August 19, 2014

Is There a Better Exit Strategy Than Death?—Part I: The Interviews: Roxanne Jensen—Balancing Work and Family While Staying Engaged and Challenged

Editor’s Note: This article appeared in the August 2014 issue of The Colorado Lawyer. This is the second part of a 5-part series on Legal Connection. Click here for the introduction, click here for an interview with Kyle Velte, and stay tuned for more interviews.

Sandgrund-JensenBy Ronald M. Sandgrund, Esq., InQ.

InQ.: Roxanne, how old were you when you first felt that practicing law was what you wanted do as a career? How old were you when you first had serious thoughts about exiting the full-time practice of law? What prompted this change in your thinking?

Roxanne: I first thought I wanted to practice law when I was 22, and I started practicing full-time at 25. I continued to practice full-time until I was 38, when I had my first child. At 42, I had my third child and recognized that my firm’s international law practice was changing, becoming highly specialized, and that significant travel was required to put the right person in the right place at the right time for the clients. I thought I would try to find a way to regulate my work schedule more significantly, perhaps by teaming with lawyers who could handle a more significant travel load.

InQ.: So, what happened?

Roxanne: At some point, after having three kids, I simply realized that for our family, I needed to be more present. Although every family is different, my kids needed me to commit to a career path that would require less travel. My law practice at Morrison & Foerster absolutely and justifiably required significant travel responsibilities. My initial plan was to do contract work for lawyers until the kids were a bit older. I was able to start doing contract work pretty much right away, mostly for my former law partners.

InQ.: How did that go?

Roxanne: The plan worked, but I wasn’t satisfied without having more entrepreneurial, creative input into my work. So, I started looking around for a more committing framework, with less travel obligations—something more focused and sustained than project work, with long-term goals, and seeing matters or ideas through to completion. Contract work often doesn’t fill that need. Meanwhile, I missed practice in Big Law terribly—and I still miss it. The quality of practice and the caliber of my colleagues were unmatched. I’ll never find more fulfillment in a job than I did at Morrison & Foerster, including my several years as its Denver managing partner. I thought many times about re-engaging in the practice, but I knew the travel obligations would overwhelm me and my family.

InQ.: It seems that you gave some thought to reversing course; did you do so?

Roxanne: No, I didn’t, but I changed course again to find something more committing. In 2007, I left the practice of law and joined a national legal recruiting firm, to start their division for Lateral Partners and Firm Mergers. I grew that division very profitably. However, over time, I recognized that adding owners to law firms was not a staffing issue, but a strategic one. I exited the recruiting world to join the consulting world in 2011. I currently own EvolveLaw, a strategic consulting LLC, helping law firms set and execute growth strategies (including mergers and acquisitions) and refine their business models in a changing and challenging legal services marketplace. I also am a managing director with Catapult Growth Partners, a professional services consulting group that provides strategic planning, business development, and executive recruiting services.

InQ.: Some obstacles that lawyers face when retreating from full-time practice include not being able to imagine life not practicing law full-time, fearing not being able to fill the time, and dreading not having enough money. What do you think of each of these suggested impediments?

Roxanne: For me, there are always creative professional possibilities; I’ve never felt limited to practicing law, or concerned about how to fill my time. Being valued financially and professionally is important, so of course I have felt some need to use my gifts and experience well to serve and be compensated appropriately.

InQ.: How did your significant other react during the course of you exploring options other than the full-time practice of law?

Roxanne: Despite being by nature somewhat less entrepreneurial than I, my spouse has been fabulously supportive while I’ve remade myself professionally.

InQ.: Did any tensions arise between you and others, including your children, co-workers, and significant other, as a result of you withdrawing from the full-time practice of law?

Roxanne: No.

InQ.: Looking back, what, if anything, would you do differently?

Roxanne: I would think more entrepreneurially and creatively right away, instead of “ramping down” my practice by doing contract work.

InQ.: What assumptions did you make that turned out to be mostly or wholly incorrect?

Roxanne: I assumed my highest and best use would be in legal practice, when my training and gifts were in fact suited for a broad range of possibilities.

InQ.: How happy were you when practicing law full-time versus how happy are you now?

Roxanne: I loved the practice of law; but I’m also very happy now, using my many years of practice and management and my strategic thinking skills to help firms position well in the market.

InQ.: How much did financial considerations influence your decision to retreat from the full-time practice of law?

Roxanne: Not at all.

6 Ways To Overcome Fear of Failure

Editor’s Note: This post originally appeared on the ALPS 411 blog on August 11, 2014. Reprinted with permission.

SusanCartierLiebelBy Susan Cartier Liebel

Life begins at the end of your comfort zone ~ Neale Donald Walsh

We’ve all been there. We are so morbidly afraid to fail. So afraid, in fact, we find ourselves paralyzed and simply can’t take the next step forward. Not one. And when it comes to starting a solo practice or taking on a legal matter one grade level above our expertise or leaving the Big Law job you hate, you name it, it can cripple us and severely limit our futures.

This fear is quite possibly the single strongest force holding people down far below their professional and personal potential. In a crazy world full of uncertainty, a roller coaster economy, the myriad of unexpected disasters that could happen to anyone at any time, isn’t it easy to see why most people will take the safest route possible, the tried and true?

But this is where the joke is on us: playing it safe has risk as well. If you never give yourself permission to fail, your success in life will have clear self-imposed limits. Most people grossly underestimate their recuperative powers if they don’t succeed. This underestimation leads them to pass on valuable opportunities that come knocking. And we’ve all read with awe and longing the stories of those who failed often, failed big and then rose to the top with incredible success. It’s part of our business folklore!

If you are reading this, chances are you want to open a solo practice. Here are a few strategies that can help you put risk and reward of opening up your own business in perspective. It may even help you to challenge the fears which have been holding you back from taking the plunge.

1. Missed opportunities don’t happen without a cost – Without taking risk, you can’t take advantage of opportunities that present themselves. While a steady paycheck may sound appealing, a pink slip can hit you upside the head without warning, too. But, even in with this possibility, your life can still be pleasing and predictable, quiet and reasonably fulfilling. However, the odds of you creating something original are very low and most likely you will not leave any lasting mark on the world. (And that’s not to say that’s a bad thing.) But the reality is today’s careers are dynamic, not static and you may not have the luxury of a pleasing and predictable life. Career planning is less about planning and more about being continuously alert to opportunities that present themselves to you spontaneously. You need to be able to respond. Therefore, the ideal career is one where there is a wide range of opportunities (some more risky, some less) that together form a relatively safe career choice with a high upside for growth. Taking some of these high risk opportunities is essential because at the end of the day, they offer the greatest upside for reward.

2. Banish Ignorance – What we don’t know is the source of most fear. Eliminate the paralyzing power of fear by learning and understanding what you are up against. Research and be aware of all the possible outcomes (both the good and the bad) so you can get both a macro and micro picture of the benefits of success and the risks of failure. This analysis will help you see beyond the fear and help you make a more reasoned and dispassionate decision. Learn what it really means to run your own business as a lawyer. Talk to lawyers who are doing it; talk to lawyers who have done it and now are doing something else. Educate yourself. It is the most powerful antidote to fear.

3. And if you fail? – Know how long it will take you to recover if you fail. Odds are it will be less time than you think and not as financially disruptive as you fear. Is the fear of a few potentially difficult months so strong it can keep you in a mediocre or miserable situation indefinitely?

