Haynes and Boone Blogs

Fifth Circuit Holds that Plan Can Obtain Reimbursement from Special Needs Trust

Haynes and Boone Benefits Group — Mon, 20 May 2013 14:00:59 +0000

The federal Court of Appeals for the Fifth Circuit, whose jurisdiction covers the states of Texas, Louisiana, and Mississippi, issued an opinion on May 7, 2013 in ACS Recovery Services, Inc. v. Griffin, holding that the plan administrator and plan sponsor (collectively, “ACS”) of the group medical plan that covered employee Larry Griffin (the “Plan”) could recover from a special needs trust nearly $50,000 of medical expenses paid by the Plan on Mr. Griffin’s behalf when he was injured in an automobile accident. Mr. Griffin and his ex-wife filed suit against the company responsible for the other vehicle (the “Third Party”) and obtained a settlement with a present value of just over $294,000. The Plan’s terms provided that it would have “a first lien upon any recovery, whether by settlement, judgment, arbitration, or mediation” obtained in a third-party action, and further provided that a participant must not take any action that might prejudice the Plan’s rights to reimbursement. ACS had notified Mr. Griffin’s attorney of these provisions shortly after suit was filed against the Third Party. Nevertheless, under the terms of the settlement agreement, which Mr. Griffin signed, some of the settlement proceeds were segregated for attorneys’ fees and other expenses, and the remaining sum was used by the Third Party’s insurance company to purchase an annuity contract, pursuant to which monthly payments would be paid into a statutory special needs trust for Mr. Griffin’s benefit over a 20-year period. Notably, Mr. Griffin had warranted in the settlement agreement that all of his medical costs had been paid and that all liens for his medical care had been released or satisfied.

ACS filed suit under ERISA against the trust, the trustee, Mr. Griffin, and his ex-wife. In the suit, ACS sought a constructive trust on the amounts paid by the Plan to Mr. Griffin for his medical expenses and requested that the defendants be enjoined from interfering with the Plan’s right of reimbursement. The district court ruled in favor of the defendants, holding that ACS was seeking legal, not equitable, relief because neither Mr. Griffin nor the trust had possession or control of the settlement funds held in the annuity. In addition, the district court held that, since Mr. Griffin never had any possession or control over the settlement proceeds ultimately funding the trust through the annuity, equitable relief was not available against the trust. The Fifth Circuit reversed the lower court’s ruling as to ACS’s right to reimbursement from the trust and the trustee, holding that Mr. Griffin had a pre-existing agreement with ACS to reimburse the Plan for payments on his behalf in the event of a third-party recovery and that his signature on the settlement agreement triggered an equitable lien by agreement for the benefit of ACS that was superior to his own right to the funds. The court also pointed out that in order to assent to the disposition of the funds as outlined in the settlement agreement, Mr. Griffin must have had at least constructive possession and control of the funds. Moreover, the court held that the annuity and the monthly payments to the trust were an identifiable fund to which the Plan’s lien attached and that under ERISA, appropriate equitable relief demanded the imposition of a constructive trust on the proceeds of the annuity as they accrued to the trust. ACS Recovery Services, Inc. v. Griffin, No. 11-40446 (5th Cir. May 7, 2013).

Court Finds Breach of Fiduciary Duty Against Broker for Failure to Explain Interaction of Stop-Loss and Self-Funded Health Plan Coverage

Haynes and Boone Benefits Group — Fri, 17 May 2013 19:00:16 +0000

In Express Oil Change, LLC v. ANB Insurance Services, Inc., the sponsor of an employee health plan (the “Employer”) decided to convert its funding for the plan from a fully-insured to a self-funded basis. In preparation for the conversion, the Employer sought the advice and expertise of ANB Insurance Services, Inc. (the “Broker”) with implementation of the self-funded plan (the “Plan”) and procurement of the associated stop-loss insurance coverage. Apart from providing benefit consulting services to the Employer, the Broker had a long-standing and close relationship with the Employer as its agent for various other types of insurance coverage. The terms of the newly self-funded Plan provided for a $1 million lifetime maximum per participant on out-of-network benefits, but no such limit on in-network benefits. The Employer erroneously thought that the lifetime maximum applied to both in-network and out-of-network benefits and purchased a stop-loss policy with a deductible of $75,000 and a maximum pay-out on all benefits of $1 million per participant. When an employee’s child incurred medical claims under the Plan exceeding $2.8 million, the stop-loss policy paid only the amount exceeding the deductible and up to the $1 million limit, leaving the Employer responsible for the remainder. The Employer sued the Broker for breach of fiduciary duty under Alabama state law, asserting that the Broker’s failure to adequately explain the Plan’s lifetime maximum had caused the Employer’s unexpected liability. A federal district court in Alabama held that (i) the Broker was a fiduciary of the Employer based on the long-standing, close advisory relationship between the two parties; and (ii) the Broker breached its fiduciary duty by failing to adequately explain to the Employer how the stop-loss coverage interfaced with the Plan’s lifetime maximum and the means by which the Employer could cap its total liability. Express Oil Change, LLC v. ANB Insurance Services, Inc., No. CV-10-BE-0263-KOB. (N.D. Ala. Mar. 27, 2013).

