EMPLOYMENT & LABOR LAW
JUDICIAL LAW
• ERISA benefits; long-term disability claim dismissed. A decision by a plan administrator of the Employees Retirement & Income Security Act (ERISA) to deny long-term disability benefits to an employee claimant was upheld by the 8th Circuit Court of Appeals. Reversing a decision by U.S. District Court Chief Justice John Tunheim of Minnesota, the court vacated the ruling on grounds that the judge used the wrong legal standard, de novo review, rather than abuse of discretion, and overturned the administrative determination denying benefits. McIntyre v. Reliance Standard Insurance Co., 2020 WL 4951028 (Minn. Ct. App. 8/25/2020) (unpublished).
• ERISA benefits; breach of duty rejected. Another ERISA claim was rejected for violation of fiduciary duty in failing to protect plan participants before the disclosure of a fraud scheme. The 8th Circuit upheld a ruling by U.S. District Court Judge Patrick Schiltz in Minnesota holding that the claimants did not “plausibly” plead that a prudent fiduciary would have taken other action, which warranted dismissal on the breach of fiduciary duty claim as well as a duty of loyalty claim that was insufficiently pled. Allen v. Wells Fargo & Co., 967F.3d 767 (8th Cir. 7/27/2020).
• Disability discrimination; reasonable accommodation claim denied. A claimant for disability discrimination under the Minnesota Human Rights Act lost his claim because he was unable to show that reasonable accommodation was appropriate for his disability and that such an accommodation would allow him to perform the essential portions of his job. The 8th Circuit upheld the ruling by Judge Nancy Brasel of Minnesota dismissing the lawsuit. Collins v. Abbott Laboratories, Inc., 2020 WL 5000076 (Minn. Ct. App. 8/25/2020) (unpublished).
• Discrimination, harassment & retaliation rejected; women not treated differently. A woman who claimed sex discrimination, sex harassment, and retaliation lost her claim because she did not show that she met her employer’s legitimate job expectations, or that she was treated differently than similarly situated men. The 8th Circuit, affirming summary judgment, also held that the sexual harassment claim failed because the claimant did not show that she subjectively perceived the alleged harassment as abusive, and there was insufficient evidence of retaliation. Gibson v. Concrete Equipment Company, Inc., 960 F.3d 1057 (8th Cir. 6/3/2020).
• Failure to promote; summary judgment upheld. An employee failed in challenging summary judgment for the employer in a failure-to-promote case based upon sex discrimination. The 8th Circuit upheld a ruling of U.S. District Court Judge Susan R. Nelson in Minnesota that there was insufficient evidence that the actions by the woman’s supervisors were based, in part, on gender animus; her direct sex discrimination and “cat’s paw” theories failed, too. Pribyl v. County of Wright, 964 F.3d 793 (8th Cir. 7/13/2020).
• Train accident; derailment injury dismissed. A train employee who was injured during a derailment was unsuccessful in suing his employer under the Federal Employee’s Liability Act (FELA). The 8th Circuit, upholding a lower court’s decision, ruled that the employee did not show that the employer violated safety regulations in the derailment, which may have been caused by a third party criminal act. Miller v. Union Pacific Railroad Company, 2020 WL 5032459 (Minn. Ct. App. 8/26/2020) (unpublished).
• Age discrimination; Twins’ scout prevails. A baseball scout for the Minnesota Twins, whose position scouting ball players in Australia was eliminated, managed to overturn the dismissal of an age discrimination claim. The Minnesota Court of Appeals reversed a lower court decision by Hennepin County District Court, which it said had improperly granted a blanket protective order that prevented the claimant from deposing three club officers and also erred in other discovery rulings, warranting remand. Norsetter v. Minnesota Twins, LLC, 2020 WL 4932350 (Minn. Ct. App. 8/24/2020) (unpublished).
• Counselor’s sexual abuse; university not liable. A claim against a university by a student who alleged that it was vicariously liable because of a counselor’s sexual abuse and negligence under the doctrine of respondeat superior was unsuccessful. The court of appeals, affirming a decision of the Winona County District Court, refused to apply the doctrine of respondeat superior because none of the alleged sexual abuse occurred within the scope of the counselor’s employment as a therapist or within work-related limits of time and place. Doe v. Kirby, 2020 WL 4932784 (Minn. Ct. App. 8/24/2020) (unpublished).
• Rent credits for caretaker; no statutory violation. The use by a property management company of rent credits as compensation for a property caretaker was valid. Affirming a ruling of the Hennepin County District Court, the court of appeals held that the use of rent credits for compensation did not violate the Minnesota Fair Labor Standards Act (FLSA). Hagen v. Steven Scott Management, Inc., 2020 WL 3956259 (Minn. Ct. App. 7/13/2020) (unpublished).
Marshall H. Tanick, Meyer, Njus & Tanick
ENVIRONMENTAL LAW
JUDICIAL LAW
• Minnesota Supreme Court declares viability of MERA citizen suit action against DNR for White Bear Lake groundwater pumping; declines to extend public trust doctrine. The Minnesota Supreme Court, on 7/15/2020, issued an opinion affirming in part and reversing in part, and remanding additional issues to the Minnesota Court of Appeals. In sum, the Court held that appellant homeowner associations stated a claim under the Minnesota Environmental Rights Act (MERA), Minn. Stat. §116B.03, subd. 1, by alleging that the Minnesota Department of Natural Resources (DNR) impaired White Bear Lake by mismanaging the groundwater-appropriations permitting process. The Court also held that the homeowners did not state a claim under the public trust doctrine by alleging that DNR violated the trust by authorizing pumping groundwater for use as a public water supply.
The homeowners initiated the lawsuit in 2013 as lake levels in the relatively shallow and exclusively groundwater and precipitation-fed White Bear Lake reached historic lows. Plaintiffs claimed DNR permitted an unsustainable and increasingly large volume of groundwater to be pumped in the northeast metro area, which relies almost exclusively on groundwater for municipal water supply. DNR’s conduct, plaintiffs argued, directly led to the drawdown of White Bear Lake levels and violated both MERA and the public trust doctrine.
