The Lawletter Vol 36 No 10

Sandra Thomas, Senior Attorney, National Legal Research Group

The Supreme Court of Pennsylvania has very recently addressed the issue of paternity by estoppel, examining the issue in the context of a complaint for child support.  K.E.M. v. P.C.S., No. 67 MAP 2011, 2012 WL 573635 (Pa. Feb. 21, 2012).  The mother of the minor child in that case filed a complaint seeking child support from the man she believed to be the biological father, P.C.S.  He responded with a motion to dismiss, relying on the mother's intact marriage to her husband to establish a presumption of the husband's paternity, and further relying on the husband's assumptions of parental responsibilities as implicating paternity by estoppel.

At a hearing on the motion, the mother testified that she had told her husband of her affair with P.C.S. and that the husband did not wish to be identified as the father on the birth certificate.  Genetic testing excluded the husband as the biological father of the child.  The mother testified that after she had received those results, she had asked P.C.S. to submit to testing.  He refused, although he acknowledged the child as his.  The mother testified that during the four years of the child's life, P.C.S. had undertaken some degree of involvement in the child's life, giving the mother money to buy Christmas presents, providing unsigned cards and gifts of his own, visiting parks and playgrounds, and providing the mother with a cell phone to assure her and the child's safety.  The mother testified that the child referred to both the husband and P.C.S. as "Daddy."  Id. at *1.

By the time of trial, P.C.S. had ended the relationship with the mother; at about the same time, the husband separated from the mother.  The trial court granted P.C.S.'s motion to dismiss the support action, finding that the presumption of paternity was controlling and, in the alternative, that the husband should be regarded as the child's father under the doctrine of paternity by estoppel.  The intermediate appellate court affirmed, differing with the trial court on the issue of whether the presumption of paternity should apply in a case in which the marriage was not being protected because the husband knew that the child was not his, but agreeing that paternity by estoppel applied, based on the husband's actions of holding the child out as his own and providing support.   The Pennsylvania Supreme Court allowed an appeal to consider application of the doctrine of paternity by estoppel to the case.

The mother argued that the child already knew P.C.S. as his father and that there was therefore "no concern over deleterious impact from a judicial determination to such effect," and questioned the "application of a legal fiction in a circumstance in which all parties involved fully apprehend the true state of affairs, a circumstance which is becoming increasingly common."  Id.  The mother also "asks that Pennsylvania law be modified to consider genetic testing, along with other factors, in determining paternity on a case-by-case basis."  Id.

In his argument, P.C.S. focused on the husband's continued participation in the marriage and the relationship with the child during the first four years of the child's life.  P.C.S. argued that application of paternity by estoppel remains appropriate "because it recognizes the importance, in a child's life, of a 'psychological father' who has provided nurturing and life's necessities."  Id.

The Lawletter Vol 36 No 10

John Stone, Senior Attorney, National Legal Research Group

The Fourth Circuit Court of Appeals has upheld summary judgment granted in favor of a university medical school that had been sued by a dismissed medical student with attention deficit hyperactivity disorder ("ADHD").  Halpern v. Wake Forest Univ. Health Sci., 669 F.3d 454 (4th Cir. 2012).  The claims of disability discrimination were brought under the federal Rehabilitation Act of 1973, which prohibits discrimination against the disabled in programs or activities receiving federal financial assistance, and that part of the Americans with Disabilities Act ("ADA") that prohibits disability discrimination in places of "public accommodation," 42 U.S.C. §§ 12181–12189.

To the extent possible, the ADA and the Rehabilitation Act are construed to impose similar requirements.  Accordingly, despite the different language these statutes use, they require a plaintiff to demonstrate the same elements to establish liability.  In the relevant context of a student excluded from an educational program, to prove a violation of either the ADA or the Rehabilitation Act, a plaintiff must establish that he or she (1) has a disability; (2) is otherwise qualified to participate in the defendant's program; and (3) was excluded from the program on the basis of his or her disability.  If a person, due to his or her disability, requires a modification to meet the essential requirements to participate in an educational program and if the necessary modification is unreasonable, then that person is not "qualified" under the ADA and the Rehabilitation Act to participate in the program.  In Halpern, the dismissed student had a disability, but his claims fell because he was not otherwise qualified to participate in the medical school's program and the modification or accommodations he sought were found to be unreasonable.