DOL Issues Guidance to Employers Regarding PPACA Required Notices to Employees

Haynes and Boone Benefits Group — Fri, 17 May 2013 14:36:00 +0000

The U.S. Department of Labor (the “DOL”) recently released Technical Release 2013-2, which contains temporary guidance regarding notices required by the Patient Protection and Affordable Care Act (“PPACA”) that employers must provide to their employees concerning coverage options available in the new health insurance marketplaces, or “exchanges.” Generally, PPACA requires that any employer subject to the Fair Labor Standards Act (“FLSA”) must provide its employees with written notice of the existence of an exchange, contact information for the exchange, and the services provided by an exchange; that the employee may be eligible for a premium tax credit if the employee purchases coverage through an exchange; and that the employee may lose any employer contribution to a health benefit plan, if offered by that employer, which contribution may have been excludible from the employee’s taxable income. Effective October 1, 2013, employers must provide such notices to all current employees and to all newly hired employees within 14 days of their respective start dates. The DOL cautioned that employers must provide this notice to all employees (but not to their dependents or other nonemployees who may become eligible for coverage), whether full-time or part-time, regardless of their plan enrollment status. To assist employers in meeting this obligation, the DOL published two model notices: one for an employer that offers a health plan to at least some of its employees and another for an employer that does not offer a health plan. Employers may use these model notices and rely on the temporary guidance provided in the Technical Release before the October 1, 2013 effective date. The DOL also published a new model COBRA election notice that advises plan participants who are eligible for COBRA continuation coverage that they may also have coverage options available to them through an exchange. The DOL will consider an employer who uses the model COBRA notice to be in good faith compliance with COBRA’s election notice requirements.

A copy of Technical Release 2013-2 can be found here; the model notice for employers who offer a health plan to some or all employees can be found here; the model notice for employers who do not offer a health plan can be found here; and the COBRA model election notice can be found here.

EU Court of Justice Finds that Ireland Must Protect Pension Benefits in Bankruptcy

Haynes and Boone Benefits Group — Tue, 14 May 2013 13:00:32 +0000

The EU Court of Justice held that Directive 2008/94/EC of the European Parliament and of the Council of 22 October 2008 (“Directive 2008/94”) applies to pension benefits under a supplementary pension scheme, regardless of the cause of the employer’s insolvency, and without taking into account state pension benefits. Directive 2008/94 provides that member states must protect the pension interests of retirees when an employer becomes insolvent. In prior cases, the EU Court of Justice held that, while a member state need not guarantee 100 percent of the pension benefit, a guarantee of less than 50 percent is insufficient. In the case before the court, a crystal manufacturer (the “Employer”) in Waterford, Ireland, entered into bankruptcy. The Employer’s defined benefit pension scheme was severely underfunded and could cover only between 18 percent and 28 percent of the liabilities. A group of employees sued the Irish Minister for Social and Family Affairs for relief under Directive 2008/94. In addition to holding that Directive 2008/94 applied to the supplementary pension scheme set up by the Employer, the EU Court of Justice further held that for the participants to have standing, three prongs must be satisfied: the rule of European Union law infringed must be intended to confer rights on them, the breach of that rule must be sufficiently serious, and there must be a direct causal link between the breach and the loss or damage sustained by the individuals. The EU Court of Justice found that in the case presented, all three prongs were satisfied.

HOGAN & ORS -V- MINISTER FOR SOCIAL AND FAMILY AFFAIRS & ORS 2010/2922 P (Hogan C 398/11 25 April 2013)

Directive 2008/94 can be found here.
The EU Court of Justice Opinion can be found here.

