2003-9

U.S. SUPREME COURT

A. Supreme Court Creates Test for Determining Whether Shareholder- Directors are Counted as "Employees" For ADA Jurisdiction.

The U.S. Supreme Court addressed the issue of whether four physician-shareholders who actively engaged in medical practice as shareholders and directors of a professional corporation should be counted as "employees" so as to render the ADA applicable to their practice. Clackamas Gastroenterology Associates, P.C. v. Wells, 2003 Daily Journal DJDAR 4227 (April 22, 2003) (opinion by Stevens, J., joined by Rehnquist, C.J., Stevens, O'Connor, Scalia, Kennedy, Souter, and Thomas, JJ.; dissenting opinion by Ginsburg, J. in which Breyer, J. joined).

Petitioner, Clackama Gastroenterology Associates ("the Clinic") is a medical clinic that employed Respondent as a bookkeeper. After her termination, she brought this action against the Clinic alleging unlawful discrimination on the basis of disability under Title I of the ADA. Petitioner moved for summary judgment, asserting that it was not covered by the ADA because it did not have 15 or more employees as required by the ADA. The District Court granted the motion, concluding that the four doctors were "more analogous to partners in a partnership than to shareholders in a general corporation" and therefore were "not employees for purposes of the federal anti-discrimination laws."

A divided panel for the Ninth Circuit reversed. Noting that the District Court rejected the economic realities approach, the majority held that the use of any corporation, including a professional corporation precludes any examination designed to determine whether the entity is in fact a partnership. The Ninth Circuit saw no reason to allow a professional corporation to secure the best of both worlds by allowing it both to assert its corporate status in order to reap the tax and civil liability benefits while arguing it is more like a partnership to avoid liability for unlawful employment discrimination. The U.S. Supreme Court granted certiorari to resolve the conflict.

The Court began its analysis by reviewing its decision in Nationwide Mut. Ins Co. v. Darden, 503 U.S. 318, 322 (1992) ("Darden") where, as here, the Court is asked to construe the meaning of "employee" where the statute containing the term does not helpfully define it. In Darden, the court was asked to determine whether an insurance salesman was an independent contractor or an employee under the Employee Retirement Income Security Act ("ERISA"). In applying a "common-law" test to determine whether the insurance salesman was an "employee," the Court reasoned that "when Congress has used the term 'employee' without defining it, we have concluded that Congress intended to describe the conventional master-servant relationship as understood by common-law agency doctrine."

Petitioner argued that courts should determine whether a shareholder-director of a professional corporation is an "employee" by asking whether the shareholder-director is, in reality, a "partner." The court concluded that this analysis is improper because there are partnerships that include hundreds of members, some of whom may well qualify as employees because control is concentrated in a small number of managing partners. Rather, the following two countervailing considerations must be weighed in the balance: (1) the congressional decision to limit the coverage of the legislation to firms with 15 or more employees has its own justification that must be respected; and (2) as Darden reminds us, congressional silence often reflects an expectation that courts will look to the common law to fill gaps in statutory text, particularly when an undefined term has a settled meaning at common law.

The Court when on to say that the common law's definition of the master-servant relationship does not provide helpful guidance in the present case because the Court is dealing with a new type of business entity that has no exact precedent in the common law. However, the Court found that the common-law element of control is the principal guidepost that should be followed in this case, as advocated by the EEOC. The Court was persuaded by the EEOC's focus on the common-law touchstone of "control" and adopted the following six factors to be utilized in determining whether a shareholder-director is an employee:

(1) Whether the organization can hire or fire the individual or set the rules and regulations of the individual's work;

(2) Whether and, if so, to what extent the organization supervises the individual's work;

(3) Whether the individual reports to someone higher in the organization;

(4) Whether and, if so, to what extent the individual is able to influence the organization;

(5) Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts; and

(6) Whether the individual shares in the profits, losses, and liabilities of the organization. (EEOC Compliance Manual 605:0009).

As the EEOC's standards reflect, the Court stated that an employer is the person, or group of persons, who owns and manages the enterprise. In conclusion, the Court remanded the case to the Court of Appeals and indicated that the answer to whether a shareholder-director is an employee depends on 'all of the incidents of the relationship....with no one factor being decisive.'