The focus of the MERA part of the Supreme Court’s decision focused on the interplay between sections 116B.03 and 116B.10 of MERA. Section 116B.03, subd. 1 establishes a cause of action that any person residing in the state can bring for the protection of natural resources; to a successful plaintiff, the court can grant direct equitable relief necessary to protect the natural resources. Minn. Stat. §116B.07. Section 116B.10, on the other hand, establishes a cause of action against a state agency that has issued an environmental quality permit where the plaintiff claims the permit is inadequate to protect natural resources. However, under section 116B.10, subd. 3, the only available relief for a successful plaintiff (apart from emergency temporary injunctive relief) is for the court to remit the matter to the agency to for further administrative proceedings.
In this case, plaintiffs asserted their MERA claim against DNR over the inadequacy of its water appropriation permits not under the agency-permit provisions of section 116B.10 but under the more general provisions of section 116B.03. The district court held that this was permissible and proceeded to grant direct relief, right down to dictating the times of year that residents in the northeast metro area could operate lawn sprinklers. In reversing the district court, the court of appeals held that this interpretation of MERA effectively rendered section 116B.10 of no effect, contravening principles of statutory interpretation, and would authorize courts to “issue remedies outside of the ordinary administrative process established by the legislature.”
The Supreme Court sided with the homeowners. DNR argued that the word “conduct” in the relevant MERA definition of “pollution, impairment, or destruction”—i.e., “any conduct that materially adversely affects the environment or violates environmental statutes, rules, and standards,” Minn. Stat. §116B.02, subd. 5—should not be interpreted as including administrative action, such as issuing groundwater appropriation permits. The Court disagreed, concluding that in light of MERA’s broad purpose to protect the environment, there was no basis for narrowly interpreting “conduct” as excluding government actions. The homeowners’ action was also not precluded, the Court held, by section 116B.03, subd. 1’s “no-action” clause, which disallows actions for conduct taken “pursuant to any environmental quality… permit” issued by DNR, among other agencies. The Court reasoned that DNR’s permitting scheme was not undertaken “pursuant to” any permit. Finally, the Court was unpersuaded by DNR’s position that the existence of the cause of action under 116B.10 specifically for challenging agency permits meant the homeowners could not also assert a claim under 116B.03. Nothing in section 116B.10, the Court held, precluded an action under 116B.03; plus, 116B.10 does not on its face provide relief for agency conduct violating environmental statutes, rules, and standards, which homeowners also alleged.
With regard to the public trust doctrine—which provides that the state, in its sovereign capacity, holds absolute title to all navigable waters and the soil under them for common use—the Court affirmed the court of appeals but on different grounds. The court of appeals held that the doctrine had never been expanded to resources other than navigable water in Minnesota and could thus not be extended to groundwater in this case. The Supreme Court concluded that the homeowners’ claim involved injury to White Bear Lake, a navigable water, arising from the DNR’s groundwater permitting practices, not injury to non-navigable groundwater itself. Nonetheless, the Court affirmed the lower court, finding no precedent for extending the judiciary’s common-law role in the field of public water, an area of law that has been extensively addressed by the legislative branch, particularly in the balancing of different public uses—including, in this case, balancing the public’s use of White Bear Lake water for recreation and aesthetic purposes versus the public’s use of hydrologically connected groundwater for municipal water supply.
Justice Anderson offered a spirited dissent, joined by Chief Justice Gildea, to the Court’s MERA holding. He concluded that had the Court undertaken “a meaningful statutory analysis,” it would have concluded that “conduct” does not include executive branch agency decisions. White Bear Lake Restoration Association v. Minnesota Dept. Nat. Res. et al., 946 N.W.2d 373 (Minn. 2020).
• Court of appeals rejects MERA affirmative defense based on economic considerations. In another recent MERA decision, the Minnesota Court of Appeals issued an unpublished opinion addressing the issue of the appropriate legal standard required to establish whether an affirmative defense has been appropriately made in a civil action brought under the Minnesota Environmental Rights Act (MERA).
The issues addressed in the case arose after the properties known as the Pastoret Terrace and Paul Robeson Ballroom, and the Kozy Bar (collectively, the property), which together were listed on the National Register of Historic Places as contributing structures to the Duluth Commercial Historic District, were damaged by a fire in 2010. The damage caused by the fire resulted in the property’s condemnation for human habitation.
The property was tax-forfeited to the state of Minnesota, and subsequently purchased by respondent Duluth Economic Development Authority (DEDA) in 2015. DEDA marketed the property for sale and requested proposals for rehabilitation of the property, or in the alternative, for demolition and construction of new housing. DEDA received three redevelopment proposals, all of which DEDA rejected after finding none of the proposals would create a significant number of new jobs, materially enhance the real estate tax base in the area, deconcentrate subsidized housing, contribute to the vibrancy of the neighborhood, or address the needs identified in the request for proposal. Additionally, the resolution passed by DEDA provided that none of the proposals “provided a sufficient showing of sufficient resources in terms of both personnel and finances to evidence the ability to bring the [p]roposed project to successful completion and operation.”
Upon this decision, appellants Eric Ringsred and Respect Starts Here sued DEDA and the city of Duluth, alleging that their actions allowed the property to deteriorate, and that their plans for demolition of the property “constitute[d] a material impairment of the Historic District, which is a protected resource within the meaning of MERA.” Appellants sought to enjoin DEDA from demolishing the property, and sought an order requiring DEDA to make the necessary repairs to restore the property to prevent further deterioration.
The district court found that although appellants had made a prima facie case that the property was a protected resource under MERA, DEDA had established the affirmative defense that there were no feasible and prudent alternatives to the property’s demolition, and that the demolition was consistent and reasonably required for the promotion of public health, safety, and welfare.