IRS Proposed Regulations Regarding Minimum Value of Employer Plans and the Health Insurance Premium Tax Credit

Haynes and Boone Benefits Group — Fri, 10 May 2013 18:45:52 +0000

On May 3, 2013, the IRS issued proposed regulations (the “Regulations”) regarding the health insurance premium tax credit (“Credit”) enacted under PPACA and the determination of the minimum value of health coverage (“MV”) provided by an eligible employer-sponsored plan (“Plan”). Under PPACA, individuals generally cannot receive a Credit if they are eligible for coverage under a Plan that is “affordable” and provides MV. Certain large employers may be subject to a penalty under PPACA’s “play or pay rule” if a full-time employee receives a Credit. A Plan fails to provide MV if the Plan’s percentage share of the total allowed costs of benefits provided is less than 60 percent. The Regulations address the treatment of various benefit arrangements, including integrated health reimbursement arrangements and nondiscriminatory wellness programs, in the determination of a Plan’s percentage cost share for MV purposes and the affordability of the Plan’s coverage. Notably, with respect to wellness programs, the Plan’s cost share is determined without regard to reduced cost-sharing incentives available thereunder (i.e., the Plan cannot count incentives paid), except that for such programs designed to prevent or reduce tobacco use, and MV may be calculated assuming that every eligible individual qualifies for the incentive. The Regulations further provide that, in regard to wellness incentives affecting the cost of premiums paid by an individual for Plan coverage, “affordability” is determined by assuming that every individual fails to qualify for the incentive (i.e., the premiums paid by the individual will appear higher), except in the case of a wellness program related to tobacco use whereby the assumption is made that every eligible individual meets the requirements for the incentive. Transitional relief, however, is provided in the Regulations for Plan years beginning prior to January 1, 2015, which permits special treatment of wellness program incentives for purposes of assessing penalties under the “play or pay rule.” The Regulations address other considerations related to the Credit and MV under the Internal Revenue Code, including methods for calculating MV, determinations of the “standard population” used in the MV calculation, and the treatment of retiree coverage as minimum essential coverage. The Regulations are proposed to apply for taxable years ending after December 31, 2013, but may be applied for taxable years ending before January 1, 2015.

A link to the Regulations is available here.

IRS Releases 2014 Inflation-Adjusted Amounts for HSAs

Haynes and Boone Benefits Group — Fri, 10 May 2013 13:00:06 +0000

On May 2, 2013, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2013-25, which set the annual limit on deductions permitted in 2014 for health savings accounts at $3,300 for individuals with self-only coverage under a high-deductible health plan and at $6,550 for individuals with family coverage under a high-deductible health plan. A high-deductible health plan for calendar year 2014 is a plan that has an annual deductible of at least $1,250 for self-only coverage or $2,500 for family coverage.

Revenue Procedure 2013-25 can be found here.

IRS Issues Voluntary Correction Program Submission Kit for Plan Sponsors Who Missed the Deadline to Adopt a Pre-Approved Defined Benefit Plan

Haynes and Boone Benefits Group — Fri, 10 May 2013 05:48:12 +0000

Employers that maintained pre-approved defined benefit retirement plans generally were required to adopt a new plan document, on or before April 30, 2012, that incorporated changes required by EGTRRA. Employers that failed to meet this deadline may correct this failure by adopting a restated EGTRRA plan document and filing a submission for a Voluntary Correction Program (“VCP”) compliance statement with the IRS in accordance with the submission kit, which guides plan sponsors through the steps in filing a submission for a VCP compliance statement for this adoption failure. If there are other plan failures, a submission using the kit’s requirements will not correct the other failures.

A copy of the kit can be found here.

New FAQs Address Annual Limit Waivers, Provider Nondiscrimination, and Transparency Reporting under PPACA

Haynes and Boone Benefits Group — Fri, 10 May 2013 05:44:46 +0000

The Departments of Labor, Health and Human Services, and Treasury (collectively, the “Departments”) recently released frequently asked questions (“FAQs”) addressing the implementation of the annual limit waivers, provider nondiscrimination, and transparency reporting requirements under the Patient Protection and Affordable Care Act (“PPACA”). In the FAQs, the Departments first clarified that a change to a health plan or insurance policy year will not affect the expiration date of an annual limit waiver. For instance, if a waiver was granted for an April 1, 2013 plan or policy year, the waiver will expire on March 31, 2014, regardless of whether the plan or issuer later amends its plan or policy year. Next, the Departments announced that no regulations are forthcoming to address PPACA’s provisions related to nondiscrimination against providers or coverage for individuals participating in approved clinical trials because the Departments considered such provisions to be self-implementing. Accordingly, non-grandfathered group health plans and health insurance issuers offering group coverage (“Group Health Plans”) for plan years on or after January 1, 2014, should apply these provisions using their own good faith, reasonable interpretation of the provisions. Finally, the Departments clarified that the transparency reporting requirements applicable to non-grandfathered Group Health Plans will not apply until after one benefit year, which is a calendar year for which the Group Health Plans provide coverage for health benefits, because the plan will not have all of the data necessary to fulfill the reporting requirements.

