Daniel H. Handman authored the Corporate Counsel article titled, “Expect Big Changes in Labor and Employment From the Trump Administration,” looking at the impact of the incoming administration on key labor and employment issues including organized labor, paid family leave, arbitration agreements and the “gig” economy.

Text of the article is below and can be found on Corporate Counsel’s website by clicking here.

Expect Big Changes in Labor and Employment From the Trump Administration

Since at least the 1920s, Republicans have been viewed as the party of commerce, small government and less regulation. And, to be sure, most Republicans still are. But Donald Trump challenged all of those assumptions by running a populist campaign directed to the working class in which he has often touted “yuge” government. Indeed, Trump garnered more votes from union households than any Republican candidate in decades.

Those shifting electoral dynamics, coupled with Trump’s battles against his own party and his relative silence on issues involving the American workplace, make it challenging to predict what stances his administration will take on labor and employment law issues. And so, the ordinary crystal ball simply does not work here. Nevertheless, there are some small tea leaves that provide signs of how a Trump administration might proceed.

Organized Labor

This is the diciest issue facing the Trump administration by far. The National Labor Relations Board under President Barack Obama took a very active role in support of organized labor. The four biggest changes promoted by the Obama board were:

(1) regulations expediting labor union elections (the “quickie election” rule);

(2) regulations requiring law firms offering advice to employers on union organizing to report such activity (the “persuader rule”);

(3) decisions invalidating employers’ social media policies and other rules which, in its view, chilled organizing activity; and

(4) decisions expanding its jurisdiction in untraditional environments, like franchises or graduate teaching assistants.

Republicans railed against each of those changes and in some cases challenged them successfully in court. With any other Republican, it would be a no-brainer; there would be an about-face. But Trump is not an ordinary Republican, and considering his populist message and broad appeal to working class voters, the question remains whether he will take positions in office that serve the interest of management over labor.

Most experts expect him to make a pivot on those controversial issues. The persuader rule, which at least one court has already found to be invalid, will likely be revoked shortly after he gets into office, and the quickie election rule is probably not far behind. One would also expect Trump board appointees to reverse course on the controversial decisions, but the question remains: Will the same Trump who told workers “I will be your voice” really appoint employee-friendly board members? The safe money is on a reversal in course, but that is decidedly up in the air.

Paid Family Leave

Perhaps the most surprising statement of policy during Trump’s campaign was his expressed support for paid family leave—one of the few areas where he and Democratic party nominee Hillary Clinton agreed. Trump himself floated a plan to offer six weeks of paid maternity leave to employees if their employer did not already offer it.

As with many of Trump’s policies, the finer details of this proposal were left unstated, and, again, his expressed comments departed dramatically from Republican dogma. Indeed, the Family and Medical Insurance Leave Act, which would have provided for paid family leave, was introduced in the U.S. Senate last session but garnered the support of no Republican senators and died in committee without even a hearing.

This of course raises a major question. Will Trump be able to get such a bill through a Congress controlled in both chambers by members of his own party, albeit a party which provided him with less support than any other major party nominee in the recent past?

Expect movement on this issue. Republicans will feel intense pressure to return some favor to working class voters and to hold true on some of the more achievable promises Trump made, and this is one. But do not expect it to be funded through a payroll tax, like Social Security or unemployment. Rather, expect a tax break to employers who provide paid leave.

Arbitration Agreements

It is not exactly a sexy campaign issue, but many expect the trend favoring private arbitration to pick up pace with Trump U.S. Supreme Court nominees, most importantly with regard to class action waivers. In 2011, the Supreme Court decided AT&T Mobility v. Concepcion, a landmark decision in which it agreed to enforce arbitration agreements with class action waivers. Private employers have since seized on that ruling to stem the growing cost of class action litigation.

Employee advocates fought back on two fronts. On the state level, some states enacted laws—California’s Private Attorneys General Act principal among them—allowing groups of employees to litigate collectively, although not technically through a class action. Secondly, federal agencies, most prominently the NLRB, pushed back against the enforcement of class action waivers in arbitration agreements, and they have met with some success.

Expect Trump to appoint a Supreme Court justice who favors the trend toward private arbitration and away from class action litigation. In particular, look for the court to close any remaining avenues for class or class-like litigation and to stem the tide of NLRB action in opposition to arbitration agreements.

