it wasn’t offering to the little guys.

The 7th Circuit said no: “The Commission now takes the view that subsections 13(d) and (e) pertain only to promotional services or facilities. Package size alone, it urges in an amicus curiae brief in this case, ‘is not a promotional service or facility.’”

“The Commission’s position is a logical one: if the convenience of a large pack were a promotional ‘service or facility’ simply because the size made it more attractive to customers, then nearly all product attributes would be services or facilities’ covered by subsection 13(e)…. This would undermine the balance that Congress has struck between subsection 13(a)’s broad prohibition (which is limited by the need to show harm to competition) and subsection 13(e)’s narrow but categorical prohibition.”

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IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION

IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION 2016 WL 4473247 (8th Cir. 2016) The most significant 8th Circuit antitrust decision of this past year (but

it’s not all that significant). A proposed class action brought against distributors of pre‐filled

propane exchange tanks. The allegation was that when the price of propane raise in 2008, the

defendants acted in concert to reduce the fill level of the tanks from 17 to 15 pounds of propane.

There was a settlement in 2010. But the plaintiffs allege the conspiracy continued. In fact, the FTC issued a complaint in 2014, which prompted this new lawsuit.

The defendants moved to dismiss this new lawsuit based on the 4‐year statute of limitations in the Clayton Act. The district court agreed with the defendants and dismissed.

Plaintiffs appealed, arguing a continuing violation.

IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION The 8th Circuit affirms the district court. “Plaintiffs have not alleged any overt acts within the limitations

period that were new and independent acts, uncontrolled by the initial agreement. The sales of 15 pound tanks to Plaintiffs were the mere, unabated consequences of the original agreement between Defendants to lower the fill level of the propane tanks while maintaining the same price. Plaintiffs do not allege that Defendants met to fine‐tune their agreement, further increased the price of the propane tanks, further reduced the fill levels without reducing the price, or took any other novel overt act in furtherance of the conspiracy within the limitations period. Continued sales pursuant to an earlier unlawful agreement, under which prices were immediately raised, reflect mere reaffirmations of the agreement and are insufficient to restart the limitations period.”

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IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION I think the decision is maybe a bit questionable. Judge Benton dissented.

Even if there were no new overt acts within the limitations period, if the conspiracy was still going on, then I don’t understand why the defendants would not be liable for conduct occurring within the limitations period.

The majority takes a conduct approach, rather than a structure approach.

What makes the dismissal perhaps justifiable is not that the conspiracy had started in 2008, but that it is the second crack at conduct after there was already a first crack and a settlement.

O’BANNON v. NCAA

O’BANNON v. NCAA 802 F.3d 1049 (9th Cir. 2015) This is a class action case brought by current and former men’s

college basketball and football players challenging the NCAA’s requirement that they sign away all rights to their college image/likeness/name in return for no compensation.

NCAA rules cap (or capped) financial aid at the value of the full “grant‐in‐aid” and prohibit student‐athletes from receiving any other sports‐related compensation, including compensation for use of their likeness, image, etc.

The argument runs that this is an unlawful horizontal conspiracy.

The NCAA has previously argued, generally with success, that amateurism is essential to the college sport so it is lawful not to pay athletes.

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O’BANNON v. NCAA After a bench trial, the district court ruled for the plaintiffs and entered an injunction: The NCAA cannot limit member schools from paying players out of licensing revenues from their names, images, and likenesses (“NIL” rights) to the extent the total payments plus scholarships are less than actual cost of attending college.

Also, the NCAA cannot limit member schools from covering the total cost of attendance and depositing up to $5,000 per year of a player’s eligibility in a trust fund to be paid out when the player leaves school (COA plus $5,000).

The NCAA appealed. In July 2015 the 9th Circuit entered a stay of the district court’s ruling.

O’BANNON v. NCAA A group of law professors, including Professor Hovenkamp, filed a brief

in support of the NCAA. Their point: Once you find significant procompetitive effects from the

restraint, you don’t tweak the restraint to preserve the procompetitive effects and mitigate the anticompetitive harms. The less restrictive alternative must be substantially – i.e., qualitatively ‐ less restrictive. And if the procompetitive effects outweigh the anticompetitive effects, the case is over.

“[A] defendant cannot be subject to antitrust liability merely because a court can identify potential improvements to a restraint that is conceded to be reasonably necessary to a valid business purpose.”

To put it another way, either the court has to get rid of the restraint or it has to find for the defendant. It can’t adjust the restraint – say from GIA to COA, or from COA to COA plus $5,000.

O’BANNON v. NCAA The 9th Circuit kind of adopted the law professors’ position.

It affirmed the district court in striking down any cap on scholarships that was below COA. In other words, schools must be free to offer scholarships up to COA.

But it vacated the district court’s ruling allowing students to be paid deferred compensation of up to $5,000 per year.

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O’BANNON v. NCAA “[A]s a general matter, courts should not use antitrust law to make marginal

adjustments to broadly reasonable market restraints. The particular restraint at issue here, however—the grant‐in‐aid cap that the NCAA set below the cost of attendance—is not such a restraint. To the contrary, the evidence at trial showed that the grant‐in‐aid cap has no relation whatsoever to the procompetitive purposes of the NCAA: by the NCAA's own standards, student‐athletes remain amateurs as long as any money paid to them goes to cover legitimate educational expenses.”

“Thus, in holding that setting the grant‐in‐aid cap at student‐athletes' full cost of attendance is a substantially less restrictive alternative under the Rule of Reason, we are not declaring that courts are free to micromanage organizational rules or to strike down largely beneficial market restraints with impunity. Rather, our affirmance of this aspect of the district court's decision should be taken to establish only that where, as here, a restraint is patently and inexplicably stricter than is necessary to accomplish all of its procompetitive objectives, an antitrust court can and should invalidate it and order it replaced with a less restrictive alternative.”

O’BANNON v. NCAA However, the court said the $5,000 per year payments went too far.

“The difference between offering student‐athletes education‐related compensation and offering them cash sums untethered to educational expenses is not minor; it is a quantum leap. Once that line is crossed, we see no basis for returning to a rule of amateurism and no defined stopping point…”

But in the end, this is a conduct‐based approach, not a structural one. The court makes no attempt to weigh anticompetitive and procompetitive effects. It simply concludes that one level of restraint is consistent with amateurism and one isn’t.

O’BANNON v. NCAA

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ANTITRUST ENFORCEMENT ACTIVITIES I will talk about the biggest DOJ and the biggest FTC cases this year. First, DOJ.

DOJ has brought challenges to (1) the Anthem/Cigna merger and (2) the Aetna/Humana merger.

Anthem is the BC/BS entity in 14 states (not Iowa –Wellmark).

Not clear to me why State of Iowa has joined the case. Anthem and Cigna pretty invisible in Iowa. I didn’t see any Iowa market pled in the complaint.

US v. ANTHEM/CIGNA

US v. ANTHEM/CIGNA There are some allegations in the complaint relating to HHI’s – it’s

better than the US Airways/American complaint ‐ but there is a lot of emphasis on conduct. Quotes from internal documents where Anthem and Cigna talk about each other’s competition.

Also, the innovative competitor theory is featured in the complaint: “Cigna has been particularly effective in using its innovative wellness programs to compete with Anthem.”

“Cigna has been particularly focused on investing time and resources in value‐based arrangements…”

I’m skeptical of the innovative competitor theory. Additionally, the complaint alleges relevant markets consisting of the

public exchanges in certain counties in Colorado and Missouri. Query: If many of the exchanges have a limited number of insurers, is this approach to market definition going to make insurance companies more reluctant to serve the exchanges because it will be held against them if they want to merge?

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US v. AETNA/HUMANA The Aetna/Humana challenge is concerned only with:

(1) Medicare Advantage plans.

(2) The public exchanges.

US v. AETNA/HUMANA Both Aetna (Coventry) and Humana participate in Medicare Advantage in Iowa and elsewhere.

Medicare Advantage is significant.

But is it really a separate market?

What are the barriers to entry?

Also, as noted in the complaint, Aetna offered to divest the Humana Medicare Advantage business.

US v. AETNA/HUMANA The allegations in the Aetna/Humana complaint about the public exchange market are similar in nature to those in the Anthem/Cigna complaint.

Here the focus is on certain counties in Florida, Georgia, and Missouri where both Aetna and Humana offer plans on the exchange.

The complaint notes that United Healthcare just pulled out, thus reducing the number of competitors.

But again, is this approach (treating each exchange as a separate market for antitrust purposes) going to end up deterring insurance companies from serving those exchanges?

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US v. AETNA/HUMANA And like the other complaint, this complaint is replete with allegations about conduct.

E.g.: “To convince Humana to proceed in the face of antitrust risks, Aetna agreed to pay a $1 billion break‐up fee if the merger is not consummated by December 31, 2016.”

“Both companies have invested successfully in programs designed to keep seniors healthier and in their own homes longer by, for example, installing ramps and providing transportation services.”

US v. AETNA/HUMANA Note that DOJ kind of treated the two mergers as a package deal that left the industry with only 3 large players instead of 5. It sued to block both on the same day.

What does that make you think of…

DuPont/Dow

Bayer/Monsanto

FTC v. STAPLES/OFFICE DEPOT FTC sued in 2015 to block Staples’ acquisition of Office Depot.

The U.S. District Court for the District of Columbia blocked the acquisition in 2016, just as it had in 1997 –19 years earlier.

The 2016 decision is somewhat surprising, given what has happened to office supply superstores since 1997.

Now the case could have been captioned “FTC v. Tyrannosaurus/Stegosaurus.”

But let’s compare the two opinions, 1997 and 2016.

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FTC v. STAPLES/OFFICE DEPOT I 970 F.Supp. 1066 (DDC 1997).

Dry opinion: “Plaintiff, the Federal Trade Commission (‘FTC’ or ‘Commission’), seeks a preliminary injunction pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), to enjoin the consummation of any acquisition by defendant Staples, Inc. of defendant Office Depot, Inc….”

The opinion relies heavily on structural evidence, especially evidence that prices are significantly higher in one‐firm markets.

