by Jack B. Harrison
Recently, the Department of Labor (“DOL”) issued a Notice of Proposed Rulemaking under which it stated its intentions to extend the protections of the Family and Medical Leave Act (“FMLA”) to all eligible employees in legal same-sex marriages regardless of the state in which they live. In releasing the proposed rule change, the DOL described the purpose of this proposed rule change as follows:
The proposal would help ensure that all families will have the flexibility to deal with serious medical and family situations without fearing the threat of job loss. Secretary Perez is proposing this rule in light of the Supreme Court's decision in United States v. Windsor, in which the court struck down the Defense of Marriage Act provision that interpreted "marriage" and "spouse" to be limited to opposite-sex marriage for the purposes of federal law.
Under the proposed rule change, the regulatory definition of “spouse” would be changed to allow eligible employees in a legal same-sex marriage to take FMLA leave for his or her spouse or family member regardless of the state in which the employee resides. Under the current regulatory definition of "spouse," only same-sex spouses who reside in a state that recognizes same-sex marriage are able to take advantage of FMLA leave. The proposed rule would define “spouse” for FMLA purposes as follows:
Spouse, as defined in the statute, means a husband or wife. For purposes of this definition, husband or wife refers to the other person with whom an individual entered into marriage as defined or recognized under State law for purposes of marriage in the State in which the marriage was entered into or, in the case of a marriage entered into outside of any State, if the marriage is valid in the place where entered into and could have been entered into in at least one State. This definition includes an individual in a same-sex or common law marriage that either (1) was entered into in a State that recognizes such marriages or, (2) if entered into outside of any State, is valid in the place where entered into and could have been entered into in at least one State.
Thus, under the proposed rule change, coverage under the FMLA would be based on the law of the place where the marriage was entered into (“state of celebration” as opposed to “state of residence”), which would allow legally married same-sex couples to be eligible for FMLA family leave rights regardless of whether the state in which they currently reside recognizes such marriages.
Under the process following the issuance of a Notice of Proposed Rulemaking, interested parties may submit comments on the proposed rule at www.regulations.gov. Interested parties who wish to provide comments on the proposed rule must do so on or before August 11, 2014.
Employers, particularly those in states that do not currently recognize same-sex marriages, should closely follow the developments surrounding this proposed rule. Assuming the rule is adopted, employers should be prepared to modify their leave policies to bring them in line with the new rule. Cors & Bassett will continue to monitor developments related to this proposed rule and will provide updates as appropriate.
by Jack B. Harrison
On the final day of the term, the United States Supreme Court issued its much anticipated decision in Burwell v. Hobby Lobby. In Hobby Lobby, the Supreme Court ruled in favor of Hobby Lobby and two other entities, holding that closely held, for-profit entities who had objections to certain aspects of the birth control mandate imposed by the Affordable Care Act ("the ACA") based on religious beliefs could invoke the protections of the Religious Freedom Restoration Act (RFRA) to avoid complying with the mandate.
Hobby Lobby involved three closely held companies, Hobby Lobby Stores, Inc., Conestoga Wood Specialties Corporation, and Mardel, Inc., all of whom sought exemption from the birth control mandate contained in the ACA. In its decision, the Supreme Court held specifically that:
(a) for-profit, closely held corporate entities are "persons" authorized to bring claims under RFRA;
(b) the ACA's birth control coverage mandate with respect to the four specific forms of birth control at issue in the case placed a substantial burden on the religious beliefs of the entities seeking the exemption; and
(c) while agreeing with the government’s position that providing corporate employees free access to these four forms of birth control was a matter of compelling interest to the federal government, the ACA's coverage mandate was not the least restrictive means of achieving that goal.
Justice Ginsburg, joined in full by Justice Sotomayor, authored a very strong dissent in which she clearly articulated her disagreement with all three of these holdings by the majority. Justices Breyer and Kagan also dissented, refusing to reach a conclusion as to whether for-profit corporations had standing to bring claims under RFRA, but joining in the remainder of Justice Ginsburg’s dissent.
