Archive for the ‘Legal Research’ Category

Christopher K. Gridley v. State Farm: Unfair Titling Practices (2004)

August 16, 2009

The case stemmed from Gridley’s purchase of a four-door, 1998 Volvo S70, with a clean title, at an auction in November 1999. Five months after the sale, a mechanic discovered that the Volvo had been seriously damaged in a major accident prior to Gridley’s purchase, and stated the auto had been “improperly rebuilt”.

Christopher K. Gridley of Denham Springs, Louisiana, filed suit against State Farm in June, 2000. According to the lawsuit, State Farm declared the car totaled a month prior to Gridley’s purchase, but the company failed to obtain a salvage title.

According to information gathered, Gridley’s Louisiana Counsel discovered that similar claims against State Farm and other insurers had been filed elsewhere, forming the basis of a potential class action. The St. Louis firm of Korein & Tillery were brought in as part of Gridley’s Counsel, and the case was filed in Madison County Illinois’ Third Circuit District Court. (Korein & Tillery are among the most infamous class action plaintiff firms, having won the $10.1 billion dollar judgment against Philip Morris in Illinois. Madison County, Illinois consistently ranks at the top of the American Tort Reform Association’s annual “Judicial Hellhole” list for the size of judgments rendered and, in some cases, the apparent lack of forum connection to Madison County.)

The Gridley suit became significant for reasons other than State Farm’s titling practices. National backers of tort reform have consistently attacked Illinois Courts for their outrageous Plaintiff awards. The Plaintiff’s Bar has developed a huge industry of bringing Class Action suits to these courts, and are widely accused of court “venue shopping”. Gridley, a citizen of Louisiana, attempted to demonstrate that State Farm’s significant presence in Illinois supported his choice of geographic venue. The Illinois case went back and forth through the appellate process, with one court supporting Gridley’s choice of venue, another denying the Illinois forum.

The insurance industry, along with the U.S. Chamber of Commerce, tort reform lobbyists, and corporations previously hit by Illinois judgments have jumped in to the fray in support of State Farm. Numerous, extensive amicus curiae (friend-of-the-court) briefs were filed for Gridley  when it reached the Illinois Supreme Court, harshly criticizing the case as representative of national tort abuse. “The watchers of the case and the filers of the briefs hope that the court in the course of ruling affirmatively on the change of venue will formulate rules that “will put the brakes on” what they call Madison County’s ‘litigation industry’”.

The Gridley case is on the Illinois Supreme Court’s “Advisement Docket” for their January Term, 2005. It is unknown when this case will be heard again.

Broker Contingency Fee Research – 2005

August 16, 2009

Recently, insurers and brokers in several states have come under regulatory scrutiny for their joint participation in contingency fee arrangements. In these arrangements, a broker receives increased profit commissions from an insurer based on the volume of policies placed with an insurer, or on the low incidence of risk of the business placed. This practice, common in the insurance industry overall, is being attacked on two fronts: first, that these types of contingency fee arrangements create an inherent and impermissible conflict of interest for a broker, who by legal definition represents the consumer and his best interests in a transaction with an insurer; and second, that when a contingency fee arrangement does exist between an insurer and a broker, disclosure to the consumer of the arrangement is non-existent or at the best, weak and insufficient. Private causes of action, though currently limited, have also been initiated challenging contigency fee arrangements as inherently unfair business practices.

New York Attorney General Eliot Spitzer and regulatory officials in Connecticut and California are currently investigating contingency fees paid to brokers by insurers, based on profit. In April, 2004, Aon, Marsh & Mclennan, Willis Group, and Chubb all confirmed receiving subpoenas from the NY Attorney General’s office.  Hartford, Cigna, Aetna and Metlife, Inc. confirmed in late May that instructions were received from the New York Department of Insurance ordering the company not to destroy any documents relating to their dealing with brokers. In addition, another half-dozen insurers also may have received subpoenas. The subpoenas issued have stimulated a windstorm of anxious activity.  Following the subpoena, Aon Corp. shares dropped 8%.

Spitzer has attained notoriety for his Wall Street investigations of similar mutual fund industry agreements, allegations of improper trading in variable annuities, and conflicts of interest between investment bankers and stock analysts. Known for upstaging the Securities and Exchange Commission, Spitzer spearheads new investigations, with the SEC following up with their own inquiries.

