Will Jonathan Gruber’s Comments Impact the Supreme Court?

Jonathan Gruber, the MIT professor who was paid by the government to consult on the creation of the Affordable Care Act, recently made headlines with his controversial ObamaCare comments about the “stupidity of the American voter.”  His other comments, however, deserve a second look.  One comment shows how the Chief Justice may have been misguided by the government in his tie-breaking vote to support the Affordable Care Act, while another comment could have a big impact when the Supreme Court soon decides a landmark case.

The Supreme Court’s narrow vote supporting the Affordable Care Act depended on Chief Justice Robert’s conclusion that the Act created a tax, and thus fell within one of the constitutionally enumerated powers of Congress to support its creation of the Act.  However, Gruber’s controversial comments included his assertion that the bill “was written in a tortured way to make sure CBO did not score the mandate as taxes.”  If this comment was accurate, it conflicts with the Justice Department’s argument, accepted by the Chief Justice in casting his tie-breaking vote to support the law, that the Act created a tax and Congress therefore had the authority to enact it.

Gruber also asserted that Congress “want[ed] to sort of squeeze the states” to feel pressure to set up their own insurance exchanges, and that “if you’re a state and you don’t set up an exchange, that means your citizens don’t get tax credits.”  Once again, Gruber is conflicting with the Administration’s position in the upcoming King v. Burwell Supreme Court case.  In King, the Supreme Court will decide if the government exceeded its authority in promoting tax credits and subsidies for residents of states that did not create their own exchange.  According to the language of the Affordable Care Act and Gruber’s own comments, such credits are not allowed – for two thirds of the states that never gave in to the ‘squeeze’ to set up their own exchange - and therefore a big part of ObamaCare’s financial engine should fail.  This contrasts with the Administration’s argument pulling the Court in the opposite direction, asserting that the Act intended to allow credits and subsidies for all such states in order to fund ObamaCare.

Both sides cannot be right, and the Justices will need to resolve this in a few months. If the majority of the Court follows the language of the statute and takes professor Gruber’s comments to heart, a big part of ObamaCare’s funding will be disallowed since the credits and subsidies challenged in King will be struck down.  In the meantime, the next time a former consultant for the Administration makes sarcastic comments about the American voter and the law, he may want to consider whether the nine people wearing robes in the Supreme Court building will hear what he has to say before they cast their next vote.  Time will tell if his words will influence the Supreme Court to reach a different result.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard, LLP, and is a Fox Business and Bloomberg TV contributor on breaking news such as ObamaCare and Supreme Court cases.

Handling Workplace Concerns Over the Ebola Crisis

Concerns associated with the spread of Ebola are growing. The World Health Organization has declared the virus an “international health emergency” and the Centers for Disease Control confirmed that the U.S. has now experienced several cases of the virus. Although it’s still too early to deem this a major health crisis in the United States, concerns are growing and employers need to be prepared to address questions about the transmission and handling of Ebola.

Though the media attention surrounding Ebola continues to grow, health authorities are still advising that the risk of actually transmitting the disease is low, and therefore, employers should be mindful not to overreact and risk running afoul of discrimination laws that can come into play when dealing with infectious diseases. Of particular note, the Americans with Disabilities Act (“ADA”) prohibits employers from discriminating against people with disabilities. Given its severity, and the broad interpretation of “disability,” Ebola arguably qualifies as a disability under the ADA. Though the ADA restricts employers from making disability-related inquiries, an employer is allowed to conduct a medical examination if they have a reasonable belief that a particular employee’s disability poses a direct threat to the workplace. A direct threat is defined as significant risk of substantial harm to the health or safety of that employee or others in the workplace and such risk cannot be eliminated or reduced by a reasonable accommodation.

The direct threat exception cannot be based on fears or misconceptions, but rather, the employer must take into consideration current medical knowledge from health authorities and objective evidence. For example, an employer could not require a medical examination simply because one of its employees recently traveled to West Africa. That could open an employer up to a so-called “regarded as” discrimination claim under the ADA, or a potential national origin discrimination claim.