From the defendant medical school's viewpoint, the problem was not the student's disability, per se, but his objectionable behavior that may well have stemmed from the disability.  To determine whether a plaintiff has satisfied the burden of establishing that he or she is qualified for an educational program, a court must decide whether the plaintiff has presented sufficient evidence to show (1) that he or she could satisfy the essential eligibility requirements of the program, that is, those requirements that bear more than a marginal relationship to the program at issue; and, if not, (2) whether any reasonable accommodation by the defendant would enable the plaintiff to meet these requirements.  For purposes of this analysis, the court in Halpern began with the premise that the University's professional judgment as to the medical student's ability to continue in the medical program with his ADHD and anxiety disorder and as to whether his proposed accommodations would effect substantial modifications to the program was entitled to deference.

April 3, 2012

Brad Pettit, Senior Attorney, National Legal Research Group

Corporate and tax law attorneys frequently are asked to assist clients who have formed or want to create an organization that will serve the public good.  Section 501 of the Internal Revenue Code recognizes the desirability of such organizations by according tax-exempt status to "[c]orporations, and any community chest, fund, or foundation" that is "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . . , or for the prevention of cruelty to children or animals."  I.R.C. § 501(c)(3) (emphasis added).  The Treasury Regulations further indicate that in order to be exempt from taxation under § 501(c)(3), an organization must be both "organized and operated exclusively for one or more of the purposes specified in such section."  Treas. Reg. § 1.501(c)(3)-1(a)(1).  According to the Regulations, "[i]f an organization fails to meet either the organizational test or the operational test, it is not exempt [from taxation]."  Id.

A.         Organizational Test

The Treasury Regulations provide that an organization is organized exclusively for one or more exempt purposes only if its articles of organization (1) limit the purposes of the organization to one or more exempt purposes, and (2) do not expressly empower the organization to engage, other than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.  Treas. Reg. § 1.501(c)(3)-1(b)(1)(i).  The Regulations go on to caution that

     An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3).

Id.  § 1.501(c)(3)-1(b)(1)(iii).  As part of an organization's application to the IRS for tax-exempt status, it must submit a detailed statement of its proposed activities.  Id. § 1.501(c)(3)-1(b)(1)(v).

B.         Operational Test

Charlene Hicks, Senior Attorney, National Legal Research Group

The always thorny topic of mandatory arbitration provisions in consumer sales contracts has recently developed a new layer of legal complexity.  Prior to July 2009, many businesses routinely inserted into their consumer sales contracts arbitration clauses that required consumers' complaints to be resolved through binding arbitration administered exclusively by the National Arbitration Forum ("NAF").  At that time, the NAF was the largest administrator of consumer arbitrations in the United States.  A 2009 investigation of the NAF conducted by the Minnesota Attorney General, however, revealed that the supposedly neutral body of the NAF actually held a strong anticonsumer bias.  See Arbitration or "Arbitrary":  The Misuse of Mandatory Arbitration to Collect Consumer Debts:  Hearing Before the H. Domestic Policy Subcomm. of Comm. on Oversight & Gov't Reform, 111th Cong. 3-5 (July 22, 2009).  The NAF routinely "represented to corporations that it would appoint anti-consumer arbitrators and discontinue referrals to arbitrators who decided cases in favor of consumers."  Khan v. Dell, Inc., No. 10-3655, 2012 WL 163899, at *8 (3d Cir. filed Jan. 20, 2012) (Sloviter, J., dissenting).  The NAF's "various deceptive practices" had the effect of unfairly disadvantaging consumers in the arbitral forum.  Id. at *2 (majority opinion).  As a result of the Minnesota Attorney General's investigation, the NAF entered into a consent judgment wherein it agreed to cease administering and participating in all consumer arbitrations.

Because the NAF is no longer available to serve as an arbitral forum in consumer disputes, consumers in recent cases have moved the courts for orders setting aside mandatory arbitration clauses that name the NAF as the exclusive arbitrator of the consumers' complaints.  Courts confronted with this issue have reached differing conclusions as to whether the unavailability of the NAF to serve as arbitrator of consumer-related disputes renders the entire arbitration clause unenforceable.