4. Understand the benefits of failure – While I say there is no such thing as failure if you try (only not trying is failure) others believe you can fail and should fail and should fail often. So if you are in this category know that every failure is an experiment and an opportunity to grow. Sometimes, even if the failure impacts you financially, oftentimes the knowledge you accumulate from the experience can be worth the financial downside. It can even position you for the next opportunity which will help you not only recoup the losses but take you further in your life than you would have gone otherwise. In the corporate world, it is well known that managers prefer to hire someone who tried to start a company and failed than someone who has always been strictly corporate. It is true in the legal world, too. Many who have gone solo have been offered jobs because they showed initiative, took risks, showed they could wear multiple hats and hustle. That the solo practice wasn’t a raging success didn’t matter to the hiring lawyer. The initiative, chutzpah and self-taught education the lawyer received is what mattered.

5. Have a Plan BContingency plans (or a safety net) are yet another way to minimize risk. If Plan A doesn’t work out you always have Plan B. Sometimes just knowing there is a Plan B makes it easier to move forward with Plan A. I find, depending upon the situation, having contingency plans allows me to take more risks and take them with greater confidence simply because I know it’s not ‘do or die.’

6. Start Moving – Sometimes the best way to climb the mountain is not to look at the mountain peak but down at your feet and put one foot in front of the other. As soon as you take the first step you begin to gain experience and education. We’ve all been there. Everything is or seems hardest the first time we do it quite simply because we’ve never done it before. So, you just put one foot in front of the other, build up momentum and rhythm and as you get closer to your goal, the fear of not succeeding seems less overwhelming.

How have you addressed your fears?

Susan Cartier Liebel is the Founder & CEO of Solo Practice University® (solopracticeuniversity.com), the only educational and professional networking community for lawyers and law students designed for those who want to create and grow their solo or small firm practices.

A coach/consultant for solos and small firms, an attorney who started her own practice right out of law school, a Member of the Suffolk School of Law – Institute on Law Practice Technology & Innovation advisory board charged with guiding the Institute’s future, an Entrepreneur Advisor for Law Without Walls, an adjunct professor at Quinnipiac University School of Law for eight years teaching law students how to open their own legal practices right out of law school, a columnist for LawyersUSA Weekly, the Connecticut Law Tribune, The Complete Lawyer, and Law.com, she has contributed to numerous online publications such as Forbes.com, legal publications and books on this topic as well as the issues facing women in the workforce. She speaks frequently to law schools and professional organizations around the country on issues facing solos, offering both practical knowledge and inspiration. She can be contacted at: susan@solopracticeuniversity.com.

CLE is hosting Hanging Your Shingle this weekend. If you are ready to overcome your fears and hang your shingle, this program is for you. Order the homestudy below.

CLE Program: Hanging Your Shingle

This CLE presentation will take place on August 14  through 16, 2014. Click here to order the CD homestudy – click here to order the Video OnDemand homestudy – click here to order the MP3 Audio Download homestudy. You can also order by phone at (303) 860-0608.

Is There a Better Exit Strategy Than Death?—Part I: The Interviews: Kyle Velte—Less Stress, More Time With Her Children

Editor’s Note: This article appeared in the August 2014 issue of The Colorado Lawyer. This is the second part of a 5-part series on Legal Connection. Click here for the introduction, and stay tuned for more interviews.

Sandgrund-VelteBy Ronald M. Sandgrund, Esq., InQ.

The Inquiring Lawyer (InQ.): Kyle, how old were you when you first felt that practicing law was what you wanted to do as a career?

Kyle: I did not think about practicing law until after college and I entered the working world. I had planned on being a college professor, and I was taking a few years off before applying to PhD programs. I worked at the National Organization for Women in Washington, DC, where one of my jobs was to run the internship program. As part of that program, I took interns to a U.S. Supreme Court argument. One of the arguments I saw was Romer v. Evans. When I saw Jean Dubofsky argue on behalf of the gay, lesbian, bisexual, and transgender plaintiffs, I then and there decided to go to law school and become a lawyer.

InQ.: How old were you when you started practicing law full-time?

Kyle: I had two judicial clerkships after law school—one at the age of 28, the other at 30. (I completed an LLM in between clerkships.) I entered a firm when I was 31.

InQ.: How long did you practice law full-time?

Kyle: Nine years.

InQ.: How old were you when you first had any serious thoughts about exiting the full-time practice of law? Did something in particular prompt this thought?

Kyle: A few years into practice—around the age of 35—I began thinking about exiting to teach law. My pre-law school plan had been to be a college professor, so teaching law always loomed in the back of my mind as something I would like to do.

InQ.: How old were you when you first started making concrete plans to exit the full-time practice of law, and what was your thought process?

Kyle: When I was 40 years old (eight-and-a-half years into practice), I had the chance to teach an adjunct class at the University of Denver School of Law (Denver Law). I did that while continuing to practice full-time. I loved teaching. My thought process was to try adjunct teaching first, before deciding to make the big move, to see if I really did like it as much as I expected to. I did.

InQ.: Why did you want to leave the full-time practice of law?

Kyle: For several reasons. Although I was in a regional, mid-sized litigation firm, where my focus was commercial litigation, with fantastic colleagues and interesting and engaging work, I was growing tired of litigation as a whole. The constant conflict and stress, the travel, and the unpredictable and sometimes very large number of hours (particularly around trial) began to wear me down. In addition, I have children and wanted a more consistent, less stressful job to spend more time with them.

InQ.: Did you develop any sort of plan as to how to accomplish this goal?

Kyle: My plan was to try to teach as an adjunct first. I was able to do that, which in turn led me to my current position at Denver Law.

InQ.: How long did you expect it would take you to implement your plan?

Kyle: I wasn’t entirely sure. I had planned to continue teaching as an adjunct while practicing for at least as long as it took me to write and publish a law review article, which is highly encouraged to enter academia. However, I didn’t have to wait even that long, because my current position opened just a few months after I finished teaching my first adjunct class. I just got lucky on timing. The position I’m currently in opened in the fall of 2011, and I finished teaching my adjunct class in April 2011. I saw the opening, applied, and by November 2011, I was a full-time faculty member of Denver Law’s Legal Externship Program.

InQ.: What sort of obstacles cropped up, if any, impeding the plan’s implementation?

Kyle: The biggest obstacle was financial: figuring out how to manage a significant pay cut.

InQ.: How well did you manage this obstacle, and what strategies did you employ?

Kyle: I worked with a financial planner and figured out a way to make the financial transition.

InQ.: At any point in the process of implementing your plan, did you think about reversing course?

Kyle: Only briefly, when the financial obstacle had not been overcome. But I never reversed course. Except for a pro bono matter that ended in March 2013, I have not practiced law since November 2011.

InQ.: Some say that the biggest obstacle to retreating from the full-time practice of the law is the inability to imagine what life would be like not practicing law full-time. Others say it is a fear of not being able to fill the time. Still others say it is a concern of not having enough money later in life. What do you think of each of these suggested impediments and how, if at all, did they affect your thinking?

Kyle: The first two concerns never entered my mind. I knew that I would find enjoyable and fulfilling work in teaching law. The money issue was the biggest challenge, and it gave me great pause.

InQ.: How did your significant other—if you had one—react during the course of exploring options other than the full-time practice of law?

