On May 31, 2013, the Minnesota Supreme Court issued an opinion that may have a significant impact on medical malpractice cases, and the insurers that issue coverage to health care providers. In Dickhoff v. Green, No. A-11-0402, the Court held that Minnesota law permits a claim for loss of chance of recovery or survival. The 3-2 decision represents a shift in Minnesota malpractice law, and makes Minnesota the latest to join a growing majority of jurisdictions in permitting such a claim.

Under a traditional tort analysis of a medical malpractice case, in order to succeed, a plaintiff has to establish that it is “more probable than not” that their injury resulted from the doctor’s negligence rather than from their pre-existing condition. This “all or nothing” approach to causation provides a significant defense to medical professionals, particularly those treating patients with significant injuries or serious diseases with poor prognoses. Critics have argued for the application of a “loss of chance” approach – allowing a plaintiff, or her survivors, to recover for a doctor’s negligence that reduces the chance of recovery or survival, regardless of whether the patient’s chance of survival was above or below 50% at the time of the doctor’s alleged negligence.

A number of jurisdictions have recognized such a doctrine, which, proponents say, recognizes that a patient’s chance of survival has value, and that the defendant should be liable for the value of the chance that was lost. These include Arizona, the District of Columbia, Illinois, Indiana, Iowa, Kansas, Louisiana, Massachusetts, Missouri, Montana, Nevada, New Jersey, New Mexico, Ohio, Oklahoma, Pennsylvania, South Dakota, Virginia, Washington, West Virginia, Wisconsin and Wyoming. Only eight states have considered and clearly rejected the doctrine: Florida, Idaho, Maryland, Mississippi, New Hampshire, Tennessee, Texas, South Carolina and Vermont.

As of May 31, 2013, Minnesota can be added to the list of jurisdictions recognizing the last clear chance doctrine in the context of medical malpractice claims. In Dickhoff v. Green, No. A-11-0402, the Minnesota Supreme Court, in a 3-2 decision, overruled longstanding precedent and held that Minnesota state law permits a claim for loss of chance of recovery or survival. The Court framed its holding not as “recognizing a new injury” but, rather, “recognizing that an injury that has always existed is now capable of being proven to a reasonable degree of certainty.” In this regard, the Court indicated its belief that medical science has progressed to a point where a doctor can gauge a patient’s chances of survival to a reasonable degree of medical certainty. The Court stated that these advances make it possible to prove causation in a loss of chance case.

This is the latest opinion in a fundamental shift in the nature of medical malpractice cases, providing additional avenues of recovery for plaintiffs and limiting one of the defenses typically available to the medical professional. Whether this will cause an increase in the number of claims, the cost of defending those cases or the exposure to medical professions is yet to be fully analyzed. However, it is a trend that should be watched.

Given the significance of the ruling, and the 3-2 nature of the decision, it is anticipated that the defense will seek rehearing en banc of the decision in Dickhoff.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.

The SEC has released certain Frequently Asked Questions (FAQs) regarding Rule 15a-6 and foreign broker-dealers. Rule 15a-6 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), provides certain conditional exemptions from broker-dealer registration requirements under the Exchange Act for foreign broker-dealers engaging in specified activities involving U.S. investors, including:

• Effecting unsolicited securities transactions;
• Providing research reports to major U.S. institutional investors, and effecting transactions in the subject securities with or for those investors;
• Soliciting and effecting transactions with or for U.S. institutional investors or major U.S. institutional investors through a “chaperoning broker-dealer”; and,
• Soliciting and effecting transactions with or for registered broker-dealers, banks acting in a broker or dealer capacity, certain international organizations, foreign persons temporarily present in the United States, U.S. citizens resident abroad, and foreign branches and agencies of U.S. persons.

The Staff’s guidance provided in response to a few of the FAQs follows below.

Unsolicited Transactions in Securities

Rule 15a-6(a)(1) exempts a foreign broker-dealer from registration to the extent that it effects unsolicited transactions in securities. A foreign broker-dealer may rely on such exemption to effect more than one unsolicited securities transaction on behalf of a single U.S. investor, absent any other indicia of solicitation. The SEC will analyze a foreign broker-dealer’s efforts and activities to determine whether solicitation has occurred, as opposed to focusing merely on the number of securities transactions effected by a foreign broker-dealer.

The SEC generally considers solicitation “as including any affirmative effort by a broker or dealer intended to induce transactional business for the broker-dealer or its affiliates. Solicitation includes efforts to induce a single transaction or to develop an ongoing securities business relationship.” For example, the SEC would consider the following conduct to be solicitation by a foreign broker-dealer:

• Telephone calls from a broker-dealer to a customer encouraging use of the broker-dealer to effect transactions;
• Advertising directed into the United States of one’s function as a broker or a market maker; and,
• Recommending the purchase or sale of particular securities, with the anticipation that the customer will execute the recommended trade through the broker-dealer.

Nonetheless, the Staff would view a series of frequent transactions or a significant number of transactions between a foreign broker-dealer and a U.S. investor as being indicative of solicitation through the establishment of an “ongoing securities business relationship.”

The FAQs also clarify that a foreign broker-dealer relying on Rule 15a-6(a)(1) may send confirmations and account statements to the U.S. investor in connection with such transaction. A foreign broker-dealer may also provide the U.S. investor with documents related to the transaction that are required under foreign law, such as a prospectus, proxy statement or a privacy notice. The foreign broker-dealer, however, may not provide the U.S. investor with any document that includes advertising or other material intended to induce either a securities transaction or transactional business for the foreign broker-dealer or its affiliates.

Chaperoning Broker-Dealer

Rule 15a-6(a)(3) exempts a foreign broker-dealer from registration to the extent that it induces the purchase or sale of a security by a U.S. institutional investor or a major U.S. institutional investor, subject to certain conditions, including, without limitation, that the foreign broker-dealer effects any resulting transactions through a registered broker or dealer. The FAQs indicate that to the extent required by foreign law or as required by a firm’s internal policies and procedures applicable to its global business operations, a foreign broker-dealer may send confirmations and account statements directly to U.S. counterparties. Nonetheless, the chaperoning broker-dealer maintains an obligation to be sure that confirmations and account statements are sent to the investor that comply with all applicable U.S. requirements, including Rule 10b-10 under the Exchange Act and applicable self-regulatory organization rules. Also, any confirmation or account statement sent to a U.S. counterparty by a foreign broker-dealer on behalf of a chaperoning broker-dealer must clearly identify the U.S. broker-dealer on whose behalf the document is sent.

Furnishing Research Reports to Major U.S. Institutional Investors

Rule 15a-6(a)(2) permits a foreign broker-dealer to furnish research reports to major U.S. institutional investors and to effect transactions in the securities discussed in the reports with or for those major U.S. institutional investors provided that certain conditions are satisfied. The rule does not require that the distribution be made by a registered broker-dealer, even if the foreign broker-dealer has a chaperoning arrangement with a registered broker-dealer. Further, the chaperoning broker-dealer would not have any obligations with respect to a research report if the chaperoning broker-dealer was not involved in the distribution and it would not be required to retain a copy of a research report that it did not ever possess.

However, if the foreign broker‑dealer has a chaperoning arrangement with a registered broker-dealer that satisfies the requirements of Rule 15a-6(a)(3), any transactions with the foreign broker-dealer in securities discussed in the research reports must be effected only through the chaperoning broker-dealer in compliance with the requirements of Rule 15a-6(a)(3). For example, Rule 15a-6(a)(3) requires the chaperoning broker-dealer to maintain all books and records relating to the transactions effected thereunder. As such, to the extent that a chaperoning broker-dealer obtains a copy of a research report distributed directly to major U.S. institutional investors by a foreign broker-dealer pursuant to Rule 15a-6(a)(2), such research report should be retained by the chaperoning broker-dealer in light of its obligation to effect transactions in the relevant securities as described above.

***************

This advisory does not discuss all of the FAQs, including FAQs relating to (A) the determination of whether a person would be considered “temporarily present in the United States” under Rule 15a-6(a)(4)(iii), (B) communications with and transactions for a U.S. employee by a foreign broker-dealer administering a global stock option plan for a foreign issuer under Rule 15a-6(a)(1), and (C) the minimum net capital requirement, net capital charges for failed transactions, and recordkeeping obligations applicable to chaperones under Rule 15a-6(a)(3). Certain of the FAQs also specifically refer to certain SEC no-action letters (referred to as the “Nine Firms Letter” and the “Seven Firms Letter”) and the scope of certain positions taken in such no-action letters, such as the applicability of the Nine Firms Letter and the Seven Firms Letter to a foreign broker-dealer with a chaperoning arrangement with an unaffiliated registered broker-dealer (and not just an affiliated registered broker-dealer), and the applicability of the expanded definition of a “major institutional investor” set forth in the Nine Firms Letter to all provisions of Rule 15a-6, among others. In addition, certain of the FAQs also refer the Rule 15a-6 adopting release, Registration Requirements for Foreign Broker-Dealers, Exchange Act Release No. 27017 (July 11, 1989). Thus, we recommend reviewing the FAQs, applicable no-action letters and the adopting release in their entirety and contacting legal counsel before reaching any conclusions regarding how the FAQs might impact your particular circumstances.