The NY, CA and CT investigations of broker contingency agreements were pushed to the forefront by a few different factors.  A letter addressed to New York Attorney General Eliot Spitzer, New York Superintendent of Insurance Gregory V. Serio, California Attorney General Bill Lockyer and California Insurance Commissioner John Garamendi, written by the Washington Legal Foundation (WLF), a non-profit public policy think tank, discussed the conflicts of interest that exist within the insurance brokerage industry.  Two industry practices were cited for inquiry: Placement Service Agreements, also referred to as “revenue sharing” or “contingency agreements”; along with “leveraging” or “tying”.

 Placement Service Agreements (PSAs) or Market Service Agreements (MSAs) are contingent profit commissions paid annually to brokers based on volume of policies placed with an insurer, and the low incidence of risk of the business placed. “Leveraging” or “tying” refers to a related practice involving reinsurance contracts. Brokers will threaten to withhold referrals to an insurance company unless the insurer agrees to address reinsurance needs with that broker.

Non-Profits and consumer advocacy groups allege that contingency commissions are kickbacks for brokers, and that the consumer’s best interests cannot be primary in a broker’s profit incentive program.  In the event a broker was closing in on their volume target for an insurer, they might be enticed to place their next policy there, despite the consumer’s needs. Brokers often help their clients file and collect on insurance losses, and a PSA arrangement based on assessed risk might discourage a broker from reporting claims.

Insurance Brokers argue that when they perform well under contingent commission arrangements, the increase of low risk business placed with an insurer leverages better pricing conditions. “Brokers have had such agreements with insurance companies for many years to compensate the brokers for services they provide to the carriers and many of the major carriers have these agreements with brokers,” Willis Group stated in an April 23, 2004 press release. Compensating brokers does seem to be a long-standing industry custom: an Aon spokesman described the arrangements as an “age-old common practice”. A letter to Business Insurance by the CEO of a New York brokerage firm described commissions as “a reward system when a job is done right”.

Disclosure

Five years ago, the Risk & Insurance Management Society (RIMS) criticized the practice of contingent commissions – particularly brokers’ failure to disclose their financial involvement with insurers. According to the Executive Director of RIMS, “Our members appreciate what the broker is doing. They don’t care where the payments are coming from as long as they are disclosed.” RIMS eventually compromised by jointly developing with super-brokerage Marsh & McLennan a disclosure policy that notified a client of the broker’s contingency fees upon the client’s request.

Concurrently, in 1998 the New York Insurance Department issued a bulletin warning that undisclosed compensation is “sufficient to create the perception that brokers are conflicted in their loyalties and that such conflict may constitute a violation of Section 2110 (New York Insurance Code) as a dishonest or untrustworthy practice.” The Bulletin further described the methods of disclosure with which brokers and insurers must comply. A Wall Street Journal article concluded that the New York Insurance Department’s interest in the contingency fee issue stemmed from the brokerage industry consolidation of the period.

At this point, all brokers are engaging in disclosure practices. However, the practice is not specifically directed toward the client in many cases.

In a recent lawsuit in Illinois against brokerage Arthur J. Gallagher & Co, the appellate court said that the firm’s disclosure statement in their 10-K SEC filing was not sufficient.  The plaintiff argued that a client should not have to rely upon a disclosure statement contained within a lengthy financial statement such as a SEC filing.  The court supported this view, stating that although the 10K filing on public record might be considered disclosure, that the question was whether disclosure was “complete, full, clear and candid.”

In January, 2004, J.P. Morgan issued a summary regarding contingent commissions within a semi-forecast of the future of the P&C sector, and supported the idea that current disclosure practices are weak and incomplete. The securities firm believed that an active debate over the issue of contingent commissions would be launched in 2004, and those contingent commission fees would be negatively impacted. “Although the often-undisclosed contingent arrangements are legal, recent trends within the regulation of financial institutions suggest that such arrangements could well be prohibited, or significantly modified in the future. We believe the most likely outcome is greater disclosure requirements and an outcry for reform from insureds.”

Litigation

In 2001, a Monterey, California attorney with Anderson Kill & Olick filed a lawsuit against the insurers in The Hartford group. This suit has gained in momentum and scale over the past few years – over 40 individual insurers have been named as defendants ( Allianz, American International Group (AIG), Continental, Chubb, The Hartford and all California-licensed subsidiaries) and a precursory examination of the listed court documents, orders, motions, and stipulations provide approximately 250 separate documents. The lawsuit is still in pre-trial discovery stage.

Anderson Kill previously targeted the major brokerages – Aon, Willis and Marsh – in a similar contingency fee suit, and settled out-of-court and off public record. The current San Francisco lawsuit names no brokerages as defendants, and specifically refers to the aforementioned brokerage firms as “excepted brokers”.