Gig Economy Issues

The most talked about issue by employment lawyers—but one which received no mention on the campaign trail—is the changing face of the American workplace and whether existing employment laws are flexible enough to deal with the new “gig economy” workers. The NLRB and other agencies see no problem in applying New Deal-era laws to such workers, steadfast in the belief that they can easily be classified as employees or independent contractors, or so they believe. But a federal judge in a wage-hour class action involving Lyft drivers recently lamented that the task was like trying to fit a square peg into two round holes, imploring Congress to come up with new classifications to deal with emerging technology employers.

Some gig economy companies have proposed a new classification for such workers, frequently referred to as “dependent contractors.” This third classification, they propose, would be nimbler and, among other things, would allow portable benefits to follow a worker between jobs.

While many experts agree that change is needed, neither Trump nor congressional Republicans appear to have much sympathy for the industry. Indeed, Silicon Valley businesses contributed overwhelmingly to Clinton and other Democrats. Even with Republicans controlling Congress, it does not seem a priority for Republicans, no matter how needed a change is. For one thing, it would challenge fundamental assumptions about the nature of the American workplace, and, again, Trump’s populist campaign was focused on getting jobs back from overseas, not on reinventing how employees work.

The Bottom Line

Workers were critical to Donald Trump’s successful campaign, and he has many debts to repay them. Trump pledged in bombastic fashion to be “the greatest jobs producing president that God ever created,” but no one—not even members of his own party—expect factory jobs to return from overseas. Like it or not, he has large shoes to fill, as Obama was one of the most successful job-creators in recent history. To be sure, he will do what he can to assuage the business world; but, at the same time, to keep those voters in the Republican tent, Trump will need to do more, so expect changes you would not otherwise see in a Republican president.

November 18, 2016 edition of the “Corporate Counsel”© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com

SEC CONTINUES BRINGING ENFORCEMENT ACTIONS AGAINST COMPANIES FOR RESTRICTIVE LANGUAGE IN CONFIDENTIALITY AND SEVERANCE AGREEMENTS THAT COULD STIFLE WHISTLEBLOWERS

In separate actions on August 10, 2016 and August 16, 2016, the Securities and Exchange Commission (“Commission”) has again brought enforcement actions against companies for having confidentiality provisions in their agreements that in the Commission’s view violate the federal securities laws by stifling whistleblowers.

The August 10, 2016 announcement, which comes on the heels of the Commission’s enforcement action last year against KBR Inc., came in an action brought against BlueLinx Holdings Inc., a public company, for violating Rule 21F-17 enacted by the Commission effective August 12, 2011 pursuant to the Dodd-Frank Act. The Dodd-Frank Act includes provisions aimed at encouraging whistleblowers to report possible violations of the securities laws to the Commission through a combination of measures, including financial rewards, confidentiality protections and prohibitions on employer retaliation.

Rule 21F-17 provides in part, as follows:

“(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”

Even after the adoption of Rule 21F-17, BlueLinx had required employees who were to receive severance benefits to enter into a severance agreement that contained the following language:

“[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets….Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company’s Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you… Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with…the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Emphasis added.)

The Commission in its order instituting a settled administrative proceeding found that such language “raised impediments to participation by its employees in the [Commission’s] whistleblower program” because “by requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” Moreover, the order indicated, “by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”

Without admitting or denying the charges, BlueLinx agreed to pay a $265,000 civil money penalty to settle the charges and to amend its severance agreements and other applicable confidentiality agreements to include the following provision:

“Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”

BlueLinx also agreed to make reasonable efforts to contact former employees who entered into severance agreements after August 12, 2011 to notify them of the order, that BlueLinx will not prevent them from contacting or providing information to the Commission staff without notice to BlueLinx, and that they may accept a whistleblower award from the Commission.

In a second enforcement action brought on August 16, 2016, the Commission in its order instituting a settled administrative proceeding against Health Net, Inc., found that language in its severance agreements requiring employees to waive rights to whistleblower awards for information provided to the Commission violated Rule 21F-17. Without admitting or denying the charges, Health Net agreed to pay a $340,000 civil money penalty. Health Net also agreed to make reasonable efforts to contact former employees who entered into severance agreements after August 12, 2011 to notify them of the order and that Health Net will not prohibit them from seeking and obtaining a whistleblower award from the Commission.

In the BlueLinx and Health Net matters, as well as the KBR matter last year in which the Commission found a Rule 21F-17 violation for language in KBR’s confidentiality agreements that prevented employees from discussing witness interviews in internal investigations with anyone without advance authorization from the company’s general counsel, the Commission apparently was not aware of any instances in which the companies had attempted to enforce the offending provisions.