FTC v. STAPLES/OFFICE DEPOT II 2016 WL 2899222 (D.D.C. 2016) Catchy opening: “Drawing an analogy to the fate of penguins whose

destinies appear doomed in the face of uncertain environmental changes, Defendant Staples Inc. (“Staples”) and Defendant Office Depot, Inc. (“Office Depot”) argue they are like ‘penguins on a melting iceberg,’ struggling to survive in an increasingly digitized world and an office‐supply industry soon to be revolutionized by new entrants…”

Lots of anecdotes in the body of the opinion. “Defendants themselves used the proposed merger to pressure B‐to‐B customers to lock in prices based on the expectation that they would lose negotiating leverage if the merger were approved. See, e.g., PX05236 (ODP) at 001 (‘This offer is time sensitive. If and when the purchase of Office Depot is approved, Staples will have no reason to make this offer.’).” More conduct than structure.

CONCLUSION Thank you for your attention.

Questions?

Ed Mansfield, Iowa Supreme Court

[email protected]

ANTITRUST IN 2015‐16 Antitrust is an interesting area of law. You have ½ the cases (per se) where conduct is king. ½ the cases (rule of reason) where structure is king.

Analyzing structure is harder than analyzing conduct, so there is a tendency to emphasize the latter rather than the former.

This is not necessarily a plaintiff vs. defendant issue. You can have a pro‐plaintiff approach to structure or a pro‐defendant approach to structure.

You can have a pro‐plaintiff approach to conduct or a pro‐defendant approach to conduct.

I am seeing a shift to emphasis on conduct both in the courts and in enforcement.

TODAY’S AGENDA We will cover:

The US Supreme Court

Some interesting federal appellate court decisions

The NCAA (a regular installment in this presentation)

Antitrust enforcement activities

THE SUPREME COURT IN 2015‐16 The Supreme Court did not decide any antitrust cases this past term but has one already on the 2016‐17 docket.

Osborn v. VISA, Inc., 797 F.3d 1057 (D.C. Cir. 2015).

OSBORN v. VISA, INC.

OSBORN v. VISA, INC. Both Visa and MasterCard have required ATM operators to give

them MFN status. That is, if you want to accept their cards, you can’t charge a higher access fee than for other cards. However, Visa and MasterCard charge higher network service fees to the operators, so the operator gets less $ on a Visa or MasterCard transaction than on another network transaction.

No claim that Visa and MasterCard have conspired with each other. The claim is that the member banks in Visa and in MasterCard have conspired among themselves. Visa and MasterCard are both publicly held companies today, but the rules in question were adopted when they were owned by the member banks.

ATM operators and consumers sued, alleging violations of § 1 of the Sherman Act.

OSBORN v. VISA The district court dismissed the case on a 12(b)(6) motion, but the 2nd Circuit reversed.

“The Plaintiffs have adequately alleged an agreement that originated when the member banks owned and operated Visa and MasterCard and which continued even after the public offerings of these associations.”

The Supreme Court has granted cert.

OSBORN v. VISA, INC. The defendants argue mere membership in an association can’t be enough to make you a conspirator even if the association has an anticompetitive rule.

The argument seems to have several different strands: (1) Under Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), you need to allege enough detail to demonstrate that an antitrust conspiracy is plausible. Here there is no allegation that any bank communicated with any other bank.

(2) When a joint venture acts as a joint venture and pursues the interest of that venture as a whole, that cannot be the basis for a § 1 claim.

(3) A § 1 complaint challenging a joint venture must plausibly suggest that the venture’s members were pursuing separate economic interests.

OSBORN v. VISA, INC. So this is a case where a couple of trouble spots in the law intersect: Twombly. Joint venture law. The Supreme Court has decided a couple of joint venture cases in recent years – American Needle, Inc. v. Nat’l Football League and Texaco Inc. v. Dagher. It’s not clear that the law has been made clearer. This will be the 3rd such foray.

Remember the case involves a motion to dismiss, not summary judgment or a trial. The Court could use the case to clarify “Twiqbal.”

The Supreme Court may take additional antitrust cases this term. They are steering away from some of the big constitutional and civil rights cases until they have 9 justices.

OSBORN v. VISA, INC. From a structural standpoint, you might think about what the industry looks like. Visa and MasterCard compete with each other. Also, there are an increasing number of ways today to “visit your money.”

From a conduct standpoint, it seems unfair for Visa and MasterCard to pay less to the ATM operator than competitors but to demand that the ATM operator not offer a lower fee to customers using a different network.

GELBOIM v. BANK OF AMERICA 823 F.3d 759 (2nd Cir. 2016) LIBOR – a price‐fixing conspiracy waiting to happen… “The daily USD LIBOR was set as follows. All 16 banks were

initially asked: ‘At what rate could you borrow funds, were you to do so by asking for and then accepting inter‐bank offers in a reasonable market size just prior to 11 a.m.?’ Each bank was to respond on the basis of (in part) its own research, and its own credit and liquidity risk profile. Thomson Reuters later compiled each bank's submission and published the submissions on behalf of the BBA. The final LIBOR was the mean of the eight submissions left after excluding the four highest submissions and the four lowest. Among the many uses and advantages of the LIBOR‐setting process is the ability of parties to enter into floating‐rate transactions without extensive negotiation of terms.”

GELBOIM v. BANK OF AMERICA “Three key rules governed the LIBOR‐setting process: each panel bank was to independently exercise good faith judgment and submit an interest rate based upon its own expert knowledge of market conditions; the daily submission of each bank was to remain confidential until after LIBOR was finally computed and published; and all 16 individual submissions were to be published along with the final daily rate and would thus be ‘transparent on an ex post basis.’ Thus any single bank would be deterred from submitting an outlying LIBOR bid that would risk negative media attention and potential regulatory or government scrutiny. Collectively, these three rules were intended as ‘safeguards ensuring that LIBOR would reflect the forces of competition in the London interbank loan market.’”

GELBOIM v. BANK OF AMERICA “Although LIBOR was set jointly, the Banks remained horizontal competitors in the sale of financial instruments, many of which were premised to some degree on LIBOR.”

The allegation is that the banks conspired to corrupt the LIBOR rate‐setting process and artificially lower LIBOR.

Various holders of debt instruments sued, alleging that the banks’ conspiracy cheated them out of interest in violation of Sherman § 1.

The banks’ response was that LIBOR was just a benchmark. Each instrument had a competitively set price: “[A]ppellants remained free to negotiate the interest rates attached to particular financial instruments.”

GELBOIM v. BANK OF AMERICA The district court dismissed the case.

The 2nd Circuit reverses.

(1) Horizontal fixing of a price component (even if not the final price) is a per se violation. See Catalano v. Target Sales, 446 U.S. 643 (1980).

(2) No need to allege anticompetitive effects when there is a per se violation.

The 2nd Circuit focuses on conduct, but to my mind, does so correctly. It is a per se violation. Also, ask yourself, if you are a banker, why bother with this elaborate conspiracy if it isn’t going to benefit you and affect what you have to pay in interest?

But let’s turn to what is really important: How good is the food?


GELBOIM v. BANK OF AMERICA “After the belt‐driven introduction to the food, we decide to branch out and order hot food from the kitchen. I opt for the gothic‐sounding black cod, which arrives sizzling on a little bed of leaves, and my accomplice has heard good things about the soft‐shell crab.”

“It’s worth noting that these dishes are the most expensive items on a very modestly priced menu, coming in at a very reasonable £7.50 each. Lord Libor was a remarkably cheap date, it would seem.”

HANOVER 3201 REALTY v. VILLAGE SUPERMARKETS 806 F.3d 162 (3rd Cir. 2015)

The Third Circuit seems to be the brewhouse for a lot of antitrust law these days. Perhaps this is due to an active plaintiffs’ antitrust bar in the Philadelphia/NJ area.

Hanover, a real estate developer, had a lease and site‐development agreement with Wegman’s, a supermarket chain.

Shoprite was the incumbent local supermarket. It began an allegedly sham petitioning campaign with various state and local entities to block Hanover from getting required government permits. Hanover sued for violations of Sherman § 2.

The district court dismissed, finding no antitrust standing because Hanover was neither a consumer nor a competitor in the relevant market (supermarkets). Hanover was just a developer.

HANOVER 3201 REALTY v. VILLAGE SUPERMARKETS The 3rd Circuit reverses, “Had Wegmans purchased the property from Hanover Realty and itself applied for the permits, the costs imposed by Defendants’ challenges would have qualified as antitrust injuries. It should make no difference that the parties’ lease shifted these costs to Hanover Realty. Regardless of who bore these costs, Defendants’ objective remained the same: to keep Wegmans out of the relevant market.”

HANOVER 3201 REALTY v. VILLAGE SUPERMARKETS A dissenting judge notes that the defendant’s “alleged attempted monopolization of the relevant markets hurts Wegmans, a full‐service supermarket, and it hurts consumers who would prefer a choice among supermarkets… [I]t is hard to see why Hanover is a proper antitrust plaintiff even if it has valid tort claims arising out of otherwise anticompetitive conduct. In short, because the anticompetitive effects of [ShopRite’s] allegedly illegal activity have not caused any injury to Hanover, it does not have an antitrust claim.”

This is a close case for me but I tend to agree with the dissent.

2016 WL 4394564 (7th Cir. 2016)

Clorox sells its largest packages which give you most bang for the buck only to discount warehouses like Sam’s and Costco.

Woodman’s, a smaller grocery store, sued Clorox under the Robinson‐Patman Act for unlawful price discrimination.

The district court denied Clorox’s motion to dismiss. On interlocutory appeal, the 7th Circuit reverses.


WOODMAN’S FOOD MARKET v. CLOROX Woodman’s dropped its basic § 13(a) price discrimination claim.

Pursued a claim under § 13(e) that Clorox was offering “services or facilities” to the discount warehouses that it wasn’t offering to the little guys.

The 7th Circuit said no: “The Commission now takes the view that subsections 13(d) and (e) pertain only to promotional services or facilities. Package size alone, it urges in an amicus curiae brief in this case, ‘is not a promotional service or facility.’”

“The Commission’s position is a logical one: if the convenience of a large pack were a promotional ‘service or facility’ simply because the size made it more attractive to customers, then nearly all product attributes would be services or facilities’ covered by subsection 13(e)…. This would undermine the balance that Congress has struck between subsection 13(a)’s broad prohibition (which is limited by the need to show harm to competition) and subsection 13(e)’s narrow but categorical prohibition.”

IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION

IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION 2016 WL 4473247 (8th Cir. 2016) The most significant 8th Circuit antitrust decision of this past year (but

it’s not all that significant). A proposed class action brought against distributors of pre‐filled

propane exchange tanks. The allegation was that when the price of propane raise in 2008, the

defendants acted in concert to reduce the fill level of the tanks from 17 to 15 pounds of propane.

There was a settlement in 2010. But the plaintiffs allege the conspiracy continued. In fact, the FTC issued a complaint in 2014, which prompted this new lawsuit.

The defendants moved to dismiss this new lawsuit based on the 4‐year statute of limitations in the Clayton Act. The district court agreed with the defendants and dismissed.

Plaintiffs appealed, arguing a continuing violation.

IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION The 8th Circuit affirms the district court. “Plaintiffs have not alleged any overt acts within the limitations

period that were new and independent acts, uncontrolled by the initial agreement. The sales of 15 pound tanks to Plaintiffs were the mere, unabated consequences of the original agreement between Defendants to lower the fill level of the propane tanks while maintaining the same price. Plaintiffs do not allege that Defendants met to fine‐tune their agreement, further increased the price of the propane tanks, further reduced the fill levels without reducing the price, or took any other novel overt act in furtherance of the conspiracy within the limitations period. Continued sales pursuant to an earlier unlawful agreement, under which prices were immediately raised, reflect mere reaffirmations of the agreement and are insufficient to restart the limitations period.”

IN RE PRE‐FILLED PROPANE TANK ANTITRUST LITIGATION I think the decision is maybe a bit questionable. Judge Benton dissented.

Even if there were no new overt acts within the limitations period, if the conspiracy was still going on, then I don’t understand why the defendants would not be liable for conduct occurring within the limitations period.

The majority takes a conduct approach, rather than a structure approach.

What makes the dismissal perhaps justifiable is not that the conspiracy had started in 2008, but that it is the second crack at conduct after there was already a first crack and a settlement.

O’BANNON v. NCAA

O’BANNON v. NCAA 802 F.3d 1049 (9th Cir. 2015) This is a class action case brought by current and former men’s

college basketball and football players challenging the NCAA’s requirement that they sign away all rights to their college image/likeness/name in return for no compensation.

NCAA rules cap (or capped) financial aid at the value of the full “grant‐in‐aid” and prohibit student‐athletes from receiving any other sports‐related compensation, including compensation for use of their likeness, image, etc.

The argument runs that this is an unlawful horizontal conspiracy.

The NCAA has previously argued, generally with success, that amateurism is essential to the college sport so it is lawful not to pay athletes.

O’BANNON v. NCAA After a bench trial, the district court ruled for the plaintiffs and entered an injunction: The NCAA cannot limit member schools from paying players out of licensing revenues from their names, images, and likenesses (“NIL” rights) to the extent the total payments plus scholarships are less than actual cost of attending college.

Also, the NCAA cannot limit member schools from covering the total cost of attendance and depositing up to $5,000 per year of a player’s eligibility in a trust fund to be paid out when the player leaves school (COA plus $5,000).

The NCAA appealed. In July 2015 the 9th Circuit entered a stay of the district court’s ruling.

O’BANNON v. NCAA A group of law professors, including Professor Hovenkamp, filed a brief

in support of the NCAA. Their point: Once you find significant procompetitive effects from the

restraint, you don’t tweak the restraint to preserve the procompetitive effects and mitigate the anticompetitive harms. The less restrictive alternative must be substantially – i.e., qualitatively ‐ less restrictive. And if the procompetitive effects outweigh the anticompetitive effects, the case is over.

“[A] defendant cannot be subject to antitrust liability merely because a court can identify potential improvements to a restraint that is conceded to be reasonably necessary to a valid business purpose.”

To put it another way, either the court has to get rid of the restraint or it has to find for the defendant. It can’t adjust the restraint – say from GIA to COA, or from COA to COA plus $5,000.

O’BANNON v. NCAA The 9th Circuit kind of adopted the law professors’ position.

It affirmed the district court in striking down any cap on scholarships that was below COA. In other words, schools must be free to offer scholarships up to COA.

But it vacated the district court’s ruling allowing students to be paid deferred compensation of up to $5,000 per year.

O’BANNON v. NCAA “[A]s a general matter, courts should not use antitrust law to make marginal

adjustments to broadly reasonable market restraints. The particular restraint at issue here, however—the grant‐in‐aid cap that the NCAA set below the cost of attendance—is not such a restraint. To the contrary, the evidence at trial showed that the grant‐in‐aid cap has no relation whatsoever to the procompetitive purposes of the NCAA: by the NCAA's own standards, student‐athletes remain amateurs as long as any money paid to them goes to cover legitimate educational expenses.”

“Thus, in holding that setting the grant‐in‐aid cap at student‐athletes' full cost of attendance is a substantially less restrictive alternative under the Rule of Reason, we are not declaring that courts are free to micromanage organizational rules or to strike down largely beneficial market restraints with impunity. Rather, our affirmance of this aspect of the district court's decision should be taken to establish only that where, as here, a restraint is patently and inexplicably stricter than is necessary to accomplish all of its procompetitive objectives, an antitrust court can and should invalidate it and order it replaced with a less restrictive alternative.”

O’BANNON v. NCAA However, the court said the $5,000 per year payments went too far.

“The difference between offering student‐athletes education‐related compensation and offering them cash sums untethered to educational expenses is not minor; it is a quantum leap. Once that line is crossed, we see no basis for returning to a rule of amateurism and no defined stopping point…”

But in the end, this is a conduct‐based approach, not a structural one. The court makes no attempt to weigh anticompetitive and procompetitive effects. It simply concludes that one level of restraint is consistent with amateurism and one isn’t.

O’BANNON v. NCAA

ANTITRUST ENFORCEMENT ACTIVITIES I will talk about the biggest DOJ and the biggest FTC cases this year. First, DOJ.

DOJ has brought challenges to (1) the Anthem/Cigna merger and (2) the Aetna/Humana merger.

Anthem is the BC/BS entity in 14 states (not Iowa –Wellmark).

Not clear to me why State of Iowa has joined the case. Anthem and Cigna pretty invisible in Iowa. I didn’t see any Iowa market pled in the complaint.

US v. ANTHEM/CIGNA

US v. ANTHEM/CIGNA There are some allegations in the complaint relating to HHI’s – it’s

better than the US Airways/American complaint ‐ but there is a lot of emphasis on conduct. Quotes from internal documents where Anthem and Cigna talk about each other’s competition.

Also, the innovative competitor theory is featured in the complaint: “Cigna has been particularly effective in using its innovative wellness programs to compete with Anthem.”

“Cigna has been particularly focused on investing time and resources in value‐based arrangements…”

I’m skeptical of the innovative competitor theory. Additionally, the complaint alleges relevant markets consisting of the

public exchanges in certain counties in Colorado and Missouri. Query: If many of the exchanges have a limited number of insurers, is this approach to market definition going to make insurance companies more reluctant to serve the exchanges because it will be held against them if they want to merge?

US v. AETNA/HUMANA The Aetna/Humana challenge is concerned only with:

(1) Medicare Advantage plans.

(2) The public exchanges.

US v. AETNA/HUMANA Both Aetna (Coventry) and Humana participate in Medicare Advantage in Iowa and elsewhere.

Medicare Advantage is significant.

But is it really a separate market?

What are the barriers to entry?

Also, as noted in the complaint, Aetna offered to divest the Humana Medicare Advantage business.

US v. AETNA/HUMANA The allegations in the Aetna/Humana complaint about the public exchange market are similar in nature to those in the Anthem/Cigna complaint.

Here the focus is on certain counties in Florida, Georgia, and Missouri where both Aetna and Humana offer plans on the exchange.

The complaint notes that United Healthcare just pulled out, thus reducing the number of competitors.

But again, is this approach (treating each exchange as a separate market for antitrust purposes) going to end up deterring insurance companies from serving those exchanges?

US v. AETNA/HUMANA And like the other complaint, this complaint is replete with allegations about conduct.

E.g.: “To convince Humana to proceed in the face of antitrust risks, Aetna agreed to pay a $1 billion break‐up fee if the merger is not consummated by December 31, 2016.”

“Both companies have invested successfully in programs designed to keep seniors healthier and in their own homes longer by, for example, installing ramps and providing transportation services.”

US v. AETNA/HUMANA Note that DOJ kind of treated the two mergers as a package deal that left the industry with only 3 large players instead of 5. It sued to block both on the same day.

What does that make you think of…

DuPont/Dow

Bayer/Monsanto

FTC v. STAPLES/OFFICE DEPOT FTC sued in 2015 to block Staples’ acquisition of Office Depot.

The U.S. District Court for the District of Columbia blocked the acquisition in 2016, just as it had in 1997 –19 years earlier.

The 2016 decision is somewhat surprising, given what has happened to office supply superstores since 1997.

Now the case could have been captioned “FTC v. Tyrannosaurus/Stegosaurus.”

But let’s compare the two opinions, 1997 and 2016.

FTC v. STAPLES/OFFICE DEPOT I 970 F.Supp. 1066 (DDC 1997).

Dry opinion: “Plaintiff, the Federal Trade Commission (‘FTC’ or ‘Commission’), seeks a preliminary injunction pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), to enjoin the consummation of any acquisition by defendant Staples, Inc. of defendant Office Depot, Inc….”

The opinion relies heavily on structural evidence, especially evidence that prices are significantly higher in one‐firm markets.

FTC v. STAPLES/OFFICE DEPOT II 2016 WL 2899222 (D.D.C. 2016) Catchy opening: “Drawing an analogy to the fate of penguins whose

destinies appear doomed in the face of uncertain environmental changes, Defendant Staples Inc. (“Staples”) and Defendant Office Depot, Inc. (“Office Depot”) argue they are like ‘penguins on a melting iceberg,’ struggling to survive in an increasingly digitized world and an office‐supply industry soon to be revolutionized by new entrants…”

Lots of anecdotes in the body of the opinion. “Defendants themselves used the proposed merger to pressure B‐to‐B customers to lock in prices based on the expectation that they would lose negotiating leverage if the merger were approved. See, e.g., PX05236 (ODP) at 001 (‘This offer is time sensitive. If and when the purchase of Office Depot is approved, Staples will have no reason to make this offer.’).” More conduct than structure.

CONCLUSION Thank you for your attention.

Questions?

