Many non-union employers labor under the impression that the National Labor Relations Act (”Act”) does not apply to them. The decision of Loparex LLC v. NLRB  is a reminder of the Act’s broad reach.  In Loparex, the Seventh Circuit Court of Appeals upheld the National Labor Relations Board’s (”NLRB”) determination that a company violated the National Labor Relations Act (”Act”) by restricting union organizing activity at the workplace when it took the following actions: (i) after union supporters posted material on company bulletin boards, the company issued a policy that required employees to obtain approval before placing any material on the boards; (ii) stopping employees from distributing pro-union flyers in the company’s parking lot; (iii) informing employees that passing out union buttons on work premises violated company’s policy; (iv) informing all of the shift leaders that they qualified as supervisors under the Act and that therefore, they were prohibited from participating in union activities; and (v) discouraging employees from talking about any union organizing activities during working hours.  Loparex LLC v. NLRB, Case Nos. 09-2187, 09-2289, 2009 U.S. App. LEXIS 28754 (7th Cir. Dec. 31, 2009).  

Loparex is a reminder that non-union employees may commit unfair labor practices under the Act if their human resource policies discriminate against union activities.  Employers’ handbooks must be neutrally drafted and neutrally applied.  If they are tilted against union activity, an employer risks the result which occurred in Loparex.

A bold new era began on January 1st for estate planning attorneys and their clients.  Despite December efforts in Congress to pass legislation amending the estate tax to either permanently reform the system or provide a short term patch, the Senate failed to agree on and pass any legislation regarding the estate tax whatever.  Consequently, on January 1st, the post-2009 provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) are in effect, and for the first time since 1915, our country has no estate tax.  What does this mean?    

For starters, here is what we do know.  First, effective January 1, 2010, under current law, the federal estate tax is repealed for any person dying on or after 12:01 a.m., on that day, or any time in the next twelve months.  In theory, this means that any amount can be transferred to beneficiaries at death as long as death occurs in 2010.     

Second, the federal generation-skipping transfer tax (GSTT) also is repealed for one year, effective the same day.  So it should make no difference whether inherited wealth is left to children, grandchildren, great-children, great-nieces or nephews, etc.  The law will no longer penalize those who die and by will or trust provisions effective at death skip one or more generations and benefit younger family members, either by direct outright bequests or by creating long-term trusts.    

Third, the federal gift tax is NOT repealed.  The lifetime gift tax exemption will continue to be limited to $1 million, but the top gift tax rate will drop from 45 to 35%.  This seems to be an intentional effort by Congress to attempt to limit the amount that wealthy individuals will give away in 2010.    

Fourth, the stepped-up basis rules are repealed for 2010 and replaced with a modified carryover basis regime.  Before 2010, the income tax basis of property received by inheritance was “stepped up” to the fair market value of the property on the day the decedent died.  Under the new rule, the basis of property acquired from a decedent is the lesser of the decedent’s adjusted basis or the fair market value of the property on the date of the decedent’s death, whichever is lower.  There will be two exceptions to the new rule:  (1) the executor under a decedent’s will can allocate up to $1.3 million to increase the basis of assets received from the decedent; and (2) the executor also will be able to increase the basis of additional assets passing to the surviving spouse, either by outright bequest or in a particular type of trust for the benefit of the spouse (QTIP trust).  Remember that the $1.3 and $3 million amounts refer NOT to asset values, but to the amount of permitted basis increase that can be allocated.     

The effect of carryover basis is an income tax increase for wealthier families.  The rules for allocation will be complicated, and we will deal with that process in a separate article.  The bottom line to remember here is that identifying and preserving tax basis records will become extraordinarily important.  For the first time in recent memory, a beneficiary may have to substantiate the decedent’s basis in inherited property.    

Under the current law, all of these changes are scheduled to come to an end on January 1, 2011.  Effective on that date, under the “sunset provisions” of EGTRRA, the federal estate and generation-skipping transfer taxes both come back into existence with exemptions of only $1 million and a 55% top tax rate (with an additional 5% surtax for some large estates).  The federal gift tax continues with the same $1 million exemption and a 55% top rate, meaning all three taxes (estate, GSTT and gift) are again united.  Carryover basis is repealed and the stepped-up basis is reinstated.    