NINTH CIRCUIT COURT OF APPEALS

A. Union Operating Exclusive Hiring Hall is Subject to Heightened Duty of Fair Dealing.

In reviewing the Union's refusal to reinstate a member to the hiring hall, the Ninth Circuit determined that the National Labor Relations Board ("Board") has a heightened duty of fair dealing when operating an exclusive hiring hall. Lucas v. National Labor Relations Board, Daily Journal DJDAR 4060 (9^th Cir. April 17, 2003) (opinion by Paiz, R.A., concurrence by Wallace, J.C.).

Lucas was a member of Local 720 from 1981 until he took an honorable withdrawal in 1992. He continued to obtain work assignments through the hiring hall until May 1994, when a Union employee told him he would no longer receive any referrals. Shortly after Lucas filed an unfair labor practice charge, the Union's executive board decided to expel him from the hiring hall, purportedly for engaging in misconduct over a 15-year period. When the NLRB regional director notified Lucas that a complaint would not be issued, Lucas learned for the first time that he had been expelled from the hiring hall based on alleged complaints about his behavior on work assignments and toward union officials. Lucas did not appeal the regional director's decision not to issue a complaint. Thereafter, Lucas sought readmission to the hiring hall, but the Union refused to reinstate him. At about the same time, Lucas contacted AVW Audio Visuals Inc. to request work. AVW then requested Lucas from the hiring hall, which refused, saying he had been expelled.

Lucas filed a second unfair labor practice charge alleging that the Union had engaged in unfair practices when it refused to readmit him and refer him to AVW. The NLRB issued a complaint and the ALJ decided that the Union violated Section 8(b)(1)(A) and 8(b) (2) of the National Labor Relations Act. The ALJ found that the Union failed to rebut the presumption that it refused to readmit Lucas because he was no longer a union member and that the Union lacked objective standards for operating the hiring hall. The Union appealed to the Board who declined to adopt the ALJ decision. The Board concluded that the Union's refusal to re-register Lucas was not arbitrary and that the Union had "demonstrated that its conduct was necessary to protect the representative role that it performs in administering an exclusive hiring hall.". Accordingly, the Board concluded that the Union had neither breached its duty of fair representation nor engaged in an unfair labor practice.

The Ninth Circuit reviewed prior cases holding that when a union operates an exclusive hiring hall, it cannot act in 'an unreasonable, arbitrary, or invidious manner in regard to an employee.' "In administering a hiring hall, a union has a heightened duty of fair dealing that requires it to operate by reference to objective criteria." An aggrieved employee need not prove that a union had the specific intent to discriminate on the basis of union membership or activity, as a union commits an unfair labor practice if it operates its exclusive hiring hall arbitrarily or without reference to objective criteria, thereby adversely affecting the employment status of the individual it is expected to represent. Because the above defined standard was not applied in the present case, the Board erred in applying a more deferential standard.

Ordinarily the Court would remand the matter to the Board so that it could reconsider its decision under the correct legal standard, however remand was not necessary because, in dismissing Lucas's complaint, the Board found that the evidence supported the Union's necessity defense. Therefore, the only decision left for the Court was to determine whether the Board's decision was supported by substantial evidence. The Ninth Circuit concluded that the Board's determination that the Union's refusal to readmit Lucas to its exclusive hiring hall was necessary to promote the efficiency and integrity of its hiring hall operations was not supported by substantial evidence.

As previously recognized, any union activity that prevents an employee from being hired is presumptively designed to encourage union membership, thereby placing the burden on the union to justify its actions. The Ninth Circuit went on to say that it agrees with the D.C. Circuit in that the presumption can be overcome only by establishing either that the union acted in accordance with a valid union security clause or that the union action was necessary to the effective performance of its duty to represent its constituency.

In determining that the Union's actions were necessary for the effective operation of its exclusive hiring hall, the Board purported to rely on Lucas' alleged record of misconduct. However, the ALJ did not admit evidence of any specific instances of Lucas's alleged misconduct. What the record reflected was that the Union expelled Lucas from the hiring hall for alleged misconduct, but the nature of the alleged misconduct, its frequency, the identities of the alleged victims and the employers' responses, if any, were not admitted into evidence. In addition, the Union's refusal to re-register Lucas was not guided by any objective criteria. The Ninth Circuit concluded that "it is a mystery why the Union's continued refusal to readmit Lucas was necessary to the effective operation of the hiring hall." As such, the presumption was not overcome and the decision was not supported by substantial evidence.