About the Canadian Practice

Troutman Sanders is pleased to announce that it has ranked as the top U.S. firm in Thomson Reuters Full Year 2012 Global Capital Markets Review Legal Advisors in two areas:

Canada Equity & Equity Related – Issuer Legal Advisor

• Top U.S. firm on the list
• #6 ranked firm on the list

Canada Equity & Equity Related- Manager Legal Advisor

• Top U.S. firm on the list (second year in a row)
• #7 ranked firm on the list

According to Thomson Reuters, total combined debt and equity capital markets activity totaled US$6.8 trillion for 2012, marking an increase of 10.6% in comparison to the total level of capital raised in 2011.

Troutman Sanders’ Canadian Practice team represents Canadian companies with respect to their U.S. legal needs. Team attorneys practice in the areas of securities and corporate finance; mergers and acquisitions; corporate; international trade; energy regulation; energy trading; intellectual property; immigration; tax; government contracts; and complex litigation. The Canadian Practice team regularly acts as counsel on U.S. public and private equity and debt offerings for Canadian issuers, Canadian and U.S. underwriters or agents and Canadian and U.S. investors, including assisting Canadian companies with U.S. exchange listings and U.S. periodic reporting obligations.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.

 

Managing an employee’s medical leave of absence is often enough to give an employer a headache of its own. When an employee requests time off from work for a medical reason, questions that commonly arise include: Why is the leave needed? When is the employee expecting to return to work? Does the employer have to grant the leave request? And, if so, for how long? What kind of documentation, if any, can the employer require the employee to submit? As employers answer those questions, they have to comply with a handful of different laws, most notably workers’ compensation law, the Family and Medical Leave Act (the “FMLA”), and the Americans With Disabilities Act (the “ADA”). Perhaps for that reason, it is not surprising that some managers and Human Resources professionals tend to rely on common, familiar principles to navigate these situations—including, gathering information, following company policy, and treating employees the same. Armed with those principles, they move forward and make decisions they believe are fair and reasonable. Is that so wrong?

Well, maybe. It is often wise to gather information, follow (legal) company policies, and treat employees the same. But in the context of managing a medical leave of absence, these principles, if relied upon exclusively, can sometimes steer even astute managers and HR professionals off the FMLA and ADA compliance track. Below are some of the most common misunderstandings about managing medical leaves.

Misunderstanding #1: If you don’t understand why an employee needs a medical leave of absence, it’s okay to ask about the employee’s diagnosis prompting the work restriction.

Most managers wear two hats on a regular basis: their “prudent manager” hat and their “concerned colleague” hat. So, when an employee reports that he needs some time off to tackle a health issue (by, for example, having surgery), the prudent manager is focused on trying to ensure that he or she has sufficient coverage to meet the company’s production or service needs. But the manager is also concerned about the employee’s overall health and wellbeing. So, driven by concern, curiosity, or the need for careful planning, managers sometimes inquire into an employee’s diagnosis. This is often a mistake.

As a general rule, an employer should never ask about an employee’s underlying medical condition or diagnosis, either orally or in writing. If the employee has a serious medical condition, the leave may be protected by FMLA. The FMLA regulations expressly state that an employer can require an employee’s health care provider to provide a statement or description of appropriate medical facts regarding the employee’s health condition in connection with evaluating the applicability of the FMLA and that such facts may include information on symptoms and the employee’s “diagnosis,” among other things. 29 C.F.R. § 825.306(a)(3). But this regulation does not mean that management can ask the employee directly about that diagnosis. And the regulation does not require the employee’s health care provider to provide the diagnosis in order for FMLA leave to be approved. More importantly, if the employee has a “disability” under the ADA (which is a relatively easy thing to show, thanks to the ADA Amendments Act, which broadened the definition of “disability”), then the employer must also comply with a more stringent requirement in the ADA that the employer not make health or medical inquires, unless doing so is “job-related and consistent with business necessity.” But wait, you say, wouldn’t inquiring about a diagnosis that keeps an employee out of work always be “job-related and consistent with business necessity?”

According to some courts, the answer is “no.” Earlier this year, for example, the United States District Court for the Southern District of California determined that an employer with a policy that an employee’s health-related absence would not be excused unless the employee submitted a doctor’s note stating, “the nature of the absence (such as a migraine, high blood pressure, etc.)” violated the ADA. The court reasoned that such inquiries were not job-related and consistent with business necessity, because there was no evidence the employer needed to know the nature of the condition causing the absence. Instead, the employer only had a need to know whether the employee had a legitimate need to be absent from work (which a medical professional was capable of confirming without revealing the employee’s diagnosis).

Misunderstanding #2: You can always request a doctor’s note to verify the need for a medical leave of absence.

Employers sometimes require employees to produce a doctor’s note every time they need to take leave for a health reason. Asking an employee to obtain a doctor’s note is often fine (and, in fact, the FMLA has a detailed certification process designed to help employers obtain information from the employee’s doctor to verify the need for FMLA-covered leave). But there is at least one context in which doctors’ notes should not be requested: where the employee has already been approved to take FMLA leave on an intermittent basis for the condition prompting the absence. In such scenario, requiring a doctor’s note for each instance of intermittent leave can give rise to a claim of FMLA interference. According to the United States District Court for the Northern District of Illinois, requiring an employee to seek out a doctor’s note for each instance of an FMLA-certified absence may constitute interference with the employee’s rights “on a practical level,” where it effectively discourages the employee from taking FMLA leave and, therefore, is unlawful. Employers may, however, require employees to provide a new medical certification in each subsequent leave year if the need for intermittent leave continues.

Misunderstanding #3: If an employee has a medical condition and needs to be absent from work, the maximum amount of leave to which the employee is entitled is 12 weeks of FMLA leave.

Another common misconception is that, once an employee has exhausted his or her 12 weeks of FMLA leave, the employee’s job protection rights end and the employee may be terminated if he or she cannot return to work. This is not necessarily true. If the employee continues to have a medical condition that constitutes a disability under the ADA, the employer may have to provide an extra leave of absence, beyond the 12 weeks of FMLA leave, as a reasonable accommodation to that employee. Numerous courts have ruled that an employer is not required to grant an employee’s request for an indefinite amount of time off from work. But an employer does have an obligation to consider on a case-by-case basis whether it can accommodate an employee who requests a leave of absence for some finite period of time after his or her FMLA leave ends. Thus, an employer cannot have a “blanket rule” that employees who have been absent from work for a specified period (e.g., a year) will be terminated. As with any other accommodation, if the employer can establish that the proposed leave would amount to an “undue hardship” or that another accommodation would enable the employee to perform the essential functions of the position, the proposed leave need not be provided.

In the real world, it is often tricky to determine how much extra leave may need to be provided as an accommodation. Accordingly, employers would be wise to document any specific and unique factors that were considered in analyzing how much leave is tolerable (such as the employee’s position, the financial impact of the leave, the employer’s resources, and ongoing business initiatives impacted by the leave), along with the steps the employer followed to gather relevant factual information, so that the context would be apparent to a jury, if litigation were to result. Some HR professionals may resist that advice because they have been trained to believe another principle, below, which is:

Misunderstanding #4: If you treat everyone the same, you won’t violate the law.

HR professionals are commonly advised to treat all employees the same. That overarching principle often helps keep employers out of hot water and minimize the risk of a discrimination lawsuit. However, there are some occasions where one employee may need to be treated differently than other employees. One such instance is where the employee has limitations that are caused by a “disability” under the ADA. The ADA requires reasonable accommodations for persons with disabilities, even if doing so requires the employer to do some things it normally does not do for non-disabled employees, such as modifying work schedules. In fact, a disabled employee may have to be provided with an accommodation even if that accommodation will result in a greater burden for non-disabled employees. For example, under the ADA, an employer may be required to remove non-essential job functions from a disabled employee’s job and give those additional responsibilities to his or her non-disabled coworkers.

Another example of a seemingly-fair, but problematic policy is a “no-fault” attendance policy, in which all absences are treated the same, regardless of the reason for the absence. The problem with these policies is that, if some of the absences qualify for FMLA leave or constitute a reasonable accommodation for a disability, the FMLA or the ADA may prohibit the employer from disciplining the employee for those absences, even if they violate company policy.

No-fault attendance policies are on the EEOC’s radar screen. In fact, in 2011, the EEOC negotiated the settlement of a class action targeting denial of accommodations under a telecommunications company’s no-fault attendance policy for $20 million, which, according to the EEOC, “represents the largest disability discrimination settlement in a single lawsuit in EEOC history.” Thus, strict no-fault attendance policies generally should be avoided, in favor of more flexible leave policies.