Though the EEOC has not issued anything specific to Ebola, the agency did issue guidance during the H1N1 pandemic in 2009 that employers should note in addressing Ebola. The guidance provides useful information if Ebola spreads to a pandemic similar to H1N1, including:

• If an employee shows Ebola-like symptoms, employers may advise such employee to go home;
• Employers may ask employees if they are experiencing Ebola-like symptoms, yet all information must be kept confidential;
• Employers may ask whether employees have traveled to an area where Ebola has been present, such as West Africa;
• Employers can encourage employees to telework; and
• Employers may inquire into why an employee has been absent from work if the employer suspects it was for a medical reason.

Ultimately, if current fears of Ebola expand into a broader reality in the United States, employers must be equipped with various actions they can take to provide a safe working environment. If employers are considering conducting medical examinations or making employment decisions based on a suspected case of Ebola, employers should first consider consulting with an attorney as well as engaging with a medical provider familiar with this disease.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Court Weighs In On Validity of Liquidated Damages Clauses

It is not uncommon for business contracts to contain a liquidated damages clause that provides a set amount to be paid in the event a party breaches the contract. However, a recent decision from the Fairfax County Circuit Court could significantly impact how companies structure liquidated damages provisions in their contracts. In Sagatov Builders LLC v. Christian Hunt, the Seller (Sagatov Builders) and Buyer (Christian Hunt) entered into a contract for the purchase of real property.  As part of the contract, the Buyer was obligated to deliver a deposit of $50,000. The Seller subsequently filed a lawsuit alleging that the Buyer breached the contract and sought to retain the deposit as liquidated damages based upon a damages provision in the contract. The damages provision provided that—in the event of the Buyer’s default—the Seller would have the option to either retain the deposit as liquidated damages or pursue actual damages against the Buyer. The Buyer sought to dismiss the lawsuit arguing that an optional liquidated damages clause is a penalty as a matter of law, and the Seller was required to prove actual damages.

In considering the enforceability of the option clause, the Fairfax Circuit Court noted that to be enforceable, the liquidated amount must (1) be a reasonable estimation of actual damages which by their nature are difficult to ascertain, effectively avoiding all future questions of damage, and (2) not function as a penalty.
The court determined that the damage provision clearly did not avoid all future questions of damage and therefore the arrangement “fails to achieve the fundamental purpose of a stipulated damage provision.”  The provision also functioned as a penalty since it was intended only to be operative where the deposit exceeded the actual damages incurred, “establishing the implication that the parties intended to punish the defaulting party.”

As a result of this holding, parties must now show caution in designing a liquidated damages provision.  Since liquidated damages are intended to reflect future harm that is inherently difficult to calculate, contracting parties are now in the awkward position of needing to accurately determine a stipulated amount beforehand, or relying on litigation to prove actual damages. If parties decide upon a liquidated damages provision, this case should serve as guidance to no longer include the option to pursue actual damages if damages end up amounting to far more than the amount stipulated in the contract. This case should also serve as a good reminder to business owners and executives to revisit your commonly used boilerplate language that may be found in your contracts to ensure they are compliant and up-to-date with existing case law.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Supreme Court Allows Closely-Held Corporations to Opt Out of Obamacare Birth Control Mandate

On June 30, 2014, the Supreme Court ruled in a 5-4 decision that closely-held for-profit corporations may opt out of regulations issued under the Patient Protection and Affordable Care Act (ACA) mandating insurance plan coverage for certain contraceptive drugs. 

Three corporations brought the action under the Religious Freedom and Restoration Act of 1993 (RFRA), which prohibits the Government from substantially burdening a person’s exercise of religion unless the government shows that such a burden is the least restrictive means to further a compelling governmental interest.  In Burwell v. Hobby Lobby Stores, Inc., the Court not only considered the legality of the contraceptive mandate under the RFRA analysis, but also addressed whether a for-profit corporation has standing as “a person” under the statute.

Writing for the majority, Justice Alito ruled that the contraceptive mandate was unlawful under the RFRA and constituted a substantial burden on a corporation’s right to conduct business in accordance with its religious beliefs. The Court concluded that, in enacting the RFRA, Congress intended to provide broad protection to the exercise of religion, including religious exercises practiced by the natural persons associated with closely-held corporations.  The majority noted that the legal fiction in which a corporation is considered a person for certain purposes is really intended to provide protection for the natural persons associated with that company since corporations, “separate and apart from the human beings who own, run, and are employed by them, cannot do anything at all.”  Extending the scope of protection offered by the RFRA is therefore intended to benefit the human beings comprising the corporation, rather than the intangible entity itself.  

