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Smart Construction: Increasing Opportunities for Small Businesses in Infrastructure

House Small Business Committee News - Tue, 11/19/2019 - 10:00am

The Committee on Small Business Subcommittee on Contracting and Infrastructure will hold a hearing titled, “Smart Construction: Increasing Opportunities for Small Businesses in Infrastructure.” The hearing is scheduled to begin at 10:00 A.M. on Tuesday, November 19, 2019 in Room 2360 of the Rayburn House Office Building.

Advanced construction technology like GPS enabled equipment, 3D digital design software like Building Information Modeling, and proptech enable construction companies, civil engineers, and developers to build infrastructure that is safer, energy efficient, and sustainable at lower costs. The hearing will explore advancements in smart construction technology and opportunities for small businesses to play a major role in improving America’s infrastructure.


To view a livestream of the hearing, please click here. 


Hearing Notice 

Hearing Memo 

Witness List 

Witnesses 
Mr. Lennart Anderssen, RA
Director of Virtual Design, Construction & Operations (VDCO), LiRo Group
Professor, Pratt Institute
New York, NY
*Testifying  on  behalf  of  the  American  Society  of  Civil  Engineers  (ASCE),  the Construction Institute (CI), LiRo Group, and Pratt Institute
Testimony

Mr. Ryan Forrestel
President
Cold Springs Construction
Akron, NY
*Testifying on behalf of the GPS Innovation Alliance
Testimony 

Mr. Bryn Fosburgh
Senior Vice President
Trimble, Inc.
Westminster, CO
Testimony 

Mr. Phillip Ogilby
CEO and Co-founder
STACK Construction Technologies
Cincinnati, OH
Testimony 
 



*Witness testimony will be posted within 24 hours after the hearing’s occurrence





 
 
 

A Fair Playing Field? Investigating Big Tech’s Impact on Small Business

House Small Business Committee News - Thu, 11/14/2019 - 1:00pm

The Committee on Small Business will hold a hearing titled, “A Fair Playing Field? Investigating Big Tech’s Impact on Small Business.” The hearing is scheduled to begin at 1:00 P.M. on Thursday, November 14, 2019 in Room 2360 of the Rayburn House Office Building.

Over the last decade, digital platforms have transformed American commerce through the rapid development of innovative business solutions that have helped small businesses reach and serve new customers. However, the boundless influence of Big Tech has raised concerns about how these platforms impact small firms that have come to rely on their business models. This hearing will give Members the opportunity to hear from large tech companies and small business about their perspectives on how to ensure that main street businesses have an equitable opportunity to compete in the information age.


To view a livestream of the hearing, please click here. 


Hearing Notice 







 
 
 

Assessing the Government’s Role in Serving Rural American Small Businesses (Part One)

House Small Business Committee News - Thu, 11/14/2019 - 10:00am

The Committee on Small Business Subcommittee on Rural Development, Agriculture, Trade, and Entrepreneurship will hold a hearing titled, “Assessing the Government’s Role in Serving Rural American Small Businesses (Part One).” The hearing is scheduled to begin at 10:00 A.M. on Thursday, November 14, 2019 in Room 2360 of the Rayburn House Office Building.

Rural America, encompassing about 72% of our nation’s total land and about 46 million residents, plays a critical role in our economy. Yet, rural businesses face many unique challenges, such as access to capital, training, and technology. The hearing will examine the U.S. Department of Agriculture’s Rural Business-Cooperative Service programs and Small Business Administration’s programs, and how these agencies can work together to support entrepreneurship, economic growth and business development in rural communities.


To view a livestream of the hearing, please click here. 


Hearing Notice 

Hearing Memo 

Witness List 

Witnesses 
Ms. Michelle Christian
National Director, Office of Rural Affairs
United States Small Business Administration
Washington, DC
Testimony

Ms. Bette Brand
Administrator
Rural Business-Cooperative Service
USDA-Rural Development
Washington, DC
Testimony 



*Witness testimony will be posted within 24 hours after the hearing’s occurrence





 
 

After DOJ Letter on Website Compliance, the ADA Guessing Game Continues

WLF Legal Pulse - 4 hours 59 min ago

John D. McMickle is co-founder of North South Government Strategies, a Washington, DC-based consulting firm. He was previously a Judiciary Committee Counsel for Senator Charles Grassley and a Partner with Winston & Strawn, LLP. He is the author of a September 21, 2018 WLF Legal Backgrounder, The Americans with Disabilities Act and Cyberspace: Who Will Provide Sorely Needed Guidance?

In recent years, Congress had demonstrated a continuing interest in addressing litigation abuses under Title III of the Americans with Disabilities Act (“ADA”).  According to a document from the Administrative Office of the United States Courts (the administrative body of the federal judiciary which, among other things, tracks trends in federal litigation), civil rights cases filed in federal courts between 2005-2017 decreased by 12 percent while ADA cases during the same period increased by an astounding 395 percent.  Much of the recent uptick in ADA litigation can be attributed to lawsuits regarding websites.  As the Washington Legal Foundation has argued in a Supreme Court amicus brief, it is not clear that the ADA, enacted by Congress before the World Wide Web even existed, applies to websites.  And the Supreme Court recently declined to hear an appeal from Domino’s Pizza that could have harmonized conflicting circuit court decisions.

In 2018, the House of Representatives passed legislation, the ADA Education and Reform Act.  Although the Senate failed to consider this measure, which would have required potential litigants to give notice of an ADA violation before filing a lawsuit, a similar bill is expected to be introduced in late 2019 or early 2020.  As the law stands now, any prudent business with a public-facing website has to guess how to make it compliant with the ADA.

Meanwhile, interested Senators have focused on the power of the Department of Justice to provide legal clarity around whether and how the ADA applies to websites. In response to a July, 2019 letter from several U.S. Senators, the Department of Justice recently reiterated its “longstanding interpretation that the ADA applies to the websites of public accommodations.” 

This way of stating the issue—that the ADA applies to websites of public accommodations—could be significant.  One of the issues that the Supreme Court could have resolved in the Domino’s Pizza case is whether the ADA applies to web-only business.  There is currently a circuit split on this question.  It is the rule in some federal circuits that the ADA applies only to websites that are related to a physical space that is also covered by Title III of the ADA.  In other circuits, websites are classified as public accommodations whether or not connected to a physical place.  One wonders whether DOJ intended to communicate a view on this point.

