Current Developments in Estate Planning and Business Law: July 2023

Jul 14, 2023 10:00:00 AM


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From the United States Supreme Court’s grant of certiorari of a constitutional challenge to a tax on unrealized gains, its recognition of a 42 U.S.C. § 1983 civil rights action by nursing home residents against federally funded nursing facilities, and its ruling that companies who register to do business in Pennsylvania consent to all-purpose jurisdiction, we have recently seen significant developments in estate planning, elder law, and business law. To ensure that you stay abreast of these legal changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning and business law practice.

The US Supreme Court Grants Certiorari in Case Challenging Constitutionality of Tax on Unrealized Gains

Moore v. United States, No. 22-800, 2023 WL 4163201 (S. Ct. June 26, 2023)

On June 26, 2023, the US Supreme Court granted certiorari in a case in which Charles and Kathleen Moore (the Moores) sought to invalidate the Mandatory Repatriation Tax (MRT), which is a one-time tax created by the 2017 Tax Cuts and Jobs Act that provides that US persons who own at least 10 percent of a controlled foreign corporation (a foreign corporation whose ownership or voting rights are more than 50 percent owned by US persons) are taxed on that foreign corporation’s profits, regardless of whether it distributed its earnings to them. 

The Moores, who owned 11 percent of a foreign corporation called KisanKraft, had an increased tax liability of approximately $15,000 for 2017 due to the MRT. They challenged the constitutionality of the MRT, contending that it violates the Apportionment Clause and the Due Process Clause. The United State District Court for the Western District of Washington dismissed their claim (Moore v. United States, No. C19-1539-JCC, 2020 WL 6799022 (W.D. Wash. 2020)), and the Ninth Circuit Court of Appeals affirmed the district court’s order (Moore v. United States, 36 F.4th 930 (9th Cir. 2022), reh’g denied, 53 F.4th 507 (9th Cir. 2022)).

Takeaways: The Supreme Court’s decision could have a significant impact on the constitutional viability of legislation that has repeatedly been proposed that would create a “wealth tax” on unrealized gains. Four Ninth Circuit judges dissented from the denial of rehearing en banc in Moore v. United States, 53 F.4th 507 (9th Cir. 2022), summarizing the important issue that will be argued before the US Supreme Court: “We become the first court in the country to state that an ‘income tax’ doesn't require that a ‘taxpayer has realized income’ under the Sixteenth Amendment  .  .  .  .  In other words, we allow a direct tax on the ownership interest of a taxpayer—even when the taxpayer has yet to receive any economic gain from the interest and has no ability to direct distribution of gain from the interest.” Id. at 509. The dissenting judges believed that the Ninth Circuit “erred in disregarding the realization requirement of the Sixteenth Amendment.  .  .  .  Without the guardrails of a realization component, the federal government has unfettered latitude to redefine ‘income’ and redraw the boundaries of its power to tax without apportionment.” Id. at 514. 

Taxpayer’s Substantial Compliance with Adequate Disclosure Regulation for Gift Tax Purposes Triggered Three-Year Limitations Period, Which Expired Before Issuance of Notice of Deficiency 

Schlapfer v. Comm’r, T.C.M. (RIA) 2023-65, 2023 WL 3580897 (May 22, 2023) 

Ronald Schlapfer, a citizen of Switzerland, obtained a life insurance policy funded with $50,000 in cash and all of the issued and outstanding shares (100 shares of common stock) of his business, EMG, a Panamanian corporation. The premium payments, in the form of the cash and stock transfer, were made in 2006. EMG issued a share certificate in 2006 showing that the policy’s brokerage account was the owner of the stock. In 2007, Ronald assigned the policy to his mother, but later the same year, Ronald and his mother requested that the policy be assigned jointly to his mother, aunt, and uncle and that the beneficiary designations in place be made irrevocable.

Ronald applied for US citizenship in 2007 and became a US citizen in 2008. In 2013, Ronald took advantage of the now-terminated Offshore Voluntary Disclosure Program (OVDP), which allowed US taxpayers with undisclosed income from offshore assets to resolve income tax liabilities and tax information reporting obligations. The OVDP required taxpayers to disregard all entities in their disclosure packet through which the undisclosed assets were held and to pay all tax, interest, and penalties related to the assets during the most recent eight years. 

