Monday, June 27, 2005

Ketchup Blots Lawyer's Career

In 2001: A Space Odyssey, a mysterious rectangular slab appears at critical times to change the course of human destiny. In the case of a London, England lawyer, a blob of ketchup, perhaps from one of those rectangular packets, has apparently derailed a career. As reported in and elsewhere, a secretary to a well-paid London lawyer dribbled some ketchup on the lawyer's trousers (exactly how remains unclear). The lawyer later e-mailed the secretary asking for the £4 his cleaner would charge to remove the stain. And he wanted the cash that day. The secretary did not see the e-mail until she returned from her mother's funeral and was outraged. Her withering reply, detailed in the article, circulated in the firm and across the globe. Following the furor generated by the e-mail, the lawyer resigned, although he says he made the decision to resign long before the ketchup incident. The complete e-mail is at, a website devoted to verifying internet stories and urban legends.

Wednesday, June 22, 2005

Employees Have an Uphill Battle to Win Discrimination Claims. Is There Appellate Court Bias?

A study by two Cornell Law School professors confirms what many employment lawyers intuitively understand: employment discrimination plaintiffs find it more difficult to prevail than other plaintiffs. As noted on, the study is now available on-line. The authors write:

Employment discrimination plaintiffs have a tough row to hoe. They manage many fewer happy resolutions early in litigation, and so they have to proceed toward trial more often. They win a lower proportion of cases during pre-trial and at trial. Then, more of their successful cases are appealed. On appeal, they have a harder time upholding their successes and reversing adverse outcomes.

Some of the key (post-1991) findings of the Cornell Study are:
  1. Employment cases spend an average of 410 days on the court's docket, compared to 354 days for all other plaintiff categories.
  2. About 50% of non-employment cases are resolved early in the litigation process, compared to only 35% of employment cases.
  3. Employment plaintiffs obtain summary judgment in about 2% of cases, compared to 22% of other plaintiffs.
  4. At trial, employment plaintiffs prevail in about 37% of jury trials and 21% of bench trials compared to 45% and 46% respectively for other plaintiffs.
But it is the results at the appellate level that are perhaps the most intriguing. According to the study, losing defendants in employment discrimination cases are able to obtain a reversal from the court of appeals in 42% of cases, while losing plaintiffs prevail on appeal only about 10% percent of the time. The spread between defendants and plaintiffs in other types of cases is much smaller. What accounts for the success of the defendants?

The authors believe they have unearthed an "anti-plaintiff effect" in the federal appellate courts. In essence, most employment discrimination cases that reach the trial stage turn on the intent of the employer, and "intent" is a factual issue that depends on witness credibility. If an employee plaintiff proves to the satisaction of the factfinder that the employer's decisions were motivated by wrongful intent, "that finding should be largely immune from appellate reversal, just as defendants' trial victories are largely immune from reversal." In other words, appellate courts are supposed to focus on the legal framework applied by the district court, deferring to the trier of fact on issues of fact. But according to the Cornell study, appellate courts unduly favor employers by stepping outside the usual boundaries for reversing the result of a trial.

You can download the complete research paper here.

Friday, June 17, 2005

New Pennsylvania Law Protects Employer Disclosure of Work History

Pennsylvania employers that disclose information about current or former employees to a prospective employer will enjoy a presumption that the disclosure was in good faith. This means, according to the law, that the employer will be "immune from civil liability for such disclosure or its consequences" in any lawsuit brought by the employee or former employee. Employees will be able to rebut the presumption of good faith only by presenting "clear and convincing evidence" that the employer disclosed information that:
  • the employer knew or should have known was false
  • the employer knew was materially misleading
  • was false and disclosed with reckless disregard for the truth; or
  • was probibited from disclosure by contract or other law.
Comment: Pennsylvania was one of only 14 states that did not provide statutory protection to employers for disclosures of job performance information to prospective employers. Pennsylvania employers previously had a comon law conditional privilege to make such disclosures. The new statute does not affect immunities available under common law, so the existing immunities should be available in addition to the immunity offered by the new statute.

Thursday, June 16, 2005

Pension Legislation

Janell Grenier has posted Helpful Links Regarding Pension Legislation Introduced Last Week.

Advertising Industry Soap Opera Raises Issues of Employee Loyalty

The June 20 issue of New York Magazine recounts the saga of Mike Burns and 17 other former Saatchi advertising executives who left Saatchi because they were not comfortable, to say the least, with Saatchi chief Kevin Roberts's management of the agency. Burns, a top Saatchi executive in charge of the lucrative General Mills account, resigned and negotiated a separation package that included a one year non-compete clause, primarily to stop him from taking the General Mills business. The 17 other executives quit a few days after Burns quit. Saatchi then filed a $3 million lawsuit against Burns, alleging that he breached his contract and violated his fiduciary duties by engineering the departure of the 17 with the ultimate goal of taking the General Mills account.