On appeal, the Minnesota Court of Appeals found the district court erred with regard to the applicable legal standard to apply when determining whether an affirmative defense has been established. The court of appeals held that the district court erred in its finding because, although MERA clearly states that “economic considerations alone shall not constitute a defense,” the only considerations discussed by the district court as justification for DEDA’s rejection of the proposals were all economic in nature. The court of appeals, in making its decision, upheld previous Minnesota Supreme Court rulings in which it has been found that the protection of natural resources is to be given paramount consideration, and those resources should not be polluted or destroyed unless there are truly unusual factors present. Ringsred v. Duluth Economic Development Authority, 2020 WL 5104885 (Minn. Ct. App. 8/31/2020).
ADMINISTRATIVE ACTION
• EPA issues final significant new use rule for PFAS under TSCA. The U.S. Environmental Protection Agency (EPA) published a final significant new use rule (SNUR) for long-chain perfluoroalkyl carboxylate (LCPFAC) and per- and polyfluoroalkyl sulfonate chemical substances (PFAS) under the Toxic Substances Control Act (TSCA). 15 U.S.C. §2601 et seq.
PFAS substances are a family of man-made chemicals that have been manufactured since the 1940s. These chemicals have historically been used in the production of “nonstick” and “waterproof” manufactured goods and are very resistant to degradation, often persisting in the environment for decades. Studies have found that these chemicals can accumulate in human bodies over time and can lead to adverse human health effects. The main pathway of exposure for humans is through drinking contaminated groundwater; however, PFAS can also be found in food packaging and commercial household products like nonstick cookware, beauty products, stain repellent carpets, and firefighting foam.
The final rule designates as a significant new use manufacturing, importing, processing, or distributing of a certain subset of LCPFAC chemicals for any use that was no longer ongoing after 12/31/2015; and all other LCPFAC chemicals for any use that was no longer ongoing after 1/21/2015. The SNUR requires manufacturers to notify the EPA at least 90 days prior to the commencement of those actions with respect to the covered chemicals. After notification, the EPA will evaluate the significant new use, considering specific parameters such as the projected volume of manufacturing and processing of the chemical substance and the extent to which a use increases the magnitude and duration of exposure of human beings or the environment to the chemical substance. Following the determination, EPA may impose conditions of use upon the manufacturer, and will publish a determination on the notice in the Federal Register before the company may begin use of the covered chemicals.
Furthermore, the SNUR removes the exemption for the import of certain products containing PFAS chemicals as a surface coating, and requires 90-day notification for those articles. The SNUR also removes the exemption for the import of carpets containing PFAS chemicals, and requires 90-day notification for any imports of carpets containing PFAS chemicals.
Finally, the March 2020 proposed rule requested comment on whether EPA should adopt a de minimis threshold for determining “reasonable potential for exposure” for covered chemicals, as well as whether EPA should include a safe harbor provision for importers of articles that can demonstrate their use was ongoing prior to the effective date of this rule. In this final rule, EPA is not finalizing a de minimis threshold or establishing a safe harbor provision.
The final SNUR became effective 9/25/2020. Long-Chain Perfluoroalkyl Carboxylate and Perfluoroalkyl Sulfonate Chemical Substances; Significant New Use Rule, 85 Fed. Reg. 45109 (7/27/2020).
Jeremy P. Greenhouse, The Environmental Law Group, Ltd.
Jake Beckstrom Vermont Law School, 2015
Erik Ordahl Barna, Guzy & Steffen
Audrey Meyer University of St. Thomas School of Law, J.D. candidate 2020
FEDERAL PRACTICE
JUDICIAL LAW
• Permanent injunction; appeal; mootness. Where the plaintiff sued its former employee and his new employer on claims arising out of the breach of a noncompete agreement, the district court entered a permanent (albeit short) injunction, defendants filed an appeal from the injunction while portions of the case remained pending in the district court, and the injunction expired while the appeal was pending, the 8th Circuit held that the appeal was moot, but rather than remanding with directions to dismiss the case, the 8th Circuit instead remanded for further proceedings not inconsistent with its opinion. Perficient, Inc. v. Munley, ___ F.3d ___ (8th Cir. 2020).
• Minor plaintiff; parents not permitted to act as counsel. Distinguishing cases where parents had been permitted to represent their children in actions seeking Social Security benefits, and rejecting the argument that not permitting parents to represent their children denied children their fundamental right to access the courts, the 8th Circuit held that parents could not represent their minor child in a Section 1983 action. Crozier v. Westside Cmty. School Dist., ___ F.3d ___ (8th Cir. 2020).
• Personal jurisdiction; multiple cases. Where the plaintiffs’ complaint did not allege any facts suggesting that the defendant New York attorney and his law firm were subject to personal jurisdiction in Minnesota, and it was undisputed that the individual defendant had never entered the state, Chief Judge Tunheim relied on cases holding that an attorney-client relationship with a resident of Minnesota is not sufficient to establish personal jurisdiction, also rejected plaintiff attempt to rely on the Calder effects test (Calder v. Jones, 465 U.S. 783 (1983)), and granted defendants’ motion to dismiss for lack of personal jurisdiction. Lawhead v. The Law Offices of Joseph Martin Carasso, 2020 WL 5106817 (D. Minn. 8/31/2020).
Judge Nelson determined that the corporate plaintiff’s former president and the new competing company he founded were likely subject to personal jurisdiction in Minnesota on claims arising out of an alleged breach of noncompete and non-solicitation provisions, but that other former employees of the plaintiff were not subject to personal jurisdiction. Travel Leaders Leisure Grp., LLC v. Cruise & Travel Experts, Inc., 2020 WL 4604534 (D. Minn. 8/11/2020).
• Motion to amend to more clearly plead an affirmative defense granted. Where the defendant’s initial answer in a wage and hour action asserted that “certification of a collective action or class action… would constitute a denial of Defendant’s due process rights,” but did not specifically assert an affirmative defense premised on a lack of personal jurisdiction, Magistrate Judge Schultz found that defendant had pleaded—“however inartfully”—its personal jurisdiction defense in its original answer and granted its motion to amend its answer to “clearly plead” that defense. Borup v. CJS Sols. Grp., LLC, 2020 WL 5047523 (D. Minn. 8/26/2020).