So what does this all mean and what should our clients be doing? No one expected the scheduled estate tax repeal to occur. As late as December 1st and after, commentators in the legal world and Washington fully expected Congress to pass either permanent estate tax reform or a temporary patch extending the 2009 exemptions and rates through at least part of 2010 to give Washington time to wade through health care reform and properly deliberate regarding the numerous issues involved with the estate tax.  Consequently, there is ”massive confusion” (in the words of Senate Finance Committee Chairman, Max Baucus) regarding what Congress will ultimately do and the best course of action for estate planning clients now that the unthinkable repeal has occurred.    

Basically, in 2010, one of four things will occur:  (1)  Congress will act to reenact the estate tax (and GSTT), retroactive to January 1st.  This would seem to be the most likely scenario, but it may be very difficult for Congress to pull together the necessary votes.  Neither Republicans nor Democrats will  relish the thought of restoring an unpopular tax in an election year.  Also, if the tax is reenacted retroactively, there are certain to be constitutional challenges.  The Chief Tax Counsel to the House Ways and Means Committee, John Buckley, has announced his opinion that reenacting the estate tax and GSTT retroactively would be unconstitutional.  (2) Congress will reenact both taxes in 2010, but will not attempt to make them retroactive.  This likely will depend upon how early in the year the matter can be brought to a successful vote.  Action in the first couple months almost certainly will date back to January 1st, whereas if the estate tax becomes a political football and action is delayed until late in the year, the possibility of a retroactive application decreases.   (3)  Congress will take no action, allowing the repeal to stand for 2010, with a return to the prohibitive tax rates and low exemptions scheduled as part of EGTRRA for 2011.  (4) Congress will not succeed in reenacting the estate tax and GSTT for 2010, but will act shortly to repeal carryover basis and restore the stepped-up basis.     

What should our clients be doing now?  First and foremost, do not lose sleep over the estate tax situation.  We are monitoring the commentators and Washington sources very closely and will keep you informed.  If you are worried about your specific situation, do not hesitate to contact one of us to discuss your concerns.     

Second, we will be looking very closely at the unique planning opportunities that may be presentedby the temporary absence of the estate tax and GSTT and will be happy to make specific recommendations.  Depending on the likelihood of retroactive reenactment of the tax (which may or may not become easier to predict in the next couple weeks), this may be the ideal time to pursue aggressive gifting with payment of some gift tax at the reduced rate, use of discounts, and creation of grantor-retained annuity trusts (GRATs) and similar devices to take advantage of  the current law.  At the same time, we will advocate caution to ensure that a return of the tax does not cause undesirable consequences for transactions carried out early in the year.  We also will be reporting to you on how the federal law changes impact the Illinois estate tax (as well as other states’ estate taxes) and similar issues that may affect your planning.    

Third, regarding traditional estate planning, we are incorporating alternative language in our estate planning documents designed to provide the best tax consequences no matter whether the estate tax and/or carryover basis does or does not exist at the time of death.  For clients who already have documents in place, remember that we have been using “trust protector” provisions (providing for amendment of the document even after death by a third party) for a number of years.  The trust protector concept is specifically designed to protect and implement a client’s wishes regarding disposition of their assets even in the event of tax law or other changes that may unfavorably impact the planning a client put in place before death or mental disability made amendment by the client impractical. For the short-term, the trust protector provision could be implemented as needed if a client were to die with older out-dated planning in place. In the case of a decedent whose documents did not include a trust protector provision, a proceeding could be brought in state court to amend or “reform” the document.    

Finally, we will be contacting you at an appropriate time to suggest a meeting, as periodic updating of your estate plan is always a good idea, even in times not as tumultuous as these.  But do not hesitate to pick up the phone or send an e-mail to us at any time that you have thoughts or concerns that you would like us to address immediately. Your peace of mind is always our ultimate goal.  Have a happy and prosperous 2010 and stay tuned!