Interestingly the other 17 executives did not have employment contracts and are not defendants in the lawsuit. But did these employees have any obligations to Saatchi during their employment that might form the basis of a lawsuit? Many states recognize that employees, even at-will employees, have a fiduciary duty of loyalty to their employer. For example, employees are not permitted to use confidential information to undermine their employer. More generally, employees may not act in ways that are contrary to the interests of the employer. It is not clear what, if any, claims Saatchi may have against the 17 former executives. But employees who are considering leaving their current employer to join competitors or start a rival firm of their own should be mindful of their legal obligations before, during and after their departure and should consult with legal counsel for guidance.

Read more about the Saatchi saga here.

Wednesday, June 15, 2005

Former NFL Player Loses Disability Claim

NFL players can reap large monetary rewards during their playing years but face potentially disabling degenerative conditions afterwards. The NFL's retirement plan for players includes disability benefits but the players face the same hurdles to obtain those disability benefits as employees in less glamorous occupations. ERISA governs claims under the NFL's disability plan, so benefits denials are subject to an arbitrary and capricious standard of review, as demonstrated in a recent case, Boyd v. Bell. Boyd, a former NFL lineman, played from 1980 to 1987. After retiring from the NFL, Boyd held various jobs until 1999 when he was no longer able to work. Boyd's claimed he was suffering from organic brain problems that he traced back to a 19980 preseason game where he was knocked unconscious, suffered temporary blindness in one eye but continued to play. During his football career, Boyd noticed various symptoms that are traditionally associated with concussions such as lack of focus and forgetfulness.

The NFL Plan provides a range of disability benefits depending on the timing of the disabling condition's onset, its severity and origin. In this case, the NFL Plan initially determined that Boyd was totally and permanently disabled arising from non-football related activities. Boyd, however, claimed he was entitled to Football Degenerative disability, which would entitle him to a much higher benefit payment. Two doctors performed a special brain scan and concluded that Boyd was disabled due to a brain injury or head trauma. Another doctors, a neurologist, described as a "plan neutral" physician (i.e. not Boyd's treating physician) concluded that Boyd had "several problems that may arise out of head injuries suffered in the course of his NFL career" and checked the "yes" box when asked whether the injury was football-related. A psychologist also concluded that Boyd's disabling psychological problems were due to football-related injuries.

The Plan, however, referred Boyd to a fifth doctor (not described as plan neutral), also a neurologist, who concluded that the August 1980 head injury could not be the cause of Boyd's problems. The Plan subsequently denied Boyd's claim for Football Degenerative benefits based on the fourth doctor's opinion. The court held that the Plan's denial was not an abuse of discretion. The Plan was not required merely to tally the opinions and decide based on numbers. The court also noted that some of the favorable evidence was equivocal, especially the neurologist's opinion that Boyd's problems "may" arise out football-related head injuries. On the other hand, the fourth doctor seemed to downplay the severity of the 1980 head injury (describing it as "alleged") and the results of a special scan performed by the two doctors who concluded that Boyd's disability was due to brain injury.

Former NFL players seem to be in a third and long situation when it comes to seeking disability benefits. As an article from a Pittsburgh newspaper shows, many players are unaware of the benefits and those who do apply must overcome the Plan's strict rules and the arbitrary and capricious standard to prevail. Although a daunting task, it is not impossible. Recently, the estate of Mike Webster convinced a federal judge that the NFL Plan abused its discretion by denying Webster's brain-injury based disability claims. It is likely that more such claims will be litigated in the future, given the nature of the sport.

Tuesday, June 14, 2005

More Fallout from United Bankruptcy

United's default on its pension promises continues to reverberate. An article posted on MSNBC focuses on how the retirees are being affected by the benefit cutback and a PBGC official warned that United's problems are not unique:

PBGC Executive Director Bradley D. Belt said in an interview that United is only the latest — and largest — illustration of what ails the federal pension protection system: It allows companies to drastically underfund pensions, and even to disguise the problem. Defaults have so escalated in troubled sectors of the economy, Belt said, that the PBGC now is on the hook for $450 billion in pension obligations, compared with $50 billion only three or four years ago. In three years, it has gone from having a $7 billion surplus to a $23 billion deficit. Without changes to the 30-year-old pension protection system, he said, the PBGC could itself become insolvent.

Many retirees face a double hit because they had also invested heavily in United stock that lost much of its value over the past few years. Although the situation is clearly not the fault of the United employees, there is a lesson here for employees of other companies: diversification. Just as the collapse of Enron exposed the danger of investing 401(k) money too heavily in company stock, the United pension debacle shows that employees should review their entire investment and retirement portfolio as a whole to determine whether their financial security depends on the performance of a single company.