A copy of the FAQs can be found here.

LivingSocial Needs to Get Ready to Stand Up

William O'Neill — Wed, 08 May 2013 18:39:47 +0000

In the words of CBS News, “another day, another high-profile password hack.” LivingSocial posted a security notice on its website on April 27, 2013 alerting users to a cyberattack of its servers. For those readers who have not used the company’s services, LivingSocial is a discount site similar to Groupon that claims more than 70 million members worldwide. As of November 2012, LivingSocial advertised that it had sold over 123 million vouchers.

As first reported by tech blog AllThingsD, customer data for more than 50 million users may have been accessed. Some of this data may include users’ names, email addresses, encrypted passwords and the dates of birth.

Avid readers of this blog may recall that we discussed the rise in litigation following high-profile hacking in January. That post was recently expanded into a full-length article in Managing IP. In quick summary, plaintiffs’ counsel are finding new and novel ways to sue companies whose systems are hacked. Companies have fought back by attacking the plaintiffs’ “standing” to file such litigation because the plaintiffs are often unable to prove that they were damaged. Companies that have already deployed this defense include Google, LinkedIn and Activision/Blizzard. It may very well be the case that LivingSocial will need to deploy the same defense in the coming months.

IRS Issues Anti-Cutback Relief for ESOPs Eliminating In-Service Distributions

Haynes and Boone Benefits Group — Fri, 03 May 2013 13:00:00 +0000

In Notice 2013-17, the IRS extended the deadline to amend an employee stock ownership plan (“ESOP”) to eliminate certain statutory in-service distributions as a diversification option that applies to an ESOP that does not hold publicly traded employer securities when the employer’s securities become publicly traded and to an ESOP that becomes subject to the diversification requirements that apply to ESOPs holding publicly traded employer securities. This guidance permits the change in the diversification rules and distribution rights without causing the ESOP to be in violation of the anti-cutback provisions of Section 411(d)(6) of the Internal Revenue Code. The prior deadline to so amend an ESOP was the deadline to amend under the Pension Protection Act (“PPA”). Pursuant to Notice 2013-17, the new deadline is the later of the PPA deadline or the last day of the first plan year starting on or after January 1, 2013.

A copy of the notice can be found here.

Supreme Court Holds that a Plan’s Clear Terms Prevail in Reimbursement Action

Haynes and Boone Benefits Group — Thu, 02 May 2013 18:58:16 +0000

On April 16, 2013, the U.S. Supreme Court issued its decision in US Airways, Inc. v. McCutchen. In its opinion, the Court addressed whether equitable doctrines derived from the principle of unjust enrichment can override the clear terms of an ERISA benefit plan regarding rights to reimbursement from a third-party recovery. Mr. McCutchen was a participant in the US Airways group health plan (the “Plan”), which was governed by ERISA. After incurring claims under the Plan based on injuries he sustained in an automobile accident, McCutchen hired an attorney on a contingency fee basis to sue the driver of the other vehicle. McCutchen sought damages for medical costs, lost earnings, and other injuries. The lawsuit resulted in a settlement recovery, and McCutchen also obtained a payment from his own automobile insurer. After offsetting his total recovery by his attorney’s contingency fee, McCutchen was left with a recovery that was less than the amount paid by the Plan for his injury claims. The Plan contained provisions requiring participants to reimburse the Plan for amounts it paid for a participant’s claims out of any monies the participant recovered from third parties, including the participant’s own insurer. Accordingly, the Plan demanded reimbursement from McCutchen of the full amount of his claims it had paid. When McCutchen refused, the Plan filed an action for reimbursement under ERISA § 502(a)(3), which authorizes civil actions “to obtain…appropriate equitable relief…to enforce…the terms of the plan.” McCutchen raised two defenses based on equitable doctrines: the first asserting that reimbursement should be available to the Plan only to the extent of his “double recovery,” and the second asserting that the Plan, as the party seeking reimbursement, must be required to pay a share of the attorney’s fees incurred in securing the recovery (i.e., the “common fund” doctrine). The Court held that in an action brought under ERISA § 502(a)(3), neither general principles of unjust enrichment nor specific doctrines reflecting those principles, such as the two asserted by McCutchen, could override the clear terms of the ERISA plan. The Court found that the Plan contained the clear terms necessary to prevent the application of the “double recovery” doctrine; therefore, the Plan could obtain reimbursement from McCutchen even though he had not recovered his full damages. However, the Court determined that the Plan did not contain any provisions addressing the allocation of attorney’s fees; thus, the common fund doctrine was the appropriate default. Consequently, the Plan’s reimbursement was offset by a proportional allocation of McCutchen’s attorney’s fees.