The letter is also noteworthy for stating, yet again, that absent a formal rulemaking, DOJ will not establish “specific technical requirements” for making websites compliant with the ADA.  This aspect of the letter is perhaps the most disingenuous and frustrating for stakeholders.  In fact, DOJ has used “specific technical requirements” to settle ADA lawsuits when DOJ is the plaintiff.  In 2104, for instance, when DOJ settled a Title III ADA action against Peapod (the web grocery ordering and delivery service for Giant Foods) for failure to make its website accessible, the settlement agreement required that Peapod use a certain technical protocol known as WCAG 2.0.  The settlement agreement (available here) stated that “[u]under the agreement, Peapod is required to…ensure that www.peapod.com and its mobile applications conform to, at minimum, the Web Content Accessibility Guidelines 2.0 Level AA Success Criteria (WCAG 2.0 AA), except for certain third party content.”  Similarly, in 2015, the Department required the municipality of Cedar Rapids, Iowa to comply with WCAG 2.0

In other words, DOJ actually imposes a standard for website accessibility in litigation but refuses to do so through rulemaking.  DOJ maintains that the failure to announce a binding regulatory standard is actually good news—website owners have flexibility to comply with the ADA in various ways.  The letter does not point to any specific compliance strategy, merely stating that the “touchstone for compliance with the ADA with respect to the websites of public accommodations remains the requirements of nondiscrimination and effective communication.”  Given the predatory litigation environment surrounding Title III of the ADA, the absence of any binding standard of general application leaves website operators to the tender mercies of serial plaintiffs.

An alternative approach to the issue of website accessibility could look to the standards the federal government applies to itself for its own websites. Rules issued under Section 508 of the Rehabilitation Act of 1973 use the WCAG 2.0 standard for federal websites.  Further, the Section 508 rule contains several “safe harbors” to ensure that compliance with WCAG 2.0 does not unduly burden federal agency resources.   Applying this regulatory approach to private sector websites covered by the ADA would promote accessibility while ensuring that the private sector benefits from similar safe harbors.

DOJ also notes that websites associated with a physical space could be considered “auxiliary aids” designed to assist the disabled in the use and enjoyment of a public accommodation.  Under this view, DOJ seems to leave open the possibility that a website owner could satisfy its obligations under Title III if the owner provided access to information through an alternative means.  Thus, for instance, a customer service telephone number that provides a blind customer with assistance with ordering from a retailer might satisfy the ADA.  

Interestingly, the 2019 Senate letter also asked Attorney General Barr whether “the Department considered intervening in pending litigation to provide clarity on these issues, or to push back against any identified litigation abuses?” (emphasis added.)  Such a federal effort would provide a much-needed supplement to state and local efforts.  For instance, the Attorney General of Arizona and the District Attorney of Riverside, California have sought to dismiss apparently non-meritorious ADA lawsuits.  And in August, 2019, a federal court sanctioned a Miami attorney and his client for a litigation strategy “to dishonestly line their pockets with attorney’s fees from hapless defendants under the sanctimonious guise of serving the interests of the disabled community.”

In sum, the position of the Department of Justice remains untenable.  DOJ believes the ADA applies to at least some websites but will not provide guidance to stakeholders—except in the course of a specific enforcement action. Such a stance is a dereliction that could undermine public confidence in the laudable purposes of the ADA.  The business community has to guess how to ensure a website complies with the ADA, and hope it guessed correctly.  Surely it is more beneficial—for all involved—for businesses to spend time and resources complying with meaningful standards.  Perhaps DOJ will at least target litigation abuses to mitigate the financial jeopardy that flows from the legal uncertainty that DOJ itself has created.

The post After DOJ Letter on Website Compliance, the ADA Guessing Game Continues appeared first on Washington Legal Foundation.

Categories: Latest News

Upskilling the Medical Workforce: Opportunities in Health Innovation

The Committee on Small Business will meet for a hearing titled, “Upskilling the Medical Workforce: Opportunities in Health Innovation.” The hearing is scheduled to begin at 11:30 A.M. on Wednesday, November 13, 2019 in Room 2360 of the Rayburn House Office Building.

It is predicted that America faces a doctor shortage upwards of 100,000 doctors by 2030, which could disproportionately affect rural and underserved communities. Beyond training more doctors, opportunities in innovative healthcare practices offers another method to proactively address the shortage. Telehealth and HealthIT have the potential to help many small medical practices manage patient information, be more efficient, and provide the most effective treatment. This hearing will analyze ways the health care workforce can be trained to leverage these new technologies to lower costs, incentivize start-ups, and provide quality care.


To view a livestream of the hearing, please click here. 


Hearing Notice 

Hearing Memo 

Witness List 

Witnesses 
Dr. Matthew Conti
Orthopaedic Surgery Resident
Hospital for Special Surgery (HSS)
New York, NY
*Testifying on behalf of the American Academy of Orthopaedic Surgeons (AAOS)
Testimony 

Dr. Ingrid Zimmer-Galler
Associate Professor of Ophthalmology
Founding Clinical Director of the Office of Telemedicine
Johns Hopkins University School of Medicine
Baltimore, MD
*Testifying on behalf of the American Academy of Ophthalmology
Testimony 

Dr. Nancy Fahrenwald, PhD, RN, PHNA-BC, FAAN
Dean and Professor
Texas A&M University, College of Nursing
Bryan, TX
*Testifying on behalf of the American Association of Colleges of Nursing
Testimony 

Mr. Michael Hopkins
CEO & Founder
True Concepts Medical
Centerville, OH
Testimony 

*Witness testimony will be posted within 24 hours after the hearing’s occurrence





 

The PTAB Is Here to Stay, but Individual Administrative Patent Judges May Not Be

WLF Legal Pulse - Tue, 11/12/2019 - 8:00am

Jeffri A. Kaminski is a Partner with Venable LLP in its Washington, DC office and is the WLF Legal Pulse’s Featured Expert Contributor, Intellectual Property—Patents

On October 31, 2019, the Federal Circuit, in Arthrex, Inc. v. Smith & Nephew, Inc., No. 2018-2140, ruled that the current structure of the Patent & Trial Appeal Board (PTAB) violated the Appointments Clause of Article II of the U.S. Constitution. Rather than eliminate the PTAB as some feared (or hoped for), the Federal Circuit remedied this constitutional violation by divesting the more than 200 Administrative Patent Judges (APJs), who decide cases before the PTAB, from the protections of “the statutory removal provisions.” In doing so, the Federal Circuit reclassified the APJs as “inferior officers” who could be removed from their positions without cause by the Secretary of Commerce and the Director of the USPTO.

The Federal Circuit also vacated and remanded the Board’s decision without reaching the merits of the case, holding that a “new panel of APJs must be designated and a new hearing granted.” However, the Federal Circuit specifically limited this holding only to those cases where “final written decisions were issued and where litigants present an Appointment Clause challenge on appeal.” Thus, other PTAB decisions cannot be reviewed or vacated on this basis.

In Arthrex, Smith & Nephew, Inc. filed a petition to the PTAB requesting an inter partes review to challenge the patentability of certain claims of U.S. Patent No. 9,179,907, directed to a knotless suture securing assembly, which Arthrex owns. The PTAB issued a final written decision finding those specific claims of ʼ907 unpatentable. Arthrex appealed the PTAB’s decision to the Federal Circuit and raised the issue that APJs were not constitutionally appointed but were acting as principal officers, not “appointed by the President with the advice and consent of the Senate” as the Appointments Clause of the U.S. Constitution requires.