• Failure to meet and confer provides a sufficient basis to deny motion. Denying the plaintiff’s motion for leave to file a fourth amended complaint on a number of grounds, Judge Brasel found that the plaintiff’s failure to meet and confer provided an independent basis to deny the motion, and rejected the plaintiff’s argument that that an email seeking to “initiate” the meet and confer process fulfilled her meet and confer obligations. Yang v. Robert Half Int’l, Inc., 2020 WL 5366771 (D. Minn. 9/8/2020).
• Fed. R. Civ. P. 30(e); motion to strike deposition errata sheet granted. While acknowledging the absence of controlling 8th Circuit authority, Magistrate Judge Menendez granted defendants’ motion to strike plaintiff’s deposition errata sheet, in which the plaintiff attempted to—among other things—change “yes” answers to “no.” Elsherif v. Mayo Clinic, 2020 WL 5015825 (D. Minn. 8/25/2020).
• Overbroad discovery requests; refusal to “blue pencil.” Finding many of defendants’ disputed discovery requests to be overbroad, Magistrate Judge Wright denied defendants’ motion to compel responses to those requests, and repeatedly indicated her unwillingness to “blue pencil” the overbroad requests to make them “relevant and proportional.” Rodriguez v. Riley, 2020 WL 4747610 (D. Minn. 8/17/2020).
• Forum selection clause; expiration of underlying contract. Enforcing a forum selection clause contained in a contract that had expired, Judge Schiltz found that the forum selection clause “survived any termination of the contract.” Granite Re, Inc. v. Hutton, Inc., 2020 WL 4735309 (D. Minn. 8/14/2020).
• Reply brief; waiver of argument. Judge Montgomery refused to consider an argument defendants raised in support of their motion to dismiss where that argument was raised for the first time in their reply brief. Lapushner v. Admedus Ltd., 2020 WL 5106818 (D. Minn. 8/31/2020).
• Fed. R. Civ. P. 35 medical examination; motion to compel videotaping. Acknowledging the absence of “clearly established law in this district” and that other courts were “divided” on the issue, Magistrate Judge Leung found that the plaintiff had the burden to show why he should be permitted to videotape the his Rule 35 examination, and that permitting him to record one examination when others had not been recorded “would risk slanting the level playing field that Rule 35 is supposed to create.” Ellis v. West Bend Mut. Ins. Co., 2020 WL 3819410 (D. Minn. 7/8/2020).
Josh Jacobson, Law Office of Josh Jacobson
INTELLECTUAL PROPERTY
JUDICIAL LAW
• Patent: Extending stay and injunction pending IPRs. Judge Schlitz recently extended a stay of the case and denied a motion to dissolve a preliminary injunction. Plaintiff QXMédical, LLC sued defendants (collectively, Teleflex) seeking a declaration that it did not infringe any of Teleflex’s patents and that Teleflex’s patents were invalid. Teleflex counterclaimed for infringement. In December 2019, as the case moved towards a February 2020 trial, QXMédical moved to stay the action pending inter partes review challenges to the patents-in-suit brought by Medtronic in a related action. QXMédical agreed to suspend all sales of the accused device and to waive certain invalidity defenses. The court granted the stay and enjoined QXMédical’s sales of the accused device. After the PTAB instituted review on petitions covering six of the eight claims at issue, QXMédical moved to extend the stay and dissolve the injunction. The court agreed that the stay should be extended to take advantage of the efficiencies gained by the IPR process. The court also found that due to the covid-19 pandemic, it would likely be at least a year before the court could resume lengthy civil jury trials.
The court, however, found no “good reason” to dissolve the injunction. The court was not persuaded that denial of Teleflex’s motion for a preliminary injunction in the Medtronic case meant the injunction needed to be dissolved in the instant case. In refusing to modify the injunction, the court held QXMédical to the terms of the deal that it offered to induce the court to order a stay. The court found that dissolving the injunction would be highly unfair to Teleflex. Teleflex had opposed QXMédical’s initial motion for a stay, and the court would not have granted that stay without QXMédical’s offer for the injunction. Finally, the court rejected QXMédical’s argument that the concessions were not sufficient to continue the injunction and that Teleflex was required to prove it was entitled to a preliminary injunction under the traditional four-factor test. QXMédical, LLC v. Vascular Sols., LLC, No. 17-cv-1969 (PJS/TNL), 2020 U.S. Dist. LEXIS 118305 (D. Minn. 7/7/2020).
• Patent: Contempt requires actual infringement. Judge Schiltz recently denied Boost Oxygen, LLC’s motion to hold Oxygen Plus, Inc. in contempt. In 2017, Boost sued Oxygen Plus for infringement of a design patent and trade dress related to lightweight portable oxygen canisters. Judge Schiltz found the lawsuit meritless, as Oxygen Plus’s product did not infringe Boost’s patent or trade dress, but Oxygen Plus did not have money to spend on lawyers so the parties entered a consent judgment and agreed Oxygen Plus would not infringe Boost’s patent or trade dress. Boost now moved to hold Oxygen Plus’s redesigned product in contempt of the consent judgment. To prove contempt, Boost had to prove (1) the newly accused product is not more than colorably different from the product found to infringe and that (2) the newly accused product actually infringes. The parties agreed that the redesigned mask was not more than colorably different from the original mask but disputed whether the redesigned mask actually infringed. Boost argued Oxygen Plus was collaterally estopped from arguing that its redesigned mask did not infringe Boost’s patent. The court disagreed. The issues of the current litigation related to the redesigned mask, not the original mask from the first action. Collateral estoppel did not apply because the issue sought to be precluded was not the same as the issue involved in the prior action and the issue sought to be precluded was not actually litigated in the prior action because consent judgments have no issue-preclusive effects. The court also found Oxygen Plus’s redesigned mask did not infringe Boost’s patent. Infringement of a design patent is based on the ordinary-observer test, which asks whether an ordinary observer, giving such attention as a purchaser usually gives, would find that the two designs are substantially the same. The court found Oxygen Plus’s redesigned mask was plainly dissimilar to Boost’s patented design. Boost Oxygen, LLC v. Oxygen Plus, Inc., No. 17-cv-5004 (PJS/DTS), 2020 U.S. Dist. LEXIS 142722 (D. Minn. 8/10/2020).