This case is noteworthy because it resolves a split among the federal circuit courts regarding whether equitable defenses can override an ERISA plan’s reimbursement provisions. Moreover, it highlights the importance of ensuring that an ERISA plan contains clear and complete language regarding the plan’s rights to both subrogation and reimbursement from third party recoveries, including the allocation of attorney fees. For example, an ERISA plan could be drafted to expressly provide that the plan’s recovery is not offset by any portion of the plaintiff’s attorney’s fees.

A copy of the McCutchen opinion is available here.

PBGC Proposed Rule Would Exempt 90 Percent of Plans and Plan Sponsors from Reportable Event Requirements

Haynes and Boone Benefits Group — Fri, 19 Apr 2013 13:25:51 +0000

The Pension Benefit Guaranty Corporation (“PBGC”) recently issued proposed Rule 2013-07664, which would exempt most pension plans and plan sponsors from reporting many corporate and plan events under ERISA. Currently, ERISA plans and plan sponsors must report certain events to PBGC, such as active participant reductions, missed contributions, and an inability to pay benefits when due, among others. The proposed rule significantly changes the reportable event waiver structure currently in place and adds new funding-based and financial soundness safe harbors. Consequently, the proposed rule would reduce the reporting requirements of plans and plan sponsors that are financially sound and would permit PBGC to focus its resources on those plans that are at risk. The proposed rule includes a summary chart that compares the current and proposed reporting waiver structures. Additionally, the proposed rule makes electronic filing of reportable event notices mandatory. The proposed rule would apply to reportable events occurring on or after January 1, 2014.

A copy of the proposed rule can be found here.

Bloggers Beware: FTC Issues New Guidelines for Social Media Advertising Disclosures

Leanne Stendell — Thu, 18 Apr 2013 20:00:39 +0000

The Federal Trade Commission has issued updated “.com Disclosures” guidelines aimed at clarifying the disclosures required of online advertisers, in addition to the general advertising law principles, like truthfulness, that advertisers should follow regardless of the medium.

The new guidelines apply to all methods of online advertising, including sponsored posts on personal blogs and Twitter accounts.

Any time a blogger or user of any other online medium receives compensation in return for a post, has been given a free product to review, receives a commission on sales, or receives any other type of consideration (including services) in return for promoting a third party’s offering, the blogger must disclose that fact.

This disclosure must be “clear and conspicuous.” Disclosures made solely at the bottom of posts, in small print, in a general “legal guidelines” document, or far away from the claim would not meet this standard.

Rather, the disclosures must be at least the same size as the advertising claim, in a color that contrasts with the background, and preferably accompanied by graphics to emphasize the disclosure, though graphics are not mandatory. Additional guidelines include ensuring that the disclosure is:

placed as close as possible to the claim, ideally so that the user does not have to scroll to find the disclosure
visible on and compatible with the various devices and programs used by consumers to view the ad
revealed before the consumer makes a decision to buy (such as before the user clicks “add to cart”)
repeated if the site is lengthy, or if there are multiple advertising claims made
in plain, readily understandable language
as unavoidable as possible

A hyperlinked disclosure could be appropriate, if the disclosure is not integral to the claim and if it is so complex that it cannot readily be conveyed in the text alongside the claim. The link should be obvious and labeled to convey the importance of the information and to give an idea of the type of information contained in the disclosure (more specific than just “disclosure” or an indecipherable shortened URL), and the linked page should immediately provide the disclosure.

On Twitter, making the disclosure via a hashtag at the end of the message might not be sufficient (e.g., “#spon”). The FTC suggests placing the word “Ad:” at the beginning of sponsored tweets. It would not be acceptable to include the disclosure in a subsequent tweet separate from the sponsored tweet. The same tweet must also include any necessary disclaimers, like the average results from a weight-loss program.

If the medium simply cannot accommodate all of the necessary disclosures (for instance, in a single tweet), then the FTC advises the advertiser not to run ads in that medium.

For more detailed guidelines and specific examples, please refer to the FTC’s .com Guidelines document.