Kyle: As a single parent without a significant other, making this change was a particular challenge for me. No matter how wonderful a private firm is, litigation never stops, and when you’re in trial, everything else in your life comes to a standstill. Now that I am out of practice, I have a very predictable schedule; my stress level is way lower (which makes me a better parent); and I’m much more involved in my kids’ lives, volunteering in the classroom, chaperoning field trips, being home at night to help with homework, etcetera.

InQ.: What sort of activities have you embraced to fill the time you formerly devoted to the full-time practice of law, and how satisfying have those activities been?

Kyle: I still work full-time, so there is no need to fill any time. In addition, because I am no longer a litigator and no longer have a billable-hours requirement, I have been able to do more than when I was practicing. I now sit on four boards of directors and I am active in specialty bar associations.

InQ.: During your decision-making and decision-implementing process, what mistakes, if any, do you feel you made?

Kyle: Looking back, I don’t have any regrets and don’t feel like I made any mistakes.

InQ.: What, if anything, would you do differently?

Kyle: Nothing!

InQ.: What assumptions did you make that turned out to be mostly or wholly incorrect?

Kyle: I had assumed that it would be difficult to find an opportunity outside practice that would still be engaging to me and also one for which I would be qualified. However, I also assumed that if I were to find such a position, I would be able to find a fulfilling and satisfying professional experience outside practice. The first assumption was wrong: there are, contrary to my assumption, many non-practice opportunities that are engaging, interesting, and fulfilling, and for which practicing attorneys will be given serious consideration. My assumption that I could be professionally satisfied outside practice was completely accurate. In fact, I’m more satisfied now.

InQ.: Did any tensions arise between you and others, including your children, as a result of you retreating from the full-time practice of law?

Kyle: No.

InQ.: How happy were you when practicing law full-time and how happy are you now?

Kyle: I was content while practicing and sometimes happy. I am extremely happy with my career now, and often think to myself: “I really love my job and am so lucky to have it.”

InQ.: How much did financial considerations influence your decision to retreat from the full-time practice of law?

Kyle: As noted above, it was an obstacle—and a scary one—but I overcame it and have learned lessons about what I really need to be happy.

InQ.: In retrospect, did you give financial considerations too much, too little, or just the right amount of weight?

Kyle: Just the right amount.

InQ.: How, if at all, did having children affect your decision-making process?

Kyle: It impacted it for sure, because I had to make sure that I could still provide for them. Once I figured that out, I knew that leaving the practice of law would be a big benefit to them, as well as to me.

The InQuiring Lawyer: Is There a Better Exit Strategy Than Death?—Part I

Editor’s Note: This article appeared in the August 2014 issue of The Colorado Lawyer. This is the first part of a 5-part series on Legal Connection. Stay tuned for the interviews.

SandgrundIntroduction to Part I of the Dialogue

by Ronald M. Sandgrund, Esq., InQ.

This two-part article discusses an issue all lawyers must face during their careers: developing and deploying an exit strategy. This can mean exiting one practice area for another; transitioning from the law to a different career; accommodating the demands of raising a family; and slowing down or retiring near the end of one’s career. This article explores the issue through the eyes of two groups of lawyers: the first group transitioned from the day-to-day practice of law to a different job; the second group sought to reduce their hours either to accommodate family needs or as they travelled the long and winding road to retirement.

Although it is easy for me to reflect on the extraordinary blessings my legal career has afforded me—I basically worked for the same law firm and with the same terrific people for thirty years—there were more than a few times when I wanted to run for the hills. One time came when I noticed a small, balding spot in the back of my head due to a nervous habit I had developed of unconsciously twisting and plucking out my hair. With this incontrovertible evidence in hand, I worried that my job was ruining my mental and physical health. Then, my firm’s revenues dropped by 70% over thirty-six months due to sea changes that were occurring in our insurance defense practice. At the time, it appeared like a good opportunity to make a change, but I could imagine no exit strategy that seemed feasible. How would working at another firm change anything? At least I was a partner in my current firm, which allowed me greater control over my life—but which also burdened me with sometimes crushing managerial and financial worries. Also, what skills did I have that would have transferred to a job outside the law? Zero: I had gone straight from college to law school, and practicing law was all I knew.

In the end, I was very lucky. My law partners and I effectively doubled down on our law practice (that is what gamblers do, right?), jumping from the defense bar and into the strange new world of a plaintiff contingency-fee practice. In my twelfth year of practice, at age 36, I realized that the last thing I wanted to do was work for someone else or work with anyone else. I also recognized that I had developed a civil trial skill set that, if refocused, could still bring me joy and, hopefully, reward.

My wife and I adopted austerity measures that I found liberating rather than constraining. Eight years and a lot of good fortune later, things had come full circle. I sat down with my law partner and told him I wanted to map out a five-year exit strategy (which took seven years to implement). Later, I realized there was so much that I enjoyed about practicing law that we agreed to lengthen the exit ramp. I still practice some today, as of counsel with an energetic and skilled group of attorneys in a newly merged law firm—and my little bald spot has (mostly) grown back in. I also teach occasionally at Colorado Law, have written much short fiction (which I am trying to get published), started this column, travel to places I thought I’d never see, and I am working really, really hard on my tennis backhand—the last, always a work in progress (and now a greater challenge with an artificial hip and a reconstructed knee).

The story of every lawyer I spoke to is different; however, the moral of those stories is the same: there are many, many better exit strategies than death. For those who want to “jump to the chase,” I will tell you right up front that all the people I spoke to were happy to have employed their exit strategies. Not a single one of them left the full-time practice of law with any serious regrets.

Is There a Better Exit Strategy Than Death?—Part I

Some view practicing law like the Hotel California, a place “you can check out anytime you like, but you can never leave,” and where the guests are “all just prisoners here, of [their] own device.”[1] I spoke at length to eight lawyers over the past year, each of whom sought to exit the full-time practice of law, either early on, in the middle of, or near the end of their legal careers. Their reasons for exiting were personal to each, and none was provided a road map on how to accomplish this goal. All enjoyed the practice of law, but each saw the need to develop an exit strategy. By “exit strategy” I mean a change from the status quo, but not necessarily leaving the practice of law entirely—although for many, this is exactly what it entailed. For example, one lawyer with whom I spoke, Sue Borgos, practiced law for ten years, and then transitioned to information technology (IT) for twenty years. She ran her own IT company for the last nine of those twenty years before being hired as a territory manager for a national IT firm. Sue told me that she firmly believes her law degree was not wasted, nor was her time as an attorney, and that she still uses the skills she gained as a lawyer in many different ways on a regular basis.

None of the lawyers I spoke to found a “how to” book on transitioning effectively. For each, it was dynamic process; they learned as they went along. Based on what they shared with me, the keys to their accomplishment included:

1) recognizing that a change was necessary to make their lives more fulfilling;

2) imagining how their world would be after they had made such a change;

3) making and implementing a plan to effect this change; and

4) clearly communicating their desire for change to those around them.

In this Part I, we talk to four lawyers who sought a change of scenery outside the day-to-day practice of law. In Part II, we will talk to four lawyers who sought a reduction in workload on the road to retirement.

 

 


[1] From “The Hotel California,” by the Eagles, words by Don Felder, Don Henley, and Glenn Frey (1977). Having grown up in the 1970s and 1980s, I am most familiar with the Eagles’ lyrics; but every generation’s music seems to repeat their themes.