Although some may regard the Commission’s application of Rule 21-F as being extremely broad in scope, it should be noted that the Commission in recent years has publicly highlighted its concerns in this area and has now brought three enforcement actions. In light of the current environment, it is prudent for companies to review their agreements and practices to make sure that they do not prevent or restrict the ability of their employees to report possible securities or other federal law violations to the SEC or other governmental agencies and to collect whistleblower awards. It is also advisable for private companies (particularly those that contract with public companies) to focus on this issue.

This e-Bulletin was prepared by William Ross. Mr. Ross is of counsel to the law firm of Hirschfeld Kraemer LLP, and represents clients on business matters, including the formation, operation, acquisition, disposition and dissolution of business entities.

HK’s Derek Ishikawa gives analysis of the Supreme Court’s recent decision in the Fisher v. University of Texas (“Fisher II”).

A link to the article can be found here.

The world changed on October 6, 2015; well, at least the world of data transfer between the European Union and the U.S. On that day, the European Court of Justice issued its “Schrems” judgment (case C-362/14) declaring the Safe Harbor Program legally void. This decision resulted in throwing out a well-established set of rules on data transfers between the EU and the US that had been in effect for nearly 15 years. From an HR perspective, this means that any use or transfer of HR data, for example, global talent management programs, salary and benefits schemes or cross border corporate investigations, cannot rely on Safe Harbor.

There is no safe harbor anymore.

The Safe Harbor Program had set forth seven principles that needed to be followed in order to ensure an appropriate level of protection for transatlantic data transfers. Unfortunately, this decision set aside those rules.  The initial shock resulting from this ruling has now subsided, but uncertainty remains: Does the end of the Safe Harbor Program really mean that the entire set of data transfer rules between Europe and the U.S. are now illegal? Are data flows between the EU and its most important trading partner, the U.S., all of a sudden not permitted – entailing all of the conceivable catastrophic consequences for internationally active businesses of every kind and size? 

Where do data protection authorities currently stand?

EU governmental authorities acted swiftly after this decision was announced.  On October 16, 2015, the Article 29 Data Protection Working Party declared the Safe Harbor Program was null and void and  concluded that the EU Standard Contractual Clauses and the so-called Binding Corporate Rules had to be followed for a transitional period ending January 31, 2016.

German data protection agencies quickly announced that very strict investigations would be immediately initiated to ensure corporate compliance and declared that fines would be imposed on companies that continued to rely on the Safe Harbor program. Multi-national companies quickly concluded that a workable solution had to be found.

Privacy Shield as a new safe harbor?

On February 2, 2016, the EU Commission issued a press release concerning the EU-US Privacy Shield Agreement, the follow-up regulation to Safe Harbor. Apparently, the EU Commission and appropriate US government agencies had quietly negotiated a new agreement between October 2015 and January 2016. On February 29, 2016, the EU Commission released more details concerning the new solutions for a so-called Privacy Shield. These new rules called for the following:

• Strong obligations on companies and robust enforcement: the new arrangement will be transparent and contain effective supervision mechanisms to ensure that companies respect their obligations, including sanctions or exclusion if they do not comply.
• Clear safeguards and transparency obligations on U.S. government access.
• Redress possibility in the area of U.S. national intelligence for Europeans through an Ombudsperson mechanism within the U.S. Department of State, who will be independent from national security services.
• Effective protection of EU citizens’ rights with several redress possibilities: Complaints have to be resolved by companies within 45 days. A free of charge Alternative Dispute Resolution solution will be available. 
• Establishing an annual joint review mechanism.

However, not all NGOs and data protection regulators reacted positively: In a letter addressed to the responsible EU bodies on March 16, 2016, several NGOs, such as Amnesty International, Electronic Privacy Information Center or European Digital Rights, criticized the new EU-US Privacy Shield for not meeting the standards established in the “Schrems”-judgment, for its non-transparency and for not foreseeing adequate legal remedies.

On February 13, 2016, the Article 29 Data Protection Working Party wrote about clarifications needed in order to assess whether the Privacy Shield in its proposed wording would be able to ensure the necessary level of data protection. In light of these concerns, the EU Commission has stated it will review these issues and we anticipate that it will ultimately revise the current privacy rules over the next few months.

So, what should US-based multinationals do in the meantime?Until the Privacy Shield rules are finalized, care must be taken to ensure that data transfers between the US and EU are handled in a way that minimizes governmental scrutiny.