The current, unsettled status of the law in this regard was well documented by the Third Circuit Court of Appeals in Khan.  In that case, Khan, a consumer, filed a putative class action on behalf of himself and other similarly situated purchasers and lessees of a certain Dell computer model that he claimed had been defectively designed.  Khan purchased his computer for $1,200 directly from Dell's website.  To complete the purchase, Khan was required to click a box that stated:  "I AGREE to Dell's Terms and Conditions of Sale."  Id. at *1.  The Terms and Conditions of Sale contained an arbitration clause that provided that any claim or dispute between the parties relating to the computer purchase

SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) under its Code of Procedure then in effect. . . . This transaction involves interstate commerce, and this provision shall be governed by the Federal Arbitration Act[,] 9 U.S.C. sec. 1B16 (FAA).

Id. (citation omitted).

At the time Khan filed his lawsuit, the consent judgment entered into by the NAF barred the NAF from arbitrating Khan's complaint.  Even so, Dell moved to compel arbitration on the ground that the arbitration provision in the sales contract was binding and covered all of Khan's claims.  Khan objected by arguing that the arbitration provision was unenforceable because the NAF was no longer permitted to conduct consumer arbitrations, and that the NAF's designation as the arbitral forum was integral to the arbitration provision.  Id.

Finding that the contract language indicated that the parties had intended to arbitrate exclusively before a particular arbitrator that was no longer available, the district court denied Dell's motion to compel.  Id.  In addition, the district court refused to appoint a substitute arbitrator, finding that it could not compel the parties to submit to an arbitral forum to which they had not agreed.  Id.

The Lawletter Vol 36 No 9

Tim Snider, Senior Attorney, National Legal Research Group

The Supreme Court takes so few cases on writs of certiorari that it is remarkable that the Court in consecutive Terms has accepted and decided two cases involving arbitration of consumer disputes.  Last Term, the Court decided AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act, 9 U.S.C. § 2, preempts California's judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts.  This Term, the Court again took up arbitration, also in the context of consumer contracts, in CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012).

There, a group of consumers filed a class-action complaint in the U.S. District Court for the Northern District of California against the defendant credit card issuers, alleging, inter alia, violations of the Credit Repair Organizations Act ("CROA"), 15 U.S.C. §§ 1679–1679j.  The claims largely involved the defendants' allegedly misleading representation that the issuers' credit card could be used to rebuild poor credit and their assessment of multiple fees upon opening the accounts, which greatly reduced the advertised credit limit.  The defendants moved to compel arbitration in accordance with a provision in the consumers' contracts.  The district court denied the motion, and the Ninth Circuit affirmed.  Greenwood v. CompuCredit Corp., 615 F.3d 1204 (9th Cir. 2010). The Supreme Court reversed and remanded.

CROA sets out a statement that credit repair organizations must provide to consumers before any contract is executed.  15 U.S.C. § 1679c(a).  One sentence of the required statement reads, "'You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.'"  Id.  CROA's nonwaiver provision states, "Any waiver by any consumer of any protection provided by or any right of the consumer under this subchapter—(1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person."  Id. § 1679f(a).  The Ninth Circuit reasoned that the disclosure provision gives consumers the "right to sue," which "clearly involves the right to bring an action in a court of law."  Greenwood, 615 F.3d at 1208.  Because the nonwaiver provision prohibits the waiver of "any right of the consumer under this subchapter," the arbitration agreement—which waived the right to bring an action in a court of law—could not be enforced.

The Supreme Court rejected the premise that the disclosure provision affords consumers a right to bring an action in a court of law.  The Court concluded that the defendants were required only to provide consumers with the mandated statement, which referred to rights afforded elsewhere in the statute.  The statute provides for procedures that must be utilized if and when the case finds its way into court, but that does not mean that Congress intended to supplant the availability of arbitration under the Federal Arbitration Act ("FAA").  If Congress had intended to do so, it would have done so explicitly as it has done elsewhere, particularly inasmuch as arbitration is a favored means of resolving disputes.

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.