From Consumer-Driven to struCtureD FinanCe: Covering the range oF
FinanCial serviCes litigation
With John Doherty, Frank Hirsch and Matt McGuire
Déjà vu all over again: Bank oFFiCers anD DireCtors PrePare For a
rePlay oF litigation that FolloweD the savings anD loan Crisis
By Mary C. Gill, Mark C. Kanaly and Robert R. Long
how CaliFornia’s green Chemistry initiative will Change the gloBal
By Maureen F. Gorsen and Colin K. Kelly
Ricci v. DeStefano: what Does the suPreme Court’s DeCision mean For
By Jesse M. Jauregui and Erin L. Connolly
CaliFornia aPPellate Court DeParts From ninth CirCuit By aPPlying the
FeDeral government ContraCtor DeFense to state ProDuCts liaBility
Claims Brought against manuFaCturers oF government-ProCureD non-
By Stephanie A. Jones and J. Andrew Howard
In Trends, we seek to highlight developments in the law and
Alston & Bird’s litigation practice. This edition covers both topics.
Financial institutions faced unprecedented challenges this year.
Our first two pieces in this edition of Trends address how we are
assisting our clients in this arena. First, there is an interview with
important new additions to the Alston & Bird team—John Doherty,
Frank Hirsch and Matt McGuire—concerning their cutting edge
financial institution practices and the evolving state of the relevant
law. Next, Mary Gill, Mark Kanaly and Robert Long examine the firstname.lastname@example.org
potential challenges that bank directors and officers face in light
of the financial crisis.
The remaining three articles are also timely. Maureen Gorsen
and Colin Kelly analyze the effect of California’s green chemistry
initiative on consumer trends and anticipated regulator y
enforcement. Jesse Jauregui and Erin Connolly examine the
recent landmark U.S. Supreme Court case concerning Title VII
and the City of New Haven Firefighters. Finally, Stephanie Jones
and Andy Howard examine how the California appellate court’s
interpretation of the federal government contractor defense in
product liability cases differs from that of the U.S. Court of Appeals
for the Ninth Circuit.
We hope you enjoy Trends and, as always, we value your comments.
Todd R. David
Todd R. David
Tr e n d
From Consumer-Driven to struCtureD
FinanCe: Covering the range oF
FinanCial serviCes litigation
l l l
In light of the complex and volatile issues facing the financial services
industry, Alston & Bird has expanded its capacity in this arena. With
John P. Doherty, Partner the addition of John Doherty to our New York office, and Frank Hirsch
Litigation & Trial Practice and Matt McGuire to our North Carolina practice, we have added top
email@example.com flight talent with deep experience in all aspects of financial services.
Todd David, co-chair of the firm’s litigation practice, spoke recently
with John, Frank and Matt about the legal landscape.
Alston & Bird has historically had great strength in its financial
services practice, but we knew in the current economic environment
it was a good time to increase our bench strength. We are pleased
you decided to join A&B.
First, John, let me start with you—tell us about your practice.
I’m a commercial litigator. In the financial sector, I regularly
Frank A. Hirsch, Jr., Partner handle matters concerning structured finance, structured products,
Litigation & Trial Practice derivatives and other related investment products. I have handled
firstname.lastname@example.org a broad cross-section of disputes involving almost every type of
market player in the securitization, asset class and securitization
structure. In addition, I represent commercial lenders and special
servicers for both securitized and portfolio loans in connection
with workouts, foreclosures and servicing issues involving loan
syndications and participations, senior/subordinate and mortgage/
I also represent asset managers. Most of these have a hedging
arrangement, and I represent parties to credit default swaps and
other hedging arrangements.
Frank and Matt, can you describe your practice?
Here in North Carolina, we have more of a consumer-driven
practice, focused on home mortgage litigation, credit card litigation,
unsecured consumer lending and the defense of class-actions. We
also have commercial lending litigation experience, but not to the
extent John does, because New York tends to be the hub of those
Matthew P. McGuire, Partner
In addition, we deal a lot with the federal “alphabet soup” claims—
Litigation & Trial Practice
the Truth in Lending Act, Fair Credit Reporting Act, Fair Debt
Collection Practices Act, Home Ownership Equity Protection
Act—the entire panoply of consumer regulatory schemes developed
over the past 30 to 40 years.
Recently, we’ve seen a spike in state law claims—for example,
unfair and deceptive trade practice claims—because most plaintiffs’
lawyers want to avoid federal court.
Years ago, the business community was relatively satisfied with the
state of the law regarding lender liability. It sounds like there are
some initiatives to make new law by certain claimants or debtors.
Is that a trend?
Absolutely. We’re seeing it on two levels. Sophisticated lenders have
figured out how to originate loans within the guidelines mandated
by state and federal governments. Although claims arising out
of the initial lending decision have declined, two types of claim
theories have increased. One is based on predatory servicing—some
time after the loan closed, things went wrong on the servicing end.
This litigation often occurs under the guise of wrongful foreclosure
actions, brought to stop or slow down foreclosure proceedings.
The other trend is newer and more dangerous for our clients.
This is the notion of structural unfairness or unsuitability—a way
of circumventing the federal regulatory schemes and looking at
lenders’ activities from a different perspective. Essentially, this
theory posits that it doesn’t matter whether you complied with
the governing regulations because lenders have a fiduciary duty
to make sure that the loan products are suitable for borrowers and
are structurally fair. That’s a radical concept—it’s essentially an
attempt by the plaintiffs’ bar to superimpose a totally different
paternalistic regulatory scheme on lenders.