Inherited IRAs in Light of the U.S. Supreme Court’s Decision in Clark v. Rameker

This post originally appeared on Barbara Cashman’s Denver Elder Law blog on June 18, 2014.

CashmanBy Barbara Cashman

Everyone knows what an IRA is – right?  We think IRAs have been around a really long time, but they only came into being in 1975 with ERISA legislation, and Roth IRAs came in 1997. IRAs are classic nonprobate property that someone can pass to others without probate in many circumstances.

Q: What happens if I complete the beneficiary designation form?

A: Your beneficiaries will have much more flexibility and protections (especially on the tax front).

Q: What happens if I don’t bother with the beneficiary form?

A: Well, you won’t be around to find out – right?!  Here’s a link to a Colorado Business Magazine article about the importance of designating a beneficiary to maintain that flexibility.

Some handy IRA vocabulary words:

  • RBD – required beginning date (701/2 years of age), after which you are required to withdraw the
  • RMD – required minimum distribution, an annual distribution.

Here it is important to consider whether the decedent died after his or her RBD.  If she or he was already receiving RMDs, you will want to determine whether the distribution for that final year needs to be paid. Be sure to check with the account custodians to determine if the distribution was made before the date of death.  There are two basic types of IRAs that can be passed along to survivors:

  1. Spousal IRA 
    This is generally the simplest to accomplish and a spouse will want to consider among several choices –  to roll them over into an IRA, start receiving benefits, have them paid out in a lump sum, or disclaim some portion to minimize estate taxes in the spouse’s estate.
  2. Inherited IRA
    There is an important distinction initially regarding whether the beneficiary designation was made out to the beneficiaries or left blank. . .  There is generally much more flexibility when the designations are completed.

So here’s a question . . . . Whether inherited IRAs are generally exempt from creditors depends on where you live! Are these funds still qualified and exempt, or are they just another inherited asset?

In an inherited IRA scenario, a beneficiary (often an adult child) will need to take out the RMD in the parent’s IRA every year and declare that as income. In addition, the IRA cannot be added to by the inheritor. You might be wondering what types of protections are afforded inherited IRAs from the creditors of the inheritor. Well, I can say with all lawyerlike confidence . . .  it depends. Under Colorado law, specifically Colo. Rev. Stat. § 13-54-102(1)(s), there is an exemption from judgment creditors for certain types of retirement accounts and benefits. The definition includes IRAs “as defined under Section 408 of the Code” (this would be 26 U.S.C. § 408(d)(3)(C)(ii)). Under the Bankruptcy Abuse Preventive and Consumer Protection Act of 2005 (BAPCPA), many states opted out of the federal bankruptcy exemptions in favor of state law exemptions. Read more on this topic here from my learned colleague Laurie Hunter.

It is important to consider that there are at least three different layers to the inherited IRA treatment: federal tax law, state law relating to bankruptcy and what creditors can collect, and bankruptcy. Until just a few days ago, when the U.S. Supreme Court ruled on a writ of certiorari on the U.S. Court of Appeals for the Seventh Circuit’s 2013 decision, In re Clark, there was a split among the federal circuit courts of appeal – you can read more about it here.

The Federal Circuit Courts of Appeal Were Split Over the Meaning of the Phrase “Retirement Funds”

Two federal courts of appeal – the Fifth and Seventh Circuits (whose decisions were binding in the regions that they cover – Colorado is part of the Tenth Circuit) had come to opposite conclusions while interpreting the meaning of the same term. In 2013, the Fifth Circuit decided that the phrase “retirement funds” in the bankruptcy exemption statute quoted above means any funds “set apart” in anticipation of “withdrawal from office, active service, or business” and that the statute does not limit “retirement funds” solely to funds of the bankrupt debtor, so long as the funds were originally “set apart” for someone’s retirement. In re Chilton, 674 F.3d 486 (5th Cir. 2012). Once the funds were set apart for retirement, they maintained that same character for bankruptcy exemption purposes. The court thereby permitted the debtor in Chilton to exempt all of a $170,000 IRA inherited from her mother.

In Clark, the Seventh Circuit expressly disagreed with the Fifth Circuit, adding that it “do[es] not think the question is close.” The Seventh Circuit observed that, while inherited IRAs do shelter money from taxes until it is withdrawn, they lack many of the other attributes of an IRA. That court noted in particular that the beneficiary of an inherited IRA is prohibited from rolling those funds over into his or her own IRA and from adding her own funds to the inherited IRA. The beneficiary must take distributions from the inherited IRA within a year of the original owner’s death and complete those payouts over a defined period, often as little as five years, regardless of the beneficiary’s age and employment status. In short, once the original owned died, “the money in the inherited IRA did not represent anyone’s retirement funds.” That court of appeals declined to extend the character of a decedent’s retirement funds into the inheritance context and therefore decedent’s daughter could not then use that money as her own retirement savings, and it became no different from an inherited certificate of deposit or money market account: non-exempt and available to distribute to the daughter’s creditors.  That was the essence of the split in the circuits.

Just a few days ago, the U.S. Supreme Court ruled unanimously in Clark v. Rameker that inherited IRAs are not protected in bankruptcy. Here’s a link to the SCOTUSblog coverage of the decision. The US Supreme Court followed the line of reasoning of the bankruptcy court and the Seventh Circuit, disallowing the attempt by petitioner in bankruptcy court, Hedi Heffron-Clark, to exclude the funds in the IRA from the bankruptcy estate using the “retirement funds” exemption under Section 522 of the Bankruptcy Code, which exempts tax-exempt retirement funds from a bankruptcy estate. Just in case you are an insomniac and want to read the entire decision, rendered June 12, 2014, here it is in pdf format.

I still think that, notwithstanding the U.S. Supreme Court’s ruling, inherited IRAs are  an important legacy for a parent to leave an adult child, and it is important to not underestimate the “emotional” value of the money from a deceased parent’s retirement savings for the use of a child’s retirement. But beware, they won’t be protected from an adult child’s creditors in a bankruptcy proceeding. So please remember that an IRA and an inherited IRA are not really the same animal!

Barbara Cashman is a solo practitioner in Denver, focusing on elder law, estate law, and mediation. She is active in the Trust & Estate and Elder Law sections of the CBA and is the incoming chair of the Solo/Small Firm section. She contributes to the SOLOinCOLO blog and blogs weekly on her law firm blog, where this post originally appeared. She can be contacted at barb@DenverElderLaw.org.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Recent Colorado Cases Broaden Independent Contractor versus Employee Considerations

Mike-Schreiner_WEBBy Michael Schreiner

Two recent Colorado Supreme Court cases, Industrial Claims Appeals Office v. Softrock Geological Services, Inc., 2014 CO 30, No. 12SC501 (May 12, 2014) and its companion Western Logistics, Inc. v. Industrial Claims Office2014 CO 31, No. 12SC911 (May 12, 2014), clarify that the determination of whether an individual is an independent contractor or employee for purposes of unemployment tax liability is based on the “totality of the circumstances” and not the rigid application of the nine-factor test set forth in C.R.S. § 8-70-115(1)(c).

Under the Colorado Employment Security Act (CESA), employers are required to pay unemployment taxes on wages paid to employees but not on payments made to independent contractors. A division of the Industrial Claims Appeal Office (ICAO) routinely audits businesses to determine whether a business is classifying its employees appropriately and collecting and submitting the correct amount of tax. Under CESA, an employer can prove that an individual is an independent contractor by demonstrating that (1) the individual is free from the employer’s control and direction, and (2) the individual is “customarily engaged in an independent trade, occupation, profession or business related to the service performed.” C.R.S. § 8-70-115(1)(b).