Joe Dubis, Merchant & Gould
TAX LAW
JUDICIAL LAW
• Tax court has jurisdiction over 11 of 16 disputed quarters in a “Section 530 dispute.” Reflectxion Resources, Inc. is a medical staffing agency in an employment tax dispute with the Service. The company employed therapists to fulfill contracts with hospitals, schools, and other healthcare facility clients that sought therapists for temporary staffing and for direct hire purposes. Reflectxion hired both local and “traveling” therapists. The underlying dispute has to do with the characterization of reimbursements for the traveling therapists. This opinion, however, does not reach the merits of the dispute. Instead, the court addressed Reflectxion’s “Motion to Determine Jurisdiction.”
The jurisdiction dispute arose because Reflectxion partnered with an HR company, Gevity HR, Inc., for 11 of the 16 quarters in dispute. Reflectxion and Gevity had a professional services agreement under which Gevity (not Reflectxion) reported the wages and withholding of Reflectxion’s employees on Forms 941, “Employer’s Quarterly Federal Tax Return,” and Forms W-2, “Wage and Tax Statement.” Gevity did this reporting under its own employer identification number (EIN). On those forms the payments for travel reimbursement were not reported as wages subject to employment taxes. Reflectxion did not deposit any FICA taxes or ITW with the IRS under its own EIN for the Gevity-reported quarters. The parties ended the PSA in quarter 11 of the 16 at-issues quarters.
For the next five quarters, Reflectxion timely filed Forms 941 and issued Forms W-2 to the travel therapists; it did so under its own EIN. On those forms Reflectxion reported the wages it paid to the traveling therapists, but Reflectxion (like Gevity in the previous quarters) did not report or pay taxes on the travel reimbursement payments at issue.
The Service disagreed with the characterization of the travel reimbursement expenses, and following an examination the Service determined that the travel expense reimbursements were subject to employment taxes. Reflectxion contends that the travel expense reimbursements are not taxable for any quarter, and further argues that for the 11 calendar quarters reported by Gevity, the therapists were employees not of Reflectxion but of Gevity and that Reflectxion therefore was entitled to “section 530 relief” from employment taxes under the Revenue Act of 1978, Pub. L. No. 95-600, sec. 530, 92 Stat. at 2885.
“Section 530 relief” refers to the limited statutory relief provided to taxpayers for underpayments of employment taxes that result from employers’ mistakes in classifying employees as independent contractors. Employers do not owe employment taxes for workers correctly characterized as independent contractors. However, the line between an employee and an independent contractor is tricky. Section 530 is a Congressional nod to that fraught line-drawing, and the section gives the employer relief from employment taxes even though the actual employment relation would have required the payment of those taxes. Section 530 applies only where the employer did not treat the worker as an employee. In this dispute, then, Section 530 might apply for the 11 quarters that the PSA between Reflectxion and Gevity was in force.
If the tax court has jurisdiction over this dispute, or over portions of the dispute, the court’s jurisdiction stems from Section 7436, which grants the tax court jurisdiction over cases involving employment taxes. The court has characterized the grant of jurisdiction in Section 7436 as a grant of “limited jurisdiction.” For that limited jurisdiction to attach, three requirements must be met: (1) “there must be a certain kind of ‘determination’… either a determination that someone is an ‘employee’ of the person whose return is being audited… or a determination that the taxpayer is not entitled to section 530 treatment.” (2) That determination must have been either “in connection with an audit” of the taxpayer’s returns or “as part of an examination.” (3) There must be an “actual controversy” regarding that audit determination.
The “actual controversy” requirement is at issue requirement in this case. As the court explained, “actual controversy” is a term of art. Relevant to this dispute, “if the IRS makes a purported determination that the taxpayer is not entitled to section 530 treatment, but the taxpayer had not claimed section 530 treatment, then there is no ‘actual controversy’ about section 530 and no jurisdiction in the tax court.”
Applying the jurisdictional rules and Section 530, the court held that it had jurisdiction over the 11 quarters in which Reflectxion considered its workers independent contractors since all three statutory requirements were met: After an audit, the Service issued a determination concerning section 530 relief, as to which there was an “actual controversy.” In contrast, the court did not find jurisdiction as to the five calendar quarters reported by Reflectxion, because, despite the Service’s “determinations” concerning the workers’ status as employees and concerning section 530 relief, Reflectxion had reported the workers as employees and had never claimed section 530 relief for those reported quarters. Since “it takes two to have a controversy” the court concluded that there was no “actual controversy” on those issues, as required by I.R.C. Sec. 7436(a). The merits dispute is reserved for a future opinion. Reflectxion Res., Inc. v. Comm’r, 120 T.C.M. (CCH) 82 (T.C. 2020).
• Rejecting commissioner’s complaint that the appraisal was “unqualified,” taxpaying couple permitted charitable deduction for contribution of land to city; strict compliance not required to satisfy the elements of a qualified appraisal. Peter Emanouil is a real estate developer who purchased nearly 200 acres of undeveloped property in Westford, Massachusetts in 1999. Over the course of the next 10 years, Mr. Emanouil negotiated with the town over the parcel’s use; eventually, Mr. Emanouil pursued a development plan called the “Graniteville Woods project.” During the extensive negotiations, Mr. Emanouil discussed donations of various parcels to the town. As the Graniteville Woods project progressed, it became clear that not all 200 acres were required for the plan. Mr. Emanouil and his spouse, Mrs. Emanouil, decided to donate the extra acres, divided into two lots, to the town. Mr. Emanouil consulted with his tax advisers about the donation, and was advised that an appraisal was required, which Mr. Emanouil obtained. The couple eventually claimed a charitable donation of $1.5 million gift for one of the parcels and a $2.5 million charitable gift for the second parcel. Due to limitations on claiming charitable contribution deductions, only a portion of each gift could be used in the current tax year, and the couple carried forward the remainders.