The Plaintiff’s Causes of Action under California Business & Professional Code (Subsection 17200 et seq.) demonstrate the Insurance Companies’ inherent unfair business practices involved with the payment of contingent commissions. Specific points include:

  • Commissions paid to brokers constitute a conflict of interest on behalf of the policyholder and unfairly negate the policyholder’s right to coverage;
  • Commissions paid to brokers provide incentives to unfairly conduct business with policyholders, such as failing to make claims on behalf of the consumer.
  • Policyholders pay premiums for specific, requested insurance coverages. The commissions paid to brokers by insurers come indirectly from the consumers’ premium payments. The cost of these commissions has been passed to the consumer. The restitution sought is a repayment of these premiums to policyholders.
  • The fees and commissions produced for brokers as a result of undisclosed contracts constitute undisclosed kickbacks to brokers of premiums paid to insurers by policyholders.

The remedies sought include restitution in the form of a refund to all policyholders. In addition, the “Plaintiff also seeks to enjoin the Hartford Defendants from selling any more insurance through certain brokers unless and until they fully inform all past and prospective policyholders of the kickback agreements.”

Limiting Risk

JP Morgan’s report of the broker commission issue stated that tighter protocol for disclosure would be in the future. Where would a disclosure statement to the consumer fall?  The Illinois appellate courts in the Arthur J. Gallagher suit found that disclosure statements in SEC filings are inadequate. If we began the practice of including a disclosure statement in an insured’s application or policy, these would come under the scrutiny of Insurance Regulatory officials who review consumer documents prior to issue.

The New York Insurance Department regulated disclosure of broker’s compensation in the past, and issued an advisory bulletin. Enclosed in the 1998 NY bulletin are the following recommendations for disclosure. Italicized language has been added, offering suggestions and notes for each state-mandated suggestion:

  • All compensation arrangements between an insurer and a broker should be reduced to writing and agreed to by both parties;
  • All such compensation arrangements should be disclosed to insureds prior to the purchase so as to enable insureds to understand the costs of the coverage and the motivation of their broker in placing the business;
  • All fees paid to brokers should be included as factors in the establishment of an insurer’s premium rates;
  • All fees paid to brokers (and reasons for such fee payments) should be included in a broker file maintained by the insurer; and
  • The insurer’s internal auditing procedures should include verification that all fees paid to brokers are proper and within the parameters of the New York Insurance Law and Department regulations.

Research may need to be conducted into the short term risks involved with XXXX Corporation’s brokers. Willis Group, one of the mega-brokerage holding companies involved in the New York regulatory investigation, has a small San Diego subsidiary that brokers Property & Casualty insurance.

Long term, a great risk would be a private action brought forth in civil trial. The subpoenas issued by the New York Attorney General for insurers (Aetna, Cigna, and Hartford) may only be information gathering with the purpose of attacking brokers’ disclosure practices. However, a recent national news agency article surmised that the subpoenas are part of a broad investigation “whether the fees that insurers pay brokers as an incentive to sell their products constitute a fair business practice or pose a conflict of interest.”  Risk also includes further litigation such as that in the San Francisco Anderson Kill suit, which has demonstrated the legal avenues the Plaintiff’s Bar might approach in their pursuit of insurers.

Reference Guide: 

(1)             “Aetna, Cigna Subpoenaed in Broker Probe

                   Associated Press – 6/11/04

                   http://biz.yahoo.com/ap/040611/insurance_probe_3.html

(2)             “UPDATE – Hartford receives subpoena on broker compensation

                   Reuters – 6/10/04

                   http://biz.yahoo.com/rc/040610/finanical_hartford_2.html

(3)                “Birth of a Crusade: Spitzer Turns to Insurance Brokers

By Matthew Goldstein

TheStreet.com    4/23/04

 http://www.thestreet.com/pf/markets/matthewgoldstein/10156237.html

(4)                “Now, insurance comes under regulatory fire

                   The Economic Times – 5/2/04

                   http://economictimes.indiatimes.com/articleshow/msid-657839,prtpage-1.cms

(5)                 “Payments to insurance brokers draw scrutiny

                   By Theo Francis

                   The Wall Street Journal   5/17/04

                   http://www.ajc.com/money/content/money/0504/17insure.html

(6)                 “Contingent Compensation and Service Agreements Between Insurance 

                   Brokers and Insurers”

                   Insurance Information Institute May 2004

                   http://server.iii.org/yy_obj_data/binary/736589_1_0/BrokerCompensation.pdf

(7)                  “June 2: Commentary – Fatalism and Conflicts of Interest”

