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Since the late 1970s, federal employees have enjoyed protection from retaliatory acts in response to the reporting of illegal or other wrongful conduct by their employers. Such protections were provided in the Civil Service Reform Act of 1978. Since that time, Congress has expanded the protections for federal employees in the Whistleblower Protection Act of 1989 (“WPA”) and the Whistleblower Protection Enhancement Act of 2012 (“WPEA”). Whistleblower Protection Act Of 1989 To trigger the anti-retaliation protections of the WPA, an employee must demonstrate that: (1) a “personnel action” was taken, (2) because of a “protected disclosure” ( i.e. , whistleblowing), (3) which was made by a “covered employee.” 5 U.S.C. § 2302(b)(8). If the employee meets the foregoing requirements, then the burden shifts to the agency to prove by clear and convincing evidence – which is a more difficult standard to satisfy than the preponderance of the evidence standard – that it would have taken the same action against the employee regardless of whether the employee engaged in protected activity ( i.e. , reported concerns about illegal or improper activity). 5 U.S.C. 1214(b)(4)(B)(ii).  When determining whether an agency has satisfied its burden, the Merit Systems Protection Board (“MSPB” or the “Board”) considers the following factors, among others: “the strength of the agency’s evidence in support of its personnel action; the existence and strength of any motive to retaliate on the part of the agency officials who were involved in the decision; and any evidence that the agency takes similar actions against employees who are not whistleblowers but who are otherwise similarly situated.” See Carr v. Soc. Sec. Admin. , 185 F.3d 1318, 1323 (Fed. Cir. 1999) (citations omitted). The Elements of a Claim of Retaliation Under The WPA Personnel Actions Under the WPA, an agency may not “take or fail to take, or threaten to take or fail to take, any personnel action against any employee or applicant for employment because of” whistleblowing activity ( e.g. , exercising any appeal, complaint, or grievance right granted by law, rule, or regulation; testifying for others or lawfully assisting others in any such appeal, complaint, or grievance right; cooperating with or disclosing information to an agency Inspector General or the Special Counsel; or refusing to obey an order that would be in violation of law). The WPA defines the term “personnel action” to include the following categories of activity: an appointment; a promotion; an action under Chapter 75 of Title 5 or other disciplinary or corrective action ( g. , a demotion; a reduction in pay or grade; a furlough of up to 30 days; removal from federal employment; a suspension; placement on administrative leave; a letter of warning; a reduction in force; and/or a reprimand (either oral or in writing)); a detail, transfer, or reassignment; a reinstatement; a restoration; a reemployment; a performance evaluation (including a performance improvement plan); a decision concerning pay, benefits, or awards, or concerning education or training if the education or training may reasonably be expected to lead to an appointment, promotion, performance evaluation, or other action; a decision to order psychiatric testing or examination; and any other significant change in duties, responsibilities, or working conditions. Certain actions under the WPA are not considered to be personnel actions. These include an arrest by an agency police officer, comments directing an employee to “find another job,” and denying or revoking an employee’s security clearance. Also, opening an investigation into an employee’s conduct is not considered to be a personnel action. However, when “an investigation is so closely related to the personnel action” that the investigation “could have been a pretext for gathering evidence to retaliate,” then the agency must demonstrate by clear and convincing evidence “that the evidence would have been gathered absent the protected disclosure.” If the agency fails to meet this burden, “then the will prevail on his affirmative defense” of whistleblower retaliation. Russell v. Dep’t of Justice , 76 M.S.P.R. 317, 324 (1997).  In that event, the employee may seek compensation for defending against the claim, including recovery of fees, costs, and/or damages reasonably incurred due to the improper investigation. 5 U.S.C. § 1214(h). Pleading Actual or Threatened Personnel Action in Response to Whistleblowing To establish a prima facie case of retaliation for whistleblowing ( i.e. , exercising an employee’s disclosure rights under Section 2302(b)(9) of the WPA), an employee must prove the following by a preponderance of the evidence: (1) the employee, or someone identified with the employee, engaged in a protected activity; (2) the agency took, failed to take, or threatened to take a personnel action ( note : an action recorded on a Standard Form 50 Notification of Personnel Action (SF-50) or SF-52 (Request for Personnel Action) is generally considered to be sufficient proof of personnel action); (3) the official responsible for the personnel action knew about the employee’s protected activity; and (4) a causal connection existed between the protected activity and the personnel action. The Employee Was Engaged in Protected Activity Under the WPA, the employee must be engaged in protected activity – i.e. , whistleblowing. Such activity can include reporting “a violation of any law, rule, or regulation” or “gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety.” 5 U.S.C. § 2302(b)(8)(A). The Employer Knew That The Employee Was Engaged Protected Activity Under the WPA, the employee must prove that individuals within the agency responsible for the decision to engage in the personnel action knew about the employee’s protected disclosures. An employee can meet this requirement by showing either actual or constructive knowledge. An employee may prove actual knowledge using direct or circumstantial evidence and constructive knowledge where an official with actual knowledge influenced the deciding official. Causation An employee must show a causal connection between the protected activity and the retaliatory personnel action. An employee can show causation in one of two ways: the knowledge–timing test; or circumstantial evidence. To satisfy the knowledge–timing test, an employee must prove: (1) the official who took the personnel action knew of the protected disclosure; and (2) the personnel action occurred within a period of time such that a reasonable person could conclude that the protected disclosure was a contributing factor in the personnel action. If the employee fails to demonstrate both knowledge and timing, then the employee may present circumstantial evidence to show that no other factor influenced the outcome of the personnel action. Marano v. Dep’t of Justice , 2 F.3d 1137, 1143 (Fed. Cir. 1993) (holding that “the employee only needs to demonstrate by preponderant evidence that the fact of, or the content of, the protected disclosure was one of the factors that tended to affect in any way the personnel action.”). Protected Disclosures As noted, any disclosure of information that a covered employee reasonably believes evidences “a violation of any law, rule, or regulation” or evidences “gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety” is protected under the WPA, as long as the disclosure is not prohibited by law or required to be kept secret by Executive Order in the interest of national defense or foreign affairs. In the WPEA, Congress added that a disclosure is protected even if the disclosure is made to a person, including a supervisor, who participated in the alleged wrongdoing; revealed previously disclosed information; is made by an employee who may have other motives for making the disclosure; is made while the employee was off duty; is about events that occurred a long time ago; or is made during the employee’s normal course of duties, provided the employee can show that the personnel action was taken “in reprisal for” the disclosure. Moreover, any disclosure made to the Special Counsel or to the Inspector General of an agency or another employee designated by the head of the agency to receive such disclosures, which the employee reasonably believes evidences “a violation of any law, rule, or regulation,” or evidences “gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety” is protected. Notably, the employee need not prove that the matter disclosed was unlawful or constituted gross mismanagement, a gross waste of funds, an abuse of power, or a danger to public health or safety. Rather, the employee need only show that a person standing in his/her shoes would reasonably believe, given the information available to him/her, that the disclosure evidences one of these types of wrongdoing. See Lachance v. White , 174 F.3d 1378, 1380 (Fed. Cir. 1999) (noting the test is based on the “reasonable belief” of the employee and stating that the proper test is whether “a disinterested observer with knowledge of the essential facts known to and readily ascertainable by the employee reasonably conclude that the actions of the government evidence the conduct described in 5 U.S.C. § 2302(b)”) (internal quotation marks and citations omitted). Gross Mismanagement, Gross Waste of Funds, Abuse of Authority, and Substantial and Specific Danger To Public Health Or Safety Defined Gross Mismanagement Gross mismanagement is “a management action or inaction which creates a substantial risk of significant adverse impact upon the agency’s ability to accomplish its mission.” Kavanagh v. M.S.P.B. , 176 F. App’x 133, 135 (Fed. Cir. Apr. 10, 2006). Gross Waste of Funds A “gross waste of funds” is defined as a “more than debatable expenditure that is significantly out of proportion to the benefit reasonably expected to accrue to the government.” Van Ee v. EPA , 64 M.S.P.R. 693, 698 (1994). Abuse of Authority An abuse of authority is an “arbitrary or capricious exercise of power by a federal official or employee” that harms the rights of any person or that personally benefits the official/employee or their preferred associates.” Elkassir v. Gen. Servs. Admin. , 257 F. App’x 326, 329 (Fed. Cir. Dec. 10, 2007). Substantial and Specific Danger to Public Health or Safety To determine whether the disclosed harm was “specific,” the Board looks to the likelihood that the harm will result, as well as when the harm may occur. Chambers v. Dep’t of the Interior , 515 F.3d 1362, 1369 (Fed. Cir. 2008). For example, “ f the disclosed danger could only result in harm under speculative or improbable conditions, the disclosure” would “not enjoy protection.” Id . Similarly, a “revelation of a negligible, remote, or ill-defined peril that does not involve any particular person, place, or thing, is not protected.” Sazinski v. Dep’t of Housing & Urban Dev. , 73 M.S.P.R. 682, 686 (1997). In short, the disclosure of a danger only potentially arising in the future is not a protected disclosure. Chambers , 515 F.3d at 1369; Herman v. Dep’t of Justice , 193 F.3d 1375, 1379 (Fed. Cir. 1999). To determine whether the disclosed harm was “substantial,” the Board looks at the nature of the harm ( i.e. , the potential consequences). The disclosure of trivial or de minimis matters are not protected.   