In his disclosure packet, in addition to a payment for tax years 2004 through 2011, Ronald included a 2006 gift tax return reporting a gift of the EMG stock to his mother, a protective filing statement attached to the 2006 gift tax return, a Schedule F of Form 5471 for his 2006 federal income tax return, and an Offshore Entity Statement. The packet did not include a 2007 gift tax return. In his protective filing, Ronald stated that he had made a gift of controlled foreign company stock valued at $6,056,686 in 2006. He reported the gift as stock rather than as the insurance policy because of the OVDP’s instructions to disregard certain entities; he believed the policy was such an entity. In addition, he asserted that he had no intent to remain permanently in the United States in 2006 and thus was exempt from gift tax for the 2006 gift.

The Internal Revenue Service (IRS) requested additional documentation, which Ronald supplied. He included a statement of his position that the gift was made on July 6, 2006, which he asserted was the date that he had instructed the insurance company to transfer ownership of the policy to his mother, aunt, and uncle. He also agreed to a revised gift date of September 22, 2006, which was the date the policy was issued, but explained that the insurance company had made a scrivener’s error in listing him as the initial owner of the policy in 2006 and that the requests for the assignments to his mother, aunt, and uncle in 2007 were simply to correct that error.

In 2016, the IRS opened an examination of Ronald’s 2006 gift tax return and ultimately concluded that there had been no taxable gift in 2006. The IRS asserted that Ronald had made an incomplete transfer because he had not relinquished control of the insurance policy until 2007. Ronald refused to concede that the gift was made in 2007, and as a result, he was given the choice of opting out of or being removed from the OVDP. He chose to withdraw from the OVDP. The IRS prepared a substituted 2007 gift tax return and in 2019, issued a notice of deficiency for 2007, determining a gift tax liability of $4,429,949 and penalties of $4,319,200. 

Ronald filed a petition in the Tax Court challenging the IRS’s determinations and a cross-motion for summary judgment asserting that the IRS’s limitations period had expired before the issuance of the notice of deficiency because he had adequately disclosed the gift on his 2006 gift tax return.

The Tax Court stated that to determine if the limitations period had expired before the issuance of the notice of deficiency, it was required to determine whether Ronald had adequately disclosed the gift on his gift tax return under I.R.C. § 6501. Section 6501(a) provides the general rule that the Commissioner has three years after a gift tax return is filed to assess any gift tax. However, I.R.C. § 6501(c)(9) provides an exception for certain gifts that are required to be shown on the gift tax return but are not shown on it: under those circumstances, the IRS may assess the gift tax at any time. However, the exception does not apply if the gift has been disclosed in the return or a statement attached to it “in a manner adequate to apprise the Secretary of the nature of such item.” I.R.C. § 6501(c)(9). For gifts that have been adequately disclosed in a gift tax return, the three-year limitations period is applicable. Pursuant to Treas. Reg. § 301.6501(c)-1(f)(5), if a gift has been adequately disclosed, the three-year limitations period will begin to run when the return is filed “even if the transfer is ultimately determined to be an incomplete gift.”

In determining whether Ronald adequately disclosed the gift—regardless of whether it was a gift of stock or an insurance policy—the court evaluated whether the disclosure in the 2006 tax return was “sufficiently detailed to alert the Commissioner and his agents as to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one.” Schlapfer v. Comm’r, T.C.M. (RIA) 2023-65, 2023 WL 3580897, at *11 (May 22, 2023). The court looked to Treas. Reg. § 301.6501(c)-1(f)(2), which lists information that, if provided on a gift tax return or statement attached to it, will amount to adequate disclosure. The court determined that, in Ronald’s circumstances, transfers would be adequately disclosed if the return or an attached statement provides: (1) a description of the property transferred and any consideration; (2) the identity of the transferee and transferor and the relationship between them; and (3) a detailed description of the method used to determine the fair market value of the gift.

Ronald pointed to the gift tax return, the protective filing attachment, the Schedule F of Form 5471, and the Offshore Entity Statement in support of his claim that the gift had been adequately disclosed on his 2006 gift tax return. The IRS asserted that the Offshore Entity Statement was not part of Ronald’s gift tax return and should not be considered in determining if he had made an adequate disclosure of the gift and that even if it was considered, Ronald had not satisfied the requirements for adequate disclosure in Treas. Reg. § 301.6501(c)-1(f)(2).