                   By H. Felix Kloman     6/2/04

                   Global Association of Risk Professionals (GARP) – Todays Risk eNews

                   http://www.garp.com/risknews/newsfeed.asp?Category=16&MyFile=2004-

                   06-02-8757.html

(8)                  “RIMS and J&H Marsh & McLennan Agree to Contingency Disclosure

                   Policy”

                   RIMS News Release 1/25/99

                   http://www.rims.org/Content/NavigationMenu/Home/99release.doc

(9)                  “RE: Disclosure of Brokers’ Compensation

                   State of New York Insurance Department

                   Circular Letter No. 22 (1998)

                   8/25/98

                   http://www.ins.stat.ny.us/c198_22.htm

(10)        “Marsh & McLennan Agrees to Disclose Contingency Fees It Gets From

                   Insurers”

                   Wall Street Journal – 1/26/99

                   http://www/siver.com/SiverScan/May99_Risk_Man.htm

(11)        “Payments to insurance brokers draw scrutiny

                    By Theo Francis  5/17/04

                    The Wall Street Journal

                    http://www.ajc.com/money/content/money/0504/17insure.html 

(12)         “Contingents May Be Smaller, But More Prominent in 2004

                    Insurance – Non-life

                    US Equity Research

                    JP Morgan Securities Inc.

                    1/13/04

                    http://www.rims.org/Content/NavigationMenu/Home/JPMorgan.pdf

(13)        “UPDATE – Hartford receives subpoena on broker compensation

                    Reuters – 6/10/04

                    http://biz.yahoo.com/rc/040610/finanical_hartford_2.html

Paralegals: FLSA Exemption Applicability

August 15, 2009

Paralegals: FLSA Exemption Applicability

On August 23, 2004, the “white – collar” exemption guidelines under the Fair Labor Standards Act (“FLSA”) were amended for the first time in almost 30 years. Under the FLSA, all workers are entitled to overtime pay. Only employees determined to be exempt under the ‘white-collar’ guidelines may be excluded from non-exempt, hourly compensation procedures. Specifically, the regulations at 29 C.F.R. Part 541 ( “Part 541”) provide exemption from overtime compensation for specific types of executive, professional, or administrative workers ( “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees”, 2004).

The revisions made to the FLSA language were highly anticipated for some time. The job duty requirements needed to satisfy the “exempt employee” definition had not been altered since 1949. The minimum salary required to meet exemption standards had not been updated since 1975. Until the regulations were revised, the theoretical possibility existed that an employee earning only $8,060 per year could have been classified as an executive, and denied overtime compensation (“Defining and Delimiting….”, 2004).

According to several resources utilized, many employers “large and small, public and private – don’t understand how to interpret the exemption regulations under the Fair Labor Standards Act” (Ritter, 2002). One of the benefits provided by the FLSA revision was the amount of open conversation, debate, and contention that occurred as a result of the proposed rulemaking, which spurned immense interest in FLSA compliance (Priest, Coleman; 2004). Many employers, industry groups, and lobbyists answered the proposed regulations with individual legal opinions, either concurring with or arguing against the new Part 541 language. Since the August 2004 enactment, quite a few employment law consultants have held symposiums or seminars, answering questions and concerns about the changes made.

For the purpose of this research, the newfound ability to locate insightful, modern analyses of the FLSA exemption standard has been incredibly useful. “The revisions which became effective on August 23, 2004, sparked a flurry of action in the legal community as employment lawyers across the country scrambled to digest the changes and advise their clients” (Priest, Coleman; 2004). Had the FLSA revisions not occurred, it is questionable whether the dearth of current, critical resources would have been available.

This research provided several conclusions regarding XXXXXX Corporation’s Legal Compliance Department paralegals and their exemption status under the FLSA.  First, these particular paralegal employees are quasi-specialists, and cannot be construed as typical paralegals working in other legal venues. Second, these employees are normally engaged in duties that easily fall under the FLSA’s “white-collar” exemption, specifically under the administrative duties category. Lastly, various types of “Paralegal Specialists” are becoming more commonplace, as employers realize the cost effective benefits of paralegal utilization and engage these employees in tasks that do not require an attorney’s efforts.

“Legal compliance” has increasingly assumed a greater role in traditional business stratagem. In light of some of the more rigorous compliance standards that have been enacted in the past decade, such as the Sarbanes-Oxley Act or the Graham-Bleach-Bliley Act, corporations in the 21st century clearly understand the significance of compliance.

XXXXX Corporation’s Legal Compliance Department has become responsible for a number of specific areas, including forms compliance, DOI regulation, legislative and litigation tracking, and business practice advisement.  Insurance is an exceedingly regulated industry, and the need for an internal department to act as a guide in these areas is crucial.

