The Lawletter Vol 36 No 9

Suzanne Bailey, Senior Attorney, National Legal Research Group

The antiretaliation provision of the Fair Labor Standards Act ("FLSA") makes it unlawful

to discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to this chapter, or has testified or is about to testify in any such proceeding, or has served or is about to serve on an industry committee[.]

29 U.S.C. § 215(a)(3) (emphasis added).  Whether "filed any complaint" includes complaints made to an employer or whether it is limited to complaints brought before an administrative agency or a court has been the subject of much litigation.  In Minor v. Bostwick Laboratories, Inc., No. 10-1258, 2012 WL 251926 (4th Cir. Jan. 27, 2012), the Fourth Circuit Court of Appeals recently joined the majority of circuits that have addressed the issue in holding that intracompany complaints may constitute protected activity within the meaning of § 215(a)(3).  See, e.g.,  Hagan v. Echostar Satellite, LLC, 529 F.3d 617, 626 (5th Cir. 2008); Lambert v. Ackerley, 180 F.3d 997, 1004 (9th Cir. 1999) (en banc); Valerio v. Putnam Assocs., 173 F.3d 35, 43 (1st Cir. 1999); EEOC v. Romeo Cmty. Sch., 976 F.2d 985, 989 (6th Cir. 1992); EEOC v. White & Son Enters., 881 F.2d 1006, 1011 (11th Cir. 1989); Brock v. Richardson, 812 F.2d 121, 124-25 (3d Cir. 1987); Love v. RE/MAX of Am., Inc., 738 F.2d 383, 387 (10th Cir. 1984); Brennan v. Maxey's Yamaha, Inc., 513 F.2d 179, 181 (8th Cir. 1975).

In reaching its conclusion, the Fourth Circuit rejected the employee's argument that the U.S. Supreme Court's decision in Kasten v. Saint‑Gobain Performance Plastics Corp., 131 S. Ct. 1325 (2011), compelled a holding that her intracompany complaint was protected under the FLSA.  The court observed that the sole issue resolved by the Supreme Court in Kasten was whether an oral complaint could be protected activity under the antiretaliation provision of the FLSA; the Court expressly declined to address whether an intracompany complaint could be protected activity.  Likewise, the Fourth Circuit rejected the employer's argument that the court's prior decision in Ball v. Memphis Bar‑B‑Q Co., 228 F.3d 360 (4th Cir. 2000), required a finding that intracompany complaints are not protected activity.  Ball was distinguishable on its own terms because it addressed only the "has testified or is about to testify in any such proceeding" clause of § 215(a)(3), not the "filed any complaint" clause under consideration in Minor.

The Lawletter Vol 36 No 9

Charlene Hicks, Senior Attorney, National Legal Research Group

On January 27, 2012, the Delaware Chancery Court issued a 75-page slip opinion in Auriga Capital Corp. v. Gatz Properties, LLC, No. C.A. 4390-CS, 2012 WL 361677 (Del. Ch. Jan. 27, 2012) (slip op.), which holds that managers of Delaware limited liability companies ("LLCs") owe fiduciary duties of loyalty and care to their investors unless an express contractual provision exists that waives or modifies those duties.  The opinion is notable for the broad and comprehensive scope of the court's analysis of the Delaware LLC Act and its application to common-law principles of fiduciary duty.

The facts of Auriga Capital Corp. involved various egregious acts committed by Gatz, the majority owner and manager of a Delaware LLC, against the minority members of the company.  Gatz had entered into a long-term lease with a management company to manage the golf course owned by the LLC.  The management company managed the golf course poorly, and Gatz soon saw that an opportunity would present itself for him to both buy back the property at a bargain price and simultaneously squeeze out the minority investors.  Gatz then exercised his management powers within the LLC in a manner that ultimately resulted in an auction in which he was the only bidder and in which the same counsel represented him in his dual capacities as both manager of the LLC and auction bidder.