While the decision is expressly limited to the specific birth control mandate of the ACA, the forms of birth control specifically objected to in the case, and the specific corporate structure (i.e. closely held, for-profit entities) before the Supreme Court in Hobby Lobby, it is likely that language in the decision will spawn litigation over religious objections to generally applicable federal laws, including non-discrimination laws.
The majority stated in its opinion the following:
The principal dissent raises the possibility that discrimination in hiring, for example on the basis of race, might be cloaked as religious practice to escape legal sanction. Our decision today provides no such shield. The Government has a compelling interest in providing an equal opportunity to participate in the workforce without regard to race, and prohibitions on racial discrimination are precisely tailored to achieve that critical goal.
It can be argued that this statement by the Supreme Court should be read narrowly, applying only to federal statutes that prohibit discrimination based on race. Presumably, those taking such a position would argue that because race based discrimination is specifically prohibited by the Constitution, federal statutes implementing the Constitutional prohibition are beyond the reach of RFRA. Arguably, it would then follow that federal statutes prohibiting discrimination on other categories, such as gender or sexual orientation / gender identity would be subject to religious objections under RFRA. It is unlikely that the Supreme Court meant for its language to be read so narrowly. However, this language certainly opens the door for future challenges.
Prudent employers, particularly closely held, for-profit entities whose corporate documents and practices express strong religious beliefs, should review this decision and its implications for them. However, such employers should continue to comply with all federal, state, and local laws prohibiting discrimination, giving consideration to the public relations problems that might be created by openly seeking to defy non-discrimination laws based on religious beliefs, no matter how strongly held they may be.
Legislation has already been introduced in the Congress to reverse the impact of this decision. Introduced on July 9, 2014, the Protect Women’s Health from Corporate Interference Act of 2014 (H.R. 5051, S. 2578), specifically seeks to overturn the decision in Hobby Lobby. According to the sponsors of this legislation, the “bill exempts federally mandated health services from RFRA while keeping in place the existing exemption for religious employers (e.g., houses of worship) and accommodation of religious non-profits who do not wish to provide contraceptives.” The intent of this legislation is to “explicitly prohibit for-profit employers that maintain a group health plan for its employees from using religious beliefs to deny employees coverage of contraception or any other vital health service required by federal law.”
Thus, employers should continue to monitor developments following Hobby Lobby, both in the courts and in the Congress. Cors & Bassett will continue to provide updates as developments occur.
by Jack B. Harrison
In the past several months, the Equal Employment Opportunity Commission (EEOC) filed two lawsuits confirming the agency’s intent to continue to aggressively challenge severance agreements negotiated between an employer and employee.
The first of these cases, EEOC v. CVS Pharmacy Inc. was filed in February 2014 in the United States District Court for the Northern District of Illinois. In this first suit, the EEOC alleged that the defendant had violated Title VII by conditioning its offer of severance benefits on the employee signing a severance agreement that, according to the EEOC, “deters the filing of charges and interferes with employees’ ability to communicate voluntarily” with the EEOC. According to the EEOC’s complaint, the offending provisions in the severance agreement included a requirement that the employee notify the company if he or she became part of an administrative investigation, a non-disparagement clause, a non-disclosure of confidential information clause, a release of all claims by the employee, and a covenant not to sue the company. As should be obvious to most employers, many of these types of clauses are standard provisions in many severance agreements.
The EEOC filed its second suit challenging the provisions of a severance agreement in April 2014 in the United States District Court for the District of Colorado. In this suit, EEOC v. CollegeAmerica Denver, the EEOC alleged that the severance agreement used by the defendant, a private college, chilled and interfered with the employee’s rights to pursue age discrimination claims under the Age Discrimination in Employment Act (ADEA).
In CollegeAmerica, the director of the Wyoming campus of CollegeAmerica, Debbi Potts, resigned from her position in July 2012. In September 2012, Potts signed a separation agreement that included a provision that she would “refrain from personally (or through the use of any third-party) contacting any governmental or regulatory agency with the purpose of filing any complaint or grievance that shall bring harm to CollegeAmerica” and also included a non-disparagement provision. Potts then filed a charge of discrimination against CollegeAmerica with the EEOC.