Alternatively, under C.R.S. § 8-70-115(1)(c), an employer could submit a written document signed by both the employer and the individual that meets nine conditions. These conditions are that the employer will not do any of the following:

  1. Require the individual to work exclusively for the person for whom services are performed, except that the individual may choose to work exclusively for the said person for a finite period of time specified in the document;
  2. Establish a quality standard for the individual, except that the employer can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed;
  3. Pay a salary or hourly rate but rather a fixed or contract rate;
  4. Terminate the work during the contract period unless the individual violates the terms of the contract or fails to produce a result that meets the specifications of the contract;
  5. Provide more than minimal training for the individual;
  6. Provide tools or benefits to the individual, except that the materials and equipment may be supplied;
  7. Dictate the time of performance, except that a completion schedule and a range of mutually agreeable work hours may be established;
  8. Pay the individual personally, except for making checks payable to the trade or business name of the individual; and
  9. Combine the employer’s business operations in any way with the individual’s business, but instead maintains such operations as separate and distinct.

In Softrock, ICAO held that an individual was an employee because he provided services only to the employer during the period in question and therefore he did not have an independent trade or business. The Colorado Court of Appeals reversed, holding that ICAO incorrectly relied on a single factor. Instead, the court of appeals found that ICAO should have determined whether the individual was an employee by considering the nine factors set forth in C.R.S. § 8-70-115(1)(c).

The Colorado Supreme Court agreed with the court of appeals that the there is no single factor test and that the nine factors should be considered. However, the supreme court found that the nine factors required to be set forth in a document are not exclusive, but rather a fact-finder should also consider “the dynamics of the relationship between the employer and the putative employee and should not be limited to only considering nine factors.” According to the court, it would also be appropriate to consider such factors as “whether the putative employee maintained an independent business card, listing, address or telephone; had a financial investment such that there was a risk of suffering a loss on the project; used his or her own equipment on the project; set the price for performing the project; employed others to complete the project; and carried liability insurance.”

The court also held that the fact that the putative employee did not provide services to another does not conclusively establish that the individual is an employee. Rather, the determinative issue is “whether the putative employee chose to work for another in the field, regardless of, among other things, the intent of the parties, the number of weekly hours the putative employee actually worked for the employer, or whether the putative employee even sought other work in the field.”

The decision in Softrock means that the determination of whether an individual is an independent contractor or an employee for purposes of collecting unemployment compensation tax is no longer limited to the application of the nine factors set out in C.R.S. § 8-70-115(1)(c), or that the alternative single factor test factor test is dispositive. Instead, an employer can present additional information beyond the nine factors to establish the relationship. Further, the fact that an individual provides services only to one business does not conclusively establish that the individual is an employee. Rather, it is appropriate to determine the motivation of the individual and the circumstances surrounding the individual’s actions. In sum, a fact-finder will be required to look at the totality of the circumstances surrounding the relationship to determine whether a service provider is an employee or an independent contractor.

Michael Schreiner is a senior litigator at Caplan and Earnest LLC. His practice focuses on employment matters, employment-related litigation, commercial litigation and public education. He previously worked in the Colorado’s attorney general’s office, Colorado State University and the University of Colorado. He may be reached at mschreiner@celaw.com.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Colorado Supreme Court News: Two New Cases to Decide Seven Issues

Stuart-StullerBy Stuart Stuller

The Colorado Supreme Court agreed to review two cases covering seven different issues, six of them raised in one case.

Criminal Sentencing Based on Prior Offenses

The case with one issue, Jarrod Ralph Rutter v. The People of the State of Colorado (No. 13SC523), focuses on Colorado’s habitual criminal sentencing statute under which the sentence of a person convicted of a crime is quadrupled if the person has three prior convictions of a certain class of crimes. Because the multiplier is formulaic, there is a possibility that the resulting sentence could be grossly disproportionate to the underlying criminal conduct, violating the Eighth Amendment’s prohibition against cruel and unusual punishment. As a result, such a sentence is subject to a proportionality review to determine whether it is constitutional.

Jarrod Rutter was convicted on charges relating to the manufacture of methamphetamine. Rutter had three prior convictions for possession and use of controlled substances, exposing him to the habitual criminal sentence enhancement. In the interim, the Colorado General Assembly had reduced possession and use drug crimes to misdemeanors, but if the crimes were felonies at the time of the fourth offense, they still would be counted toward habitual criminal status. With only the manufacture conviction, Rutter would have faced a 24-year sentence. Because of the possession and use offenses, Rutter’s sentence was quadrupled to 96 years.

Rutter argued that while the possession and use convictions could be counted toward the statutory sentence enhancement, the fact that the General Assembly had reduced the possession and use crimes to misdemeanors should be considered in the proportionality inquiry. The court of appeals, in an unpublished opinion by Judge Hawthorne, Judge Taubman concurring, rejected the argument. Judge Graham concurred in part and dissented in part.

School Vouchers

The six-issue case, Taxpayers for Public Education et al. v. Douglas County School District et al, (No. 13SC233), arises out of a statutory and constitutional challenge to a private school voucher program funded by the Douglas County School District under which public school funding is used to pay some students’ tuition at private schools, many of which are religious schools.

The statutory challenges are brought under the Public School Finance Act, which regulates the sourcing and distribution of funding for public education. The initial question is whether citizens have the ability, or standing, to raise such a challenge, an issue that the court held turned on whether the Finance Act gives rise to an implied private right of action.

If the Finance Act challenge is permitted, the next question will be whether the voucher program violates the Act by allowing the school district to include students who are enrolled in private schools in the enrolled student count that the district submits to the state for funding.

The remaining four questions focus on constitutional challenges brought under three different provisions of the Colorado Constitution.

One question extends to all three provisions, that is, whether the voucher program is entitled to a presumption of constitutionality that can be rebutted only by proof “beyond a reasonable doubt.”

The first constitutional challenge is that the voucher program violates the constitutional provision that money from the state public education fund shall remain “inviolate and intact.” The trial court’s Judge Michael Martinez determined that state fund money, which comprises 2 percent of the funding received by the district, was diverted to private schools; therefore, this violated the constitution. The court of appeals, in an opinion by Judge Jones with Judge Graham concurring and Judge Bernard dissenting, relied on the constitutional presumption to assume that the voucher program was funded entirely with the remaining 98 percent of the district’s funding.

The second challenge arises from a provision in Colorado’s Bill of Rights that lacks both the brevity of the federal constitution’s religious clauses and the well-developed case law. The pertinent part of the provision states that no person shall be “required to attend or support any ministry, or place of worship, religious sect or denomination against his consent.” The trial court held that the program violated the Bill of Rights by using taxpayer money to support religious instruction. The court of appeals reversed, holding that the federal constitution forbids state constitutional law from turning on inquiries into the extent to which private schools are religious in character.

The final constitutional challenge is anchored to a provision that prohibits public entities from using public funds to support sectarian purposes using terms that go well beyond the usual constitutional proscription of “shall,” that is, the provision states in pertinent part that no public entity “shall ever make any appropriation, or pay from any public fund . . . anything in aid of any church or sectarian society, or for any sectarian purpose . . . whatsoever.”

Motions to exceed word and page limits are expected.