Herman v. Dept. of Justice , 193 F. 3d 1375, 1379 (Fed. Cir. 1999). Covered Employees Generally, current and former employees or applicants for employment to positions in the executive branch of government and the Government Printing Office, in both the competitive and the excepted service, as well as positions in the Senior Executive Service, are considered covered employees. The WPA does not apply to federal workers (1) employed by the U.S. Postal Service or the Postal Rate Commission, the Government Accountability Office, the Federal Bureau of Investigation, the Central Intelligence Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, the National Security Agency; (2) any executive entity that the President determines primarily conducts foreign intelligence or counter-intelligence activities; (3) positions that have a “confidential, policy-determining, policy-making, or policy-advocating character”; and (4) positions exempted by the President based on a determination that it is necessary and warranted by conditions of good administration. Damages Available Under the WPA If an employee prevails on his/her claim, he/she can recover lost wages, attorney’s fees, equitable relief ( e.g. , reinstatement, rescinding a suspension, or modifying a performance evaluation), and compensatory damages (including, damages for emotional distress). The Forums in Which a Whistleblower Claim May Be Asserted Under the WPA, there are three general forums in which a whistleblower may seek protection: (1) an appeal to the MSPB; (2) actions instituted by the Office of Special Counsel (“OSC”); and (3) individual rights of action (“IRA”). Notably, an aggrieved employee adversely affected by a prohibited personnel action is limited to only one of the foregoing forums. Once the employee selects the forum in which to proceed, the other two options are no longer available. Aside from the statutory provisions of the WPA, the defense or claim of retaliation for whistleblowing might also be raised in a grievance proceeding initiated by an employee pursuant to a grievance procedure that was negotiated through collective bargaining between the agency and the employee’s union. However, the employee cannot file a union grievance and an MSPB appeal or OSC complaint over the same act of retaliation. Appeals to the MSPB The MSPB is authorized to hear and rule on appeals by employees regarding agency actions affecting the employee and that are appealable to the MSPB by law, rule, or regulation. The types of agency actions against employees that are appealable to the MSPB, and in which an employee may raise the defense of retaliation for whistleblowing as a prohibited personnel action, include adverse actions against the employee for “such cause as will promote the efficiency of the service” (generally referred to as conduct-based adverse actions) (5 U.S.C. § 7513(a)), and performance-based adverse actions against employees for “unacceptable performance.” 5 U.S.C. § 4303(a). In such appeals, an agency’s decision and action will not be upheld if the employee “shows that the decision was based on any prohibited personnel practice described in section 2302(b) of this title.” 5 U.S.C. § 7701(c)(2)(B). Actions by the Office of Special Counsel The OSC is responsible for receiving allegations of prohibited personnel practices and to investigate such allegations, 5 U.S.C. § 1212(a)(2), as well as to conduct an investigation of possible prohibited personnel practices on its own initiative, absent any allegation. 5 U.S.C. § 1214(a)(5). The Special Counsel has several avenues available through which to pursue allegations, complaints, and evidence of retaliation for whistleblowing activities, including (1) requiring agency investigations and agency reports concerning actions the agency is planning to take to rectify those matters referred (5 U.S.C. § 1213(c)); (2) seeking an order for “corrective action” by the agency before the MSPB (5 U.S.C. § 1214(b)(2)); (3) seeking “disciplinary action” against officers and employees who have committed prohibited personnel practices (5 U.S.C. § 1215(b)); (4) intervening in any proceedings before the MSPB, except that in cases where an individual has brought an IRA under Section 1221 or an appeal to the MSPB under Chapter 77, the OSC must first obtain the individual’s consent (5 U.S.C. § 1212(c)); and (5) seeking a stay from the MSPB for any personnel action pending an investigation. 5 U.S.C. § 1212(b)(1). If an employee chooses to make a claim for whistleblower retaliation with the OSC, then the OSC must investigate the allegations and render a decision within 240 days of receipt of the complaint as to whether there are reasonable grounds to believe that a prohibited personnel action took place. If the OSC rules against the employee, then the employee can seek relief by appealing to the MSPB 60 days after the OSC closes its investigation or 120 days after filing a complaint with the OSC. Individual Right of Action In an IRA appeal, the employee is subject to a personnel action and claims that the action was taken because of whistleblowing. Under this option, the employee has an independent right to seek review of a Section 2302(b)(8) whistleblower retaliation claim at the MSPB, after exhausting administrative remedies at OSC. The IRA appeal option is available after 120 days have passed since the whistleblower filed a complaint with OSC, and an IRA appeal must be filed within 65 days of receiving an IRA rights letter from OSC. Section 101(b) of the WPEA expands the IRA right to include most 2302(b)(9) reprisal claims, including: retaliation for filing a whistleblower appeal; retaliation for assisting an individual in the exercise of an appeal, complaint or grievance right; retaliation for cooperating with or disclosing information to the Inspector General of an agency, or the Special Counsel; or retaliation for refusing to obey an order that would require the individual to violate a law.

There is an old idiom that says: “the devil is in the details.” It generally means that although something may seem simple, the details are complicated and likely to cause problems. This aptly describes pleading a fraud claim under New York law. To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id . Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Recently, the New York Appellate Division, First Department, had the opportunity to apply these principles. Fried v. Lehman Brothers Real Estate Associates III, L.P. Background The plaintiffs were each limited partners in one of eleven Delaware limited partnerships (the “Partnerships”) that collectively operated under the name Lehman Brothers Real Estate Partners III (“LBREP III”). The Partnerships were formed generally for the purpose of making investments in real estate assets. Beginning in the fall of 2007, the Partnerships distributed private placement memoranda (“PPM”) to prospective investors. The PPMs generally described the investment opportunity and the Partnerships’ intended investment strategy, outlined the process for selecting investment properties, and set forth the Partnerships’ management structure. The PPMs also contained comprehensive risk disclosures and warnings. Prior Proceedings and the New York Supreme Court Action In October 2009, the plaintiffs filed an action under the federal securities laws against the defendants in federal court to recover the losses they sustained from their investment in the Partnerships. In March 2011, the district court dismissed the complaint. Among other things, the court held that the plaintiffs failed to plead scienter with particularity.  That decision was affirmed by the Second Circuit in 2012. In May 2011, the plaintiffs commenced the action in state court. One month later, the defendants removed the action to federal court. Ultimately, the case was remanded back to state court. The plaintiffs filed an amended complaint in February 2015, alleging, among other things, fraud in connection with the investment in the Partnerships. The defendants moved to dismiss, contending that, inter alia , the plaintiffs failed to plead fraud (and its elements) with the particularity demanded under CPLR 3016 (b). The Supreme Court granted the motion.  The plaintiffs appealed. The First Department Ruling In a pithy decision, the First Department unanimously affirmed the Supreme Court’s dismissal of the fraud claim. Fried v. Lehman Brothers Real Estate Associates III, L.P. , 2017 NY Slip Op. 08638 (1st Dept. Dec. 12, 2017). ( Here .) In doing so, the Court explained that the plaintiffs failed to plead fraud with particularity, and specifically, the scienter (or, intent to deceive) element of the claim: The first and second causes of action, alleging fraudulent misrepresentation and gross negligence in misrepresentation, failed to satisfy the pleading requirements of CPLR 3016(b). The allegations of scienter here were not pleaded with the requisite particularity, but are conclusory, and scienter may not reasonably be inferred from the circumstantial evidence relied on by plaintiffs. Internal citations omitted. Takeaway Business and commercial litigation often involve allegations of fraud. As noted, such claims must be alleged with particularity – remember, the devil is in the details. The failure to do so, as the plaintiffs in Fried learned, will result in the dismissal of the claim.

