FTC v. St. Luke’s: The Intersection of Antitrust and the Affordable Care Act

Tuesday, May 5th, 2015

On February 10, 2015, the Ninth Circuit Court of Appeals affirmed an Idaho district court ruling to unwind the acquisition of Saltzer Medical Group, Idaho’s largest independent physician group, by St. Luke’s Health System on the basis of federal antitrust law violations, specifically Section 7 of the Clayton Act. The decision by the Ninth Circuit in FTC v. St. Luke’s is significant because it is a key indicator of how courts will balance Affordable Care Act (“ACA”) provisions that incentivize integrated healthcare services with antitrust scrutiny.

In enacting the Affordable Care Act, Congress found that the lack of integration in the nation’s health care system was a major source of inefficiency; at the clinical level due to inadequate or unnecessary care caused by lack of coordination between providers, and at the administrative level due to high administrative costs and ineffectual competition. In taking a major step towards speeding up integrated healthcare delivery approaches, the ACA adopted a provision (Section 3022 Medicare Shared Savings Program) that rewards healthcare organizations who improve quality of care and reduce costs by allowing them a “share” of the cost savings under Medicare. In order to participate, qualifying provider groups must report data to the Center for Medicare and Medicaid Services (“CMS”) and meet quality, performance, and cost reduction targets set by the agency. In the wake of this legislation, healthcare organizations have rushed to integrate – through mergers, physician hospital networks, physician practice associations, and accountable care organizations (“ACOs”).

This trend has implications for healthcare markets, especially those that are already dominated by large providers and insurers with market power. Healthcare integration runs afoul of the antitrust laws when the combining entities threaten to raise prices and restrain competition. Economic research shows that higher concentration in healthcare markets leads to significantly higher prices, as high as 40-50 percent. For healthcare consumers in highly concentrated markets, this means that the price for the same service can vary drastically across, and even within, markets simply based on the number and relative strength of healthcare providers. Antitrust enforcement aims to protect healthcare consumers from these harmful effects by ensuring there is enough competition between firms.

The balancing of antitrust concerns and ACA opportunities presents a potentially problematic tradeoff for integrated care groups: providers need sufficient size to capture the benefits of integration including lower costs and higher quality care, but to the extent they acquire too much of the market, they may trigger antitrust scrutiny by exercising market power. Healthcare providers involved in an existing joint venture or looking to merge would be wise to take note of the court’s analysis in FTC v. St. Luke’s. But first, a brief background on the case.

The district court detailed in its Findings of Facts and Conclusions of Law that St. Luke’s Health System and Saint Alphonsus are two competing health systems in Idaho’s Treasure Valley, an area stretching west of Boise to Nampa. St. Luke’s operates two hospitals and has physicians in three locations. Saint Alphonsus also operates two hospitals and employs physicians at various locations in the area. In 2012, St. Luke’s acquired Saltzer Physician Group, over the request by the Idaho Attorney General to hold off completing the deal until it could complete an investigation. Despite that request, St. Luke’s closed the deal by the end of 2012 paying $16 million for Saltzer. All of the doctors in the Saltzer group were required to enter into five-year professional service agreements with St. Luke’s that included a non-compete.

In March 2013, the FTC and Idaho Attorney General filed a joint complaint seeking to undo the merger based on horizontal antitrust theory that the merger would substantially lessen competition in the market for adult primary care physician services in Nampa, ID. The FTC alleged that the acquisition could create two kinds of anticompetitive effects: (1) increased negotiating leverage with commercial payers that would result in higher prices for St. Luke’s primary care physician services, and (2) increased costs of ancillary services, like laboratory tests and X-rays, from primary care physicians referring patients to St. Luke’s higher-cost facilities.

In its January 2014 ruling, the district court focused extensively on the market for adult primary care physician services in Nampa. In a classic antitrust horizontal merger analysis, the court first determined the relevant product and geographic markets, calculated market shares and concentration, identified barriers to entry in the market, and then assessed whether the network’s market power caused a restraint on competition. St. Luke’s acquisition of Saltzer gave it 80% of the primary care physician services in Nampa (measured by visits). This made it the “dominant provider in the Nampa area for primary care” and gave it “significant bargaining leverage over health insurance plans.” This percentage share the district court considered “well above the thresholds for a presumptively anticompetitive merger.” The court also found that Saltzer and St. Luke’s were each other’s closest substitute as providers of primary care services in the Nampa area.

In the February 2015 appellate decision, the 9th Circuit affirmed the district court’s finding that the acquisition was anticompetitive. It held the evidence of “extremely high” market concentrations and prior “statements and past actions by the merging parties made it likely that St. Luke’s would raise reimbursement rates in a highly concreated market.” The Ninth Circuit also accepted the district court’s structural remedy to break up the merged entity in order to restore the competitive status quo existing pre-merger.

There are several important takeaways from this case for integrating healthcare providers.

First, both courts focused on the lack of empirical evidence in St. Luke’s procompetitive justifications that its merged entity would improve quality of care. St. Luke’s argued the acquisition created efficiencies by employing physicians and better positioning itself to deliver integrated care. It also claimed that implementing an electronic medical record system across its locations would drive more efficient care. The court found its defenses lacking because there was no empirical evidence suggesting that the hospital by employing the physician-group doctors would reduce costs or improve quality. The appeals court highlighted the efficiency defenses were not merger specific and that St. Luke’s had failed to justify its claim that the merger would improve patient outcomes. The focus on empirical data, and the lack thereof in this case, should serve as a warning to future providers. Accepting the premise of antitrust law that competition fosters innovation, healthcare providers should be prepared to explain why reducing competition through a combination (merger) or contract (ACO or other network) would enhance rather than impair their incentive to innovate. As future providers begin to collect quality metrics under the Affordable Care Act MSSP, courts will look more and more to actual performance data to determine if defendants’ procompetitive justifications are genuine.

Second, transactions of all sizes may be subject to challenge. This is especially significant for smaller provider groups looking to integrate through new operating models like ACOs and contractual physician group networks. Even though the market size in Idaho was relatively small and the transaction did not meet the reporting threshold in Hart-Scott-Rodino, St. Luke’s deal with Saltzer was not immunized from substantial state and federal antitrust scrutiny.

