Relator's Share Found to be Ordinary Income for Tax Purposes

On July 18, the 9th Circuit, Judge Fletcher, writing for the panel, issued an unsurprising opinion in Alderson v. United States, No. 10-56007, 2012 U.S. App. LEXIS 14680 (9th Cir. July 18, 2012) holding that the relator's qui tam award under the False Claims Act is ordinary income, and cannot be characterized as capital gain.  In Alderson, the relator, who received some $27,105,035 (a 16% share of a $631 million settlement after fees and costs were deducted) filed a tax return reporting his share as ordinary income.  Thereafter, he filed an amended return characterizing it as capital gain, seeking a refund of about $5 million. 

Relator had no case law to support his contention, nor did the government apparently have any case law to support its position that such awards have been consistently treated as ordinary income.  Thus, the court, in a brief opinion, discussed relator's argument that he had exchanged documents, information, and know-how, and that that exchange constituted a "sale or exchange,” for the purposes of capital gains treatment under the tax code.  The Court rejected this argument out of hand, stating: "If Alderson had offered simply to sell or exchange the information to the government in exchange for a sum of money, the government would almost certainly have refused the offer."  The Court went on to state, "In the unlikely event the government accepted the offer, it would have done so based on some authority other than the FCA."

Alderson then argued that the information and papers were a capital asset. Alderson’s position was not entirely unprecedented – trade secrets were found to be a capital asset by the Federal Claims Court in E.I. du Pont de Nemours & Co. v. United States, 288 F.2d 904, 912 (Ct. Cl. 1961).  However, in this case, the Ninth Circuit found that the information and papers were not Alderson’s “property”, as required for treatment as a capital asset, reasoning that Alderson had no legal right to exclude others from the use of the information. 

Finally, Alderson argued that his relator's share itself was a capital asset, contending that the increase in value between 1993 when he filed his FCA case and 2003 when he received his $27,105,035 was a capital gain.  The Court, while recognizing that the share can be property for some purposes and is assignable, found it not to be property, and not a capital asset, as Alderson did not receive his share in return for an "underlying investment of capital."  Moreover, the increase in value was not the sort of "accretion in value" that characterizes a capital gain. 

Accordingly, the Ninth Circuit affirmed the holding of the Central District of California (718 F. Supp. 2d 1186 (Wilson, J), finding the relator's share to be ordinary income).

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Some Banks May Be Able to Edge Plaintiffs Out of State Court

Walter Evans Edge

A little known statute, the Edge Act, provides, in relevant part, as follows:

[A]ll suits of a civil nature at common law or in equity to which any corporation organized under the laws of the United States shall be a party, arising out of transactions involving international or foreign banking, . . . or out of other international or foreign financial operations, . . . shall be deemed to arise under the laws of the United States, and the district courts of the United States shall have original jurisdiction of all such suits; and any defendant in any such suit may, at any time before the trial thereof, remove such suits from a State court into the district court of the United States for the proper district by following the procedure for the removal of causes otherwise provided by law.

12 U.S.C. § 632.

In Sollitt v. KeyCorp, Nos. 09-4143, 10-3408, 2012 Fed. App. 0123N, 2012 U.S. App. LEXIS 1910 (6th Cir. Feb. 1, 2012), the plaintiff filed suit against his former employer, KeyCorp, in state court in Ohio for wrongful termination.  KeyCorp had a foreign currency exchange group, which was divided into two desks, the sales desk and the trading desk.  The sales desk sold foreign currencies, and the trading desk executed trades for the sales.  Plaintiff complained internally that the manager of the sales desk was defrauding customers.  Several months after the plaintiff’s initial complaint, the company installed new software to conduct a company-wide “sweep” of all employee email, scanning for pornography, nudity, or other offensive content.    As a result of the sweep, KeyCorp identified pornographic or offensive material on the accounts of 90 employees and fired 20 of them, including plaintiff.  Plaintiff’s email account revealed over 80 emails containing nude images or other pornographic content, some of which the court described as “extremely graphic.”