Certain issues regarding Labor Law §240 were discussed in “Be Helpful at Your Own Peril” , an article posted on this Blog on October 20, 2017. Again, Labor Law § 240 was enacted, inter alia , to protect construction workers from height related injuries.  In discussing the purpose behind Labor Law § 240, the New York Court of Appeals stated: The legislative purpose behind this enactment is to protect workers by placing ultimate responsibility for safety practices at building construction jobs where such responsibility actually belongs, on the owner and general contractor (1969 NY Legis Ann, at 407), instead of on workers, who are scarcely in a position to protect themselves from accident. ( Rocovich v. Consolidated Edison Company , 78 N.Y.2d 509, 513 (1991) (citations and internal quotation marks omitted).)  An owner, among others, can be held strictly liable for injuries resulting from, and has a non-delegable duty to comply with, Labor Law § 240.  As the Rocovich Court stated: It is settled that section 240(1) is to be construed as liberally as may be for the accomplishment of the purpose for which it was thus framed.  Thus, we have interpreted the section as imposing absolute liability for a breach which has proximately caused an injury. Negligence, if any, of the injured worker is of no consequence. In furtherance of this same legislative purpose of protecting workers against the known hazards of the occupation , we have determined that the duty under section 240(1) is nondelegable and that an owner is liable for a violation of the section even though the job was performed by an independent contractor over which it exercised no supervision or control. ( Rocovich, 78 N.Y.2d at 513 (citations and internal quotation marks omitted) (emphasis in original).) A judicial determination that a personal injury case falls within the purview of Labor Law § 240 (as opposed to simple negligence) can have significant implications on a commercial property owner (and, under certain circumstances on a residential property owner as discussed in “Be Helpful at Your Own Peril” ) as well as a contractor. Hoyos v. NY-109 Avenue of the Americas, LLC , 2017 NY Slip Op 08717, decided by the First Department on December 14, 2017, and in which summary judgment was granted to the plaintiff on his Labor Law § 240 claim, expanded the reach of Labor Law § 240 by broadly defining the perimeter of a construction site.   The Owner in Hoyos owned a 42-story commercial office building (the “Building”) in Manhattan. The plaintiff in Hoyos was a painter employed by a subcontractor involved with renovations (the “Project”) for MetLife, a tenant on several floors of the Building. As is frequently the case, the construction workers were not permitted to enter the Building from the main entrance.  Pursuant to the operative lease, certain construction project “rules and regulations set forth standards and procedures that had to be followed so as to insure that other tenants in the building are not inconvenienced by the construction.”  The lease required, inter alia , “that all workers of the various contractors had to use the loading dock and freight elevator at all times”, and that none of the contractors “set[] up ‘shop’ outside a particular tenant’s area, unless the owner approved of an alternate ‘shop’ area”….” Plaintiff, Hoyos, sustained injuries after falling off an elevated and “overcrowded” loading dock, while standing in line with other construction workers to sign a security log and obtain a pass allowing him to enter the building where he was painting.  The loading dock was four feet high and had no guardrails, ropes or any other indication of “where its platform ended and the ledge began.”  The dock was located in the service entrance of the Building and was the only designated point of ingress for the construction workers working on the Project. In determining that Labor Law § 240 was applicable despite the fact that Hoyos “was not ‘working’ at the time of the accident and he was in his street clothes”, the Hoyos Court found: Here, plaintiff, who had been working on this construction project for a month, was following the rules and regulations of the owner and building protocol that he wait outside a closed, gated service entrance until it was opened by the building’s security staff.  Once the gate was opened, and after proceeding through the gate, he could not travel directly upstairs to whichever floor he was assigned to paint.  He was required to line up with other construction personnel and use the crowded, elevated loading dock to gain access into the building at the start of each workday and throughout the day whenever he needed to retrieve supplies. The Hoyos Court noted that Labor Law § 240 does not “use or define the term ‘construction site’ or otherwise expressly limit its protections in that way.”  In reasoning that expanding the Hoyos construction site to include the loading dock area in the Building, the Hoyos Court reasoned that: Plaintiff had no choice but to adhere to the owner’s work site policy, and he was not provided with a safer or different means of gaining access to any other part of the building, including the area that MetLife was renovating in accordance with the terms of its lease with the owner.  Since plaintiff’s painting assignment related to a construction/renovation project within the building plaintiff was unquestionably engaged in an enumerated activity within the meaning of Labor Law § 240(1). In determining that an expansive view of the “job site” was appropriate and that “Labor Law § 240(1) should be construed with a commonsense approach to the realities of the workplace at issue” (citations and internal quotation marks omitted), the Hoyos Court found that “ he building as a whole, and in particular those parts, which must be accessed by a worker to do his or her job, cannot be discounted as a job site simply because it is multi-storied and the dock is not in the immediate vicinity of the floor(s) above that plaintiff was assigned to paint.”  Therefore, the argument that the injury did not occur at a construction site “places an unintended limitation on Labor Law § 240(1).”  Nor was the Hoyos Court moved by the argument that Plaintiff “was not actually engaged in work involving a gravity-related risk” (citations omitted) or that the loading dock area may have been in compliance with OSHA.  Similarly, because the Hoyos Court found that Labor Law § 240(1) was applicable, the issue of plaintiff’s comparative negligence was not deemed to be relevant. Thus, “under the lease had the right and ability to provide safer access to the construction workers using the loading dock” and “ laintiff’s fall was a direct consequence of the owner’s failure to provide adequate protection against the risk of such fall.” Two Justices dissented, in part, and would have dismissed the Labor Law § 240 claim.  In concluding that the scope of Labor Law § 240(1)’s reach should not be extended as held by the majority, the dissent argued: The majority, in invoking Labor Law § 240(1) in this case, has expanded its application to include an injured worker who was not at the work site and not engaged in any enumerated activity under the statute at the time of his injuries, and a fall from height which the Court of Appeals has deemed not to constitute a significant elevation differential to warrant application of section 240(1).  This is a substantial departure from the legislature’s clear intent in promulgating section 240(1) and the case precedents concerning the statute issued by the Court of Appeals. TAKEAWAY Because there was a lengthy, two Justice dissent, the defendants may seek to appeal the Hoyos decision to the Court of Appeals and, thus, this may not yet be over. In the meantime, owners and contractors should be mindful of the First Department’s willingness to expand a plaintiffs’ rights under the Labor Law.  Deciding Hoyos as a Labor Law case (as opposed to a simple negligence case), precluded the defendants from asserting plaintiff’s comparative negligence to potentially reduce any damage award.  Further, any decision expanding the scope of the reach of Labor Law § 240 is troublesome for Owners and contractors.  Owners and contractors should be extra vigilant in making sure that actual work sites, as well as their expanded surrounds, are safe for workers. Perhaps the Court will accept liability for any damages occasioned by the slippery slope created by its decision.   It should be noted that the Hoyos plaintiff asserted a common law negligence claim against the Hoyos defendants and, therefore, would not have been left without a remedy had the Labor Law claim been dismissed.

Standing to sue derivatively requires stock ownership in the corporation at the time the lawsuit is filed and at the time of the wrongful occurrence. As noted in a recent article posted by this Blog ( here ), these standing requirements are strictly enforced. Now comes another decision from the New York Appellate Division, Second Department, that reiterates the point that the absence of standing is the death knell of a shareholder’s derivative action. , 2017 N.Y. Slip Op. 08506 (2d Dept. Dec. 6, 2017). ( Here .) William Jacobs (“Jacobs”) and Charles Cartalemi (“Cartalemi”) were the members of the Westchester Industrial Complex, LLC (“WIC”). At the time Jacobs commenced the action, Jacobs held a 20% membership interest in WIC and Cartalemi held the remaining 80% interest. Jacobs brought the action on September 27, 2012, both individually and derivatively against Cartalemi and WIC, alleging five causes of action: accounting, breach of fiduciary duty, appointment of a receiver, constructive trust, and waste of corporate assets. Jacobs alleged, among other things, that since 2006, Cartalemi had improperly increased his salary and paid his family members excess wages, used space on WIC’s property for his personal use and failed to pay WIC a fair rental price, and mismanaged and misappropriated funds from WIC. During the pendency of the action, Jacobs withdrew his ownership interest in WIC effective December 1, 2015. By notice of motion dated February 5, 2016, Cartalemi and WIC moved for summary judgment dismissing the complaint, contending that Jacobs no longer had standing to maintain any of his causes of action, which were all derivative in nature. Jacobs opposed the motion, contending, , that until such time as he was paid for his membership interest, he remained the equitable and beneficial owner of a 20% interest in WIC, and, therefore, was entitled to assert derivative claims. He also contended that, in any event, he could still maintain each of his causes of action as individual ones. On June 27, 2016, the motion court granted the defendants’ motion for summary judgment dismissing the causes of action for breach of fiduciary duty, imposition of a constructive trust and waste of corporate assets, and denied the motion with regard to the causes of action for an accounting and the appointment of a receiver. Jacobs appealed the portion of the order granting the defendants’ motion for summary judgment. Cartalemi and WIC cross-appealed from the portion of the order which denied dismissal of the causes of action for an accounting and the appointment of a receiver. The Second Department affirmed the dismissal of the causes of action for breach of fiduciary duty, imposition of a constructive trust and waste of corporate assets, and reversed the decision declining to dismiss the causes of action for an accounting and the appointment of a receiver. It did so because Jacobs lacked standing to assert the derivative claims: In the context of a corporation, the standing of the shareholder is based on the fact that . . . he is defending his own interests as well as those of the corporation. Where the plaintiff voluntarily disposes of the stock, his rights as a shareholder cease, and his interest in the litigation is terminated. Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit. The same is true in the context of an LLC. … Thus, the Supreme Court properly held that, once the plaintiff withdrew from WIC, he lost standing to maintain any derivative causes of action on behalf of the company, notwithstanding his possible right to a future payment for the value of his membership interest upon his withdrawal. Internal quotation marks and citations omitted. For the same reasons, the Court held that the motion court should have dismissed the first cause of action, which sought an accounting. “Here, the plaintiff’s right to an accounting was based on his ability to prove that Cartalemi breached his fiduciary duty to WIC, a claim that is entirely derivative and which the plaintiff, having withdrawn as a member from WIC, no longer had standing to maintain.” (Citations omitted.) As to the cause of action seeking the appointment of a receiver, the Court found that the motion court should have granted the motion for summary judgment because Jacobs improperly asserted it as a “form of ultimate relief that can be awarded in a plenary action,” rather than as a “limited … provisional remedy … or as an aid in post-judgment enforcement.”   Takeaway : Since February 2008, members of a limited liability company (“LLC”) have been permitted to bring a derivative action on behalf of their company. , 10 N.Y.3d 100, 102 (2008). In order to do so, the plaintiff must be a member of the LLC. , 122 A.D.3d 506, 507 (1st Dept. 2014); , 21 Misc. 3d 535, 540 (Sup. Ct., Erie County (2008). The reason for this requirement “is based on the fact that . . . is defending his own interests as well as those of the corporation.” , 6 N.Y.2d 204, 211 (1959); , 50 N.Y.2d 259, 263(1980). Therefore, a plaintiff who voluntarily disposes of his/her stock cannot defend the corporation’s rights because he/she no longer has an interest in the company. And, without ownership in the company, the courts consider the plaintiff to be nothing more than “a stranger to the corporation,” lacking the necessary “standing to institute or continue the suit.” , 50 N.Y.2d at 263-264. In , these principles informed the Court’s decision and dictated the outcome of the appeal.