FAQs on Use of Exchanges to Offer Ancillary Insurance Products

Haynes and Boone Benefits Group — Fri, 12 Apr 2013 13:30:06 +0000

On March 29, 2013, the Centers for Medicare & Medicaid Services (“CMS”) released a set of Frequently Asked Questions (“FAQs”) regarding the use of health care reform exchanges (“Exchanges”) to offer ancillary insurance products, such as stand-alone vision, disability, and life insurance coverage. The FAQs clarify that an Exchange may offer only “qualified health plans” (“QHPs”), which include stand-alone dental plans, to qualified individuals and qualified employers, but that ancillary insurance products may be offered by separate state programs that share resources and infrastructure with a state-based Exchange. In addition, Exchanges are permitted to provide information about ancillary products, such as explanations of the coverage the ancillary products provide, but must also caveat that enrollment in an ancillary product does not qualify as enrollment in a QHP. A copy of the FAQs is available here.

Federal Court Lacks Jurisdiction to Consider Arbitration or ERISA Benefit Related Issues under Employment Agreement

Haynes and Boone Benefits Group — Mon, 08 Apr 2013 13:31:35 +0000

The U.S. Court of Appeals for the Eighth Circuit recently held that it lacked jurisdiction to hear a motion to enjoin a request for arbitration to settle disputes under an employment agreement. Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”) entered into an employment agreement with its president and CEO (the “Defendant”) to encourage his retention following an anticipated change of control. With a merger imminent, DM&E terminated the Defendant without cause and triggered the employment agreement’s severance provisions; the Defendant filed a demand for arbitration. DM&E then filed an action in federal court to enjoin the arbitration. The Eighth Circuit agreed with the district court that the benefits sought in the Defendant’s arbitration demand were not claims for benefits due under an ERISA plan. The circuit court held that the benefits being demanded under the employment agreement (i.e., the continued provision of employee benefits or cash payments if such benefits were unavailable under the terms of the plans) were demands under a free-standing, single-employee contract that pegged DM&E’s payment obligations to amounts that would have been due under the ERISA plans. Because there was no evidence to indicate that the parties intended to amend the ERISA plans and because the employment agreement is not itself an ERISA plan, the court held that the claims were not claims for benefits due under an ERISA plan. Accordingly, the court held that it lacked federal subject matter jurisdiction to consider the arbitration issue or any other issue arising under the employment agreement. Dakota, Minnesota & Eastern Railroad Corp. v. Schieffer, No. 12-1807 (8th Cir. Mar. 28, 2013

SEC Clarifies the Application of Regulation FD to Social Media Disclosures

Katherine "Kit" Addleman — Sun, 07 Apr 2013 18:46:39 +0000

Since the announcement of the investigation by the SEC of the CEO of Netflix, Inc. for a July 2012 Facebook post celebrating a company milestone, there has been considerable uncertainty as to whether companies can use social media outlets, like Facebook and Twitter, to communicate with investors without violating Regulation Fair Disclosure (“Regulation FD”). On April 2, 2013, the SEC addressed this uncertainty by issuing a Report of Investigation (the “Report”) in which it clarified the rules applicable to companies releasing information to the public through social media. The Report indicates that the SEC is amenable to the increased use of social media outlets by companies while also reinforcing the applicability of Regulation FD to any such disclosures.

Regulation FD contains the federal securities regulations requiring public companies to disclose material, non-public information to investors in a manner reasonably designed to achieve effective broad and non-exclusionary distribution to the public before providing such information to shareholder and securities professionals. Regulation FD is meant to prevent shareholders and securities professionals from having an advantage as a result of early access to material, non-public information. The SEC previously released guidance permitting companies to make disclosures of material, non-public information to the public through their company websites under specified circumstances. The Report carries this principle one step further by applying the 2008 guidance for disclosures on company websites to social media disclosures.

Companies considering social media disclosures should be mindful of two important requirements. First, before disclosing material, non-public information through social media outlets, companies must ensure that the social media outlet will be a recognized channel of distribution to investors. This is a fact-specific inquiry, but may be satisfied in many circumstances by advising investors on the company website ahead of time of the intention to release such information using social media. Second, companies must ensure that information is distributed in a manner reasonably designed to achieve effective broad and non-exclusionary distribution to the public. This requirement focuses on the access that investors and the public have to the information released. In circumstances where the public does not have equal access to the information being released as a result of the characteristics or settings of a social media outlet, a company will likely fail to satisfy Regulation FD.

Companies considering expanding their use of social media as an avenue of communication with investors should review their existing social media policies in light of the procedures that need to be followed and the type of medium that may be used for dissemination of information. They should also make sure their website makes reference to any additional authorized channels. Breaches of Regulation FD can lead to expensive and time consuming legal or administrative actions. Haynes and Boone regularly counsels clients on the applicability of Regulation FD to releases of public information through a variety of channels.