••• That’s right. These claim theories are being litigated across the
country. There’s not much set law, but the concepts of suitability
The other trend is newer
and structural fairness are cropping up more often, creating the
and more dangerous for our battleground upon which consumer-driven lending litigation will
clients. This is the notion be fought over the next decade.
of structural unfairness or
unsuitability—a way of
With that in mind, what big-picture advice can you offer members
circumventing the federal of the financial services industry regarding risk prevention and
regulatory schemes and management?
looking at lenders’ activities
from a different perspective.
In the future, we will see a much greater focus on compliance.
••• If the Consumer Financial Protection Agency comes to pass, as
advocated by President Obama, the regulatory environment for
financial institutions will be more aggressive.
Whether it’s among note holders in a securitization, within an
investment bank, among co-lenders or in the context of a foreclosure
action on behalf of a collateralized debt obligation and an investment
bank—the legal concepts of confidentiality and privilege are vitally
important. My advice for any financial institution is to improve its
understanding of how to keep things confidential and privileged,
and when to involve a lawyer. Developing sound practices for these
two concepts will reduce both costs and exposure.
John, what led you to conclude Alston & Bird was an appropriate
platform for your practice?
I was impressed with every aspect of the firm. Alston & Bird has a
sophisticated financial institutions practice, exceptional litigation
capability and a national footprint. I’ve been handling credit crisis
litigation since late 2006, and I could see that Alston & Bird was
uniquely positioned to service clients in that area. Since 2008,
and in particular in 2009, the needs of financial institutions have
undergone a shift that reflects the changing nature of the client’s
business. The loan and securitization origination platforms have
been transformed into distressed asset and workout groups, and
special servicers of commercial loans have seen a significant uptick
in defaults and workouts. I could see that my practice would mesh In the future, we will
quite well within the firm. Also, on a personal level, I knew I would see a much greater focus
feel comfortable here. I met 40 partners before I came here and
was favorably impressed. The Alston & Bird people across the table
were good, decent people, and impressive in their own right. And •••
when you combine that with the depth of talent, specifically in my
area, I knew this would be a great fit.
We felt the same thing. Our previous firm did not have either the
RMBS or CMBS experience, so that was really important to us.
And we held the class action expertise within Alston & Bird in high
esteem—Mark Vasco, Cari Dawson, Mike Kenny, Candace Smith,
Steve Collins, Johnny Stephenson, Chris Riley and others—all
We were also attracted to the national platform and capability that
Alston & Bird offered. In today’s business environment, many
financial services companies are looking to consolidate their legal
work in firms that operate in more places. The ability to project
ourselves into California, New York, Texas, D.C. and around the
country was really critical. It was just such a natural fit. It’s been
a great experience so far.
Talk a little bit more broadly about the things you’ve done outside
of financial services.
We’re involved in general complex commercial litigation as well.
Whether it’s a business tort or unfair competition matter, Matt
and I have a good bit of experience and a sizable practice. We
also deal with complex commercial disputes, sometimes in the
arbitration setting and sometimes in the North Carolina Business
Court setting, and we handle a lot of litigation in the soft IP space.
This isn’t as specialized as our financial services work, but it’s an
important aspect of our practice.
••• That’s right. In North Carolina, we’ve developed a general complex
The firm has a business litigation practice that runs a wide gamut. Over the past
five years, for example, roughly 20 percent of my work has been in
sophisticated financial telecommunications litigation. In addition, my practice involves
institutions practice, commercial foreclosures, guaranty litigation, very high-dollar trust
exceptional litigation and estate litigation and insurance coverage claims.
capability and a John:
national footprint. In addition to finance litigation, I also practice in the areas of
••• securities, insurance, construction, aviation, and oil and gas
litigation. Being in New York requires an international focus
as well, including international arbitration under the ICC. The
crash of the Concorde, for example, involved matters in Germany
and France. We were also recently retained by a Belgian industrial
company in connection with a lawsuit brought in New York by the
Republic of Iraq. I’ve worked on a number of suits out of London
involving structured investment vehicles and derivatives, and
complex, cross-border privilege issues. And, in South America,
I’ve been involved in oil and gas disputes between Chile and
Argentina, and an international arbitration dispute involving a
U.S. pharmaceutical company and its operations in Colombia.
Obviously our clients will benefit greatly from your presence at
Alston & Bird. Thanks for talking with me today.
Tr e n d
Déjà vu all over again: Bank oFFiCers anD
DireCtors PrePare For a rePlay oF litigation
that FolloweD the savings anD loan Crisis
l l l
Tloancurrentwhen 1,813 financial institutions failed. savings
financial crisis is unparalleled since the
have been 123 bank failures to date in 2009, in addition to the 26 Mary C. Gill, Partner
bank failures in 2008, with projections indicating that hundreds Securities Litigation
more bank failures may be on the horizon.2 Recent figures suggest email@example.com
that the current financial crisis may ultimately overshadow the
experience 20 years ago.3
In most instances, the failure of a bank is preceded by a variety
of regulatory mandates. These include heightened supervisory
initiatives, such as a board resolution or a memorandum of
understanding, as well as more substantive formal enforcement
initiatives, such as a cease and desist order that mandates steps the
bank must take to attain financial soundness and prompt corrective
actions if the bank continues to fail to comply. In general, these
directives impose additional requirements on the banks to raise
capital and place restrictions on lending activity. As a director of a Mark C. Kanaly, Partner
distressed bank, navigating through these troubled waters can be Financial Services & Products
treacherous and, unfortunately, the risk of litigation is high. firstname.lastname@example.org
The officers and directors of a failing or failed bank face scrutiny
by one or more regulators, but the most likely threat of litigation
is from the Federal Deposit Insurance Corporation (FDIC).