In prior posts, this Blog has discussed the elements required to assert a shareholder’s derivative action. ( Here .) Today’s article focuses on the standing requirements needed to commence such an action and the consequences of not satisfying them. What is a Derivative Action? A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. , 47 N.Y.2d 619, 631 (1979).  As the New York Court of Appeals explained long ago: The remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights. , 258 N.Y. 257, 264 (1932) (citations omitted.). , 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”). Standing Requirements In New York, as in most jurisdictions, a derivative plaintiff must be a shareholder of the company “at the time of bringing the action,” and at the time of the alleged wrongdoing. , , BCL § 626(b); , 181 A.D.2d 66, 70 (1st Dept. 1992).   , 477 A.2d 1040, 1049 (Del. 1984). “ plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing” to sue derivatively. , 477 A.2d at1049. Accordingly, courts have focused on the plaintiff’s stock ownership during both points in time, and in particular at the time of the alleged misconduct. In New York, the contemporaneous ownership rule is “strictly enforced.” , 291 A.D.2d 318, 318 (1st Dept. 2002). To satisfy the requirement, the plaintiff must have owned stock in the corporation throughout the course of the activities that constitute the primary basis of the complaint. This is not to say that a plaintiff must have owned stock in the company during the entire course of all relevant events. It does mean, however, that a proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired. , 320 F.3d 291, 298 (2d Cir. 2003). “ ailure to satisfy the . . . contemporaneous ownership requirement of § 626(b) is such a fundamental lack of capacity that it results in failure to state a cause of action.” , 15 Misc. 3d 1127(A), 2007 NY Slip Op 50868(U) (Sup Ct. Nassau County 2007), at *6 (citing , 36 N.Y.2d 371 (1975)). For this reason, courts require the plaintiff to plead contemporaneous ownership with particularity rather than through boilerplate assertions. , , , , 2007 WL 1321715, at *15 (C.D. Cal. Mar. 26, 2007) (“ eneral allegation insufficient to allege contemporaneous ownership during the period in which the questioned transactions occurred.”). If a plaintiff voluntarily sells his/her shares during the pendency of a derivative action, his/her rights as a shareholder cease, and his/her interest in the litigation is terminated. , 50 N.Y.2d 259, 263-64 (1980) (citations omitted). “Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit.” . at 264. When that occurs, another shareholder with standing can intervene to maintain the lawsuit because his/her rights are no longer represented. , 573 F. Supp. 2d 1228, 1237 (N.D. Cal. 2008) (after dismissing derivative complaint without prejudice because lead plaintiff sold all his shares in the company, the court requested other plaintiffs and intervening shareholders to file new motions to appoint lead plaintiff). Business Corporation Law § 626(b) includes an exception to the requirement that shareholders commencing a derivative action must demonstrate that he/she owned stock both at the time the lawsuit was brought and when the transaction(s) occurred.  That exception provides that the shareholder’s “shares or his interest therein devolved upon him by operation of law.” In that regard, an interest is conferred by operation of law under BCL § 626 only if it occurs automatically by application of some legal mandate or doctrine, not by the voluntary actions of private parties. Thus, where shares are acquired through a will or intestacy, they devolve by operation of law since neither the decedent nor recipient had any control over the death. , 181 A.D.2d at 71. In contrast, shares that are obtained through some deliberate act, such as by gift or contract, do not devolve by operation of law. . Another exception to the rule is the continuing wrong doctrine. Under this exception, the contemporaneous ownership requirement will not apply where the alleged wrong is occurring at the time the shareholder bought his/her stock even if it began before the shareholder purchased the stock. Courts in New York have recognized the continuing wrong doctrine as a limited exception to the contemporaneous ownership rule. , , , 19 A.D.2d 610, 610 (1st Dept. 1963); , 8 A.D.2d 310, 324 (1st Dept. 1959) (explaining that the continuing nature of a wrong did not prevent shareholders from bringing a derivative action with respect to acts that occurred after they became shareholders), , 8 N.Y.2d 430 (1960); , 65 N.Y.S.2d 536, 540-41 (Sup. Ct. NY County 1946), , 272 A.D. 1045 (1st Dept. 1947) (holding that the plaintiff had not satisfied the contemporaneous ownership requirement, noting that the “allegations refer back to the alleged original wrongs specified in some detail under other paragraphs of the complaint, all of which occurred sometime before plaintiff obtained her stock.”).   Upon the commencement of a bankruptcy proceeding, derivative claims become the property of the bankruptcy estate and are subject to the control of the bankruptcy court. , , , 2009 WL 426179, at *3 (Bankr. D. Del. Feb. 20, 2009); , 397 B.R. 670, 680-81 (Bankr. S.D.N.Y. 2008) (holding that breach of fiduciary duty and negligence claims are derivative and belong to the trustee). The right to bring a derivative action asserting claims for injury to the debtor corporation by its officers and directors vests exclusively with the trustee. , 2009 WL 426179, at *3 n.9. If a derivative action is pending at the time the bankruptcy petition is filed, it must be dismissed unless the plaintiff is able to show: (1) the bankruptcy trustee has affirmatively assigned or abandoned the derivative claims to the plaintiff; and (2) the bankruptcy court approves of the plaintiff’s continued prosecution of the derivative claims. , 2009 WL 426179, at *3-4 (dismissing derivative suit because the plaintiff failed to show that the trustee had abandoned or assigned the derivative claims). Recently, the Second Department considered the standing requirements in BCL § 626(b), holding that the plaintiff was not entitled to a fee award for successfully litigating a derivative action because he lacked standing to bring the action. , 2017 N.Y. Slip Op. 08403 (2d Dept. Nov. 29, 2017) ( here ). The case was brought by Walter Sakow (“Sakow”) individually and derivatively on behalf of Mawash Realty Corp. (“Mawash”) against Michael Waldman (“Waldman”) and Mawash. Sakow and Waldman each held an ownership interest in Mawash: Sakow owned 25% and Waldman owned 75% of the company. Mawash owned an apartment building located at 264-266 West 25th Street in Manhattan (the “25th Street Property”). Sakow and Waldman also owned an apartment building at 237 East 10th Street in Manhattan (the “10th Street Property”) as tenants in common. Sakow, both individually and derivatively on behalf of Mawash, commenced the action, alleging that Waldman had retained all of the net income derived from the operation of both apartment buildings without accounting to Mawash or to Sakow, and had pledged or caused Mawash to pledge the two properties as collateral security for a number of loans, with Waldman allocating the proceeds of the loans to his own benefit. The matter proceeded to a nonjury trial. After concluding that Sakow was individually entitled to 50% of the $6,679,958, or $3,339,979, in net income and loan proceeds that related to the 10th Street Property, and 25% of the $5,122,388, or $1,280,597, in net income and loan proceeds that related to the 25th Street Property, the trial court awarded a judgment to Sakow, individually, in the principal amount of $4,620,576, or $3,339,979, plus $1,280,597, and awarded Mawash nothing. On appeal, the Second Department modified the judgment by, among other things, awarding damages to Mawash on a cause of action asserted derivatively on its behalf by Sakow, and remitted the matter to the trial court for the entry of an amended judgment. , 124 A.D.3d 860 (2d Dept. 2015) ( here ). Sakow then moved pursuant to BCL § 626(e) for an award of an attorney’s fees from Mawash. On June 18, 2015, the trial court granted the motion, awarding Sakow $324,204 in attorney’s fees. On September 8, 2015, the court entered a money judgment upon the order. Mawash appealed from the order and the money judgment. That appeal was dismissed. Subsequently, Mawash moved for leave to renew its opposition to Sakow’s motion for an award of an attorney’s fees, arguing that it had recently discovered that Sakow was not a shareholder of Mawash when the action was commenced and, therefore, he lacked standing to commence a derivative action and was not entitled to an award of an attorney’s fees under BCL § 626(e). In opposition, Sakow did not dispute that he had transferred his Mawash stock to nonparty Mawash Realty Trust (the “Trust”) more than two years before the action was commenced. However, Sakow asserted that he had standing to initiate the derivative action because he was acting as a nominee of the Trust. Upon granting renewal, the trial court adhered to its determination that Sakow was entitled to an award of an attorney’s fees under BCL § 626(e), but lowered the award to $300,000 and vacated the money judgment. Mawash appealed. The Second Department reversed, holding that Sakow did not satisfy the standing requirements of BCL § 626(b). In doing so, the Court stated: Here, upon renewal, the Supreme Court erred in determining that Sakow was entitled to an award of an attorney’s fee under Business Corporation Law § 626(e). At the time this action was commenced, Sakow was not a holder of shares or of voting trust certificates of Mawash, and he did not have a beneficial interest in such shares or certificates. Accordingly, Sakow did not have standing to commence a derivative action. While Sakow contends that, as nominee of the Trust, he could have commenced a derivative action on Mawash’s behalf, that was not the capacity in which he initiated the instant action. Since Sakow failed to satisfy the standing requirements for a derivative action, he was not entitled to an award of an attorney’s fee. Internal quotations and citations omitted. Takeaway The policy behind BCL § 626(b) is sensible. It is designed to prevent plaintiffs from buying into a lawsuit or commencing a derivative action by simply purchasing shares after the alleged wrong has occurred. , , , , 50 N.Y.2d 259, 263 (1980). Although there are exceptions to the rule, the law has long required plaintiffs bringing a derivative action to have a stake in the corporation on whose behalf the action is commenced.  After all, if the plaintiff is not a shareholder of the corporation, then he/she has no right to vindicate the corporation’s rights and obtain a judgment on its behalf. In , the Second Department reinforced this common-sense policy.