As KeyCorp is engaged in “transactions involving international or foreign banking,” it removed Mr. Sollitt’s case to federal court, on the basis of Section 632 of the Edge Act.  The district court, No. 1:09-cv-43, 2009 U.S. Dist. LEXIS 156 (N.D. Ohio Feb. 11, 2009), denied plaintiff’s motion to remand, finding that Mr. Sollitt’s claim for wrongful termination arose out of a transaction involving international or foreign banking, as required by the Edge Act.  The Sixth Circuit, Judge Batchelder, writing for the panel, reversed, finding that although Mr. Sollitt’s allegations involved foreign currency transactions, which are international or foreign banking activities, the case nonetheless did not satisfy the jurisdictional requisite that it arise out of such a transaction. 

The court, recognizing that the issue was not without some ambiguity, stated that the federal courts had divided on the question whether the Edge Act should be interpreted as providing “a broad basis for federal jurisdiction or whether the statute should be read more narrowly.” (quoting New Mexico ex rel. Foy v. Vanderbuilt Capital Advisors, LLC, No. 09-0178, 2009 U.S. Dist LEXIS 105528 (D.N.M. Apr. 13, 2009).  For example, in Pinto v. Bank One Corp., No. 02 Civ. 8477, 2003 U.S. Dist. LEXIS 9348 (S.D.N.Y. June 4, 2003), the court held that the Edge Act’s jurisdictional requisites were satisfied if “any part” of the suit arose out of transactions involving international or foreign banking.  The Sixth Circuit rejected what it characterized as a “limitless” view of the Edge Act’s language, and instead aligned itself with the First Circuit’s holding in Diaz v. Pan American Fed. Savings and Loan Assoc., 635 F.2d 30 (1st Cir. 1980), in which that court declined to read the statue so broadly.  In Diaz, the plaintiff bounced a couple of checks.  Pan American filed criminal charges, and Diaz sued in federal court for malicious prosecution.  The First Circuit declined to find jurisdiction under the Edge Act, holding that the filing of a criminal complaint was not an aspect of “banking” and that, accordingly, Diaz’s claim did not “arise out of” a banking transaction. 

Following the reasoning of the First Circuit, the Sixth found that the firing of the plaintiff was not an aspect of “banking,” and that, accordingly, plaintiff’s claim did not “arise out of” a banking transaction, even though the entire episode could be traced back to the foreign currency transaction. 

Following the reversal by the Sixth Circuit, KeyCorp filed a petition for certiorari, which is currently pending.

Putting aside whether the holdings in Sollitt and Diaz correctly interpret the Edge Act, it has been argued that the Act is unconstitutional. See Elizabeth R. Sheyn, The (Un)Constitutionality of Section 632 of the Edge Act: An Analysis Under Article III and Theories of Protective Jurisdiction, 41 Loy. U. Chi. L.J. 587 (Apr. 8, 2010).

In those courts that have more broadly construed Section 632 of the Edge Act or where there simply is no jurisprudence, the Edge Act can be a weapon in the defense arsenal to remove cases from what many in the defense bar view as a hostile environment, many state courts, to federal district court.

 For those who are curious about the derivation of this statute’s name, the statute is named after its sponsor, then Republican Senator from New Jersey, Walter Evans Edge.  Senator Edge lived an interesting life.  Not only was he a United States Senator for ten years (1919-1929), he was also governor of New Jersey from 1917 to 1919 and then again from 1944 to 1947.  He was a leading supporter of General Eisenhower for the Presidency, our ambassador to France for a period of time, and a newspaper magnate.  Then Senator Edge sponsored what came to be known as the Edge Act, a 1919 amendment to the Federal Reserve Act.

A tip of the hat to Jason Rossiter’s February 1, 2012 article in The Personnel Files Blog for calling this to our attention.

Please be sure to visit our website at http://RobertBFitzpatrick.com

USERRA Still Has No Statute of Limitations

            Recently, the Sixth Circuit handed down a decision, holding that the employer could enter into an agreement with its employees limiting the time within which they could sue on any employment-related claim to six months.  (Hat tip to Molly DiBianca at the Delaware Employment Law Blog).  The case before the Sixth Circuit had been filed under USERRA within three years after the plaintiff had been terminated, allegedly due to his military service in Iraq.  The District Court granted the employer’s motion to dismiss on the ground that the employment agreement required that such USERRA claim be filed within six months of termination, and the Sixth Circuit affirmed.  See Oswald v. BAE Indus., Inc., No. 11-1119, 2012 U.S. App. LEXIS 10005 (6th Cir. May 12, 2012). 

