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BlogsLegal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Eighth Circuit grants Union Pacific $75 million in Tax Relief

August 17, 2017 | Megan Stumph-Turner

Earlier this month, the Eight Circuit Court of Appeals overturned the lower court’s decision in a case that involved a dispute over whether the Railroad Retirement Tax Act (RRTA) requires a railroad to pay taxes upon issuing stock as compensation to employees.

In an opinion mirroring, and even explicitly referencing, the textualist sentiment of Justice Gorsuch’s opinion in Hensen v. Santander, the Eight Circuit addressed the parties’ respective positions as to what the words “money” and “compensation” mean in the context of the RRTA. While the federal government argued that “money” has a broad and sometimes intangible meaning, Union Pacific maintained that “money” must refer to a “medium of exchange” – i.e., something tangible and of value that may be given in exchange for goods or services.  The Eighth Circuit found Union Pacific’s reading of the text to be more compelling than the government’s.

In its discussion, the Court further distinguished the RRTA from FICA, which includes a more all-encompassing definition for compensation subject to taxation.  The Court explained that, since the RRTA and FICA’s predecessor were drafted during the same time period, any difference or distinction between each law’s definition of compensation must have been intentional.

It is certainly worth noting that the Eighth Circuit referenced and rejected a recent holding by the Seventh Circuit in Wisconsin Cent Holding v. United States that stock may be considered “money remuneration” that is tantamount to cash, reasoning that “one cannot pay for produce at the local grocery store with stock.” 

The Eighth Circuit also reversed the lower court’s decision concerning ratification payments made pursuant to a union’s collective bargaining agreements, because those payments were not made pursuant to “employment” of the individual by Union Pacific. 

With that, the Eighth Circuit completely reversed the summary judgment rulings previously entered in favor of the United States and against Union Pacific, thus entitling Union Pacific to a $75 million refund for taxes paid over the course of 10 years on stock compensation and ratification payments.

The full text of the Eight Circuit’s opinion is available here.

U.S. Supreme Court Says it Again: Arbitration Agreements Should be Honored, and Not Singled Out for Negative Treatment by State Courts

August 10, 2017 | David Eisenberg

For years, the U.S. Supreme Court has made two fundamental principles crystal-clear:

  1. Under the Federal Arbitration Act, arbitration agreements are “valid, irrevocable, and enforceable”, except where grounds exist that could invalidate any type of contract (such as fraud, duress, or lack of consideration).
  2. As explained by the Supreme Court in its 2011 landmark Concepcion decision, though a court may invalidate an arbitration agreement based on “generally applicable contract defenses,” it may not do so based on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”  The FAA thus preempts any state rule that discriminates on its face against arbitration or that covertly accomplishes the same objective by disfavoring contracts that have the defining features of arbitration agreements.  Arbitration agreements must stand on an “equal footing” with other contracts.

Unfortunately, some state courts have failed to get the message.  And the Supreme Court’s recent 7-1 decision in Kindred Nursing Centers L.P. v Clark, 137 S. Ct. 1421 (2017),forcefully drives home the point that contrived state court attempts to explain why a rule is not impermissibly targeted at arbitration agreements will be viewed dimly

In Kindred, the Kentucky Supreme Court adopted a “clear statement” rule, under which a general power of attorney that was otherwise valid to authorize the execution of contracts in general, would not validly authorize execution of an arbitration agreement unless the power of attorney expressly addressed that topic.  Thus, when family members holding a power of attorney agreed to arbitrate claims regarding the care of their loved ones in a Kindred nursing home, the arbitration agreement was deemed invalid, because the family members’ power of attorney did not “clearly state” that they had the power to waive the right to a jury trial.  The state court opined that “the divine God-given right” to a jury trial could not be contractually waived, absent “an explicit statement before an attorney-in fact” that could “relinquish that right on another’s behalf.”

Justice Kagan, writing pointedly for the 7-member majority, would have none of that.  She wrote that beyond the FAA “prohibiting outright the arbitration of a particular type of claim”, the law likewise prohibits “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of an arbitration agreement.”  To the Kentucky court’s suggestion that its rule “could also apply when an agent endeavored to waive other ‘fundamental constitutional rights held by a principal’,” the Court responded:  “But what other rights, really?  No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”  Justice Kagan further noted the absence in Kentucky law of explicit authorization requirements as to settlement agreements or consents to a bench trial, both of which relinquish the right to a jury trial.

