Category Archives: Governance, Risk & Compliance

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Court Dismisses EEOC Lawsuit for Lack of Jurisdiction

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On Sept. 22, 2014, in EEOC v. Vicksburg Healthcare LLC, et al., Judge Keith Starrett of the U.S. District Court for the Southern District of Mississippi granted defendant’s motion to dismiss an EEOC lawsuit for lack of personal jurisdiction and insufficient service of process. The EEOC had filed a disability discrimination claim on behalf of a nurse who worked at a hospital owned by a subsidiary of the defendant. The court held that the EEOC, which sued a subsidiary hospital in Mississippi and its Tennessee-based parent corporation, did not put forth prima facie evidence of the necessary factors to satisfy personal jurisdiction requirements for the parent corporation in Mississippi.

While this ruling is favorable for non-Mississippi parent corporations operating subsidiaries in Mississippi, it has larger significance for employers. It shows that nationwide jurisdiction is not a given when the EEOC sues. Additionally, the ruling provides the framework for how to prevent liability by avoiding personal jurisdiction.

Case Background

The EEOC filed an action on behalf of Beatrice Chambers alleging disability discrimination under Title I of the Americans with Disabilities Act of 1990. The complaint named Community Health Systems, Inc. (CHSI) and Vicksburg Healthcare, LLC (VHL) as Defendants, alleging that both CHSI and VHL have been continuously doing business as River Region Medical Center (River Region) in Vicksburg, Mississippi.

The EEOC alleged that the defendants terminated Chambers–who had worked as a nurse at River Region for about 36 years–because of her unspecified disability, and additionally failed to provide her with reasonable accommodations in violation of the ADA. VHL was a subsidiary of CHSI, which was incorporated in Delaware and had its principal place of business in Tennessee. While VHL admitted doing business as River Region and admitted employing Chambers, CHSI denied doing business as River Region and denied employing Chambers. Further, in its motion to dismiss, CHSI asserted the affirmative defenses of lack of personal jurisdiction, insufficient process, and insufficient service of process.            

The Court’s Decision

In granting CHSI’s motion to dismiss, the court held that the issue of personal jurisdiction was controlling. The EEOC has the burden of establishing a prima facie case for personal jurisdiction. The court noted that a non-resident defendant is amenable to being sued in Mississippi if: (1) Mississippi’s long-arm statute confers jurisdiction over the defendant; and (2) the exercise of personal jurisdiction comports with the requirements of federal due process. The Mississippi long arm statute consists of three prongs, including: the contract prong; the tort prong; and the doing-business prong. It was undisputed that the “doing-business” prong was case dispositive.

CHSI submitted an affidavit from its Senior Vice President and Chief Litigation Counsel to the effect that it did not conduct business in Mississippi and that it lacked sufficient minimum contacts to be hauled into court in Mississippi.

The affidavit confirmed that CHSI is a holding company with no employees; CHSI indirectly owned subsidiaries including VHL; CHSI neither operated nor controlled the day-to-day operations of River Region; CHSI and River Region maintained separate banking records and did not co-mingle funds; CHSI did not employ nor have control over any River Region staff; CHSI never made any employment decisions regarding Chambers; CHSI and River Region observed corporate formalities (including no overlap between the Board of Trustees of River Region and the board of directors of CHSI; the respective boards of River Region and CHSI each convened separate meetings, (the boards maintained separate minutes and records); and CHSI is not qualified to do business in Mississippi–owns no property there, has no offices there, does not market there, and does not pay taxes there.

Following well-established precedent, the court found this aggregation of factors to be dispositive. It held that the EEOC lacked personal jurisdiction to sue CHSI in Mississippi.