Finally, divestitures are still the preferred antitrust remedy and the FTC has successfully litigated the breakup of several healthcare mergers over the past few years. In the healthcare context, the FTC prefers structural remedies to conduct-based remedies, like consent decrees, because conduct remedies require monitoring of future behavior and

Tax Inversion Stop-Gaps and Signs of Deeper Problems

Tuesday, May 5th, 2015

The United States, unlike most other developed countries, taxes profits no matter where they are earned. If a U.S. domiciled multinational corporation makes a profit in the U.S., they are taxed at the applicable domestic corporate tax rate, just over thirty nine percent at the highest rate. If the same domestic company earns a profit in Ireland, it is taxed by the Irish at the local corporate tax rate of twelve and one half percent, and by the U.S. on the difference between the thirty nine percent U.S. corporate tax rate and the twelve and one half percent Irish corporate tax rate. This delta theoretically represents up to a twenty six percent swing in effective corporate tax rate, an enormous figure for a large multinational corporation.

To avoid this U.S. taxation of foreign earnings, U.S. domiciled corporations are increasingly turning to a transaction known as a “tax inversion.” A corporate tax inversion is “[a] transaction in which a U.S. based multinational restructures so that the U.S. parent is replaced by a foreign parent, in order to avoid U.S. taxes,” according to the U.S. Treasury department.

From 2008-2014 a number of tax Inversion Transactions were completed to reduce a company’s on-going tax liability and free up trapped overseas cash from potential U.S. taxation when repatriated. Many of these tax inversions were structured such that there was no rational economic basis for the deal beyond tax savings and global cash management benefits (the ability to avoid taxation when repatriating cash to the United States). A majority of these inversions were not “genuine” according to the guidelines of the U.S. Treasury, but nonetheless qualified as appropriate inversions under the tax-inversion statute.

In September of 2014, in response to a number of high profile inversion transactions, the U.S. Treasury enacted regulations to discourage inversions perceived as driven principally by tax considerations rather than “genuine” cross border mergers. The regulations worked and these “false inversions” mostly dried up in the subsequent nine months. However, the regulations had the unexpected side-effect of encouraging more inversions based on “genuine” acquisitions by foreign companies, which nonetheless were still largely motivated by tax savings and global liquidity management benefits derived from re-domiciling the acquired company somewhere other than the United States.

This Financial Times report notes that:

Since the crackdown, there have been $156bn of inbound cross-border U.S. deals announced, compared with $106bn in the same period last year and $81bn a year earlier, according to data from Thomson Reuters.

By far the biggest acquirers have come from countries with lower tax rates such as Canada and Ireland, which have announced $26bn and $22bn of deals respectively, highlighting the competitive advantage that their companies have when it comes to mergers and acquisitions. Before the crackdown, groups from Germany and Japan were the biggest buyers of US companies.

So far this year, foreign buyers have announced $61bn worth of US acquisitions, an increase of 31 per cent on last year and the strongest start to a year for inbound cross-border deals since 2007, according to the data.

The market adjusted very quickly to the Treasury tinkering at the edges of the law to continue to allow for these transactions to drive tax revenues away from the U.S.

This is not all bad. On one hand, the Treasury Department has achieved one of its major goals by reducing the number of inversion transactions that are not “genuine.” However, the fact that these transactions continue in increasing amounts demonstrates that there is significant value to be unlocked by a multi-national company not being domiciled in the United States, even considering the costs and uncertainties of a cross-border merger or acquisition.

Some argue that having a larger multinational entity is preferable for its own sake, for the usual reasons of strategic fit, economies of scale and better international sales platforms. In addition, the Financial Times report notes that “George Bilicic, a vice-chairman of Investment Banking at Lazard, said there were other reasons for the jump in foreign takeovers. ‘Cross border M&A is being driven by US companies’ desire to go global and non-US companies seeking to expand in America, which is enjoying a period of strong economic growth.’”

Still, a major, likely the largest, component of these deals is the ability to unlock value by re-domiciling the target outside of the U.S. This speaks to the deep disconnect that our tax system has with the rest of the world regarding global taxation. There is enormous potential value unlocked through these cross-border transactions by allowing public U.S. companies to get around this tax burden. Unless some real change is made to make the U.S. system of global taxation more competitive with the rest of the developed world, the U.S. will continue to lose valuable tax revenues.

Treasury employees quoted in the Financial Times report admit to the problem: “As we’ve always said, we need to fix underlying problems in our tax code through business tax reform to address inversions and other creative tax avoidance techniques. We are committed to working with Congress to enact business tax reform that simplifies the tax code, closes unfair loopholes, broadens the base and levels the playing field.”

Many politicians criticized the regulations as they were made, predicting that they would be ineffective without an accompanying overhaul of the U.S. corporate tax code or reduction of the corporate tax rate. Political gridlock has made this a hard solution, but the quick market response to these regulations shows that stop-gap measures will continue to be ineffective in the long term. We can hope that tax reform will become a major issue in the upcoming U.S. presidential election.

Innovation in Legislative Measures to Prevent White Collar Crime

Tuesday, May 5th, 2015

While judicially it appears that the definitions of white-collar crimes are narrowing, novel legislative measures to prevent white-collar crime may be on the rise. While the concurrent nature of these moves indicates that there is likely not a direct causation relationship yet, the proliferation of these legislative preventative measures may increase in light of the judicial branch’s hesitancy to lend broad readings to white-collar crime statutes.

Judicious Applications

On February 25, 2015, the Supreme Court released its opinion in Yates v. United States. Petitioner Yates had thrown undersized fish caught during commercial fishing operations, in violation of federal conservation regulations, off board of his ship. Yates was subsequently charged with a violation of § 1519 of the Sarbanes-Oxley Act of 2002 which provides for punishment if a person “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence” a federal investigation. The majority of the Supreme Court, in an opinion authored by Justice Ginsburg, held that “fish” did not fall within the intended coverage of the term “tangible object,” thus reversing the conviction.

Peter J. Henning, a professor at Wayne State University Law School, wrote in the New York Times that the Yates decision “is part of a trend to more narrowly interpret statutes used to prosecute white-collar crimes. The message is that the government should be careful in how aggressively it tried to apply provisions that carry heavy punishments to defendants who pose little threat to the public’s safety.