Thursday, June 09, 2005

25% of Private Companies Sued By Employees

According to a Chubb Group survey, one in four privately held companies has been sued by an employee or former employee. More than half of the surveyed executives estimated that it would cost $100,000 or more to settle a lawsuit while 10 percent estimated that it would cost at least $1 million.

Casting a Larger Net

The Tenth Circuit has weighed in on who might be held responsible for theft of assets from an ERISA plan in addition to the thieving fiduciary. The case, Coldesina, D.D.S. P.C. Employee Profit Sharing Plan and Trust v. Simper, involved an investment advisor who embezzled plan assets under his control. When the dentist/plan sponsor became dissatisfied with the plan's investments, he asked the advisor to turn over the plan's account documentation. On the day he was supposed to turn over the documents, the advisor committed suicide, leaving a note that confessed his embezzlement. The dentist sued estate of the advisor, certain companies for whom the advisor was an agent or broker/dealer (KCL and Sunset), and an accountant (and his company) who provided administrative services to the plan.

The Tenth Circuit ruled that the accountant was a fiduciary because he accepted plan contributions into his business account and then wrote checks to one of the advisor's companies. Initially, the accountant wrote the checks payable to KCL. The dentist was apparently aware that the checks were being paid to KCL but there were no explicit plan policies covering the accountant's check-writing activities. Later, without the dentist's knowledge, the advisor directed the accountant to make the checks payable to Greystone Marketing, a company owed by the advisor. The accountant was thus not acting at the plan's direction but using his own judgment to follow the advisor's instructions. This made the accountant a fiduciary subject to ERISA's fiduciary rules and exposed him to potential liability for the plan's losses.

The court then turned to the issue of whether the dentist's state law claims against KCL and Sunset were preempted. The advisor had encouraged the plan to buy investment products sold by these companies and, indeed, the advisor's recommendations were almost entirely limited to products sold by KCL and Sunset. The court ruled that KCL and Sunset had an independent state law duty to the plan to supervise the advisor (a negligent supervision claim) that was not preempted by ERISA. A vicarious liability claim, however, was preempted. The difference for the court seemed to be that negligent supervision claim was not based on the advisor's behavior, but the behavior of KCL and Sunset.

Tuesday, June 07, 2005

Wages, Not Capital

As the Philadelphia Phillies turn around their season and the Eagles face a T.O. hold-out, thoughts turn naturally to the tax treatment of signing bonuses. The IRS ruled at the end of 2004 that signing bonus for a baseball contract are wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and for income tax treatment. The ruling specifically revoked older rulings that signing bonuses that were not contingent on performance of future services could be treated as "capital" taxed at lower capital gains rates and were not subject to FICA and FUTA. The new ruling also applies to bonuses paid to union members when CBAs are ratified, so at least there is equal treatment of sports stars and ordinary working people.

The rationale for the ruling was that a signing or ratification bonus is ordinary income because it is payable in connection with the establishment of an employment relationship. Under the now revoked ruling, bonuses that were not contingent on the performance of past or future services did not meet the definition of wages. That argument is no longer viable.

In T.O.'s case, he received a signing bonus of roughly $7.5 million early in 2004 when he signed with the Eagles. That signing bonus theoretically was contingent on T.O.'s playing for the Eagles, unless he was injured. So that bonus likely was considered as wages even under older IRS rulings. T.O.'s contract, however, also calls for a "roster bonus" of approximately $6 million if he is on the roster as of a date certain in 2006. Perhaps T.O. assumed that roster bonus would be treated as capital gains and taxed at the lower capital gains rate. Now it is clear that any bonus paid in connenction with employment meets the definition of wages. Perhaps it is no coincidence that T.O.'s hold out came after the IRS ruling.

Pension Plan Accounting

As reported in the New York Times today, United's pension plans were in trouble years before it filed for bankruptcy, but pension funding rules permitted United to treat the plans as if they were safe and sound. ERISA pension funding rules create opportunities for plan sponsors to report their plans as fully funded (or close to fully funded) even though analysis of the plan under SEC accounting rules show that the plans are seriously underfunded. The discrepancy between SEC and ERISA accounting rules is nothing new and United's actions were perfectly legal. ERISA accounting rules essentially permit plan sponsors to smooth out over time their funding obligations because it was assumed that the plans would be able to pay plan benefits over long time periods, so spikes and valleys in asset valuations could be ignored. However, the economy has changed since 1974, when ERISA was enacted and the losses suffered in the financial markets in recent years has now exposed problems that Congress now needs to address.

It was the failure of a number of pension plans in the 1960's and early 1970's that led to ERISA. Now, there appears to be a new pension plan crisis perhaps analagous to the problems faced by the savings and loan industry in the 1980's. At this juncture, the PBGC, and by implication, the American taxpayer, is at risk to bear more and more of the burden of "private" pension plans.