The Legal Compliance Department’s paralegals are consistently engaged in activities that are not typically part of paralegal practice. Paralegals employed in most corporate legal departments are engaged in the tasks involved with litigation. The Legal Compliance Department has instead served as a type of preventative legal function for XXXXX Corporation. By consistently identifying potential risk, actively learning of new risks for litigation as identified by XXXXX Corporation’s competitors, and by providing counsel for management, the Legal Compliance Department has been at the forefront of reducing the risk of future litigation or regulatory intervention. In this way, the department’s work is much less procedural and finite than the legal work typically part of litigation. Because of this difference, paralegals in the Legal Compliance Department are continuously engaged in work that is more abstract, and as a result, cannot be gauged by a timeline. An example of such work is universal research projects, typically encompassing months of effort. Tasks involved with a typical universal research project include determining the legal viability of a specific business practice, recommending changes to a supervising attorney, and after receiving a supervising attorney’s approval, acting as a contact during the implementation process.

The abstract work performed by the Legal Compliance Department’s paralegals conform to the Department of Wage and Hour’s interpretation of an exempt employee’s work. According to the historical summary of the FLSA, in the revised Part 541, “the type of work they [exempt employees] performed was difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA’s time-and-a-half overtime premium”( Department of Labor, 2004 ). 

XXXXX Corporation’s paralegal employees serving within this Legal Compliance Department have fulfilled various responsibilities within this preventative compliance process. Examples include the following:

  •    Legal Environment Tracking: Researching current activities and events occurring in the areas of litigation, legislation, and business practices. Identifying appropriate members of the organization to communicate these current trends with, and relaying the continuing stream of information for necessary action. This type of competitive research has prompted increased awareness of current trends on the industry horizon. As a result of such information, necessary changes have been implemented in various company functions.
  • Legal Research: After learning of potential risks, research is conducted internally, often across multiple departments, in order to develop a sound viewpoint regarding XXXX Corporation’s business practices. Case law, statutory law, and competitor’s business practices are identified in order to provide conclusive resolution to the long-standing question: “What is XXXX Corporation’s exposure?” After the research conclusions are summarized, they are reviewed and approved by supervisory attorneys, prior to changes being implemented.
  • Licensing:  Research, preparation, and submission of both new XXXXX Corporation licenses, or updated/renewal licenses. Staying abreast of changes within the business, necessary revisions are identified, and specific procedures are followed for implementation. Often involved in researching XXXXX Corporation licenses for business purposes, such as identifying the appropriate licensed producer for a hybrid business operation, or researching/job costing of licensing vendors in order to obtain new licenses in a more time-efficient manner.

Discretion and Independent Judgement

 In order to qualify for the Part 541 exemption, employees must be further categorized as Professional, Administrative, or Executive employees. In the past, the Department of Labor’s Wage and Hour Division has issued several statement letters regarding paralegal workers. The greatest argument has always been for paralegal exemption under the professional category. Many paralegals feel that their specialized education, training, and job skills provide them with the necessary ammunition to claim exemption as a learned professional. Unfortunately, due to the lack of standardization within the paralegal profession, this attempt to brushstroke paralegal employees into a legal, professional category has not been embraced.

XXXXX Corporation’s Legal Compliance Department Paralegals fall under the administrative category of Part 541. In the past, the Wage & Hour Division has also struck down this possibility for paralegals, by inciting a theorem based on a paralegal’s job duties and the unauthorized practice of law. Specifically, in the Opinion Letter issued by the Division in 1977, it was agreed that a paralegal worker could not receive exemption, except under the administrative employee capacity. Then, in order to strike down this possibility, the Division issued the following declination:

         “It is our further position that ‘legal assistants’ and ‘paralegals’ generally are not involved in the performance of duties requiring the exercise of discretion and independent judgment of the type required by section 541.2; they are, instead, involved in the use of skills rather than discretion and independent judgment. In our view, such employees generally are found to be highly trained and highly skilled specialists who, as such, would not qualify for the exemption as defined….in Regulations, Part 541.5” (Rodriguez, 2002).

 Unfortunately, each of the Department of Labor’s opinion letters regarding paralegal exemption only considered paralegals working in positions specific to litigation. While considering paralegal employees under the administrative, exempt employee category, the Wage & Hour Division found that “traditional legal assistant duties such as preparing oral presentations or meeting and interviewing clients do not involve the exercise of discretion and independent judgment”(Rodriguez, 2002). In the Department of Labor’s “most recent opinion letters, legal assistant duties such as drafting pleadings, discovery requests and letters to clients, performing legal research, cite-checking briefs, preparing trial material and dealing with clients and witnesses, represent duties that involve the application of skills and knowledge rather than discretion and independent judgment” (Priest, Coleman; 2004).