Henning, as further evidence of this “narrowing,” pointed to the Supreme Court’s 2010 decision in Skilling v. United States, where the honest services fraud statute was interpreted to encompass only bribery and kickback schemes. That decision “pared [] down [the “honest services” law] to what the majority called its ‘solid core’.”

Another example of the Supreme Court’s recent narrow readings of white-collar crime statutes was announced in Sekhar v. United States in 2013. There, the Supreme Court concluded that attempting to compel a person to recommend an investment to his employer was not a violation of the Hobbs Act, concluding that to violate the Hobbs Act (which punishes extortion), the property sought must be “obtainable.”

On the Circuit Court of Appeals level, the recent Second Circuit decision in United States v. Newman, reversed the insider trading conviction of two hedge fund managers, “raising the bar on what the government must show to establish a violation for trading confidential information.” Questions about the remote tippee liability in the wake of Newman remain.

Whether motivated by the rule of lenity, congressional intent, or a sheer hesitancy to impose often lengthy sentences for acts causing only economic harm, the judicial branch has been forging hurdles to such prosecutions.

Legislative Novelties

Meanwhile, both the federal and state legislatures have been at work to prevent such white-collar crimes through creative new deterrents. Strict sentencing regimes still reign in the white-collar realm despite American Bar Association reform efforts. Even within the federal system, white-collar crime sentencing is still variable depending on the Circuit. The sentencing issues remain a hotly debated topic in white-collar crime prosecutions—some commentators going so far as to label the current results nonsensical. On the state level, however, other methods to prevent and deter white-collar crime are making today’s headlines.

New York Attorney General Eric Schneiderman announced “that he would propose legislation in Albany to protect and reward employees who report information about illegal activity in the banking, insurance, and financial services industries.” The bill would “provide financial compensation to whistleblowers who voluntarily report fraud in their industry, and whose tips lead to more than $1 million in penalties or settlement proceeds.” The bill, modeled somewhat after the whistleblower programs developed by Dodd-Frank’s financial overhaul, “would be the first of its kind” on the state level.

The Utah legislature recently approved the creation of “the nation’s first white-collar offender registry.” The bill “authorizes the attorney general’s office to set up a registry for convicted fraudsters, much like a sex offender registry.”

In Rhode Island, a bill was recently introduced in order to “codify in state law the public corruption and white collar crime unit within the Department of the Attorney General.” Such would effectively ensure that no future Attorney General could abandon the white collar crime unit currently existing in the Rhode Island Attorney General’s office, as well as establish a whistleblower hotline for relevant violations.

Thus, it appears legislatures may be beginning to seek solutions—outside of sentencing—to the issues presented by white-collar crime.


While the concurrent nature of these two trends indicate coincidence rather than causation at this point, their diverging viewpoints may come further into tension. As the judicial branch narrows the definitions of statutes permitting white-collar crime convictions, the legislative branch may continue to turn to deterrent measures outside of the traditional prosecution model.

The Cyclical Nature of Corporate Criminal Prosecutions

Tuesday, May 5th, 2015

“The sentries were not at their post,” concluded the Financial Crisis Inquiry Commission, referring to federal regulators who failed to prevent, or even foresee, the 2008 global financial crisis. Why does it take a nearly ruinous set of circumstances to spur action by federal regulators and prosecutors tasked with rooting out corporate crime? Put simply, there is a false presumption that corporate crime and pervasive fraud are cyclical, or that it only rears its head during times of economic crises. The reality is, however, that the criminal activities of corporations are ever-present, and only come to light once regulators and prosecutors begin to peel back the layers.

Since the 1980s, excessive greed and fraud within financial and corporate institutions has ultimately resulted in a cyclical detriment to the economy. To add perspective, since 1989, the U.S. economy has suffered three significant economic recessions: 1990-91; early 2000s; 2007-09. In each, corporate crime and fraud was a substantial contributor to the negative economic conditions. With respect to the recession of 1990-91, which was the result of the savings and loan crisis of the late 1980s, “criminal misconduct by insiders played a crucial role in many thrift failures,” the primary catalyst of negative economic growth during this period. At the beginning of the twenty-first century, a new wave of corporate crime, in the name of accounting scandals, gripped the U.S. economy. The fraud uncovered at several of America’s corporate titans­­—Enron, Worldcom, Tyco, and Adelphi—“involved executives misleading investors about the financial health of the company and misappropriating company funds for personal use.” Finally, egregious levels of criminal and civil fraud within the financial and mortgage industries were rampant in the years immediately prior to the collapse of the global economy in 2008. Predatory and fraudulent lending was prevalent, particularly in the mortgage industry, in the years prior to the collapse of the real estate market. See Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report xxiii (2011). Mortgage fraud flourished as a result of weakened lending standards and lax regulation. Id. at xxii. Thus, corporate crime, particularly fraud, was the critical component, or, at the very least, a major catalyst, to the three categorized recessions suffered by the U.S. economy over the past twenty-five years.

The issue is not that federal prosecutors and regulators have failed to punish the wrongdoers. In fact, government officials have been relatively successful in obtaining liability and retribution for white-collar and corporate crime. It is, instead, that this ex post approach to investigating and rooting out corporate crime fails to serve the U.S. economy best. Additionally, by failing to constantly monitor, prevent, and prosecute corporate crime, federal regulators and prosecutors only exacerbate the economic circumstances once the crimes of the global financial and corporate institutions are revealed—which usually occurs during the depth of the recession or during the recovery period.

This approach to corporate crime can be traced to Attorney General Eric Holder’s 1999 Department of Justice memo, widely viewed as paving the way for the “Too Big to Jail” approach to prosecuting corporations. AG Holder argued in this memo, when he was Deputy Attorney General, that, when deciding whether to seek charges against a corporation, federal prosecutors should consider the collateral economic consequences. The consideration of the consequences to the economy at large, however, loses viability when public outrage boils during economic crises caused by the criminal activities of those same corporations now under investigation. Therefore, federal prosecutors face immense public pressure and must pursue litigation against financial and corporate institutions, still struggling to recover from the aftermath of a global recession. Thus, ironically, although federal prosecutors attempt to avoid negative economic collateral consequences by approving a lenient oversight approach to corporate misdeeds during boom years, as evidenced by the Holder memo, they are then left pursuing criminal liability against corporations when the viability economy and those corporations is most sensitive. This ex post approach to government oversight results in severe unintended consequences not considered by the Holder memo.