When a federally insured bank is closed, the FDIC is appointed
as conservator or receiver. The FDIC may then pursue a claim
against directors or officers of the failed financial institutions in an
effort to recoup losses to the bank. Of the financial institutions
that failed in the period between 1985 and 1992, the FDIC initiated
claims against the former officers and directors of 24 percent of
According to an FDIC Policy Statement, claims will not be brought Robert R. Long, Partner
against officers and directors “who fulfill their responsibilities, Securities Litigation
including the duties of loyalty and care, and who make reasonable email@example.com
business judgments on a fully informed basis and after proper
deliberation.”5 In general, actions were brought against officers
and directors during the savings and loan crisis where the FDIC
believed that there was evidence of (i) dishonest conduct or abusive
insider transactions; (ii) violations of internal policies, law or
regulations that resulted in a safety or soundness violation; or
(iii) failure to establish, monitor or follow proper underwriting
procedures, or heed warnings from regulators or advisors.6
••• In a replay of the earlier crisis, the FDIC has begun to investigate
The number of shareholder many of the failed banks and to make pre-litigation demands for
payment of civil damages against officers and directors of some
class actions filed against failed banks for losses incurred by the bank. There is no public
financial institutions source of information regarding the number of investigations
in 2008 was at an all- or subpoenas that have been issued by the FDIC. It is also too
early to determine how aggressive the FDIC will be in filing civil
time high, accounting for actions against officers and directors of failed banks. As noted in
54 percent of the market the FDIC Policy Statement, however, “the FDIC brings suits only
cap of all such lawsuits where they are believed to be sound on the merits and likely to be
cost effective.” Accordingly, in order to determine the ability of
filed against S&P 500 an individual to respond to a claim, if successful, it is routine for
companies. the FDIC to seek personal financial information from the officers
and directors as part of the investigation. In addition, the FDIC
••• typically sends its demand for payment of civil damages directly
to the D&O insurance carrier to provide the requisite notice under
the policy to trigger insurance coverage as a potential source of
recovery if liability is established.
A further source of litigation risk for officers and directors of banks
or holding companies are shareholder lawsuits. The number of
shareholder class actions filed against financial institutions in 2008
was at an all-time high, accounting for 54 percent of the market cap
of all such lawsuits filed against S&P 500 companies.7 This is the
highest percentage of any business sector, by a wide margin, in the
past eight years. Moreover, financial institutions were defendants
in 67 percent of the shareholder class action filings in the first
half of 2009.8 The shareholder plaintiffs typically allege that the
company’s stock price was inflated by falsely disclosed financial
reports that overestimated the value of real-estate-backed assets,
and that once the truth was revealed, it caused the stock price to
fall to the shareholders’ detriment.
With the heightened risk of litigation in the financial sector, there
are certain steps that counsel for bank officers and directors may
take to prepare for claims or litigation that may follow. Meeting
with the board members and reviewing the examination reports
and other documents available while the bank remains open will
provide insight into the specific issues that confront the board
of directors and management. It is important that documents
pertaining to the bank are preserved and counsel may give guidance
on specific document preservation procedures.
In this environment, it is especially important for bank officers and
directors to have a clear understanding of the scope and potential •••
limitations of their D&O insurance policies. There are a variety of The waves of litigation
clauses that may impact the availability of insurance coverage in
these cases. In the wake of the savings and loan crisis, insurance from the financial crisis
carriers began to include regulatory exclusions in D&O policies, will undoubtedly continue.
in an effort to reduce exposure to claims for civil damages and/or
penalties sought by the regulators.9 Bank directors and officers •••
will want to know whether their policy contains such limitations
and have sought legal counsel regarding the practical impact of the
limitations. Other provisions of the insurance policy may require
that certain action be taken to afford coverage. For example,
many policies require that the insureds furnish a “Notice of
Circumstances” under the policy, which is typically prepared by
counsel and provides a description of potential claims that may be
brought against the insureds. Such notices may provide coverage
under the policy that the directors and officers otherwise would
not have. Accordingly, directors and officers should seek counsel
to consider whether a Notice of Circumstances is warranted.
The waves of litigation from the financial crisis will undoubtedly
continue. Counsel for bank officers and directors can take
steps now to prepare for claims or litigation that may follow,
including (i) gaining an understanding of the particular issues
confronting the bank, through a review of the examination reports
and other documents available while the bank remains open;
(ii) a review of the D&O policies; and (iii) the preparation of a
Notice of Circumstances. There may be other steps that are also
appropriate at this juncture, depending upon the particular facts
and circumstances of the bank.
Between 1988 and 1992, there were 794 bank failures and 1,019 savings and
loan failures. Testimony of Donna Tanoue, FDIC Chairman, On Recent Bank
Failures and Regulatory Initiatives, Before The Committee on Banking and Finan-
cial Services, U.S. House Of Representatives, February 8, 2000.