The DOL’s paralegal decision is not specific to XXXXX Corporation’s Legal Compliance Department Paralegals. Only one of the job duties above – “performing legal research” – could be attributed to these specific XXXXX Corporation employees. The rest of the tasks are only attributable to paralegal employees either working in the Claims Department or in Litigation.  

The Department of Labor’s interpretation of the FLSA provides that a number of factors must be considered when analyzing an employee’s use of discretion and independent judgment. No criteria have been set for how many of the factors must be utilized to meet exempt status. The factors considered by the DOL include:

  • “Whether the employee has authority to commit the employer in matters that have significant financial impact;
  • Whether the employee has authority to waive or deviate from established policies and procedures without prior approval;
  • Whether the employee performs work that affect business operations to a substantial degree” (Snider, 2004).
  • “Whether the employee has authority to formulate, affect, interpret or implement management policies or operating practices;
  • Whether the employee carries out major assignments in conducting the operations of business;
  • Whether the employee has authority to negotiate/bind the company on significant matters;
  • Whether the employee provides consultation or expert advice to management;
  • Whether the employee represents the company in handling/ resolving grievances or in arbitrations”(Borgen, 2004).

XXXXX Corporation’s paralegal employees in the Legal Compliance Department arguably do not participate in a number of the above scenarios. However, tasks performed by Legal Compliance paralegals do fall into several of the categories above – “whether the employee performs work that affects business operations to a substantial degree”(Snider, 2004); “whether the employee has authority to formulate, affect, interpret or implement management policies or operating practices”; “whether the employee carries out major assignments in conducting the operations of business”; and “whether the employee provides consultation or expert advice to management”(Borgen, 2004). Examples of tasks that fell into one of the above referenced categories include:

  •   Fair Credit Reporting Act (FCRA) case law research: Research of recent case law  against XXXXX Corporation competitor. Located specific market/business practice issues called into question by the court. Identified similar issues with XXXX Corporation practices/forms. Submitted findings/recommendations to supervising attorney, who then led effort to implement internal changes based on research conducted.

 

  •   Spanish Forms Translation:  Research of applicable state statutes and case law,  supporting supposition that legal conflicts may exist with consumer forms translation. Research of XXXXX Corporation’s competitor experiences with translating consumer forms. Identified necessary components of a reputable translation service. Submitted findings/recommendations to supervising attorney. Upon review, supervising attorney counseled the organized business team on conclusions of law.

 

  • XXXXX Corporation competitor’s financial reports:  Upon filing of SEC financial statements, either year-end reports or quarterly statements, review is made of  competitors’ documents. Research, composed of competitor’s reported legal issues, is compiled and compared to previous compilations. New issues are identified, and the natural progression of competitor’s cases and regulatory proceedings are also noted. Findings are submitted to supervising attorneys, noting new elements of risk in the litigation environment. Potential future issues requiring compliance scrutiny are also identified.

Reich v. Page & Addison LLC

The Department of Labor suffered a huge blow to their opinion on administratively exempt paralegals in 1994. In Reich v. Page & Addison, the Department of Labor used their limited resources to prosecute in their attempt to allege that Page & Addison, LLC, had improperly designated their paralegal employees exempt. “The Department of Labor slapped a federal lawsuit on the firm – an action only infrequently taken due to financial constraints. But it’s safe to say, when the Department of Labor does take the time and expense of going to court, one of it’s primary intentions is to broadcast a message to the rest of the industry in question”(Ritter, 2002).  A Dallas jury in the United States District Court in the Northern District of Texas agreed with the law firm, and found the paralegals in question to be exempt. All of the Page & Addison, LLP paralegals were found to exercise independent judgment and discretion when they performed their duties and fulfilled their responsibilities, even though a supervisory attorney must approve or reject the paralegals’ work. “A key to the successful defense was the virtually unanimous support the firm received from its legal assistants who resented the department’s attempts to characterize them as (in their own words) ‘glorified secretaries’ (Priest, Coleman; 2004). Another article summarizing the activity behind Reich v. Page & Addison described the Deparment of Labor’s loss as follows:

Smarting from that decision, the government appealed to the 5th U.S. District Court of Appeals; then, six months later, the Department of Labor did something that remains a mystery to this day, it dropped the appeal. Why? Did the Department of Labor’s move signal an abandonment of its long-standing position that the majority of legal assistants must be paid overtime? No one at the Department of Labor was willing to go on the record about the dropped appeal, except to say that nothing in the agency’s decision should suggest a change of heart. And, in fact, the labor department continues to pump out administrative rulings, some stating paralegals generally don’t qualify for any of FLSA’s exemptions”(Ritter, 2002).