            Now, USERRA is a rather unique statute in many respects – one of which is that it lacks a statute of limitations.  That fact did not preclude the Sixth Circuit from reasoning that, by agreement, employer and employee could create a six-month statute of limitations.  And, as we have blogged earlier (Can an Employer in the Employment Application Shorten the Statute of Limitations for Anti-Discrimination Claims?) here, and (Federal Express Six Month Limitation on Statutes of Limitations in Employment Disputes Approved) here, the courts generally have been approving such agreements in employment cases.  See e.g., Ravenscraft v. BNP Media, Inc., No. 09-C-6617, 2010 U.S. Dist. LEXIS 37919, 2010 WL 1541455, at *1 (N.D. Ill. Apr. 15, 2010); PSC Info Group v. Lason, Inc., 681 F. Supp. 2d 577, 587 (E.D. Pa. 2010); Cole v. Federal Exp. Corp., No. CV-06-3485, 2008 U.S. Dist. LEXIS 71431, 2008 WL 4307090, at *9 (E.D. Pa. Sept. 19, 2008); Vincent v. Comerica Bank, No. H-05-2302, 2006 U.S. Dist. LEXIS 28613, 2006 WL 1295494, *5-6 (S.D. Tex. May 10, 2006); Badgett v. Federal Express Corp., 378 F. Supp. 2d 613 (M.D.N.C. 2005); Fink v. Guardsmark, LLC, No. CV 03-1480-BR, 2004 U.S. Dist. LEXIS 16970, 2004 WL 1857114, at *1 (D. Or. Aug. 19, 2004); Johnson v. DaimlerChrysler Corp., No. C.A. 02-69 GMS, 2003 WL 1089394, at *1 (D. Del. Mar. 6, 2003).

            But, before you pick up the phone to call your client with your latest brilliant idea, understand that Oswald is like a grandfather clock – it is an out-of-date antique that has no application to any claims that arise after October 10, 2008, the effective date of the Veterans’ Benefits Improvement Act, Pub. L. No. 110-389, §311(f)(1), 122 Stat. 4145, 4164 (2008) (codified at 38 U.S.C. § 4327(b)) (the “VBIA”).  In particular, Oswald may not apply to claims that were not time-barred as of the effective date of the VBIA, even when those claims are filed after they otherwise would be time-barred, absent the VBIA.  The VBIA contained an amendment to USERRA which replaced USERRA’s prohibition on the application of state statutes of limitations with the following language:

If any person seeks to file a complaint or claim with the Secretary [of labor], the Merit Systems Protection Board, or a Federal or State court under this chapter alleging a violation of this chapter, there shall be no limit on the period for filing the complaint or claim.

VBIA, Pub. L. No. 110-389(f)(2)(b).  Oswald’s claim arose on September 14, 2007, the date of his termination.  Furthermore, in Oswald, the plaintiff admitted that the amendment did not apply retroactively.  And in Middleton, described below, the Seventh Circuit declined to retroactively apply the unlimited-filing period contained in the VBIA. 