The Federal Circuit agreed with Arthrex because neither the Secretary of Commerce nor the Director—the only two presidentially-appointed officers that provide direction to the USPTO—“exercised sufficient direction and supervision over APJs to render them inferior officers.” Under the flawed structure, the Secretary of Commerce appoints the APJs to the PTAB. When a petitioner requests an inter partes review, the APJs then serve on a three-judge panel to consider the patentability of challenged claims and issue final written decisions determining the patentability of challenged claims “on behalf of the Executive Branch.” The Federal Circuit held that this significant exercise of authority along with the limitations on removal from service only for “such cause as will promote the efficiency of the service” gave the APJs status as principal officers instead of inferior officers.

Rather than eliminating the three-APJ panels or completely altering the method of appointing APJs, the Federal Circuit “partially severed” the APJs from the statutory provision that applies to other officers and employees of the USPTO—classifying APJs as “inferior officers” and subjecting them to at-will removal by the Director. The Federal Circuit thought this to be the “narrowest viable approach to remedying the violation of the Appointment Clause” and “the proper course of action and the action Congress would have undertaken.”

Now that APJs are “at-will” officers, the finality of their issued decisions is checked by the fact that the Director can dismiss them for any reason. It remains to be seen, however, if this will shape their day-to-day practices at the PTAB. Will the Director involve himself in the details of every appeal, which can be highly complex and technical, now that he can remove any APJ he disagrees with? Likely no. However, if a case is high-profile, could APJs feel compelled to rule a certain way to stay in the good graces of their Director who may have other objectives, whether political or policy-driven? Perhaps yes. Whether or not individual APJs may come and go, what is certain is that the PTAB still remains a legitimate administrative law body that will continue to review and cancel patent claims it deems unpatentable.

The post The PTAB Is Here to Stay, but Individual Administrative Patent Judges May Not Be appeared first on Washington Legal Foundation.

Categories: Latest News

SCOTUS County of Maui Argument: Whiskey, Septic Tanks, and Limiting Principles

WLF Legal Pulse - Mon, 11/11/2019 - 9:28am

Samuel B. Boxerman is a Partner with Sidley Austin LLP in the firm’s Washington, DC office and is the WLF Legal Pulse’s Featured Expert Contributor on Environmental Law and Policy.

Whether whiskey being poured from a bottle to a flask and then to a punch bowl would be regulated—whether the groceries you buy come from the store, or from your car, as that is the last place they were before you enter your house—and whether releases from one septic tank would have to be permitted, but not from a housing development with hundreds of septic tanks.  These are among the analogies discussed at oral argument before the U.S. Supreme Court as the Justices questioned counsel about how to interpret the Clean Water Act (CWA) in County of Maui vs. Hawaii Wildlife Fund.

As reported here previously, the case concerns a wastewater treatment plant operated by the County of Maui.  The plant is permitted to inject treated wastewater into underground injection wells—and some of that wastewater travels from the wells through groundwater to the Pacific Ocean, a half mile away.  At issue is whether the County needed a permit for the injected wastewater leaving the wells and reaching the ocean:  Does the CWA require a permit when pollutants originate from a point source (the wells) but are conveyed to a navigable water (the Pacific) via a nonpoint source (the groundwater).  The County has argued no, a discernible, confined, and discrete conveyance must carry the pollutant to be regulated.  The Ninth Circuit disagreed, holding that a permit would be required, so long as pollutants were “fairly traceable” from the wells to the ocean so that it was “the functional equivalent” of a discharge to a navigable water.  The respondent environmental groups support the lower court’s approach.

At argument, Justice Breyer, in questioning Maui’s attorney, asked whether the County’s reading would provide a “road map” for avoiding regulation, as a source could “just cut off” the discharge pipe before the stream.  Justice Kagan echoed that, stating that “nobody would ever have to get a permit” under petitioner’s approach.  Justice Sotomayor’s questioning also appeared to support respondent, suggesting the other laws petitioner pointed to are “remedial” while the CWA is “preventative” and “that’s why we give them a permit.”  Justice Ginsburg, meanwhile, asked how the respondent’s test differed from “direct hydrological connection” test adopted by the Fourth Circuit in the Upstate Forever case (also discuss previously here) that is also before the Court (but on hold for now).

Justice Kavanaugh questioned whether the County’s test was akin to the test rejected by late Justice Scalia in Rapanos, but also sought “some clear line for property owners” that would be objectively clear “up front” and not after much litigation.  In questioning respondent’s counsel, Justice Alito expressed concern “whether there is any limiting principle that can be found in the text and is workable and does not lead to absurd results.”  Chief Justice Roberts and Justice Gorsuch likewise each asked respondent to define a “limiting principle” on their approach, with Chief Justice Roberts noting the respondent’s “proximate cause” approach was “notoriously manipulable.”

It is often perilous to read the tea leaves of oral argument and predict how the Court might rule.  This case is no different, as the Justices revealed a range of views and much uncertainty about how they might interpret the Act.  The Court took the case, which often does signal an interest in reversing the lower court.  Yet, if Justice Kavanaugh’s reference to Rapanos suggests some inclination to find a middle ground, it could be the case that they are headed towards a ruling that would require permitting in certain circumstances beyond the scope advanced by Maui, provided a majority can coalesce around an appropriate limiting principle.  Stay tuned.

The post SCOTUS <em>County of Maui</em> Argument: Whiskey, Septic Tanks, and Limiting Principles appeared first on Washington Legal Foundation.

Categories: Latest News

Fostering the American Dream: How SBA Can Empower Immigrant Small Business Owners

House Small Business Committee News - Fri, 11/08/2019 - 10:00am
The Committee on Small Business Subcommittee on Investigations, Oversight, and Regulations will hold a hearing titled, “Fostering the American Dream: How SBA Can Empower Immigrant Small Business Owners.” The hearing is scheduled to begin at 10:00 A.M. (PST) on Friday, November 8, 2019 at Rosemead City Hall, 8838 East Valley Boulevard, Rosemead, CA 91770.

The United States is currently home to over 43 million immigrants and over 3 million have started small businesses. These companies pay an estimated $126 billion in wages to six million people and generate over $65 billion in income. Recognizing their economic contributions, the hearing will focus on how the federal government can better assist immigrant entrepreneurs desiring to start a small business. Members will learn why immigrants are more likely to start new businesses but less likely to have access to traditional sources of capital, and how the Small Business Administration’s programs, such as entrepreneurial development and lending programs like the Community Advantage program can help immigrant business owners succeed.

To view a livestream of the hearing, please click here. 