We seem to believe that the LIBOR and FX rate rigging conspiracies, the pervasive insider trading scandals, and Ponzi schemes of the past several years, which have surfaced since the economic crisis of 2008, were the residual fraudulent activities pervasive in financial markets that contributed to the recession. But this belief is misplaced. The criminal and fraudulent behaviors prevalent in these examples are always pervasive and, moreover, commonplace within financial and economic markets, yet only become public once an economic crisis reinvigorates regulators and prosecutors to seek liability and retribution. Essentially, federal regulators and prosecutors on duty repeatedly failed “in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves.” Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report xvii (2011). Corporate crime is not cyclical, however; why should corporate criminal prosecutions?

SEC’s Second Circuit Amicus Brief Argues Dodd-Frank Covers Insider Whistleblowers

Tuesday, May 5th, 2015

In Berman v. Neo@Ogilvy, the Second Circuit must decide whether a person whose employer retaliates against him for internal whistleblowing before that person brings any information to the SEC is entitled to protections under the Dodd-Frank Act. As an interested party, the SEC has filed an amicus brief with the Second Circuit, urging the court to adopt plaintiff’s contention that the SEC’s rule protecting insider whistleblowers is entitled to Chevron deference

Facts and Background

In 2014, Daniel Berman reported to his superiors at NEO@Ogilvy several transactions that he suspected ran afoul of the Sarbanes-Oxley, Dodd-Frank, and other securities laws. Vitally, Berman did not report any of these suspected violations to the SEC before NEO@Ogilvy took action against him. On January 28, 2014, plaintiff petitioner Daniel Berman filed a civil action against his former employer, NEO@Ogilvy LLC for allegedly wrongfully terminating him in violation of the Dodd-Frank Act’s whistleblower protections. At issue in this case is whether Berman can be considered a whistleblower under Dodd-Frank—and become entitled to the Act’s protections—even though the alleged retaliatory act took place before he made any report to the SEC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 defines a whistleblower as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” The Act is meant to encourage employees to report possible violations of securities laws to the authorities without fear of retribution. To that end, the Act authorizes the Commission to pay monetary awards to those reporters whose leads contribute to successful law enforcement action. In addition, the Act protects the reporting individual from retaliation.

The SEC asserts that it is important that Dodd-Frank’s protections extend to insider whistleblowers because “the rule helps protect individuals who choose to report potential violations internally in the first instance…[and] if the rule were invalidated, the Commission’s authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened.” The SEC has adopted rules—Exchange Act Rule 21F-2(b)(1), 17 C.F.R. §240.21F- 2(b)(1), codified at 17 C.F.R. §240.21F—that allow for initial internal whistleblower reporting. Under Chevron v. NRDC, administrative agencies are typically entitled to significant judicial deference to the agency’s own interpretation of the statute it administers. Critically, the statute’s text must be ambiguous for Chevron deference to apply.

Case Summary

Berman argues that under section (h)(iii) of the Act, “Protections of whistleblowers,” the statute extends protections for disclosures made to those with supervisory authority over the whistleblower. In turn, Berman argues that Dodd-Frank’s general definition of whistleblower must be broad enough to account for this subsection, and thus protections cannot be limited exclusively to SEC reporting. In the very least, Berman argues, this definitional mismatch casts a shadow over the plain meaning of the statute and the SEC’s interpretation is entitled to Chevron deference.

On December 4, 2014, District Judge Gregory H. Woods of the Southern District of New York granted defendant Neo@Ogilvy’s 12(b)(6) motion to dismiss for failure to state a claim. Despite an August 15, 2014 recommendation from Magistrate Judge Sarah Netburn that plaintiff Berman could constitute a Whistleblower under the Dodd-Frank Act, Judge Woods held otherwise. Rather than accept the magistrate judge’s recommendation, Judge Woods gave more weight to the only circuit court to consider whether an insider whistleblower constitutes a whistleblower under Dodd-Frank.

In Asadi v. G.E. Energy (USA), LLC , the Fifth Circuit held that “the plain language of the

Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC.” The court held that there is no definitional problem in the Dodd-Frank whistleblower provisions if the initial whistleblower definition accounts for who is protected, while the section Berman relies on describes only what actions are protected.

As a consequence, Judge Woods held that because plaintiff “did not report any information to the Commission prior to the alleged retaliatory acts,” he was not covered by the Act’s whistleblower provisions. In the Dodd-Frank definition of “whistleblower,” Judge Woods emphasized that the individual in question my provide information “to the Commission.” Thus, Judge Woods held that the text of the statute was unambiguous and therefore there was no ambiguity from which to defer to the SEC’s parsing of the text.


While it is far from clear how the Second Circuit will rule, administrative agencies are typically given significant deference in interpreting and promulgating their own rules. The SEC can argue persuasively that to hold against Berman would eviscerate an important whistleblower protection in clear contravention of the purposes of Dodd-Frank. Ultimately, then, the case turns on how sympathetic the Second Circuit is to Berman’s contention that the text of the statute is ambiguous, and thus does not on its face preclude the SEC’s interpretation. If Berman is able to cast doubt on the clarity of the statute’s text, he will benefit from the court’s Chevron deference to the SEC.

EEOC v. Abercrombie & Fitch: The Supreme Court Looks At Religious Discrimination in the Workplace

Wednesday, April 8th, 2015

What is the scope of an employer’s legal duty to make room for employees with religious beliefs that may conflict with business objectives? The Supreme Court heard oral arguments addressing this issue on Wednesday, February 25, in the case of the EEOC v. Abercrombie & Fitch Stores. This case arose when Abercrombie & Fitch refused to hire a Muslim teenager who was deemed not to fit the company’s “Look Policy” because she wore a black headscarf to her job interview. The retailer describes its “Look Policy” as a “classic East Coast collegiate style of clothing,” which prohibits caps or similar head-coverings.