After examination, the commissioner argued that the Emanouils failed to properly substantiate their contributions because their appraisals attached to their returns for the years of the contributions did not identify the dates (or expected dates) of the contributions and did not contain statements that the appraisals were prepared for income tax purposes—the appraisals, that is, were not “qualified appraisals.” Without a qualified appraisal, a taxpayer may not claim deductions for donations of property in excess of $5,000. Regulations amplify what must be included in the qualified appraisal. 26 C.F.R. sec. 1.170A-13(c). The Emanouils’ appraisal satisfied the requirements in most, but not all, ways.
The tax court nonetheless held that the appraisal was sufficient. The court reasoned that “the taxpayer who does not strictly comply [with the regulation’s requirements] may nevertheless satisfy the elements if he has substantially complied with the requirements.” The court characterized the specific requirements in the regs as “‘directory’ (i.e., ‘helpful to respondent in the processing and auditing of returns on which charitable deductions are claimed’) rather than ‘mandatory’ (i.e., literal compliance is required).” The court further held that “the fact that a Code provision conditions the entitlement of a tax benefit upon compliance with respondent›s regulation does not mean that literal as opposed to substantial compliance is mandated.” (Internal quotation omitted.)
The court also rejected the Service’s argument that the deduction should be denied because it was made in exchange for permission to pursue Mr. Emanouil’s development project. The court was “persuaded by the evidence that Mr. Emanouil’s concessions… were those that he and the town expressly negotiated and to which they agreed, and that his contribution [of the parcels] was not a quid pro quo for that approval.” The court similarly rejected the Service’s argument that the properties were overvalued. Finally, the court concluded, “Since we do not sustain the deficiencies in tax that the IRS determined, penalties do not apply in this case.” Emanouil v. Comm’r, T.C.M. (RIA) 2020-120 at 34 (T.C. 2020).
• Rejecting attorney-petitioner’s argument as a “non-starter,” tax court upholds accuracy-related penalty. Nirav Babu was an attorney specializing in tax return preparation. During and following law school, Mr. Babu worked for Instant Tax Services (ITS), which at the time was one of the largest tax return preparation firms in the country. In 2013, following a two-week trial, ITS and related entities were enjoined from “engaging in and facilitating extensive and pervasive tax fraud.” Mr. Babu was not a named defendant, but he was singled out in the court’s opinion as having been complicit in the abusive conduct in which ITS engaged, and the DOJ would not approve any arrangement that enabled Mr. Babu to take over the tax preparation business formerly conducted by ITS. That business was taken over by Great Tax, LLC, a new tax preparation service.
Shortly after the court issued its injunction against ITS, Mr. Babu formed and became the sole member of Refunds Plus, LLC. Refunds Plus and Great Tax had utilized the same software that ITS had employed. The two companies also had revenue-share (or referral) agreements, and eventually Mr. Babu was authorized to withdraw cash from Great Tax’s bank accounts. He had broad authority to make withdrawals: He was permitted access to any Great Tax account and did not need to secure consent from Great Tax before making withdrawals. Mr. Babu wired well over $3 million out of Great Tax’s bank accounts during 2014.
Despite his legal education and extensive experience preparing federal returns, Mr. Babu maintained no formal books or records tracking Refund Plus’s income and expenses during 2014. On its 2014 federal income tax return, Refunds Plus checked the box electing the cash basis of accounting and reported that it had zero gross receipts. The parties now agree that Refunds Plus in fact had gross receipts of $2,819,433 from Great Tax and that Mr. Babu failed to report, on his individual return, $2,908,220 of flow-through income from Refunds Plus.
The Service issued timely notices of deficiency for 2013 and 2014 to Mr. Babu. Eventually, Mr. Babu and the Service filed a stipulation of settled issues resolving all issues but one—whether Mr. Babu is liable for an accuracy-related penalty with respect to the portion of the 2014 deficiency attributable to his failure to report flow-through income from Refunds Plus. That dispute forms the heart of the tax court’s instant opinion.
Mr. Babu contended that he was not subject to the penalty because he relied on professional advice as to the proper reporting. He also raised an alternative argument: that, because Refunds Plus received no payments directly from Great Tax, Mr. Babu reasonably concluded that Refunds Plus had no gross receipts.
The court made short work of Mr. Babu’s alternative argument, finding that Mr. Babu “was a lawyer with at least seven years of intensive experience in the business of preparing federal income tax returns.… His argument, in essence, is that [Refunds Plus] had no gross receipts because he, as [Refunds Plus’s] sole member, deposited directly into his bank accounts the fees that [Refunds Plus] was owed for the services it performed. We do not believe that petitioner actually misunderstood the tax law that makes this argument a nonstarter. It is obvious and well established that a shareholder cannot avoid current taxation by diverting a company›s gross receipts to himself.”
The court was equally vexed by Mr. Babu’s argument that he was not subject to the penalty because he relied on professional advice as to the proper reporting. In rejecting this claim, the court had severe language not just for Mr. Babu, but also for the attorney, Chelsea Rebeck, on whom Mr. Babu claimed he was relying for professional advice. In particular, the court rejected Ms. Rebeck’s testimony on several points, and found that on the whole, Ms. Rebeck “did not strike the Court as an objective or candid witness.” In addition to casting doubts on her credibility, the court also questioned Ms. Rebeck’s competence, stating directly, “The theories that Ms. Rebeck offered at trial to justify not reporting [Return Plus’s] gross receipts were implausible…. All in all, Ms. Rebeck’s testimony raised serious questions as to whether she was a competent professional who had sufficient expertise to justify reliance.” The penalties were upheld. Babu v. Comm’r, T.C.M. (RIA) 2020-121 (T.C. 2020).