Conclusion

As the case law and discussion above indicates, compliance with the FMLA and ADA is not always intuitive. FMLA and ADA rights can, at times, “trump” an employer’s normal process and established procedures. Employers should be aware of the misunderstandings highlighted above and ensure that each medical leave of absence and applicable company policy is reviewed for FMLA and ADA compliance. For questions about applying those principles to a particular individual or reviewing a specific policy, please contact a member of the Troutman Sanders LLP Labor & Employment Group.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.

 

Including a Right of First Refusal (ROFR) provision in a lease or other real estate contract is significant since a holder of such ROFR has essentially locked in a future right to exercise an option to purchase the property and, thus, protect its investment in the real estate, including all physical improvements and any goodwill developed relating to the site.

Under an ROFR, the owner of the property agrees in advance that if, in the future, it decides to sell the property, the holder of the ROFR has the first right to accept or reject any such offer.

When a holder receives an offer, what steps should it and its counsel take? What are the terms of the offer, and is the holder bound by the same terms? If the holder is amenable to the sale price but is unwilling to accept other nonmonetary terms in the offer (i.e., limitations of remedies), can the holder negotiate more acceptable terms? How does the holder accept the offer and can the holder rescind its acceptance if it reconsiders? If the thwarted third-party buyer claims that its offer was not the one accepted by a holder or any other such breach and sues the seller and holder, what is the likelihood that the transaction will be prevented? What are the potential litigation costs? Could the holder or seller be liable for monetary damages?

The ease of navigating through the myriad issues that may arise with an ROFR will largely depend on the original negotiations of the right and the final ROFR terms that the seller and holder agreed to in advance. Because the terms of the ROFR will govern the offer, it is important to negotiate the terms of the right with an eye to the future, ensuring that the holder’s specific requirements are incorporated into the ROFR itself. If the ROFR provision did not include specific terms or parameters when initially negotiated, the holder may have to consider an offer with terms that the holder finds unfavorable. In this case, the holder may have to decide between an imperfect offer and no transaction at all.

Beyond the original negotiations, the holder’s attorneys can also provide significant value when an offer is tendered to the holder. The attorneys can help the holder evaluate the offer and ensure that the ROFR is properly exercised. While negotiating the final provisions after exercising the ROFR, the holder and its counsel need to keep in mind the threat of litigation with the seller or any third party, particularly if material changes are made to the offer.

Understanding the Offer

Before the holder can decide whether it wants to exercise the ROFR, it must understand what the terms of the offer actually are. The answer will depend greatly on whether the seller and third party have negotiated a term sheet or a full contract, and whether the ROFR included specific pre-negotiated terms.

An offer in the form of a term sheet gives the holder of an ROFR more flexibility and room to negotiate terms that are more suitable to the holder, as opposed to an offer in the form of a fully negotiated contract, which will force the holder to accept the pre-negotiated terms in that contract. For this reason, the holder should try to negotiate in the original

ROFR provision the requirement that the seller only provide a term sheet as the offer. Sometimes, however, it is more practical and cost-effective for the seller to negotiate a complete contract with the third party before submitting the offer to the holder, especially if, for example, the property is part of a portfolio and the seller is negotiating the sale of many parcels of real estate that include the property with the ROFR.

Moreover, the seller may wish to simply retain leverage over the holder of the ROFR. For example, in some situations, the seller might later prefer to sell to a specific third party and a full contract might act as a deterrent to the holder, increasing the likelihood of closing with the preferred buyer. For these reasons, the seller may refuse to include such a provision.

As noted above, the contours of the offer will also depend on the provisions of the ROFR itself, illustrating the importance of the original negotiations. If the ROFR provides that the holder’s right to purchase the property is on commercially similar terms to any offer, then the holder will have much more flexibility in its later negotiations with the seller than if the ROFR provides that the right to purchase is on the same terms as any offer.

The initial negotiation of an ROFR provision provides an opportunity to lock in certain provisions or terms by stating that those provisions will govern irrespective of the specific terms in the third party’s offer. Such carve-outs can include confidentiality provisions, indemnity provisions, acceptable encumbrances on title, a party’s responsibility with respect to broker fees and closing costs, and required closing documentation. Furthermore, the ROFR may also specify, inter alia, certain limitations on remedies or provide for certain representations in advance. Although the seller may object to including these carve-outs in the ROFR, if it is important that the holder have any of these provisions, then these provisions should be discussed in the original negotiations so that they could be ultimately included in the ROFR.

If drafted properly, the ROFR should also have addressed certain contingencies related to the offer. The ROFR should provide a method to determine a purchase price for the property if the proposal contemplates the sale of multiple parcels, such as an appraisal or a predetermined formula. Similarly, the ROFR should provide a method to value noncash consideration. By negotiating and setting these terms in the ROFR, the holder’s attorneys can eliminate some ambiguities in advance and possibly avoid future disputes. If these provisions are not included in advance, the holder and seller may disagree on how to allocate the purchase price or value the non-cash consideration, leading to a failed transaction or even litigation.

Additionally, if the holder’s contractual right is a last right of first refusal, then the seller has the ability to use the holder as a stalking horse. See Jeremy’s Ale House Also v. The Joselyn Luchnick Irrevocable Trust, 22 A.D.3d 6, 8 (1st Dept. 2005). Again, the negotiation of the original terms of the holder’s rights determines the nature of the subsequent offer, so the holder’s attorney should take appropriate steps to avoid these risks.

Exercising the ROFR

Once the holder understands the terms of the offer, it can properly evaluate whether it wants to exercise the ROFR. Assuming the holder chooses to move forward, how should it actually exercise the right? As before, the terms of the ROFR will govern, including any deadlines or notice requirements.

The notice and other exercise requirements applicable to the ROFR should be strictly followed. Although failure to strictly comply with these provisions may be excused in some instances, cf. Pitkin Seafood v. Pitrock Realty, 146 A.D.2d 618, 619 (2d Dept. 1989) (holding that deficiencies in tenant’s imperfect exercise of option to purchase would be disregarded and compelling landlord to specifically perform the contract because the tenant had made substantial improvements to the property and the landlord was not prejudiced by the deficient exercise), complying with such requirements will avoid the risk of a dispute. At the very least, any dispute will add costs.

The ROFR should clearly provide the time period the holder has to exercise the ROFR. In negotiating the ROFR, the holder needs to consider how much time it will need to evaluate an offer, taking into account its internal processes, particularly if it is a large company that may require multiple internal parties to review and approve the exercise of the offer. That said, the seller will not want to provide the holder with too much time to make a decision, since delays may affect the seller’s transaction and negotiations with the third party. The holder and its attorneys, on the other hand, should attempt to obtain as long a period as possible.

If the holder is certain that it wants to exercise the ROFR, it should notify the seller of its exercise as soon as possible because the seller normally has the ability to withdraw its offer before the holder accepts unless the ROFR specifically provides that the offer must remain open for a certain amount of time. See LIN Broadcasting v. Metromedia, 74 N.Y.2d 54, 62-65 (1989). Again, if the holder wants this or other provisions, then it must negotiate for them in the ROFR.

Post-Exercise of ROFR

As an initial matter, it is important to note that the exercise and acceptance of an offer by the holder creates a binding contract. See Cipriano v. Glen Cove Lodge #1458, B.P.O.E., 1 N.Y.3d 53, 59 (2003); see also Danyluk v. Jonathan L. Glashow, M.D., 2 Misc. 3d 1005A, 2004 N.Y. Misc. LEXIS 217, at *9-10, 21-22 (Civ. Ct. N.Y. Cty. 2004) (noting that the exercise of the ROFR created a binding contract and that material deviations from this contract constituted the breach thereof). Even while a more complete contract is being negotiated, the parties need to recognize that they are contractually bound to each other from the time of the offer’s acceptance, and that any attempt to rescind the offer could be considered a breach of this contract.

However, from a practical standpoint, an arrangement may be possible if both the seller and the third party still want to proceed. The holder’s attorneys must approach these discussions delicately because the risk of breach is real, and the seller could bring an action against the holder as a result, seeking damages from the breach, including liquidated damages (i.e., the deposit) if provided in the offer.

Assuming that the holder still desires to proceed, to what extent can it negotiate the details and the specifics of the purchase? The flexibility in the negotiations will depend on several factors. First, if the offer consisted of a term sheet as opposed to a fully negotiated contract, then the details must necessarily be negotiated (within the limits of the term sheet). Second, if the ROFR provided that the right to purchase would be on commercially similar terms as opposed to on the same terms, then the holder and the seller have more flexibility to alter the contract. However, even with this flexibility, the seller and holder and their attorneys may be reluctant to make major changes because there is a risk of litigation with the third party over whether the new terms are commercially similar. Even if the seller and the holder prevail in such litigation, the inevitable costs may act as a deterrent to major changes.