Title VII of the Civil Rights Act of 1964 and federal employment discrimination law requires that employers must “reasonably accommodate” an employee’s religious beliefs, as long as it does not provide an undue hardship to the business. Arguing that Abercrombie had discriminated against Samantha Elauf because of her religious practice, the federal government, through the Equal Employment Opportunity Commission (EEOC), sued on Elauf’s behalf and won. In granting summary judgment for the plaintiff, the U.S. District Court for the Northern District of Oklahoma found that Abercrombie had engaged in religious discrimination, holding that Abercrombie & Fitch failed to demonstrate that accommodating Elauf would cause undue hardship. But in 2013, the 10th Circuit U.S. Court of Appeals reversed that decision, holding that Elauf is not protected under Title VII of the 1964 Civil Rights Act because she did not explicitly inform her interviewer that she wore her headscarf for religious reasons and would need a religious accommodation.

The narrow issue before the high court then, is whether an employer can be liable for religious discrimination under Title VII only if the applicant or employee gives the employer explicit notice that a religious accommodation is required. Was it Elauf’s sole responsibility to explain that she wore a headscarf because of her faith? Or should Abercrombie, before rejecting Elauf as an employee because of her headscarf, have made its policy clear so that Elauf knew what was required and could ask for an accommodation?


The EEOC argues that employers cannot refuse to hire someone based on their religion or religious practice so long as the employer correctly understands the practice and can accommodate that practice without undue hardship. Job applicants should not be required to explicitly notify the prospective employer about their religious views or practices, especially because in some circumstances the applicant may not even know that their religious practice may conflict with a business policy.


On the other side, Abercrombie & Fitch argues that employers should not have to probe into an applicant’s religious practices. For the employer to make an accommodation, the applicant must inform the employer that a potential conflict may exist in the first place. While Abercrombie & Fitch admits they did not hire Elauf because of her headscarf, they contend that it may not always be clear that a practice stems from religious reasons.


While the oral arguments did not yield a consensus for either side’s proposed rule, many commentators note that a majority seems likely to rule in Elauf’s favor, with several Justices voicing support for a rule that would require the employer to make their business policy clear to the applicant, and ask whether the applicant will be able to comply.


This case is important for several reasons. The question the Court is set to address seems discreet, but its resolution could go a long way in combatting religious discrimination in the workplace. If the Court rules for Elauf, the decision could benefit job applicants from all faiths who need a range of religious accommodations, from those who wear religious clothing to those who need time off for religious holidays. Putting the burden on employers to make their policies clear and to ask whether applicants will be able to comply would prevent employers from quietly but freely rejecting applicants because of their religious practices. At the very least, it would give job applicants knowledge of a potential conflict and an opportunity to ask for an accommodation. If the Court rules for Abercrombie & Fitch, however, the decision could open the door to religious stereotyping and could be immensely harmful to diversity in the workforce. Even if an employer is nearly certain that an applicant’s appearance or practice stems from his or her faith, the employer will have no obligation to inquire further and may freely reject the applicant on that basis. No matter how the Court decides the case, its decision is likely to alter the balance between religious rights and employer responsibility.

Workplace religious discrimination claims have been on the rise. In the initial months following the attacks of September 11, 2001, the EEOC reported a 250% increase in religious discrimination complaints involving Muslims. By 2010, the total number of religion-based EEOC claims nearly doubled. Samantha Elauf’s case is also not the first time Abercrombie & Fitch has been sued for religious discrimination in cases involving Muslim employees or applicants. In two other similar cases, a district court ruled that the retailer had engaged in religious discrimination and rejected its undue hardship defense. While in the past courts have generally deferred to employers’ interests over religious employees or applicants in religious accommodation cases, these cases demonstrate that the trend may be being reversed. Although Elauf’s case has not rendered a victory for employees as of yet, it may be wise for employers to review their policies and procedures for addressing religious diversity in the workplace to avoid costly consequences.

FCPA Violations in the Hiring Process

Wednesday, April 8th, 2015

The Foreign Corrupt Practices Act (FCPA) prohibits U.S. based or U.S.-listed companies from providing, with corrupt intent, money or other items of value to foreign officials in order to generate business. Essentially, the act bars companies or representatives of companies from bribing officials in order to gain a business advantage. Recent regulatory investigations and enforcement actions reveal that hiring practices have come under greater FCPA scrutiny. But what qualifies as something of value? Would the hiring of the relative of a foreign official qualify as something of value to the foreign official herself?

Banks are facing investigations regarding these very questions. In its recent Form 8-K filing with the SEC, The Bank of New York Mellon disclosed that the bank is facing enforcement action by the SEC over allegations of FCPA violations in the hiring of interns related to sovereign wealth fund officials. Last year, the Wall Street Journal reported that the SEC sent letters to Credit Suisse Group, Goldman Sachs, Morgan Stanley, Citigroup and UBS seeking information about their hiring practices in Asia. In 2013, the SEC investigated J.P. Morgan Chase’s Asian hiring program, called “Sons and Daughters”, for potential FCPA violations. Emails related to the J.P. Morgan investigation refer to the “existing and potential business opportunities” that would result from hiring the offspring of powerful officials. Given the SEC’s recent scrutiny of the hiring practices of these banks, it is important to look to legal precedent and guidance provided by regulators to clarify under which circumstances it is legal to employ the relative of a foreign official and under which circumstances the hiring constitutes a violation of the FCPA.

Where the employment relationship is simply for the appearance of legitimacy and only based on illicit reasons, the law is clear. In SEC v. Tyson Foods, the SEC accused Tyson de Mexico, a subsidiary of the American poultry company, of making illegal payments to government officials between 2004 and 2006. The alleged payments were made to the wives of Mexican officials who were responsible for certifying Tyson de Mexico’s poultry products for exported sale. The company concealed these payments by temporarily putting the officials’ wives on the payroll as staff of the company, though the women performed no services. Ultimately, Tyson Foods, the parent company, was made to pay $4 million dollars to settle a criminal penalty tied to the FCPA violation. Similarly, in United States v. DaimlerChrysler China, Daimler and its Chinese subsidiary, DaimlerChrysler China, were accused of employing the relatives of Chinese government officials in an effort to obtain contracts from state owned companies. In that case, Daimler ‘s consulting agreement with the officials’ relatives were shams and no services were rendered. Daimler settled the suit, admitted the allegations, and paid a penalty.