The Tax Court rejected the IRS’s contention that the Offshore Entity Statement could not be considered in determining adequate disclosure, relying on prior cases in which it had looked beyond a taxpayer’s tax return to determine adequate disclosure, particularly if the return references a separate document. Ronald’s Offshore Entity Statement was submitted to the OVDP in a disclosure packet that included the 2006 gift tax return. In addition, the protective filing statement, which was attached to the gift tax return, directed the IRS to refer to the Offshore Entity Statement for information about the gift reported on the gift tax return.

The court also disagreed with the IRS’s contention that strict compliance with all applicable requirements of Treas. Reg. § 301.6501(c)-1(f)(2) was necessary. Rather, substantial compliance with those requirements had been accepted by the US Department of the Treasury in Treasury Decision 8845, in which it declined to expressly allow substantial compliance, but acknowledged that this did not mean that “the absence of any particular item or items would necessarily preclude satisfaction of the regulatory requirements, depending on the nature of the item omitted and the overall adequacy of the information provided.” According to the court, “[t]hat statement describes, and accepts, the very essence of substantial compliance.” Schlapfer v. Comm’r, at *15.

In determining if Ronald substantially complied with the requirements of the regulation, the court stated that he would meet that standard if he “fulfilled all essential purposes of the requirement.” Id. at *16. Although Ronald did not provide information about the insurance policy on his gift tax return, failed to include a statement describing how he determined the fair market value of the gift, and listed his mother rather than his mother, aunt, and uncle on the Offshore Entity Statement, the court determined that disclosure was adequate because it was “sufficiently detailed to alert the Commissioner to the nature of the transaction so that the decision to select a return for audit is reasonably informed.” Id. As a result, the court concluded that the limitations period had expired before the IRS issued the notice of deficiency and thus granted Ronald’s cross-motion for summary judgment.

Takeaways: This case is a taxpayer win for Ronald, but also provides some clarity for other taxpayers. It is the first reported case thoroughly addressing what is considered substantial compliance with the adequate disclosure rules set forth in Treas. Reg. § 301.6501(c)-1(f)(2). It also clarifies that the elements of what has sometimes been described as a description safe harbor in Treas. Reg. § 301.6501(c)-1(f)(2) are not mandatory but instead merely guidance to taxpayers to enable them to satisfy adequate disclosure.

Surviving Spouse Who Was Sole Beneficiary and Sole Personal Representative of Deceased IRA Owner’s Estate Not Required to Include Distribution of IRA Account in Gross Income When Proceeds Rolled Over to IRA

I.R.S. Priv. Ltr. Rul. 2023-22-014 (June 2, 2023)

On June 2, 2023, the IRS released Private Letter Ruling 202322014, addressing whether the surviving spouse was required to report the distribution of an individual retirement account (IRA) from her deceased spouse’s estate in her gross income in the year of distribution. The deceased spouse did not designate a beneficiary of the IRA, and pursuant to the agreement with the custodian of the account, the balance remaining in the IRA account at his death was payable to his estate. The deceased spouse’s will left his entire residual estate to his surviving spouse, who was the sole personal representative of his estate. The surviving spouse indicated that she wished to direct all of the remaining balance of the IRA to herself as beneficiary of the estate and that the proceeds would be rolled over to her IRA within sixty days after the proceeds were paid to the estate.

The surviving spouse sought a ruling that she would be treated as the distributee of the proceeds from the IRA account, that the IRA would not be treated as an inherited IRA, that she would be eligible to roll the proceeds over to her IRA as long as the rollover occurred within sixty days, and that she would not be required to include the IRA proceeds rolled over to her IRA in her gross income. 

Under I.R.C. § 408(d)(1), proceeds distributed from an IRA are generally included in the gross income of the distributee. However, under I.R.C. § 408(d)(3)(A), the general rule does not apply to amounts distributed from the IRA to an individual for whose benefit the IRA is maintained if the entire amount is rolled over into the individual’s own IRA within sixty days.  