Even if the offer consists of a fully negotiated contract and the ROFR provides for the right to purchase on the same terms as any offer, the holder and the seller will still have the ability to make non-material changes. What is considered ‘material’? Certainly, any provision affecting the financial terms would be considered material and could not be changed. In Danyluk, the court found that alterations to the amortization period of a purchase money mortgage and the addition of a personal guarantee were material changes. 2 Misc. 3d 1005A at 12-17. In other contexts, courts have found the following terms were material: caps on sellers’ liability for attempting to eliminate title defects, see, e.g., Mehlman v. 592-600 Union Ave., 46 A.D.3d 338, 342-43 (1st Dept. 2007); limitations on buyers’ remedies for sellers’ defaults, see, e.g., Gindi v. Intertrade Internationale, 50 A.D.3d 575, 576 (1st Dept. 2008); provisions prohibiting purchase price abatements, offsets, and consequential or lost profit damages, see, e.g.,101123 LLC v. Solis Realty, 23 A.D.3d 107, 108, 113 (1st Dept. 2005); and election of remedies provisions, see, e.g., H Eighth Ave. Assoc. v. Stessa, 92 A.D.3d 592, 593 (1st Dept. 2012). Other terms, such as representations and warranties, may also be material.

For the foregoing reasons, the seller’s attorneys may be particularly hesitant to alter any terms when the offer involves a fully negotiated contract with the third party. The holder’s attorneys must proceed delicately and manage their client’s expectations. Any attempts at negotiation by the holder should be pursued with the understanding that it cannot push to the same extent as a normal purchase agreement negotiation. In the end, the holder may have to settle for terms that it would prefer excluded. This possibility reinforces the importance of the ROFR negotiation and understanding the offer before exercising the ROFR. Practically speaking, the holder should have made the decision that it is completely comfortable with the fully negotiated contract prior to exercising the ROFR.

If the third party does initiate a lawsuit related to negotiated changes in the offer, what form will the action likely take, and what analysis will a New York court perform? The third party may bring an action against the seller for breach of contract and other claims and against the holder for tortious interference. Despite the above discussion regarding the contractual restrictions and the limited flexibility of the seller and the holder, New York courts will most likely not strictly enforce these limitations for the benefit of the third party. Rather, in analyzing the third party’s claims against the seller, the court will determine whether “the total substantive value of the [holder’s] offer was at least equivalent, if not better, than what [the seller] would have received from [the third party].” Montaperto v. Liu, 2009 N.Y. Misc. LEXIS 6261, at *9 (Sup. Ct. N.Y. Cty. 2009); see also Salm v. Sammito, 111 A.D.2d 844, 845 (2d Dept. 1985); 34th & 7th Ave. v. 152 W. 34th St., 269 A.D.2d 153, 154 (1st Dept. 2000). If the total substantive value is equivalent, then the third party’s action against both the seller and the holder will fail. See Montaperto, 2009 N.Y. Misc. LEXIS 6261 at *11-12. However, even if the seller and holder escape liability to the third party, they will have to incur legal fees to defend the action, increasing the overall cost of the transaction.

Conclusion

When negotiating an ROFR provision in a lease or other real estate contract, a practitioner needs to help guide its client to think about the future and help it protect its investment in the property. If the holder and its attorneys do not consider the issues related to effectively exercising an ROFR and account for the risks of potential litigation claims if not exercised within any limitations imposed, then the holder may be faced with a costly path that could ultimately cost the client the right to acquire the property. However, a well-thought-out ROFR provision, along with proper guidance on limiting the risks of litigation, will help a practitioner shape its client’s future.

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.

When drafting a severance offer or release agreement, one of the first questions that legal counsel or human resources asks is, “is the employee over 40?”  But why does the employee’s age matter in the context of a release?  This article summarizes the extra protections provided to employees age 40 and over, and outlines why one-size-fits-all severance and release agreements just don’t work.

 

For an employee who is 40 years old or older, the detailed, employee-friendly provisions contained in the Older Workers Benefit Protection Act (“OWBPA”) apply.  The OWBPA, which is part of the Age Discrimination in Employment Act (“ADEA”), requires employers to follow a strict timeline to get a valid release of any age discrimination claims.  The OWBPA also requires employers to provide additional, detailed information when two or more employees are terminated at or around the same time.  Although the OWBPA most commonly applies in the context of involuntary terminations and reductions-in-force, its strict rules apply equally to early retirement plans, exit incentive plans, and other voluntary departures where an employee is asked to sign a release.  

 

General Rules for Employees over 40

 

Under the OWBPA, for a release of age discrimination claims to be valid, the release must be “knowing and voluntary.”  At minimum, this means that the release must:

 

• be in writing;

• be written in a manner that the employee would understand;

• be in plain, clear language that avoids technical jargon and long, complex sentences;

• not mislead or misinform the employee executing the release;

• not exaggerate the benefits received by the employee in exchange for signing the release, or the limitations imposed on the employee as a result of signing the release;

• specifically refer to the ADEA;

• specifically advise the employee to consult an attorney before signing the release; and

• not require the employee to waive rights or claims arising after the date the employee signs the release.

 

As with all releases, the employee also must receive additional consideration, above and beyond anything of value to which he or she was already entitled.  This means that an employer cannot, for example, require an employee to sign a release to receive his or her final pay for hours worked.

 

The OWBPA requires employers to give employees a specific amount of time to consider the release.  For a single employee, the employee must be given 21 days to consider the release.  The consideration period starts to run from the date of the employer’s final offer to the employee.  Although material changes to that offer will restart the clock, the employer and employee may agree that changes, whether material or not, do not restart the running of the consideration period.

 

After considering and signing the release, an employee has seven days to change his or her mind and revoke his or her agreement to the release.  If these time periods are not specifically included in the release, then the release is unenforceable.

 

Additional Requirements for Two or More Employees Over 40

 

When an employer requests release agreements from a group or class of employees (i.e., two or more employees) age 40 or over, those employees receive additional protections.  First, the required consideration period increases from 21 to 45 days.  Second, the employer must provide the over-40 employees with detailed information about each of the other employees who have been offered severance and asked to sign a release.  This requirement applies even when the departures are spaced out over a period of time, as long as it is part of the same decision-making process.  For example, if an employer’s expense reduction plan calls for staggered terminations over a six-month period, all of the terminations that are part of the plan count as multiple terminations under the OWBPA.  The employer must provide the following information to the employees:

 

• the class, unit, or group of employees that were covered by the exit program (whether voluntary or involuntary);

• the eligibility factors for the program;

• the time limits applicable to the program;

• the job titles and ages of all of the individuals who (in the case of a voluntary exit incentive program) are eligible for the program, or who (in the case of an involuntary termination program) were selected for the program; and

• the ages of all individuals in the same job classification or organizational unit who are not eligible for, or who were not selected for, the program.

 

The rationale for requiring this information is that it allows employees to make an educated decision about whether to sign the release.  This informational requirement exposes the employer’s process for selecting employees for termination or determining which employees will be eligible for voluntary exit incentive programs.  Again, these rules and the information requirements are very detailed.  Employers should work carefully with legal counsel to develop and properly document the eligibility and selection process and to prepare the appropriate releases and notices.

 

Finally, keep in mind that even if a terminated employee signs a release, the Equal Employment Opportunity Commission (“EEOC”) always has the right and responsibility to enforce the ADEA, as with the other laws under its regulation.  Accordingly, releases may not include provisions that prohibit employees from (a) filing a charge or complaint with the EEOC, including a challenge to the validity of the waiver agreement; or (b) participating in any investigation or proceeding conducted by the EEOC.

 

The take away: with any severance or release agreement offered to a worker over the age of 40, be aware that the OWBPA applies, and make sure you consult with legal counsel to ensure you take all proper precautions.

 

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.

Employers face many challenges when dealing with claims under the Family and Medical Leave Act (FMLA), including the initial determination of whether the leave is covered by the FMLA. Many illnesses and injuries qualify as a “serious health condition,” thus entitling an employee to covered leave. However, many injuries and illnesses do not. The first step in making this determination is to request a certification.  

 

Below are ten of the most common questions and answers with respect to FMLA certifications:

 

1. When Should You Request a Medical Certification?

If you are unsure whether an alleged medical condition is covered by the FMLA, you may request a medical certification from your employees. However, any requests for a certification should be made when you first learn of an employee’s need for leave or within five business days thereafter. If the leave is unforeseen (i.e., the employee is involved in an accident), you should request a certification within five business days after the leave commences.

 

2. Do You Have to Use the Certification Forms Provided by the Department of Labor (DOL)?

No, but you cannot request more information than what is already set forth in the DOL’s forms.  To ensure that you are in compliance with the FMLA, use the certification forms provided by the DOL, available here. Remember to use form WH-380-E for certification of an employee’s own serious health condition and form WH-380-F for certification of a family member’s serious health condition.

 

3. How Long Does An Employee Have to Provide the Certification?

Employees must be allowed at least fifteen (15) calendar days from the date of the initial request to provide a medical certification, unless the circumstances require additional time. The DOL has advised employers to “be mindful that employees must rely on the cooperation of their health care providers and other third parties in submitting the certification and that employees should not be penalized for delays over which they have no control.” 