Cases like Daimler and Tyson are straightforward – they present examples of obviously illicit employment relationships that are likely to be investigated and prosecuted as FCPA violations. What is more difficult to ascertain is the legality of hiring the relative of a foreign official when services will be rendered and the employment is not clearly for illicit purposes. In a formal opinion on procedure released in 1984, the DOJ provides some guidance on best practices by explaining its decision not to prosecute in a similar case. In that case, a company wished to hire a marketing firm in another country. One of the principals of the marketing firm was related to the head of state of the foreign country and was responsible for the management of the head of state’s business affairs and investments. Despite this close relationship between the firm principal and the head of state, the DOJ indicated that this hiring did not merit FCPA enforcement.

To avoid a finding of corrupt intent in the hiring process, the DOJ stressed that key representations and warranties need to be demonstrated. These representations, which were included in the contract between the American company and the marketing firm described in the procedure memo, included that (i) the marketing firm would not pay anything of value on the American company’s behalf to any public official and that the contract with the American company would cease if such a thing happened, (ii) the marketing firm will assume all costs and expenses incurred in connection with representation of the American company unless expressly stated otherwise in writing, and (iii) if required, the marketing firm would provide full disclosure to the U.S. government of its identity and the amount of commission in the contract. Also crucial to the DOJ’s non-enforcement decision was the representation from the American company that it had considered several, objective factors in selecting the marketing firm. The combination of contractual warranties protecting against improper conduct and representations explaining objective factors that influenced the hiring decision appear to be the key to ensuring FCPA compliance in cases involving the employment of relatives of foreign officials.

The last decade has marked an increase in FCPA enforcement activity. The SEC’s shift to a “broken windows” strategy of regulatory enforcement means that all suspected violations, large and small, are investigated. As such, it becomes even more crucial that companies develop compliance programs that account for the possibility of FCPA violations on the basis of the hiring process. Objective hiring standards, due diligence into the relations of foreign employees, and contractual representations are necessary to avoid costly violations

Funding the President’s Middle-Class Relief Plan: Is the ‘Bank Tax’ a Good Idea?  

Tuesday, April 7th, 2015

In his most recent State of the Union Address, President Obama unveiled a series of reforms designed to mitigate the effects of middle-class wage stagnation. The President’s proposal would offer short-term assistance in the form of tax breaks to middle-income earners, and credits for childcare and education. Equally significant in the President’s plan is a strategy for long-term relief, offering qualifying Americans access to free community college. The component elements of President Obama’s plan are fairly uncontroversial, with many receiving past support from Members of Congress on both sides of the aisle. The question that is then raised, is, how do we pay for the President’s proposal?

The White House has released a series of potential reforms that would allow the government to raise sufficient revenue to fund the President’s plan. Primarily, high-income earners would see an increase in tax rates on capital gains and dividends, as well as the eradication of the “stepped-up” basis loophole. Arguably the most controversial of the President’s revenue sources, however, is a new tax on financial institutions with more than $50 billion in assets. The White House proposal would specifically apply a fee of 7 hundredths of a percent on the liabilities of financial firms meeting the requisite $50 billion threshold. Despite support from several key officials to bolster taxes on financial institutions, the plan’s release sparked widespread criticism from politicians and industry experts, arguing for alternative means of raising revenue.


Arguments For the Financial Institutions Tax

In addition to raising revenue for a worthy cause, the White House and its allies advocate taxing the liabilities of qualifying financial institutions for a number of reasons. First, imposing a tax on liabilities would discourage excessive borrowing by financial institutions, thereby mitigating risk to the broader economy. The White House argues that over-leveraging by financial institutions was a key contributor to the 2008 recession, and measures must be taken to prevent similar crises in the future. Second, large financial institutions are sufficiently profitable that enough tax revenue could be raised without looking to other sources. JPMorgan Chase, alone, could produce hundreds of millions of dollars in tax revenue for the U.S. government to fund a middle-class relief program.


Arguments Against the Financial Institutions Tax

Opponents of the White House plan argue that taxing financial firms’ liabilities could have a number of negative associated implications for the financial industry and economy-at-large. First, incentivizing financial institutions to take on less debt could reduce the capacity of these firms to issue loans, ultimately increasing the cost of capital. Opponents contend that this could perpetuate formidable barriers for everyday Americans hoping to obtain loans for homes or businesses. Second, provisions codified in Dodd-Frank already require banks to hold a substantial amount of liquid assets that can be sold if another financial crisis were to occur. Therefore, regulations that encourage these institutions to deleverage are unnecessary for stabilization purposes. Third, opponents argue that the tax is not confined to large “Too Big to Fail Banks” like previous policies, but rather extends to a variety of smaller financial institutions who may be substantially affected by higher costs. Specifically, the President’s proposal envelops banks, asset-managers, exchanges, insurance companies, broker-dealers, specialty finance corporations, financial departments of nonfinancial corporations, and American subsidiaries of foreign firms. In addition to casting a wide net, the proposed tax goes deep into each category, affecting smaller regional institutions as well.


Policy Alternatives

Following the release of the President’s plan and its ensuing debate, a number of commentators proposed alternative reforms, drawing ideas from both the White House and its opponents. In their article, Vasquez and Bautista argue that the tax’s $50 billion benchmark should be raised to $100 billion in order to spare relatively small financial institutions from annual regulatory costs totaling millions of dollars. The authors further claim that the flat 0.07% tax on liabilities is regressive and disproportionality harms smaller regional banks. Instead, the tax should be graduated to promote fairness while incentivizing the largest financial institutions to break up into smaller entities, thereby mitigating systemic risk. Furthermore, a graduated tax (assuming that the lowest bracket would be lower than 0.07%) would more strongly encourage banks to grow and cross into the tax threshold.