The FDIC announced on August 27, 2009, that the number of financial
institutions on the “Problem List” had increased from 305 to 416 by the second
quarter of 2009. See FDIC Quarterly Banking Profile, Second Quarter 2009,
June 30, 2009.
According to a recent article relying upon statistics from the MIT Center for
Real Estate, commercial real estate has experienced a 39 percent decline in
prices from the peak period two years ago, which is much higher than the 27
percent real estate decline from the prior savings and loan crisis of the late
1980s and early 1990s. “Commercial Real Estate Crisis Threatens Recovery,”
Atlanta Journal-Constitution, September 15, 2009.
FDIC Financial Institution Letter (FIL-87-92), December 3, 1992.
Cornerstone Research, Securities Class Action Filing, 2008: A Year in Review.
Cornerstone Research, Securities Class Action Filings, 2009 Mid-Year Assessment.
The terms of these “regulatory exclusions” vary between policies and the
specific terms of the policy should be reviewed carefully.
AbouT The AuThorS
l l l
Mary C. Gill, Mark C. Kanaly and Robert R. Long are partners in the
firm’s Atlanta office and are part of its dedicated Officers & Directors
of Distressed Financial Institutions team, a cross-disciplinary group
comprised of members with substantial experience in representing
the financial services sector on transactional and regulatory
issues, as well as in matters involving bank officers and directors
in regulatory, securities and other corporate governance disputes.
The team has recently advised more than 20 distressed banks and
represents well over 100 bank officers and directors in regulatory
and shareholder matters, including in over 30 claims by the FDIC
brought after bank failures.
In addition to Ms. Gill and Messrs. Kanaly and Long, the team
includes John L. Latham, Tod J. Sawicki and Dwight C. Smith, III.
Tr e n d
how CaliFornia’s green Chemistry initiative
will Change the gloBal Consumer eConomy
l l l
In the fall of 2008, the California Environmental Protection
Agency (Cal/EPA) developed its Green Chemistry Initiative,
a six-point program with the audacious goal of fundamentally
transforming global consumer product manufacturing. Thus far, Maureen F. Gorsen, Partner
only two of the six program points have been enacted into law, but Environmental &
some observers think that Governor Arnold Schwarzenegger will Land Development
seek to solidify his green chemistry legacy and lead the passage of firstname.lastname@example.org
the remaining four initiatives during his final term in office.
As with any significant new regulatory program, industry watchers
are also interested in whether potential legal challenges will emerge
upon adoption of the initiative’s implementing regulations. Among
the issues are potential due process concerns that arise from reliance
on chemical information obtained from other nations, governments
and authoritative bodies; interstate commerce concerns related to
the program’s efforts to regulate the chemical industry beyond
California’s geographic boundaries; and the scope of liability and
enforcement with regard to manufacturers, suppliers and retailers,
both in and outside of California.
Why Is California Leading the Green Chemistry Revolution?
In the last decade, an extensive canon of thought and literature has Colin K. Kelly, Partner
been developed, focusing on a single theme—that we can design a Products Liability
new and safer way to make the products we all use. These authors email@example.com
all say, in essence, that if companies think more strategically about
the ingredients, the molecules and the design of their products,
then there will not be as pressing of a need for environmental
laws to ward off toxins in the air, water, land and people because
the products will be “benign by design.” California, true to its
reputation as an early adopter, is the first state to embrace these
ideas in policy and in law through the Green Chemistry Initiative.
At its heart, green chemistry seeks to head off the drumbeat of
consumer angst about the increasing number of public health and
environmental problems associated with ingredients in everyday
consumer products. The Green Chemistry Initiative seeks to
gather information and provide tools that can help companies
accelerate the switch to safer substitute materials in their products.
Alzheimer’s, autism, cryptochordism, infertility and certain
cancers have risen at alarming rates over the last decade. Experts
disagree about the various causes behind the dramatic rise of these
conditions, but to the extent that a chemical or group of chemicals
becomes a factor in the harm, the initiative will eliminate its use
in favor of a safer substitute. Prior to the initiative, California’s
In the last decade, efforts to ban certain toxic substances created several unintended
an extensive canon consequences. California’s ban on lead in gasoline led to the
wide-spread substitute MTBE, a potential human carcinogen.
of thought and literature
This “regrettable substitution” caused California to trade in its air
has been developed, focusing pollution problem for a far worse water pollution problem.
on a single theme—that
we can design a new and What Does the California Green Chemistry Initiative Call For?
safer way to make the The California Green Chemistry Initiative calls for six main policy
and law changes:
products we all use.
1. Expand pollution prevention and product stewardship
••• programs to more business sectors, to refocus additional
resources on prevention rather than clean up.
2. Develop green chemistry workforce education and training,
research and development and technology transfer through
new and existing educational programs and partnerships.
3. Create an online product ingredient network to disclose
chemical ingredients for products sold in California, while
protecting trade secrets.
4. Create an online toxics clearinghouse—an online database
of chemical toxicity and hazards populated with the
guidance of a green ribbon science panel to help prioritize
chemicals of concern and data needs.
5. Accelerate the quest for safer products, creating a
systematic, science-based process to evaluate chemicals
of concern and alternatives to ensure product safety and
reduce or eliminate the need for chemical-by-chemical
6. Move toward a cradle-to-cradle economy to leverage market
forces to produce products that are “benign-by-design,” in
part by establishing a California green products registry
to develop green metrics and tools (e.g., environmental
footprint calculators, sustainability indices) for a range of
consumer products and encourage their use by businesses.