In her dissenting opinion, Justice Ginsburg disagreed that a for-profit corporation qualified as a “person” under the RFRA because a corporation is artificial and has no conscience, and therefore cannot practice religion.   The dissent noted that religious entities and other nonprofits are exceptions to this principle because they “exist to serve a community of believers.”  For-profit companies, on the other hand, are likely composed of workers of diverse religions and are motivated by commercial profit. In the dissent’s view, upon incorporating a for-profit business and escaping personal liability for its obligations, the owners essentially sever their right to contest government regulation of that business based upon their religious beliefs.  Justice Ginsburg expressed further concern that providing for-profit closely-held corporations a cause of action would proliferate RFRA claims by encouraging “corporations of any size, public or private…to seek religion-based exemptions from regulations they deem offensive to their faith.”

Although the majority only considered whether a closely-held for-profit corporation could constitute a person, Justice Ginsburg’s observation that the ruling would likely proliferate claims from corporations of all sizes is worthy of note.  Despite tailoring the language of its holding to closely held corporations, the Hobby Lobby decision technically does not preclude the extension of RFRA protection beyond the close corporation context.  The majority expressly acknowledged this possibility by refusing to interpret “person” to include natural persons and “some but not all corporations.”  Furthermore, although the holding centers upon four specific contraceptive drugs, the majority does not suggest that these are the only medical treatments and procedures mandated by the ACA which may be actionable under the RFRA.  Perhaps mandatory insurance coverage for vaccinations and blood transfusions will be next on the chopping block.  Since the decision is not constrained within Obamacare regulation, maybe religiously inclined businesses will seek to opt out of anti-discrimination regulations.  The Hobby Lobby decision ultimately provides corporations carrying out business in a manner reflecting sincere religious beliefs with the means to challenge any number of government regulations that burden its operation.

David Moon is a summer intern with Berenzweig Leonard, LLP.  He can be reached at dmoon@berenzweiglaw.com.

Virginia Orders Uber and Lyft to Pull Over

In the latest conflict between technology and government regulation, Virginia’s DMV has issued a cease and desist order to Uber and Lyft, claiming that their businesses are illegal and cannot pick up passengers in Virginia.  Undeterred, Lyft has responded that it intends to continue operating there, stating in a press release that Virginia residents and others have embraced it “as an affordable and reliable transportation alternative.”  Lyft also points out that the current regulations for taxis and limos are outdated and do not account for this new tech-based industry.  Uber also criticizes Virginia’s move, stating that it “hurts thousands of small business entrepreneurs who rely on [them] to make a living, create new jobs and contribute to the economy.”

This is an interesting development for Virginia, which has enjoyed a reputation as a business friendly venue but is now taking a stand many consider to be against free markets.  The DMV has already fined Uber and Lyft thousands of dollars, and contends their businesses violate Virginia regulations since they allegedly do not “have proper operating authority.”  Virginia’s move is in line with a recent trend by other governments in Los Angeles, Portland and San Francisco, where taxicab companies have wielded influence to try halting competition in those markets as well.  Uber, which has raised over $300 million in venture capital, is also currently appealing a Maryland judge’s ruling that it must file an application to operate as a traditional for-hire carrier in order to operate there.

Virginia’s action as well as those of governments on the West Coast shows how old government regulations can stand in the way of free market technological innovation and cut down consumer choice.  Regulations should evolve over time to enhance creativity, not stifle markets.  The government too often has a heavy handed reputation of putting up barriers to entry, rather than supporting new technology and creativity that can increase profitability and decrease unemployment.  Small businesses should be encouraged to expand consumers’ freedom of choice, which appears safe given Uber’s unique online consumer rating system that weeds out problems in a business model that does not apply for legacy carriers like taxis.  Their drivers also use interactive apps with consumers in a manner that is more responsive but does not fit neatly into old-model government regulations.

This is a hot and emerging issue impacting cities throughout the United States, since Lyft is currently operating in sixty US cities and Uber has a presence in 100 cities.  It is interesting that various governments take the position these technology based companies are not in trend with regulations, when it appears the government is not keeping pace with new technology.  These trends appear to be on a collision course in Virginia, and this heated dispute will probably require a court to step behind the wheel and decide how far governments can go to head off technological advancement.  Watch closely as this dispute heats up, as some resolution lies down the road.