In their op-ed in the Wall Street Journal, Roe and Tröge implicitly echo President Obama’s call for reducing risk in the financial industry while conceding the negative implications associated with taxing liabilities. The two authors propose an innovative middle-ground solution, where instead of taxing debt, equity is made more attractive to financial institutions. Specifically, the cost of equity could be made tax-deductible (as debt is today) in order to discourage overly aggressive debt financing. Roe and Tröge argue that the deductibility of debt could be reduced to make the change tax-neutral. The authors’ proposal is certainly an interesting one, and would seemingly promote the ancillary goals of the President’s plan to mitigate systemic risk. However, Roe and Tröge’s plan is nonetheless revenue neutral, and would not raise the necessary money to fund the President’s middle class relief package. The deductibility of debt would have to be even further reduced in order to raise the requisite tax revenue.



The President’s proposal, while unlikely to pass Congress in its current form due to the present political climate, offers compelling arguments as to why taxing the liabilities of financial institutions constitutes a prudent source of revenue. However, opponents of the plan also make valid claims as to why the President’s plan may actually generate unanticipated consequences for the American economy. The ensuing debate spurred the publication of numerous innovative policy alternatives that seem to bridge the gap between the two schools. It will be interesting to see how politically viable these alternatives are in the near future.



What’s Future is Prologue: How Anticipating Policy Shifts in Fiduciary Duty Analyses Helps and Harms the Environmentalist Movement

Tuesday, April 7th, 2015

Is a pension fund manager’s choice to invest in coal mines, oil companies, and old power plants so financially unwise as to constitute a breach of fiduciary duty to the pensioners? This is the novel theory that the Asset Owners Disclosure Project [AODP], an organization formed to “protect members’ retirement savings from the risks posed by climate change[,]” hopes to employ in a planned lawsuit against thousands of pension funds. Having identified funds that are heavily invested in “high-carbon assets” through its Global Climate Index, AODP aims to pressure these funds through a class action suit to divest from their less ‘sustainable’ holdings. The most legally interesting aspect of AODP’s claim is that it would assert a breach of fiduciary duty not only because such fund trustees failed to account for losses in holdings’ profitability caused “directly by climate change phenomena such as rising sea levels,” but also because these trustees failed to account for future “regulation to contain those effects.” That is, fund managers would be liable both for their inability to predict market-based shifts, e.g., consumers purchasing solar panels for their homes or switching to high-efficiency appliances, and for their inability to predict policy-based shifts, e.g., the introduction of federal cap and trade legislation for carbon emissions.

While the former inability is a traditional basis for pension plan fiduciary liability, the latter is unprecedented. This post argues, first, that AODP’s fiduciary duty argument is empirically shaky even when only market-based shifts are considered, and, second, that even if AODP is correct that government regulation of carbon emissions is so inevitable as to entail liability when not acknowledged, a court’s consideration of this factor in a breach of fiduciary duty calculus may set an unsavory precedent: the monetization of environmentalist policy goals through a proliferation of similar fiduciary duty claims risks the under-inclusion of unprofitable but necessary environmental policy shifts and the over-inclusion of profitable but environmentally harmful policies.

AODP’s central premise, that companies dependent on emitting carbon to be profitable are bad long-term investments in which no fund trustee could responsibly invest, is a point of fierce contention amongst financial experts. While asset management firms such as Aperio Group and NorthStar have published reports showing that divesting from fossil fuel holdings has no or positive impacts on fund returns, a more recent study (although a study funded by the Independent Petroleum Association of America) from Professor Daniel R. Fischel of the University of Chicago Law School argues that such divestment reduces returns on investment by 0.7% each year for a projected 50-year period. As Fischel points out, management fees for mutual funds that adhere to environmentalist goals are on average significantly higher than funds not so conscientiously bound. Fischel’s critics have responded, or rather tweeted, that his study improperly uses past industry performance to model future performance without considering current upheavals in the energy industry as a whole, “cherry-picks” data, and assumes unjustifiably that management fees for ‘green’ funds will not decrease over time as more such funds enter the market and produce economies of scale and common pools of expertise. But presently, no full study countering Fischel’s findings has been published.

Thus AODP’s central premise might meet the same fate as the analogous argument born from Citizens United v. Federal Election Commission, whereby those opposed to corporate political spending, a sizeable majority of the population and thereby a sizable majority of corporate shareholders, argued that without specific shareholder approval of each political expenditure, corporate managers would be breaching a fiduciary duty to shareholders insofar as these expenditures were assumed to be unprofitable in the long term. However, an enormous and comprehensive aggregation of studies on the actual ‘return on investment’ of corporate political spending, in terms of the tangible benefits that flowed to the company as a result of subsequently passed favorable legislation, showed that such ‘speech’ was in fact on average a beneficial use of the corporation’s finances. It seems that even though a large proportion of stockholders initially thought that corporate political spending was inefficient and thus grounds for a breach of fiduciary duty claim, the empirical data does not support that popular assumption. Likewise, while we as financial laypeople may assume that fossil fuel companies will of course be less profitable in a future of oil and coal scarcity and regulation, the empirical data need not, again, necessarily align with these assumptions. Overall, we have perhaps found reason to be wary of conclusive financial predictions regarding systemic practices within or impacts to complex, dynamic industries.

The precedent of courts considering the likelihood and effects of future legislation on investment strategies risks acting as a double-edged sword for environmentalist groups: while certain goals would doubtless become more easily obtainable through the monetizing ‘lens’ of fiduciary duty claims, others would become that much further out of reach politically if they could not be justified economically. Put another way, when all you have is the hammer of fiduciary duty, all policies start to look like long-term investment nails. This concern finds grounding in the work of Professor Margaret Jane Radin of the University of Michigan Law School, who writes broadly about the potential consequences of monetizing hitherto unmonetized interactions, such as prostitution and the market for newborns. Applying Radin’s method of delineating likely social norm upheavals and ethical consequences resulting from monetization to the situation at hand, we may be able to identify the benefits and detriments of an increase in fiduciary duty environmental litigation.