Find additional information and read the Report of Investigation here.

This alert can be read in its entirety on the Haynes and Boone, LLP website.

6th Circuit Reverses Trial Court’s “Mechanical Application” of Statutory Pre-Judgment Interest Rate Applied to Pension Benefit Award

Haynes and Boone Benefits Group — Fri, 05 Apr 2013 18:00:36 +0000

The U.S. Court of Appeals for the Sixth Circuit recently affirmed a trial court’s award of more than $3 million in unpaid pension benefits but reversed the trial court’s award of pre-judgment interest at the statutory rate. The Sixth Circuit agreed that a class of plaintiffs’ claims for unpaid pension benefits were not precluded by their execution of severance agreements, which included a release of claims, because the claims allegedly released (i.e., lump sum benefit calculations) had not yet accrued at the time the severance agreements were signed, since lump sums were not yet available for those who signed the releases, and because there was no mention in the releases of future pension or ERISA claims. The circuit court held that its ruling was consistent with the law that waivers of future ERISA violations are unenforceable. Nevertheless, the Sixth Circuit reversed the trial court’s application of the statutory pre-judgment interest rate of 0.12 percent. The Sixth Circuit found the trial court’s “mechanical application” of the statutory rate, without considering case-specific factors, to be an abuse of discretion because the statutory interest rate failed to adequately compensate the plaintiffs for the lost time value of their pension benefits and failed to prevent the defendant employer’s unjust enrichment. Accordingly, the Sixth Circuit remanded the case back to the trial court to set a more appropriate pre-judgment interest rate based on the specific factors of the case. Schumacher v. AK Steel Corp. Retirement Accumulation Pension Plan, No. 1:09-cv-794 (6th Cir. Mar. 28, 2013).

IASB Proposed Amendment to IAS 19: Accounting for Employee Contributions to a Defined Benefit Plan

Haynes and Boone Benefits Group — Fri, 05 Apr 2013 12:30:11 +0000

The International Accounting Standards Board (“IASB”) recently proposed amending IAS 19 to address the proper method of accounting for contributions from employees or third parties to a defined benefit plan when such contributions are required by the defined benefit plan’s terms. The amendment is intended to clarify when an employer can recognize such contributions as a reduction in its short-term employee benefits costs instead of a reduction in its post-employment benefits costs. The proposed amendment would permit an employer to recognize the contributions as a reduction in its short-term employee benefits costs in the same period in which the benefits are payable if, and only if, the contributions are linked solely to the employee’s services rendered during that period, for example, employee contributions based on a fixed percentage of the employee’s salary regardless of the employee’s years of service to the employer. Interested parties may submit comments to IASB through July 25, 2013. A copy of the proposed amendment can be found here.

What Happens on Facebook, Stays on Facebook (When It Is Subject to a Discovery Request)

Alex Stevens — Wed, 03 Apr 2013 21:40:12 +0000

As readers of this blog know, social media evidence, like other electronically stored information, must be preserved when a party “reasonably foresees” or “reasonably anticipates” that it may be needed in litigation. As a New Jersey federal judge recently made clear, attempts to evade this requirement by deleting social media information may result in sanctions.

In Gatto v. United Airlines, Inc., defendants in a personal injury lawsuit sought access to a number of plaintiff’s social networking accounts to find evidence relating to his credibility and his online businesses, which would be relevant to the plaintiff’s damages. Case no. 2:10-cv-01090 (D. N.J. March 25, 2013). At mediation, plaintiff agreed to change his Facebook password so that he could share his account information with defendants’ counsel.

Defendants’ counsel then accessed plaintiff’s account, causing Facebook to alert plaintiff that his account had been accessed by an unknown IP address. The plaintiff then deactivated his account. Whether he then took additional steps to delete his account is a matter of dispute, but this question did not affect the judge’s determination that the plaintiff’s failure to preserve this evidence had prejudiced the defendants.

The judge applied a four-factor test, finding that the social media evidence was in the plaintiff’s control, that there had been an actual suppression or withholding of evidence, that the evidence in question was relevant to the claims or defenses at issue, and that it was reasonably foreseeable that the evidence would be discoverable. The judge accordingly partially granted the defendants’ motion for sanctions, finding that the defendants were entitled to an instruction that the jury may draw an adverse inference against the plaintiff for failing to preserve his Facebook account and intentionally destroying the evidence it contained. The judge denied defendants’ motion for monetary sanctions, however.

This case is a good reminder of the value of requesting social media information in discovery in any case where a party’s state of mind, whereabouts, or communications are at issue. However, although this ruling is helpful to employers looking to obtain social media data, it is an equally important reminder of the need to preserve social media evidence.