Hearing Notice 

Hearing Memo 

Witness List 

Witnesses 
Ms. Rachelle Arizmendi
Vice-President and Chief Operations Officer
Pacific Asian Consortium in Employment (PACE)
Los Angeles, CA
Testimony 

Mr. Donald J. Loewel, MBA
Director
Small Business Development Center
Pasadena City College
Pasadena, CA
Testimony

Ms. Tatiana Bonilla
President
Andrew Design Group, Inc.
Pasadena, CA
Testimony 


*Witness testimony will be posted within 24 hours after the hearing’s occurrence




 

NAAAOM v. Comcast Corp.: Civil Rights Laws Should Protect Minorities, Not Frivolous Litigators

WLF Legal Pulse - Thu, 11/07/2019 - 11:33am

Comedian-turned-Hollywood-mogul Byron Allen is bringing his contract dispute with Comcast Corp. to the Supreme Court next week. To hear Allen tell it, Comcast is trying to turn back the civil-rights clock and make it harder for minorities to redress racial discrimination. But that’s a distortion of the case. Comcast is simply asking the Supreme Court to rule—in line with the vast majority of courts that have addressed the question before the justices—that proving racial discrimination in contracting requires proving that one has actually suffered an injury. The actual-injury requirement allows courts to differentiate between meritorious claims and those (such as Allen’s) filed simply to force a defendant to settle in order to avoid unwanted publicity.

Allen’s media empire includes ESN, which operates seven cable networks that are available in a limited number of U.S. media markets. Over the past decade, Comcast has declined ESN’s requests that Comcast carry the networks, citing low consumer demand for ESN’s programming. Other cable operators declined similar requests from ESN for similar reasons.

In response to the refusals to carry its programming, ESN sued Comcast as well as Charter Communications, Time Warner Cable, DirecTV, and AT&T. The suits alleged that the defendants violated the Civil Rights Act of 1866, which prohibits racial discrimination in making and enforcing contracts. Several of the defendants settled the claims by agreeing to carry ESN programming, but Comcast chose to fight—and its case is now before the Supreme Court.

There is no direct evidence of racial discrimination here. But Allen alleges that Comcast offered carriage contracts to white-owned networks that had less viewers than ESN’s networks; he asserts that racial discrimination can be inferred from that allegedly disparate treatment. Comcast denies that it treated white-owned businesses more favorably and notes that its cable offerings include many minority-owned networks. Among those offerings is the Weather Channel, which Allen himself purchased in 2018 for $300 million.

The trial court gave Allen three chances to submit a complaint that stated an adequate racial-discrimination claim. The court found each complaint insufficient and dismissed the lawsuit. It ruled that Allen failed to show that racial discrimination, not other, race-neutral reasons, motivated Comcast’s refusal to offer a carriage contract. The trial court’s ruling adopted the approach taken by every federal appeals court in analogous racial-discrimination suits; those courts held that the plaintiff must show that it would have received the desired contract “but for” the alleged discrimination.

Allen appealed, and the U.S. Court of Appeals for the Ninth Circuit reinstated his case. It ruled that under the federal law governing contract discrimination, it is enough to allege that race was “a factor” in the decision not to sign a contract, even if no contract would have been made if race had played no role. The Supreme Court last June agreed to review Allen’s case, as it often does when two or more federal appeals courts disagree about how to interpret a federal law.

The standard of proof applied by a trial court makes a difference in discrimination claims of this sort. Allen’s claim is thin at best. Nothing in his complaint suggests that Comcast considered Allen’s race when it declined to offer his networks a carriage contract. But if the Supreme Court adopts the lenient standard Allen proposes—that a plaintiff need only allege that race was “a factor” in the contracting decision—it will become extremely difficult for a defendant to win early dismissal of even the most frivolous claims. And once a plaintiff survives a motion to dismiss on the pleadings, the high cost of litigation (including the cost of responding to endless depositions and document requests) will virtually force the defendant to settle the lawsuit without regard to its merits.

That may well be what Allen is counting on. But Congress adopted the civil rights laws to eliminate racial discrimination in the making of contracts, not as a litigation tool that unhappy plaintiffs can use to browbeat others into making unwanted deals. Byron Allen should not be permitted to besmirch Comcast’s civil-rights record for the purpose of expanding his own business.

Also published by Forbes.com on WLF’s Contributor Site

The post <em>NAAAOM v. Comcast Corp.</em>: Civil Rights Laws Should Protect Minorities, Not Frivolous Litigators appeared first on Washington Legal Foundation.

Categories: Latest News

October 2019 Month in Review

WLF Legal Pulse - Tue, 11/05/2019 - 8:15am

To read more about the items below, click the link above for a PDF of the newsletter.

NEW FILINGS

  • The Alien Tort Statute does not permit human-rights activists to file federal-court claims based on a defendant’s conduct in foreign countries. (Nestle USA, Inc. v. Doe I)
  • The Federal Trade Commission improperly held that drug companies’ settlement of patent-infringement litigation violated antitrust laws, without evidence that the settlement harmed competition. (Impax Laboratories, Inc. v. FTC)
  • Regulations proposed by the Department of Housing and Urban Development appropriately limit the scope of disparate-impact liability under the Fair Housing Act. (In re FHA Disparate-Impact Liability)
  • Proposed Food and Drug Administration regulations violate the First Amendment by compelling cigarette manufacturers to place controversial statements on product labeling. (In re Required Warnings for Cigarette Packaging and Advertisements)
  • Property owners are entitled to compensation under the Takings Clause when a government arbitrarily delays their building permit. (Bottini v. City of San Diego)
  • Antitrust law is designed to protect competition, not competitors; it does not concern itself with evidence that a defendant may have desired to harm a competitor. (Swisher Int’l v. Trendsettah USA)

DECISIONS

  • The Ninth Circuit declines to reconsider its certification of a class of Facebook users despite no evidence that they suffered any injury. (In re Facebook Biometric Information Privacy Litig.)
  • U.S. Supreme Court declines to review a Ninth Circuit decision barring removal to federal court (under the Class Action Fairness Act) of a “mass action” in which a single state-court judge is coordinating thousands of identical claims. (Pfizer, Inc. v. Adamyan)
  • The U.S. Supreme Court declines to review a Ninth Circuit decision holding that the Americans with Disabilities Act extends to cyberspace and requires companies to revamp their web sites to accommodate the needs of the visually impaired. (Domino’s Pizza, LLC v. Robles)
  • The U.S. Supreme Court declines to review a California court decision that, in conflict with the Federal Arbitration Act, refuses to enforce an arbitration agreement. (Winston & Strawn LLP v. Ramos)
  • The U.S. Court of Appeals for the District of Columbia Circuit upholds a decision by the Federal Communications Commission to rescind its 2015 “net neutrality” rules, which imposed burdensome regulations on Internet providers. (Mozilla Corp. v. FCC)

The post October 2019 Month in Review appeared first on Washington Legal Foundation.

