Publications

THE HOWE & HUTTON REPORT
April 2008 - Volume 2008, Issue 4

PAGE ONE ARTICLE

FAA’S “SAFETY BLITZ” – The Federal Aviation Administration’s so-called “safety blitz” in which the FAA tells an airline that its safety records are not acceptable leading to wholesale cancellations of flights for days at a time, e.g., Southwest’s older 737 aircraft and American Airline’s MD-80 aircraft, seems to have been undertaken without consideration of a less draconian approach. Are travelers better off with thousands of flight cancellations than if the rushed inspections were spread over a longer period? It seems more like bureaucratic politics than a reasoned approach to safety inspections. And more such chaos is predicted to come in the next few months.

TWO MORE INDICATIONS OF CHINA’S ASTONISHING GROWTH – China recently passed Japan is annual auto sales and only lags the U.S. in this statistic. Chinese sales currently are approximately 8 million units compared to the 15-16 million units sold in the U.S., but steadily increasing every year. The number of Chinese Internet users recently surpassed U.S. users, increasing to more than 230 million. With indicators such as these, it should come as no surprise to U.S. companies – and their associations - that China will continue to be a formidable competitor and enticing market opportunity. Recall the tale of riding a tiger – or is it a dragon?

DOMAIN NAME REGISTRATION FEES INCREASE OCTOBER 1, 2008 – VeriSign, Inc. has said that after October 1, 2008 .com and .net domain name registration fees will increase. The .com registration fee will increase to $6.86 from $6.42, and the .net registration fee will increase to $4.23 from $3.85. The increases are in accordance with VeriSign’s agreement with the Internet Corporation for Assigned Names and Numbers. Keep the date and fee increases in mind if you are considering any domain name registration filings later this year.

CALIFORNIA STOPS POSTING SOCIAL SECURITY NUMBERS ONLINE – The California Secretary of State announced her office has shut down online access to records containing individuals’ Social Security numbers and certain other sensitive information due to identity theft concerns until such information is redacted or no longer included in records. And it only took three years to get to this point from disclosure that such information was posted online.

NOT-FOR-PROFIT LAW DEVELOPMENTS

DISMISSAL OF ANTITRUST CLAIMS AGAINST ASSOCIATION AFFIRMED – A federal appellate court in New York affirmed dismissal of all antitrust and related state and constitutional law claims brought against an association by a former member who had resigned in 2000. Monopolization, restraint of trade, NY state antitrust, First Amendment right of association and Fifth Amendment due process claims were all dismissed at the pleadings stage, with the trial court ruling and the appellate court affirming that the former member, a St. Lawrence Seaway and Great Lakes registered pilot, had failed to state an antitrust or other claim against the St. Lawrence Seaway Pilots’ Association. The association’s members were selected under a federal regulatory scheme managed by the U.S. Coast Guard to provide pilot services for ships transiting the St. Lawrence Seaway. The Coast Guard has discretion to use independent registered pilots such as the plaintiff if it concludes the association’s members are not providing “[A]dequate and efficient pilotage services.” The courts said the antitrust laws protect competition, not individual competitors; the association was not denying membership to the pilot but he would be bound by its rules the same as other members; and it was the Coast Guard, not the association, that determined only association member pilots would be used for pilotage services. The courts said that individual injury does not provide an antitrust exception to regulatory oversight. The Coast Guard determined the pool of pilots, not the association. It was the former member’s choice to quit the association and he was not barred from rejoining, so all of his claims were dismissed.