During the course of the EEOC’s investigation of Potts’ claim, CollegeAmerica produced a form severance agreement that it had used for several years. This form agreement included provisions under which an employee would release all claims alleging discrimination and/or claims arising under Title VII, would agree not to assist in pursuit of claims against the company, unless compelled by law, and would agree that no lawsuit or administrative action had been filed against the company in the employee’s name. In its complaint filed in this case, the EEOC alleges that the severance agreements used by CollegeAmerica include “provisions that chill and deter the filing of charges of discrimination and may interfere with employees’ ability to communicate voluntarily with the EEOC . . . and interfere with employees’ protected right to file charges or participate in investigations or proceedings conducted by the Commission.”
Taken together, these two suits serve as a signal to employers that the EEOC plans to continue its review of and challenge to severance agreements that include provisions such as those outlined in these two cases. Given that such provisions are standard in many severance agreements used by employers, it becomes important that prudent employers review their standard severance agreements to determine whether they will withstand a challenge by the EEOC. The provisions in these agreements should be narrowly tailored to provide the maximum protection possible for the employer, while, at the same time, not intruding on the employee’s rights under Title VII and other discrimination statutes.
By Jack B. Harrison
In a decision of importance to both internet website operators and free speech advocates, on June 16, 2014, the United States Court of Appeals issued its opinion in the highly watched case of Jones v. Dirty World Entertainment. In its decision the Court of Appeals reversed d decision by the lower court that had held that a website and its editor were not entitled to immunity under the Communications Decency Act and were, therefore, potentially liable for defamatory posts submitted by the website’s users.
In 2009, the website TheDirty.com posted a story stating as fact the sexual exploits of Sarah Jones, a high school teacher and Cincinnati Bengals cheerleader, involving Cincinnati Bengals players. A subsequent post asserted that Jones had engaged in sexual relations with her husband in her classroom and that she had STDs. Both posts were submitted to the website anonymously by readers of the website. However, the publisher of TheDirty.com, Nik Richie, added his own comment at the bottom of the second post, stating: “Why are all high school teachers freaks in the sack? – nik.”
Jones then filed a lawsuit against Richie and the site, claiming the two posts alleging she had STDs were defamatory. However, Jones did not sue the individual who actually wrote the posts. Rather she sued the website which posted the anonymous comments and the publisher of the website.
The Court of Appeals described the procedure history of the case as follows:
In response to the posts appearing on www.TheDirty.com, Jones brought an action in federal district court alleging state tort claims of defamation, libel per se, false light, and intentional inflection of emotional distress. Richie and Dirty World claimed that § 230(c)(1) [of the Communications Decency Act of 1996] barred these claims. The district court rejected this argument and denied defendants-appellants’ motion to dismiss, motion for summary judgment, motion to revise judgment, and motion for judgment as a matter of law. The district court also denied Richie’s and Dirty World’s motion for leave to file an interlocutory appeal. The case was submitted to a jury, twice. The first trial ended in a mistrial upon a joint motion. The second trial resulted in a verdict in favor of Jones for $38,000 in compensatory damages and $300,000 in punitive damages. On appeal, Richie and Dirty World maintain that § 230(c)(1) barred Jones’s claims.
Thus, the issue before the Court of Appeals was whether or not the lower court was correct in holding that TheDirty.com and its publisher were not immune from suit for the publication of these stories because, according to the lower court, they “encouraged” the publication.
Following extensive briefing by the parties, as well as the filing of a large number of amicus briefs on behalf of website operators and free speech advocates, the Court of Appeals reversed the decision of the lower court and set aside the jury verdict. In reaching this conclusion, the Court of Appeals adopted the “material contribution” test for determining whether or not a website operator or publisher is immune from suit under the Communications Decency Act for content that appears on its website. Under this test, a court is to examine whether or not the website operator or publisher materially contributed to the content that is allegedly defamatory. In applying this test to the facts of this case, the Court of Appeals stated the following:
[T]he [district] court concluded that those comments [by Richie] “effectively ratified and adopted the defamatory third-party post” and thereby developed the defamatory statements, [and] thus rul[ed] that the CDA did not bar Jones’s claims. Jones IV, 965 F. Supp. 2d at 823 (“Defendants are mistaken, for the salient point about Richie’s tagline is not that it was defamatory itself and thus outside CDA immunity, but rather that it effectively ratified and adopted the defamatory third-party post.”). The district court’s adoption or ratification test, however, is inconsistent with the material contribution standard of “development” [under the CDA] and, if established, would undermine the CDA. Therefore, Dirty World and Richie did not develop the statements forming the basis of Jones’s tort claims and accordingly are not information content providers as to them.