Real property owners or lessees (“Owners”) often find that their real property is in need of improvement and/or repair (the “Work”).  Sometimes the Work requires access to the property of an adjoining property owner (the “Neighbor”).  In many instances, the Neighbor graciously permits access to the Owner’s contractors so that the Work can be performed.  In such instances the parties can informally agree on how to resolve problems that may result from the Work. Sometimes  the Neighbor may voluntarily permit the Work to be prosecuted, but only after a formal license/access agreement is negotiated and executed.  Access agreements can address many issues including, but not limited to: time and day restrictions for the Work; appropriate indemnification and hold harmless provisions; insurance requirements; requiring the Owner’s insurance policies to name the Neighbor as an additional insured; requiring prompt repair of damage to the Neighbor’s property, and the like. However, when neither informal nor formal cooperation is forthcoming from thy Neighbor, an Owner can rely on section 881 of New York’s Real Property Actions and Proceedings Law (the “RPAPL”), for relief.  RPAPL §881 provides: When an owner or lessee seeks to make improvements or repairs to real property so situated that such improvements or repairs cannot be made by the owner or lessee without entering the premises of an adjoining owner or his lessee, and permission so to enter has been refused, the owner or lessee seeking to make such improvements or repairs may commence a special proceeding for a license so to enter pursuant to article four of the civil practice law and rules. The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires. The licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry. In explaining the need for RPAPL §881, the court, in , 55 Misc.3d 621 (Sup. Ct. Queens Co. 2017), stated: RPAPL 881 authorizes the court to grant the license on such terms as justice requires.  This language is broad and allows for the flexibility and full scope upon which equity depends.  In a normal commercial setting, where a license agreement cannot be reached, there is no license.  Where a license pursuant to RPAPL 881 is sought, the license can be compelled even though no agreement is reached, and, in that situation, the terms of the license are set in the discretion of the court. ( 55 Misc.3d at 623.) Relief under RPAPL §881 is “addressed to the sound discretion of the court, which must apply a reasonableness standard in balancing the potential hardship to the applicant if the petition is not granted against the inconvenience to the adjoining owner if it is granted.”  ( , 154 A.D.3d 943 (2 nd Dep’t 2017) (citations omitted).) The court may consider a host of factors in deciding a petition under RPAPL §881, including, but not limited to, “the nature and extent of the requested access, the duration of the access, the protections to the adjoining property that are needed, the lack of an alternative means to perform the work, the public interest in the completion of the project, and the measures in place to ensure the financial compensation of the for any damage or inconvenience resulting from the intrusion.”   ( , 154 A.D.3d at 943 (citations omitted).) Courts also recognize that since the access required by an RPAPL §881 order does not benefit the Neighbor, “ quity requires that the compelled to grant access should not have to bear any costs resulting from the access.”  ( , 138 A.D.3d 539, 540 (1 st Dep’t 2016).)  Similarly, “ he statute and case law provide that is strictly liable for any damage it may cause to property.”  ( 55 Misc.3d at 623 (citations omitted).) Accordingly, RPAPL §881 orders frequently require that the Owner reimburse the Neighbor for Architectural and/or Engineering fees incurred by the Neighbor so that Neighbor does not have to bear “the costs of a design professional to ensure work will not endanger his property, or having to grant access without being able to conduct a meaningful review of plans.”  ( , 149 A.D.3d 518, 519 (1 st Dep’t 2017) (citations and internal quotation marks omitted).)  Courts also can award to the Neighbor, reimbursement of the legal fees it incurred in responding to Owner’s petition.  ( , 149 A.D.3d at 519.) In addition, under appropriate circumstances (depending on the length and extent of the intrusion), courts may award an access fee to the Neighbor because the court ordered license may “deprive of the use of a portion of his property.”  ( , 149 A.D.3d at 519.)  Similarly, the posting of a bond by the Owner to secure possible damages and the payment of license fees is sometimes granted notwithstanding the availability of Owner’s insurance.  ( 138 A.D.3d at 540.) TAKEAWAY Informal access, or access under a negotiated license/access agreement, with a cooperative Neighbor is certainly the preferred method of completing Work when access to adjoining property is necessary.  However, commencing a special proceeding under RPAPL §881, and complying with such resulting order as may be issued by the court, while costly, may be the only way for an Owner to complete necessary and/or desired repairs and/or improvements to real property, if dealing with an uncooperative Neighbor.

On November 28, 2017, the United States Supreme Court heard arguments ( here ) in Digital Realty Trust v. Sommers , a case that will determine whether employees who report suspected violations of the securities laws internally can file suit against their employers under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Dodd-Frank”) for retaliation, even if they do not report their concerns to the Securities and Exchange Commission (“SEC”). At issue in Digital Realty is whether the anti-retaliation provisions in the Dodd-Frank Act protect whistleblowers who report suspected violations of the law internally, rather than directly to the SEC. Under Dodd-Frank, the term “whistleblower” is defined to mean an “individual who provides information . . . to the Commission.” The case reached the Supreme Court on appeal from a decision of the Ninth Circuit, which joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only. Rather, the anti-retaliation provisions also protect those who were fired after making internal disclosures of alleged unlawful activity under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and other laws, rules, and regulations.  In so holding, the court deferred to the SEC’s interpretation of the term “whistleblower” under the Dodd-Frank Act. This Blog has been following the case since the Ninth Circuit issued its opinion in March of this year. ( Here , here , and here .) (Before the Ninth Circuit heard the appeal of the district court’s order, the Second Circuit decided Berman v. Neo@Ogilvy LLC, WPP Group USA, Inc. ) By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied Dodd-Frank’s definition of “whistleblower” to apply only to those who disclose suspected wrongdoing to the SEC. Asadi v. G.E. Energy (USA), L.L.C. , 720 F.3d 620, 621 (5th Cir. 2013). In doing so, the court rejected the SEC’s regulation (17 C.F.R. § 240.21F-2), which extends the anti-retaliation protections to those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC. Id . at 630. Summary of the Allegations Digital Realty arose from the dismissal of Paul Somers, a vice president and portfolio manager at Digital Realty’s Singapore office. Somers alleged that he was fired in 2014, weeks after reporting a possible $7 million cost overrun on a project in Hong Kong. Somers did not contact the SEC before his firing, or file a complaint with the Department of Labor, as required under Sarbanes-Oxley. The company denied Somers’ claims of wrongdoing, and moved to dismiss on the grounds that, among other things, under the Dodd-Frank Act, Somers was not a whistleblower entitled to protection from retaliatory acts. Both the district court and the Ninth Circuit rejected the company’s argument. The Argument Narrow or Broad Reading. Which is it? The parties and the Court focused on whether Congress intended the definition of whistleblower to be narrowly or broadly interpreted. The lawyers for Digital Realty contended that the term should be read narrowly –  that is, only individuals who report suspected violations of the securities laws to the SEC are protected by Dodd-Frank – claiming that any contrary reading was “nakedly atextual.”  Lawyers for Somers and the SEC argued that such a narrow reading of the statute would weaken internal corporate compliance programs and substantially diminish Dodd-Frank’s deterrent effect. Justices Ginsburg and Sotomayor expressed concern for individuals who report suspected violations of the securities laws internally and are fired before they also reported to the SEC – a group likely to include auditors and attorneys engaged in internal reporting (assuming members of this group could go outside the organization at all). For example, Justice Sotomayor noted that employees who are subpoenaed by the SEC before they report a suspected violation of the law and then fired for cooperating also would be excluded from Dodd-Frank protection, as well as Sarbanes-Oxley: “I don't know that that employee is protected under the Sarbanes-Oxley provision either. The only thing that would protect that particular employee is the government’s reading.”  Justice Kagan questioned the fairness of protecting an individual who was fired for reporting internally and externally to the SEC about an unrelated matter that occurred in the past: “There are two employees, and they both internally report, and they’re both fired. And one of them, tough luck, but the other one is going to get protection because he’s filed a report with the SEC about some different matter entirely 10 years earlier. Why does he get extra protection?” By contrast, Justice Gorsuch expressed support for the narrow reading, asking: “I’m just stuck on the plain language here . . . how much clearer could Congress have been than to say in this section the following definitions shall apply, and whistleblower is defined as including a report to the Commission?” Justice Gorsuch pressed further, rhetorically asking: “So ‘shall’ just means maybe; sometimes?” To Give Chevron Deference or Not Give Chevron Deference, that is the Question In addition to addressing whether a narrow or broad reading of the statute was appropriate, the Court considered whether it should give deference to the SEC in construing the statute. In a prior post about this case ( here ), this Blog discussed the possibility that the Court could address the “Chevron deference” doctrine enunciated in the Court’s 1984 decision Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc . Under this doctrine, courts defer to agency interpretations of statutory mandates unless the interpretations are unreasonable. This Blog opined that Justice Gorsuch was no fan of the doctrine, noting that “ hile sitting on the Tenth Circuit, then-Judge Gorsuch called the doctrine ‘a judge-made doctrine for the abdication of the judicial duty.’” During the argument, Justice Gorsuch showcased his dislike of the doctrine. For example, during questioning of Somers’ attorney, Justice Gorsuch argued that the SEC’s administrative procedures were fundamentally flawed – an issue that went to the heart of whether deference should be given to the SEC’s interpretation of the statute. In that regard, he expressed the view that although it might be too late to challenge the validity of the SEC’s definition of “whistleblower” on those grounds, the soundness of those procedures could be taken into account in determining whether Chevron deference should be accorded: “The agency acts without the benefit of the notice and comment and is unable to issue a reasoned decision-making, and then we’re supposed to defer to that to resolve this ambiguity? … How does all that get you Chevron ?” In pressing the point with the assistant to the solicitor general, as an amicus in support of Somers, Justice Gorsuch extracted a concession that if the administrative procedures were inadequate, it would be inappropriate to accord deference to the SEC’s interpretation – a concession that Justice Breyer encouraged the government to retract: “I would be wary of that because I don’t know what implications it has for other cases … I’m just saying … that is not necessarily … a lifetime concession on the part of the government” to make, “is it?” “No, it is not,” responded the government. Can A Court Ignore the Meaning of a Statutory Term? The Court considered whether it is permissible to ignore specific language in a statute to reach a particular result.  The government argued, relying on Lawson v. Suwanee Fruit & SS Steamship Co. , that giving the term “whistleblower” “its ordinary meaning in the retaliation context would harmonize the statute and avoid the anomalies that would result from woodenly applying the statutory definition.” Lawson involved a sailor who had been injured in a pre-employment accident – he lost sight in one eye. He sued his employer for disability when he injured his other eye. The applicable statute defined “injury” as harm or damage that happens on the job; it did not include pre-existing injuries. The Court explained that under the circumstances of the case (which it described as “unusual”), it would be anomalous to give employers relief from injuries incurred while employees worked for them, but not for pre-existing injuries. While such a result would be definitionally correct, it would “create obvious incongruities in the language, and … destroy one of the major purposes of the second injury provision: the prevention of employer discrimination against handicapped workers.” If A Court Can Ignore the Meaning of a Statutory Term, What Standard Should Apply? Justice Alito questioned how the Court could articulate the standard for future cases if it were to ignore the meaning of a term in a statute: “So, you have a statute … that uses a particular term … nd what we write is that the definition in the statute doesn’t apply if it produces an anomaly. Is that the standard?” Justice Ginsburg added that the standard needed to address circumstances that were more than mere anomalies but ones that would produce “an absurd result”: “I thought the stock phrase was absurd, that you -- if the statute gives a definition, you follow the definition in the statute unless it would lead not merely to an anomaly, but to an absurd result.” Ultimately, the government conceded, in response to a question from Justice Gorsuch, that application of the narrow reading of the definition of whistleblower would not produce an absurd result. Conclusion As with most cases before the Supreme Court, it is difficult to tell from the argument how the Court will ultimately decide the case. However, if one were to glean anything from the argument, it is fair to conclude that Digital Realty had a good day. A decision is expected by the end of June 2018.