Categories: Latest News

WLF Asks U.S. Supreme Court to Clarify When Government May Compel Speech

WLF Legal Pulse - Fri, 11/01/2019 - 8:00am

“The decision below, if left to stand, would allow government regulators to transform a First Amendment test created to correct false or misleading speech into a justification for foisting false or misleading speech onto the public.”
—Cory Andrews, Vice President of Litigation

Click here for WLFs brief.

(Washington, D.C.)—Washington Legal Foundation (WLF) today filed an amicus curiae brief urging the U.S. Supreme Court to review—and ultimately to strike down—a Berkeley, California ordinance that requires all cell-phone retailers to warn their customers about the supposed dangers of ordinary cell-phone use.

The petition marks CTIA’s second time asking the high court to review the Berkeley ordinance. The Court granted an earlier petition without opinion in 2018, vacating a decision of the U.S. Court of Appeals for the Ninth Circuit that upheld the ordinance and remanding the case for reconsideration in light of National Institute of Family and Life Advocates v. Becerra (2018). Even so, the Ninth Circuit once again sustained the ordinance against a First Amendment challenge, holding that the city’s mandated warning qualifies as a purely factual and noncontroversial disclosure under Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio (1985). 

Berkeley’s mandated warning informs cell-phone users how to avoid the purported dangers of being overexposed to radiofrequency (RF) from their cell phones. But the Federal Communications Commission (FCC), in concert with other federal agencies responsible for ensuring health and safety, already ensures that U.S. cell phones have RF-exposure limits 50 times below the level of any adverse biological effect. As a result, the FCC has determined that any cell phone legally sold in the United States is a “safe phone.”

In its brief, WLF explains that by divorcing the government’s authority to compel speech from any need to remedy pre-existing commercial speech, the decision below grants Berkeley a roving commission to compel speech entirely on its own terms. The city’s mandated warning is thus not a traditional commercial-speech disclosure under Zauderer, but a freestanding speech compulsion subject to strict scrutiny. And even if Zauderer applies, WLF’s brief argues, Berkeley’s mandated warning misleads readers into believing that ordinary cell-phone use may be dangerous. Not only is that message intentionally misleading, it is highly controversial and thus cannot pass constitutional muster under Zauderer.

Celebrating its 42nd year, WLF is America’s premier public-interest law firm and policy center advocating for free-market principles, limited government, individual liberty, and the rule of law.

The post WLF Asks U.S. Supreme Court to Clarify When Government May Compel Speech appeared first on Washington Legal Foundation.

Categories: Latest News

Playing Nice in a No-Action Sandbox: The SEC’s Careful Approach to a Blockchain System for Clearing and Settling Equity Trades

WLF Legal Pulse - Thu, 10/31/2019 - 12:53pm

Daniel S. Alter is a Shareholder in the New York, NY office of Murphy & McGonigle P.C. and is the WLF Legal Pulse’s Featured Expert Contributor, Legal & Regulatory Challenges for Digital Assets.

Three cheers for the Securities and Exchange Commission!  On October 28, 2019, the SEC’s Division of Trading and Markets issued a no-action letter to Paxos Trust Company, LLC, a New York State chartered trust company (Paxos), essentially permitting Paxos to operate a blockchain-based settlement system without first registering as a clearing agency under Section 17 of the Securities Exchange Act of 1934 (“No-Action Letter”).  This may be a baby step for the agency, but it’s nevertheless a very big one.

The No-Action Letter is a baby step because it gives Paxos a license to test its blockchain prototype for only two years and under very limited conditions.  Described by the SEC, these conditions are “reasonably designed to ensure that activity remains de minimis through operating parameters designed to limit the scope of operations and manage financial and settlement risk, using, among other things, participation requirements and limits, securities eligibility criteria, margin collection, volume limits, ongoing monitoring, and regular reporting to [SEC] Staff.”  In other words, the agency will be keeping a tight rein on the project.

But that’s great!  It’s exactly what the SEC should be doing—and much more of it.  As with anything else, blockchain applications will improve through trial and error.  Given how high the stakes are for the proper clearing and settlement of trades in the securities market, however, it’s critical to work out the kinks of any new technology before handing over the keys.  Although entrepreneurs may find excitement in the concept of disruption, the idea of it is pure dread for regulators.

Viewed from that perspective, the SEC’s decision finally to go down this path at all is a very big baby step.  And for others looking to make similar headway with the agency, there are at least two important lessons to be learned here:

First, packaging matters.  In its request for no action relief, Paxos sought permission from the SEC to conduct a short-term “Feasibility Study.”  This was an invitation for the SEC to become proactively involved in determining whether the Paxos system can work to the agency’s satisfaction.  It was not a declaration of theoretical superiority with an implicit charge of Luddism.  A little humility can go a long way.

The second point is simultaneously both subtle and glaring.  So far, commentators have not focused on the fact that the No-Action Letter hinges on a Paxos account at the Depository Trust Company or DTC.  The DTC is a “central securities depository”—a common utility that holds securities in certificated or uncertificated form so that they can be transferred between buyers and sellers more quickly via book entries rather than through physical delivery.  It is one of the cornerstones of our present market infrastructure.

Paxos proposes to use its own DTC account to hold its clients’ securities in subaccounts.  Once a client deposits its securities into the Paxos subaccount, Paxos will create “a digitized security entitlement, which is a digital representation” of the clients’ assets.  Paxos will then use those digital representations to clear and settle securities trades on a blockchain, thereby allowing the instantaneous swap of assets for cash in those client subaccounts.  The Paxos system purports to reduce clearing and settlement time to 0—an accomplishment that would vastly reduce financial risk in the market and release significant amounts of capital held in reserve pending trade completion.

Ironically, to the blockchain evangelist preaching the good news of disintermediation, this solution is the devil’s design.  Instead of removing the inefficiencies and risks associated with trusted financial middleman (like DTC)—which is the fundamental peer-to-peer promise of blockchain technology—Paxos intends to add itself as another layer to the clearing and settlement process.  Heresy.

Or is it faithful pragmatism?  This model may be a necessary step in the infrastructure evolution.  Surely, the SEC found comfort in the idea that client securities will remain at the DTC, a familiar and reliable custodian.  And perhaps that backstop convinced the agency to take a big baby step.

Consider, also, there may be other existing market structures onto which blockchain technology might be grafted—at least at first—to accomplish a great benefit.  The No-Action Letter reaffirms something obvious yet important; perhaps innovators not so much, but Commissioners need to walk before they can run.

The post Playing Nice in a No-Action Sandbox: The SEC’s Careful Approach to a Blockchain System for Clearing and Settling Equity Trades appeared first on Washington Legal Foundation.

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If it Takes History Seriously, the Supreme Court Will Strike Down the CFPB

WLF Legal Pulse - Thu, 10/31/2019 - 10:13am

Everyone knows where to find the most powerful person in Washington. He lives and works in an old neoclassical mansion known as the White House. Every day, swarms of tourists, cranks, and clowns gather at the fence beyond his front door, tacitly acknowledging his preeminence.