The court rejected the EEOC’s three arguments in opposition of dismissal. First, the EEOC argued that the 10-K form submitted by CHSI to the SEC demonstrated CHSI’s intent to do business in Mississippi as it often used language such as “we” when referring to the hospital.  The court rejected this argument, noting that the 10-K form also contained a provision saying the hospitals are expressly owned and operated by the subsidiaries. Next, the EEOC mistakenly speculated that the River Region employee handbook contained references to CHSI. The court cited an affidavit from CHSI’s litigation counsel clarifying that the entity referred to in the handbook was a different indirect subsidiary, and not the parent corporation. Finally, the EEOC erroneously relied on another case involving CHSI – Bass v. Community Health Systems, Inc., Case No. 2:00cv193 (N.D. Miss.). The court noted that no facts from that case illustrated that CHSI should be amenable to personal jurisdiction.

Implications for Employers

 When out-of-state parent corporations conduct business in Mississippi through subsidiaries, it is imperative that they observe corporate formalities to clearly maintain the parent-subsidiary relationship. Further, in documents such as 10-K forms and employee handbooks, employers must explicitly indicate that subsidiaries, and not the parent, own and operate local entities. If parent corporations follow the teachings of EEOC v. Vicksburg Healthcare, LLC, et al., they can avoid unwittingly submitting to personal jurisdiction in Mississippi courts while their subsidiaries do business there.

This blog was previously posted on the Seyfarth Shaw website.

Crime Expert Reveals Biggest Gaps in Company Security

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WINNIPEG, MANITOBA, Canada – After decades of working undercover for the Royal Canadian Mounted Police, the U.S. Drug Enforcement Administration and U.S. Customs Service, crime and risk expert Chris Mathers knows where companies are vulnerable and what it takes to protect them.

“In a world where popular culture tells us that the ends justify the means, crime is all about perception,” he said in a keynote address at the 2014 RIMS Canada Conference. “Young people are bombarded with it all the time, but we are in business, too. So the question is, how vulnerable is your business?”

Mathers, who joined the forensic division of KPMG and was later named president of corporate intelligence, shared his insight into how companies can best guard against “the business of crime, and crime in business.”

During his 20 years dealing with drug traffickers, money launderers and members of organized crime syndicates, Mathers developed what he calls a “10/80/10” theory – 10% of the population is truly bad, 10% is truly good and would never lie (but you will probably never meet), and the other 80% is everywhere in between. Identifying and managing the risks of that 80% requires far more work than employers are currently doing, he said.

Background checks may be the single biggest thing companies can do better, Mathers said. While most businesses perform background checks when an employee is hired, such investigations are seldom conducted during the course of employment. As an example, he cited a case where a company had a director who was serving jail time on the weekends. Due to Canadian privacy laws, however, the case was never reported, so no one knew he had been convicted and imprisoned while on staff. In addition to possible reputation implications, the company could have been exposed to liability if any incidents had occurred at work.

While searching for criminal records of new hires is an excellent start, periodic checks should be implemented for all employees. High levels of drug use in the workplace in industries like manufacturing can be further compounded by the lack of drug testing in Canada, Mathers said. Further, 90% of corporate theft cases he have involved perpetrators who were gamblers.

He suggested that investigations should examine whether employees: have extreme views, use or are addicted to drugs, exhibit signs of alcoholism, are addicted to gambling or participate in illegal gambling, frequent prostitutes, or have relatives or a spouse associated with a criminal organization.

Associating with criminals can be a significant risk factor, regardless of the nature of the relationship. “Prostitutes are criminals and associate with criminals,” Mathers said. “They are around that activity and more likely to engage in it, which may mean they steal a client’s wallet or steal the sensitive intellectual property he’s carrying.” Similarly, an administrative assistant who is married to a member of the Hell’s Angels can introduce far more than just reputation risk if the spouse gets involved in illegal activities like drug smuggling.

Employees within a company can also rationalize criminal behavior. In the case of a man found to have stolen thousands of dollars through expense account fraud, for example, Mathers said the company faced a wrongful dismissal suit from the thief. He was never told that he could not steal, the man said, claiming the practice was an “unofficial bonus program.” Further, he claimed his boss had been doing it for years. “People see that behavior and come to think it is OK because they become accustomed to seeing it,” Mathers said. Maintaining regular internal investigations and ensuring compliance does not just bust wrong-doers, but prevents others from developing, especially as new technology continually emerges to make theft easier to commit and harder to track.