Employment Law Update

1:45 p.m. - 2:30 p.m.

Presented by

Elizabeth CoonanBrown Winick PLC666 Grand Avenue

Suite 2000 Ruan CenterDes Moines, IA 50309Phone: 515-242-2408

Ann Holden KendellBrown Winick PLC666 Grand Avenue

Suite 2000 Ruan CenterDes Moines, IA 50309Phone: 515-242-2450



1

EMPLOYMENT LAW UPDATE2016 Corporate Counsel/Trade

Regulations Seminar

Beth Coonan and Ann KendellBrownWinick

666 Grand Avenue, Suite 2000Des Moines, IA 50309-2510

FLSA

Sweeping changes to “white collar” exemptions under FLSA

Final Rule published in Federal Register May 23, 2016

Effective December 1, 2016

FLSA

Significant increase to salary level• Current: $455/week ($23,660 annually)

• Final Rule: $913/week ($47,476 annually)

Highly Compensated Employee• Current: $100,000

• Final Rule: $134,404

2

FLSA

Current Regulations: No automatic adjustments to salary level

Final Rule: Requires updates to salary level every 3 years

Defend Trade Secrets Act May 11, 2016

Allows companies to seek recovery in federal court.

Enhanced remedies.

3 year SOL

Requires whistleblower protections – provided to employees and independent contractors.

ADAAA/FMLAWhen seeking more than 12 weeks of leave due to employee’s serious healthcondition as a reasonable accommodation, it is the employee’s burden to showthat he or she could perform the essential functions of the job with thataccommodation.

“The ADA does not require an employer to permit an employee to perform ajob function that the employee's physician has forbidden.”

“It is not reasonable to expect an employer to disregard an employee'streating physician's opinion expressly imposing physical restrictions.”

Scruggs v. Pulaski Cty., Ark., 2016 WL 1274119, at *4 (8th Cir. Apr. 1, 2016).

3

ADAAA/FMLACompare with guidance published by the EEOC on May 9, 2016:

“Employer-Provided Leave and the Americans with Disabilities Act”

“An employer must consider providing unpaid leave to an employee witha disability as a reasonable accommodation if the employee requires it,and so long as it does not create an undue hardship for the employer.”

“That is the case even when:

the employer does not offer leave as an employee benefit;

the employee is not eligible for leave under the employer's policy; or

the employee has exhausted the leave the employer provides as abenefit (including leave exhausted under a workers' compensationprogram, or the FMLA or similar state or local laws).

ADAAA/FMLA(Continued…)


Addresses:

Maximum leave policies

Reassignment

100% Healed policies

Undue hardship

https://www.eeoc.gov/eeoc/publications/ada-leave.cfm

Bermuda Triangle – A New TwistYoung v. United Parcel Service, Inc., 135 S. Ct. 1338 (March 25, 2015).

McQuistion v. City of Clinton, 872 N.W.2d 817, 831-32 (Iowa, December 24, 2015).

Employers in both cases were providing preferential treatment (i.e., accommodations) to employees with temporary disabilities (such as work-related injuries), but not providing these to pregnant employees.

If the numbers show that this is resulting in a large percentage of non-pregnant employees are accommodated and a large percentage of pregnant employees are not accommodated, this could be a problem…

4

EEOC - RetaliationEEOC Issues Final Enforcement Guidance on Retaliation and Related Issues

after Public Input Process (Issued August 25, 2016)

The scope of employee activity protected by the law.

Legal analysis to be used to determine if evidence supports a claim of retaliation.

Remedies available for retaliation.

Rules against interference with the exercise of rights under the ADA.

Detailed examples of employer actions that may constitute retaliation.

Source: EEOC Press Release (8-29-2016) https://www.eeoc.gov/eeoc/newsroom/release/8-29-16.cfm

EEOC – National OriginEEOC Issues Proposed Enforcement Guidance on National Origin

Discrimination (Issued June 2, 2016)

Addresses employment decisions (e.g., recruitment, hiring, promotion, discipline) and harassment (e.g., hostile work environment, employer liability, human trafficking).

Provides details on workplace issues relating to different languages (e.g., accent discrimination, fluency requirements, English-only rules) and citizenships.

“Best practices” that employers may adopt to reduce the risk of Title VII violations based on national origin discrimination.

Source: EEOC Press Release (6-2-2016)

https://www.eeoc.gov/eeoc/newsroom/release/6-2-16a.cfm

EEOC – Pay Data in EEO-1’s

EEOC Announces Proposed Addition of Pay Data to Annual EEO-1 Reports

Proposed revision to include collecting pay data from employers with 100 ormore employees and federal contractors. In addition to information on race,ethnicity, sex, and job category, employers would also provide aggregatedata on pay ranges and hours worked beginning March 31, 2018.


https://www.eeoc.gov/eeoc/newsroom/release/7-13-16.cfm

5

DOL – Joint-Employer LiabilityJoint-Employer Liability

DOL in Administrator’s Interpretation released Jan. 20, 2016, provides a roadmap to liability in “situations where more than one business is involved in the work being performed.”

Source: U.S. Department of Labor, Wage and Hour Division Administrator’s Interpretation No. 2016-1 (1-20-2016)

http://www.dol.gov/whd/flsa/Joint_Employment_AI.pdf

OSHA“Improve Tracking of Workplace Injuries and Illnesses” Final Rule published May 12, 2016

Requires electronic reporting (January 1, 2017)

No retaliation provisions (November 1, 2016)

No deterring or discouraging of employee reports (i.e., immediate reporting policies with discipline; post-accident testing; employee incentive programs)

https://www.gpo.gov/fdsys/pkg/FR-2016-05-12/pdf/2016-10443.pdf

https://www.osha.gov/recordkeeping/finalrule/TrackingEnforcementMemo.pdf

Website: www.brownwinick.comToll Free Phone Number: 1-888-282-3515

OFFICE LOCATIONS:

666 Grand Avenue, Suite 2000Des Moines, Iowa 50309-2510

Telephone: (515) 242-2400Facsimile: (515) 283-0231

616 Franklin PlacePella, Iowa 50219


DISCLAIMER: No oral or written statement made by BrownWinick attorneys shouldbe interpreted by the recipient as suggesting a need to obtain legal counsel fromBrownWinick or any other firm, nor as suggesting a need to take legal action. Do notattempt to solve individual problems upon the basis of general information providedby any BrownWinick attorney, as slight changes in fact situations may cause amaterial change in legal result.

EMPLOYMENT LAW UPDATE2016 Corporate Counsel/Trade

Regulations Seminar

Beth Coonan and Ann KendellBrownWinick

666 Grand Avenue, Suite 2000Des Moines, IA 50309-2510

FLSA

Sweeping changes to “white collar” exemptions under FLSA

Final Rule published in Federal Register May 23, 2016

Effective December 1, 2016

FLSA

Significant increase to salary level• Current: $455/week ($23,660 annually)

• Final Rule: $913/week ($47,476 annually)

Highly Compensated Employee• Current: $100,000

• Final Rule: $134,404

FLSA

Current Regulations: No automatic adjustments to salary level

Final Rule: Requires updates to salary level every 3 years

Defend Trade Secrets Act May 11, 2016

Allows companies to seek recovery in federal court.

Enhanced remedies.

3 year SOL

Requires whistleblower protections – provided to employees and independent contractors.

ADAAA/FMLAWhen seeking more than 12 weeks of leave due to employee’s serious healthcondition as a reasonable accommodation, it is the employee’s burden to showthat he or she could perform the essential functions of the job with thataccommodation.

“The ADA does not require an employer to permit an employee to perform ajob function that the employee's physician has forbidden.”

“It is not reasonable to expect an employer to disregard an employee'streating physician's opinion expressly imposing physical restrictions.”

Scruggs v. Pulaski Cty., Ark., 2016 WL 1274119, at *4 (8th Cir. Apr. 1, 2016).

ADAAA/FMLACompare with guidance published by the EEOC on May 9, 2016:


“An employer must consider providing unpaid leave to an employee witha disability as a reasonable accommodation if the employee requires it,and so long as it does not create an undue hardship for the employer.”

“That is the case even when:

the employer does not offer leave as an employee benefit;

the employee is not eligible for leave under the employer's policy; or

the employee has exhausted the leave the employer provides as abenefit (including leave exhausted under a workers' compensationprogram, or the FMLA or similar state or local laws).

ADAAA/FMLA(Continued…)


Addresses:

Maximum leave policies

Reassignment

100% Healed policies

Undue hardship

https://www.eeoc.gov/eeoc/publications/ada-leave.cfm

Bermuda Triangle – A New TwistYoung v. United Parcel Service, Inc., 135 S. Ct. 1338 (March 25, 2015).

McQuistion v. City of Clinton, 872 N.W.2d 817, 831-32 (Iowa, December 24, 2015).

Employers in both cases were providing preferential treatment (i.e., accommodations) to employees with temporary disabilities (such as work-related injuries), but not providing these to pregnant employees.

If the numbers show that this is resulting in a large percentage of non-pregnant employees are accommodated and a large percentage of pregnant employees are not accommodated, this could be a problem…

EEOC - RetaliationEEOC Issues Final Enforcement Guidance on Retaliation and Related Issues

after Public Input Process (Issued August 25, 2016)

The scope of employee activity protected by the law.

Legal analysis to be used to determine if evidence supports a claim of retaliation.

Remedies available for retaliation.

Rules against interference with the exercise of rights under the ADA.

Detailed examples of employer actions that may constitute retaliation.

Source: EEOC Press Release (8-29-2016) https://www.eeoc.gov/eeoc/newsroom/release/8-29-16.cfm

EEOC – National OriginEEOC Issues Proposed Enforcement Guidance on National Origin

Discrimination (Issued June 2, 2016)

Addresses employment decisions (e.g., recruitment, hiring, promotion, discipline) and harassment (e.g., hostile work environment, employer liability, human trafficking).

Provides details on workplace issues relating to different languages (e.g., accent discrimination, fluency requirements, English-only rules) and citizenships.