REGULATORY LAW DEVELOPMENTS

PROFESSIONAL SOCIETY SETTLES PRICE-FIXING CHARGES WITH FTC – Another professional society, this time the Colegio de Optometras de Puerto Rico, which represents nearly all optometrists practicing in Puerto Rico, has entered into a consent decree with the Federal Trade Commission, agreeing to cease price-fixing activities for optometric services in Puerto Rico. The Colegio demanded that a company selling vision care services and products through health plans immediately raise its reimbursement rates to Colegio members or Colegio members would drop out of the company’s network and also cease doing business with health plans using the company’s products and services. Some optometrists promptly ceased doing business with the company and with health plans using its services. Faced with the loss of a great deal of business, the company agreed to and did raise its reimbursement rates as demanded. The FTC had no problem finding a violation of Section 5 of the FTC Act. The Colegio and two its principal officers who had led the price-fixing conspiracy have entered into the usual consent decree barring all such anticompetitive activities in the future. The paper trail on this conspiracy was so public and in obvious violation of the Sherman Act as well as the FTC Act that a rapid settlement was about the only reasonable option open to the Colegio and its officers.

EMPLOYMENT LAW DEVELOPMENTS

EMPLOYEE WHISTLEBLOWING MAY NOT BE NOT PROTECTED BY IL STATUTE - The Illinois Whistleblower Act was enacted in 2004 to protect employees against retaliatory discharges for disclosing alleged wrongdoing that violates a clear mandate of public policy. But what happens when an employee complains about alleged wrongdoing to company management but not to government or law enforcement agency representatives? This issue has been presented a number of times. Federal and state courts in Illinois consistently rule that an employee who discloses alleged wrongdoing only to company management, even when the alleged wrongdoing violates a clearly mandated public policy, is not protected by the Illinois Whistleblower Act. The statute is interpreted to require disclosure of wrongdoing to government or law enforcement agencies. This may be good law but one can question whether this is good policy for a business. It would seem better for the business if the whistleblowing employee let management know of a problem without bringing in government or law enforcement officials but management too often seeks to cover up a problem, not address it so the more prudent action for a whistleblowing employee seems to be to tell the regulators first.

DHS APPEALS COURT’S REJECTION OF EMPLOYEE ID-CHECKING REGULATION – The Department of Homeland Security (“DHS”) is appealing a San Francisco judge’s October 2007 injunction blocking enforcement of the so-called “no-match rule.” The rule required employers who receive letters from the Social Security Administration (“SSA”) stating that an employee’s name does not match the Social Security number on file with the SSA for that name to have the employee explain or resolve why the name did not match the Social Security number on file with the SSA. An employee unable to satisfactorily explain or resolve the bad match would have to be terminated. A number of employers and unions sued to prevent enforcement of the regulation, claiming it is well known that government records are often wrong, and that employees would be discharged through no fault of their own. Homeland Security claims it is well known that many of the mismatches are caused by illegal workers buying or otherwise obtaining legitimate Social Security numbers of others or fraudulent numbers and using them when applying for positions. The regulation is intended to put the onus on employers to make sure that their employees are legal under U.S. law to work in this country. The stakes are high for DHS, SSA, employers, employees and illegal workers.

NEWSPAPER DISTRIBUTOR NOT EMPLOYEE FOR DISCRIMINATION CLAIM - A federal court in Chicago concluded that a woman newspaper distributor who claimed she was terminated by a Chicago newspaper because she was pregnant was not an employee for discrimination law purposes, therefore she was not protected by Title VII of the Civil Rights Act of 1964. The court relied on a five-factor test to determine whether she was an independent contractor or an employee. The court noted she did not receive benefits or paychecks. She was not personally reimbursed for costs involved in her newspaper distribution (daily delivery of the papers). She and the newspaper entered into one-year renewable contracts that were subject to 30 days’ cancellation. The one-time training she received and the newspaper’s limited ability to tell her how to do her work were insufficient to establish an employment relationship. The newspaper’s control of her work was based on which days she had to deliver the newspapers and the customer list she was given, but that was insufficient to establish control over how she did her work. The protections afforded employees under discrimination statutes do not directly apply to independent contractors. It behooves employers, including associations, to be very specific when entering into employment or independent contractor relationships. Labels are not enough. (Once upon a time “newspaper distributors” were kids on bikes – “paper carriers.”) As always, the key issue is control of the person’s work.