Because (1) the defendants are interactive service providers, (2) the statements at issue were provided by another information content provider, and (3) Jones’s claim seeks to treat the defendants as a publisher or speaker of those statements, the CDA bars Jones’s claims. See Universal Commc’n Sys., 478 F.3d at 418. Given the role that the CDA plays in an open and robust internet by preventing the speech-chilling threat of the heckler’s veto, we point out that determinations of immunity under the CDA should be resolved at an earlier stage of litigation. See Nemet, 591 F.3d at 254 (“[I]mmunity is an immunity from suit rather than a mere defense to liability [and] is effectively lost if a case is erroneously permitted to go to trial.”).
In its opinion, the Court of Appeals affirms the basic value user-submitted speech to internet websites, even where such speech is critical and, arguably, defamatory. As the Court of Appeals states in its opinion:
Some of this content will be unwelcome to others—e.g., unfavorable reviews of consumer products and services, allegations of price gouging, complaints of fraud on consumers, reports of bed bugs, collections of cease-and-desist notices relating to online speech….Under an encouragement test of development, these websites would lose the immunity under the CDA and be subject to hecklers’ suits aimed at the publisher.
The Court of Appeals does not conclude, of course, that there could be no liability for allegedly defamatory speech that appears on such a website. Rather, the appropriate target of such a lawsuit, under the opinion issued by the Court of Appeals, would appear to be the actual author of the statements.
by David J. Schmitt
Early last year, I blogged about the trial court’s decision in the San Allen v. Ohio Bureau of Workers’ Compensation case. An update is now clearly in order.
Pursuant to the trial court ruling, employers who paid Ohio Worker’s Compensation premiums between 2001 – 2008, and which were not group-rated, are entitled to reimbursement for a portion of their premiums.
In the case of San Allen, Inc., et al, v. Stephen Buehrer, Administrator of the Ohio BWC, Cuyahoga County Court of Common Pleas, Case No. CV-07-644950, the plaintiffs consist of Ohio employers who paid workers compensation premiums during the indicated period, and which did not receive group-rated premium discounts. The lawsuit contended that the BWC’s premium discounts for group-rated employers were too steep and that the BWC overcharged other employers to make up the difference.
The case was granted class-action status meaning that any employer that paid premiums to the BWC on a nongroup-rated basis during any one or more of the policy years in question is automatically part of the class unless it affirmatively opted-out.
The plaintiffs initially requested close to $1.3 Billion in reimbursement for class members. In a decision issued December 28, 2012, Judge Richard McMonagle determined that the BWC did indeed overcharge the plaintiff employers and that the class is entitled to reimbursement in the amount of $860 Million Dollars.
Unsurprisingly, the Ohio BWC appealed the decision to the Cuyahoga County Court of Appeals. After several months of waiting, the Court has upheld the lower court’s decision, meaning that the BWC is still on the hook for $860 Million Dollars. The court’s written opinion was particularly harsh. In the very first sentence, the Court stated, “Reduced to its irreducible essence, this appeal is about a cabal of Ohio Bureau of Workers’ Compensation bureaucrats and lobbyists for group sponsors who rigged workers’ compensation premium rates so that for employers who participated in the BWC’s group-rating plan, it was “heads we win” and for employers who did not participate in the group-rating plan, it was “tails you lose”.
The Court of Appeals also returned the case to the trial court for a recalculation of damages, including the over $2Million Dollars per month in interest on the original verdict that has been piling up during the pendency of the appeal.
The BWC stated that it is disappointed in the decision and is reviewing its options. These may include appealing the case to the Ohio Supreme Court. If that were to occur, it will likely be another year at least before any distribution would be made to class members.