Initiatives four and five have moved from policy to law with
the passage of two bills signed by Governor Schwarzenegger in
September 2008. Cal/EPA is busy creating the templates and
requirements for an online toxics clearinghouse—a “Facebook”
for chemicals. The department within Cal/EPA assigned to •••
implement the program—the Department of Toxic Substances The advantage of
Control (DTSC)—is busy developing the alternatives analysis
regulations that it will require of product manufacturers selling California’s Green
goods in California. Both efforts can be followed at www.dtsc. Chemistry Initiative is that
ca.gov. it helps to level the playing
field for companies who
How Will You Know If Your Product Is “Green” and How Will
That Knowledge Give You a Market Advantage? sell/import products in
Advertisements are filled with pictures of leaves, trees, windmills
California by creating an
and the ubiquitous picture of two hands cupping a tiny sprout. objective “environmental
Many companies are making bold claims that they are “green.” footprint criteria” . . .
Consumer and environmental groups have been threatening
companies with lawsuits if they make false claims about the •••
“greenness” of their products and/or manufacturing processes—
referred to as “greenwashing.” Will switching from petroleum-
based ingredients to citrus-based ingredients qualify a consumer
product company as being green? Right now there is no objective
way to measure whether a company or its products are in fact green.
The advantage of California’s Green Chemistry Initiative is that
it helps to level the playing field for companies who sell/import
products in California by creating an objective “environmental
footprint criteria” for products based on the lifecycle of the product.
Companies that have already made investments in sustainable
practices or environmental improvements will be rewarded with a
lower environmental footprint score than companies that have not
made those investments. It will also give claims of greenness an
objectively verifiable measurement system and, hence, a competitive
advantage similar to the LEED system for green buildings.
How Do You Prepare and Get Ahead of the Green Chemistry
Know the ingredients in your products. To the extent that you already
know all the various chemical ingredients in your products, you are
way ahead of the game. If you do not, then you should look at your
supplier agreements and push for a full disclosure of ingredients. If
you do not spend the time now to find out what materials are being
used along your supply chain, someone else will and a mandatory
race to find an acceptable substitution may be expensive.
Stay abreast of emerging chemicals of concern. There are many
Web sites, blogs and listservs you can join to learn about emerging
••• chemicals of concern. For instance, a weekly perusal of Web sites
To the extent that you for the Environmental Working Group, the Environmental Defense
Fund, the Breast Cancer Fund and Environmental Health News
do not know your should alert you to chemicals that are concerning these groups.
ingredients, are not aware
Regularly test your products for emerging chemicals of concern and
of potential concerns and always be on the lookout for safer alternatives. This may be a
have not investigated chemical substitution or it may be a product design or materials
change that eliminates the need for the chemical. To the extent
alternatives, you may
that you do not know your ingredients, are not aware of potential
become an early guinea concerns and have not investigated alternatives, you may become
pig for Cal/EPA under an early guinea pig for Cal/EPA under its new green chemistry
its new green chemistry
AbouT The AuThorS
l l l
Maureen F. Gorsen, the former director of the California
Department of Toxic Substances Control and former general coun-
sel of the California Environmental Protection Agency, is a partner
with Alston & Bird and focuses her practice on environmental law.
Colin K. Kelly is a partner in the firm’s Products Liability and
Litigation and Trial Practice Groups in Alston & Bird’s Atlanta
office. Mr. Kelly has defended multiple Fortune 500 companies
in connection with a variety of products liability, toxic tort and
complex commercial litigation matters and has prepared more
than 100 cases for trial in more than 10 different states. Mr. Kelly
has also spoken and written on a variety of toxic tort and product
liability issues nationally.
Tr e n d
Ricci v. DeStefano: what Does the suPreme
Court’s DeCision mean For emPloyers?
l l l
In Ricci v. DeStefano, 129andCt. 2658 (2009), the United States
Supreme Court addresses
attempts to reconcile what the
majority of the Court views as the inherent tension between the
disparate treatment and disparate impact provisions of Title VII, Jesse M. Jauregui, Partner
42 U.S.C. § 2000e, et seq. Since it was issued on June 29, 2009, Labor & Employment
the Court’s opinion has garnered a great deal of attention not only firstname.lastname@example.org
because it reversed the ruling of then-pending Supreme Court
nominee Sonia Sotomayor and her colleagues on the Second Circuit
Court of Appeals, but also because it left many open questions as
to how the principles underlying the opinion will be applied,
and potentially expanded, in the future. This article explores the
Court’s opinion and examines the uncertainties employers now
face in applying the Court’s ruling to their employment practices.
In 2003, New Haven firefighters took standardized written and oral
examinations to determine eligibility for promotions to lieutenant
and captain. The city had hired a third-party company to develop
the exams, assemble the exam assessors and process the results.
With respect to the captain’s exam, the results demonstrated
Erin L. Connolly, Partner
large disparities in performance along racial lines, with the black
Labor & Employment
applicants’ pass rate at approximately 37.5 percent while the
white applicants’ pass rate was approximately 64 percent. On the
lieutenant’s exam, the black applicants’ pass rate was approximately
31.6 percent while the white applicants’ pass rate was approximately
58.1 percent. Under the city’s “Rule of Three,” which provided that
it could only promote from those applicants with the three highest
scores on the exam, no black applicants could be considered for
immediate promotion to either lieutenant or captain.