“There are no new crimes – they’re the same crimes, they’re just using new techniques to get them to you,” he said. Companies need to keep updating their monitoring strategies to match.

 

EPA, DuPont Reach Settlement Over Pesticide Violations

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Failure to register and label a pesticide with the U.S. Environmental Protection Agency (EPA) has netted a penalty of $1.85 million for DuPont, the EPA announced today.

DuPont did not submit reports about the potential adverse effects of an herbicide product called Imprelis, introduced in 2010, the EPA said in a statement. The agency alleges that from October 2010 through June 2011, DuPont distributed or sold Imprelis on 320 occasions with labeling that did not include adequate directions for use, warnings or caution statements to protect non-target plants.

The product was available in 4.5 fl. oz., 1 gallon and 2.5 gallon size containers, and was primarily sold to pest control professionals servicing the lawn, golf, turf and weed control sectors from New Jersey to Wisconsin, the EPA said. Customers who applied the product found that it led to damage and death of some types of coniferous trees, including Norway spruce and white pine.

In June 2011, the EPA started to get complaints from state pesticide agencies regarding evergreen damage related to use of Imprelis. According to the EPA, DuPont reported it received more than 7,000 claims of death or damage to trees. Cases of tree damage and death were widespread in the Midwest, especially Indiana, Illinois, Michigan, Minnesota, Ohio and Wisconsin. Indiana investigated more than 400 cases of tree damage related to Imprelis in 2011, the EPA said.

The agency added that media reports put claims as high as 30,000 by homeowners, landscapers, golf courses and entities with crop damage from the use of the herbicide.

DuPont stopped selling the product in August 2011 and in 2013, the Wilmington, Delaware-based company reached a settlement with representative plaintiffs in a class action lawsuit in federal court in Pennsylvania.

Reuters reported that under the settlement agreement, DuPont will pay property owners to remove and replace damaged trees and other losses. Businesses that applied the herbicide to the property of others will also be compensated for customer site visits and other expenses.

The settlement provides up to $7 million in attorney’s fees and also costs for plaintiffs’ lawyers, Reuters said.

According to the EPA:

Pesticide registrants such as DuPont who violate FIFRA are subject to maximum civil penalty of $7,500 for each offense per FIFRA section 14(a)(1), as amended. In determining an appropriate civil penalty amount, FIFRA section 14(a)(4) requires that EPA consider the appropriateness of such penalty to the size of the violator’s business, the effect of the penalty on the violator’s ability to continue in business, and the gravity of the violation.

 

Smaller Boards Mean Bigger Results, Study Finds

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Small Boards Bigger Stockholder Returns

According to a new study by GMI Ratings, bigger isn’t always better in the boardroom. In research for the Wall Street Journal, analysts found that large companies with the smallest boards produced substantially better shareholder returns.

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Based on a study of 400 companies with a market capitalization of at least $10 billion, those with small boards outperformed their peers by 8.5 percentage points, while those with large boards underperformed peers by 10.85 percentage points. The smallest board averaged 9.5 members, compared with 14 for the largest. The average size was 11.2 directors for all companies studied, GMI said. Their results were replicated across 10 different industries, from energy to healthcare.

Smaller boards tend to be “decisive, cohesive, and hands-on,” the WSJ noted, with more freedom to delve deep on operational issues and substantively debate issues. Further, as NYU finance professor David Yermack told the paper, small boards are more likely to dismiss CEOs for poor performance—a threat that declines significantly as boards grow.

Board Size and Shareholder Returns

While the details of causality are up for debate, the correlation is striking.

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Apple, which expressed firm plans to limit the board to 10 people, outperformed competitors in the technology sector by 37% between 2011 and 2014.

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Helmed by just seven directors, Netflix outperformed its industry peers by 32% during the same period. By contrast, pharmaceutical giant Eli Lilly, which has a board of 14, trailed its peers in the healthcare sector by 16%.