SEC Disgorgement Constitutes a Penalty – How Far Will the Argument Go?

On June 5, 2017, Justice Sotomayor delivered the unanimous opinion in Kokesh v. SEC, 2017 U.S. LEXIS 3557 (June 5, 2017), holding that disgorgement collected by the Securities and Exchange Commission (SEC) constitutes a “penalty” under 28 U.S.C. §2462,[1] and thus subject to a five-year statute of limitations. In a relatively short, but thorough opinion, the Court overturned a Tenth Circuit decision finding that disgorgement was not properly characterized as a penalty within the federal statute and therefore not subject to the limitation period.

In the underlying case, the SEC sought civil monetary penalties, disgorgement, and an injunction barring Charles Kokesh, the owner of two investment-adviser firms, from violating securities laws in the future. After a 5-day trial, a jury found that Kokesh’s actions violated various securities laws. As to civil penalties, the district court determined that the 5-year limitations period precluded any penalties for misappropriation of funds prior to October 27, 2004 (i.e., prior to the date the Commission filed the complaint), but ordered a civil penalty of $2.3 million for the amounts Kokesh received during the limitations period. Regarding the Commission’s request for a $34.9 million disgorgement judgement ($29.9 million of which resulted from violations outside the limitations period) the court agreed with the Commission that because disgorgement was not a “penalty ” within the meaning of §2462, no limitation period applied. The court thereafter entered a disgorgement judgment in the amount of $34.9 million. On appeal, the Tenth Circuit affirmed, agreeing with the district court that disgorgement was not a penalty or a forfeiture, and therefore, the statute of limitations did not apply to the SEC’s disgorgement claims.

Thereafter, the Supreme Court granted certiorari to resolve disagreement among the Circuits regarding whether disgorgement claims in SEC proceedings were subject to the 5-year limitations period.  Applying legal principles governing the interpretation and meaning of a “penalty,” the court articulated three reasons why it concluded that SEC disgorgement constituted a penalty within the meaning of §2462. First, SEC disgorgement is imposed by the courts as a consequence for violating “public laws.” Second, SEC disgorgement is imposed for punitive purposes. Third, in many cases SEC disgorgement is not compensatory. Thus, the Court reasoned that SEC disgorgement “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”

Since the Kokesh decision arose out of an SEC enforcement action, its impact will likely be seen in how the SEC chooses its targets for future enforcement actions. It remains to be seen, however, whether similar arguments that disgorgement is a penalty will be raised in other contexts. For example, the issue is often raised in insurance coverage disputes between insurers and insureds, as claims seeking disgorgement are generally not covered. Whether courts will be receptive to similar arguments in other contexts is an area insurers and their counsel should continue to monitor.

[1] 28 U.S.C. §2462, applies to “any action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary of otherwise.”

What is the Impact of the Financial Choice Act on Small Business? It depends on who you ask.

The House of Representatives passed legislation this month aimed at erasing several key provisions of the 2010 Dodd-Frank Act. The Financial Choice Act (the Act), if enacted, would bring vast changes to the financial regulatory system. Proponents of the Act claim it will benefit small businesses, resulting in job growth. On its website, the Financial Services Committee cites President Obama’s Small Business Administration Director as stating that Dodd-Frank’s regulations hurt small business lending because “[s]mall banks have been laden with excessive costs and confusion from overlapping regulations…”[1]

The Act seeks to increase lending to small businesses by exempting smaller financial institutions from a number of regulatory requirements. Under one component of the Act, banks with a leverage ratio of 10% or more would be exempt from a number of regulatory requirements. However, critics of the Act are concerned that a 10% leverage ratio may be insufficient to avert another financial crisis.

Critics further point out that much of the regulation targeted by the Act is inapplicable to community banks. Of the 5,000 small banks classified as “community banks” by the FDIC, only six are subject to the Dodd-Frank stress tests that apply to banks with over $10 billion in consolidated assets. As such, the Act may not do enough to alleviate the pressures from regulatory requirements felt by small banks.

Further, Dodd-Frank may have little or nothing to do with the trend of small banks closing or being acquired by larger banks.[2] Instead, this is a trend that has been ongoing for decades and is likely the result of broad macroeconomic trends rather than government regulation.