Stuart Stuller practices appellate, litigation, constitutional, employment discrimination, and education law. He regularly appears before both state and federal appellate courts and has played a substantial role in more than 30 cases that resulted in published decisions. He can be reached at sstuller@celaw.com.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Colorado Supreme Court News: Pretrial Discovery Process Under Review

Stuart-StullerBy Stuart Stuller

On April 7, 2014, the Colorado Supreme Court agreed to review a case that will be watched closely by the legal community. The issue before the court does not concern how cases are to be decided, nor how cases will be tried, but the authority of a trial court to control the discovery process that precedes trial.

The case, Antero Resources Corp., et al v. Strudley, case no. 13SC576, will address whether the Colorado Rules of Civil Procedure permit trial courts to issue so-called Lone Pine orders that are sometimes used in large and complex personal injury cases often involving environmental contamination where there is some doubt that the plaintiffs can prove contamination and causation.

The case involves claims by a family alleging that nearby natural gas operations contaminated their well water, causing them medical harm. Prior to full-blown discovery, the phase of litigation in which parties demand records, conduct depositions and inspections, and otherwise gather information, the trial court required the family to submit evidence showing that their well was contaminated by pollutants from the defendants’ operations, that scientific research links the alleged contaminants to the maladies suffered by the family, and that the contaminants did cause such harm to the family.

After the family responded, the defendants argued that the materials submitted by the family did not meet the threshold showing required by the court’s order. The court agreed and dismissed the case. The Colorado Court of Appeals reversed, holding that the trial court’s order was inconsistent with the Colorado Rules of Civil Procedure.

Questions related to pretrial discovery are enormously significant within the legal community because the cost of conducting discovery can be substantial. Defendants, such as the companies here, contend that the prospect of large discovery costs is often used as leverage to settle cases that are not meritorious. Conversely, plaintiffs and the Colorado Court of Appeals contend that the ordinary rules of civil procedure are sufficient to prevent such scenarios. Trial courts, charged with managing cases in a manner that protects the integrity of the judicial process, are caught in the middle.

The Colorado Defense Lawyers Association, the Colorado Civil Justice League and the American Petroleum Institute filed amicus curiae (friend of the court) briefs urging the Colorado Supreme Court to review the court of appeals’ decision. Now that the court has agreed to address the issue, organizations on both sides of the issue are expected to participate.

Stuart Stuller focuses on appellate practice, litigation, constitutional law, employment discrimination and education law. He regularly appears before both state and federal appellate courts and has played a substantial role in more than 30 cases that resulted in published decisions. He can be reached at sstuller@celaw.com.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Five Things to Know About Heartbleed

heartbleedThe news media has been abuzz with talk of the Heartbleed bug, a recently discovered vulnerability to commonly used security software. Here are answers to some common questions about Heartbleed.

1. What is Heartbleed?

Heartbleed is a vulnerability to OpenSSL, a widely used encryption program. The vulnerability was inadvertently created while trying to fix a different bug. Although the Heartbleed vulnerability has been present in OpenSSL for two years, it was only recently discovered. The vulnerability created by Heartbleed could allow hackers to steal passwords, credit card data, or Social Security numbers from websites, home routers, smartphones running older Android operating systems, and other web-connected devices.

2. Which websites were affected?

Many commonly used websites use OpenSSL, including Facebook, Google, Gmail, YouTube, Yahoo, and Wikipedia. A website called LastPass has a handy Heartbleed checker, where you can enter a URL and see if it is vulnerable or safe. Another website, Mashable, created a “Heartbleed Hit-List” compiling vulnerability info for many sites.

3. Which websites were not affected?

Fortunately, most banking websites use more stringent security measures, so they were not affected by Heartbleed. Websites that were not affected include Amazon, AOL, Bank of America, Chase, LinkedIn, Hotmail, Outlook, PayPal, U.S. Bank, and Wells Fargo, among others. The CBA and CLE websites also were not compromised; neither uses OpenSSL.

4. What can I do to protect my information?

Most of the affected websites have issued patches by now. If the website was not vulnerable, you do not need to do anything (except keep up with regular password changes). If the website was vulnerable but has now been patched, change your password immediately. Secure passwords contain combinations of letters, numbers, and special characters, and should not be names, birthdates, or any other easily discoverable information. It is advisable to use different passwords for each website you frequent; websites like LastPass can help you keep track of these as well.

5. What about confidential client information?

Hopefully, most confidential client information would not have been vulnerable to Heartbleed. Aaron Street of The Lawyerist wrote a great article called “Heartbleed: What Lawyers and Law Firms Need to Know” that explains why client information is probably not susceptible. He also addresses the important question of safety in the cloud, particularly after Heartbleed and the Target data breach last fall.

As technology advances and its use becomes more widespread, safety breaches like Heartbleed will become more common. Heartbleed is a reminder that internet safety is important for everyone.

IAALS Releases Preliminary Findings on Colorado Civil Access Pilot Project

Corina_Gerety_bw_smallThis post originally appeared on IAALS Onlinethe blog for IAALS, the Institute for the Advancement of the American Legal System at the University of Denver, on April 7, 2014.

By Corina Gerety

IAALS is pleased to announce the completion of its preliminary evaluation report on the Colorado Civil Access Pilot Project (CAPP), which tests a new set of pre-trial procedures for business actions in state district court. The project, which began in January 2012 and runs through December 2014, is in place in five Denver metro-area courts.

Relating to pleadings, disclosures, discovery, and case management, the CAPP rules were designed to bring the disputed issues to light at the earliest possible point, tailor the process proportionally to the needs of the case, provide active case management by a single judge, and move the case quickly toward trial or other appropriate resolution. The preliminary report combines the results of a docket study with attorney and judge surveys.

Our initial analysis reveals that the CAPP process as a whole has succeeded in achieving many of its intended effects, including a reduced time to disposition, increased court interaction, proportional discovery and costs, and a lower level of motions practice. Much of the positive feedback relates to CAPP’s early, active, and ongoing judicial management of cases, with many calling for this to become a permanent feature of the rules.

For those cases that are at least minimally contested, one of the challenges of the project relates to differences between simple and complex cases. The first part of the CAPP process (rolling and staggered deadlines for pleadings and initial disclosures) appears to work better in simple cases, while it can fall apart in complex cases. The second part of the CAPP process (everything from the joint case management report forward) appears to provide a real benefit for complex cases, while it can be too much for simple cases. This is just one nuance in the results, and the full report will provide interesting reading for those engaged in these issues—both inside and outside of Colorado.

This report accompanies other recent reports on rules projects taking place around the country, includingNew HampshireMassachusetts, and Utah. It is preliminary because some cases in the docket study sample have not yet resolved and because differences in the survey data based on case or respondent characteristics will need to be more fully explored. The final report will be released in the fall of 2014.This is, however, a very valuable starting point.

Click here to download the Preliminary Findings on the Colorado Civil Access Pilot Project.

Corina Gerety directs long-term research and evaluation projects for IAALS. Her work involves legal and empirical research, analysis, and writing, as well as research-related collaboration and presentation. She conducts research for all IAALS initiatives on an as-needed basis. Gerety came to IAALS in the Spring of 2009 from the public sector, having worked for a number of years in the Office of the Colorado Attorney General and in clerkships at the Colorado Supreme Court, Colorado’s Second Judicial District Court, and the Office of the Presiding Disciplinary Judge.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Complexity of Mission and the Power of Form

joe_yockeyBy Joseph Yockey
Associate Professor of Law, University of Iowa

Consider two different social enterprises: Blue River Technology and Greyston Bakery.