As a result of the statistical disparity in the pass rates of white and
minority firefighters, a heated public debate arose as to whether
the exam results should be certified or discarded. Ultimately,
New Haven’s Civil Service Board deadlocked in a 2-2 vote and
refused to certify the results based on a concern that the exam had
a disparate impact on minorities and, therefore, would expose the
city to potential liability under Title VII.
Seventeen white firefighters and one Hispanic firefighter who were
to be considered for promotion based on the exam results sued
the city. They claimed that by discarding the results, the city had
discriminated against them in violation of the disparate treatment
provisions of Title VII and the Equal Protection Clause of the
14th Amendment. The city prevailed on summary judgment at
the District Court level, and the Second Circuit Court of Appeals
affirmed. The firefighters then appealed the case to the United
States Supreme Court.
In arriving at its decision, The Supreme Court Decision
the Court applied a new In a 5-4 ruling, the Supreme Court reversed the rulings of the
“strong basis in evidence” lower courts and held that New Haven’s decision to discard the
test results violated Title VII.1 In arriving at its decision, the Court
standard to determine applied a new “strong basis in evidence” standard to determine
when an employer may when an employer may engage in intentional disparate treatment
engage in intentional in order to remedy a perceived disparate impact violation. Ricci,
129 S. Ct. at 2675-76. Specifically, the Court explained that in
disparate treatment in order to justify discarding the exam results—i.e., to engage in the
order to remedy a perceived disparate treatment of the white and Hispanic firefighters—the city
disparate impact violation. must have had a “strong basis in evidence” to believe that had it not
done so, it would have faced liability under Title VII’s disparate
••• impact provisions. Id.
Justice Kennedy, writing for the majority, ruled that the city’s
rejection of the exam results based solely on the statistical disparity
could not satisfy the new standard. The Court pointed out that
there was no genuine dispute as to whether the exams were
job-related and consistent with business necessity, nor was there
sufficient evidence that the city had refused to adopt an equally
valid, less discriminatory alternative that served the city’s business
needs. Id. at 2678-79. According to the Court, “[f]ear of litigation
alone cannot justify an employer’s reliance on race to the detriment
of individuals who passed the examinations and qualified for
promotions.” Id. at 2681.
In the dissent, written by Justice Ginsburg on behalf of herself
and Justices Stevens, Souter and Breyer, Ginsburg noted that the
Court left out important facts in determining whether the city met
the “strong basis in evidence” standard, emphasizing evidence of
multiple flaws in the exams, as well as expert testimony that there
were other better, less-discriminatory selection methods that the
city could have utilized. Id. at 2690. Additionally, though they
believed that the city had met the newly articulated standard, the
dissenting justices also believed that the standard was too strict
and that a less strict “good cause standard” was more appropriate.
Id. at 2702. Ultimately, Justice Ginsburg opined that the Court’s
decision would not have “staying power.” Id. at 2690.
Justices Alito and Scalia wrote separate concurring opinions. In
Justice Scalia’s concurrence, he noted that even though the Court
did not have to address the Equal Protection Clause issue, it
inevitably would face the question of whether, or to what extent,
the disparate impact provisions of Title VII are consistent with the
Constitution’s guarantee of equal protection. In Justice Alito’s . . . although the Ricci
concurrence, with which Justices Scalia and Thomas joined, case did not involve an
he addressed some of the dissent’s major points by arguing that
even if the city had met the “strong basis in evidence” standard,
affirmative action program,
the firefighters likely would have had a strong argument that the many have characterized
city’s asserted reason for discarding the exam results was a pretext it as an affirmative action
for discrimination based on certain evidence of record in the case,
including evidence that an influential community leader lobbied
case . . .
city administration to scrap the test results and the city did so to •••
placate a politically important racial constituency. Id. at 2684-88.
Prospective Application of Ricci
The Court’s Ricci decision constitutes a significant development
in employment discrimination law, and going forward, it is likely
that its application and impact will reach beyond the narrow issue
of employee testing expressly addressed in the opinion.
One area of employment law that may be impacted by the Ricci
decision involves voluntary affirmative action programs. Indeed,
although the Ricci case did not involve an affirmative action
program, many have characterized it as an affirmative action case
because New Haven engaged in race conscious actions to achieve
further diversity in its workforce. In its decision, the Supreme
Court seemingly recognized the potential impact of its ruling on
affirmative action plans and stated as follows: “We do not question
an employer’s affirmative efforts to ensure that all groups have a
fair opportunity to apply for promotions and to participate in the
process by which promotions will be made. But once that process
has been established and employers have made clear their selection
criteria, they may not then invalidate the test results, thus upsetting
an employee’s legitimate expectation not to be judged on the basis
of race[.]” Id. at 2677.