MEETING & TRAVEL LAW DEVELOPMENTS

ANOTHER HOMELAND SECURITY PLAN – MORE TRAVELER FINGERPRINTS - The Department of Homeland Security (“DHS”) has proposed a rule requiring airlines and cruise lines to fingerprint – at their expense, not government expense – all departing travelers who are not U.S. citizens and send the fingerprints to DHS within 24 hours. The purpose is to facilitate DHS going after persons who overstay their visas. The estimated cost is some $3.2 billion over 10 years. The travel industry has 60 days to comment on the proposed rule. Some of the drawbacks: The airlines are bleeding cash, and airports are already struggling to provide efficient security areas, before dealing with this added expense. Expect further security delays in airports and cruise terminals. This is likely to further discourage tourism and business travel. Associations with foreign members, meeting attendees and exhibitors will have one more issue to address. Oh, and it’s not just DHS doing this. Congress ordered it years ago.

TAX DEVELOPMENTS

IRS EXPLAINS ITS NFP COMPLAINT INVESTIGATION PROCESS - The Internal Revenue Service recently released 2008 Fact Sheet #13 on how it conducts investigations of tax-exempt organizations in response to complaints. Complaints are acknowledged by letter but the person making the complaint is not thereafter notified of the outcome. Complaints are assigned to an experienced revenue agent in the IRS Exempt Organizations Division for review under a “reasonable belief” standard. If the agent has a reasonable belief the complaint is factual, the review continues. If not, the file is closed. A complaint deemed to deal with future actions may lead to a review at a later date. The agent may refer the complaint to a committee of experienced managers and agents for their decision on whether or not to conduct an investigation. If yes, the complaint goes to a revenue agent for an examination of the tax-exempt organization. This may be a compliance check or more comprehensive audit as detailed in Fact Sheet #14. With 2008 election campaigns well underway, anticipate numerous complaints to the IRS that church groups and others are violating their exempt status. §501(c)(3) organizations should be particularly careful to avoid activities which might induce such complaints in an election year.

IRS ANNOUNCES THIS YEAR’S “DIRTY DOZEN” TAX SCAMS – The Internal Revenue Service recently released this year’s “Dirty Dozen” tax scams. Number 12 is abuse of charitable organizations and deductions. Two of the most common abuses are overstating the value of donated property and improperly attempting to maintain control over donated goods or income from donated property. The IRS also warns against use of frivolous arguments which expose taxpayers to a $5,000 fine in addition to interest and other penalties. The IRS maintains a list of frivolous arguments at www.irs.gov. Scams to get people to reveal personal financial information to collect their economic stimulus payment and “pfishing” are the leading scams this year. The IRS has already received some 33,000 forwarded e-mails with more than 1,500 different pfishing scams. Be exceedingly wary of any request for personal financial information or offering something in return for such personal financial information.

INTELLECTUAL PROPERTY & COMPUTER LAW DEVELOPMENTS

SUGGESTIONS TO LIMIT LEGAL EXPOSURE FROM BLOGGING – A New York lawyer has offered suggestions on ways to limit legal exposure for corporate blogs which he defines as a blog written, published or maintained by a company’s employees as part of their job or by a contractor. Some of his key suggestions include not using another’s trademarks without permission; avoiding defamatory statements and removing them when discovered; not using another’s copyrighted materials; and being aware of what employees are posting on the blog. Associations have reason to be wary of maintaining a blog, especially if comments by third parties are allowed or posted. What sort of oversight is provided? Are association staffers involved? Is the blog useful or helpful to members as a source of information? Is your insurance carrier aware of your blog? Consider the legal issues as well as information issues before embarking on a blog.

OTHER ISSUES, TRENDS & DEVELOPMENTS

WHO IS RESPONSIBLE FOR INDEMNIFIED PARTY’S OWN NEGLIGENCE? – The Illinois Supreme Court recently ruled that an indemnification agreement covering “any and all claims” without limitation may require the indemnifying party (“Indemnitor”) to be responsible for the indemnified party’s (“Indemnitee”) own negligence. If the Indemnitor promises indemnification for any and all claims arising out of the Indemnitor’s work or products, then the indemnification would not cover the Indemnitee’s negligence. But, the court said, if the indemnification provision is open-ended and applies to "any and all claims” without limitation, the Indemnitor will be obliged to cover the Indemnitee’s own negligence. Indemnification and hold-harmless agreements are commonly used in contracts, but a good understanding of the scope of coverage is critical to understanding the potential protection and exposure such a provision entails for both parties. A few words in such a provision can be very costly.