Hirschfeld Kraemer’s data protection experts have the necessary skills and experience to advise US-based companies on this challenging field. If you would like any further information, please contact Jan Lelley at 415.835.9015 or by email.  Jan is a German-qualified lawyer and an expert on European Data Privacy Laws. He serves as EU Data Privacy Counsel for Hirschfeld Kraemer.

Dear Clients and Friends,

We are pleased to provide you with the following update authored by our new senior colleague, Jeffrey Orleans, former Executive Director of the Ivy League, who has joined our firm of counsel with a focus on athletics issues.  Jeff currently Co-Chairs the NCAA’s Gender Equity Task Force, and also consults to the Knight Foundation Commission on Intercollegiate Athletics; he has decades of experience both with Title IX and on many NCAA governance committees.

We want to wish all of you a great beginning to the new academic year – and before we get too far into that year, to share with you our “watch list” of matters related to college athletics – an area that recently has generated important legal headlines.  To help ensure that our clients are employing maximally effective risk management strategies for their athletic programs, we also expect to convene this winter a number  of regional discussions that will focus on using conferences and leagues as the focus for various compliance efforts and for programmatic change.

We predict continuing uncertainty over the next year, from three different sources, about athletic governance and finance, and the structure of financial relations between athletes and institutions, both in the select group of “high-revenue” Division I leagues and also in the rest of Division I and, though less directly, in Divisions II and III as well:

• The recent 9th Circuit panel decision in the O’Bannon litigation, holding that NCAA rules about “amateurism” are subject to “rule-of-reason” antitrust analysis;
• The effect of this decision on the Jenkins and Alston cases, which broadly challenge NCAA limits on athletic grants-in-aid, particularly whether these cases will be allowed to proceed as class actions; and,
• The NLRB’s dismissal of a unionization petition by football players at Northwestern University, which highlights the issue of how athletes actually participate in setting the rules that govern their athletic activities.  (The NLRB ruling is explored at greater length in an article by Jeff and Christine Helwick of our firm, Where the Football Union Fight Goes Next.)

Many NCAA and other groups are seeking to shape these areas, with new developments anticipated at and after the January 2016 NCAA Convention.  We have been in discussions with many of our clients regarding these issues, and will update you as these landscapes change.

While the finances and future of Division I schools and conferences are very visible topics, their resolution will directly affect only a minority of institutions that sponsor athletics.  There are many immediate issues that involve athletics at all institutions, three of which we consider especially important, and all of which we think will benefit from league-wide consideration.

Integrated Approach to Athletics

First, institutions must be mindful of and employ strategies to fully apply institution-wide approaches for the myriad of today’s “student experience” issues, to the ways in which these issues are addressed by athletic departments, teams, staff and athletes.  For example, policies and procedures in areas such as sexual harassment and abuse, hazing, campus speech, Greek life, academic integrity, and relations with local police authorities all should apply fully to athletics – especially since matters involving student-athletes are likely to very visible on campus and to alumni and local communities.

Institutions must ensure that their athletics programs (including intramural and recreational activities) are fully integrated not only into institutional Title IX administration (especially given the Office for Civil Rights’ recent re-emphasis of the campus-wide role of the Title IX Officer), but in all student affairs and disciplinary and judicial approaches, at each step from creating policies through campus education and programming to, when needed, crisis management.

Conference-wide discussions can improve institutional efforts in all these areas.  But perhaps nowhere can a “conference” approach be as helpful as in attention to the developing science and approaches in a number of areas that affect athletes’ health, including especially the appropriate responses to concussions, and to returning to practice or competition after injuries.

Compliance with Title IX 

Second, Title IX’s oversight of gender equity should continue to have your close attention, both as to the “three-prong” test for participation rates and sponsored sports, and as to resources and support for men’s and women’s team:  precisely because these are not new areas, it’s essential not to let compliance responsibilities be overshadowed by more novel or “visible” matters.  Careful Title IX analysis and strategy are especially important when institutions plan to sponsor new sports as part of enrollment strategies, or are facing financial pressures, with possible effects on both athletic participation patterns and team budgets.

We strongly recommend collaborative efforts among institutions to identify positive and cost-effective strategies at the conference level, with a focus on adding new league-wide women’s sports to promote compliance by all institutions in a conference, and we expect to make such efforts a focus of the regional client discussions we will develop this winter and spring, as discussed below.