Consider two contrasting hypotheticals involving prominent environmental goals. First, we have the movement to reduce our reliance on coal-fired power plants. While the short-term consequences of mass divestment from these plants would likely entail widespread unemployment form shuttered coal mines and plants, long-term energy industry restructuring into differently-fired or otherwise green plants would likely offset the losses and lead to greater profitability long-term. This calculus thus justifies divestment from a fiduciary duty standpoint. But consider the movement to save small island nations such as the Maldives from rising sea levels. Whereas most nations would survive in some form through international action to constrain global temperature increases to two and a half degrees centigrade, the Maldives need to constrain such increases to one and a half degrees to avoid complete submersion. But it is possible that, from a broad perspective, it is ‘efficient’ to let the Maldives drown to allow the rest of the worlds’ economies to prosper relatively by only reducing emissions to the two degrees level. Thus, saving the Maldives may not be justified under a fiduciary duty standpoint. This harsh result may give environmentalists pause when considering endorsing vigorous litigation under the fiduciary duty theory.

To conclude, it seems that a fiduciary duty theory of fossil fuel divestment is likely empirically weak due to the Citizens United-esque problem of attempting to derive singular, one-sided conclusions out of immensely complex systems. Further, the theory may be harmful to other environmental goals in its broader operation on the way societies would over time come to re-envision ‘good’ environmental ends, i.e., as monetized environmental ends. Unfortunately, those ‘better’ or ‘best’ paths to addressing climate change may not come without economic sacrifices or financial pain.

Want to Disappear? For Now, Just Go to Europe.

Tuesday, April 7th, 2015

We live in a world that is increasingly driven by data. Minute Men on Wall Street trade on data just seconds before the rest of the market and are able to capture millions of dollars off penny spreads. Social media networks expose private details to the bored, the curious, and the interviewers alike. A security breach at a major health insurer can mean over eight million victims of identity theft. As yet, the legal market in the United States has yet to set determinate confines for how precious, personal data may be collected, stored, purchased, and mined.

Mega-retail providers like PepsiCo and Wal-Mart have integrated neuromarketing and data mining analytics into their core business models. By mining over thirty petabytes of consumer data, these companies are able to target new demand spaces and, most lucratively, pregnant women (note: one petabyte = twenty million four-drawer filing cabinets filled with text). As both consumers and producers in the information market, retail stores not only purchase data feeds from third parties, but they also compile their own repository of information from consumer spending and shopping habits. As conceded by a Target statistician: “If you use a credit card or a coupon, or fill out a survey, or mail in a refund, or call the customer help line, or open an e-mail we’ve sent you or visit our Web site, we’ll record it… We want to know everything we can.” Retailers use purchasing patterns and personal information to predict future purchasing behaviors of their customer or to suggest other goods they feel those customer might also like. For example, retailors can determine the likelihood that a specific customer will open an email coupon and make an online purchase compared to the chances if that same customer received a paper version of the coupon in the mail. Stores can also learn from a customer’s spending habits whether he or she is moving to college soon and will need to purchase dorm supplies, or is planning on purchasing a new home. Armed with these sorts of clues, retailors can then target consumers with personalized ads and coupons. By luring in shoppers with personalized bait, these stores, like the Minute Men of Wall Street, are able to capture millions of dollars in sales.

Retailers contend that using data in this way helps create a more personalized experience for their customers. By way of example, rather than showering a new mother with coupons for lawn mowers, Target can present her with the baby diaper and formula coupons that she really needs, in the form of communication that she is most likely to read. On the other hand, suspicious consumers protest that targeted advertisements represent a trend towards an Orwellian society where Big Brother knows and directs our individual spending habits. The same consumers that hunt for good deals also value their autonomy and feel threatened by what they feel are coercive marketing schemes forcing them to spend their money. As a result, companies often embed personalized ads amid random product offerings, so that consumers do not suspect they are being tracked; thus the new mother will still receive lawnmower coupons, even if her local retailor is well aware that she is not in the market for gardening tools. But while mining data analytics might offend consumers, these marketing efforts are totally legal. “We are very conservative about compliance with all privacy laws. But even if you’re following the law, you can do things where people get queasy.” The same Target statistician admits that even while working within the confines of U.S. privacy laws, there is a yet wide berth for retailers to harvest and purchase private information about their customers.

Another massive channel through which data is being collected is, unsurprisingly, through the Internet. Websites are able to track user demographics, income, social networks, health, finances, and much more. Laws regarding data usage are much more progressive in Europe than in the United States. In May 2014, the European Court of Justice ruled that, at the behest of an Internet patron, search engines like Google, Yahoo, and Bing must respect le droit à l’oubli (literally translated, “the right to be forgotten”). Similar to adding one’s phone number to telemarketers’ coveted “Do Not Call” list, this proposal affirmed the right of individuals in the EU bloc to prevent their information from being displayed in search engine results. Upon request, search engines were required to remove all personal information regarding the user from their database results. To the consternation of the search engine providers, however, the original announcement from the EU Court of Justice neglected to define the ruling’s geographic scope. Out of either hope or resignation, Google reacted forthwith in complying with the new regulations in all (but only) its European domains. Thus, while cautious users can remove their private information from Google.fr or Google.uk, the very same information may be unearthed on Google.com, even if the website is accessed within the EU borders.

On its voyage across the Atlantic, however, le droit à l’oubli met a hard stop against Silicon Valley companies avowing to protect their empires of data as well as their right to provide that information to others. The most comparable legislation to le droit à l’oubli in the United States was the Do Not Track proposal presented to the Federal Trade Commission in 2007. The proposed program allows users to signal to websites that they would not like their data to be tracked and shared – but the request is not enforceable. As the title of one CNN article, “Do Not Track Proposal is Dead on Arrival,” suggests, the proposal has not proved to be effective. Other consumer privacy laws in the United States are similarly limited for individual users. The Gramm-Leach-Bliley Act, for example, requires that financial institutions disclose their privacy practices to clients, and while it allows customers to opt-out of certain personal disclosures, the disclosures only need to be made annually, and there are broad exceptions to providing the right to opt-out to customers. For example, a financial institution can share non-public personal information with third-party agencies like Mint.com to help market its products, or to other institutions with which it is providing a joint-offering.

As the collection, analysis and commercialization of data continues to grow unconstrained in the United States, the need for further legislation governing its limits is evident. The best way to address the social policy and privacy concerns inherent in the use of data is proactively, defensively, and sooner rather than later, before the practice becomes too pervasive to contain. In the meantime, for those consumers and Internet users who wish to protect their information, the best advice for now may be: move to Europe.