Nonetheless, small banks appear to be strong proponents of the Financial Choice Act. Many have vehemently complained that Dodd-Frank has “strangled their business with needless paperwork and data collection.”[3] In a New York Times article discussing the impact of the Act, John M. Barrett, Chief Executive Officer of Citrus Bank in Tampa, is quoted as saying that the Dodd-Frank “[r]ules were meant to placate some bureaucrat in an ivory tower in Washington, D.C.” The general consensus among small banks, then, is that the Financial Choice Act would provide some relief from the current regulations.

If smaller banks believe that the Financial Choice Act would be beneficial for their business, then perhaps this is the strongest indicator that enactment of the Act would provide benefits to all small business.

[1] A small or community bank is generally defined as one with less than $1 billion in total assets.
[2] Akshat Tewary, The Choice Act is Not a Community Banking Bill, American Banker, June 15, 2017.
[3] Alan Rappeport, Bill to Erase Some Dodd-Frank Banking Rules Passes in House, The New York Times, June 8, 2017.

Literal Interpretation – Not Always Black and White?

In Atlasnavios-v-Navigators Insurance, the Court of Appeal (the highest court within the Senior Courts of England and Wales) found that Insurers were entitled to rely on a literal interpretation of a standard war risks exclusion to deny coverage for the detainment of a vessel, despite the fact that the detainment was caused by a “malicious act,” which was itself a covered peril.

In August 2007 a routine underwater inspection by divers discovered 132 kg of cocaine strapped to the hull of the vessel “B Atlantic” in Venezuela. The vessel was detained by the Venezuelan authorities, and ultimately abandoned to the Court.

The ship owners presented a claim to their Insurers for the total constructive loss of the vessel on the basis that the detainment constituted a malicious act. Insurers declined cover, relying on the standard war risk exclusion in the ship owner’s policy to exclude losses from “arrest restraint detainment confiscation…by reason of infringement of any customs or trading regulations.”

The Court at first instance found in favour of the ship owners. Insurers appealed.

The Court of Appeal overturned the lower Court’s decision, holding that the loss suffered by the ship owners was caused by a combination of two separate proximate causes, one that was covered (the concealment of drugs on the vessel by a third party) and one that was excluded (the detainment of the vessel by reason of infringement of any customs or trading regulations).

It was common ground that the act of concealing the drugs constituted a malicious act. However, this act alone would not have caused the ship owners to suffer a loss had the ship not then been detained. Although the concealment was a covered peril, the subsequent detention was not. Therefore Insurers were not liable to pay for the loss of the vessel.

The Court of Appeal commented that the war risk exclusion should not be read as being subject to any “implied limitation” as had been imposed by the lower Court; to do that would be writing words into the policy that were not there. Exclusions must, the Court of Appeal held, be given a ‘business-like’ interpretation, and Insurers’ literal interpretation of the exclusion was not sufficiently unbusiness-like for the Court to resile from it.

UK Conservative Party Pledges to Abolish Serious Fraud Office if Re-elected on 8 June 2017

In my C-Suite Risk Report posting in March, I discussed the UK’s Serious Fraud Office’s (SFO) investigation into Rolls-Royce (RR) and the UK Court’s approval of a Deferred Prosecution Agreement (DPA). As a result of that DPA, RR avoided prosecution, but paid £671m (approximately US $800m) to UK, US and Brazilian authorities in order to settle bribery and corruption allegations. The RR DPA was followed by another DPA in April involving supermarket/grocery giant Tesco who paid £129m (approximately US $165m) in what was the fourth DPA to be concluded since 2014. Because of reporting restrictions, the details of the Tesco DPA are not yet known. However, the investigation was connected to a well-publicised accounting scandal in 2014.

My March posting about the RR DPA concluded with a warning to the D&O insurance community that the number of DPAs was likely to carry on increasing at a quickening pace – the Tesco DPA is further evidence supporting this prediction. Further, I predicted that the implications of this trend for insurers was likely to include more investigations and related civil actions against the individuals involved.