Since the Page & Addison decision, each opinion issued by the DOL regarding the issue has only focused on paralegals’ inability to claim status under the professional exemption. In regards to the administrative exemption, the DOL will only state that paralegals “are generally” not exempt. 

Attorney Supervision

The Department of Labor had previously asserted that American Bar Association standards regarding the unauthorized practice of law restricted a paralegal’s ability to claim exemption under Part 541. In their belief, a paralegal, by definition an employee under the supervision of an attorney, could not exercise the amount of independent judgment and discretion required of an administratively exempt employee.

           “Delegating legal tasks to a lay person is proper ‘only if  the lawyer maintains a direct relationship with the client, supervises the delegated work and has complete professional responsibility for the work produced. The implication of such strictures is that [a legal assistant] would probably not have the amount of authority to exercise independent judgments with regard to legal matters necessary to bring them within the administrative exemption’”(Rodriguez, 2002).

This seems to be the strongest argument against paralegal exemption. Following this theory, the amount of supervision required by an attorney negates any possibility that the decisions made by paralegals require enough discretion and independent judgment. Unfortunately, this argument fails on several grounds. 

First, the amended FLSA “white-collar” exemption standards now allow an administratively exempt employee to be supervised. “The regulations state that exercise of judgment/discretion is not negated by the fact that the employee’s decision making may not be final or unlimited. Some review by higher authority may be tolerated, even if decisions are ‘upon occasion’ revised or reversed after review”(Borgen, 2004).

As the FLSA seems to allow administratively exempt employees to make decisions under the general guidance of a superior, the real question lies in the degree of supervision that an attorney is required to give while overseeing a paralegal’s work product. A recent Oklahoma Bar Journal article supports the theory that an attorney can exercise enough diligence in their supervision of non-attorneys, that those non-attorneys may still exercise enough discretion and independent judgment to claim exemption status:

    “ The revised administrative exemption also relaxes the earlier requirement that employee decisions be free from  immediate supervision. It indicates that employees can  exercise discretion and independent judgment even when their decisions are reviewed at a higher level. Accordingly, legal assistants could exercise the requisite discretion and independent judgment even where their decisions are reviewed by supervising lawyers, as they must be under the Rules of Professional Conduct. Legal assistants were found to utilize discretion and independent judgment in Reich. There, the jury found that legal assistants exercised the requisite discretion and judgment to qualify as exempt”(Priest, Coleman; 2004).  

In fact, the general supervision required of an attorney, by law, does not seem to override the assertions made by many employers, that their paralegal employees exercise enough discretion and independent judgment to render them exempt. According to NFPA’s (National Federation of Paralegal Associations) 1999 Report, the industry is nearly equally divided on the exempt vs. non-exempt question. In the corporate legal environment, the proportion of exempt v. non-exempt paralegal employees is very different. “Almost three-quarters (73.3%) of for-profit corporations consider paralegals exempt; a quarter (25.2%) pay them overtime, and 1.5% responded “other” or didn’t reply” (Martin-Bowen, n.d.).

The American Bar Association has issued statements supporting the preposition that a paralegal’s work is substantive in nature. The following definition of paralegals and legal assistants was issued within the ABA’s Standing Committee on Legal Assistants’ position paper on the “Question of Legal Assistant Licensure or Certification”:

           “[A] person, qualified through education, training, or work experience, who is employed or retained by a lawyer, law office, governmental agency, or other entity in a capacity or function which involves the performance, under the ultimate direction and supervision of an attorney, of specifically-delegated substantive legal work, which work, for the most part, requires a sufficient knowledge of legal concepts that, absent such assistant, the attorney would perform the task”(Meckler, B.R., Leigh, M.; 2004).

This ABA opinion, reflecting on the substantive nature of paralegal work, is also upheld in case law.  In Missouri v. Jenkins (491 U.S. 274 (1989))¹, the U.S. Supreme Court upheld an award of attorney fees that included a stipend for paralegal time at “market rate”. Ever since this formulative case decision, the law has been consistently questioned about this decision. Specific to this research is the question, “What types of tasks can a paralegal be compensated for, through court-awarded attorney’s fees?”