 
4. What Can You Do If an Employee Returns a Certification That Is Incomplete or Non-Responsive?

A certification is “incomplete” if an entry on the certification form is left blank. A certification is “insufficient” if the information provided is vague, ambiguous, or non-responsive. You should notify employees in writing as soon as possible after receiving a certification that you believe is incomplete or insufficient. Employees must be given seven (7) calendar days (unless the circumstances require additional time) to cure deficiencies if their certification is incomplete or insufficient. You must advise the employee of the consequences of failing to provide adequate certification, including the denial of FMLA leave until the required certification is provided.

 

5. When Can You Request Additional Information from an Employee’s Health Care Provider?

If you receive a certification that is incomplete or insufficient, you cannot contact an employee’s health care provider. Instead, you must give the employee the opportunity to cure the deficiencies, as discussed in Number 4 above. Once you have received a complete and sufficient certification from an employee, you may request additional information from an employee’s health care provider, but only under two circumstances: 

 

1.  Authentication.  You may ask a health care provider to “authenticate” the certification by requesting verification that the information contained on the certification form was completed and/or authorized by the health care provider who signed the document. 

 

2.  Clarification.  If you can’t read the handwriting on a certification or you don’t understand the meaning of a response, you may request a “clarification” from the health care provider. However, you cannot request information beyond that required by the certification form. 

 

6. Who Can Contact the Employee’s Health Care Provider?

Be careful with this one! Contacting an employee’s health care provider can be a hazardous venture (even when done properly) because of the risk that information beyond what is required by the certification form may be disclosed. Also, the employee’s supervisor cannot be the one to make the call. The only individuals who may contact an employee’s health care provider are (1) a health care provider hired by the employer; (2) a human resources professional; (3) a leave administrator; or (4) a management official (other than the supervisor). If possible, try to use an individual that will not be involved in the decision-making process and remember to keep the conversation limited to the information that was previously contained in the certification form.

 

7. What Can You Do If an Employee Fails to Provide a Certification?

You may deny the employee’s request for leave. A certification that is not returned to the employer is not considered incomplete or insufficient, but constitutes a failure to provide certification. An employee who fails to return a certification has no right to cure. In addition, you are not required to provide the employee with notice when a certification is not received. This doesn’t mean that you should deny an employee’s request for FMLA leave as soon as the fifteen-day period for providing the certification expires. If you have reason to believe that the employee is acting diligently and in good faith to obtain the certification, but it is simply taking longer than expected, be flexible on the timing requirement before deciding to deny leave.

 

8. Can You Obtain a Second Opinion?

Yes. If you have reason to doubt the validity of a certification, you may require the employee to obtain a second opinion at your expense. You may choose the health care provider, but it cannot be one that is regularly used by your company. If the second opinion does not establish the employee’s entitlement to FMLA leave, the leave should not be designated as FMLA leave and may be treated as paid or unpaid leave under your established leave policies. Also, if the employee fails to cooperate with the request for a second opinion (i.e., if the employee fails to authorize his or her health care provider to release all relevant medical information pertaining to the serious health condition), leave may be denied. If necessary, you may obtain a third opinion, however, the regulations provide that this opinion shall be “final and binding.”

 

9. Can You Request a Recertification to Determine if Leave is Still Necessary?

Yes. As a general rule, you may request recertification no more than once every thirty days. If a certification indicates that the minimum duration of the condition will last more than thirty days, however, you must wait until that minimum duration expires before requesting a recertification. For instance, if you learn that an employee will need sixty days to recover from knee replacement surgery, you cannot request a recertification after only thirty days.  You should wait the full sixty days.

 

There are some circumstances in which you may request recertification in less than thirty days. For example, if you receive information that casts doubt upon the employee’s reason for the absence, or the continuing validity of his or her absence, you may request a recertification at any time.

 

10. Can You Require a Certification for Non-Medical Leave?

Yes. Remember that the FMLA now allows certain military personnel to take leave for “any qualifying exigency,” which could be entirely unrelated to an employee’s medical condition. You may require an employee to provide a copy of his or her active duty orders or other documentation issued by the military. A copy of this form is available here.

 

After receiving numerous inquiries, the California Board of Equalization (BOE) recently issued proposed guidelines for administering a statutory exclusion from real property tax assessment for active solar energy systems constructed on building rooftops or on land. The guidelines should settle months of industry uncertainty over the availability of the exclusion for new solar projects where the form of permanent financing is a sale-leaseback or a partnership flip.

 

Certain active solar energy systems are eligible for an exclusion from California property tax if they are “newly constructed” and have not undergone a “change in ownership.” The BOE takes the position that a sale-leaseback of property constitutes a change in ownership of that property.

 

Amendments to the legislation in August 2011 were intended to clarify that a sale-leaseback of a newly constructed solar project that is installed as an addition to an existing structure qualifies for the exclusion where the existing structure is not also sold and leased back. In response to the solar community’s call for confirmation of the legislative intent, the BOE on October 13, 2011, issued proposed guidelines on the application of the active solar energy system new construction exclusion.

 

The guidelines provide county assessors’ staff, assessment appeals board members, and taxpayers with information about the exclusion. The text of the guidelines is available here and the August 2011 legislative amendment is here.

 

Background

 

All real and personal property is generally subject to ad valorem property taxation in California, unless a specific exemption applies. The tax is assessed annually, generally at 1% of assessed value. The valuation assessment rules vary depending on whether the  property is classified as real or personal property.

 

In the case of “real property,” increased assessments and the applicable rate are limited under Article XIII.A of the California state constitution. Real property generally cannot be reassessed above the year-of-acquisition valuation (plus an inflation factor) unless a “change in ownership” or “new construction” occurs with respect to the property. In the typical case of real estate, reassessment is triggered when the property changes hands (new owners) or when there is value added to existing property through new construction (e.g., an addition or renovation to an existing building or an improvement to land).  

 

For California property tax purposes, “real property” includes not only land and buildings, but also “fixtures.” “Personal property” generally means everything other than real property. In determining whether property is taxable as a fixture, courts generally look to its degree of “permanence” and the manner in which it is attached to the building.

 

It has been the BOE’s informal policy to treat PV solar installations as “real property,” and this position is formalized in the guidelines. As real property, PV systems generally were subject to assessment if they were “newly constructed” or a “change in ownership occurred.” In order to encourage the installation of newly constructed solar systems, the California legislature  adopted a specific exclusion from California real property tax for “active solar energy systems.”[1]

 

However, the exclusion was worded so that while “newly constructed” PV systems were protected from reassessment, they were still subject to reassessment upon a “change in ownership.” Questions immediately arose concerning whether a “change in ownership” occurs when a qualifying solar project is incorporated into a newly constructed building. Does the installation of qualified PV systems on newly constructed homes and buildings result in reassessment of the existing property when the builder sells the home to its first buyer? Similar questions arose in the context of newly constructed distributed generation projects that are financed upon completion with a sale-leaseback or partnership flip.  

 

In 2008, the California legislature adopted A.B. 1451, amending the statutory exclusion for solar projects. What prompted the change was this: home builders delivering newly built homes equipped with built-in PV solar systems that otherwise qualified for the exclusion were concerned that the original sale of the home to the first buyer would constitute a “change in ownership” of the PV system, and preclude the exclusion from applying to the portion of the home’s cost attributable to the PV system.  

 

The legislation provides that where an active solar energy system is incorporated by the owner-builder in the initial construction of a new building that the owner-builder does not intend to occupy or use, the sale of the building to the initial purchaser will not be treated as a “change in ownership” and the solar system qualifies for the exclusion from tax as new construction. The exclusion applies to the initial purchaser of the new building, so long as the owner-builder did not receive the exclusion for the same system. Similar rules were enacted for residential subdivisions. 

 

As is demonstrated by A.B. 1451, the change in ownership rules were not intended to apply to brand new property, but rather to property that has had the opportunity to appreciate in value without reassessment over a period of years. Thus, a new PV installation should not be subject to reassessment until the project or the underlying property changes ownership after the initial sale-leaseback or transfer in connection with a partnership flip. However, A.B. 1451 did not address the question about sale-leasebacks and partnership flips.

           

Sale-Leasebacks and Partnership Flips

 

The industry sought clarification from the BOE that a new rooftop or ground-mounted PV system did not lose its eligibility for the new construction exclusion as a result of being financed with a sale-leaseback or a partnership flip. The industry also sought a clarifying amendment to the legislation. In August 2011, the California legislature adopted Assembly Bill ABX-1 15, the second amendment to the solar exclusion.

 

The bill provides that “…newly constructed active solar energy systems are often sold or transferred in sale leaseback arrangements, partnership flip structures, or other transactions to purchasers that may also be eligible for federal tax benefits” and “[a]s long as the active solar energy system is newly constructed or added and another taxpayer has not received an exclusion for the same active solar energy system, it is the intent of the Legislature that the purchaser of the active solar energy system in a transaction such as that described above receive an exclusion….” The new guidelines confirm, “this legislation ensures that newly constructed active solar energy systems transferred using sale-leaseback and similar arrangements that require the solar system itself, but not the real estate on which it is situated, to be sold or transferred to a third party, will continue to receive the property tax exclusion.” 