Where can one find Washington’s second most powerful person? Is he at the main executive building? Is she in an office next to the Capitol? Perhaps he’s at the Supreme Court? Plausible suggestions all. But no one in these places can get much done without the support of other—sometimes many other—equally mighty and ambitious people.

There’s a case to be made that the second most powerful person in the federal government sits a block from the West Wing, in a drab concrete structure the sightseers invariably pass without a glance. The building houses the Consumer Financial Protection Bureau, the director of which implements more than a dozen major statutes—and answers to no one. Not to voters. Not to other bureaucrats. Not even to the chief executive. Although a CFPB director can be fired for misconduct, she cannot be removed due to her policies. The protocols she imposes, the priorities she sets, and the tactics she uses are in her hands to make. Her choices are her own. The president is stuck with them.

What are we to make of this? What do the traditions of our nation and our law have to say about this regulatory lord and her fiefdom?

*

“Will no one rid me of this turbulent priest?” Four knights immortalized this howl of protest, indignantly emitted by Henry II while his blood was up, by taking it seriously. They took their leave, rode to the Norman coast, and crossed the Channel. They found the Archbishop of Canterbury, Thomas Becket, in his cathedral, and they hacked him to pieces.

Becket had once been the king’s friend and counsellor. When Henry had him appointed archbishop in 1162, however, he promptly went native. The Church of that day was a power apart—a body with its own lands and privileges, its own laws and courts—and Becket became its champion. He denied the Crown’s authority, undermined royal policy at every turn, and excommunicated clerics loyal to the king. Henry could do little about any of it except shout and sputter. When at last, in 1170, the knights mistook one of Henry’s many impotent tirades as a command and removed Becket by cutting him down, the scandal shook the kingdom to the core. Becket was hailed a martyr and a saint. Henry spent years atoning for the sacrilege he had set on foot.

Just as the King of England could not always remove a man, neither could he always retain one. Edward II’s favorite, Piers Gaveston, gave the high and mighty of the realm nicknames such as “burst belly” and “the cuckold’s bird.” The barons took him to the woods and executed him in 1312.

Parliament impeached Charles I’s first minister, the Earl of Strafford, in 1640. When Strafford proceeded to defend himself a little too ably at his trial, the Puritans dropped the impeachment, attainted him, forced the king to sign a death warrant, and had him beheaded before 100,000 spectators. Charles never forgave himself. When he in his turn stepped onto a scaffold in 1649, he declared that God was punishing him for the “unjust sentence” that he had “suffered to take effect.”

But these dramatic episodes are aberrations. They are exceptional. For centuries England’s high officials—its chancellors, its judges, and, once Henry VIII had his way, even its bishops—served at the king’s pleasure. A minister’s powers were the king’s powers. They were, as Maitland explained, “royal prerogatives” that “the king might lawfully exercise himself were he capable of discharging personally the vast business of government.” An untrammeled power of appointment and removal was itself such a prerogative.

Some of these prerogatives were stripped away just as the American colonies were becoming a going concern. After the Revolution of 1688, the Crown lost finally and for all time the power to suspend a law. No sovereign has vetoed a bill from the throne since Queen Anne did so in 1708. When Anne died in 1714, the monarchy’s power to remove a judge “during good behavior” died with her. Royal authority withered further under George I and George II, Hanoverians who cared little about England or its affairs. Although George III took some interest in governing, by his day the king no longer attended cabinet meetings.

Yet the king remained formidable, at least in theory. He retained his say in foreign affairs. And his power to appoint and remove officers was untouched. The king, Blackstone wrote in 1765, was still “the fountain of honour, of office, and of privilege.” It was for him alone, therefore, to decide “in what capacities, with what privileges, and under what distinctions his people [we]re best qualified to serve and to act under him.” He could even create new offices, albeit only with what money parliament might supply.

The Declaration of Independence accuses George III of committing “every act which may define a Tyrant.” At times the document seems to rail against a despot whose writ ran no farther than Thomas Jefferson’s imagination. Accurate or no, however, Jefferson’s view of the king played on the minds of the men who assembled for the Constitutional Convention in 1787. The charter they crafted prises many royal prerogatives from the grasp of our chief executive. In line with the British practice by that time, he may not remove judges. But he also may not declare war or create offices; those powers belong to Congress. And he may not make treaties or appoint senior officers by himself; he needs the Senate’s approval.

But the British monarchy was not the Framers’ only point of reference. The Articles of Confederation had created a meagre executive power and assigned it to Congress. Forget George III; the absence of a separate executive was, Jefferson exclaimed, “the source of more evil than we have ever experienced from any other cause.” “Nothing is so embarrassing nor so mischievous in a great assembly as the details of execution,” he cried. Hamilton agreed. The lack of a “proper executive” led, he wrote, to a “want of method and energy.” “Responsibility” was too “diffused.” The Framers wanted to fix this problem.

So it is important to note how the Framers went about trimming the executive bough. First, they invested a chief executive with his panoply: they roundly vested “the executive Power” in a single “President.” Then, when they wanted to revoke some prerogative or other, they did so openly and in plain words. The president may not “provide and maintain a Navy”; he may not grant anyone a “Title of Nobility”; and so on. The Framers wanted to reduce the president’s authority to a point, and no further. “All the powers properly belonging to the executive department of the government are given,” as Fisher Ames put it to the First Congress, “and such only taken away as are expressly excepted.”

The Constitution requires the president to rely on Congress to erect and fund offices, and on the Senate to approve principal officers. Meanwhile, however, it commands the president, and the president alone, to “take Care that the Laws be faithfully executed.” And although it says that judges “shall hold their offices during good behavior,” it extends no like protection to executive officials. A balance has plainly been struck. The president answers to Congress, but the government answers to the president. An officer must, in Washington’s words, “assist the supreme Magistrate in discharging the duties of his trust.”

When Jefferson became president, he circulated among his heads of departments a letter setting Washington’s administration as his standard. Washington had required his officers to keep him “always in accurate possession of all facts and proceedings.” He had “formed a central point for the different [executive] branches, preserved a unity of object and action among them,” and “met himself the due responsibility for whatever was done.” Jefferson contrasted this approach with “Mr. Adams’s administration,” in which the president, during “his long and habitual absences,” let the government be “parceled out” among “four independent heads, drawing sometimes in opposite directions.” “That the former is preferable to the latter course,” declared Jefferson, “cannot be doubted.” Washington—and Jefferson—clearly believed that the president may guide, command, and, when necessary, remove government officials. Indeed, although no law granted the president a removal power, Washington, Adams, and Jefferson each dismissed many officers. Jefferson fired 124 of them.