The IRS noted that the proceeds of a decedent’s IRA that pass through a third party such as an estate before being distributed to the decedent’s spouse are generally treated as being received by the surviving spouse from the third party rather than from the decedent’s spouse, precluding the surviving spouse from eligibility to roll over the proceeds into their own IRA. However, in a situation such as the present case in which the deceased spouse’s estate is the beneficiary of the IRA proceeds and the surviving spouse is the sole beneficiary of the IRA proceeds that pass through the estate and the estate’s sole personal representative, “no third party can prevent the surviving spouse from receiving the proceeds of the IRA and from rolling over the proceeds into the surviving spouse’s own IRA.” I.R.S. Priv. Ltr. Rul. 2023-22-014, at 4 (June 2, 2023). Because the surviving spouse was the sole personal representative of the deceased spouse’s estate and the sole residual beneficiary under his will, she was “effectively the individual for whose benefit the [deceased spouse’s] IRA is maintained.” Id. As a result, the proceeds of the IRA would not be included in the surviving spouse’s gross income (unless it was rolled over to a Roth IRA). Thus, the surviving spouse would be treated as a distributee of the proceeds of the deceased spouse’s IRA and would be permitted to roll it over to her IRA.

Further, the IRA was not an inherited IRA under I.R.C.§ 408(d)(3)(C)(ii) (an IRA is inherited only if it is acquired as a result of the death of an individual by someone other than the surviving spouse of the deceased).

Takeaways: Although private letter rulings are not binding precedent and cannot be relied upon by other taxpayers, Private Letter Ruling 2023-22-014 addresses a common factual situation and suggests that taxpayers in the same circumstances may be able to avoid including the proceeds of their deceased spouse’s IRA in their gross income by rolling it over to their own IRA.

US Supreme Court Rules that Residents of Medicaid-Funded Nursing Facilities Have Private Right of Action under 42 U.S.C. § 1983

Health and Hosp. Corp. of Marion Cnty. v. Talevski, 143 S. Ct. 1444 (June 8, 2023)

In 2016, Gorgi Talevski’s family placed him in Valparaiso Care and Rehabilitation (VCR), a nursing home, because his dementia had progressed to a degree that they could no longer care for him. When he entered VCR, he was could talk, feed himself, walk, socialize, and recognize his family. However, later in 2016, his condition suddenly deteriorated, leaving him unable to feed himself or communicate in English (he could only speak in Macedonian, his native language). Although VCR claimed that his deterioration was the result of the natural progression of his dementia, his daughter suspected that VCR was using medication to chemically restrain him. Physicians outside of VCR confirmed her suspicions. An outside neurologist tapered down the medication, and Gorgi regained his ability to feed himself. The Talevskis filed a formal complaint with inspectors from the Indiana State Department of Health (Department of Health) regarding VCR’s use of medication to chemically restrain Gorgi.

In late 2016, VCR asserted that Gorgi was harassing female residents and staff and began sending him to a psychiatric hospital ninety minutes away for several days at a time. Although VCR readmitted Gorgi twice, it did not readmit him a third time and attempted a permanent transfer to a dementia facility in Indianapolis. This was done without notifying Gorgi or his family. The Talevskis filed another complaint with the Department of Health regarding the forced transfer, but Gorgi had to remain at another facility ninety minutes away from his family while the complaint was pending. Although an administrative law judge nullified VCR’s attempt to transfer Gorgi, VCR initially refused readmission. After the Talevskis filed another complaint and the Department of Health issued a report regarding them, VCR’s management company, American Senior Communities, LLC (ASC) contacted Gorgi’s wife, Ivanka, to discuss his possible readmission to VCR. Fearing retaliation against Gorgi, as well as his acclimation to the new facility, the Talevskis decided against readmission. The result left the family with a three-hour round trip every time they visited him.

After Gorgi’s death, Ivanka, as his personal representative, sued VCR, ASC, and Health and Hospital Corporation of Marion County (HHC) (collectively, Petitioners) in 2019. The lawsuit asserted that Gorgi’s rights under the Federal Nursing Home Reform Act (FNHRA) had been infringed. FNHRA, among other provisions, requires nursing homes that receive Medicaid funding to respect and protect the health, safety, and dignity of patients. Specifically, FNHRA includes the right to be free from chemical restraint and transfer, only upon the satisfaction of certain preconditions. The lawsuit asserted that those rights could be enforced pursuant to 42 U.S.C. § 1983, which provides an express cause of action to individuals deprived of any rights “secured by the Constitution and laws” by any person acting under color of state law.

The district court dismissed Talevski’s claims, but the Seventh Circuit Court of Appeals reversed. That decision was then appealed to the US Supreme Court. 