Seth Berenzweig is a managing partner at the Washington, DC regional business law firm, Berenzweig Leonard, LLP. He can be reached at SBerenzweig@BerenzweigLaw.com.

Cautionary Tale: When Contemplating Live Music at Your Venue, Get a License

Last summer, a small band performed at a bar called 69 Taps in Medina, Ohio, near Cleveland. That evening, the band covered a number of popular songs that the mostly middle-aged audience had grown up listening to. The bar had not asked for a set list, nor had the band provided one. The band took requests, playing hits like “Brown Eyed Girl” and “Freebird” for a small audience. The problem? “Freebird” and nine other songs that the band covered that evening are protected by Broadcast Music, Inc. (“BMI”), a performing rights organization tasked with collecting royalties, and 69 Taps did not have a license to present music from BMI’s catalog.

 The bar was slammed with a lawsuit brought by BMI and the copyright holders of each of the ten covered songs, demanding that 69 Taps pay significant damages and attorneys’ fees. While it may seem harsh to sue a small-time bar for copyright infringement over an amateur cover band’s decision to take requests on a summer evening, this lawsuit is a testament to the fact that BMI (one of the “big three” American performing rights organizations along with ASCAP and SESAC) takes aggressive steps to protect the intellectual property of its artists. Because 69 Taps did not ask for a set list or post one on its website, BMI could only have found out about the performance of the infringing works through its survey process—by actually having a representative in the audience to keep tabs on the performance. Any venue that presents live music, no matter how small or obscure, should expect to be “surveyed” by the three performing rights organizations. 

The solution to avoiding these lawsuits is for venues to purchase a “blanket license.” For example, if 69 Taps had purchased BMI’s blanket license, it would have had unfettered permission to present any of the roughly 8.5 million songs in BMI’s catalog for a flat annual fee. BMI allocates shares of the licensing fee to the artists whose work is represented in the venue’s programming, as determined by the same survey methodologies that discovered 69 Taps’s unlicensed performances. The cost of the blanket license is much less than the cost of defending just one copyright infringement lawsuit, so if your business plans on offering live music, the safe bet is to purchase blanket licenses from all three major performing rights organizations. Otherwise, businesses may have to “face the music.”

Frank Gulino is an associate attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at FGulino@BerenzweigLaw.com.

Selling Your Company? Make Sure Your Deal Protects Privileged Communications.

The Delaware Court of Chancery, one of the most sophisticated and influential venues for the resolution of corporate disputes, has held that when one company acquires another, privileged communications between the acquired company and its attorneys are not protected during subsequent litigation between the companies unless the merger agreement contained a term providing otherwise. While the acquired company holds the privilege as long as it remains a separate entity, control over privileged communications passes to the acquiring company at the time of the acquisition, along with other company assets.

This issue arose recently in Great Hill Equity IV, LP v. SIG Growth Equity Fund I, LLLP, in which the acquiring company had a case of “buyer’s remorse” following the deal after discovering what it believed to be evidence of fraud on the part of the acquired company. The evidence consisted of pre-acquisition communications between the acquired company and its legal counsel. In a subsequent lawsuit between the two corporations, the acquired company cited attorney-client privilege in its efforts to prevent the introduction of those communications into evidence. In holding that those pre-acquisition communications were no longer privileged, the Court of Chancery noted that “all property, rights, privileges, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.”

Because “privileges” are specifically listed under the Delaware statute, otherwise-protected communications between the acquired company and its counsel are available for use by the acquiring company during litigation in the absence of a clear carve-out in the acquisition agreement that preserves the privilege. Because the Delaware Court of Chancery handles so many corporate law matters and operates in the state of incorporation of a majority of Fortune 500 companies, the holding in Great Hill Equity provides a roadmap that should interest all business owners. In order to ensure the continued privilege of pre-acquisition communications, the parties should take steps to negotiate, agree upon, and include in their acquisition agreement a term that provides for such a continuation of the privilege. Otherwise, the rights to those communications will be transferred to the acquiring company just like any other property, and could cause serious problems.

Frank Gulino joined Berenzweig Leonard as an associate attorney in 2013. He can be reached at FGulino@BerenzweigLaw.com.