On the other hand, the State may decide that it is time to settle. The BWC can afford it. The agency has over $8 Billion in its surplus fund, and has had the judgment amount in escrow for many months.
Regardless of whether it is a class member, all Ohio employers should continue to follow this case. Class members will naturally be interested in how much reimbursement they may be entitled to. Non-class members may still be impacted because if the BWC’s appeal fails and it has to pay this judgment, it may have to raise premiums in order to recoup some or all of its losses.
As developments continue to arise in this case, Cors & Bassett will provide further information and guidance to assist you. Please contact David Schmitt at email@example.com or by phone at 513-852-2587 if you would like to discuss this matter further.
by Jack B. Harrison
In what should be a decision of great importance for employers, the United States Court of Appeals for the Sixth Circuit issued a decision on April 22, 2014, holding that employers may be required under the Americans with Disabilities Act (“ADA”) to allow telecommuting as a “reasonable accommodation” for a disabled employee. The Court of Appeals rendered this decision despite evidence presented by the employer that personal interaction with other employees and customers was an essential function of the position held by the employee.
In EEOC v. Ford Motor Company, the employee, Jane Harris was employed as a resale buyer for Ford. In her position as a resale buyer, Harris purchased steel and resold it to entities that manufactured and supplied vehicle parts to Ford’s plants. Ford took the position that the position of resale buyer was “highly interactive,” arguing that the interactions between resale buyers and those with whom they deal professionally should optimally occur face to face.
Throughout her career, Harris repeatedly had attendance issues. In 2009, she requested that she be allowed to telecommute as an accommodation for her irritable bowel syndrome. Ford investigated possible ways in which to accommodate the request, but ultimately rejected Harris’ request, concluding that her job required face to face interactions. Ford concluded that if Harris was unable to be physically present for her work, then she did not meet the essential qualifications for the job.
Following the denial of her request, Harris sued Ford, with the EEOC ultimately pursuing the case on her behalf. Ford then moved for summary judgment, arguing that face to face interactions were an essential function of the job of resale buyer. Because Harris was unable to be physically present, Ford argued that she was not “otherwise qualified” for the position as required by the ADA. The district court accepted Ford’s arguments and granted summary judgment. In discussing whether telecommuting is a reasonable accommodation in the case of Harris, the district court stated, “in general, courts have found that working at home is rarely a reasonable accommodation.”
The EEOC then appealed the decision of the district court to the United States Court of Appeals for the Sixth Circuit. On appeal, the Court of Appeals reversed the lower court decision. Unlike the district court, the Court of Appeals did not defer to the employer’s conclusion that being physically present was an essential function of Harris’ position as resale buyer. Rather, the Court of Appeals reviewed other factors, such as the employee’s own sense of how much of her job involved face to face interactions and how much took place via conference calls. The Court of Appeals concluded that based on the entire record, it was error for the district court to conclude, as a matter of law, that Harris needed to be physically present at the office to perform her job as a resale buyer.
The Court of Appeals went even further by noting that prior decisions holding that being physically present in the workplace is an essential function of a particular position may well be based on antiquated notions of the “workplace.” The Court of Appeals stated:
When we first developed the principle that attendance is an essential requirement of most jobs, technology was such that the workplace and an employer’s brick-and-mortar location were synonymous. However, as technology has advanced in the intervening decades, and an ever-greater number of employers and employees utilize remote work arrangements, attendance at the workplace can no longer be assumed to mean attendance at the employer’s physical location. Instead, the law must respond to the advance of technology in the employment context, as it has in other areas of modern life, and recognize that the “workplace” is anywhere that an employee can perform her job duties. Thus, the vital question in this case is not whether “attendance” was an essential job function for a resale buyer, but whether physical presence at the Ford facilities was truly essential. Determining whether physical presence is essential to a particular job is a “highly fact specific” question. Hoskins, 227 F.3d at 726. Accordingly, we consider several factors to guide our inquiry, including written job descriptions, the business judgment of the employer, the amount of time spent performing the function, and the work experience of past and present employees in the same or similar positions. See 29 C.F.R. § 1630.2(n)(2).