Blue River applies expertise in robotics to develop new agricultural technologies. Recognizing that $25 billion is spent annually on herbicides that pose environmental risks, the company offers farmers the option to reduce their chemical usage by switching to robots pulled behind tractors that can quickly identify and kill weeds with a rotating blade.

Greyston sells brownies (including some found in Ben & Jerry’s ice cream), but it also adheres to a strict workforce development program. The company staffs its operations with hard-to-employ individuals and teaches them skills that they can use when looking for jobs across the wider foodservices industry. As Greyston’s slogan says, “We don’t hire people to bake brownies, we bake brownies to hire people.”

Greyston is organized as a benefit corporation; Blue River is not. That probably makes sense.

Blue River approaches what some call “the hybrid ideal” – a situation where everything a company does generates social value and revenue. The company’s social objectives are market driven. There is little tension between profits and impact. Mission drift is relatively easy to monitor. I wouldn’t think Blue River has much to gain by becoming a benefit corporation. Indeed, it seems to be doing just fine.

Greyston is different. It can’t align profits with public good quite as neatly. Its social mission is broader and open to greater interpretation. What does it mean for someone to be “hard-to-employ?” How should we measure something as fuzzy as workforce development? Even if we say that Greyston is near the hybrid ideal, can we be sure it won’t move toward greater pursuit of profits at the expense of public benefit? This might follow from something as simple as a change in ownership or leadership, and it could be hard to detect. Blue River’s products strike me as easily observable, but if Greyston makes discrete changes to its hiring policies, those decisions seem easier to keep under wraps.

The provisions found in benefit corporation statutes do not fully resolve these issues. However, I’m not ready to say that benefit corporation statutes are a mistake, or that becoming a benefit corporation is only about greenwashing. Instead, I argue that the benefit corporation’s best opportunity for influence is to be seen as a new institutional structure—one that can motivate the development of self-regulatory standards and provide a normative framework for social entrepreneurs and pro-social investors. This framework, in turn, can be particularly helpful to companies like Greyston that pursue more complex social missions.

First, the benefit corporation form offers a rallying or focal point that ought to make it easier for like-minded private actors to come together and collaborate on issues ranging from corporate governance practices to the development of social impact metrics. Seeing benefit corporation laws as focal in this way does not mean they will dictate particular standards. Rather, they simply incentivize firms and stakeholders to participate in a self-regulatory process by providing an archetype and hub that can facilitate communication and standards development. The form’s mandate to consider multiple interests should make such cooperation more palatable. Firms that prioritize profits above other objectives often lack the incentive to share information with their competitors. In that case, first-movers will see their profits slip if information sharing allows others to easily replicate their strategies. However, by definition, the benefit corporation form means that profits are not the overriding focus. It thus creates more room for cooperation and coordination—and as Haskell Murray reports, this already appears to be happening.

Additionally, a key step in addressing issues like mission drift is to recognize that, just as they send broader signals about values to the market, legal forms also influence corporate behavior. The people within an organization are the most significant determinants of its commitment to mission. With respect to the benefit corporation, forms that reflect a specific ideological commitment can influence internal culture by signaling the values that should inform employee decision-making.Patagonia cited this belief as a motivating factor in its decision to become a benefit corporation.

Finally, establishing a culture that leads to the internalization of values is easier when organizational goals match employees’ personal beliefs. The benefit corporation’s emphasis on dual objectives should attract socially minded employees by signaling that they will find a supportive structure in place. When employees then enter organizations that reflect their own values, they often exhibit greater motivation to act consistently with those values.

There is obviously much more to say about these points, and for anyone looking to wade deeper into them, I offer a fuller explanation here.

Unless the rapid spread of benefit corporation laws is evidence of an enthusiastic or cynical mistake (which I think is possible but unlikely), then there must be some underlying logic to unpack. My aim is to keep working to explain the social enterprise phenomenon, to put it into a clear theoretical framework, and to distill the best justifications for offering special organizational options for social entrepreneurs.

Joseph W. Yockey joined the faculty of the University of Iowa as an Associate Professor of Law in 2010 and was voted Professor of the Year by the law school student body for 2011-12.  He is also a two-time nominee for the University of Iowa’s campus-wide President and Provost Award for Teaching Excellence.  He teaches Business Associations, Securities Regulation, and a seminar on Securities Litigation.  His writing interests are in the areas of corporate governance, securities regulation, and corporate crime.

Before coming to Iowa, Professor Yockey taught as a Visiting Assistant Professor at the University of Illinois College of Law.  He is also a summa cum laude graduate of the University of Illinois College of Law, where he served as articles editor for the University of Illinois Law Review and was elected to the Order of the Coif.  After graduating from law school, he clerked for Judge John D. Tinder (presently of the U.S. Court of Appeals for the Seventh Circuit) in Indianapolis and practiced corporate and securities litigation at Sidley Austin LLP in Chicago.  He is a member of the Illinois Bar.

Professor Yockey is also a guest blogger for The Conglomerate, where this post originally appeared on March 20, 2014.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 

CLE Homestudy: Public Benefit Corporation Act, Effective April 1, 2014

This CLE presentation took place on February 12, 2014. Click here to order the Video On Demand and watch the entire presentation online, click here for the MP3 Audio Download homestudy, click here for the CD homestudy, or call (303) 860-0608 to order by phone.

 

U.S. Supreme Court Rules Private Contractors and Subcontractors Are Covered By SOX Whistleblower Protections

CoburnSuttleRiordanBy Bob Riordan, Brett E. Coburn, and Brooks A. Suttle

On March 4, 2014, the U.S. Supreme Court issued its decision in Lawson v. FMR LLC,[1] addressing for the first time the whistleblower provision of Section 806 of the Sarbanes-Oxley Act (SOX), which provided in relevant part:

No [public] company . . . or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].[2]

While it is clear from the statutory language that a private contractor or subcontractor of a public company cannot engage in retaliatory actions against an employee, courts have divided on whether “an employee” refers only to the public, SOX-reporting company’s employees, or also protects employees of the private contractor or subcontractor from retaliation.

In Lawson, the U.S. Court of Appeals for the First Circuit took the former view, holding that the meaning of “employee” in Section 806 is unambiguous, and that employees of privately-held companies are not covered by SOX’s whistleblower protections regardless of who their employer contracts with.[3] In a 6-3 split decision, however, the high court reversed and remanded the First Circuit’s decision, finding instead that SOX’s anti-retaliation provision also covers employees of private contractors and subcontractors that are hired by public companies covered by the law. In so doing, the Court significantly expanded SOX’s whistleblower protections to give the law what appears to be, in the words of Justice Sotomayor’s dissent, a “stunning reach.”

The plaintiffs in Lawson were two former employees of private companies that contracted to advise and manage mutual funds, which had no employees and are covered by SOX as companies required to make certain regulatory filings. After they were allegedly retaliated against for attempting to report a purported fraud related to mutual funds, the plaintiffs brought a whistleblower claim against their former employers under Section 806. The defendants’ motion to dismiss was initially denied by the District Court, but the First Circuit reversed the decision and found that dismissal was appropriate because Section 806 did not protect the plaintiffs as employees of private companies.