The US Supreme Court affirmed the Seventh Circuit’s decision, rejecting the Petitioners’ argument that the “laws” enforceable by individuals pursuant to 42 U.S.C. § 1983 do not include laws that Congress enacts via its spending power, which would have precluded its use to enforce rights recognized by the FNHRA. Rather, the court held that the applicable provisions of the FNHRA “unambiguously create § 1983-enforceable rights” and that there was no incompatibility between the statutory scheme created by Congress under the FNHRA for the enforcement of those rights and private enforcement under § 1983. Health and Hosp. Corp. of Marion Cnty. v. Talevski, 143 S. Ct. 1444, 1446 (June 8, 2023).

The court held that the FNHRA provisions relied upon by Talevski unambiguously confer individual federal rights enforceable under § 1983 pursuant to the test set forth in Gonzaga Univ. v. Doe, 536 U.S. 273 (2002). The Gonzaga test is satisfied if the relevant provision is “phrased in terms of the persons benefited” and includes “rights creating, individual-centric language with an unmistakable focus on the benefited class.” Health and Hosp. Corp. of Marion Cnty. v. Talevski, 143 S. Ct. 1444, 1457 (June 8, 2023). According to the court, the unnecessary restraint and predischarge notice provisions of the FNHRA satisfy the Gonzaga test because they are requirements relating to residents’ rights, which is indicative of an individual rights-creating focus. The unnecessary restraint provision protects the nursing home resident’s “right” to be free of physical or chemical restraints imposed for the purpose of “discipline or convenience” rather than medical treatment. 42 U.S.C. § 1396r(c)(1)(A)(ii). Similarly, the predischarge notice provision is in a paragraph addressing transfer and discharge “rights” and precludes a nursing facility from transferring or discharging a resident unless certain preconditions are met, i.e., notice has been provided to the resident and their family, the transfer is necessary for the resident’s welfare, the resident has improved and no longer needs the facility, or the transfer is necessary to protect the health or safety of other residents. 42 U.S.C. § 1396r(c).

Further, the court noted that the FNHRA did not expressly forbid the use of § 1983 to enforce the rights it creates. Absent that express language forbidding its use, the Petitioners were required to show that the FNHRA created “a comprehensive enforcement scheme that is incompatible with individual enforcement under § 1983.” Health and Hosp. Corp. of Marion Cnty., at 1459. The Petitioners failed to make that showing. The court found that although the FNHRA addresses administrative processes for inspection of nursing facilities and accountability for noncompliant facilities, it “lacks any indicia of congressional intent to preclude § 1983 enforcement, such as an express private judicial right of action or any other provision that might signify that intent.” Id. at 1460. The fact that private entities own most nursing homes also does not support the argument that Congress intended to preclude enforcement under § 1983. Rather, “implicit preclusion” of a 1983 enforcement action “requires something in the statute that shows that permitting § 1983 to operate would thwart Congress’ intent in crafting the FNHRA.” Id. at 1462. The court found that nothing in the FNHRA’s language even hints that Congress intended to preclude such an action; rather, the express language of 42 U.S.C. § 1396r(h)(8) indicates the opposite: “[t]he remedies provided  .  .  .  are in addition to those otherwise available under State or Federal law and shall not be construed as limiting such other remedies.”

Takeaways: The ruling in Health and Hosp. Corp. of Marion Cnty. v. Talevski is a significant win for residents of nursing homes funded by Medicaid, who are now assured of their right to a private action under § 1983 to enforce their rights set forth in the FNHRA.

Agent Under Illinois Healthcare Power of Attorney Lacked Authority to Bind Nursing Home Resident to Arbitration Agreement Where Agreement Was Not Required for Admission

Parker v. Symphony of Evanston Healthcare, LLC, No. 1-22-0391, 2023 WL 3806800 (Ill. App. June 5, 2023)

In 2005, Mae Jefferson executed an Illinois short form power of attorney for healthcare (see 755 Ill. Comp. Stat. Ann. 45/4-10 (2023)), naming her daughter Kathy as her agent. Pursuant to the power of attorney, Kathy was authorized to “make any and all decisions for [her] concerning [her] personal care, medical treatment, hospitalization and health care and to require, withhold or withdraw any type of medical treatment or procedure, even though [her] death may ensue.” Parker v. Symphony of Evanston Healthcare, LLC, No. 1-22-0391, 2023 WL 3806800, at *1 (Ill. App. June 5, 2023) In addition, the healthcare power of attorney authorized Kathy to “sign and deliver all instruments, negotiate and enter into all agreements, and do all other acts reasonably necessary to implement the exercise of the powers granted to the agent.” Id. at *5.