However, the UK Conservative Party’s policy manifesto (a listing of its policies to be implemented if elected), published in May 2017, means this anticipated trend may not, in fact, emerge or at least not to the extent previously anticipated. If elected, the Conservative party has promised to bring the SFO under the remit of a newly established National Crime Agency (NCA). Commentators in the UK are noting that, if this occurs, it is reasonable to expect that the NCA will not demonstrate the same appetite, as the SFO has, for undertaking complex, multi-jurisdictional and often extremely expensive investigations like the ones involving RR and Tesco. The new agency would be operating with a much wider remit and may, instead, choose to focus its resources on other types of financial criminal activity where prosecutions are more easily achieved.

This issue is of course unlikely to be a relevant factor for the vast majority of the British electorate when it makes its final decision on 8 June 2017. For insurance market participants, however, the election result may potentially halt the anticipated trend for more DPAs in the future. Moreover, it is possible the ancillary and subsequent regulatory investigations and civil actions into individuals may not be the emerging trend that many in the industry had previously predicted.

In One Fell Swoop, Supreme Court Upends Quarter Century of Practice and Limits Proper Venue in Patent Disputes, Much to the Dismay of Patent Trolls

On May 22, the U.S. Supreme Court determined that a domestic corporation “resides” only in its State of incorporation for purposes of the patent venue statute, 28 U.S.C. § 1400(b). While seemingly an esoteric discussion of civil procedure, the decision will fundamentally alter the landscape of modern patent litigation.

To appreciate the significance of TC Heartland LLC v. Kraft Foods Group Brands LLC, a history lesson is in order.[1] In 1957, the Supreme Court reached a conclusion similar to that reached in TC Heartland – a domestic corporation resides only in its State of incorporation for patent venue purposes.[2] In 1990, however, the Federal Circuit changed the prevailing view of venue in patent disputes, ruling that Congressional changes to the general venue statute (28 U.S.C. § 1391(c)) in 1988 altered patent venue rules as well.[3] In short, since 1990, a corporation “resides” for patent venue purposes anywhere in which it is subject to the court’s personal jurisdiction. Given the broad scope of personal jurisdiction, a domestic corporation thus became susceptible to patent litigation almost anywhere in the country.

TC Heartland concluded that the Federal Circuit’s 1990 ruling was incorrect and reaffirmed the Supreme Court’s 1957 holding that “residence” for patent venue purposes was limited to the party’s State of incorporation. Between 1990 and 2017, however, the volume of patent disputes grew exponentially, and most of those disputes were governed by the Federal Circuit’s broader view of patent venue. And with this broader view, one district court emerged as the patent plaintiffs’ favored jurisdiction: the Eastern District of Texas.[4]

Why the Eastern District of Texas? Initially, in the 1990s, patent disputes were filed in the District because of its small criminal court docket.[5] With a smaller number of criminal cases – which typically take priority over civil disputes – the District began addressing patent cases with greater speed. The District also implemented various procedural reforms designed to streamline patent cases. And, much to the chagrin of defendants, patent cases in the District are heard by a small number of jurists who grant summary judgment at a rate far below the national average. As a result, this combination of factors created the most patentee-friendly court in the nation, and patent infringement plaintiffs, including the much-maligned patent trolls, took note.[6]

With TC Heartland, however, the Eastern District of Texas will no longer host a disproportionate number of patent disputes. Plaintiffs must now file suit in the jurisdiction in which the defendant is incorporated or where the defendant maintains “a regular and established place of business” (28 U.S.C. § 1400(b)). The business community will support the TC Heartland decision, as they will say the decision upholds the ideals of the patent system itself in protecting ideas and encouraging innovation. Some patent plaintiffs will dislike the decision, arguing that it unduly restricts plaintiffs’ choice of venue. No one, however, will weep for the trolls.