Thus, in the immediate aftermath of Ricci, it appears that employers
may continue to develop policies and programs aimed at promoting
diversity in their workforces; however, if those policies and programs
as implemented result in the disparate treatment of a particular
racial group, employers should be prepared to face a more stringent
standard of review in justifying the necessity of the policies and
programs. Accordingly, now more than ever, it is imperative that
employers carefully examine all types of remedial measures they
. . . it is imperative use or intend to use to obtain a diverse work environment, and that
that employers carefully they document not only their implementation of those measures,
but also the reasons why they feel those measures are necessary.
examine all types of
remedial measures they The scope of the Ricci decision’s impact also may extend to
reduction-in-force (RIF) analyses. Often employers faced with the
use or intend to use to difficult task of laying off employees attempt to reduce exposure
obtain a diverse work to discrimination claims by engaging in pre-RIF statistical testing,
environment . . . which is used to determine whether there will be any unfavorable
statistical disparities among protected groups. If such disparities are
••• discovered, the employers may choose to reconfigure their selection
criteria to obtain a more favorable statistical result.
In the wake of Ricci, however, employers should be mindful that
if statistical analysis yields unfavorable results against a protected
group, they may expose themselves to liability if they reconfigure
their criteria to obtain a more desirable result. In order to justify
such a reconfiguration, Ricci suggests that employers must be able
to demonstrate that they had “a strong basis in evidence” to believe
that the initial selection was unlawful and disparately impacted
a protected group—and presenting evidence of the results of the
statistical analysis alone may not suffice.2
Many people will be watching the development of the Ricci
jurisprudence over the next several years to see whether it is
expanded as contemplated above, or whether it indeed lacks
“staying power” as Justice Ginsburg surmised. While the
Ricci decision favored the firefighter-employees, the decision’s
immediate impact is to provide employers with greater guidance
and arguably greater protection against disparate impact claims.
In the meantime, however, the best advice for employers is to
make certain that all employment-related decisions are carefully
analyzed, well-documented and premised upon specific and precise
job-related criteria. If and when unanticipated disparities arise
as a result of an employment test or some other selection device,
being armed with evidence of a well-documented, well-reasoned
decision will be imperative.
Because the resolution of the Title VII issue granted the firefighters the relief
they sought, the Court did not reach the Equal Protection Clause issue.
It is worth noting that the “strong basis in evidence” standard is taken from a
reduction-in-force case applying the Equal Protection Clause of the Four-
teenth Amendment. See Wygant v. Jackson Bd. of Education, 476 U.S. 267
AbouT The AuThorS
l l l
Jesse Jauregui is a partner in the Los Angeles office and focuses
his practice on employment law and litigation as well as
telecommunications law. Mr. Jauregui has significant experience
handling employment matters for both private and public entities
and provides advice and counsel to both. Mr. Jauregui is a former
city attorney and has been special counsel to various municipalities
in Southern California. Mr. Jauregui was recently named a
Southern California “Super Lawyer” for 2010 and is a member of
the Labor and Employment section of the State Bar of California.
Mr. Jauregui was a recent co-presenter for a BNA Webinar on
the Ricci v. City of New Haven decision and its implications for
Erin Connolly, a partner in the firm’s Los Angeles office,
focuses her practice on labor and employment law. In addition
to litigating both single-plaintiff and class-action employment
claims, Ms. Connolly has substantial experience in prosecuting
and defending actions involving claims for breach of restrictive
covenants, breach of fiduciary duties and duties of loyalty, tortious
interference with business relations, unfair competition and trade
secret misappropriation. Ms. Connolly also regularly assists clients
in connection with the drafting and negotiation of employment
agreements, separation agreements and restrictive covenant
Tr e n d
CaliFornia aPPellate Court DeParts From
ninth CirCuit By aPPlying the FeDeral
government ContraCtor DeFense to state
ProDuCts liaBility Claims Brought against
manuFaCturers oF government-ProCureD
Stephanie A. Jones, Partner l l l
On the helicopter heUnited States Marine Davidthe Virginia
April 27, 1983,
was co-piloting crashed off
coast during a training exercise. While Mr. Boyle survived the
impact of the crash, he drowned because he could not open the
escape hatch—which swung outward from the airframe—due
to the surrounding water pressure as the helicopter sank. His
father sued the helicopter manufacturer, alleging, among other
things, that the escape hatch had been defectively designed and
should have opened inward, rather than outward. This allegedly
defective design, however, had been approved by the government
and incorporated into the helicopter’s specifications.
The case made its way to the United States Supreme Court. There,
a majority of the Court held that liability for design defects in
military equipment cannot be imposed upon the government’s
J. Andrew Howard, Partner civilian manufacturers or suppliers where (1) the United States
Construction & approved reasonably precise specifications; (2) the equipment
Government Contracts conformed to those specifications; and (3) the manufacturer
email@example.com warned the government of any dangers in the use of the equipment
that were known to the manufacturer but not the United States.
Boyle v. United Technologies Corp., 487 U.S. 500 (1988). This case
is regarded as the seminal case outlining the requirements for what
is commonly referred to as the government contractor defense to
state law product liability actions.
While the factual circumstances in Boyle caused the Supreme
Court to frame the parameters of the defense in terms suggesting
its application only to manufacturers of military equipment, most
courts that have subsequently considered it draw no distinction
between manufacturers of military and non-military equipment.
These courts reason that the underlying rationale for the rule
applies equally to both. In other words, federal procurement
policies take precedence over state products liability claims in
certain circumstances where the allegedly defective product was
manufactured pursuant to government-approved specifications.
Accordingly, for all intents and purposes, the manufacturer
or supplier of such products is cloaked with the government’s
sovereign immunity and shielded from state tort liability.