The Court further rebuffed Plaintiffs’ argument that the FAA applied only to contract enforcement, and not to contract formation, which was at issue in this case, emphasizing that:

  1. This argument was squarely contrary to the FAA’s text and case law; and
  2. “Adopting the respondents’ view would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it. As the respondents have acknowledged, their reasoning would allow States to pronounce any attorney-in-fact incapable of signing an arbitration agreement—even if a power of attorney specifically authorized her to do so. . . . (After all, such a rule would speak to only the contract’s formation.) And why stop there? If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements. (That rule too would address only formation.) The FAA would then mean nothing at all—its provisions rendered helpless to prevent even the most blatant discrimination against arbitration.”

 

The Supreme Court’s message in support of the enforceability of arbitration agreements seems unmistakable.  But a number of states’ courts (including Missouri, California, and others), while routinely accepting arbitration agreements governing commercial disputes, still seem to bristle at enforcing arbitration agreements between consumers and manufacturers or retailers; or between employees and their employer.  State courts that look for reasons not to place all arbitration agreements on an “equal footing” with other contracts in general, do so at their peril.

Is It Necessary for an Expert Opinion to Take Into Account Obvious Alternative Explanations for an Injury? Eighth Circuit Weighs In.

August 7, 2017 | Leigh Ann Massey

In Redd v. DePuy Orthopaedics, Inc., the Eighth Circuit Court of Appeals has reminded litigators of the importance of ensuring expert witnesses perform a thorough review of a matter, including apparent alternative causal explanations, prior to issuing their opinions.

 In 2008, plaintiff Redd underwent a total hip replacement, receiving an implant supplied by hip manufacturer DePuy Orthopaedics, Inc.  At the time of her surgery, Redd suffered from a number of risk factors that placed her at a higher risk for failure of the implant as she took immunosuppressant drugs and was considered morbidly obese.  Four years after her initial surgery, the implanted hip stem fractured.  During the revision surgery to replace the hip stem, the doctors determined that the stem had not properly grown into the bone at the top of Redd’s hip, which was a known possibility given her risk factors.  Two years after her revision, Redd again experienced a hip stem fracture.  Plaintiff brought a federal diversity action against DePuy Orthopaedics, alleging negligence and strict liability claims based on product defect and failure to warn.  DePuy moved for summary judgment and for exclusion of plaintiff’s expert testimony under Federal Rule of Evidence 702 and the analysis set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).

Plaintiff retained a professor of metallurgy and materials science, Dr. Shankar Sastry, to testify as to the cause of the fracture.  In preparing his expert report, Dr. Sastry failed to review records related to the manufacturing process of the hip implant and disregarded consideration of biomechanical factors that could have resulted in failure of the prosthesis.  Dr. Sastry concluded that it was the physical state of the implant’s metal that caused the fracture.  He further concluded that any individual environmental or biomechanical factors would have been a secondary cause of the fracture. 

In granting DePuy’s motion to exclude Dr. Sastry’s testimony, the US District Court for the Eastern District of Missouri concluded that Dr. Sastry lacked a scientific or factual basis to conclude that there was a manufacturing defect or to opine on causation, and that he failed to consider the necessary issues of the forces that were exerted on the implant as it was placed in Redd’s hip.  Following exclusion of Dr. Sastry’s testimony, Redd lacked expert testimony on defect or causation and DePuy’s motion for summary judgment was granted.

On appeal, the Eighth Circuit reviewed the district court’s exclusion of Dr. Sastry’s testimony, the propriety of which is governed by Rule 702 and the Daubert standard.  Plaintiff argued that the district court erred by requiring Dr. Sastry to exclude other potential causes of the fracture.  The Eighth Circuit concluded that, while an expert is not required to rule out all possible causes of an injury, he or she nonetheless should adequately account for obvious alternative explanations.  Dr. Sastry did not consider the obvious alternative explanation for the fracture—failure of the hip stem to grow into the patient’s upper hip bone and subsequent failure to properly distribute her weight—which was a known possibility at the time of Redd’s surgery given her risk factors.  Because Dr. Sastry failed to consider the individual biomechanical forces placed on the prosthesis in issuing his report, the district court’s decision to exclude the causation testimony was affirmed.

The opinion may be found here.

For more on Missouri’s recent adoption of the expert witness standard set forth in Federal Rules of Evidence 702 and Daubert, see The Daubert Standard – Coming Soon to a Missouri Court Near You.

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