On appeal, the Supreme Court examined the text of the statute, the context in which it was enacted, and its legislative history. Writing for the majority, Justice Ruth Bader Ginsburg wrote with regard to statutory text that the language of Section 806 is unambiguous, and contains “numerous indicators that the statute’s prohibitions govern the relationship between a contractor and its own employees.”[4] With regard to legislative intent, Justice Ginsburg likewise found that Section 806 was enacted “to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work.”[5] Justice Ginsberg was joined in the majority by Chief Justice Roberts, and Justices Breyer and Kagan. Justices Scalia penned a separate opinion, joined by Justice Thomas, concurring in the ruling but criticizing the majority’s focus on legislative intent and comparisons to other whistleblower laws.

In a strongly worded dissent in which she was joined by Justices Kennedy and Alito, Justice Sotomayor wrote that the majority’s opinion gave the SOX whistleblower laws a “stunning reach” that could lead to “absurd results,” and that “nothing in the text, context, or purpose of the Sarbanes-Oxley Act suggests that Congress actually wanted to do so.”[6] Finding that the statutory text is ambiguous, and that Congress intended a narrow reading of Section 806 that excluded employees of private companies, Justice Sotomayor dissented that whatever “laudatory purpose” the majority’s interpretation of the whistleblower law might serve, “that is not the statute Congress wrote.”[7]

The dissent notwithstanding, the Court’s decision is now the law of the land, and will likely remain so unless and until Congress acts to overturn the majority’s interpretation of Section 806. While the majority was dismissive of any “floodgate-opening concerns” about a potential deluge of new whistleblower litigation,[8] there is no question that the number of employees covered by SOX’s whistleblower provisions has been enormously expanded by the Court’s ruling. As such, many private employers who have become accustomed to thinking of themselves as outside the scope of SOX’s whistleblower provisions will need to reevaluate their practices and procedures in light of Lawson, and take steps to minimize the potential for whistleblower claims. Such steps can include, among other things, changes to the company’s training programs, employee documentation and record-keeping procedures, and internal policies governing the discipline process and the permissible grounds for taking adverse action against an employee.

At a minimum, private companies who contract to do business with public companies should seek the assistance of counsel to conduct a thorough review of their internal control and compliance procedures, in addition to modifying their anti-retaliation policies as needed. Companies should also conduct training on what is and is not permissible given SOX’s whistleblower provisions, and make it clear that knee-jerk firings and other adverse actions must be avoided when an employee reports fraud or other misconduct covered by SOX, whether allegedly occurring at the public company or at the contractor-employer. Likewise, public companies need to recognize that they may now be found liable not only for retaliation against their own employees who report SOX violations, but also for retaliatory acts conducted by agents of the public company against the employees of its private contractors and subcontractors. Public company employers thus may also need to reconsider their SOX reporting and anti-retaliation policies in light of the fact that Lawson greatly expanded the pool of potential whistleblower claimants.

As a final note on Lawson, it is worth noting that the Supreme Court chose not to weigh in on another important issue recognized in the case – the extent to which a prior decision by the Department of Labor’s (“DOL”) Administrative Review Board’s (“ARB”) was entitled to deference by the Court. Several months after the First Circuit’s decision in Lawson, the ARB came to the opposite conclusion in Spinner v. David Landau & Associates, LLC.[9] In that case, the ARB held that the meaning of “employee” in Section 806 was ambiguous, and therefore the ARB did not have to follow the First Circuit’s ruling. Instead, the ARB sought to expand SOX’s reach in holding that Section 806 applied to employees of privately-held companies if they had contracts with publicly-traded companies.[10]

Thus, when the Supreme Court agreed to hear Lawson, many observers hoped that the Court would use it as an opportunity to decide the proper level of deference that courts should give to the ARB’s construction of SOX. The Court, however, essentially passed on the issue, simply noting in a footnote that “[b]ecause we agree with the ARB’s conclusion that [Section 806] affords protection to a contractor’s employees, we need not decide what weight that conclusion should carry.”[11] But while the deference issue was left unanswered, the Court’s Lawson decision will almost certainly have a large impact in the arena of SOX whistleblower litigation. At the very least, it has given both public company and private company employers plenty to consider in ensuring that they are in compliance with SOX’s anti-retaliation laws.

Brett Coburn is a partner who concentrates his practice on employment litigation and counseling. His litigation experience includes gender, race, age and disability discrimination suits under Title VII, the ADEA and the ADA, as well as FLSA wage and hour claims and FMLA interference and retaliation claims. His experience also includes the defense of collective actions under the FLSA and ADEA. He has litigated cases involving misappropriation of trade secrets, breach of employment contracts, violation of non-competition and other restrictive covenants, defamation, breach of employee duties, tortious interference and related customer and employee raiding claims.

Brooks Suttle is an associate in the firm’s Labor & Employment Group. Brooks received his J.D., with honors, from Emory University School of Law, where he was elected to the Order of the Coif. While at Emory, he served as the executive symposium editor for the Emory Law Journal, where he was responsible for planning and organizing the 2012 Randolph W. Thrower Symposium, “Innovation for the Modern Era: Law, Policy, and Legal Practice in a Changing World.” He also received the 2011 Myron Penn Laughlin Award for Excellence in Legal Research and Writing for his journal comment: “Reframing Professionalism: An Integral Approach to Lawyering’s Lofty Ideals.”

Bob Riordan is a litigator who focuses on disputes relating to employment, business torts, unfair competition and commercial transactions. He regularly represents clients in both federal and state courts, as well as various agencies and arbitral forums. He has appeared in trial and appellate courts throughout the country, and has been recognized for his achievements in Best Lawyers in AmericaChambers USA: America’s Leading Lawyers for Business, Georgia Trend’s Legal Elite, PLC Which Lawyer? and Super Lawyers magazine. Mr. Riordan has extensive experience in defending wage disputes brought on a mass and class basis as well as whistleblower claims. He also regularly defends companies against claims of all varieties of discrimination and retaliation, as well as claims relating to the law of public accommodation, tortious interference, breach of fiduciary and other duties, theft of trade secrets and similar matters. In addition, Mr. Riordan often litigates contract disputes, including earn-out and other claims tied to business combinations.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] 571 U.S. ___ (March 4, 2014).

[2] 18 U.S.C. § 1514A(a) (2006 ed.) (emphasis added).

[3] See Lawson v. FMR, LLC, 670 F.3d 61 (1st Cir. 2012).

[4] Slip op. at 16.

[5] Id. at 19. Despite Justice Ginsburg’s observation, the rule of Lawson extends to reports of alleged misconduct committed by both the public company and the employer-contractor. Indeed, as pointed out in the dissent, under the majority’s holding, the employer-contractor’s alleged misconduct may have nothing to do with the contract between the employer-contractor and the public company.

[6] Id. at 2 (Sotomayor, dissenting).

[7] Id. at 20.

[8] Slip op. at 22.

[9] ARB Nos. 10-111, 10-115 (May 31, 2012).

[10] For its part, the First Circuit noted in its decision that, because the statute was unambiguous, the court owed no so-called Chevron deference to any contrary agency determinations. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) (holding that agency interpretations of ambiguous statutes will be upheld so long as they are reasonable, but where a statute is unambiguous, the courts as well as the administrative agencies must give effect to its clear meaning).

[11] Slip op. at 9 n.6. The dissent in Lawson argues that the majority in fact declined deference by not endorsing all of the ARB’s holding in Spinner. Slip op. at 17 n.11.