Employers, particularly those within the jurisdiction of the Sixth Circuit, should find this decision troubling, particularly given the refusal of the Court of Appeals to defer to the employer's business judgment in managing its workforce. In response to this decision, prudent employers should carefully review their job descriptions to insure that where the employer sees physical presence as an essential function of a position, such a requirement is clearly delineated in the job description. Additionally, when an employer has a telecommuting policy, those policies should be reviewed to insure that they are narrowly drafted to specifically define when such an employment arrangement is allowed.
by Jack B. Harrison
On April 22, 2014, an administrative law judge for the National Labor Relations Board (“NLRB”) held that certain provisions of the Kroger Co. of Michigan’s online communication policy was unlawfully broad because specific provisions of the policy could reasonably be interpreted as infringing upon employees rights under the National Labor Relations Act. Specifically, the decision held that the provisions at issue could be interpreted as unlawful limitations on employees’ rights under Section 7 of the Act to “self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all of such activities.”
The four specific policy provisions that were of concern to the Board in this decision follow:
- If you identify yourself as an associate of the Company and publish any work-related information online, you must use this disclaimer: “The postings on this site are my own and do not necessarily represent the postings, strategies or opinions of The Kroger Co. family of stores.”
- You must comply with copyright, fair use and financial disclosure laws, and you must not use without permission or compromise in any way the Company’s intellectual property assets (like copyrights, trademarks, patents or trade secrets –including, for example, Kroger or banner logos, or trade names of products, or non-public information about the Company’s business processes, customers or vendors).
- Confidential and proprietary information should not be discussed in any public forum unless it has been publicly reported by the Company. Confidential and proprietary information includes but is not limited to: financial results, new store designs, current or future merchandising initiatives, and planned technology uses or applications. Do not comment on rumors, speculation or personnel matters.
- When online, do not engage in behavior that would be inappropriate at work—including, but not limited to, disparagement of the Company’s (or competitors’) products, services, executive leadership, employees, strategy and business prospects.
In each instance, the Board concluded that the provisions were unlawfully broad, in that a broad application of these restrictions would, in the Board’s view, necessarily implicate an employee’s legitimate Section 7 activity. For example, the Board found unlawful the following sentence included in these policies: “Do not comment on rumors, speculation or personnel matters.” The Board’s reasoning for finding this statement unlawful was that a “rule prohibiting employees from commenting on “personnel matters” strikes at the heart of Section 7 activity,” in that this rule could arguably lead employees to believe that they were prohibited from discussing conditions of employment and wages with union representatives, a right protected by Section 7.
The important learning for employers from this decision is that they must be cautious in the language used in Social Media policies to insure that they do not potentially reach activity protected by the National Labor Relations Act. In drafting these policies, prudent employers should adhere closely to the language provided in the Board’s Social Media Policy Guidance Memoranda, keeping in mind that the Board has made it clear that it will interpret even the language contained in the sample policies in its own Memoranda very narrowly.
With the dramatic increase in the use of social media in the workplace and by employees outside the workplace, it is important that employers have policies in place that both protect their interests and can withstand Board scrutiny. Additionally, as the law in this area is rapidly changing, employers must constantly review their social media policies to insure that they are consistent with the current state of the law.
by Joseph S. Burns
The Kentucky General Assembly has enacted a new law regarding data breaches (H.B. 232), making it the 47th state to have a data breach notification law. The new laws will take effect on July 15, 2014.
The new law applies to any person or business conducting business in Kentucky that is not otherwise governed by Title V of the Gramm-Leach-Bliley Act (“GLBA”) or the Health Insurance Portability and Accountability Act (“HIPAA”). The law covers unencrypted unredacted computerized “personally identifiable information,” which is defined as an individual’s first name and (a) a driver’s license number, (b) bank or credit card account number, or (c) social security number.