After a three-day bench trial in Nashville, Tennessee, U.S. District Court Judge John T. Nixon found in favor of a female African-American plaintiff on her race and sex harassment claims and entered a judgment of $1,073,261.00 against her former employer, Whirlpool Corporation.  EEOC v. Freeman, Case No. 3:06-0593, 2009 U.S. Dist. LEXIS 118624 (M.D. Tenn. Dec. 21, 2009).   This case is a useful reminder that Title VII plaintiffs may be entitled to not only back pay but substantial front pay awards as well.  

In this case, Judge Nixon determined that as a result of the ongoing harassment, Plaintiff “suffer[ed] from chronic posttraumatic stress disorder rendering her unable to work.” Plaintiff’s expert witness, Dr. Mark Cohen, testified that, adjusted for present day value, Plaintiff experienced a range of wage loss between $415,772.00 (through age 57.6) and $623,541.00 (through social security retirement age).  In all, Dr. Cohen calculated Plaintiff’s net loss in earning capacity to be $773,261.00 to age 67.  Dr. Cohen’s testimony proved persuasive because this was the exact amount of Judge Nixon’s back pay and front pay award.  The remaining $300,000.00 of the award was for Plaintiff’s non-pecuniary losses, i.e., emotional injuries.   This amount was the statutory maximum that any Title VII plaintiff could recover for their compensatory and/or punitive damages.  See 42 U.S.C. § 1981(b)(3). 

Interestingly, the last sentence of Plaintiff’s post-trial brief read as follows: “Defendant’s Fourth-Quarter 2008 net earnings were $44 million dollars, and Defendant expects to generate free cash flow between $300 and $400 million in 2009.”  While the facts of the case were certainly egregious, Whirlpool’s size and financial earnings may also have played a role in the judge’s decision to generously compensate the Plaintiff with a high front pay award.

Stuck in between the investigation phase and the litigation phase, conciliation of a discrimination charge pending before the EEOC is akin to a middle child - often overlooked - but just as important as the other children.  The recent decision in EEOC v. Supervalu, Inc., 2009 U.S. Dist. LEXIS 116718 (Dec. 15, 2009)  demonstrates that conciliation should be given the same rigorous attention that defense counsel give to the investigation and ensuing litigation of an EEOC charge.  Further, if an employer is going to allege that the EEOC failed to conciliate in good faith, that employer must be ready to prove that it approached the conciliation process with a seriousness and good faith that was lacking from the EEOC.

           In Supervalu, Inc. the EEOC brought suit against Supervalu and Jewel-Osco alleging that they failed to provide their employee, Patricia Shied, with a reasonable accommodation in violation of the Title I of the Americans with Disabilities Act of 1990 (”ADA”), 42 U.S.C. § 12101 et seq. and Title I of the Civil Rights Act of 1991, 42 U.S.C. § 1981a.  Before any substantive issues were decided in the case, Supervalu and Jewel-Osco filed a Motion to Dismiss under the Federal Rules of Civil Procedure  on the grounds that the EEOC failed to make a sufficient effort to resolve the parties dispute through informal conciliatory means prior to filing suit.  The EEOC must attempt conciliation with employers when it finds reasonable cause to believe that the have engaged in discrimination under the ADA,  the ADEA,  and Title VII.  See 42 U.S.C. § 200e-5(b).

            U.S. District Judge Elaine E. Bucklo  rejected Supervalu’s argument that the EEOC failed to conciliate in good faith.  In particular, she identified three deficiencies with Supervalu’s position.  First, Judge Bucklo noted that the record before her was factually inadequate so there was no way she could determine whether the EEOC made a good faith effort to conciliate or not.  Second, based on the scant record before her, Judge Bucklo noted that the EEOC invited Supervalu to submit a settlement offer on December 13, 2007, yet Supervalu did not respond to this invitation until nearly two years later on March 17, 2009.

             Finally, Judge Bucklo held that the EEOC was entitled to conclude that further conciliation efforts would be futile since Supervalu’s settlement offer was $10,000 with no equitable relief.  In closing, Judge Bucklo stated: 

Under these circumstances, I cannot say that the EEOC failed to carry out its obligation to engage in good-faith conciliation efforts.  The EEOC invited the defendants to engage in the conciliation process.  However, the defendants responded long after the deadline indicated by the Commission.  And when the defendants finally did respond, their offer was underwhelming.

