On December 22, 2017 President Trump signed into law the Tax Cuts and Jobs Act (officially Public Law no. 115-97, named “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”). Recognized generally for changes to the individual income tax brackets, the corporate tax cuts, and the estate tax modification, a separate section, 13307, likely will have a significant impact on sexual harassment settlements.

Senator Bob Menendez (D- NJ) proposed the Weinstein tax exclusion (above) in direct response to the #MeToo movement after the sexual harassment revelations about Harvey Weinstein. The provision was added to the Tax Cuts and Jobs Act to restrict tax deductibility of sexual harassment settlements associated with nondisclosure agreements. Such agreements were reported in connection with Harvey Weinstein, Fox News, and other high profile cases.

Section 13307 modified the IRS Tax Code section 162 to eliminate the ability of businesses and defendants (and possibly plaintiffs) to deduct the costs associated with settlements of sexual harassment claims that are subject to nondisclosure agreements, including legal fees related to the settlements. Because most settlements related to sexual harassment have included confidentiality or nondisclosure language, the impact of this legislation will be significant for all parties involved, and will be reflected in advice from legal counsel. The provision applies to any payments made on or after December 22, 2017 and is not retroactive, except to the extent it affects payments left to be paid after December 22, 2017 on any prior settlement agreement.

The statutory language does not provide definitions for the terms “sexual harassment” or “sexual abuse.” The statutory language also does not clarify the meaning of “related to” for the purposes of settlement or legal fees. This ambiguity leaves several important open questions:

• An employment dispute that does not involve claims of sexual harassment but results in a nondisclosure agreement that includes broad releases may be problematic. If the scope of the releases includes sexual harassment claims, can that settlement be deducted by the business?

• What if a plaintiff has multiple claims, including but not limited to retaliation, gender discrimination, and a sexual harassment claim; what portions of a settlement payment will be deductible? Could effective contract drafting allocate most of the settlement consideration to the non-sexual harassment claims and thereby affect deductibility?

• In settling multiple claims, should counsel draft two separate agreements, one dealing only with the sexual harassment claim and the other agreement with all remaining claims, and allocating the larger portion of the settlement consideration to the nonsexual harassment claim, which is deductible?

• Does the statute exclude all legal fees associated with the claim from deduction, or just the portion of fees associated with the negotiation of the settlement and the drafting and execution of a settlement agreement?

Until more clarity is provided by administrative rules, legislative changes, or court opinions, lawyers will have an important role advising clients how to modify previous boilerplate nondisclosure settlement
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DelawareUnder Delaware law, when a derivative plaintiff loses its stockholder status as the result of a merger, the plaintiff usually also loses its standing to pursue a derivative suit on behalf of the corporation.  This rule is subject to only two limited exceptions: (1) when “the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive shareholders of the standing to bring a derivative action,” and (2) when “the merger is in reality merely a reorganization which does not affect plaintiff’s ownership in the business enterprise.”  Lewis v. Ward, 852 A.2d 896, 902 (Del. 2004) (clarifying exceptions identified in Lewis v. Anderson, 477 A.2d 1040 (Del. 1984)).  In a decision revisiting a 2010 mining tragedy in which dozens of miners were killed, the Delaware Court of Chancery recently concluded that neither exception applied to preserve the standing of stockholders of Massey Energy Company (“Massey”) to bring derivative claims, and that plaintiffs had not brought direct claims for an “inseparable fraud.”  In re Massey Energy Co. Derivative & Class Action Litig., Consol. C.A. No. 5430-CB (May 4, 2017).

Backstory: The Court of Chancery Refuses To Enjoin The Massey-Alpha Merger

In 2011, stockholder plaintiffs attempting to enjoin a merger between Massey and Alpha Natural Resources, Inc. (“Alpha”) argued that Massey should be forced to assume and transfer derivative claims against certain Massey fiduciaries to a trust for the benefit of Massey stockholders, rather than allowing the claims to pass to Alpha.  While finding “little doubt” that plaintiffs’ derivative claims could survive a motion to dismiss, the Court also concluded that plaintiffs were likely to lose standing to pursue those claims if the merger was consummated.