• Court reverses commissioner’s individual income tax assessment; appellants prove Florida domiciliary. Appellants Mark L. Zauhar and Sharon R. Zauhar appealed an order from the Commissioner of Revenue determining that Mark was a Minnesota domiciliary resident for tax years 2013 and 2014 and assessing the Zauhars additional Minnesota individual income tax, penalty, and interest.
The Zauhars timely filed 2013 and 2014 Joint Minnesota Individual Income Tax Returns, and indicated that Mark was a “full-year nonresident of MN” and that Sharon was a Minnesota resident. The commissioner audited the returns and requested that Mark and Sharon each fill out and submit a residency questionnaire.
On 9/12/2017, the commissioner issued an order determining that Mark was a domiciliary resident of Minnesota during 2013 and 2014 and assessed the Zauhars $1,554,206.72 in additional individual income tax, penalty, and interest. The Zauhars timely appealed the commissioner’s order directly to the tax court.
All net income of a Minnesota resident individual, wherever earned, is subject to Minnesota income tax. Minn. Stat. §290.014, subd. 1 (2018). Here, “resident” means “any individual domiciled in Minnesota.” Minn. Stat. §290.01, subd. 7(a). Minn. R. 8001.0300 (2013) provides that “domicile” is “that place in which a person’s habitation is fixed, without any present intentions of removal.” Id., subp. 2. “To establish ‘domicile,’ one must have ‘bodily presence’... in a place coupled with an intent to make such a place one’s home.” See Sanchez v. Comm’r of Revenue, 770 N.W.2d 523, 526 (Minn. 2009). Once a person’s domicile is established in Minnesota, “it is presumed to continue until another domicile is actually established.” Mauer v. Comm’r of Revenue, 829 N.W.2d 59, 68 (Minn. 2013); see also Minn. R. 8001.0300, subp. 2.
The Minnesota Supreme Court has emphasized that “the proper focus of inquiry is on whether a new domicile has been established elsewhere, not on whether a Minnesota domicile has been abandoned.” Sandberg v. Comm’r of Revenue, 383 N.W.2d 277, 283 n.7 (Minn. 1986) (citing Comm’r of Revenue v. Stamp, 296 N.W.2d 867, 870 (Minn. 1980)). When a Minnesota domiciliary “acquires an out-of-state residence, the issue of whether the person’s domicile has changed is ‘ordinarily a question of fact’” and the taxpayer has the burden of proving the establishment of a new domicile. Mauer, 829 N.W.2d at 67-68; Sanchez, 770 N.W.2d at 526.
Minn. R. 8001.0300 sets forth 26 separate considerations to evaluate domicile. The considerations “must be weighed in each particular case” because “[n]o positive rule can be adopted with respect to the evidence necessary to prove an intention to change a domicile[.]” Mauer, 829 N.W.2d at 70; Minn. R. 8001.0300, subp. 2. Additionally, the rule provides that an intention to change domicile “may be proved by acts and declarations… acts must be given more weight than declarations.” Minn. R. 8001.0300, subp. 2; Seccomb v. Bovey, 135 Minn. 353, 356, 160 N.W.2d 1018, 1020 (1917) (noting that a person’s conduct is given greater weight than a declaration of domicile).
After an extensive review of the Zauhars’ declarations and actions in the years preceding, as well as the tax years at issue, the court determined that the Zauhars presented sufficient evidence proving that Mark Zauhar was a Florida domiciliary in 2013 and 2014. The court reversed the commissioner’s assessment of $327,757.29 in additional Minnesota individual income tax, penalty, and interest for tax year 2013, and of $1,226,449.43 in additional tax, penalty, and interest for tax year 2014. Zauhar v. Comm’r of Revenue, 2020 WL 4912971 (Minn. T.C. 8/19/20).
n Court grants petitioners’ motion limiting use of confidential commercial information. IRC Champlin Marketplace and IRC Plymouth Town Center, (collectively, petitioners as relevant here) are each disputing the market value of their subject properties as of 1/2/2018 with Hennepin County. On or about 1/22/2020, the county corresponded by email with petitioners concerning certain document requests. Specifically, the county assessor requested: (1) copies of leases; (2) a summary of updating, renovating, or remodeling of units or common areas exceeding $5,000 performed since 2016; (3) appraisals performed since 2016; and (4) physical inspections of the subject properties.
The parties corresponded and could not agree on the production of leases (rather than lease abstracts). Petitioners informed the county they were willing to produce the requested leases, appraisals, and information concerning physical conditions subject to discovery protective orders. The parties agreed in principle to submit to the court a proposed protective order concerning the county’s requests, but disagreed about the inclusion of language limiting the use of any responsive documents.
Specifically, the parties disagreed about language explicitly limiting its use to this action, “[e]xcept as otherwise expressly permitted by Minnesota law.” The county asserts the inclusion of that limitation constitutes a “super-protection” in excess of the Data Practices Act, to which Champlin and Plymouth are not entitled. Petitioners contend the confidential commercial nature of the requested information merits its protection pursuant to Minnesota Rule of Civil Procedure 26.03(a)(7).
Petitioners requested entry of an order providing that, “[e]xcept as otherwise expressly permitted by Minnesota law, nonpublic assessor’s data shall be used solely for purposes of this action and Respondent shall not directly or indirectly transfer, disclose, or communicate it or its contents in any way to any person or third party.” They also sought an order as to proprietary information granting “protection from any form of direct or indirect transfer, disclosure, or communication by Respondent to any person or third party as nonpublic assessor’s data” under the Data Practices Act. The county proposed an order that prohibits it from “disseminat[ing] data covered under Minn. Stat. §13.51 to any third party except as otherwise permitted by Minnesota law.” Regarding proprietary information, the county proposed “protection from any form of disclosure by Respondent as nonpublic assessor’s data” under the Data Practices Act. The parties ultimately were unable to reach agreement concerning stipulated protective orders for the court’s consideration.