[1] TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341, slip op. (U.S. May 22, 2017).
[2] Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222, 226 (1957).
[3] VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1578-80 (Fed. Cir. 1990). The United States Court of Appeals for the Federal Circuit has exclusive jurisdiction over appeals from patent disputes arising in the federal district courts.
[4] Based on new patent cases filed in 2015, 43.7% of patent cases were filed in the Eastern District of Texas. No other district court was even close.
[5] The history of the Eastern District of Texas’ evolution into the hotbed of patent infringement litigation is taken from Kaleigh Rogers, The Small Town Judge Who Sees a Quarter of the Nation’s Patent Cases (May 5, 2016), available at https://motherboard.vice.com/en_us/article/the-small-town-judge-who-sees-a-quarter-of-the-nations-patent-cases.
[6] A “patent troll” is generally defined as a company that obtains the rights to one or more patents in order to profit by means of licensing or litigation, rather than by producing its own goods or services.

U.S. Supreme Court Holds Municipality Can Sue Banks for Financial Injuries Under the Fair Housing Act, but Whether There is Proximate Cause is for Another Day and Another Court

In a 5-3 decision in Bank of America Corp. et al. v. City of Miami, Florida (No. 15-1111 and No. 15-1112, May 1, 2017), the United States Supreme Court held that the City of Miami (“City”) was an “aggrieved person” authorized to bring suit under the Fair Housing Act (the “FHA”) for predatory lending by defendant banks to minorities, but remanded the case on the issue of proximate cause. The City had alleged that Bank of America and Wells Fargo (the “Banks”) violated the FHA in connection with their lending to African-American and Latino residents and neighborhoods. The City alleged the Banks lent to minorities on worse terms than equally creditworthy non minorities, as well as induced minority borrowers into defaults by failing to extend refinancing and fair loan modifications. This conduct purportedly led to a concentration of foreclosures and vacancies in minority neighborhoods, which: (1) impaired the City’s racial integration efforts; (2) diminished the City’s property tax revenue; and (3) increased the demand for the City to provide municipal services.

The district court had dismissed the City’s original complaint. After the United States Court of Appeals for the Eleventh Circuit reversed the lower court’s decision, the Banks filed petitions for writ of certiorari, which were granted by the U.S. Supreme Court. In deciding the case, the Supreme Court explored two issues: 1) whether the City is authorized to sue the Banks under the FHA; and 2) whether the City established proximate cause.

As to the first issue, the Supreme Court explained that the FHA forbids racial discrimination in real estate transactions, and that it permits any aggrieved person to file a civil lawsuit for an FHA violation. The statute defines an aggrieved person as someone who claims to have been injured by a discriminatory housing practice, and prior Supreme Court decisions have interpreted this definition broadly. The Supreme Court further explained that a plaintiff must show that the statute applies to the cause of action that he or she asserts. A statute is presumed to provide a cause of action to a plaintiff whose interests fall within the zone of interests the law seeks to protect. Here, the Supreme Court likened the City’s alleged financial injuries to those sustained by the Village of Bellwood in Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91 (1979). It explained that, in Gladstone, it allowed the Village of Bellwood to bring suit under the FHA for lost tax revenue and undermined racial balance. Thus, it had already ruled that the type of injuries the City sustained fell within the FHA’s zone of interests. As such, citing the principles of stare decisis, the Supreme Court held that the City is an aggrieved person authorized to bring suit under the FHA.

However, regarding the second issue, the Supreme Court found that the Eleventh Circuit erred in holding that foreseeability alone was sufficient to establish proximate cause under the FHA. Rather than mere foreseeability, the Supreme Court held that the FHA requires a direct relation between the injury asserted and the injurious conduct alleged. It declined to set forth the “precise boundaries of proximate cause under the FHA,” noting that no court of appeals has weighed in on the issue. It then instructed the lower courts to determine the “contours of proximate cause” and how it applies to the City’s claim. Thus, the Supreme Court vacated and remanded the Eleventh Circuit’s decision accordingly.

In a partial dissent, Justice Thomas, joined by Justices Kennedy and Alito, disagreed with the majority’s decision concerning the zone of interests. Justice Thomas explained that the City’s injuries were “marginally related to or inconsistent with the purposes” of the FHA, whose quintessential aggrieved person is a prospective homebuyer discriminated against during the home-buying process. According to Justice Thomas, nothing in the FHA suggests that, when Congress enacted the statute, it was concerned with decreased property values, foreclosures, urban blight, or strains on municipal budgets – the types of injuries the City allegedly sustained. For these reasons, he believed the injuries fell outside the zone of interests. As to the second issue, Justices Thomas, Kennedy, and Alito agreed with the majority that foreseeability alone was insufficient to establish proximate cause; however, they would have taken the additional step of finding that the City’s injuries were too remote to satisfy proximate cause here. Justice Gorsuch, the newest member of the Supreme Court, did not participate in the decision.