The Court of Chancery noted that a corporation reasonably may conclude that the risks arising from a lawsuit outweigh the potential risk-weighted recovery, even when the corporation clearly has been harmed.  As a practical matter, a corporation with strong claims against former executives may choose not to pursue those claims for valid reasons, including a wish to avoid pleading formal admissions that potentially could be used against the corporation by third parties, such as insurance carriers, government agencies, and employees and other individuals with personal injury and other claims.  Delaware courts have declined to hold that these kinds of dilemmas – which arise because the corporation itself is conflicted, and not because the directors suffer a personally disabling conflict of interest – justify excusing a would-be plaintiff from the requirement of a pre-suit demand.  In its injunction opinion, the Court in Massey similarly refused to create another exception to the general rule that a merger extinguishes the ability of a former stockholder plaintiff to pursue claims derivatively on behalf of the corporation.  In addition, the Court noted that if a potential buyer cannot rely on the fact that a merger will eliminate derivative claims, bids for troubled assets will be reduced, if not deterred completely, because the buyer must discount the value of the assets to reflect the uncertainty. 
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california-160550_960_720California’s Unfair Competition Law

The Legislature enacted California’s Unfair Competition Law (the “UCL”) to deter unfair business practices and protect consumers from exploitations in the marketplace. Allen v. Hyland’s Inc. (C.D. Cal. 2014) 300 F.R.D. 643, 667. Under the UCL “unfair competition” means “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act.” Bus. & Prof. Code, §§ 17200; 17500. The Legislature initially imposed no standing requirements for private litigants to bring suit and, “[a]s a result, a private individual or entity with no relationship to the alleged wrongful practice could use the statute to force a business to repay substantial sums arguably acquired through a UCL violation.” In re Tobacco II Cases (2009) 46 Cal.4th 298, 329 (dissenting opinion).

In November 2004, California voters passed Proposition 64, a ballot proposition designed to prevent “shakedown suits” brought under the UCL. In re Tobacco II Cases, 46 Cal.4th at 316. Lawmakers aimed Proposition 64 at “unscrupulous lawyers” who exploited the UCL’s generous standing requirement to extort money from small businesses by bringing frivolous lawsuits. Id.[1]  

Proposition 64 required that for private litigants to bring an action under the UCL the litigant must suffer an actual economic injury as a result of the unfair business practice at issue. Bus. & Prof. Code, § 17204. Critically, under Proposition 64, local public prosecutors can still bring UCL lawsuits without meeting the more stringent standing requirements applicable to private litigants. Bus. & Prof. Code, § 17204. Thus, while Proposition 64 limited private litigants’ standing to sue under the UCL, government prosecutors’ standing was in no way affected by this law. Californians For Disability Rights v. Mervyn’s, LLC (2006) 39 Cal.4th 223, 232.

The Aftermath of Proposition 64

Ever since the Legislature amended the UCL pursuant to Proposition 64, California courts have been faced with the issue of interpreting the “as a result of” language under the UCL. The California Supreme Court has opined the “as a result of” language requires that a putative plaintiff actually relies on the conduct at issue in order to have standing to sue under the UCL. In re Tobacco II Cases (2009) 46 Cal.4th 298, 326. The actual reliance need not be the only cause of the plaintiff’s harm; so long as the reliance is a substantial factor in actually influencing the plaintiff’s decision, standing will lie. Id., at 326-27.

In 2016 the Court of Appeal for the Second District recognized that the “as a result of” language required “reliance on a statement for its truth and accuracy.” Goonewardene v. ADP, LLC (2016) 5 Cal.App.5th 154, 185 (citing Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 327).

Veera v. Banana Republic, LLC

The California Supreme Court will have another opportunity to further define “as a result of” under the UCL in a case which appellant Banana Republic recently filed for review. In Veera v. Banana Republic, LLC the plaintiffs alleged that they were “lured” into a
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supreme-court-building-1209701_1280 On February 28, 2017, the Missouri Supreme Court joined a growing list of tribunals to apply a strict reading of the United States Supreme Court’s seminal ruling in Daimler AG v. Bauman, 134 S. Ct. 746 (2014). In State ex rel. Norfolk So. Ry. Co. v. Hon. Colleen Dolan, No. SC95514, the Missouri Supreme Court held that Missouri courts lack the requisite personal jurisdiction, either specific or general, over a non-resident defendant, Norfolk Southern Railway Company, in a claim brought by a non-resident plaintiff who asserted a Federal Employer’s Liability Act (FELA) violation arising from his employment by Norfolk Southern in the State of Indiana. The ruling marks a significant victory for corporate defendants seeking to combat forum shopping by plaintiffs, the practice of bringing cases in jurisdictions which are more likely to provide a favorable judgment or a more lucrative verdict.