Mae was admitted to Symphony of Evanston Healthcare (Symphony), a long-term care facility, in 2017. Approximately one month after Mae’s admission, Kathy executed an admission agreement and a separate “health care arbitration agreement,” which provided: “[t]he Resident and Facility have entered into a separate Health Care Arbitration Agreement in connection with this Contract and expressly affirm and state that said Health Care Arbitration Agreement be incorporated into this document as though stated and contained herein.” Id. at *1. The arbitration agreement specified that claims arising out of “any dispute between you and us” including those due to healthcare provider negligence or wrongful acts other than intentional torts will be submitted to binding arbitration. The arbitration agreement further stated that Symphony agreed to pay $5,000 of the resident’s arbitration costs, attorney’s fees, and expenses in consideration for the execution of the agreement. In all capital letters, the arbitration agreement advised residents that they could not be required to sign the arbitration agreement to receive treatment.

Mae died in 2020. In 2021, Cheryl Parker, as the independent administrator of Mae’s estate, filed an action against defendants Symphony and Maestro Consulting Services, LLC (Maestro), which she alleged owned, operated, and managed Symphony and exercised significant control over its day-to-day operations. The complaint asserted that Symphony had failed to provide appropriate care to prevent the development and deterioration of bed sores, a condition that Mae had been at high risk of developing. In addition, the complaint alleged that Maestro had failed to provide appropriate care and supervision to prevent the bed sores from developing and becoming infected. Cheryl further alleged that as a result of Symphony and Maestro’s failures, Mae’s condition had worsened, leading to unnecessary pain and suffering, and had caused or contributed to her death.

Symphony filed a motion to dismiss based on Kathy’s execution of the arbitration agreement as Mae’s agent under her healthcare power of attorney. Cheryl asserted that Kathy did not have authority under the healthcare power of attorney to sign the arbitration agreement. The trial court granted Symphony’s motion to dismiss and compel arbitration of several claims and stayed other claims pending resolution of the arbitration.

The Illinois Court of Appeals disagreed with the trial court’s ruling based on Fiala v. Bickford Senior Living Grp., LLC, 32 N.E.3d 80 (Ill. App. 2015), which clarified that an agent acting pursuant to a healthcare power of attorney is not authorized to sign an arbitration agreement and cannot bind the patient “where the arbitration provision is optional or otherwise not necessary to gain admission to a long-term-care facility.” Parker, at *6. Because the arbitration agreement expressly stated that it was optional, signing it was not “reasonably necessary to implement the exercise of” Kathy’s healthcare power of attorney. Id. In addition, the arbitration agreement expressly stated that it was separate from the admission agreement rather than a part of the admission agreement as contended by Symphony. As a result, the court reversed the trial court’s order dismissing and compelling or staying arbitration of Cheryl’s claims and remanded the case to the trial court for further proceedings consistent with its order.

In a terse concurring opinion, Justice Pucinski stated: 

Arbitration does not do anything associated with health care. It does not check the patient’s vital signs, monitor heart rate, prevent or treat pressure sores, draw blood, set or maintain an IV, diagnose illness, or prescribe or dispense medication. Arbitration is not health care. It is about money. Arbitration is just simply not included in the agency given in a health care power of attorney (HCPOA). The patient could, of course, add it to the HCPOA, but absent that addition, it is just the worst kind of illusion for the providers to try to jam the authority to agree to arbitration into a HCPOA.


Takeaways: A 2019 final rule issued by the Centers for Medicare & Medicaid Services prohibits long-term care facilities that participate in Medicare and Medicaid programs from requiring residents to sign binding arbitration agreements as “a condition of admission to, or as a requirement to continue to receive care at, the facility.” The 2019 rule repealed the previous prohibition on pre-dispute binding arbitration agreements between those long-term care facilities and their residents or the residents’ representatives; its enforcement had been enjoined by the United States District Court for the Northern District of Mississippi. However, as the Parker case illustrates, the arbitration agreement may still be unenforceable if it was executed by an agent under a healthcare power of attorney who lacked the authority to sign it on the resident’s behalf. Symphony complied with the 2019 final rule (prior to its effective date) by expressly stating in the 2017 arbitration agreement that arbitration was not mandatory for admission or care: this language used against it to demonstrate that Kathy was not authorized to bind Mae (or her estate) under Illinois law.