Cost of Attendance Analysis and Decisions

Finally, NCAA rules now permit all Division I institutions to award athletic “grants-in-aid” that cover the full published institutional “cost of attendance” (“COA”), over and above the traditional tuition, room and board, and books and fees (an approach also endorsed by the 9th Circuit in O’Bannon).  Conferences and institutions must consider the three overlapping questions which this change presents:

• Deciding in which if any sports to increase aid, and how to pay for that increase;
• Applying NCAA rules in a gender-equitable way for the two different kinds of grants (“headcount”, and “equivalency” or “FTE); and
• Assuring that any changes in institutional COA levels are implemented appropriately across the whole institution.

As noted earlier, we expect that there will be additional NCAA rule-making in this area – but that most decisions will be made at the conference level, and thus will require coordinated analysis by all conference members.

We will keep you informed of changes in all these areas as they arise throughout the 2015-16 academic year, and we hope you will contact us with any questions or concerns about these issues or any other areas related to college athletics..

Following the NCAA Convention, we will be convening a series of regional discussions, on the West Coast and in the Northeast, to discuss how effective strategies for compliance in these areas can be developed at the conference level.  Please let us know if you have an interest in participating and we will make sure that you receive an invitation.

If you have any questions or concerns, please contact Natasha Baker at 415.835.9004 or by email at nbaker@HKemploymentlaw.com or Jeff Orleans at 415.835.9014 or by email at jorleans@HKemploymentlaw.com.

SEC BRINGS ENFORCEMENT ACTION AGAINST A COMPANY FOR RESTRICTIVE LANGUAGE IN CONFIDENTIALITY AGREEMENT THAT COULD STIFLE WHISTLEBLOWERS

On April 1, 2015, the Securities and Exchange Commission announced that for the first time it has brought an enforcement action against a company for having “improperly restrictive language” in confidentiality agreements with “the potential to stifle the whistleblowing process.”

The announcement came in an action brought against KBR Inc., a large government contractor, for violating Rule 21F-17 enacted by the SEC effective August 12, 2011 pursuant to the Dodd-Frank Act. The Dodd-Frank Act, enacted on July 21, 2010 in response to the financial meltdown, includes provisions aimed at encouraging whistleblowers to report possible violations of the securities laws to the SEC through a combination of measures, including financial rewards, confidentiality protections and prohibitions on employer retaliation.

Rule 21F-17 provides in part, as follows:

“(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”

Before and after the adoption of Rule 21F-17, KBR had asked employees who were witnesses in internal investigations that KBR conducted in response to employee allegations of potential illegal or unethical conduct involving KBR to agree to or sign a confidentiality agreement containing the following statement prior to being interviewed:

“I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”

Although the SEC was not aware of any instances in which a KBR employee was prevented from communicating with the SEC staff about possible securities law provisions or in which KBR attempted to enforce the confidentiality clause, the SEC in its order instituting a settled administrative proceeding found that such language “impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment.” Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated that “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”

Without admitting or denying the charges, KBR agreed to pay a $130,000 penalty to settle the charges and voluntarily amended its confidentiality agreement to make it clear that employees will not have to seek approval from KBR’s lawyers prior to communicating with the SEC or other governmental agencies about potential securities or other federal law violations, nor notify KBR after such communications nor face termination of employment or retribution for speaking to the SEC or other governmental agencies about such matters. KBR’s amended confidentiality agreement now includes the following language:

“Nothing in this Confidentiality Agreement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

KBR is providing employees who signed the confidentiality agreement since August 21, 2011 with a copy of the SEC order and a statement explaining the language that has now been added to the confidentiality agreement.

Although some may view the language added to KBR’s confidentiality agreement as exceedingly broad in scope, it should be noted that the SEC chose to quote the language in its order. In addition, the order does not question the validity of provisions prohibiting disclosure of confidential information involving potential violations of federal laws to non-governmental third parties or the media.

The SEC’s enforcement action did not take place in a vacuum. For example, the National Labor Relations Board has indicated that employers whose confidentiality provisions prohibit non-supervisory employees from discussing internal investigations may be violating the National Labor Relations Act, unless they can show a business justification for the prohibition, such as the protection of witnesses, the likely fabrication of testimony, or that evidence was in danger of being destroyed. The NLRB also has issued rulings that employers whose policies prevent employees from discussing various terms and conditions of employment with co-workers or their union violate the National Labor Relations Act.

In light of the current environment and the SEC’s enforcement action against KBR, it is prudent for companies to review their agreements and practices to make sure that they do not prevent or restrict the ability of their employees to report possible securities or other federal law violations to the SEC or other governmental agencies.

This e-bulletin was written by William Ross. Mr. Ross is of counsel to the law firm of Hirschfeld Kraemer LLP, and represents clients on business matters, including the formation, operation, acquisition, disposition and dissolution of business entities.