The duty to notify under the new law is triggered when unencrypted unredacted computerized data is acquired in an unauthorized fashion, thereby compromising the security of an individual’s personally identifiable information. After discovering a breach, the information holder must notify any Kentucky resident whose personally identifiable information is reasonably believed to have been acquired by an unauthorized person. The effected individual(s) must be contacted in writing without “unreasonable delay.” While the information holder is not required to notify the Kentucky Attorney General, if more than 1,000 persons are affected by the discloser, the information holder must notify consumer reporting agencies.
For businesses, the new law highlights the importance of (i) encrypting electronic data; and (ii) maintaining policies and procedures regarding data security and the investigation of security breaches, and training employees on such policies and procedures.
by Joseph S. Burns
On March 27, 2014, in a decision styled Biotronik AG v. Conor Medsystems Ireland, Ltd., the New York Court of Appeals highlighted, in a 4-3 decision, the pitfalls of glossing over boilerplate contract language, when it ruled that a “no consequential damages” clause in an agreement did not preclude the plaintiff from proceeding with a $100 million claim for lost profits.
Plaintiff, an exclusive distributor of defendant’s medical devices, sued for breach of contract – claiming lost profits – when the defendant terminated the distribution agreement. A clause in the agreement provided as follows: "Neither party shall be liable to the other for any indirect, special, consequential, incidental, or punitive damages with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason." Relying on this provision, defendant argued that plaintiff’s claim for lost profits was clearly barred, as lost profits fell within the definition of consequential damages.
It is generally believed that lost profits – particularly those that do not directly flow from a breach of the agreement – are consequential damages. The Biotronik court pointed out, however, that lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and such profits were the direct and immediate fruits of the contract – i.e., such profits were a direct and likely result of the breach. Indeed, after conducting a very fact-intensive analysis, the court concluded that plaintiff’s lost profits should be considered general damages (rather than consequential) because the damages were a direct and probable result of the breach, even though the profits would have been earned pursuant to a contract other than the breached agreement. As such, the court concluded that plaintiff’s claim for loss profits was not barred by the provision prohibiting the recovery of consequential damages.
The takeaway from this decision is that attention should be paid to these sorts of standard boilerplate clauses. Indeed, such provisions should be crafted to avoid the scenario in Biotronik. For instance, consider the following:
- Identify with specificity any and all damages that should be excluded. For example, the limitation of liability provision could specify that the other party shall not, in any event, be entitled to recover “lost profits, lost revenue, lost income, or any revenue arising from loss of anticipated business, even if such damages were or should have been foreseeable by the breaching party.”
- Include a liquidated damages provision that excludes recovery for actual damages, and be sure to note that such sum is not a penalty, but a reasonable estimate of damages in the event of a breach.
- Specify that the limitation of liability provision is an integral part of the agreement that has been bargained for by the parties, and that such provision will remain in effect even if any other provision of the agreement fails of its essential purpose.
by Joseph S. Burns
In a unanimous opinion on April 22, 2014, a three-judge panel of the Sixth Circuit Court of Appeals in Cincinnati ordered ProMedica Health System, Inc. (“ProMedica”) to unwind its merger with rival St. Luke’s Hospital (“St. Luke”) in Lucas County, Ohio.
In 2010, ProMedica, a nonprofit healthcare system based in Toledo, entered into a merger agreement with St. Luke’s, a community hospital located in Lucas County. In 2011, the Federal Trade Commission (“FTC”) ordered ProMedica to divest St. Luke’s, citing antitrust laws and finding that the merger of the two hospitals would impede competition and create an unfair advantage in the market. ProMedica subsequently filed a petition to overturn the FTC’s ruling.
The Sixth Circuit upheld the FTC’s ruling. Given that it controlled 46.8 percent of the healthcare market in Lucas County prior to the merger, ProMedica was already the “dominant” healthcare player in Lucas County, according to the Court. Adding St. Luke’s – which controlled approximately 11.5 percent of the county’s healthcare market prior to the merger – would lead to a tremendous increase in concentration in a market that already was highly concentrated. The merger, according to the Court, would provide ProMedica with undue leverage to control reimbursement rates with health insurers, leading to higher prices for patients.
The Sixth Circuit’s ruling signals a difficult challenge for hospitals that are more aggressively seeking mergers to establish economies of scale and boost their bargaining power with insurers.