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Engaged Boards Lead to Better Information Security Practices

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Board of Directors

According to a new study from Protiviti, engagement by a company’s board of directors is a critical factor in best managing information security risks.

Overall, engagement and understanding of IT risks at the board level has increased, yet one in five boards still have a low level of comprehension. As the report states, this suggests “their organizations are not doing enough to manage these critical risks or engage the board of directors in a regular and meaningful way.” Further, while large companies do exhibit stronger board-level engagement, it is not a dramatic distinction.

Overall engagement data

Of those companies that have implemented all core security policies—an acceptable use policy, record retention and destruction policy, written information security policy (WISP), data encryption policy, and social media policy—78% have boards with a high or medium level of engagement on information security. Even rudimentary security measures appear to vary with board engagement. Three out of four organizations with engaged boards have a password policy, while just 46% of those with medium or low levels of engagement have this basic provision in place.

IT Security Measures

The study did find two particularly alarming trends, both in companies with and without risk-aware boards. There was a significant increase this year in the number of organizations without a formal, documented crisis response plan to address data breach or cyberattack. Further, a surprising number of companies still do not have core information security policies. “One in three companies do not have a written information security policy (WISP). More than 40% lack a data encryption policy. One in four do not have acceptable use or record retention/destruction policies. These are critical gaps in data governance and management, and ones that carry considerable legal implications,” the report states. “On the other hand, organizations with all of these key data policies in place have far more robust IT security environments and capabilities.”

 

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.

How Not to Settle a Class Action

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Settling a workplace class action is far more complicated than resolving other types of litigation. Yet, the fundamental building blocks of settling a case—an offer, acceptance of precise terms, and substantiation of the agreement—are equally as important in resolving a simple as well as a complex piece of litigation.

On Sept. 23, Judge Amy St. Eve of the U.S. District Court for the Northern District of Illinois in Craftwood Lumber Co. v. Interline Brands, Inc., drove home this point. The court held that, despite creating a “term sheet” outlining certain terms of a purported class action settlement, the parties had not reached an enforceable settlement.

This ruling illustrates that although parties may be bound to a class settlement prior to the creation of the final agreement, which is what occurred in the Tenth Circuit decision of Miller v. Basic Research, LLC, covered here, that in order to be bound, the parties must have at least reached an agreement to the materials terms of the contract and exhibit the intent to be bound.

Although it is not an employment-related case, Judge St. Eve’s ruling in Craftwood Lumber ought to be required reading for any employer entering into settlement negotiations relative to a class action.

Background

Plaintiff, Craftwood Lumber, brought a putative class action alleging that the defendant, Interline Brands, Inc., violated the Telephone Consumer Protective Act of 1999, by sending at least 1,500 advertisements in at least 735,000 facsimile transmissions, some of which were received by the plaintiff. The parties attempted to settle the case through mediation. At the end of the one-day session, the parties and counsel hastily signed a one-page document titled “Term Sheet.”

In the following weeks the parties unsuccessfully attempted to negotiate a written settlement agreement. The defendant brought a motion to enforce the settlement, and in support, it provided the court with a copy of the Term Sheet, arguing that the parties had entered into a settlement agreement. The plaintiff’s counsel objected, asserting that there was no agreement and that it was a violation of the confidentiality agreement to produce the Term Sheet to the Court.

The Court’s Opinion

Judge St. Eve held that the Term Sheet failed to include several terms that were material to the class action settlement. The most significant omission was the amount per claim—what the defendant would pay any class member for each fax recipient or each fax transmission. Additionally, the Term Sheet lacked any release terms and settlement class definition. The court reasoned that the provisions upon which the defendant was basing its assertion that an agreement had been reached were insufficient to reasonably imply the missing terms. Judge St. Eve determined that she was unwilling to select those terms from the wide range of potential possibilities. Ultimately, the court held that in addition to lacking materials terms, it was unclear whether the parties intended to be bound by the Term Sheet. On this basis, the court held that the parties did not enter in to an enforceable settlement agreement.

Implications for Employers

This ruling illustrates what can go awry in terms of documenting an enforceable class action settlement. In order to secure an enforceable settlement agreement, the parties must reach an agreement on the material terms and evidence an intent to be bound. Normally, this situation is not a problem, given that the parties normally will strive to achieve these ends in the settlement agreement. This translates into investing significant time and effort to craft a precise Term Sheet; covering all of the key terms of the settlement (such as the class definition, the class pay-out distribution formula, and myriad other bells and whistles that make up a Rule 23 class-wide settlement); and not leaving the settlement/mediation session unless and until all of these issues are covered and both parties express their intent to be bound. Simple, but critical.

This column previously appeared on the Seyfarth Shaw website.

The End of the Florida Workers Compensation System?

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Workers Compensation Florida

A recent development in Florida has jumped that state to the front of the age old workers comp debate between employers and their workers. On August 13, Miami-Dade Circuit Judge Jorge Cueto declared the state’s workers’ compensation exclusive remedy statute (440.01 et seq.) unconstitutional on the grounds that the benefits given to injured employees by the law no longer provide a fair exchange for the surrender of an employee’s right to sue the employer for negligence damages. “The benefits in the act have been so decimated that it no longer provides a reasonable alternative,” said Judge Cueto.

For years, workers rights attorneys in Florida have been asking judges to strike down the Florida workers compensation law. They argue that successive state legislatures have continually eroded the benefits that injured employees receive under the workers comp system. Employers and some legislators counter that high workers comp insurance premiums have those changes necessary in order to stabilize the state’s economy.

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For now, Judge Cueto’s ruling will not impact areas outside of Miami-Dade’s judicial circuit. Florida Attorney General Pam Bondi, who has received criticism for not directly intervening in the Miami-Dade case on behalf of the state, has filed an appeal to Judge Cueto for a rehearing. If that appeal is denied, as seems likely, then the case could eventually make its way to the Florida Supreme Court. Should the Supreme Court uphold Judge Cueto’s ruling then workers throughout the state will be able to settle their workers compensation claims, then file a civil claim to recover additional benefits.

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This case will join other cases challenging parts of Florida’s workers comp statutes. The state Supreme Court is considering an appeal from an injured firefighter who was left with no income after his temporary wage-loss benefits expired.

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