While the vast majority of courts to consider the government •••
contractor defense apply it equally to military and non-military While the vast majority
manufacturers and suppliers alike, the U.S. Court of Appeals
for the Ninth Circuit has departed from the majority by resisting of courts to consider the
expansion of the doctrine to non-military procurements. However, government contractor
in a recent case styled Oxford v. Foster Wheeler LLC, 177 Cal.App.4th defense apply it equally
700 (2009), the California Court of Appeal diverged from Ninth
Circuit precedent by applying the federal government contractor to military and non-
defense to products liability claims originating from equipment military manufacturers
not exclusively manufactured for the military. and suppliers alike, the
In Oxford, defendant Foster Wheeler LLC manufactured boilers U.S. Court of Appeals
for the U.S. Navy during WWII pursuant to naval specifications
for the Ninth Circuit has
that required the use of asbestos. Plaintiff Oxford was exposed
to asbestos while performing repairs to those boilers, which were departed from the majority
installed in naval vessels in the mid-1960s. In 2005, Oxford was by resisting expansion of
diagnosed with mesothelioma and died later that year. In 2006,
the doctrine to non-
Oxford’s heirs sued Foster Wheeler, alleging products liability
claims. military procurements.
The jury in the trial court found in favor of the Oxford heirs on •••
one of their products claims, but also found that Foster Wheeler
had proved the elements of the federal government contractor
defense set forth in Boyle. The Oxford heirs appealed, asserting
that the boilers in question did not qualify as military equipment
for purposes of the government contractor defense even though
they were installed in Navy vessels. Their argument was based
in large part on the Ninth Circuit’s decision in In re Hawaii
Federal Asbestos Cases, 960 F.2d 806 (9th Cir. 1992), where that
court concluded that the concerns sought to be protected under
the government contractor defense, as proscribed in Boyle, do not
exist with respect to products readily available commercially. The
Oxford heirs argued that, under In re Hawaii Federal Asbestos Cases,
the fact that Foster Wheeler also sold similar boilers commercially
precluded application of the government contractor defense to their
products liability claim.
The California Court of Appeal disagreed, instead relying upon
an earlier California appellate decision that refused to find
the commercial availability of a product determinative on the
appropriateness of applying the government contractor defense.
Further, the Court of Appeal held that the trial court properly
recognized that the availability of the government contractor
defense, as articulated in Boyle, does not depend upon the
distinction between military and non-military products or parties,
Going forward, a but instead depends on whether the state law claim touches upon
government contractor a uniquely federal interest resulting in a significant conflict with
federal policy. In the end, the court in Oxford rejected the Ninth
sued in a California state
Circuit’s constrained application of the government contractor
court for claims alleging defense, concluding that Foster Wheeler would not be precluded
product defects would be from raising the defense when the case was remanded for retrial.
well advised to think twice The California Court of Appeal also adopted a test formulated by
before removing the case to the U.S. Court of Appeals for the Sixth Circuit for determining
the application of the government contractor defense to state law
federal court . . . claims for negligent failure to warn. Under current California law,
••• a contractor’s successful establishment of the three-part government
contractor defense will—in the appropriate case—insulate it
from design defect claims, but does not, by itself, also insulate the
contractor from claims for failure to warn. As to these latter claims,
to avail itself of the defense, a government contractor must prove the
following: (1) the government exercised its discretion and approved
the warnings at issue, if any; (2) the contractor provided warnings
that conformed to the warning approved by the government; and
(3) the contractor warned the government of the dangers inherent
in the equipment’s use about which the contractor knew, but the
government did not.
It is not often that a state court sitting within the jurisdictional
boundaries of a federal Circuit Court of Appeal departs from the
federal appellate court’s pronouncements on issues of federal
common law. Nevertheless, the court in Oxford extended the federal
government contractor defense to apply in cases alleging state
products liability claims for products not manufactured exclusively
for the military. Going forward, a government contractor sued in a
California state court for claims alleging product defects would be
well advised to think twice before removing the case to federal court,
because Oxford suggests that litigating the matter in state court
may provide broader defenses than those available in federal court.
AbouT The AuThorS
l l l
Stephanie Jones is a partner in the Construction & Government
Contracts Group in the firm’s Los Angeles office. She also maintains
a substantial Products Liability practice. She is a graduate of the
University of California and the University of San Diego Law
School. Ms. Jones has extensive experience with complex products
liability matters relating to manufacturing, chemical and building
products, as well as large scale claims litigation, on behalf of project
owners, developers and subcontractors, in both state and federal
courts. Ms. Jones also regularly advises her construction industry
clients on all manner of construction matters, including bid
disputes, claims avoidance and early resolution of disputes through
mediation and other alternative dispute mechanisms.
Andy Howard is a member of the firm’s Construction &
Government Contracts Group, where he specializes in helping
companies do business with federal, state and local governments.
Mr. Howard’s experience includes counseling clients on compliance
with, and in negotiation of, government contracts, representing
them in pre- and post-award bid protests and assisting them
in pursuing or responding to open records requests, and in the
prosecution and defense of claims involving federal, state and
local agencies. In addition to his government contracts practice,
Mr. Howard regularly advises owners, developers and contractors in
all manner of construction matters, including mediation, arbitration
and litigation in the state and federal courts. Mr. Howard is a
frequent author and lecturer in the fields of construction and
government contracts, and is an active member of the American
Bar Association’s Public Contract Law Section and Forum on the
Construction Industry, where he serves on the Steering Committee
for Division II.
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