 

The bill clarifies that the exclusion remains in effect until there is a “subsequent” change in ownership. The guidelines identify several instances where a “change in ownership” will trigger a reassessment. In the context of equipment that is subject to a lease commencing at the time of installation, the system is excluded from the definition of new construction at the time of installation, and continues to be excluded from assessment until a change in ownership of the system occurs. At the end of the lease term, extension of the lease for an additional period will not trigger assessment. If the lessee purchases the system before or at the end of the lease term, such purchase terminates the new construction exclusion and makes the system assessable. If the lessee exercises no purchase option, the system is returned to the lessor at the end of the lease, and removed from the lessee’s property. The guidelines confirm that the removal will not result in any change to the assessed value of the “host” property.

 

The guidelines do address partnership flips as specifically as they do sale-leasebacks. In a sale-leaseback, the transfer to which the exclusion applies is the sale to the lessor (immediately before the property is leased back). In the partnership flip context, the transfer that the exclusion prevents from triggering reassessment is the transfer of an interest in the solar project by the developer to the newly created partnership with the “tax equity” investors. Presumably, the property continues to be excluded from assessment until a change in ownership of the system occurs.

 

To qualify for the exemption where a system is sold in a sale-leaseback or a partnership flip, the lessee (or developer in the case of a partnership) must not have been entitled to or received an exclusion from property tax for the system, because in that case the owner-lessor (or partnership) would not be entitled to a second exclusion. In the context of a partnership flip, the partnership would be ineligible for the exclusion if the developer has claimed it before transferring an interest in the system to the partnership. The bill does not specify any procedure for demonstrating that there is no “double dipping” except in the case of a newly constructed building that incorporates a solar system. In this context, the bill provides for the filing of a certificate by a new building contractor, indicating that it does not intend to own or occupy the property. 

 

However, the guidelines provide that a property owner who adds an active solar energy system to an existing structure is not required to file for the exclusion. The guidelines state that the exclusion should be automatically granted when the county assessor receives a copy of the building permit. Theoretically a notice may be appropriate in ground-mounted situations, including parking structures built on land, but, in all cases, a certificate from the lessee (or developer) to the effect that it has not and will not claim an exclusion should be sufficient to comply with the bill.

 

Leasehold Interests in Government Property

 

The guidelines clarify that systems installed on leased land or leased building rooftops are also eligible for the solar exclusion. However, when a lease involves a government-owned land or building, a taxable possessory interest in the real property is created and will be valued and assessed. In the context of a sale-leaseback, there may be government-owned land or building rooftop space leased to the solar project owner-lessor. If there is a corresponding lease of the land back to the solar project lessee, for a term and for rents that match those of the ground lease, there may be little or no value attributable to the possessory interest granted in the ground lease.

 

Retroactive Effect and Sunset

 

The solar system exclusion applies retroactively to all eligible projects completed on or after January 1, 2008. It is estimated that between 2008 and 2010, approximately $1.5 billion in value of new active solar systems were installed in California, and may be eligible for the exclusion. All solar systems eligible for exclusion on January 1, 2017, will continue to be excluded after that date until a change of ownership occurs. The bill’s provisions sunset prospectively on January 1, 2017. 

 

County or State Assessment

 

Only solar systems assessed at the county level can qualify for the solar exclusion. State-assessed property is not subject to the solar exclusion and is assessed at fair market value annually on the lien date. By law, state assessment is required if the facility has a generating capacity of 50 megawatts or more; and is owned by a company which is an “electrical corporation.” An electrical corporation does not include production of solar power for one’s own use, or the use of one’s tenants, or the sale to not more than two corporations or persons for use on the real property on which the power is generated, or, in some instances, the land immediately adjacent. Most distributed generation PV solar projects are such “behind the meter” projects, providing power to one “host” customer under a lease or a power purchase agreement, solely for the use by the host on the real property on which the power is generated (i.e., on a building rooftop or on land located on or near the building site.) Owners of these projects are not “electrical corporations” as defined in the statute and therefore are county assessed and may qualify for the solar exclusion.

 

Request for Comments 
         

The guidelines are issued in proposed form and the BOE has invited public comments. Suggested revisions or comments on the guidelines should be submitted to the BOE by November 23, 2011, to Mr. Michael McDade at PO Box 942879, Sacramento, CA 94279 or Michael.mcdade@boe.ca.gov. Comments received from interested parties will be posted to the BOE Web site on January 6, 2012. Final guidelines are expected shortly thereafter. All documents regarding the guidelines are available here.

Owners, and in some cases, lessees, of qualified renewable energy projects are eligible for either an investment tax credit (ITC) equal to 30% of the tax basis for the project, or until the end of this year, a cash grant paid directly by Treasury in the same amount. The ITC is claimed on the taxpayer’s tax return, and eligibility for the credit is subject to normal IRS audit procedures. The cash grant (so-called “Section 1603 program”), on the other hand, is payable within 60 days after the taxpayer has submitted a properly completed application. A more complete summary of the Section 1603 program can be found here.

Whether the taxpayer claims the ITC or the cash grant, the tax basis for the property determines the amount of the credit or grant. The Treasury Department is reviewing literally thousands of applications under the Section 1603 program and has to make a determination of tax basis in a much shorter period of time than is available to IRS auditors in the field. To assist taxpayers with preparing Section 1603 applications, Treasury has published and posted to its Section 1603 website an outline of the process used by the Section 1603 review team to evaluate basis and the principles that guide the process. Although these principles are published in the context of the cash grant, they are the same tax concepts used to determine tax basis for ITC purposes as well. Moreover, although the Treasury paper addresses solar PV properties, the guidance states that “the methods used to evaluate cost basis described herein apply to all types of properties.”

Basis

Basis is the amount of a taxpayer’s investment in property for tax purposes.  Basis is generally the cost of the property but also includes the capitalized portion of certain other costs related to buying or producing the property (e.g. permitting, engineering, and interest during construction). However, in certain circumstances, a taxpayer’s stated cost for an asset does not reflect the true economic cost of that asset to the taxpayer and will be ignored for purposes of determining the basis of the asset. For example, a stated cost may be inconsistent with the eligible property’s true basis “where a transaction is not conducted at arm’s-length by two economically self-interested parties or where a transaction is based upon ‘peculiar circumstances’ which influence the purchaser to agree to a price in excess of the property’s fair market value.”

In order to ensure that a taxpayer’s claimed cost basis reflects the eligible property’s fair market value, basis is more closely scrutinized in cases involving related parties, related transactions, or other unusual circumstances. Similar to the authority of the IRS in the context of the ITC, in making cash payments under Section 1603, the Treasury Department has authority to decide that “an applicant has miscalculated or misrepresented the basis of its property.” However, the Treasury cannot simply deny an application because it disagrees with the taxpayer’s claimed basis. The courts have held that Treasury must pay a cash grant based on the correct basis amount. See ARRA Energy Co. I v. United States, 97 Fed. Cl. 12 (Fed. Cl. 2011) and our discussion of the case here.

The first step the Treasury review team takes to evaluate the claimed basis for solar photovoltaic (PV) properties is to compare the claimed basis to certain benchmarks. The benchmarks used by Treasury for solar PV cost basis are predicated on an open-market, arm’s-length transaction between two entirely unrelated parties with adverse economic interests, specifically with respect to setting the eligible property’s price.
 
Benchmarks considered by the Treasury review team are drawn and updated based  on publicly available information and analyses by various experts, data from existing Section 1603 applications and other confidential sources, and Treasury’s experience with solar PV properties. As of the first quarter of 2011, benchmark solar PV market expectations are as follows:

	Residential	Residential/ Small Commercial	Commercial	Large Commercial/ Utility
Size Range	< 10 kW	10 –  100 kW	100 – 1000 kW	> 1 MW
Typical Size	5 kW	25 kW	250 kW	2 MW
Turnkey Price per W	+/- $7	+/- $6	+/- $5	+/- $4

These prices reflect a high quality of equipment (modules, inverters, racking) installed by reputable companies across the United States and include profit. 

These are merely benchmarks – they are not safe harbors and they are not ceilings. Each system is different and its cost will be affected by technology choice, regional market differences and differences in size within the above categories. A property may have specific characteristics that increase (or decrease) eligible costs. Such factors are considered in evaluating how a given application’s basis compares with benchmark prices. 

If claimed basis is deemed consistent with benchmark prices, the Section 1603 review team typically focuses the remainder of its cost review on examining line items provided in the detailed cost breakdown to ensure that only eligible items have been included and that no costs have been inappropriately attributed to the property. If there are no ineligible items, the basis reflects only items appropriately attributable to the eligible property, and if there is adequate documentation to support that the costs reflect actual costs, the cost basis is accepted. 