B. Verdict Upheld Where Decision-Makers Regarding Employee's Termination Had No Knowledge of Protected Activity.

The Ninth Circuit upheld a jury verdict in favor of a medical resident who was terminated after questioning billing practices where the decision-makers regarding his termination had no knowledge of his protected activity, because the supervisor with knowledge of the complaints was heavily involved in the proceedings and the employees right to present evidence was limited. Ostad v. Oregon Health Sciences University, Daily Journal DJDAR 4521 (9^th Cir. April 29, 2003) (opinion by Fletcher, B.B., partial concurrence and partial dissent by O'Scannlain, D.F.).

Appellants Oregon Health Sciences University (OHSU) and Dr. Alan Seyfer ("Seyer") appeal following a jury award in favor of Dr. David Ostad ("Ostad"). Ostad, a former OHSU resident who worked under Seyfer, alleged that his termination from the residency program was motivated by Seyfer's retaliation against him for questioning Seyfer's billing practices. Appellants challenge the District Court's denial of their motion for judgment in their favor as a matter of law. The Ninth Circuit affirmed the District Court's determination that entry of judgment as a matter of law would be improper.

Ostad began a residency in the Plastic and Reconstructive Surgery Division of OHSU, with a one-year contract subject to renewal for a second year. Roughly two months into Ostad's rotation with Seyfer, Seyfer wrote Ostad a letter criticizing his performance. During the same period of time, Ostad raised questions about Seyfer's billing practices. (OHSU could not legally bill Medicare and Medicaid for procedures performed by residents unless a teaching staff was present for the critical part of the procedure.) Ostad claimed that Seyfer asked to be listed as the attending physician regardless of whether he was present during the procedure. Ostad claims to have challenged this practice.

Over the next few months, Ostad was given several letters criticizing his performance. Ostad claims that during this time, Seyfer made several negative statements to him referring to Ostad's complaints about Seyfer's billing practices. After receiving a final letter describing Ostad's deficiencies regarding treatment of his patients, Ostad requested a hearing, as was his right under OHSU regulations. OHSU conveyed a panel of five doctors - none of them plastic surgery specialists - to consider a formal 'Notice of Proposed Termination' compiled from Seyfer's letters. The panel relied heavily on Seyfer for a description of procedures and an assessment of how a junior resident should perform. The two-day hearing provided many of the elements of due process that would be afforded a party at trial, however Ostad was not permitted to subpoena witnesses. He was therefore unable to compel testimony or participation of two physicians who were Seyfer's colleagues and who had supervised Ostad and reviewed him favorably.

At the hearing, Ostad presented no evidence about Seyfer's allegedly improper billing practices. The panel's Opinion and Order made several factual findings and recommended that Ostad be terminated. Consistent with the panel's recommendation, OHSU's chief administrator terminated Ostad's residency. Ostad filed suit pursuant to 42 U.S.C. ?1983, alleging that Seyer and OHSU had violated his First Amendment right to freedom of speech. The jury returned a verdict against Seyfer and OHSU concluding that Ostad proved that the defendants had retaliated against him for exercising his free speech rights. The jury also found that OHSU and Seyfer failed to prove that Ostad would have been terminated from OHSU's plastic surgery program for other reasons even in the absence of his protected speech activity.

OHSU and Seyfer contend that they were entitled to judgment as a matter of law because Ostad failed to produce sufficient evidence that the exercise of his right to free speech played a role in his termination. They argued that although Seyfer may have been motivated by animus based on Ostad's speech, he ultimately did not terminate Ostad. That decision was left to the chief administrator acting on the recommendation of the Hearing Committee, which had no knowledge of Ostad's complaints about billing practices and thus, could not have been motivated by unconstitutional reasons to make its termination recommendation.

The Ninth Circuit relied on the Supreme Court's ruling in Mount Healthy City Bd. of Educ v. Doyle, 429 U.S. 274 (1977), in applying the proper framework for analyzing claims of illegal retaliation for the exercise of protected speech. The Court enunciated a burden shifting test in which a plaintiff must show that (1) his conduct is constitutionally protected; and (2) that the protected conduct was a "substantial" or "motivating" factor in the decision to take an adverse action against him. If met, the defendant must show that it would have reached the same decision as to the adverse action even in the absence of the protected conduct.

Both Seyfer and OHSU concede that Ostad's conduct with regard to Seyfer's billing practices was protected under the First Amendment. Accordingly, the Court was left to determine whether the jury properly could have found that Ostad's protected speech played a substantial or motivating factor in the decision to terminate his residency. OHSU and Seyfer contend that the Hearing Committee's independent decision severed any link between Seyfer's allegedly improper motives and Ostad's termination.