CALIFORNIA COURT REFUSES TO ENFORCE BYLAW AMENDMENT COMPELLING ARBITRATION BY THE MEMBERS OF THE CORPORATION

There have been several recent Delaware court decisions and much commentary regarding the enforceability of bylaw provisions that establish rules governing stockholder litigation, including fee-shifting provisions and forum selection clauses, and several Maryland court decisions concerning bylaw provisions mandating arbitration of shareholder disputes. Now the California Fourth District Court of Appeal has issued an opinion refusing to enforce a bylaw amendment requiring arbitration of disputes that was adopted by a California corporation following the filing of a complaint against it by several of its former and current members. Cobb v. Ironwood Country Club, Case No. G050446 (January 28, 2015).

In August 2012, Ironwood was sued in a declaratory relief action by several former and current members who alleged the country club failed to honor its agreement to repay loans made by the members to purchase additional land for the club. Four months later, the Board of Directors of Ironwood notified its membership that it was contemplating amending its bylaws to require arbitration of any claims or disputes of past or present members against the country club or its officers, directors or agents. The Board did not hear significant objections from its members and adopted the bylaw amendments on December 28, 2012.

Shortly thereafter, Ironwood filed a motion to compel plaintiffs to arbitrate their complaint, asserting that the newly-adopted arbitration provision applied because the lawsuit concerned an ongoing dispute between the parties and that Ironwood’s right to amend its bylaws applied both to current and former members. The trial court denied the motion, finding that the plaintiffs had not agreed to arbitrate the dispute.

The appellate court affirmed the trial court’s order. The appellate court held that it is impermissible for one party to a contract–here, the bylaws–to unilaterally amend the contract governing the parties’ relationship in a way that violates the covenant of good faith and fair dealing by retroactively impairing accrued rights. The appellate court also found that Ironwood’s assertion that by agreeing to bylaws permitting future amendments, each member, including a member who subsequently resigns, is automatically bound by every future bylaw provision, would render the agreement illusory and unenforceable. The appellate court also expressed concern that the “one-sided” arbitration provision “when coupled with the purported waiver of punitive or consequential damages, could be deemed unconscionable.”

The appellate court decision can be viewed as consistent with the views expressed in Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011) in which a federal district judge in California declined to uphold a forum selection bylaw clause partly because “the bylaw was adopted by the very individuals who are named as defendants, and after the alleged wrongdoing took place.”

In reaching its decision, the appellate court in Cobb did not address several recent Maryland cases upholding a bylaw provision requiring arbitration for shareholder claims, nor recent Delaware decisions that have upheld bylaw provisions establishing fee-shifting and forum selection requirements in certain circumstances. (For the Maryland cases, see Katz v. CommonWealth REIT, Case No. 24-C-13-001299 (Md. Cir. Ct. February 19, 2014); Corvex Management LP v. CommonWealth REIT, Case No. 24-C-13-001111, 2013 WL 1915769 (Md. Cir. Ct. May 8, 2013). For the Delaware cases, see ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A. 3d 554, 2014 WL 1847446 (Del. May 8, 2014); Boilermakers Local 154 Retirement Fund and Key West Police & Fire Pension Fund v. Chevron Corp., 73 A. 3d 934 (Del. Ch. 2013)).

Although it is not surprising that the court here refused to enforce a bylaw provision that mandated arbitration even on claims brought by former members who had ceased being members and had already initiated a lawsuit at the time of adoption of the bylaw provision, it is possible that a different result would occur under facts more favorable to a corporation attempting to enforce an arbitration clause. It is also conceivable that the Cobb decision may have implications in other contexts, including for example some limited liability operating agreements that grant broad authority to one or several members and/or managers to amend significant provisions regarding the rights and duties of its members and management.

This e-bulletin was written by William Ross. Mr. Ross is of counsel to the law firm of Hirschfeld Kraemer LLP, and represents clients on business matters, including the formation, operation, acquisition, disposition and dissolution of business entities.

HK’s Felicia Reid’s article in the Daily Journal entitled “Sometimes it takes work to leave work,” addresses a case currently under consideration at the U.S. Supreme Court.

You can read the article here.

“Originally published in the Los Angeles/San Francisco Daily Journal, October, 22, 2014. Copyright 2014 Daily Journal Corporation, reprinted with permission.”

HK’s Christine Helwick writes about California’s Affirmative Consent law in the latest Inside Higher Ed.

You can find a link to the article here.