In Middleton v. City of Chicago, 578 F.3d 655 (7th Cir. 2009), subsequent to the passage of the 2008 VBIA, a panel of the Seventh Circuit held that it was not retroactive, and thus a claim under USERRA was held to be subject to the four-year catch-all limitations period set forth in 28 U.S.C. § 1658.   In Middleton, plaintiff’s USERRA claim was filed 13 years after it had accrued, and prior to the VBIA’s enactment.  See also Wagner v. Novartis Pharmas. Corp., 565 F. Supp. 2d 940, 945 (E.D. Tenn. 2008) (collecting cases); Nino v. Haynes Int’l, Inc., 2005 U.S. Dist. LEXIS 43971 (S.D. Ind. Aug. 19, 2005).  See our blog’s discussion of Section 1658, Section 1981 Retaliation Claims Governed by Federal Catch-All 4-Year Statute of Limitations, here.  Previously, the Seventh Circuit had applied the equitable doctrine of laches to USERRA claims.  See Maher v. City of Chicago, 547 F.3d 817, 821-23 (7th Cir. 2008); Miller v. City of Indianapolis, 281 F.3d 648, 653-54 (7th Cir. 2002).  In neither Maher nor Miller did the parties argue that the 1994 passage of USERRA, replacing the Veterans’ Reemployment Rights Act (“VRRA”) was a federal statute enacted after December 1, 1990 and thus subject to § 1658’s 4-year catch-all statute of limitations. 

In Goodman v. City of New York, 2011 U.S. Dist. LEXIS 111069 (S.D.N.Y. Sept. 26, 2011) the Court, Judge Richard J. Sullivan, distinguished Middleton and held that “the express language of the VBIA indicates that it applies to any plaintiff who, like Doherty, filed his complaint after the statute was enacted.”  Goodman held that a USERRA claim that accrued on January 27, 2007 was not time-barred despite the fact that the complaint was not filed until May 19, 2011 – four months after the expiration of the four-year § 1658 statute of limitations – because the claim was “live” at the time of the enactment of the VBIA, 38 U.S.C. § 4327(b).  See also Andritzky v. Concordia Univ. Chicago, 2010 U.S. Dist. LEXIS 35941 (M.D. Ill. April 8, 2010) (holding that USERRA claims accruing within four years of the VBIA’s enactment are governed by the VBIA and are therefore not time-barred); Roark v. Lee Co., 2009 U.S. Dist. LEXIS 108707 (M.D. Tenn. Nov. 20, 2009) (same).

            To summarize:

·         A USERRA claim that arose before October 10, 2008 (the effective date of the VBIA) and expired by virture of § 1658’s 4-year statute of limitations prior to October 10, 2008, is moribund and is not revived by the enactment of the VBIA in 2008.

·         A USERRA claim that arose before October 10, 2008, and has expired before October 10, 2008, by virture of an express contractual agreement to shorten the 4-year statute of limitations is moribund and is not revived by the enactment of the VBIA in 2008.

·         A USERRA claim that arose after October 10, 2008, cannot be time barred by § 1658 or an agreement to shorten the time period to sue.

A USERRA claim that arose before October 10, 2008 and “expired” after October 10, 2008 by virtue of § 1658 or an agreement to shorten the statute of limitations may not be time barred.  See Goodman, 2011 U.S. Dist. LEXIS 111069, supra.

Please be sure to visit our website at http://RobertBFitzpatrick.com

Skype™ Depositions: Why Use a Lamborghini When a Hyundai Will Do Quite Well? Part II

            This blog and the blog before it are meant to summarize the attitude of courts towards the use of Skype™ as an effective means of taking depositions.  It is also intended to provide a basic introduction to the use of Skype™ for this purpose, as well as how to address common technical and practical issues which might arise.  It is not intended to allow an individual with little or no knowledge of computers to take a Skype™ deposition unassisted, and even experienced users would be well advised to consider arranging for professional technical support to provide advice and assistance in setting up a Skype™ deposition.

1.      Skype-Specific Tips for Videoconferencing

a.       Skype™ works best on a personal computer (i.e. not a Macintosh) with the following specifications.  Please remember that ALL parties involved should be able to meet the minimum specifications below.

                                                              i.      Windows XP, Windows Vista, or Windows 7.  Make sure that your operating system has been properly updated and patched.

                                                            ii.      While Skype™ can function adequately with a 1.8 GHz processor, a 2.4 GHz Intel® Core™ 2 Duo Processor or equivalent is recommended.

                                                          iii.      While Skype™ can function with as little as 512 megabytes of ram, at least 2 GB of RAM is recommended.

                                                          iv.      A graphics card with at least 32 megabytes of RAM – with at least twice that being recommended.