The review team may ask the applicant to provide additional detail if a cost breakdown line item is defined too generally. If ineligible items are identified, they are removed, and the payment is based on the corrected amount. For example, although a project may necessitate a fence for security or a building for operations and maintenance, such costs are not eligible. 

Applications with a claimed basis that is materially higher than benchmarks will receive closer scrutiny. In addition to ensuring that only eligible costs are included, the review team looks at whether there are related transactions, related party considerations, or other unusual circumstances, such as:

1. Owner/applicant is related to the developer, installer, or supplier (collectively referred to as the “developer”). The developer may be a separate, legally-organized business, but there is common ownership/control. In such a case, a sale of the property by one related party to the other may not reflect an arm’s-length price.

1. Owner/applicant is a party to one or more related transactions with the developer such that economic interests in the specific transaction determining basis may not be adverse. For example, the owner/applicant purchased the energy property from the developer and leased the property back to the developer (sale-leaseback).

Where such circumstances are present, the review team evaluates whether the claimed basis is consistent with the property’s fair market value. (Fair market value is also relevant in the context of applications by lessees of leased property, where the parties have elected to pass through the ITC or cash grant to the lessee.) In this context, original manufacturer’s invoices/costs to the developer should be provided for major equipment, subsequent markups by the developer should be enumerated, and any markups by the owner identified. The owner may also submit a detailed and credible third-party appraisal (discussed below) demonstrating that the claimed basis is consistent with a market transaction between unrelated parties with adverse economic interests.

Ultimately, if the Section 1603 review team determines that the basis was not properly calculated or represented, the review team may adjust the basis on which a Section 1603 payment is made to a level consistent with the review team’s view of the property’s true cost, as informed by documentation provided by the applicant and other relevant information and analysis. This is no different than what might take place upon examination by the IRS if the applicant elected the ITC rather than the Section 1603 payment.

Fair Market Value

The IRS generally defines fair market value (FMV) as “the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.”

The review team does not prepare appraisals for energy property. Rather, the review team evaluates appraisals provided by applicants and prepared by independent, certified appraisers with expertise in solar PV properties. There are three broad and interrelated methods that are used in valuation efforts: the cost approach, market approach, and income approach.

Cost Approach. The cost approach is based on the actual cost to build the property. This approach should clearly show the cost buildup, including hard costs, soft costs, and profit. Because the Section 1603 program only applies to energy property placed in service after December 2008, properties are new, and the actual costs should be readily available.  As cost data for PV systems is increasingly timely and available, this approach tends to be the most concrete and supportable analysis and is favored by the review team. 

Treasury’s Section 1603 review team will accept a cost approach that includes only eligible property and a markup (“developer’s premium”) that is consistent with industry standards and with the scope of work for which the markup is received. While appropriate markups are case-specific and can depend on the ultimate transaction price, Treasury has found that appropriate markups typically fall in the range of 10 to 20 percent of actual cost to build. This 10 to 20 percent guideline is not a safe harbor or a ceiling. A cost approach that includes a markup should explicitly address the appropriateness of the selected markup in light of the activity, capital investment, and risk for which that markup is compensating.

Market Approach. The market approach is based on sales of comparable properties. The Treasury paper suggests that “thousands of solar PV properties have been installed in the last two years, and market data are readily available.” 

Income Approach. The income approach is based on the discounted value of future cash flows generated by and appropriately allocable to the eligible property. Numerous assumptions must be made, including forecasts of all relevant project revenue and cost streams, cost of capital (debt and equity), rates of inflation and taxes, number of periods of income, and residual value. Treasury has found this to be the “least reliable” method of valuation given the number of variables that are subject to speculation and open to debate. However, the reliability varies with the quality of the data and assumptions. Projects with contracted power purchase agreements (PPAs) and contracted sales of environmental attributes (e.g., SRECs) have concrete cash flows on which to base an income approach. Assumptions must still be made, however, about revenues expected to be generated after the PPA expires and residual value. For purposes of Section 1603, a credible income approach to valuation will consist of a detailed spreadsheet model showing annual revenue and expenses over the term of the contract with a reasonable residual value at contract termination.

• Inflation rates should be supported by credible sources.
• Discount rates should reflect an appropriate risk premium above the risk-free rate.
• Speculative revenue (i.e., revenue that is not specifically contracted and guaranteed by a credit-worthy customer) will be closely scrutinized and must be well-supported and documented. Projected revenue beyond contracted periods should be based on conservative, publicly-available data.
• All expenses must be included, both annual ordinary operating expenses and major maintenance (e.g., inverter replacement).
• All depreciation, taxes, and other considerations should be incorporated into the model.

These and all other assumptions should be well-reasoned and sufficiently documented, and should reflect market expectations. Moreover, the income approach should explicitly address the allocation of the estimated discounted cash flows to the eligible property. 

 

As a prudent employer, you know that an employee who complains of discrimination cannot be retaliated against. You have policies that prohibit retaliation against individuals who complain of discrimination or harassment. You train your managers on these policies and you enforce them consistently. So, you may be thinking to yourself that, when it comes to avoiding retaliation claims, we’ve got it covered.

But, did you know that retaliation claims can arise absent complaints about discrimination or harassment? The federal and state statutes that prohibit retaliation generally state that an employee cannot be retaliated against for having engaged in protected activity. Of course, protected activity includes activities such as complaining of discrimination or harassment and filing a charge of discrimination with the Equal Employment Opportunity Commission (to name a few). But, protected activity can also arise when an employee requests a reasonable accommodation under the Americans With Disabilities Act (ADA). That means there’s at least a potential risk to employers whenever it becomes necessary to discipline, terminate, or otherwise take an adverse job action against an employee who has requested a reasonable accommodation. The risk is that this employee may have a viable ADA retaliation claim.

Real World Examples of Viable ADA Retaliation Claims Based on an Employee’s Request for an Accommodation

Employers are not always successful in avoiding the risk of an ADA retaliation claim where the employee’s allegedly protected activity is a request for a reasonable accommodation. Below are some real world examples to illustrate this point:

An Employee with Depression Requests Accommodations and Her Position is Later Eliminated: In a recent case pending before a federal court in Minnesota, an employee took a leave of absence for depression. Toward the end of the leave, the employee called her boss to discuss a reduced work schedule upon her return. The employee’s boss indicated that he would look into her question. A few days later, however, the employee’s boss informed her that her position had been eliminated. Several months later, the employer, having recently received additional funds, decided to hire a replacement. The employee applied for her former position, but delayed in submitting her work history, and was not selected for this position.

The employee sued her employer claiming, among other things, that she had been discriminated against on the basis of her disability and retaliated against. The court concluded that the employee could not show she was disabled (because she was not substantially limited in a major life activity). Nonetheless, the court concluded that a non-disabled employee could pursue an ADA retaliation claim, as long as she had a good faith belief that the requested accommodation was appropriate (which this employee did because no evidence showed her request was made in bad faith). The court also reasoned that the employee’s request for a reduced work schedule was a request for a reasonable accommodation, which constituted protected activity under the ADA. Further, the employee’s termination appeared to be causally connected to her request because these events were closely related in time. The employer claimed that the employee’s termination was justified due to a decreased workload. The court, however, found contrary evidence in the record, plus evidence that the employer had ignored her application for the new position. Accordingly, the court permitted the employee to proceed to a jury trial on her ADA retaliation claim.

An Employee with ADD Requests a Leave of Absence and is Later Terminated for Insubordination: In a case arising in Massachusetts, an employee who suffered from Attention Deficient Disorder (ADD), stress, and anxiety requested several accommodations, including a short leave of absence, which was granted. Shortly after the employee returned from leave, the employee’s manager gave him some work-related instructions, which the employee attempted to follow, but was unsuccessful in doing so. The manager then fired the employee for insubordination. The employee sued in federal court claiming retaliation under the ADA. Ultimately, the court concluded that the employee’s request for a reasonable accommodation was protected activity, which appeared causally connected to his termination because these events were close in time. The court determined that the record did not (in its view) paint a picture of insubordination by the employee and, therefore, the court determined a triable issue of fact remained as to whether the employee was fired in retaliation for his request for a reasonable accommodation.

An Employee Requests Possible Accommodations for Hypersensitivity to Chemicals and Is Later Terminated: In a case arising in Pennsylvania, an employee suffered from hypersensitivity to common chemicals (e.g., scented hand creams, deodorants, White-out, furniture polish). The employee met with her supervisor to discuss possible accommodations, including the possibility of adopting a perfume-free workplace policy or installing a special air filtration device in her workspace. The meeting, however, went awry. The employee became confrontational. Accusations were made. Later, the employee was terminated. The employee then sued claiming that the employer terminated her in violation of the ADA because she requested an accommodation. The court agreed that the employee had a viable ADA retaliation claim, even though the employee never established that she was disabled.

What Should Employers Do?