In its analysis, the court first noted that the Delaware LLC Act, like the Delaware General Corporations Law ("DGCL"), does not plainly state that traditional fiduciary duties of loyalty and care apply by default to LLC managers or members.  Id. at *8.  However, section 18-1104 of the LLC Act does state that "[i]n any case not provided for in this chapter, the rules of law and equity . . . shall govern."  Del. Code Ann. tit. 6, § 18-1104.  Under traditional principles of equity, an LLC manager "would qualify as a fiduciary of that LLC and its members."  2012 WL 361677, at *8.  As a result, the court ruled that "the LLC Act starts with the default that managers of the LLCs owe enforceable fiduciary duties."  Id.  The court then conducted an extensive review of the history and statutory construction of the LLC Act and determined that the interpretation of the Act as imposing fiduciary duties on LLC managers by default "is confirmed by the Act's own history."  Id. at *9.

Although the LLC Act incorporates by default equitable principles, including fiduciary duty, the court emphasized that the statute also permits the parties to an LLC agreement "to entirely supplant those default principles or to modify them in part."  Id. at *9 & n.50.  If the LLC Agreement "clearly supplant[s] default principles in full," Delaware courts will give effect to the express contractual language.  Id. at *9 & n.52.

The court then cautioned that the implied covenant of good faith and fair dealing should not be confused with, or used as a replacement for, the principle of fiduciary duty.  "If, rather than well thought out fiduciary duty principles, the implied covenant is to be used as the sole default principle of equity, then the risk is that the certainty of contract law will itself be undermined."  Id. at *10.  This, in turn, would provide "room for subjective judicial oversight" and would therefore "inject unpredictability into both equity and contract law."  Id.  Moreover, "a judicial eradication of the explicit equity overlay in the LLC Act could tend to erode [Delaware's] credibility with investors in Delaware entities."  Id.

Under the LLC Agreement at issue in the case, Gatz had a fiduciary duty to manage the business loyally for the benefit of the company's members.  An affirmative aspect of the fiduciary duty of loyalty requires the fiduciary to take affirmative steps to protect the interests of the company committed to his charge.  A reasonable fiduciary in Gatz's position would have immediately searched for a replacement management company, assessed whether the LLC could operate the golf course profitably itself, or looked for a buyer to acquire the golf course or its assets.  Under the circumstances, Gatz's inaction amounted to a breach of fiduciary duty.

The Lawletter Vol 36 No 8

Jim Witt, Senior Attorney, National Legal Research Group

After the enactment of the Employee Retirement Income Security Act of 1974 ("ERISA"), a conflict developed among the U.S. Circuit Courts of Appeal as to whether the antialienation provision, 29 U.S.C. § 1056(d)(1) (benefits under an ERISA plan may not be assigned or alienated), applied to void an ex-spouse's waiver of ERISA plan benefits under a divorce decree.  The theory was that the waiver would result in a prohibited alienation of the benefits to the decedent's estate.  The Fourth Circuit Court of Appeals in Altobelli v. IBM Corp., 77 F.3d 78 (4th Cir. 1996), found no conflict between common-law waiver and the antialienation rule.  The Third Circuit Court of Appeals in McGowan v. NJR Serv. Corp., 423 F.3d 241 (3d Cir. 2005), held that common-law waiver in a divorce decree was barred by the antialienation rule.

In Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001), the U.S. Supreme Court, although not dealing with a spousal waiver of ERISA benefits or the antialienation rule, set the stage for the resolution of the conflict as to common-law waiver.  In reversing the Supreme Court of Washington, the U.S. Supreme Court ruled that ERISA preempted a Washington statute, Wash. Rev. Code § 11.07.010(2)(a), providing for automatic revocation upon divorce of any designation of a spouse as the beneficiary of a nonprobate asset.  The decedent, David A. Egelhoff, while married to the petitioner, had designated her as the beneficiary of a life insurance policy and pension plan, with both plans subject to ERISA.  The petitioner and Egelhoff divorced, and Egelhoff died intestate without having removed the petitioner as the beneficiary of the insurance policy and pension plan.  The respondents, Egelhoff's children by a previous marriage, claimed the proceeds of both the insurance policy and pension plan as Egelhoff's heirs at law.  In holding that the Washington statute was preempted by ERISA, the Court ruled that the statute ran counter to ERISA's command that a plan fiduciary shall administer the plan "in accordance with the documents and instruments governing the plan."  29 U.S.C. § 1104(a)(1)(D).  The Supreme Court stated:

One of the principal goals of ERISA is to enable employers "to establish a uniform administrative scheme, which provides a set of standard procedures to guide processing of claims and disbursement of benefits."  Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 9, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987).  Uniformity is impossible, however, if plans are subject to different legal obligations in different States.