The early presidents’ conduct was not challenged. To the contrary, the First Congress endorsed the notion that the president enjoys an unfettered removal power. When Madison moved to establish a Department of Foreign Affairs, “the head of which” was to be an officer “removable by the President,” a debate erupted about the nature of the removal power. A few representatives argued that removal required an impeachment trial in the Senate. Others argued that the Senate’s approval, at least, was necessary. Still others believed that, although the president should be allowed to remove people at will, his power to do so came not from the Constitution but from Congress. Madison, for his part, contended that “the lowest officers, the middle grade, and the highest” all “depend, as they ought, on the president.” And because he in turn depends on the “community,” the “chain of dependence” terminates in “the people.” An unqualified removal power ensures, in other words, that voters may hold the president to account for his officers’ actions.

In what is now known as the Decision of 1789, Congress passed several bills that contained no removal clause, but that discussed who would manage the papers of a removed officer. The traditional view holds that Congress thereby affirmed that the Constitution empowers the president to remove officers at will. Legislators on both sides of the debate placed that gloss on the affair in their private letters. The votes turned, one senator wrote, on “whether the President had a constitutional right to remove; not on the expediency of it.” Madison told Jefferson that his colleagues had taken the position “most consonant” to “the text of the Constitution” and “the requisite responsibility and harmony in the Executive Department.”

It was not until the twentieth century that the Supreme Court turned its gaze squarely on removal. When at last it did so, it threw its weight behind what was by then the custom and understanding of more than 130 years. Although the president holds all “executive power,” the court said in Myers v. United States (1926), he “alone and unaided could not execute the laws.” He must “execute them by the assistance of subordinates,” and, to do so effectively, he must be able to remove “those for whom he cannot continue to be responsible.”

*

This has been a story about the American government as it was designed and built. The government described in grade-school textbooks. The government in which one branch makes the law, another administers it, and a third applies it to cases and controversies. The plan never worked perfectly. That was never a possibility. The lines between the powers are at times too obscure, the humans tasked with finding them often too fallible and corrupt. But the model endured. Its imprint was real.

That model is gone. Not long after Myers, the Supreme Court declared, in Humphrey’s Executor v. United States (1935), that some officers can be subject only to for-cause removal. The court permitted the creation of a new, fourth branch of government. The fourth branch exercises not only executive powers, but also “quasi-judicial” and “quasi-legislative” ones. This is the branch of the commissions and boards—the branch of the Federal Trade Commission, the Securities and Exchange Commission, and the National Labor Relations Board, to name but a few. These independent agencies have their own rules, their own judges, and their own domains. They are, like Becket’s Church, a power apart.

The court has approved, in particular, of agencies governed by panels. Spreading control among a number of board members or commissioners, we are told, makes the novel bodies’ autonomy and clout more tolerable. We are to rest easy because, in a committee of five, only a confederacy of at least three may ignore, foil, and defy the president and the public.

In recent years, however, in what seems almost like a deliberate effort to wreak constitutional havoc, Congress has taken to creating departments governed by individual directors. The most powerful of these is the head of the Consumer Financial Protection Bureau. She is tasked with administering a raft of consumer-protection laws. She decides what rules her agency will issue, against whom they will be enforced, and what the penalties for breaking them will be. She draws her budget—more than $600 million—from another independent body, which shields her appropriations from the threat of presidential veto. She serves a five-year term, which means she often will proceed under a president who did not even choose her. And still, she can be removed only for “inefficiency, neglect of duty, or malfeasance in office.”

Earlier this month the Supreme Court agreed to decide, in Seila Law LLC v. Consumer Financial Protection Bureau, whether the CFPB’s structure is constitutional. The case will be contentious. Many issues will be hotly debated. The question of when and how the court may overturn its own rulings will likely attract much attention. The supposed virtues of politically insulated experts, and the palpable vices of the current chief executive, will surely worm their way into the discussion. There can be no doubt, however, about what the constitutional text and history teach us. The president, they say, can remove officers at will.

Also published by Forbes.com on WLF’s contributor page.

The post If it Takes History Seriously, the Supreme Court Will Strike Down the CFPB appeared first on Washington Legal Foundation.

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Delaware Chancery Court Clarifies Review Standard for Challenges to Conflicted-Controller Transactions

WLF Legal Pulse - Wed, 10/30/2019 - 3:11pm

Stephen M. Bainbridge is William D. Warren Distinguished Professor of Law, UCLA School of Law and serves as the WLF Legal Pulse’s Featured Expert Contributor, Corporate Governance/Securities Law.

In an important recent decision, Tornetta v. Musk,1 the Delaware Chancery Court provided new guidance on how to structure conflict-of-interest transactions to which a corporation’s controlling shareholder is a party. The case involves a shareholder lawsuit challenging an incentive compensation plan granted to Tesla, Inc.’s CEO, Elon Musk. The plan laid out twelve tranches of stock options to be awarded over a ten-year period. In order for Musk to receive each tranche, Tesla had to achieve specified milestones in market capitalization and operating results. According to the Plaintiff, the fair present value of the award was either $2.6 or $3.7 billion, which allegedly dwarfed CEO compensation at Tesla’s peer companies by orders of magnitude.

Tesla’s board of directors and its disinterested shareholders approved the compensation plan. Seventy-three percent of the disinterested shares were represented in person or by proxy at the stockholder meeting during which the plan was approved voted. They represented 47% of the total number of outstanding disinterested shares.

In his opinion, Vice Chancellor Joseph Slights acknowledged that Delaware courts normally approach boards’ executive compensation decisions with a high degree of deference. Critically, however, Musk is not just Tesla’s CEO but also its controlling shareholder.2 A controlling shareholder has been analogized to the proverbial 800-pound gorilla,3 which gives rise to “an obvious fear that even putatively independent directors may owe or feel a more-than-wholesome allegiance to the interests of the controller, rather than to the corporation and its public stockholders.”4

In response to that risk, Delaware law imposes a more intrusive standard of review on conflicted-controller transactions than on ordinary business decisions. In the latter, the standard of review is the business judgment rule; in the former, however, the burden of proof shifts to the conflicted controller to show that the transaction was fair to the corporation and its minority shareholders. In Kahn v. Lynch Communications Systems, Inc.,5 for example, the Delaware Supreme Court reaffirmed that the “exclusive standard of judicial review in examining the propriety of an interested cash-out merger transaction by a controlling or dominating shareholder is entire fairness.” Having said that, however, the Kahn court further held that “approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff.”