“Best practices” that employers may adopt to reduce the risk of Title VII violations based on national origin discrimination.


https://www.eeoc.gov/eeoc/newsroom/release/6-2-16a.cfm

EEOC – Pay Data in EEO-1’s

EEOC Announces Proposed Addition of Pay Data to Annual EEO-1 Reports

Proposed revision to include collecting pay data from employers with 100 ormore employees and federal contractors. In addition to information on race,ethnicity, sex, and job category, employers would also provide aggregatedata on pay ranges and hours worked beginning March 31, 2018.


https://www.eeoc.gov/eeoc/newsroom/release/7-13-16.cfm

DOL – Joint-Employer LiabilityJoint-Employer Liability

DOL in Administrator’s Interpretation released Jan. 20, 2016, provides a roadmap to liability in “situations where more than one business is involved in the work being performed.”

Source: U.S. Department of Labor, Wage and Hour Division Administrator’s Interpretation No. 2016-1 (1-20-2016)

http://www.dol.gov/whd/flsa/Joint_Employment_AI.pdf

OSHA“Improve Tracking of Workplace Injuries and Illnesses” Final Rule published May 12, 2016

Requires electronic reporting (January 1, 2017)

No retaliation provisions (November 1, 2016)

No deterring or discouraging of employee reports (i.e., immediate reporting policies with discipline; post-accident testing; employee incentive programs)

https://www.gpo.gov/fdsys/pkg/FR-2016-05-12/pdf/2016-10443.pdf

https://www.osha.gov/recordkeeping/finalrule/TrackingEnforcementMemo.pdf

Website: www.brownwinick.comToll Free Phone Number: 1-888-282-3515

OFFICE LOCATIONS:

666 Grand Avenue, Suite 2000Des Moines, Iowa 50309-2510


616 Franklin PlacePella, Iowa 50219


DISCLAIMER: No oral or written statement made by BrownWinick attorneys shouldbe interpreted by the recipient as suggesting a need to obtain legal counsel fromBrownWinick or any other firm, nor as suggesting a need to take legal action. Do notattempt to solve individual problems upon the basis of general information providedby any BrownWinick attorney, as slight changes in fact situations may cause amaterial change in legal result.

Corporate Governance, Minority Shareholder Oppression and Piercing the Corporate Veil

2:30 p.m. - 3:15 p.m.

Presented by

David Repp Dickinson Mackaman Tyler & Hagen PC

699 Walnut StSuite 1600

Des Moines, IA 50309Phone: 515-244-2600



1

CORPORATE GOVERNANCE, MINORITY SHAREHOLDER OPPRESSION AND PIERCING THE CORPORATE VEIL

I. Duties and Liabilities of Directors (Derived primarily from ISBA Business Law Manual)

A. Common Law

1. General Common Law Obligations

Directors have a fiduciary duty to both the stockholders of a corporation and to the corporation, and directors must "perform their duties with the diligence, honesty and the utmost good faith, inherent and implicit in their functions." Des Moines Bank & Trust Co. v. George M. Betchel & Co., 51 N.W.2d 174, 216 (Iowa 1952). Directors have both a duty of care and a duty of loyalty. Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255, 264 (2nd Cir. 1984). “The duty of care refers to the responsibility of a corporate fiduciary to exercise, in the performance of his tasks, the care that a reasonably prudent person in a similar position would use under similar circumstances” and, “the duty of loyalty, derives from the prohibition against self-dealing that inheres in the fiduciary relationship. . ." Id. "While [the] fiduciary duties of care and loyalty have been codified in Sections 490.830 and 490.831 of the Iowa Code, the common law underpinnings provide the initial definition of the scope of these elements."

2. Common Law Duty of Care

"The duty of care, developed by common law, requires a director to make informed and knowledgeable decisions." Iowa Code § 490.830 (2015). Moreover, the duty of care disallows a director from blindly relying on or being "overly swayed by, the judgment and influence of other directors. The degree of knowledge and skill that a director must bring to the decision-making process is a direct function of the director's role in the management of the corporation." Therefore, inside directors, that is, directors who are also officers or employees of a corporation, are held to a higher duty of care than outside directors of the corporation. Rowen v. Lemars Mut. Ind. Co., 282 N.W.2d at 652. The degree of care that a director owes to a corporation will vary depending on the level of the director's involvement with the corporation. A director must "exercise independent judgment when making decisions on behalf of the corporation." Midwest Management Corp. v. Stephens, 353 N.W.2d 76.

2

3. Common Law Duty of Loyalty

The duty of loyalty requires a director to act in the best interests of the corporation and its shareholders with respect to “matters affecting the general well being of the corporation." Midwest Management Corp. v. Stephens, 353 N.W.2d 76, 80 (Iowa 1984) (quoting Yerke v. Batman, 376 N.E.2d 1211, 1214 (1978)). The duty of loyalty prohibits a director from engaging in self-dealing, or usurping a corporate opportunity. Rowen v. LeMars Mut. Ins. Co., 282 N.W.2d 639, 660 (Iowa 1974). In Rowen, the Iowa Supreme Court held that the sale of "control" of a corporation by a director and majority shareholder to a third party constituted self-dealing and was a breach of a director's duty of loyalty to the corporation. The duty of loyalty has been described as having sweeping breadth and the duty of loyalty prohibits a director from misappropriating corporate assets engaging in conflict of interest transactions, competing with the corporation, or usurping a corporate opportunity without the approval of the corporation. Holi-Rest, Inc. v. Treloar, 217 N.W.2d 517, 525 (Iowa 1974). If a director is "interested" in a corporate transaction, Iowa law imposes a duty of full disclosure on the director. Cookies Food Prods., Inc., v. Lakes Warehouse Distrib., Inc., 430 N.W.2d at 454.

B. Statutory Duties and Obligations 1. Authority of Board of Directors; General Duties

a. Authority of Board of Directors.

Section 490.801(1) of the Iowa Code provides that, except as provided in Section 490.732 of the Iowa Code, a corporation is required to have a board of directors. Section 490.801(2) of the Iowa Code provides that "[a]ll corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation, or in an agreement authorized under section 490.732.

b. Statutory Duty of Care

A board member's responsibility can be divided into a decision making function and an oversight function. Section 490.830(1) the Iowa Code sets forth the standards of conduct for directors. Section 490.830(1) of the Iowa Code provides as follows:

3

1. Each member of the board of directors, when discharging the duties of a director, shall act in conformity with all of the following:

a. In good faith. b. In a manner the director reasonably

believes to be in the best interests of the corporation.

Section 490.830(2) of the Iowa Code provides that:

[t]he members of the board of directors or a committee of the board, when becoming informed in connection with their decision-making function or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.

Section 490.830(3) of the Iowa Code provides that "[i]n discharging board or committee duties, a director who does not have knowledge that makes reliance unwarranted is entitled to rely on the performance by any of the persons specified in subsection 5, paragraph "a", to whom the board may have delegated, formally or informally by course of conduct, the authority or duty to perform one or more of the board's functions that are delegable under applicable law." Section 490.830(4) of the Iowa Code allows a director, absent knowledge that reliance is unwarranted, "to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by any of the persons specified in subsection 5." Section 490.830(5) of the Iowa Code set forth the persons that a director is entitled to rely on and the requirements that must be satisfied in order for a director to rely on them. Section 490.830(5) of the Iowa Code provides as follows:

5. A director is entitled to rely, in accordance with subsection 3 or 4, on any of the following:

a. One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the functions performed or the information, opinions, reports, or statements provided.

b. Legal counsel, public accountants, or other persons as to matters involving skills or

4

expertise the director reasonably believes are either of the following:

(1) Matters within the particular person's professional or expert competence. (2) Matters as to which the particular person merits confidence. c. A committee of the board of directors of

which the director is not a member if the director reasonably believes the committee merits confidence.

c. Statutory Duty of Loyalty

The Iowa Business Corporation Act addresses situations where a conflict of interest arises between an interested director and the corporation. Section 490.832(1) of the Iowa Code provides:

1. A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has direct or indirect interest. A conflict of interest transaction is not voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true:

a. The material facts of the transaction and the director's interests were disclosed or known to the board of directors or a committee of the board of directors and the board of directors or committee authorized, approved, or ratified the transaction.

b. The material facts of the transaction and the director's interest were disclosed or known to shareholders entitled to vote and the shareholders authorized, approved, or ratified the transaction.

c. The transaction was fair to the corporation.

The issue of whether a director has a direct or indirect interest in a transaction is addressed in Section 490.832(2) which provides as follows:

2. For purposes of this section, a director of the corporation has an indirect interest in:

a. Another entity in which the director has a material financial interest or in which the

5

director is a general partner is a party to the transaction.

b. Another entity of which a director is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the Board of Directors of the corporation

Board approval of conflict-of-interest transactions is subject to the rules set forth in Section 490.832(3) of the Iowa Code which provides:

3. For purposes of subsection 1, paragraph "a", a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the directors on the board of directors or on the committee who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by a single director. If a majority of directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action under this section. The presence of, or a vote cast by, a director with direct or indirect interest in the transaction does not affect the validity of any action taken under subsection 1, paragraph "a", if the transaction is otherwise authorized, approved, or ratified as provided in that subsection.

Shareholder approval of conflict-of-interest transactions is subject to special rules set forth in Section 490.832(4) of the Iowa Code, which provides:

4. For purposes of subsection 1, paragraph "b", a conflict of interest transaction is authorized, approved, or ratified it if receives the vote of a majority of shares entitled to be counted under this subsection. Shares owned by or voted under the control of a director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in subsection 2, paragraph "a", shall not be counted in a vote of shareholders to determine whether to authorize, approve, or

6

ratify a conflict of interest transaction under subsection 1, paragraph "b". The vote of those shares, however, is counted in determining whether the transaction is approved under other sections of this chapter. A majority of the shares, whether or not present, that are entitled to be counted in a vote on the transaction under this subsection constitutes a quorum for the purpose of taking action under this section.

Approval of a transaction by the shareholders does not preclude judicial review of the director's decision. Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d at 453 Moreover, a director who engages in self-dealing must “establish the additional element that they have acted in good faith, honesty, and fairness." Id.