J.P. Morgan Securities, LLC ("J.P. Morgan") was recently fined $1.25 million by the Financial Industry Regulatory Authority ("FINRA") for how the securities firm handled criminal background checks. In particular, J.P. Morgan failed to conduct timely or adequate background checks on approximately 95 percent of its non-registered personnel, a total of about 8,600 employees.  As noted by FINRA in the announcement of the settlement ( here ), under the federal securities laws, broker-dealers are required to fingerprint certain associated persons working in a non-registered capacity who may present a risk to customers based on their positions. Fingerprinting helps firms identify if a person has been convicted of crimes that would disqualify them from being associated with a firm, absent explicit regulatory approval. Federal banking laws also require banks to conduct such checks on employees using a more limited list of disqualifying events. Section 17(f) (2) of the Securities Exchange Act of 1934 and Rule 17f-2 ( here ) promulgated thereunder require broker-dealer firms to submit fingerprints for all partners, directors, officers, and employees unless they are exempt under certain provisions.  Rule 17f-2 exempts employees from fingerprinting if they do not sell securities or regularly have access to the keeping, handling, or processing of securities, monies, or the original books and records relating to the securities or monies. Employees are also exempt if they do not have direct supervisory responsibility for those who sell securities or access to securities, monies, or the original books and records. FINRA found that for more than eight years (between January 2009 and May 2017), J.P. Morgan failed to fingerprint approximately 2,000 of its non-registered associated persons in a timely manner, preventing the firm from determining whether those persons might be disqualified from working at the firm. In addition, the firm fingerprinted other non-registered associated persons but limited its screening to criminal convictions specified in federal banking laws and an internally created list that included crimes such as kidnapping, rape, murder, manslaughter and sexual assault. In total, J.P. Morgan did not appropriately screen 8,600 individuals for all felony convictions or for disciplinary actions by financial regulators. FINRA also found that four individuals who were subject to a statutory disqualification because of a criminal conviction were allowed to associate, or remain associated, with the firm during the relevant time period. One of the four individuals was associated with the firm for 10 years; another for eight years. FINRA did not disclose the crimes to which the convictions were related. Susan Schroeder, Executive Vice President of FINRA’s Department of Enforcement, said, “FINRA member firms play an important gatekeeper role in keeping bad actors from harming investors. Firms have a clear responsibility to appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.” In addition to paying the $1.25 million fine, J.P. Morgan agreed to review its systems and procedures related to the identification, fingerprinting and screening of non-registered associated persons. The firm cooperated with FINRA in self-reporting and undertaking a plan to address the violations, a factor that FINRA weighed when determining the appropriate monetary sanction, FINRA said. “We self-reported this matter and are pleased it’s now behind us,” said J.P. Morgan spokeswoman Jessica Francisco. In settling the matter, J.P. Morgan neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. In December 2015, FINRA imposed a $1.25 million fine on Merrill Lynch for failing to fingerprint employees. ( Here .) According to FINRA, from January 1, 2009, through October 28, 2013, Merrill Lynch failed to fingerprint or properly screen approximately 4,500 out of 20,000 non-registered associated employees. Of those individuals, 1,115 were not fingerprinted, 240 were not fingerprinted until after they started working, and 3,145 were not screened for felony convictions or regulatory actions. Merrill Lynch also consented to the entry of FINRA’s findings, but neither admitted nor denied the charges. The Takeaway FINRA has stated that it is trying to detect rogue brokers who may have been disciplined for misconduct but who still work in the industry - a number that represents about seven percent of financial advisers. The settlement with J.P. Morgan, though involving non-registered, associated personnel, is an example of that effort. As a result, member firms should ensure that their background check procedures comply with the federal securities laws and rules.

Yellowstone injunctions got their name from First National Stores, Inc. v. Yellowstone Shopping Center, Inc., 21 N.Y.2d 630, 290 N.Y.S.2d 721 (1968) .  A commercial tenant that is faced with the threat of the termination of its commercial lease as a result of a lease default, must follow the procedures set forth in Yellowstone or it runs the risk of losing its lease.  While Yellowstone was decided almost fifty years ago, commercial tenants continue to lose their valuable leases by failing to follow Yellowstone’s relatively simple dictates. By way of background, the plaintiff in Yellowstone was a supermarket tenant in a shopping center owned by the defendant landlord.  The fire department ordered the landlord to install sprinklers in the cellar of the space rented to the plaintiff.  None of the other units in the center were subject to the fire department order.  The landlord and the tenant disagreed as to who was responsible under the lease to pay for the sprinklers.  The tenant urged that the lease obligated the landlord to make repairs to the leased premises required by governmental authorities.  The landlord argued that the same provision relied upon by the tenant shifted to the tenant, the burden of repairs required by governmental authorities if necessitated by the tenant’s particular use of the leased premises. After making numerous unsuccessful requests for the tenant to comply with the fire department’s order, the landlord sent the tenant a default notice pursuant to the lease requiring the tenant to cure within ten days.  The notice was received by the tenant on February 27, 1967.  Instead of curing the noticed default, the tenant commenced a declaratory judgment action on February 28, 1967 by the service of a summons only.  On March 9, 1967, the tenant followed-up with the service of a complaint and an order to show cause (without a stay) for a preliminary injunction (which was returnable on March 13, 1967).  On March 10, 1967 (more than ten days after tenant’s receipt of the default notice), the landlord sent the tenant a notice of termination. The Appellate Division determined that the tenant was indeed responsible under the lease for the sprinkler repairs ordered by the fire department because the sprinklers were necessitated by the tenant’s particular use as the landlord was not ordered to install sprinklers in the cellar of any other tenanted spaces.  Accordingly, the Appellate Division determined that it could have declared the lease terminated.  However, the Court decided not to terminate the lease because the tenant acted in good faith in bringing the declaratory judgment action.  The Appellate Division determined that the lease should remain in force if, within twenty days, the tenant installed a satisfactory fire sprinkler system or reimbursed the landlord if sprinklers were already installed by it. The Court of Appeals in Yellowstone , however, reversed the Appellate Division’s decision and determined that the lease was terminated in accordance with its terms and could not be revived.  Thus, in holding that the Appellate Division was “powerless” to reform the lease absent “a showing of fraud, mutual mistake or other acceptable basis of reformation” ( Yellowstone , 21 N.Y.2d at 637, 290 N.Y.S.2d at 725), the Court of Appeals stated: Here, the lease had been terminated in strict accordance with its terms.  The tenant did not obtain a temporary restraining order until after the landlord acted.  The temporary restraining order merely preserved the status quo as of the date it was obtained.  Once the Appellate Division determined that the tenant had in fact defaulted by not installing the sprinkler system, the conclusion had to be drawn that the lease was terminated in accordance with its terms.  The Appellate Division could not revive it unless it read into the lease a clause to the effect that the tenant could have an additional 20 days to cure is (sic) default before the landlord could commence summary eviction proceedings.  This the court was powerless to do absence a showing of fraud, mutual mistake or other acceptable basis of reformation. ( Yellowstone , 21 N.Y.2d at 637, 290 N.Y.S.2d at 725.) Riesenburger Props., LLLP v. Pi Assoc., LLC , 2017 NY Slip Op 08294, __ N.Y.S.3d __ (2 nd Dep’t November 22, 2017), a case decided almost fifty years after Yellowstone , reiterates the importance of following the procedural requirements of Yellowstone .  The Riesenburger plaintiff, the landlord with respect to a commercial lease, sent the Riesenburger defendant, the tenant, fifteen-day notices of default.  The defaults were disputed by the tenant.  After more than fifteen days passed, the tenant was served with a three-day notice of cancellation of its lease. The Riesenburger landlord commenced an action seeking a judgment of possession.  Thereafter, and more than thirty days after the expiration of the cure period, the tenant moved for a Yellowstone injunction, which the Supreme Court denied the motion as untimely.  The Supreme Court also denied the tenant’s subsequent motion to reargue. On appeal, the Second Department affirmed the decision below because the tenant failed to “move for injunctive relief until after the cure period expired and after the notice of cancellation of the lease had been served”.  ( Riesenburger , 2017 NY Slip Op 08294 (citation omitted).) In succinctly explaining Yellowstone injunctions, the Second Department stated: A Yellowstone injunction maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture of the lease.  To obtain a Yellowstone injunction, the tenant must demonstrate that (1) it holds a commercial lease, (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure, and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises. ( Riesenburger , 2017 NY Slip Op 08294 (citation and internal quotation marks omitted).) The Riesenburger Court also recognized that “ here a tenant fails to make a timely request for a temporary restraining order, a court is divested of its power to grant a Yellowstone injunction.”  ( Riesenburger , 2017 NY Slip Op 08294 (citation omitted).) TAKEAWAY Commercial leases can be an extremely valuable asset of any business.  A commercial tenant that is faced with a default notice, a notice to cure or is otherwise threatened with the termination of its lease, must act quickly to preserve its leasehold interest.  If a commercial tenant waits too long or otherwise fails to follow the relatively easy Yellowstone procedures, the court may be forced to terminate the tenant’s commercial lease.