The Kahn court’s description of fairness as the “exclusive” standard of review seemed to preclude invoking the business judgment rule in conflicted-controller transactions. In its 2014 decision in Kahn v. M & F Worldwide Corp. (“MFW”),6 however, the Delaware Supreme Court held that “when a controlling stockholder merger has, from the time of the controller’s first overture, been subject to (i) negotiation and approval by a special committee of independent directors fully empowered to say no, and (ii) approval by an uncoerced, fully informed vote of a majority of the minority investors” the standard of review becomes the business judgment rule.7

In Tornetta, the Tesla defendants argued that MFW was irrelevant to the facts of this case:

They rely heavily on a ‘statutory rubric’ argument, claiming MFW’s dual protections, devised in the context of a squeeze-out merger, mimic the approvals required by 8 Del C. § 251 but have no practical application to transactions where our law does not mandate approval at both the board and stockholder levels. … I do agree with Defendants that nothing in MFW or its progeny would suggest the Supreme Court intended to extend the holding to other transactions involving controlling stockholders.8

Vice Chancellor Slights, however, observed that the risk of coercion is just as present when a conflicted controller enters into a compensation arrangement as when it proposes a freezeout merger:

Indeed, in the CEO compensation context, the minority knows full well the CEO is staying with the company whether vel non his compensation plan is approved. As our Supreme Court observed in Tremont II:

‘[I]n a transaction such as the one considered … the controlling shareholder will continue to dominate the company regardless of the outcome of the transaction. The risk is thus created that those who pass upon the propriety of the transaction might perceive that disapproval may result in retaliation by the controlling shareholder.’

These words apply with equal force to the compensation setting.9

Accordingly, in order for a conflicted-controller transaction to be reviewed under the business judgment rule rather than entire fairness, the transaction must receive both of MFW’s dual protections.

On the facts before it, the Vice Chancellor—for purposes of defendants’ motion to dismiss—concluded that:

I have determined on the pleadings that Defendants have satisfied the ‘majority of the minority’ condition but have not satisfied the ‘fully functioning, independent special committee’ condition. The burden of persuasion shifts to Plaintiff, therefore, to demonstrate the Award is not entirely fair. At this stage, the bar set for Plaintiff is to demonstrate from well-pled facts that it is reasonably conceivable the Award is unfair to Tesla. [H]e has cleared the bar, albeit just barely.10

The Vice Chancellor’s conclusion that the “majority of the minority” vote requirement was satisfied required him to distinguish then Chancellor (and now Chief Justice) Leo Strine’s decision in In re PNB Holding Co. Shareholders Litigation11 In that case, plaintiff shareholders had challenged a freezeout merger with a controlling shareholder. In that context, Strine held that approval of a conflicted interest transaction by a “majority of the minority” means approval by a majority of the outstanding disinterested shares not just a majority of those present and voting:

The cleansing effect of ratification depends on the intuition that when most of the affected minority affirmatively approves the transaction, their self-interested decision to approve is sufficient proof of fairness to obviate a judicial examination of that question. I do not believe that the same confidence flows when the transaction simply garners more votes in favor than votes against, or abstentions from, the merger from the minority who actually vote. That position requires an untenable assumption that those who did not return a proxy were members of a ‘silent affirmative majority of the minority.’ That is especially so in the merger context when a refusal to return a proxy (if informedly made) is more likely a passive dissent. Why? Because under 8 Del. C. § 251, a vote of a ‘majority of the outstanding stock of the corporation entitled to vote’ is required for merger approval, and a failure to cast a ballot is a de facto no vote. Therefore, giving ratification effect only if a majority of the disinterested shares outstanding were cast in favor of the transaction also coheres with § 251. [FN74]

FN74. I need not, and do not, hold that a qualifying ratification vote always needs to track the percentage approval required for the underlying transaction. One can posit a situation when a particular type of transaction requires, by charter, a 66.67% supermajority vote, and a conflicted stockholder holds 40% of the total vote, with the rest of the votes held by disinterested stockholders. To promote fair treatment, the board makes approval subject to a majority of the minority vote condition. Nothing in this opinion suggests that ratification effect would not be given if an informed majority of the minority of the remaining 60% of the electorate voted in favor of the transaction.12

As Vice Chancellor Slights observed, however, DGCL § 251 required that the freezeout merger at issue in PNB—like all mergers—be approved by a majority of the outstanding shares. In contrast, under DGCL § 216(2) ordinary matters only require the affirmative vote of a majority of the shareholders present at the meeting. Accordingly, the court limited PNB’s definition of the majority of the minority to cases in which the statute requires approval by a majority of the outstanding shares.

This aspect of the Vice Chancellor’s decision is less well supported than the remainder of his analysis. First, neither § 216 nor § 251 expressly applies to conflicted-controller transactions. Those statutes speak to the basic vote required to authorize corporate action, not to the vote required to insulate a conflict-of-interest transaction from judicial review for fairness. Second, a close reading of Strine’s decision shows that he saw § 251 as strengthening the underlying argument for requiring approval by a majority of the disinterested shares rather than just a majority of the disinterested shares present at the meeting.

Overall, however, Vice Chancellor Slight’s opinion is a well-reasoned and persuasive extension of the trend in Delaware law towards judicial deference to corporate actions that benefited from procedural safeguards designed to ensure that the pertinent decision makers are free from coercion by a conflicted controller. It strengthens the argument that MFW is not limited to freezeout mergers, but rather now provides a roadmap by which all conflicted-controller transactions can receive the protections of the business judgment rule.

Notes:

  1. 2019 WL 4566943 (Del. Ch. Sept. 20, 2019).
  2. In an earlier decision involving Tesla, Vice Chancellor Slights had determined that Musk was Tesla’s controlling shareholder despite owning only 22% of Tesla’s voting stock. See In re Tesla Motors, Inc. Stockholder Litig., 2018 WL 1560293 (Del. Ch. Mar. 28, 2018), appeal refused sub nom. Musk v. Arkansas Teacher Ret. System, 184 A.3d 1292 (Del. 2018).
  3. In re Pure Resources, Inc. Shareholders Litig., 808 A.2d 421, 436 (Del. Ch. 2002).
  4. Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face, 30 Del. J. Corp. L. 673, 678 (2005).
  5. 638 A.2d 1110, 1117 (Del. 1994).
  6. 88 A.3d 635 (Del. 2014).
  7. As the Supreme Court summarized its holding:

[T]he business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.

Id. at 645.

  1. Tornetta, 2019 WL 4566943 at *13. The defendants’ argument is supported by some commentators, as Ann Lipton has pointed out:

Itai Fiegenbaum argued that entire fairness should be the rule – even with MFW procedures in place – for less than transformative transactions.  See Fiegenbaum, The Controlling Shareholder Enforcement Gap, Am. Bus. L.J. (forthcoming).  Fiegenbaum claims that in a squeeze out kind of transaction, all eyes are on the controller, there’s a real likelihood of litigation, and that scrutiny coupled with MFW procedures may protect minority stockholders.  But in more ordinary transactions, that frequently will need to be brought derivatively and thus satisfy the demand requirement, controllers know that the chance of litigation is slight.

Vice Chancellor Slights did not address that concern.

  1. Id. at *11-12.
  2. Id. at *14.
  3. 2006 WL 2403999 (Del. Ch. 2006).
  4. Id. at *15.

The post Delaware Chancery Court Clarifies Review Standard for Challenges to Conflicted-Controller Transactions appeared first on Washington Legal Foundation.

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