II. Protections Available to Directors (Derived primarily from ISBA Business Law

Manual) A. Business Judgment Rule

A significant protection for directors is provided by the "Business Judgment Rule." The Business Judgment Rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the Company." Central Iowa Power Co-Op v. Consumers Energy, 741 N.W.2d 822, (Iowa App. 2007) (citing Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d at 451). The primary principle of the Business Judgment Rule is that a court will not substitute its judgment for that of the board of directors if the board of director's decision can be "attributed to any rational business purpose." Additionally, “[t]he purpose of the rule is to severely limit second guessing of business decisions which have been made by those whom the corporation has chosen to make them.” Hanrahan v. Kruidenier, 473 N.W.2d 184, 186 (Iowa 1991). The Business Judgment Rule provides protection to the directors provided the directors "exercise that judgment without fraud and free of conflicts of interests." Galef v. Alexander, 615 F.2d 51, 57 (2d Cir. 1980). Commentators have recognized that "[c]onfusion with respect to the Business Judgment Rule has been created by the numerous formulations of the rule and the fact that courts have often stated the rule incompletely or with elliptical shorthand references.” Three requirements that are generally recognized for application of the Business Judgment Rule are that there was a business judgment that was made in good faith without a conflict of interest. Commentators have noted that beyond these three requirements, the courts differ but that there are the following three patterns to the cases (i) the Business Judgment Rule requires nothing more, (ii)

7

the Business Judgment Rule requires a gross negligence or recklessness standard and (iii) the Business Judgment Rule requires a process based standard of review. The Iowa Supreme Court stated in Hanrahan v. Kruidenier 473 N.W. 2d 184 (1991) that "[t]he Business Judgment Rule, universally applied as a part of corporate law, has long been codified in Iowa." Commentators, however, have questioned the Hanrahan court's characterization of the Business Judgment Rule55 and in doing so expressly noted that "the drafters of the Model Business Corporation Act expressly caution that section 490.830 was not intended to foreclose deferential standards of judicial review under the Business Judgment Rule.

B. Liability Shield

The threat of personal liability of directors can lead to a situation where capable individuals are deterred from becoming directors simply because of the fear of personal liability for their actions. To limit this deterrence effect, Iowa law authorizes a corporation to include in its articles of incorporation a provision that eliminates or limits the personal liability of a director to the corporation or its shareholders for monetary damages for any action or failure to take action under certain circumstances. Such a provision creates a "liability shield" for directors. Iowa's "liability shield" is authorized in Section 490.202(2)(d) of the Iowa Code. Section 490.202(2)(d) of the Iowa Code allows a corporation to set forth in its articles of incorporation "[a] provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages or any action taken, or any failure to take action, as a director." Section 490.202(2)(d) of the Iowa Code, however, does not allow a corporation to limit the liability of a director for (i) any amount of financial benefit received by the director to which the director is not entitled, (ii) any intentional infliction of harm by the director on the corporation or its shareholders, (iii) any violation of Section 490.833, or (iv) any intentional violation of criminal law. Moreover, Section 490.831 mandates that a director will not be liable to the corporation or its shareholders, unless it has first been shown that the provision in the articles of incorporation authorized by Section 490.202(2)(d) does not preclude liability. Prior to 2002, Section 490.832 of the Iowa Code specifically prohibited the articles of incorporation from limiting director liability for breaches of the duty of loyalty. Iowa Code § 832 (2001). This provision was eliminated in 2002. Iowa's current legislation regarding the liability shield closely resembles the provisions set out in the Model Business Corporation Act Annotated. A sample of a provision that can be incorporated into Articles of Incorporation is included in the Iowa State Bar Association Business Law Manual.

C. Indemnification

Indemnification is another way in which a corporation can provide protection for a director in the event a director becomes financially liable in connection with the director's role as a director of a corporation. Indemnification is a concept

8

recognizing that there will be situations where a director does not satisfy all of the elements of the standard of conduct, but where the corporation should nevertheless be permitted to absorb the costs of ensuing litigation over the matter. Section 490.202(e) of the Iowa Code authorizes a corporation to set forth in its articles of incorporation:

e. A provision permitting or making obligatory indemnification of a director for liability as defined in section 490.850, subsection 5, to any person for any action taken, or any failure to take any action, as a director, except liability for any of the following:

(1) Receipt of a financial benefit to which the person is not entitled.

(2) An intentional infliction of harm on the corporation or its shareholders.

(3) A violation of section 490.833 (4) An intentional violation of criminal

law.

There are various subcategories of indemnification including mandatory indemnification, permissible indemnification, advance for expenses, court-ordered indemnification, indemnification of officers, and insurance.

a. Mandatory Indemnification

Section 490.852 of the Iowa Code sets forth those circumstances in which a corporation is required to indemnify a director. Section 490.852 of the Iowa Code provides:

A corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because the director is or was a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding.

Section 490.852 of the Iowa Code is identical to Section 8.52 of the Model Business Corporation Act. The phrase "wholly successful, on the merits or otherwise" has been the subject to differing interpretations. Drafters of the Model Act desired a person to be considered "wholly successful, on the merits or otherwise" only when the proceeding "is disposed of on a basis which does not involve a finding of liability." Moreover, a defendant that "negotiates a dismissal of a case under a settlement agreement may qualify for mandatory indemnification, at least when the dismissal is with prejudice and the defendant neither assumes the liability nor makes any payment in connection with the settlement." Matthew G. Doré, 6 Iowa Practice § 28.16 (2008 Edition).

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b. Permissive Indemnification

Permissible indemnification is, by definition, elective in nature. Thus, a corporation has the ability to choose whether to indemnify the director whenever permissible indemnification situations arise. Section 490.851 of the Iowa Code provides:

1. Except as otherwise provided in this section, a corporation may indemnify an individual who is a party to a proceeding because the individual is a director against liability incurred in the proceeding if either of the following apply:

a. All of the following apply: (1) The individual acted in good faith. (2) The individual reasonably believed:

(a) In the case of conduct in the individual's official capacity, that the individual's conduct was in the best interests of the corporation. (b) In all other cases, that the individual's conduct was at least not opposed to the best interests of the corporation.

(3) In the case of any criminal proceeding, the individual had no reasonable cause to believe the individual's conduct was unlawful.

b. The individual engaged in conduct for which broader indemnification has been made permissible or obligatory under a provision of the articles of incorporation as authorized by section 490.202, subsection 2, paragraph "e".

2. A director's conduct with respect to an employee benefit plan for a purpose the director reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection 1, paragraph "b", subparagraph (2). 3. The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the relevant standard of conduct described in this section. 4. Unless ordered by a court under section 490.854, subsection 1, paragraph "c", a corporation shall not indemnify a director under this section in either of the following circumstances:

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a. In connection with a proceeding by or in the right of the corporation, except for reasonable expenses incurred in connection with a proceeding if it is determined that the director has met the relevant standard of conduct under subsection 1. b. In connection with any proceeding with respect to conduct for which the director was adjudged liable on the basis that the director received a financial benefit to which the director was not entitled, whether or not involving action in the director's official capacity.

c. Advance for Expenses

There is a distinction between indemnification and advance for expenses. Indemnification is retrospective in scope. Therefore, indemnification enables those in charge of determining whether to indemnify to do so on the basis of known facts including the outcomes of a proceeding. Advance for expenses, on the other hand, is prospective by nature, which limits the availability of known facts to those decision makers deciding whether to advance for expenses. Therefore, the fact there has been an advance for expenses does not determine whether a director will be entitled to indemnification. Advance for expenses is authorized by Section 490.853 of the Iowa Code.

d. Indemnification Officers

Section 490.842 of the Iowa Code outlines the standards of conduct for officers and closely resembles the standards of conduct for directors. These standards require an officer to act in good faith, with the care that a person in a like position would reasonably exercise under similar circumstances, and in a manner the officer reasonably believes to be in the best interests of the corporation. In short, an officer owes essentially the same fiduciary duties of care, loyalty and good faith as a director of the corporation. Therefore, the Iowa Code permits a corporation to indemnify its officers in the same way as directors.

III. Oppression of Shareholders

A. Before Baur v. Baur Farms.

The statutory basis for a claim of minority oppression in Iowa is Iowa Code §490.1430, entitled “Grounds for judicial dissolution. Section 490.1430 states in part that “[t]he district court may dissolve a corporation [by a shareholder proceeding if] the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.” Iowa courts have interpreted the statute to allow the court to fashion a suitable remedy short of dissolution. “It is clear in Iowa that once oppression, waste, or misapplication of the corporate assets has been found, the trial court, sitting in

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equity, can devise a remedy to meet the situation.” Maschmeier v. Southside Press, Ltd., 435 N.W.2d 377, 382 (Iowa Ct. App. 1989); see also Saur v. Moffitt, 363 Iowa Ct. App. 1984). In Maschmeier, the Iowa Supreme Court upheld the trial court’s valuation of shares and forced sale of the minority shares to the majority. Id.

As to the elements necessary to prove oppression, Maschmeier was the only Iowa case providing any guidance prior to the Baur decision in 2013. In Maschmeier, the Iowa Court of Appeals upheld the lower court’s decision finding oppression where “the majority shareholders attempted to “freeze out” or “squeeze out” the minority shareholders by terminating their employment and not permitting them to participate in the business. Id. In Maschmeier, Kenneth and Charlotte were the majority shareholders of Southside Press. They gifted 1200 shares each to their sons, Marty and Larry. Because of family disagreements, Marty and Larry were terminated as employees. The parents also blocked an attempt by the sons to borrow against their pension plan. The parents then ceased their employment with Southside and started a new corporation, transacting most of the business through the new corporation and leaving little in Southside Press. The parents offered to buy the sons’ stock for $20 per share and the sons brought suit for oppression and wasting corporate assets. The Iowa Court of Appeals described the “oppression” standard as follows:

“Oppressive” conduct is not defined in the statute or in the Model Business Corporation Act, from which our statute was derived. The North Dakota Supreme Court, however, in Balvik v. Sylvester, considered the definition of oppressive conduct at length. Balvik v. Sylvester, 411 N.W.2d 383 (N.D.1987). There, the court found that oppressive conduct, under an identical statute permitting dissolution of a corporation when the directors or others in control of the corporation engage in such conduct, is an expansive term used to cover a multitude of situations dealing with improper conduct which is neither illegal nor fraudulent. Id. at 385. The alleged oppressive conduct by those in control of a close corporation must be analyzed in terms of “fiduciary duties” owed by majority shareholders to the minority shareholders and “reasonable expectations” held by minority shareholders in committing capital and labor to the particular enterprise, in light of the predicament in which minority shareholders in a close corporation can be placed by a “freeze-out” situation. Id. at 386-87.