On November 3, 2017, Thrivent Financial for Lutherans (“Thrivent”) obtained a preliminary injunction that temporarily restrains the Department of Labor (the “Department” or the “DOL”) from enforcing an anti-arbitration provision in an exemption to the DOL’s fiduciary duty rule (the “Fiduciary Rule” or the “Rule”) against Thrivent. See Thrivent Financial for Lutherans v. Acosta , Case No. 16-cv-03289 (SRN/DTS) (D. Minn. Nov. 3, 2017). ( Here .) The decision was issued days after the DOL filed a rule with the Office of Management and Budget (“OMB”) for an 18-month delay of the Fiduciary Rule. ( Here .) The anti-arbitration provision, which restricts financial advisers from requiring retirement investors to waive their right to class litigation, is part of the Rule’s best-interest-contract exemption (“BICE” or “BIC Exemption”). An Overview of The Fiduciary Rule Retirement investment advice is governed by different regulatory and supervisory regimes, including the federal securities laws, state insurance regulation, industry self-regulatory bodies, and the Employee Retirement Income Security Act of 1974 (“ERISA”). Among other requirements, ERISA prohibits investment advisers classified as “fiduciaries” from engaging in conduct that constitutes a conflict of interest. Under the ERISA statute, a fiduciary is defined as a person or entity that “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so. . ..” 29 U.S.C. § 1002(21)(A)(ii). Pursuant to statute and executive order, the DOL has been granted interpretive, rulemaking, and exemption authority for the “fiduciary” definition and prohibited transaction provisions, both in ERISA and the parallel provisions of the Internal Revenue Code. On April 8, 2016, pursuant to this rule-making authority, the DOL expanded the definition of “fiduciary,” as well as the type of retirement advice, covered by the ERISA statute with the Fiduciary Rule.  Under the Rule, an advisor provides investment advice if s/he makes “recommendations” about “securities or other investment property,” including recommendations with respect to rollovers, transfers, or distributions from a plan or IRA. See 29 C.F.R. § 2510.03-21(a)(1). Fiduciaries that engage in prohibited transactions are subject to an excise tax equal to fifteen percent of the amount of the prohibited transaction. See I.R.C. § 4975(a). If the prohibited transaction is not corrected within the tax year, however, it is further subject to a tax “equal to 100 percent of the amount involved.” Id . § 4975(b). To ameliorate the harshness of the Rule, the DOL promulgated a number of exemptions that permit qualifying entities to continue to receive certain forms of compensation (such as commissions), and engage in otherwise prohibited transactions, without incurring punitive taxes. One of those exemptions is the BIC Exemption. To qualify for the BIC Exemption, investment advisors and their firms must agree to a number of conditions that comport with fundamental fiduciary standards. With regard to IRA investors, the BIC Exemption mandates that these conditions be contained in a contract between the financial institution and the retirement investor. While the conditions permit these contracts to include individual arbitration agreements, the BIC Exemption is not available for contracts that waive or qualify the investor’s right “to bring or participate in a class action or other representative action in court in a dispute with the Adviser or Financial Institution.” As originally contemplated by the DOL, investment advisors and their firms wishing to avail themselves of the BIC Exemption must provide such contracts by January 1, 2018. (This Blog has written about the Fiduciary Rule here and here .) The DOL Seeks to Extend the Effective Date of the Rule and Certain Exemptions The Fiduciary Rule was scheduled to become effective in 2017, with the first phase to be implemented on April 10, 2017. However, on March 10, 2017, the DOL filed a notice proposing to delay the start of the Rule from April 10, 2017, to June 9, 2017. ( Here .) On May 22, 2017, Alexander Acosta, the Secretary of Labor, confirmed that the first phase of the Rule would go into effect on June 9, 2017, as scheduled. During the transition period from June 9, 2017, until January 1, 2018, fiduciaries relying on exemptions to the Rule, such as the BIC Exemption, are required to adhere to a “best interest” standard rather than the fiduciary duty standard found in the Rule. On November 27, 2017, the DOL announced ( here ) an 18-month extension from January 1, 2018, to July 1, 2019, for the implementation of the next phase of the Rule and exemptions, and of the applicability of certain amendments to the principal transactions exemption. The extension concluded the process that the Department initiated on November 2, when it sent the proposed rule to the OMB for review. (Note: The Treasury Department said in a report released on October 27, 2017 ( here ) that it supported the effort to delay implementation of the Rule pending further review by the Department, the Securities and Exchange Commission, and the states.) In the press release, the Department said that it needed additional time “to consider public comments submitted pursuant to the Department’s July Request for Information, and the criteria set forth in the Presidential Memorandum of Feb. 3, 2017, including whether possible changes and alternatives to exemptions would be appropriate in light of the current comment record and potential input from, and action by the Securities and Exchange Commission, state insurance commissioners and other regulators.” In the February 3 memorandum, the President directed the Department to prepare an updated analysis of the likely impact of the Fiduciary Rule on access to retirement information and financial advice. (Discussed by this Blog here .) The Department has also announced that during the period June 9, 2017 to July 1, 2019, it would not pursue claims against fiduciaries working in good faith to comply with the Fiduciary Rule and exemptions, or treat those fiduciaries as being in violation of the Fiduciary Rule and exemptions. This decision, which was also contained in the rule sent to the OMB earlier in the month, was relevant to the Court’s decision in Thrivent . Thrivent Financial for Lutherans v. Acosta Thrivent is a not-for-profit, member-owned and governed fraternal benefit society incorporated in Wisconsin. Pursuant to Wisconsin law, Thrivent is required to provide insurance benefits to its members. To meet this requirement, Thrivent offers a broad range of insurance and financial products and services, including traditional life insurance, annuities, disability insurance, long-term care coverage, mutual funds, retirement planning, and money management services.  Several of the products Thrivent offers are proprietary in nature, such as fixed indexed and fixed rate annuities. These latter offerings can be acquired through an IRA, in contrast to traditional life insurance products. Many of Thrivent’s members are individuals and families of modest means. Because most of these members trade infrequently and do not need ongoing financial advice, Thrivent’s financial representatives work under a “transaction-based” compensation model ( i.e. , they receive a commission for each transaction). According to Thrivent, this model is more appropriate for most of its members than a fee-based model, where the investor pays compensation periodically based upon a percentage of the assets under management, or as a flat rate, regardless of whether transactions occur. Since 1999, Thrivent has required disputes with members over insurance products to be resolved through its Member Dispute Resolution Program (“MDRP”). The MDRP provides for a multi-tiered dispute resolution process, escalating (if necessary) to binding arbitration based on the rules of the American Arbitration Association. The MDRP mandates that all mediation or arbitration be individual in nature – representative or class claims, whether arbitral or judicial, are expressly barred. On September 29, 2016, Thrivent filed an action against the Department, asserting that the BIC Exemption’s bar on class action waivers violates the Federal Arbitration Act (“FAA”) and is unenforceable because it exceeds the DOL’s statutory authority. Thrivent sought a declaration that the class action waiver bar is in violation of the Administrative Procedure Act (“APA”) and the FAA and an injunction to enjoin its enforcement. Both parties agreed to proceed with summary judgment. (Note: the parties agreed that Thrivent’s commission-based compensation of its financial representatives and its sale of proprietary insurance products to IRA holders were “prohibited transactions” under the Fiduciary Rule.) Initially, the DOL argued that the ban against class-action waivers did not violate the FAA, and that, pursuant to 28 U.S.C. § 1108(a), the DOL had the authority to condition exemptions on adherence to certain standards, including allowing class actions.  However, shortly after the submissions, but prior to the hearing on the motions, the DOL requested a stay of the proceedings due to the President’s February 3, 2017, memorandum to the Secretary of Labor, directing him to examine the Fiduciary Rule and to prepare an updated legal and financial analysis concerning certain aspects of the Rule. The DOL stated that as part of its review process, “Plaintiff may be afforded another opportunity to seek an administrative change to the . And the Department could act to revise or rescind the challenged provision.” Shortly thereafter, on March 1, 2017, the DOL informed the Court that, among other things, the Department had proposed an extension of the April 10, 2017, applicability date for the Rule and exemptions, and initiated a 45-day comment period. The Court declined to issue a stay at that time and heard argument on the summary judgment motions. In July 2017, the DOL filed a notice of withdrawal of its cross-motion for summary judgment and its opposition to Thrivent’s summary judgment motion, explaining that “the Department no longer defends the one regulatory provision challenged in this action—the application of Exemption § II(f)(2) to arbitration agreements [ ].” Also, the DOL renewed its request for a stay, arguing that because the challenged provision was not yet applicable to Thrivent, and the DOL was reassessing both the exemption and broader rulemaking, a stay would promote judicial economy and likewise conserve the parties’ resources. Thrivent opposed the motion for a stay, arguing that neither the possibility of future regulatory changes nor the DOL’s change of legal position, supported a stay. Moreover, Thrivent asserted that while the DOJ failed to assert any hardship that it would suffer absent a stay, Thrivent would suffer irreparable harm if the Court granted the stay. Shortly thereafter, Thrivent filed its motion for a preliminary injunction. Thrivent asked the Court to enjoin the Department, as well as all other federal agencies, from implementing or enforcing the BIC Exemption against Thrivent. The Court’s Ruling The Court granted Thrivent’s motion, finding that Thrivent satisfied the requirements necessary to obtain a preliminary injunction against the Department: (1) it was likely to succeed on the merits; (2) it would incur irreparable harm in the absence of injunctive relief; (3) the balance between the irreparable harm and the harm of injunctive relief weighed in Thrivent’s favor; and (4) injunctive relief was in the public interest. Irreparable Harm The Court found that Thrivent sufficiently demonstrated the threat of irreparable harm, “both now and in the future.” Noting the “DOL’s current efforts to extend the BIC Exemption’s applicability date,” the Court found that “the current state of regulatory limbo threatens Thrivent with harm that cannot be remedied monetarily.” The Court found that to comply with the applicability date of the anti-arbitration condition, Thrivent had to change its business model. Such changes, held the Court, “may irreparably disadvantage Thrivent against its competitors and with respect to its members.” As to future harm, the Court found that the “likely harm to Thrivent’s reputation and goodwill,” “also exists in the future.” Thrivent argued that it could not comply with the BIC Exemption (which would allow it to continue paying commissions) because allowing class action litigation – a specific condition of the exemption – would undermine its core Christian values and damage its reputation and goodwill. The Court also found that Thrivent demonstrated the likelihood of future harm with respect to compliance with state regulations, as well as the impact on business operations, due to the uncertainty surrounding the viability of the BIC Exemption. Likelihood of Success The Court found that Thrivent was likely to succeed on the merits because the DOL had conceded that the anti-arbitration condition in the BIC Exemption violated the FAA. Balance of Harms and Public Interest The Court found that these factors also weighed in Thrivent’s favor because the DOL would not suffer any harm, and the public interest would be served if the DOL was enjoined from enforcing an invalid rule. The Court Issues a Stay Given the DOL’s reassessment of the applicability of the BIC Exemption, the Court found that the Department “sufficiently demonstrated the need for a stay.” Granting the stay, said the Court, would “allow the administrative process to fully develop, possibly resolving th dispute, and thereby promoting judicial economy.” And, in light the injunctive relief awarded, the Court noted that “Thrivent would not be prejudiced by the entry of a stay.” Takeaway The combination of the DOL’s rule extending implementation of the Fiduciary Rule and the exemptions, the DOL’s concession that the BIC Exemption cannot be reconciled with the FAA, and Judge Nelson’s grant of a preliminary injunction in favor of Thrivent makes it exceedingly unlikely that full implementation of the Rule or the BICE will occur.  Indeed, Micah Hauptman, financial services counsel at the Consumer Federation of America, stated: “In our view, this is not a delay. It’s an effective repeal of the rule.” If the DOL does not implement the next phase of the Rule and exemptions, then the transition versions of the Rule and exemptions will continue to apply unless other rules are proposed and adopted. Under the transition rules, investment advisers and their firms are required to provide investment advice that is in the best interests of their retirement investors ( i.e. , provide investment advice with skill, care, and prudence, without regard to the financial interests of the advisor, and consistent with the objectives, needs and financial circumstances of the client); charge reasonable compensation; and refrain from making false and misleading statements about investments, compensation, and conflicts of interest. The DOL has cautioned financial advisers and their firms that, notwithstanding the delay and uncertainty surrounding the Rule and exemptions, the Department expects them to “to adopt such policies and procedures as they reasonably conclude are necessary to ensure” compliance with the foregoing standards. This Blog will continue to monitor the implementation of the Fiduciary Rule and related exemptions and provide updates when they become available.