By holding that the City of Miami can sue banks under the FHA for the financial injuries it allegedly sustained, the Supreme Court’s ruling follows precedent and confirms the highest court’s broad interpretation of who is an aggrieved person under the statute. Notwithstanding this broad interpretation, its application may be limited, at least according to Justice Thomas. In Justice Thomas’s partial dissent, he opines that the majority decision “should not be read to authorize suits by local businesses alleging the same injuries,” such as restaurants, plumbers, and utility companies. He further comments that the decision does not give rise to a cause of action to neighboring homeowners whose houses have declined in value. Even if the majority’s conclusion is a narrow one as Justice Thomas suggests, it remains a significant one, especially for municipalities and banks.

False Claims Act Litigation and Implications for D&O and Professional Liability Insurers

Sedgwick attorneys Matthew Ferguson (NY) and Kimberly Forrester (SF) have published an article on the Federal False Claims Act (FCA) and its implications for D&O and professional liability insurers. The full article can be viewed here.

Among the issues discussed are the background and elements of the FCA and certain recent developments, including the increase in the number of cases filed by the U.S. Department Justice and substantial settlements against companies in a variety of different industries.

The article also references a number of recent insurance cases and coverage issues involving the FCA. These include potential limitations to the definition of “Loss” based on the damages available in FCA matters and cases addressing certain exclusions which have been considered in FCA claims, including regulatory, prior and pending and professional services exclusions.

Please contact Matthew (email: matthew.ferguson@sedgwicklaw.com; phone: 212-898-4006) or Kimberly (email: kimberly.forrester@sedgwicklaw.com; phone:415-627-3473 ) with any questions.

New York Steps Up To The Plate With Its Cybersecurity Regulations

Last fall, in response to the “ever-growing threat” posed to information and financial systems, the New York State Department of Financial Services (DFS) proposed cybersecurity regulations that were designed to “promote the protection of customer information and information technology systems of regulated entities.”  On December 28, 2016, DFS issued a press release effectively delaying the enforcement date to March 1, 2017. The postponement was the result of a notice and comment period allowing the effected industries to provide their comments on the hardships of abiding by the initial regulations. (The final version is codified under N.Y.C.R.R. Part 500)(the Rules). The Rules apply to “Covered Entities” which are defined to mean any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law of New York.  The final version provides greater flexibility and discretion for businesses regulated by DFS and allow for Covered Entities to tailor a cybersecurity program that fits their business needs.

The following is a summary of the significant changes that were adopted in the Rules that highlight the corporate responsibility, including Board involvement, for developing and maintaining a cybersecurity program and the reporting requirements associated with such a program:

  1. The final regulations incorporated significant flexibility with respect to the requirements of a Covered Entity’s cybersecurity program. It is now permitted to adopt a cybersecurity program maintained by an “Affiliate”—a person under its control—instead of establishing its own cybersecurity program, so long as the Affiliate’s program meets the requirements of the rules.
  2. A qualified individual must now be designated to oversee the implementation and enforcement of the cybersecurity program. This person must now be either a chief information security officer (CISO), or a comparable position. The Covered Entity may instead utilize a “Third-Party Service Provider” or an Affiliate to carry out these responsibilities, so long as someone in a senior position at the Covered Entity will supervise them. However, the Covered Entity itself must have sufficient, trained personnel to meet and execute the requirements of the cybersecurity program.
  3. Annual reports must be made to the Covered Entity’s Board of Directors, which includes information regarding the cybersecurity program and policy, any existing cyber threats, the state of the Information Systems, and any Cybersecurity Events that have occurred in the preceding year.
  4. The sections regarding penetration testing and vulnerability assessment were changed to require that Covered Entities conduct annual penetration testing—a change from quarterly testing—based on identified risk. In addition, Covered Entities are now required to conduct biannual vulnerability assessments. Further, monitoring and testing of their cybersecurity program must now be done “periodically,” as opposed to annually. This is consistent with the new requirement that Covered Entities set up written policies and procedures regarding risk assessments, and conduct risk assessments periodically instead of annually.
  5. Covered Entities are required to maintain a reduced amount of “audit trail systems.” (down from six to three) based upon the Covered Entity’s risk assessment. Systems are to be designed to detect “‘Cybersecurity Events’ that have a ‘reasonable likelihood of materially harming any material part of the normal operations of the Covered Entity.” A Covered Entity must retain audit trail system records for five years.
  6. The Rules also set forth extensive requirements regarding the role of Third Party Service Providers. Covered Entities must now implement written policies and procedures to ensure that system security and the security of Nonpublic Information is protected. The Rules outline the types of issues to be covered in these policies and procedures, including guidelines for due diligence, encryption use, and notice requirements in case of a Cybersecurity Event.
  7. Covered Entities are given some flexibility in reporting a “Cybersecurity Event” which means an event that would “have a reasonable likelihood of materially harming any part of the normal operation(s) of the Covered Entity[,]” and that it is the type of event that requires notice to a governmental body. Covered Entities must notify DFS immediately, but no later than 72 hours, after a finding that an event has occurred.

The Rules promulgated by DFS serve as an important reminder that senior management must continue to take cybersecurity issues seriously and implement the appropriate programs for their organizations. Ensuring compliance the Rules will help minimize liability exposures that can arise from data breaches. It remains to be seen whether other states will follow New York’s lead with its own regulations. Colorado, for example, will holding a hearing on May 2, 2017, on its proposed rule requiring entities with state securities licenses to conduct an annual assessment of their cybersecurity risks. Unlike the New York regulations, the proposed Colorado rule would apply to financial advisers and broker-dealers.

The author would like to acknowledge the contributions of Danya Ahmed, associate in the Sedgwick LLP New York Office, to this article.

Drastic Increase in Number of Bank Lawsuits at London’s High Court

According to a recent report from the Financial Times, big banks were named as defendants in 157 High Court lawsuits in the 12 months preceding September 2016, causing the number of lawsuits the world’s largest banks were forced to defend at London’s High Court to increase by a third from 115 the previous year.1 A study of court filings by the law firm RPC, which is headquartered in London, found the increase resulted from the continued fallout from the 2008 financial crisis, increased litigiousness on the part of companies, and a surge in the number of third-party litigation funders, who foot expensive legal costs in exchange for a share of any award.

RPC found that during the past five years, the Royal Bank of Scotland was a defendant in the highest number of cases with Barclays coming in second. Cases against the banks include allegations relating to Libor and mis-selling of hedging products.

RPC banking disputes partner Simon Hart said, “The number of claims against banks over the past five years shows the sheer impact of the credit crunch on the litigation market. Litigation was slow to arise in the immediate aftermath of 2008, but since then the banks have borne the brunt of the resulting disputes.” Hart noted that “many financial disputes are settled by banks before lawsuits are formally lodged.”

1. Croft, Jane. “Number of bank lawsuits at London’s High Court jump by a third.” Financial Times [London] March 27, 2017.

A Recent Decision by the Seventh Circuit that an Employer’s Sexual Orientation Discrimination Violates Title VII Bolsters Protection for LGBTQ Workers

On April 4, 2017, the Seventh Circuit, sitting en banc, held that an employer’s sexual orientation discrimination violates Title VII of the Civil Rights Act of 1964.[1] Following in the footsteps of the Second Circuit,[2] the Hively majority opinion provides three different views demonstrating why discrimination based on sexual orientation is illegal under Title VII. However, the opinion includes an equally cogent dissent (in line with the Eleventh Circuit’s conflicting opinion[3]) and, therefore, this issue is one that is likely to be resolved by the Supreme Court at some point in the future. A brief overview of the decision and its potential implications for corporate decision-making is discussed below.