US Supreme Court Finds Company Registered to do Business in Pennsylvania Consented to All-Purpose Personal Jurisdiction

Mallory v. Norfolk S. Ry. Co., No. 21-1168, 2023 WL 4187749 (June 27, 2023)

Robert Mallory, a former employee of Norfolk Southern Railway Company (Norfolk Southern), filed suit against Norfolk Southern under the Federal Employers’ Liability Act, a federal workers’ compensation law allowing railroad employees to recover damages due to their employer’s negligence. Robert, who had worked as a mechanic for Norfolk Southern for twenty years, was diagnosed with cancer, which he believed resulted from his work—his job involved spraying boxcar pipes with asbestos, handling chemicals in Norfolk Southern’s paint shop, and demolishing car interiors that he alleged contained carcinogens. He worked for Norfolk Southern in Ohio and Virginia, moved to Pennsylvania for a brief period after he left the company, and then later returned to Virginia. He filed his lawsuit in Pennsylvania state court.

Norfolk Southern asserted that an exercise of personal jurisdiction over it by a Pennsylvania court would violate the Due Process Clause of the Fourteenth Amendment to the US Constitution. Norfolk Southern was incorporated and headquartered in Virginia, and when Robert filed his complaint, he resided in Virginia. His complaint alleged that he was exposed to carcinogens in Ohio and Virginia.

Robert argued that Norfolk Southern should be subject to jurisdiction in Pennsylvania because it managed 2,000 miles of railroad track, operated eleven rail yards, and ran three locomotive repair shops in Pennsylvania. In addition, Norfolk Southern had registered to do business in Pennsylvania and had regular, systemic, and extensive operations there. Under 42 Pa. Cons. Stat. § 5301(a)(2)(i), (b), out-of-state companies that register to do business in Pennsylvania agree to appear in its courts on “any cause of action” brought against them. Robert asserted that Norfolk Southern had therefore consented to suit in Pennsylvania.

The Pennsylvania Supreme Court found that the Pennsylvania statute requiring out-of-state companies that register to do business in Pennsylvania to agree to exercise personal jurisdiction for any cause of action violated the Due Process Clause. Because its decision conflicted with another case in which the Georgia Supreme Court had rejected a corporate defendant’s due process argument (Cooper Tire & Rubber Co. v. McCall, 863 S.E.2d 81 (Ga. 2021)), the US Supreme Court agreed to hear the case to determine whether a state is prohibited from requiring an out-of-state corporation to consent to personal jurisdiction to do business there.

In its decision, the court determined Pennsylvania Fire Ins. Co. of Phila. v. Gold Issue Mining & Milling Co., 243 U.S. 93 (1917) was controlling. In that case, Pennsylvania Fire was an insurance company incorporated in Pennsylvania. It entered into an insurance contract in Colorado to insure a smelter owned by the Gold Issue Mining & Milling Company, an Arizona corporation. When Gold Issue Mining sought to collect on its policy after the smelter was destroyed by fire, Pennsylvania Fire refused to pay its claim. Gold Issue Mining sued Pennsylvania Fire in Missouri. 

Pennsylvania Fire asserted that the Due Process Clause precluded it from having to answer in a Missouri court in a suit with no connection to that state. The Missouri Supreme Court rejected this argument, noting that Missouri law required out-of-state insurance companies that sought to do business in the state to file paperwork agreeing to appoint an official in the state as its agent for service of process and to accept service of process on that agent as valid. Pennsylvania Fire had complied with these requirements for ten years. According to the Missouri Supreme Court, it was well settled that suits could be brought against individuals in any jurisdiction in which they were found, regardless of where the cause of action arose, so it would be nonsensical to treat a corporate person differently. The US Supreme Court noted that in Pennsylvania Fire, it had agreed with the Missouri Supreme Court’s decision, concluding that the “matter so settled by existing law that the case ‘hardly’ presented an ‘open’ question.” Mallory v. Norfolk So. Ry. Co., No. 21-1168, 2023 WL 4187749, at *6 (June 27, 2023). In the present case, Norfolk Southern had similarly complied with the Pennsylvania statute, agreeing to answer suit in that state for more than twenty years. 