The plaintiff, Indiana resident Russell Parker, argued that Missouri courts had both general and specific jurisdiction over Norfolk based on the company’s contacts with the state. Specifically, the plaintiff cited Norfolk’s ownership of approximately 400 miles of railroad track in the state, 590 employees in the state, and approximately $232,000,000 in annual revenue from the company’s operations in Missouri. As grounds for its decision, the court found that the plaintiff’s allegations did not arise from or relate to Norfolk’s activities in Missouri so as to give rise to specific jurisdiction, nor were Norfolk’s operations in the State sufficient to give rise to a Missouri court’s exercise of general jurisdiction over a defendant such as Norfolk; a company incorporated in and with principal place of business in Virginia.

Citing the Second Circuit’s decision in Brown v. Lockheed Martin Corp., 814 F.3d 619, 627-30 (2d Cir. 2016), wherein .05 percent of the defendant’s employees and no more than .107 percent of total revenue were derived from the defendant’s activities in the state of Connecticut, the Missouri Supreme Court concluded that Norfolk’s activity in Missouri represents “a tiny portion” of the company’s business activities nationwide. Specifically, the court noted that the revenue derived from Missouri is approximately 2 percent of Norfolk’s total revenues; the tracks owned and operated in Missouri constitute approximately 2 percent of the tracks Norfolk owns and operates nationally; and the company’s Missouri-based employees account for only about 2 percent of its total employees.

The Missouri Supreme Court’s decision is particularly newsworthy for its refusal to find general personal jurisdiction based on a non-resident company’s appointment of a registered agent in the state. In its ruling, the court rejected the plaintiff’s argument that Norfolk’s compliance with Missouri’s mandatory business registration requirements for foreign corporations amounted to consent to the exercise of general personal jurisdiction by Missouri courts. To the contrary, the court held that as the relevant section of law provided only that registration is consent to service of process against non-resident corporations, “the registration statute does not provide an independent basis for broadening Missouri’s personal jurisdiction to include suits unrelated
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architecture-22039_960_720“Veil piercing” is an equitable remedy that allows a plaintiff with a claim against an entity to obtain relief from the entity’s owners, in spite of laws providing for limited liability.  When the owners provide personal guarantees or otherwise contract around liability protections, or when the owners are sued in their own right based on their own conduct, it is not necessary to pierce a veil of limited liability.  True veil piercing – where the owners are asked to stand in for acts of the entity – is an extraordinary remedy to be reserved for the most extreme cases.

Courts generally have reviewed several factors, with varying degrees of emphasis, when determining whether to pierce the veil of a corporation.  These have included the existence of fraud, adherence to “corporate formalities” such as holding and documenting meetings, the level of capitalization, whether a dominant stockholder siphoned funds from the corporation, and whether investors are so active in the management of the corporation that the corporation is their “alter ego” or “instrumentality.”  Fraud may, depending on the circumstances, provide an independent basis for the liability of stockholders and others on the grounds that individuals are being found liable based on their own conduct.  Other factors supporting veil piercing also often stand in as proxies for fraud, or reasons to suspect fraudulent behavior.

As has become increasingly clear, Delaware “alternative entities” such as limited partnerships and limited liability companies are not the same thing as corporations.  While many of the same fiduciary principles applicable to corporate fiduciaries may apply under certain circumstances to the fiduciaries of an alternative entity, courts must remain sensitive to distinctions in entity law.  In the context of veil piercing, these distinctions suggest that a Delaware LLC should not be subject to true veil piercing at all, as opposed to the imposition of liability under standard concepts of fraud, fraudulent conveyance, etc.; and that assuming the LLC’s veil may be pierced, any piercing should be subject to different standards than those applicable to piercing the corporate veil.

Section 102(b)(6) of the Delaware General Corporation Law (“DGCL”) states that a certificate of incorporation “may” contain “[a] provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”  8 Del. C. § 102(b)(6).  Thus, under the DGCL, the default rule is that stockholders are not personally liable for corporate debts based on their ownership of stock, but may be liable as a result of their own conduct, and may also agree in the charter to be liable to a specified extent and upon specified conditions.

Section 18-303(a) of the Delaware Limited Liability Company Act (“DLCCA” or “Delaware LLC Act”) states that

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company,


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