Largely ignoring the legislative history of Title VII,[4] the majority found that just because “Congress may not have anticipated a particular application of the law cannot stand in the way of the provisions of law that are on the books.”[5] In turn, the majority looked to the preceding 20 year history culminating in the Supreme Court’s 2015 decision in Obergefell v. Hodges,

135 S.Ct. 2584 (2015) ending state bans on same-sex couples’ marriages. In the pivotal quote from the opinion, Chief Judge Diane Wood stated:

It would require considerable calisthenics to remove the “sex” from “sexual orientation.”…But this court sits en banc to consider what the correct rule of law is now in light of the Supreme Court’s authoritative interpretations, not what someone thought it meant, one, ten, or twenty years ago. [Citations omitted.] The logic of the Supreme Court’s decisions, as well as the common-sense reality that it is actually impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex, persuade us that the time has come to overrule our previous cases that have endeavored to find and observe that line.

In light of this finding, the majority’s opinion relies heavily on recent decisions to justify and contextualize its interpretation of Title VII’s protections for discrimination in the workplace.

On the other hand, in a concurring opinion, Judge Posner takes a pragmatic approach to Title VII, finding that evolving opinions and the “sexual revolution of the 2000s” require that courts not be held to be “obedient servants of the 88th Congress…”, noting that “[a]s society progresses, so must the courts.” [6]

In another interesting take, Judge Flaum’s concurrence turns on the finding that “[f]undamental to the definition of homosexuality is the sexual attraction of individuals of the ‘same sex.’” Thus, discriminating against Hively as a woman attracted to another woman is inextricably linked to her sex.[7]

Finally, the dissent by Judge Sykes is equally compelling. Her argument is simple. Title VII does not define discrimination based on sexual orientation, and there are various opinions distinguishing between the concepts of “sex” and “sexual orientation.” If there is to be protection for an employee’s sexual orientation in federal law, the solution for the dissenters is to pass a statute confirming same.

All four opinions provide a window into future jurisprudence in employment discrimination law. While it’s unlikely any progress will be made in the near future on a federal statute codifying protections for LGBTQ employees, a court could easily take three distinctly different approaches to further bolstering LGBTQ workplace protections. While a plain and narrow reading of the statute may disfavor these methods, it could prove to be a minefield in light of developments in state law, and likely most importantly, popular opinion on protecting LGBTQ workers.[8]

In light of the tide of public opinion, as well as the potential for media backlash (especially on social media) in response to incidents of LGBTQ employment discrimination, companies would be best served by not banking on Judge Sykes’ well-reasoned but unpopular opinion winning out in the Supreme Court. Although the Supreme Court once again has a conservative tilt given the confirmation of Justice Neil Gorsuch, a Supreme Court decision overturning Hively could result in the public outcry needed for the federal legislative push demanded by Judge Sykes. Therefore, to the extent companies have not revised their policies to date, it may be advisable to implement LGBTQ workplace protections. Strengthening workplace rights and protections for LGBTQ workers not only benefits these workers, but helps avoid any potential legal exposure.

[1] Hively v. Ivy Tech Community College of Indiana, No. 15-1720 (7th Cir. April 4, 2017).
[2] Mark Hamblett, “Second Circuit Wrangles with Workplace Discrimination Question,” New York Journal, Jan. 20, 2017, http://www.newyorklawjournal.com/id=1202777310509/Second-Circuit-Wrangles-With-Workplace-Discrimination-Question?slreturn=20170307173302.
[3] Evans v. Georgia Regional Hospital, et al, No. 15-15234 (11th Cir. March 10, 2017): http://media.ca11.uscourts.gov/opinions/pub/files/201515234.pdf.
[4] Hively, supra, No. 15-1720 at 8 (“In our view, however, it is simply too difficult to draw a reliable inference from these truncated legislative initiatives to rest our opinion on them.”).
[5] Hively, supra, No. 15-1720 at 9-10 (citing Oncale v. Sundowner Offshore Services, Inc., 523 U.S. 75, 79-80 (1998)).
[6] Hively, supra, No. 15-1720 at 34.
[7] Hively, supra, No. 15-1720 at 40.
[8] Lydia Wheeler, “Poll: Seven in 10 support LGBT nondiscrimination laws,” The Hill, July 1, 2015, http://thehill.com/regulation/246683-poll-7-in-10-americans-support-lgbt-nondiscrimination-laws.
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