The Mallory court distinguished International Shoe Co. v. Washington, 326 U.S. 310 (1945), which involved an out-of-state corporate defendant sued by the state of Washington in Washington state court. The company had not registered to do business in Washington and had not agreed to be present and accept service of process there. Nevertheless, the court had allowed an “additional road to jurisdiction over out-of-state corporations” by finding that the Fourteenth Amendment permits suit against a company when the quality and nature of its activity in the state make it reasonable and just to maintain suit there, that is, bringing suit there was consistent with “fair play and substantial justice.” Id. at *8. 

Consequently, the court rejected Norfolk Southern’s position, stating the following:

Not every case poses a new question. This case poses a very old question indeed—one this Court resolved more than a century ago in Pennsylvania Fire. Because that decision remains the law, the judgment of the Supreme Court of Pennsylvania is vacated, and the case is remanded.

Id. at *12.

Takeaways: Every state has a statute that requires out-of-state companies that want to do business in the state register in the state and appoint an agent to receive service of process there. The court’s decision in Mallory (via a 4-1-4 plurality) indicates that state statutes may require a company to consent to personal jurisdiction based on any cause of action as a condition of doing business there. Compliance with those statutes will amount to consent by the company to answer suit based on any cause of action in those states, regardless of whether the case or the parties have any other connection to the state. 

National Labor Relations Board Returns to Employee-Friendly Independent Contractor Test

The Atlanta Opera, Inc., 372 N.L.R.B. No. 95 (June 13, 2023)

On June 13, 2023, the National Labor Relations Board (NLRB) overruled a previous decision, SuperShuttle DFW, Inc., 367 N.L.R.B. No. 75 (2019), regarding the factors used to determine whether a worker is an independent contractor or an employee under the National Labor Relations Act (NLRA), which generally protects employees’ rights to form or join unions and engage in or refrain from engaging in protected, concerted activities to improve their working conditions. 

In SuperShuttle, the NLRB had overruled FedEx Home Delivery, 361 N.L.R.B. 610 (2014), by determining that the common law agency test set forth in the US Supreme Court’s decision in NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968) should be evaluated through the “prism of entrepreneurial opportunity when the specific factual circumstances of the case make such an evaluation appropriate.” Id. at 9. In other words, entrepreneurial opportunity for gain, that is, whether an individual will make a profit or loss based on their own efforts at work, should be the animating principle in evaluating whether a worker is a contractor rather than an employee under the NLRA. 

The Atlanta Opera decision returned to the standard set forth in FedEx Home Delivery, that is that, in evaluating independent contractor status in light of common law agency principles, “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.” The Atlanta Opera, Inc., 372 N.L.R.B. No. 95, 12 (June 13, 2023). Further, the NLRB should give weight only to actual rather than theoretical entrepreneurial opportunity and evaluate the constraints a company places on the individual’s ability to pursue this opportunity. 

The Atlanta Opera decision once again adopted the following ten-factor common law agency test for evaluating whether a worker is an independent contractor approved by the US Supreme Court in NLRB v. United Ins. Co. of Am. and set forth in Restatement (Second) of Agency, but emphasized that the list was not exhaustive:

(a) the extent of control which, by the agreement, the master may exercise over the details of the work;

(b) whether or not the one employed is engaged in a distinct occupation or business;

(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;

  1. d) the skill required in the particular occupation;

(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;

(f) the length of time for which the person is employed;

(g) the method of payment, whether by the time or by the job;

(h) whether or not the work is a part of the regular business of the employer;

(i) whether or not the parties believe they are creating the relation of master and servant; and

(j) whether the principal is or is not in business.

Id. at 2. After applying these standards, the NLRB determined that the workers at issue—makeup artists, wig artists, and hairstylists who worked for the Atlanta Opera—were employees under the NLRA rather than independent contractors.

Takeaways: The current NLRB has shifted back to a more employee-friendly standard that makes it more difficult and complicated for businesses to establish that a worker is an independent contractor rather than an employee under the NLRA. Businesses who use independent contractors should execute agreements that set forth their expectations and clarify their relationship with the contractor. In addition, it is prudent for businesses to allow independent contractors to have real opportunities to perform work for other employers and to exercise control over their work. Please note that other state and federal laws also address worker classification and it is important for attorneys to remain current in this area of the law, which has shifted frequently in recent years.

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