SPLIT APPELLATE DECISION ON PREVAILING PARTY IN ARBITRATION – An Illinois appellate court has determined that the prevailing party in an arbitration proceeding was entitled to payment of costs, attorneys’ fees and expenses incurred in connection with the arbitration, based on the parties’ contract. The plaintiff buyer entered into an agreement to purchase a new home and put down $6,000 in earnest money. The sales agreement provided for arbitration of any disputes and for the prevailing party in the arbitration to receive reasonable costs, attorneys’ fees and expenses. The seller declared the buyer to be in default and kept the $6,000 earnest money. The buyer demanded arbitration and sought a refund of her $6,000, plus $2,000 for damages, $10,000 in punitive damages, attorneys’ fees and costs. The arbitrator ordered a refund of the earnest money and $150 in interest, and payment of the administrative fees and expenses of the American Arbitration Association and compensation and expenses of the arbitrator. However, the buyer did not receive attorneys’ fees or expenses. She sued to obtain the attorneys’ fees and costs, but was turned down by the trial court in Chicago. The appellate court ruled the arbitrator was not entitled to rewrite the parties’ contract and ordered payment of buyer’s attorneys’ fees and reasonable expenses. One judge dissented, saying both parties had prevailed, the buyer on the refund, and the seller on compensatory and punitive damages. It is common to provide in dispute resolution provisions of contracts that the prevailing party will recover its attorneys’ fees and expenses in addition to damages or whatever relief is covered. As this decision illustrates, courts will enforce such provisions. The decision also illustrates that what is meant by “prevailing party” is not always clear and should be spelled out in more precise detail.

ILLEGAL IMMIGRATION PATTERN MAY BE AN ECONOMIC TREND INDICATOR – In Arizona, a state university business school researcher reported approximately a year ago fewer illegal immigrant apprehensions may be an economic trend indicator. The researcher found when unskilled jobs were readily available, illegal immigration surged. Just the opposite happened when the unskilled job market dried up. During the last recession in 2001-02, illegal immigrant apprehensions dropped, then increased in the years when the job market improved in the United States. The researcher found when apprehensions declined, the U.S. economy slowed about a year later. While the economists and statisticians debate whether the U.S. economy is in a recession or not, about a year ago illegal immigration apprehensions declined, and the general consensus today is that the U.S. economy is in a recession. While this may not be a definitive indicator, it bears watching now and in the future.

H&H DEVELOPMENTS

In April:

Jonathan T. Howe was selected as the first recipient of the “Hospitality Industry Lawyer of the Year” award by the Academy of Hospitality Industry Attorneys. Congratulations, Jon.

John M. Peterson discussed legal issues of relevance to associations, employers and others at meetings of three associations.

Barbara F. Dunn moderated an industry panel on how planners and suppliers can work better together during contract negotiations. She also presented an advanced level, interactive program to a meeting industry group.

C. Michael Deese presented a half-day legal orientation to a professional society’s Board of Directors.

Nathan J. Breen will be participating in a panel discussion on hotel contract negotiation issues for a meeting planning association.

Gerard P. Panaro will be discussing employment law with a school officer association.

Naomi R. Angel is speaking to two trade associations regarding “The Role of the Executive in Disaster Planning” at one association and “Ethics for Engineers” at another. Ms. Angel will also be putting on a mock trial for the education portion of a trade show that will deal with product liability and safety issues.

Leland J. Badger and our Washington, D.C. office recently assisted a national association in preparation of written and oral testimony before a House of Representatives subcommittee on a key industry issue.

Contributors to this issue...
Jonathan T. Howe, Terrence Hutton,
John M. Peterson

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