According to a report issued jointly by the New York University Pollack Center for Law & Business and Cornerstone Research, the Securities and Exchange Commission (“SEC” or “Commission”) filed 33% fewer enforcement actions against public companies and their subsidiaries in fiscal year 2017 than in fiscal year 2016. The report ( here ), SEC Enforcement Activity: Public Companies and Subsidiaries, Fiscal Year 2017 Update (the “Report”), analyzes data from the Securities Enforcement Empirical Database (“SEED”) ( here ). SEED tracks and records information for SEC enforcement actions filed against public company defendants. Created by the NYU Pollack Center for Law & Business in cooperation with Cornerstone Research, SEED facilitates the analysis and reporting of SEC enforcement actions through regular updates of new filings and settlement information for ongoing enforcement actions. In fiscal year 2017, the SEC filed 62 new enforcement actions against public companies and their subsidiaries, compared to 92 actions in fiscal year 2016. There were 45 actions filed in the first half of fiscal year 2017, but only 17 in the second half. “The data from SEED show a substantial decline in public company-related enforcement actions, the timing of which corresponds with SEC leadership changes in the new administration,” said Stephen Choi, the Murray and Kathleen Bring Professor of Law at the NYU School of Law and director of the Pollack Center for Law & Business. “For example, only two actions with FCPA allegations have been filed against public company-related defendants since February.” “We also saw major decreases in monetary penalties,” noted David Marcus, senior vice president and head of Cornerstone Research’s finance practice. “Total settlements declined from $1 billion in the first half of FY 2017 to $196 million in the second half.” In fiscal year 2017, the top three categories of cases brought by the SEC involved issuer reporting and disclosure, investment advisers and investment companies, and the Foreign Corrupt Practices Act (“FCPA”). These categories of cases represented 39%, 21% and 16%, respectively, of the total number of cases brought by the Commission in fiscal year 2017. By contrast, in fiscal year 2016, 26% of the cases involved issuer reporting and disclosure, 21% related to investment advisers and investment companies, and 20% were brought under the FCPA. A closer look at the numbers shows a change in enforcement priorities that coincides with leadership changes at the Commission. In the second half of fiscal year 2017, the largest category of cases brought by the SEC involved investment advisers and investment companies, not issuer reporting and disclosure. This change in emphasis comports with Chairman Clayton’s focus on retail investors and the new stated focus of the SEC Enforcement Division. Similarly, in the second half of fiscal year 2017, the number of FCPA cases dropped to 2 from 10 in the first half of the fiscal year. While there may be many reasons for the decline in FCPA enforcement actions, the drop in the number of FCPA actions is consistent with the commitment of the current administration in this area. President Trump has called the FCPA “ridiculous,” and a “horrible law” that makes it difficult for U.S. companies to compete overseas. ( See CNBC interview, here .) In terms of industry, the allocation of enforcement resources has also shifted from finance, insurance and real estate to manufacturing and services. In fiscal year 2016, 59% of the public company actions involved the finance, insurance and real estate sector, while the manufacturing sector accounted for about 18% of the cases, and the services sector accounted for 3%. In fiscal year 2017, however, only 42% of the cases involved the finance, insurance and real estate sector, while manufacturing and services cases increased to 32% and 8%, respectively. In fiscal year 2017, the SEC obtained $1.2 billion in cash settlements. About 89% of the public company settlements involved monetary penalties. That is comparable to the prior two fiscal years. However, a closer examination of the numbers suggests a possible shift due to a change in leadership. In the first half of fiscal year 2017, 94% of the actions settled for money. By contrast, in the second half of fiscal year 2017, the percentage of monetary settlements fell to 78%. Cooperation by a defendant also declined in fiscal year 2017.  In that year, about 54% of the settling defendants cooperated with the SEC, compared to 71% in fiscal year 2015 and 64% in fiscal year 2016. In fiscal year 2017, cooperation was at its highest in actions involving the FCPA (61%) and Municipal Securities/Public Pensions (87%). Finally, actions involving public companies with resolutions that were not concurrent with the filing of a complaint were less likely to have monetary settlements. From fiscal year 2010 through fiscal year 2017, 71% of the actions with non-concurrent resolutions had monetary settlements, compared to 88% of actions with concurrent resolutions. These statistics again raise questions regarding cooperation by defendants in enforcement actions and the settlement approach and tactics employed by the Division of Enforcement. The press release discussing the Report can be found here . The SEC, Division of Enforcement, Annual Report: A Look Back at Fiscal Year 2017 can be found here .

Following months of hinting that the Department of Justice (“DOJ” or “Department”) would change its qui tam policies, Michael Granston (“Granston”), Director of the Civil Fraud Section, announced that the DOJ will now move to dismiss qui tam actions brought under the False Claims Act when it concludes that the actions lack merit.  The announcement was made during a presentation at the Health Care Compliance Association’s Health Care Enforcement Compliance Institute on October 30, 2017, rather than through official channels. (The announcement was covered by the RAC Monitor, here .) This policy shift represents a significant departure from the government’s past practice, which typically involved allowing meritless cases to be litigated by the relator. Under the False Claims Act (“FCA”), when a relator files a qui tam action, the government has 60 days to decide whether to intervene, decline to intervene, move to dismiss, or try to settle the action.  If the government intervenes, it controls the action and has the primary responsibility for prosecuting the case. Notably, the government intervenes in only a small percentage of qui tam actions. If the government declines to intervene, which it does in roughly 78 percent of the cases, the relator may continue to prosecute the action. However, the government may intervene at a later date upon a showing of good cause. The government typically declines to intervene if there is no merit to the case, or the action conflicts with the government’s statutory or policy interests. A discussion of the process can be found here . Over the years, defendants and trade groups have encouraged the DOJ to seek dismissal in declined cases, in an effort to avoid the costs associated with defending meritless qui tam lawsuits. These groups have argued that the government is not only in the best position to evaluate a qui tam case ( e.g. , it has myriad tools at its disposal to gather facts and evaluate evidence before deciding whether to intervene), it has the statutory authority to stop them. Given such authority, they argue, the government has a responsibility to seek dismissal of meritless cases, even when to do so occurs over the objections of the relator. Although the DOJ has the statutory authority to seek dismissal of qui tam actions, the DOJ has rarely exercised this right. By choosing not to seek dismissal, the DOJ has allowed many questionable qui tam actions to go forward, costing companies millions of dollars in legal fees and over $2.2 billion in judgments and settlements. At the conference, Director Granston explained that the government’s rationale for developing the new policy was to ease the burden created by frivolous litigation (in terms of time and resources) on the courts and the defendant companies. Takeaway Only time will tell whether the new policy will materially shift the Department’s decision making.  At this point in time, however, this Blog is skeptical. First, aggressive implementation of the policy would bite the hand that feeds the government. Since the majority of qui tam recoveries come from cases initially brought by relators, the government has an economic interest in allowing relators to pursue their actions – even when the DOJ believes the merit of the claim to be dubious. Nearly 95 percent of the money recovered under the False Claims Act is obtained in cases initiated by a whistleblower. If the DOJ implements this policy, it is more likely the Department will do sparingly, reserving dismissal motions only for cases where it is clear that the relator’s allegations are baseless and sanctionable. Second, while defendants will no doubt welcome the support of the DOJ, in cases where the absence of merit is abundantly clear ( e.g. , the type of cases Director Granston referred to), the DOJ’s intervention will be of little assistance – in such cases, defendants will likely achieve dismissal on their own. Under such circumstances, it raises the question why expend the resources to seek dismissal? This Blog will monitor whether the DOJ increases the instances in which it moves to dismiss relator claims.