The Ninth Circuit relied on its decision in Gilbrook v. City of Westminster, 177 F.3d 839 (9^th Cir. 1999), to disagree with the defendants. In Gilbrook, plaintiffs alleged that they were terminated for the exercise of speech protected by the First Amendment. The Gilbrook court determined that a subordinate cannot use the non-retaliatory motive of a superior as a shield against liability if that superior never would have considered a dismissal but for the subordinate's retaliatory conduct. However, the Gilbrook court stressed that the ultimate question of liability of the subordinate is an intensely factual one, the results of which will vary depending on the circumstances.

In the present case, the jury had ample evidence of Seyfer's bias and his role in the process of terminating Ostad's participation in the residency program. The jury had evidence that Seyfer threatened Ostad for challenging the billing practices; that Seyfer wrote a number of letters that laid the groundwork for, and initiated the disciplinary hearings that resulted in his termination; that the Hearing board relied on Seyfer's expertise and testimony to reach the decision to terminate; and that Ostad was prevented from adducing evidence to rebut Seyfer's conclusions about his performance.

In addition, assuming arguendo, that OHSU's hearing committee did not share Seyfer's improper motives in terminating Ostad, Gilbrook indicates that Seyfer properly may be held liable. Thus, the District Court's denial of the motion for judgment as a matter of law was entirely correct.

CALIFORNIA COURTS OF APPEAL:

An employee's complaint alleging that her employer failed to provide her with paid time off while on injury leave, was a violation of California's Family Rights Act, is substantially dependent on interpretation of the Collective Bargaining Agreement (CBA) and thus preempted. Department of Fair Employment and Housing v. Verizon California Inc., 2003 DJDAR 4623 (April 28, 2003). Denise Harris ("Harris"), an employee of Verizon, requested family leave for back problems on an intermittent basis in the summer and fall of 1998. There was no dispute that she was allowed the full time off or that she was penalized for taking time off. For the first four weeks, Harris was paid for the time off, but in July Verizon sent her a letter saying that she needed a medical report from an orthopedist or neurologist showing total incapacitation, to receive paid time off under the CBA. She never provided such a report to her employer.

Harris filed a grievance under the CBA, alleging that Verizon had violated the part of the CBA governing paid time off for sickness and disability. The grievance was settled with Verizon paying Harris for any absences related to her back injury which occurred prior to its letter telling her a specialist report was required. However, the California Department of Fair Employment and Housing ("DFEH") filed a complaint alleging that Verizon's failure to pay Harris for all absences was a violation of the state's family leave act. Verizon claimed that Harris' state law claim was preempted by section 301 of the federal Labor Management Relations Act ("LMRA"). The trial court rejected this argument and Verizon filed this appeal.

Under the CBA, the subject of unpaid time off is covered under the "Sickness and Accident Benefits" heading. The crucial text involves a clause concerning management's right to investigate disabilities due to injury or other cause, and its right in its sole discretion to require an opinion from a non-treating physician. As such, the CBA contained a policy requiring a report from an appropriate medical specialist when leave is taken over a four-week period.

Therefore, in the present case, the determination of whether Harris was entitled to paid time off after four weeks cannot be resolved without recourse to interpreting the CBA, particularly management's right in its sole discretion to require an opinion from a physician other than the one in regular attendance. As such, the Court stated that "it should be obvious by now that Harris' state law claim seeking to be paid for her time off after four weeks is substantially dependent on an interpretation of the collective bargaining agreement." The Court went on to say that this is not a case of pure factual inquiry or pure legal inquiry independent of a collective bargaining agreement, which if true, would not mandate preemption. In addition, the Court stated that the right under state law to the time off may be non-negotiable, but that fact is irrelevant. This is not a case of Verizon denying an employee leave in the face of state law. Rather, the state law itself implied that the right to be paid for family leave depends on what is negotiated. Subdivision (e) of section 12945.2 specifically refers to "any other paid or unpaid time off negotiated with the employer" to determine the employee's right to be paid for family leave time.

Moreover, the only unconditional entitlement in the family leave act is for unpaid time off; "if an employee wants to be paid for it, then someone must ascertain what has been negotiated between the employer and employee, and in the case of this collective bargaining agreement, making that determination requires some judicial interpretation." Accordingly, the claim is preempted under Federal law.

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