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In the Balvik case, the court found that the ultimate effect of the actions of the close corporation's president, which included the firing of the vice president who was a minority shareholder and removing him as director and officer of the corporation, was to freeze him out from the business in which he reasonably expected to participate, and this conduct, thus, constituted oppression within the statute providing relief for the minority shareholder in such a situation. Id. at 388. The trial court found a similar situation here, i.e., the majority shareholders attempted to “freeze out” or “squeeze out” the minority shareholders by terminating their employment and not permitting them to participate in the business.

In the case of Baker v. Commercial Body Builders Inc., 264 Or. 614, 507 P.2d 387, 392 (1973), the Oregon Supreme Court determined that court decisions are “outmoded” which allow a “squeeze out” or “freeze out” of minority stockholders. They used as an example the case of the shareholder-director-officers refusing to declare dividends, but providing high compensation for themselves and otherwise enjoying to the fullest the “patronage” which corporate control entails, leaving minority shareholders who do not hold corporate office with the choice of getting little or no return on their investments for an indefinite period of time or selling out to the majority shareholders at whatever price they will offer.

The Baker court defined oppressive conduct as that conduct which is “burdensome, harsh and wrongful conduct; a lack of probity and fair dealing with the affairs of a company to the prejudice of some of its members, or a visual departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Id. 507 P.2d at 393.

From the language above, the elements of minority oppression in Iowa prior to Baur can be reasonably stated as follows:

1) Did the majority owe fiduciary duties to the minority;

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2) were these fiduciary duties violated; and 3) did the minority have reasonable expectations to continue their role in the enterprise?

The Iowa Court of Appeals upheld the trial court’s finding that the majority acted oppressively toward the minority shareholders and wasted corporate assets. The court also upheld the trial court’s remedy requiring the majority shareholders to purchase the shares of the minority.

B. Baur v. Baur Farms, Inc..

The Iowa Supreme Court in its Baur v. Baur Farms, Inc. 832 N.W.2d 663 (Iowa 2013) case established a new standard of shareholder oppression in Iowa – the reasonable expectations standard.

1. Factual Background Baur Farms, Inc. is a family farm corporation (taxed as a C corporation) owned by three individuals, John “Jack” Baur, Dennis Baur and Bob Baur. Jack owns 644 shares (26.29%); Dennis owns 544 shares (22.20%) and Bob owns 1262 shares (51.51%). Jack and Dennis are brothers and Bob is their first cousin. Bob, who has Ph.D. in economics and a full time job, does not farm the land, but he does manage it. Bob was charged by his father and uncle to maintain the corporation indefinitely for any Baur descendant who desired to farm the land. Jack’s nephew, James, now farms much of the land. In carrying out his charge, Bob desired to grow the farm by acquiring more farmland. Jack has never farmed and has tried to sell his shares ever since he inherited them from his father in 1989. Jack offered his shares to the corporation, to Bob and to James several times over nearly two decades, but the parties could not agree on a price. Jack then initiated suit in 2008 against Bob and Baur Farms, Inc. for fraud, illegality and oppressive conduct in violation of Iowa Code Section 490.1430(2)(b). The Iowa Supreme Court found that Bob did not abuse his authority as majority shareholder through excessive compensation or perquisites. Nor did Bob mismanage the business of Baur Farms, Inc., waste its assets, self deal or violate any of his duties of due care and loyalty. Nevertheless, the Iowa Supreme Court indicated that Bob will likely need to buy his cousin’s stock, probably at an undiscounted price. The court empathized with Jack’s unsuccessful efforts to sell his inherited shares all the while never receiving any dividends. So, the court provided Jack with a gift. It crafted a new standard of oppression of shareholders when the majority fails to satisfy the reasonable expectations of the minority at a time when the corporation has the financial resources to do so. This “reasonable expectations” standard essentially makes a market for those shareholders who do not have a controlling interest.

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2. Application of the Reasonable Expectations Standard The Iowa Supreme Court held that oppression from the controlling directors and majority shareholders occurs when the reasonable expectations of the minority shareholder have been frustrated under the circumstances. This is a very factual specific standard and will surely spawn many further cases in Iowa. The Iowa Supreme Court stated that when the oppression stems from little or no return, oppression occurs when a corporation pays no return on shareholder equity when the corporation has financial resources to do so. The case was remanded to the trial court which held Jack Baur had not been oppressed. The Iowa Court of Appeals upheld the trial court. No. 14-1412, July 27, 2016. What Are the Ramifications to Other Iowa Corporations and Shareholders? The implication of the Baur case seem clear: minority shareholders have gained significant bargaining power in negotiating their exit. Prior to Baur, the majority shareholder had to exhibit other bad behavior before being required to buyout the minority. Maschmeier v. Southside Press, Ltd., 435 N.W.2d 377 (Iowa Ct. App. 1988) (majority misapplied and wasted corporate assets); Saur v. Moffitt, 363 N.W.2d 269 (Iowa App. 1984) (majority mismanaged and took part in fraudulent acts). There were no bad acts in Baur; the oppression rested firmly on Bob’s reluctance to monetize Jack’s inheritance. One could say the Iowa Supreme Court granted all minority shareholders of Iowa corporations a “put option” exercisable in 20 years, or sooner depending on future case law developments. What If Some Dividends Are Paid? There were no dividends paid by Baur Farms, Inc. over the entire 45 years of its existence. If dividends were paid, would the Iowa Supreme have ruled differently? Probably not if the dividends were merely nominal in amount. The Supreme Court didn’t care that Jack and the other shareholder/directors were paid $5,000 in annual directors fees for several years which was essentially equivalent to a dividend. Also, the briefing of the parties indicate Bob offered to pay dividends but Jack refused stating it was a bad idea for a C corporation to pay dividends. If dividends were important to the Iowa Supreme Court, it would have mentioned this fact in its opinion. However, if material dividends were paid to Jack and the other shareholders over the years, Jack would have a much more difficult time claiming that he received no return on his invested inheritance. The absence of any sort of material return most concerned the Supreme Court. Thus, the more dividends paid to shareholders, the more the majority will be inoculated from a Baur oppression claim. What About the Business Judgment Rule? Courts have historically given great deference to the business judgment of the majority owner even if it negatively impacts the minority owner. MATTHEW G. DORE, 6 Iowa Practice – Business Organizations § 28:6 (West 2012-2013 ed.). The Baur decision erodes this long-standing rule, at least

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with respect to closely held entities. Bob clearly established that he preferred to grow the corporation through further acquisitions of farmland. Jack established that he preferred to use the corporation’s capital to buy him out. The Iowa Supreme Court seems to suggest that Jack’s interest trumps Bob’s business judgment. Majority owners of corporations with minority shareholders now have a new concern. Do they purchase a new farm or tuck capital away to buy out a shareholder. What Happens If No One Is In the Majority? This was the facts of Maschmeier v. Southside Press, Ltd. 435 N.W.2d 377 (Iowa Ct. App. 1988). In Maschmeier, two children owning a combined 48 percent sued their parents owning a combined 52 percent. No single shareholder controlled the corporation but the parents, acting in concert, were found to have oppressed the interest of the minority shareholders. In the recent Iowa case of Spears v. Com Link, Inc., et. al., 837 N.W.2d 680 (2013 Ia. Ct. App); 2013 WL 3457171, the court indicated that “controlling directors and shareholders” acting in concert can oppress one or more noncontrolling shareholders. What If a Buy-Sell Agreement Exists? The good news is that the Baur case validates the use of buy-sell agreements that include transfer price provisions, albeit, in the form of dicta. Page 16 of the opinion says that buy-sell agreements are enforceable if they are not manifestly unreasonable. The Iowa Supreme Court gave several examples of unreasonable on pages 14 and 15 that included 80 and 90 percent discounts (i.e. “unconscionable”). Perhaps more importantly, footnote 8, citing to Lange v. Lange, 520 N.W.2d 113 (Iowa 1994), indicates that a court should apply ordinary principles of contract interpretation to stock transfer restrictions. What this seems to suggest is that shareholders will have broad latitude in crafting their own buyout terms in advance of disputes, and they can expect to have the terms enforced. An example of a buyout term may be a “put option” exercisable by any shareholder at a 30 percent discount from the value of the corporation’s assets. If such a provision existed in Baur Farms, Inc., there likely would not be a Baur case. Recent Iowa Cases 1. Spears v. Com Link, Inc. 837 N.W.2d 680 (Iowa Ct.App. 2013); 2013 WL 3457171. This case originated from a 1990’s Internet company that eventually failed. A minority shareholder, Claude Spears, claimed oppression by the controlling directors and shareholders because Spears’s “reasonable expectations” were frustrated. As support, Spears claimed the controlling directors and shareholders improperly used Claude’s credit card, converted corporate property subject to security agreement, wrongfully obligated him to pay certain tax liabilities and used deceptive accounting practices to deceive him. The district court granted summary judgment against Spears and the Court of Appeals affirmed on the basis that Com Link, Inc. was a sinking ship and every shareholder’s reasonable expectations were frustrated. Apparently, Spears could not come up with a single issue of material fact to support his reasonable expectations argument.

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2. Ahrens v. Ahrens Agricultural Industries Co. 867 N.W.2d 195 (Iowa Ct.App. 2015); 2015 WL 2089372. This case originated by the incorporation of a successful business in Grinnell, Iowa, by Claude Ahrens. Claude Ahrens was the plaintiff’s uncle who groomed the plaintiff to manage the family business. The plaintiff purchased 25 percent of the stock of the company, but after two years, Claude Ahrens came to the conclusion that the plaintiff was not a good fit for management. Claude terminated the plaintiff and inserted his granddaughter and two others into management roles. Certain compensatory stock grants were issued to the new management which diluted the plaintiff’s interest from 25 percent to about 21 percent. After learning about the Baur case, plaintiff sued on minority oppression cause of action. He asserted that he had a “reasonable expectation” to a 25 percent stock interest and a job. The trial court held that the compensatory stock grant was just compensation for the new management and noted that the board sought the counsel of a CPA prior to issuance of the stock for compensation purposes. The trial also held that plaintiff’s expectation of employment was unreasonable in light of the fact that the job plaintiff wanted was unavailable in the company. The Court of Appeals affirmed the trial court on both counts. Application to LLCs In 2009, Iowa changed the Iowa Uniform Limited Liability Company Act to bring it in close proximity to the Corporate Code section on oppression and remedies. For LLCs, dissolution by court order due to oppression occurs when:

(1) “the managers or those members in control”

(2) “[h]ave acted, are acting, or will act in a manner that is illegal or fraudulent”

(3) “[h]ave acted or are acting in a manner that is

(i) oppressive and

(ii) was, is, or will be directly harmful to the applicant.”