              “Parties have debated whether the time reported by paralegals is non-reimbursable clerical time. In determining whether paralegal time reimbursable, the court in In re CF&I Fabricators of Utah, Inc.², referred to the definitions of a paralegal provided by the American Bar Association Standing Committee on Legal Assistants and the National Association of Legal Assistants, which provided that paralegal work is substantive legal work that is performed under the supervision of an attorney. In In re Busy Beaver Bldg. Ctrs., Inc.³, the court held that paralegals were to be compensated for tasks ‘involving the exercise, or potential exercise, of some paraprofessional judgment.’ However, it considered services not requiring the exercise of professional legal judgment to be non-reimbursable as clerical expenses in overhead”(Meckler, B.R., Leigh, M., 2004; see also Rodriguez, 2002).

¹ Missouri v. Jenkins by Agyei, 491 U.S. 274, 109 S.Ct. 2463.

   Jun.19, 1989 (Approx. 13 pages).

² In re CF & I Fabricators of Utah, Inc., 131 B.R. 474
   Sep 18, 1991 (Approx. 27 pages)

³ In re Busy Beaver Bldg. Centers, Inc. , 19 F.3d 833
  Mar 11, 1994 (Approx. 29 pages)

Clearly both the court and the ABA seem to rigorously defend paralegal duties in the legal environment. The ABA defines paralegal work as tasks of substantive legal involvement that would normally be accomplished by an attorney.

Case law supports the award of paralegal fees as part of attorneys’ fees, and states that only tasks requiring “paraprofessional judgment” can be reimbursed. Clerical tasks cannot be reimbursed through such award.

In the National Association of Legal Assistants’ (NALA) Corporate Human Resources Guide To The Legal Assistant/Paralegal Profession”, an extremely concise depiction of corporate paralegals is given. This description not only explains the ABA opinion of paralegals, but also expresses the intentions of illustrated case law. For the audience of Human Resources professionals, NALA also offers explanations about the typical utilization of paralegals in a corporate environment, and the cost-effectiveness of doing so. The most specific language used in the NALA guide is the depiction of attorney  supervision of paralegal employees. Please see the excerpt from NALA’s Corporate Human Resources Guide below:

                “Over the past 25 years other associations, for instance, the American Bar Association, have developed their own definitions of “legal assistant/paralegal” and much has been written as to what duties are appropriately delegated to legal assistants. All agree that legal assistants/paralegals perform work which is of a substantive nature, requiring education, knowledge and expertise, distinguishing it from that which is clerical or rote. Case law relating to legal fees has been consistent in requiring that the task performed by the legal assistant be that which an attorney would do if the legal assistant had not been available—not work traditionally done by secretaries or clerks.

               Legal Assistants do work which requires substantive legal knowledge, creativity in problem solving and independent judgment, but always under the supervision of a lawyer. The nature and amount  of supervision required lies within the lawyer’s discretion. Legal assistants/paralegals cannot ethically set fees, accept or reject clients, represent clients in court, or give legal advice. Yet, legal assistants may, and do, exercise independent judgment within established parameters…

               An in-house legal assistant acquires knowledge that is invaluable to both internal attorneys and outside counsel, which, in turn, allows matters to be handled efficiently and cost effectively. Corporate legal assistants become extremely familiar with the organization of the company, its goals, priorities, and products, and can accumulate, analyze and summarize data and facts from an insider’s perspective. From such insight legal assistants can quickly determine the appropriate persons to contact to obtain specific information, saving time and money when working with outside counsel in preparing and responding to discovery requests in litigation.

             Experienced legal assistants with in-house knowledge work not only in the legal department but are found in a variety of positions throughout a corporation: contract administrator, corporate procurement, patents or corporate secretary to name a few”(National Association of Legal Assistants, 1999).

Conclusion

Paralegal employees are being consistently utilized for various capacities, as employers realize the benefit of a legal background. These legal workers are no longer just attorney support – they are filling positions as management or as consultants in law firms, corporations and government agencies.

Several resources consulted for this research all agree that “paralegals work quite autonomously, exercising a good deal of independent judgment in performing their work. (Cannon, 2002). Although unauthorized practice of law statutes specifically prohibit nonlawyers from appearing in court on behalf of a client, establishing the attorney-client relationship, or from giving legal advice, many tasks can be legally fulfilled by a paralegal employee (Cannon, 2002).

The amount of paralegal supervision required of an attorney depends on the nature of the work assigned, along with the paralegal’s qualifications and skill set. Some paralegals, depending on the field they are involved, are unable to claim exemption under the FLSA due to the ministerial, procedural nature of their work. This is especially true of paralegals involved in litigation. However, paralegals involved in other legal specialties can claim exemption, if their tasks require independent judgment and discretion, and the employee does not require undue supervision by an attorney (Segal, 2004).

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