The takeaway from the Supervalu decision is clear.  If an employer is going to make the argument that the EEOC did not approach conciliation in good faith, it must present the court with: 1) a complete record, 2) evidence that the employer timely responded to the EEOC’s invitation to conciliate, and 3) evidence that any settlement offer made by the employer accounts for non-monetary or “equitable” forms of relief along with monetary relief.  Put another way, before an employer seeks to dismiss or stay a federal case based on the EEOC’s failure to conciliate in good faith, that employer better be able to prove that it approached the process in good faith.

Congress and the President brought a little bit of holiday cheer to unemployed Americans struggling to pay for health insurance.  As predicted by this blog in February, President Obama signed the Department of Defense Appropriations Act of 2010 yesterday which extends the federal COBRA health coverage subsidy for involuntarily terminated employees an additional 6 months.  Readers will recall that the COBRA subsidy allows laid off employees to continue their employer’s group health insurance provided they pay 35% of the monthly premium instead of the 102% that many employees had to pay in the past.

Now, employees involuntarily terminated from their employment will have the COBRA subsidy available to them for up to 15 months.  For example, if an individual was  laid off on July 15, 2009 with their health coverage ending on July 31^st, this individual is eligible for a COBRA subsidy from the period of August 2009 through October 31, 2010.

Under the new legislation, employees who experience a “qualifying event” up through February 28, 2010 will be eligible for the 15 month COBRA subsidy.  Further, the new legislation requires employers to notify former employees who were eligible for the COBRA subsidy on or after October 31, 2009, that they may continue to pay for their health insurance at subsidized rates for up to 15 months,  and that they may reinstate their COBRA coverage if they had stopped paying their COBRA premiums after their subsidy expired.

Putting aside the cost, the COBRA subsidy has been an unqualified success.  According to Hewitt & Associates,  only 19% of eligible employees made use of their COBRA rights before the ARRA.  Now, that figure rests at 38%.   Finally, we expect the Department of Labor and the IRS to have model notices ready for employers before the end of the year.

The Wall Street Journal reports that Exxon-Mobil’s recent $31 billion purchase of natural gas exploration firm XTO Energy confirms a recovery of merger and acquisition activity over the past 2 months. It reports that November and December had the most M&A activity since the summer of 2008, with values 4 times greater than a year ago. Also leading this charge were Warren Buffet’s largest ever $26 billion investment in the railroad industry, and the $4.6 billion merger of Stanley Works and Black & Decker. November alone saw the announcement of 41 U.S. deals worth a combined total of approximately $47.5 billion, benefiting mostly large Wall Street banks and boutique financial firms. Sources within the chemical industry also expect a 2010 rally in the number of deals.

Many experts believe these increases in M&A activity signal good news for the health of the broader economy in 2010. Indeed, the recent surge seems to be the result of increased access to capital markets, the stagnation of which has been cited repeatedly as the cause of the continued lagging of a broader recovery. Accompanying these positive indicators are the apparent stabilizing of economies world-wide, financing becoming more available in the broader spectrum, and the narrowing of the gap in price expectations between buyers and sellers. Consistently, a large regional bank representative recently said at a lunch meeting that their bankers have been directed to increase lending dramatically in 2010 as underwriters loosen standards for loan approval.

Until recently, any positive indicators of recovery always have seemed to accompany at least as many negative ones. As 2009 ends, however, the negative indicators appear to be waning strongly in favor of the positive. Also, while many experts claim, perhaps too definitively, that this recession is over, others hinge their disagreement mostly on lagging unemployment data. Yet unemployment typically is the last area to improve after a recession as companies tend to wait until they clearly are understaffed before resuming hiring. Moreover, early 2010 should provide great opportunities for companies to contact their previously obstinate bankers again to seek (or refinance) lines of credit and other financing.