Iowa Code § 489.701(1)(e). Compare this to the Iowa Corporate Code provision:

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“[t]he district court may dissolve a corporation” for oppression after a shareholder-brought proceeding establishes that:

(1) “the directors or those in control of the corporation”

(2) “have acted, are acting, or will act in a manner that is [either]

(i) illegal,

(ii) oppressive, or

(iii) fraudulent.”

Iowa Code § 490.1430(2). There have been no Iowa cases involving the oppression of a minority interest holder of an LLC under the 2009 revised language. Separating the statutory elements establishes two subtle differences in the availability of remedies after oppression:

(I) Direct Harm to Applicant. For LLCs, Section 489.701(1)(e)(4) explicitly requires that the controllers’ actions are both oppressive and directly harmful to the applicant; remedies for corporate oppression do not (explicitly) require proving direct harm. Compare id. with § 490.1430.

(II) Timing of Oppressive Activity. For the corporation, dissolution for oppression becomes possible when the controllers attempt or accomplish acts that are oppressive, regardless of when the oppressive acts occur. See § 490.1430(1). In contrast, § 489.701(1)(e)(2) limits its scope to cases where the controllers “[h]ave acted or are acting in a manner that was oppressive.” § 489.701(1)(e)(2) (emph. added). The future tense for oppression in LLCs applies only towards any “direct harm” that the applicant alleges will befall the applicant. See id.

IV. Oppression of Shareholders (Derived primarily from Singer Const. Inc. v. Clark

Farms, Ltd. 873 N.W.2d 301 (Iowa Ct.App. 2015); 2015 WL 7019046.

a. Exceptional Circumstances Standard. It has been long accepted a corporation is a legal entity with jural existence separate and distinct from its shareholders. See Iowa Code § 4.1(20) (defining a person to include a corporation); Wyatt v. Crimmins, 277 N.W.2d 615, 616 (Iowa 1979). It has been long accepted a corporation’s shareholders are not personally liable for the obligations of the corporation solely because of their status as shareholders. See Iowa Code § 490.622(2) ( “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation.”); 5 Matthew Doré, Iowa Practice Series: Business Organizations § 15.3(1), at 454 (2014–2015) (stating limited liability is the presumptive rule.). It also has

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been long accepted courts will disregard the presumptive rule of limited liability under exceptional circumstances and impose liability on an individual or individuals for what would otherwise be a corporate obligation. See Wade & Wade v. Cent. Broad. Co., 288 N.W. 441, 443 (Iowa 1939).

b. Unclear Standards and Rationale in Iowa Caselaw. While the rule allowing for the imposition of personal liability on a shareholder for a corporate obligation is long accepted, the rationale underlying the rule is not well developed. See 5 Doré, Iowa Practice § 15:3, at 458 (“In Iowa, as elsewhere, it is difficult to make sense of the case law governing disregard of the corporate entity.”); Mark A. Olthoff, Beyond the Form—Should the Corporate Veil be Pierced?, 64 UMKC L.Rev. 311, 312 (1995) ( “Courts and commentators have struggled for many years to develop principles that, when applied, would reveal whether a separately existing corporate organization should be disregarded.”); Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L.Rev. 1036, 1036 (1991) ( “Piercing the corporate veil is the most litigated issue in corporate law and yet it remains among the least understood.”). Iowa cases speak only in metaphor and generalities, holding the “corporate veil can be pierced” when the corporation is a “mere shell,” “sham,” “intermediary,” “instrumentality,” or “alter ego” of the shareholders. “This language is inherently unsatisfactory since it merely states the conclusion and gives no guide to the considerations that lead a court to decide that a particular case should be considered an exception to the general principle of nonliability.” ROBERT W. HAMILTON, The Corporate Entity, 49 Tex. L.Rev. 979, 979 (1971). Ultimately, the issue “is one that is still enveloped in the mists of metaphor.” Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y.1926).

c. Six Elements Test Is Really Just a Fallacy. The metaphor of piercing the corporate veil has incorrectly framed the relevant question. See id. (“Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it.”). Iowa cases treat the question of “veil piercing” as if it were a cause of action proved by evidence of one or more of the following:

1) the corporation is undercapitalized, (2) the corporation lacks separate books, (3) its finances are not kept separate from individual finances, or individual obligations are paid by the corporation, (4) the corporation is used to promote fraud or illegality, (5) corporate formalities are not followed, or (6) the corporation is a mere sham.



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See C. Mac Chambers Co., Inc. v. Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d 593, 598 (Iowa 1987). The metaphor does not capture the truth or spirit of the matter. In a veil piercing case, the “corporate veil” is not actually pierced and the corporate entity is not disregarded; instead, judgment is entered against the corporation, as the judgment entry in this case reflects, and the district court takes the additional step of imposing judgment against a shareholder for the corporation’s liability where liability otherwise would not exist. See Int’l Fin. Servs. Corp. v. Chromas Techs. Canada, Inc., 356 F.3d 731, 736 (7th Cir.2004) (“Piercing the corporate veil, after all, is not itself an action; it is merely a procedural means of allowing liability on a substantive claim.”). As one commentator noted:

In no area is the misleading character of the entity metaphor more evident than in that of shareholder liability for corporate debts. Much of the language of the cases dealing with shareholder liability starts with the proposition that the existence of the corporate entity requires the denial of such liability, and therefore any case which imposes such liability can only do so by disregarding the corporate entity. Instead of dealing with the proper question of when, if ever, shareholders will be liable for corporate obligations, decisions are made in terms of the question of whether the corporate entity exists or is to be disregarded.

WILLIAM P. HACKNEY & TRACY G. BENSON, Shareholder Liability for Inadequate Capital, 43 U. Pitt. L.Rev. 837, 843 (1982). Framing the question around the existence of the entity rather than the imposition of liability as an equitable remedy has hindered development of the law in this area in several respects, one of which deserves further consideration here. Specifically, framing the question around the existence of the entity rather than the equitable and remedial nature of the rule has precluded discussion of whether the issue should be decided by the jury at law or the district court in equity. See Goettsch v. Goettsch, 29 F.Supp 3d 1231 (N.D. Ia. 2014) (holding no Constitutional right to jury trial on oppressive conduct claim).

d. There Are Really Many Factors. The six factors are not exclusive. For example, one court considers at least nineteen factors, plus any other evidence that might be relevant in a totality of the circumstances test. See Laya v. Erin Homes, Inc., 352 S.E.2d 93, 98–99 (W.Va.1986). In Boyd v. Boyd & Boyd, Inc., 386 N.W.2d 540, 543–44 (Iowa Ct.App.1986), the court recognized the six factors usually identified as being relevant are not exclusive and that the test is simply ad hoc:






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Where [defendant’s] argument fails is in his characterization of these factors as the only factors which warrant “piercing the corporate veil.” Nowhere in Lakota Girl Scout C., Inc. v. Havey Fund-Rais. Man., Inc., 519 F.2d 634 (8th Cir.1975), is its listing claimed to be an exclusive or even an exhaustive one. Rather, no precise formula is available to predict when a court should disregard the corporate entity as Fletcher explains after a more extensive listing of factors than Lakota’s: The conclusion to disregard the corporate entity may not, however, rest on a single factor but often involves a consideration of the mentioned factors; in addition, the particular situation must generally present an element of injustice or fundamental unfairness.... It seems clear that no hard and fast rule as to the conditions under which the entity may be disregarded can be stated as they vary according to the circumstances of each case and that factors adopted as significant in a decision to disregard the corporate entity should be treated as guidelines and not as a conclusive test. Fletcher, § 41.30 at 430–31. Additionally, at least two other noted treatises on corporate law state that one of the circumstances which may move a court to disregard corporate entity is where limited liability would be inequitable. 6 Hayes, Iowa Practice Business Organizations § 882 at 298 (1985); Hornstein, Corporation Law and Practice § 752 at 265 (1959). Hayes further specifies that “[t]he corporate veil may be disregarded when recognition would work inequitably against one or more groups of creditors of the enterprise....” Hayes, § 886 at 308.

e. Is Undercapitalization Really an Important Factor? Undercapitalization

is a relational concept. The relevant question is not whether the corporation had a specific amount of capital at or near the time of incorporation but whether the capital structure was adequate as measured by the nature and magnitude of the corporate undertaking. See J–R Grain Co. v. FAC, Inc., 627 F.2d 129, 135 (8th Cir.1980) (“Adequate initial financing should not be confused with formal minimum paid-in capital requirements applicable in several jurisdictions.”); Briggs Transp. Co., Inc., 262 N.W.2d at 810 (“If capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.” (emphasis added)). See J–R Grain Co., 627 F.2d at 135 (“Inadequate capitalization ... means capitalization very small in relation to the nature of the business of the corporation and the risks the business necessarily entails. Inadequate capitalization is measured at the time of formation of the corporation. A corporation that was adequately capitalized when formed but has suffered losses is not undercapitalized.”); Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L.Rev. 89, 113 (1985) (“By ‘adequately’ capitalized









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we mean an amount of equity that is within the ordinary range for the business in question. Both the absolute level of equity investment and the debt-equity ratio will depend on the kind of business on which the firm is embarked.”).

For example, comparison with the capitalization of other corporations in the same or a similar line of business may be made. The capitalization of the corporation in question could be compared with the average industry-wide ratios (current ratio, acid-test ratio, debt/equity ratio, etc.) obtained from published sources.... These average ratios could be buttressed by expert testimony from certified public accountants, securities analysts, investment counselors or other qualified financial analysts.

Laya v. Erin Homes, Inc., 352 S.E.2d 93, 101 (W.Va.1986).

f. Is Administrative Dissolution a Factor? The mere fact that a corporation was administratively dissolved is not material to the question of personal shareholder liability. This is because the entity continued as a separate legal entity following administrative dissolution and the reinstatement related back to the date of dissolution as if it had never occurred. See Iowa Code § 490.1421(3) (“A corporation administratively dissolved continues its corporate existence ...”); Iowa Code § 490.1422(3) (“When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution as if the administrative dissolution had never occurred.”).