                                                            v.      A monitor with a minimum resolution of 640x480, though a 1280 x 720 monitor resolution is recommended.

b.      If you plan on recording the conversation, it would be advisable to have at least one terabyte of storage (a terabyte is approximately 1,000 gigabytes).  It is possible to obtain 1-2 terabyte external storage for a little over $100. 

c.       Internet Connection

                                                              i.      All parties should have a high-speed broadband connection with at least 4 megabytes/second download and 512 kilobytes/second upload.  While Skype™ can function at lower speeds than these, performance may degrade.  If you are connecting through a local area network, be sure that the network will allow the computer you plan to use for the deposition to achieve these speeds.

                                                            ii.      A hardwired internet connection is preferable to a wi-fi connection and should be used whenever possible.  Ideally, all participants should be in a Location where a high speed connection hardwired is available.

d.      Webcam – you should plan on spending $50-$100 for a decent web cam to ensure high-quality video.

e.       Both sides of the connection must have a high-speed internet connection for Skype™ to work at an acceptable level.

f.       There have been problems reported with Skype™’s audio transmissions.  If testing reveals audio problems, an easy fix is to use some other means of transmitting audio, such using land-line speaker phones at each location to transmit audio.  If you use this method, be sure to place any microphones on the Skype™-ing computers on “mute”.

2.      Software – You should have the following software and accounts

a.       All participants will need Skype™ 4.2 (or higher) for Windows.

b.      All participants will need DirectX 9.0c and a compatible video card (hardware). 

c.       to make a group video call, at least one of the people on the call must have a Skype™ Premium account (for personal accounts) or a Group Video Subscription (for business accounts).

3.      Practice –

a.       Even before a test call, be sure to practice making connections with, and using the features of, Skype™.  In addition to increasing your level of comfort with the service, it will also allow you more easily to identify and address potential problems which may arise.  In particular, practice using and repositioning the webcam, making adjustments to the audio devices, and adding participants to calls.  If you plan to record your call, you should obviously also practice doing so.

b.      Skype™ also has a number of additional features which may prove useful during a deposition – for example, the capability to send a file to all participants in a call.  To the extent you anticipate using such a feature, be sure to practice doing so beforehand.

4.      Testing in Advance – Advance testing is even more important for Skype™ depositions than for other types of videoconferencing. 

a.       If possible you should plan to make at least one test call prior to the date of the deposition which involves as many of the same participants, hardware, and locations that will be used in the actual deposition as practical.  

b.      During this call, make sure all peripheral hardware, such as the webcam and any audio devices (land lines, microphones, speakers, etc.) are working properly and provide acceptable feedback.

c.       If you encounter performance problems during testing, Game Booster, a free utility that helps improve your computer’s processing speed, may be able to help abate them.  As always, this should be tested before it is relied upon.

d.      When setting up your connections, be sure you are talking to the correct individual(s) at the other location(s) to ensure that everything is being set up correctly. 

e.       All participants should plan to call into the deposition at least 15 minutes early to work out any final bugs.

5.      Check the Settings – Remember to turn off online notifications on the computer you are using for the Skype™ conference, especially if you also use Skype™ for personal purposes.  You do not want testimony to be interrupted by a message informing you that one of your co-workers, friends, or family members is now online.  Also disable any other software or notifications which may create a distraction during the deposition.

6.      Security:

a.       Skype™ encrypts communications made using its software.

b.      However, transmissions using Skype™ (“feeds”) can be vulnerable to attacks by hackers. 

c.       To enhance the security of your transmissions, all participants should ensure that Skype™ is not using their device as a “super node”.  There are instructions on Skype™’s public website for making the modifications needed to achieve this.

7.      Skype™’s Group Chat Feature:

a.       One Member must have a Skype™ Premium Account, which is $9.99 per month.

b.      Group chat has higher system requirements than regular video chat.  As of the time of writing, the minimum requirements were a high-speed broadband connection of 512 kbps download speed and 128 kbps upload speed, and a computer with at least 1 gigahertz of processing power.  Recommended system specifications are 4 Mbps down/512 kbps up and a core 2 duo 1.8 gigahertz processor. 

Please be sure to visit our website at http://RobertBFitzpatrick.com