Illinois may not get a resolution any time soon to whether an employer is required to prove that a non-compete covenant must support a recognized, legitimate business interest. By now, lawyers and commentators are fully aware of the Fourth District’s ruling in Sunbelt Rentals, Inc. v. Ehlers and its repudiation of a decades-long test used to determine the validity of non-competes. Though that test had a somewhat bizarre development, courts throughout Illinois recognized it.

Applying the test in practice perversely has made litigation more expensive for employees, as cases frequently devolved into lengthy discovery disputes over the so-called protectable interest and whether it was threatened. Often times the concept of “reasonableness” gets lost in the shuffle. Still, many employers lost cases after failing to prove a legitimate business interest was at stake.

But Ehlers settled his case with Sunbelt Rentals, and so there won’t be a decision from the Illinois Supreme Court any time soon on the inter-district conflict. For now, that means that outside of the Fourth District, courts are still applying the legitimate business interest test. District Judge Gettleman recognized as such this week in Aspen Marketing Services v. Russell, when he denied a motion to dismiss a non-compete suit. Gettleman expressly noted the ruling in Sunbelt Rentals and declined to apply it, noting that the Illinois Supreme Court and other Illinois courts outside the Fourth District haven’t weighed in.

On a separate note, the idea of challenging the validity of a non-compete on a motion to dismiss is rarely a good one. Almost invariably, this results in an early loss for the defendant, since the concept of “reasonableness” cannot be examined under the pleadings alone. Unless there is some obvious defect (such as a nationwide covenant when the contract specifies a very limited area of responsibility), lawyers ought not to count on dismissal of a non-compete claim until at least summary judgment.

Stanford Law professor Michael McConnell thinks so.  From today’s Wall Street Journal:  “As part of the hastily enacted and seldom-read legislation establishing the Troubled Asset Relief Program (TARP), Congress authorized the Secretary of the Treasury to “require each TARP recipient to meet appropriate standards for executive compensation.” To carry out this task, last June the Treasury promulgated an emergency “Interim Final Rule,” waiving ordinary requirements for a public comment period.

As part of this emergency rule, Treasury Secretary Timothy Geithner created the office of “Special Master” for compensation, delegated his TARP authority to set compensation standards to this officer, and appointed Mr. Feinberg (a lawyer and mediator) to this position, without obtaining Senate confirmation.

Therein lies the problem. The Appointments clause of the Constitution, Article II, section 2, provides that all “Officers of the United States” must be appointed by the president “by and with the Advice and Consent of the Senate.” This means subject to confirmation, except that “the Congress may by Law vest the Appointment” of “inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

Much is being made of the “US Pay Czar,” Kenneth Feinberg’s, effort to limit executive compensation at firms that have not re-paid TARP funds.  Feinberg plans to force 175 corporate executives to cut their salaries by 90%.

A Wall Street Journal article suggests that Feinberg won’t stop at limiting salaries:

“Mr. Feinberg will also demand a series of corporate governance changes at the firms, including splitting the chairman and CEO positions, requiring boards of directors to create “risk” committees and eliminate staggered board elections, which critics charge inhibit change.”

Feinberg’s pay restrictions will be ineffective in achieving their desired goals.  Many executives who face a 90% pay cut will simply leave their firms.  But further federal intervention into corporate governance is troubling.  Corporate law has been a long been the domain of States.  So any federalization of permissible takeover defenses represents a huge shift in the power toward Washington and away from more local government. 

More importantly, staggered board elections operate as a takeover defense to prevent hostile bidders from acquiring control of the company.  The legality of the anti-takeover measures (such as the staggered board) evolved out of several high-profile Delaware Chancery Court cases in the 1980’s.  Like them or not, anti-takeover defenses yield substantial benefits to shareholders. Indeed, having a staggered board allows managers to negotiate harder and extract a higher price for the shareholder. 

Corporate governance is not likely to improve with the elimination of staggered boards.  Activist shareholders will be better equipped to challenge management - but there is no guaranty that these activist shareholders will yield more stable financial institutions.  Indeed, some acquirers may ratchet up leverage and use the company to take riskier bets in the marketplace than the old management.  As the same time, shareholders (and a nation of 401k holders) will suffer as their shares have a lower total value to potential acquirers.