New Facebook Notification: “You’ve Been Served” – Federal Court Permits Service of Process via Facebook

Jason Gonder — Mon, 01 Apr 2013 19:58:08 +0000

In March, we reported that the Texas legislature may permit Texas state courts to authorize service of process via social media. Since then, a U.S. district court has ordered that the plaintiff may serve documents, other than the summons and complaint, on defendants located abroad via email and social media. FTC v. PCCare247 Inc., No. 12-CIV-7189 (PAE) (S.D.N.Y. Mar. 7, 2013).

This appears to be the first time that a U.S. district court has authorized service via social media (albeit as a backup to email service). As an increasing number of U.S. lawsuits, especially those involving intellectual property rights, involve foreign litigants, this is an important development. This is especially true as service under international treaties can be slow and costly.

The FTC filed the case on September 24, 2012 in the U.S. District Court for the Southern District of New York. The FTC alleges that several U.S.- and India-based individuals and companies have been tricking U.S. consumers into paying the defendants “to fix non-existent problems” with the consumers’ computers.

The district court granted the FTC a temporary restraining order (“TRO”) and preliminary injunction enjoining the defendants from “directly or indirectly misrepresenting, expressly or by implication, that . . . security or performance issues have been detected on a computer, including but not limited to claims that a computer contains viruses, spyware, or system errors.”

The FTC was able to effect service of the summons, complaint, TRO, and preliminary injunction on the U.S.-based defendants via traditional service methods (e.g., service of the summons and complaint by personal service under Federal Rule of Civil Procedure 4(e)(2)(A) and service of the other documents by mail under Federal Rule of Civil Procedure 5(b)(2)(C)).

The FTC initiated service of the summons and complaint on the India-based defendants via the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (commonly referred to as the “Hague Service Convention”). Almost five months after initiating service under the Hague Service Convention, the FTC still had not received confirmation of service from the Indian government or even any response to the FTC’s status requests.

The India-based defendants retained counsel, who represented them at the preliminary injunction hearing. After issuance of the preliminary injunction, the district court granted defendants’ counsel motion to withdraw for nonpayment of attorney fees. Based on this prior representation, it appears that the India-based defendants had actual notice of the lawsuit, as well as the key terms of the preliminary injunction (which were identical to those of the TRO that issued when the case was filed, several months prior to counsel’s withdrawal).

Because of the “tremendous delay” likely to result from service under the Hague Service Convention and the defendants’ failure to comply with the terms of the preliminary injunction, the FTC asked the district court to authorize service of non-case initiating documents (i.e., everything but the summons and complaint) on the India-based defendants by email and Facebook. The FTC made the request pursuant to Federal Rule of Civil Procedure 4(f)(3), which authorizes a district court to permit service “by other means not prohibited by international agreement.” In support, the FTC stated that it verified that the email addresses associated with the India-based defendants’ Facebook accounts actually belonged to the India-based defendants.

The district court granted the FTC’s request finding that:

India’s governing body over judicial matters has not objected to service by email or Facebook and no international treaty prohibits such service;
service by email and Facebook comports with due process because the defendants used the email addresses to carry out the alleged scheme; and
the delay caused by service of every document through the Hague Service Convention “is not tolerable.”

The district court questioned whether service via Facebook only, without service by email too, would comport with due process because “‘anyone can make a Facebook profile using real, fake, or incomplete information, and thus, there is no way for the Court to confirm’ whether the Facebook page belongs to the defendant to be served.” FTC v. PCCare247 Inc. at p. 9 (quoting Fortunato v. Chase Bank USA, No. 11 Civ. 6608 (JFK) (S.D.N.Y. June 7, 2012) (we previously reported on the Fortunato decision here). The district court dismissed this concern, however, because there was “ample reason for confidence that the Facebook accounts identified are actually operated by defendants.”

Recognizing that “service by Facebook is a relatively novel concept, and that it is conceivable that defendants will not in fact receive notice by this means,” the district court noted that “service by Facebook is not intended as the sole method of service, but instead to backstop the service upon each defendant at his, or its, known email address.”

It is easy to see why service by social media was permitted in this case:

the aim of the lawsuit was to protect the public interest rather than to vindicate private rights;
the parties to be served by social media were previously represented by counsel and had notice of the proceedings;
the plaintiff verified that the social media accounts belong to the defendants; and
the service was only a backup to service via known email accounts.

While the facts in this case were unique, this case and the proposed Texas legislation may signal a U.S. trend toward considering, in appropriate circumstances, the use of social media to reach foreign litigants.