Petitioners filed similar motions or protective orders with respect to the disputed requests on May 13 and May 15. The county opposed both motions and hearings were held on 5/27/2020 and 5/29/2020. Generally, Minn. Stat. section 271.06, subd. 7 (2018), provides that Minn. R. Civ. P. govern the procedures in the tax court, where practicable. Trial courts have “considerable discretion in granting or denying discovery requests.” Erickson v. MacArthur, 414 N.W.2d 406, 407 (Minn. 1987); Montgomery Ward & Co. v. Cty. of Hennepin, 450 N.W.2d 299, 305 (Minn. 1990).
To prevent public disclosure of matters produced in discovery, a party may move for a protective order under Minn. R. Civ. P. 26.03. State ex rel. Humphrey v. Philip Morris Inc., 606 N.W.2d 676, 686 (Minn. App. 2000). “A district court has ‘broad discretion’ under Minn. R. Civ. P 26.03 ‘to fashion protective orders and to order discovery only on specified terms and conditions.’” In re Paul W. Abbott Co., 767 N.W.2d 14, 17-18 (Minn. 2009) (quoting Erickson, 414 N.W.2d at 409). Minnesota law provides, in relevant part, that upon motion by a party, and for good cause shown, the court may make an order to protect a party from embarrassment, including “that a trade secret or other confidential research, development, or commercial information not be disclosed or be disclosed only in a designated way....” Minn. R. Civ. P. 26.03(a)(7).
Petitioners contend that protection is necessary pursuant to Rule 26.03(a)(7) because it is confidential commercial information and they would be harmed if it became available to their competitors or tenants. Petitioners express concern that the county not only could use the information in connection with the cases at issue, but could disclose it, or use it in a manner that causes it to be disclosed, to third parties. In support of the motions, petitioners provided affidavits of the vice president and chief accounting officer of IRC Retail Centers, LLC, which holds an indirect ownership interest in both Champlin and Plymouth.
The court found the affidavits sufficient to establish that both Champlin and Plymouth: (1) consider such information to be confidential commercial information; (2) pursue adequate measures to protect that information from public disclosure; and (3) might be harmed if the information were disseminated to its competitors. Although the county disputes petitioners’ request, the county did not submit affidavits contradicting petitioners’ affidavits. Accordingly, the court granted petitioners’ motions for protective orders. IRC Champlin Marketplace, LLC v. Hennepin Co., 2020 WL 5097109 (Minn. T.C. 8/25/20); IRC Plymouth Town Center, LLC v. Hennepin Co., 2020 WL 5094627 (Minn. T.C. 8/25/2020); IRC Champlin Marketplace, LLC v. Hennepin Co., 2020 WL 5086582 (Minn. T.C. 8/25/20).
ADMINISTRATIVE UPDATES
• Back-to-school expenses might result in tax relief. For Minnesota taxpayers with school-aged children, the back-to-school season probably felt a little different this year, but tax relief remains. The Minnesota Department of Revenue reminds taxpayers that two tax relief programs exist for families with school-aged children: the K-12 Education Subtraction and the K-12 Education Credit. Both programs help lower taxes and may provide a larger refund when you file Form M1, Individual Income Tax. Qualifying taxpayers have a “qualifying child” attending K-12 at a public, private, or qualified home school and the taxpayer must have paid “qualified education expenses” during the year for that child’s education. More information about the benefits is available on the department’s website.
Morgan Holcomb, Mitchell Hamline School of Law
Sheena Denny, Mitchell Hamline School of Law
TORTS & INSURANCE
JUDICIAL LAW
• Insurance; first-party bad faith. Plaintiff insured suffered a soft-tissue whiplash injury in a 2009 car accident. She subsequently began suffering frequent, intense headaches. In July 2014, after settling with the other driver, the insured sought UIM benefits from defendant insurer, providing medical records and signed medical record authorizations. After insurer failed to either pay or deny her benefits for over a year, insured sued. A jury awarded her $1.4 million. She then amended her complaint to assert a first-party bad faith claim under Minn. Stat. § 604.18. Following a court trial, the district court awarded the insured her costs and fees pursuant to §604.18, subd. 2(a). A divided court of appeals affirmed.
The Minnesota Supreme Court affirmed. The Court held that the plain language of §604.18, subd. 2(a) requires a two-prong analysis for which the insured bears the burden of proof, and which is reviewed for clear error. The first prong involves an objective inquiry, which the Court held to be “whether a reasonable insurer under the circumstances would not have denied the insured the benefits of the insurance policy.” The factfinder is to “consider the level of investigation a reasonable insurer would have conducted under the circumstances… and how a reasonable insurer would have evaluated the claims in light of that investigation.” The second prong is subjective, requiring that the insurer know of, or act in reckless disregard of, the lack of a reasonable basis for the denial. The Court held that the insured must “prove that the insurer knew, or recklessly disregarded or remained indifferent to information that would have allowed it to know, that it lacked an objectively reasonable basis” for its denial. The quality and thoroughness of the insurer’s investigation of the actual claim plays a significant role in this analysis. The Court ultimately upheld the district court’s decision that the insurer displayed a “reckless indifference to facts and proofs submitted” by the insured, including medical records documenting the increased frequency and intensity of her headaches following the accident.
Justice Anderson, joined by Justice Gildea, dissented, contending that in determining reasonableness, the Court should instead have applied the reasonableness analysis applicable to summary judgment/JMOL, i.e., whether reasonable persons could draw differing conclusions from the evidence. The dissent also argued for a less deferential de novo standard of review. Peterson v. Western National Mutual Ins. Co., No. A18-1081 (Minn. 7/29/2020). https://mn.gov/law-library-stat/archive/supct/2020/OPA181081-072920.pdf
Jeff Mulder, Bassford Remele