The Washington statute at issue here poses precisely that threat.  Plan administrators cannot make payments simply by identifying the beneficiary specified by the plan documents.  Instead they must familiarize themselves with state statutes so that they can determine whether the named beneficiary's status has been "revoked" by operation of law.  And in this context the burden is exacerbated by the choice‑of‑law problems that may confront an administrator when the employer is located in one State, the plan participant lives in another, and the participant's former spouse lives in a third. In such a situation, administrators might find that plan payments are subject to conflicting legal obligations.

The Lawletter Vol 36 No 8

Brett Turner, Senior Attorney, National Legal Research Group

Steven Walsh and Janet Schaberg were divorced in New York in 2006.  They had a substantial marital estate, which they divided in a property settlement agreement.  Given the size of her property award, Schaberg agreed to waive maintenance.

Several years after divorce, a federal investigation revealed that Walsh had been engaged in a long-standing scheme to defraud investors in various funds he managed.  In fact, much of the parties' marital estate was a product of Walsh's fraud.

Two federal agencies, the Commodity Futures Trading Commission and the Securities and Exchange Commission (hereinafter "the agencies"), filed suit in federal court, seeking to recover the proceeds of Walsh's fraud not only from Walsh, but also from Schaberg.  The Second Circuit held that the agencies could recover the proceeds from Schaberg if she "lacks a legitimate claim" to the funds.  Commodity Futures Trading Comm'n v. Walsh, 618 F.3d 218, 225 (2d Cir. 2010).

Schaberg, who had been entirely unaware of Walsh's wrongdoing, argued that she had such a legitimate claim under New York state marital property law.  Because state law was involved, the Second Circuit certified two questions to the New York Court of Appeals:  (1) whether "marital property" can ever include the proceeds of fraud, and (2) if so, whether the wife nevertheless had an obligation to return the funds because she had not paid fair consideration for them in good faith.

In a 2011 opinion, the New York court answered both questions.  Commodity Futures Trading Comm'n v. Walsh, 951 N.E.2d 369 (N.Y. 2011).  It answered the first question with a yes, holding that the proceeds of fraud can constitute marital property.  They are certainly property acquired during the marriage through the active, if dishonest, efforts of the guilty spouse.  They belong to the guilty spouse unless and until the victims take legal action to recover them.  If a postdivorce attempt to recover the proceeds of fraud retroactively erases those funds from the marital estate, property-division judgments will never be final, and the policy of finality of judgments is very strong.  The court therefore held that the proceeds of fraud can constitute marital property.

The second question defied a simple and easy answer.  The agencies argued that the wife had acquired her share of the proceeds of fraud in exchange for waiving her interest in the husband's share of the proceeds of fraud.  The New York court agreed that fair "consideration cannot be predicated on a spouse's relinquishment of a claim to a greater share of the proceeds of fraud."  Id. at 377.  In other words, fair consideration must be something beyond an interest in the proceeds of fraud themselves.

January 3, 2012

John Stone, Senior Attorney, National Legal Research Group

By federal statute, anyone seeking to board a commercial airline flight must be screened by the Transportation Security Administration ("TSA") in order to ensure that he or she is not "carrying unlawfully a dangerous weapon, explosive, or other destructive substance." 49 U.S.C. §§ 44901(a), 44902(a)(1). The details of the screening process have largely been left to the discretion of the agency.

In response to a 2004 congressional directive, but also to address the inadequacies of the older magnetometers through which passengers were required to pass, the TSA began contracting with private vendors to develop advanced imaging technology ("AIT") for use at airports. One of the AIT scanners subsequently procured by the TSA uses millimeter wave technology, which relies upon radio frequency energy, and the other uses backscatter technology, which employs low‑intensity X‑ray beams. Each technology produces a crude image of an unclothed person, who must stand in the scanner for several seconds while it generates the image. That image enables the operator of the machine to detect a nonmetallic object, such as a liquid or powder—which a magnetometer cannot detect—without touching the passengers coming through the checkpoint.