In light of the cases discussed above, employers would be wise to take the following steps to minimize the risk of a retaliation claim based on requests for accommodations:

Check for Protected Activity (Including a Request for a Reasonable Accommodation) Before Approving a Discipline or Termination Decision: To minimize the risk of a retaliation claim, you should always check to confirm that the employee has not recently engaged in protected activity. Employers should recognize requests for accommodation as protected activity to evaluate the risk of a retaliation claim based on this activity.

Be Sensitive to Appearances and Timing: As with any retaliation claim, employers are well-advised to consider the timing between an employee’s request for an accommodation and any discipline or termination that’s being proposed. Where discipline or termination follows on the heels of an employee’s accommodation request, an ADA retaliation claim could follow.

Train Your Managers: Employers must train their managers to understand that requests for reasonable accommodations can constitute protected activity (regardless of whether they are granted or denied). Managers work on your organization’s front-lines daily. These managers need to understand that requests for reasonable accommodations can constitute protected activity so they know to call the Company’s Human Resources Department and/or the Legal Department if discipline, termination, or other adverse actions are necessary.

Understand That Even Non-Disabled Employees Can Pursue ADA Retaliation Claims: Do not confuse the requirements to establish an ADA discrimination claim with a retaliation claim. It matters for an ADA discrimination claim whether the employee can establish that he or she has a disability or is perceived as having a disability as defined under the ADA. Whether an employee has an ADA disability generally does not matter with respect to his or her retaliation claim (provided the accommodation request is made in good faith). So, do not assume that an employee’s ADA retaliation claim will fail if his or her impairment does not rise to the level of a disability. As the cases discussed above indicate, even non-disabled employees can sometimes prevail on ADA retaliation claims.

 

 

The general rule for when employers are required to pay employees for time spent traveling seems easy enough: commute time to and from work is not compensable, while travel time during the workday is compensable. Unfortunately for employers, the rule only seems easy to apply. No longer is a workday simply based on when an employee punches in and out. As technology changes, so too does the average workday. More employees are working from home or doing work on the road before and after the normal workday takes place. As the typical workday changes, employers must come to understand how these changes affect whether employees must be compensated for their travel time.

Under the Fair Labor Standards Act (FLSA), employers are not required to compensate employees for time spent commuting from home to work or for any activities that are “preliminary to or postliminary to” their principal activities at work. The U.S. Department of Labor (DOL) has clarified that “normal travel from home to work [whether at a fixed location or at different job sites] is not work time” because it is an “incident of employment,” and is therefore not compensable. The term “normal travel,” as used in the regulation, does not represent an objective standard of how far most workers commute or how far they may be reasonably expected to commute, but rather represents a subjective standard that is defined by a particular employment relationship.

Where courts are currently struggling, however, is with the issue of what activities trigger the start of the workday because once the workday begins, all time spent traveling will almost always be considered compensable travel time and no longer part of the employee’s non-compensable “commute”. In addition, employees must be compensated for any work performed during the commute that is integral and indispensable to a principal activity of their employment. This article addresses the various circumstances that can take place before, during, or after the commute and whether the courts and the DOL have found that such activities transform non-compensable commute time into compensable time.

Circumstances That DO NOT USUALLY Make Commute Time Compensable

The good news for employers is that commute time is generally not compensable. And courts and the DOL tend to agree that this rule remains true even when the following factors (without more) are present:

Company Vehicle: Otherwise noncompensable commute time is not compensable merely because an employee commutes in a company-provided vehicle, provided that (1) the work sites are within the normal commuting area of the employer’s establishment and (2) the use of the vehicle is subject to an agreement or mutual understanding between the employer and the employee. Employer restrictions, such as prohibiting the vehicle to be used for personal pursuits or transporting passengers or requiring employees to have their cell phone on them at all times while driving a company vehicle, do not make otherwise noncompensable commute time compensable.

Job Assignments: The mere receipt of a job assignment or other instruction before or during a commute does not require commute time to be compensable.

Carrying Equipment: Transporting ordinary parts, tools and equipment needed to perform a job does not make commute time compensable.

Loading Equipment: Loading personal equipment (such as gloves, uniforms, safety equipment) is preliminary in nature and does not trigger the start of a workday requiring commute time to be compensable.

Other De Minimis Activities:De minimis activities are activities that are conducted infrequently, take a minimal amount of time to perform, and are administratively impractical to record. De minimis activities, even if performed during the commute, do not make commute time compensable.

Circumstances That MAY MAKE Commute Time Compensable

In contrast, if an employee’s activities at home trigger the start or end of the workday, then the employee’s drive from home to work or work to home occurs within the workday and at least part of that time must be compensated. This is known as the “continuous workday doctrine.” While courts have been wrestling with what activities trigger the start or end of the workday for years, there are certain facts that typically are viewed as starting the workday.

Remote Reporting Site: Where employees are required to report to a remote site to pick up equipment, receive instruction, or drop off personal vehicles, the travel time from the remote site to the work site is compensable.

Transporting Special Equipment: Where transporting specialized or heavy equipment is a principal activity and a regular part of the employee’s daily travel, such time may be compensable. The DOL has stated that special equipment does not include typical or usual work or repair tools such as laptops, manuals, briefcases, gloves, wrenches, etc.

Special Assignment: Where an employee regularly works at a fixed location, but is given a special assignment in another city, such travel is not ordinary home-to-work travel because it is performed for the employer’s benefit to meet the needs of a particular and unusual assignment. Notably, all of the time spent traveling to the special assignment is not necessarily compensable – the amount of time it would have taken the employee to commute from his home to the fixed location may be subtracted, as it remains non-compensable.

After Hours/Emergency Work: While the DOL recognizes that there may be instances where an employee is called back into work to perform emergency work after completing his shift, the DOL has expressly refused to take a position on whether travel to the job and back home by an employee who receives an emergency call outside of his regular hours to report back to his regular place of business to do a job is working time.

Work During Commute: If the employee performs principal activities during the commute, which are not merely de minimis in nature, such time is compensable.

While the above-discussed rules provide some guidance for employers in determining whether commute time is compensable, each employment relationship is fact specific and requires some analysis before determining whether an employee’s commute time is compensable. The following cases illustrate how courts have handled some of the more difficult fact patterns that have surfaced in recent years.

For example, in Dooley v. Liberty Mutual Insurance Co., a federal court in Massachusetts held that an insurance appraiser who, in the morning and still while at home, received phone calls, checked email, responded to messages, reviewed the day’s assignments, and mapped out her route for the day was required to be compensated for commute time. It typically took the insurance appraiser about 30 minutes to complete these tasks. The court found that the employee’s activities performed at home were principal activities that commenced the workday, and the employee’s commute from home to the first appraisal site was therefore compensable.

In Hiner v. Penn-Harris-Madison School Corp., a federal court in Indiana held that a bus driver who kept his bus at home and was required to perform extensive inspections before leaving for his first stop was required to be compensated for his travel time between his home and first stop.

In both the Dooley and Hiner cases, the courts found that the employee’s activities were more than de minimis because they were frequent activities (in these cases, they occurred daily) conducted at the behest of the employer, easy to record, and usually took a significant amount of time (in both cases, more than a half hour). In addition, the courts noted that travel was integral to the employee’s job duties (i.e., insurance appraisers and bus drivers). Accordingly, travel to the first work site was not treated as traditional commute time.

By comparison, in Rutti v. Lojack Corp., Inc., the Ninth Circuit Court of Appeals recently denied a technician who installed car alarms compensation for his commute time under the FLSA. There, the technician argued that his workday started at home by receiving, mapping, and prioritizing jobs and routes for assignment and ended at home by sending a Personal Digital Assistant (PDA) transmission to his employer concerning all the jobs he performed during the day. With respect to the start of his workday, the court held that mapping his route was related to his commute, took no more than a few minutes each morning, and was therefore de minimis and noncompensable. The court also refused to require compensation for the employee’s drive home, because the employer only required the PDA transmission to be sent sometime between 7 p.m. and 7 a.m. The court held that, while the employee was required to be compensated for the actual time it took to send the transmission (typically about 10 minutes), his commute home was not compensable because the employer provided enough time to enable him to use the time effectively for his own purpose. In other words, the workday ended after the last assignment, since the employee was free to do as he chose with his night, so long as the transmission was sent by 7 a.m. the next day. As a cautionary note to California employers, however, the court in Lojack did find the employee’s commute time compensable under California law, which is broader than the FLSA.

Similarly, the Federal Circuit Court of Appeals in Bobo v. United States rejected a claim for commute time by a group of border patrol agent dog handlers for the time spent transporting their dogs from home to the border patrol office. The handlers argued that during the drive, they were required to monitor their radios, wear their uniforms, report mileage, lookout for suspicious activity, and occasionally make stops to allow the dogs to exercise or relieve themselves. The court found that the activities were de minimis and noncompensable, as the activities were performed infrequently, of little duration, and were administratively impracticable to measure.

In both the Rutti and Bobo decisions, the courts found that the employees were minimally restricted by the employer during the commute, the activities performed were de minimis in nature, and the activities performed did not materially alter the employees’ commutes.