In the challenge for one of two U.S. Senate seats, current state Rep. Gloria Johnson of Knoxville won yesterday's Democratic primary against three other contenders, including Marquita Bradshaw, who was the Democratic nominee for the seat in 2020. Johnson will face incumbent Republican Sen. Marsha Blackburn in the November election. The Tennessean reports on the race. Read more here about the primary results in the Tennessee delegation in the U.S. House of Representatives.

In a May 22 decision, Craddock v. FedEx Corp. Servs., Inc.,[1] the 6th Circuit strongly suggested that jury instructions in Title VII cases do not need to include the first three factors of the four factor McDonnell-Douglas framework. The court’s opinion, supported by a well-reasoned concurrence filed by Judge McKeague, concluded that the better practice is to avoid charging the jury using the full McDonnell-Douglas framework. According to the Craddock court, reciting the McDonnell-Douglas four factor test in jury instructions does not assist the jury and can potentially cause jury confusion. However, the court concluded that no error occurred in Craddock by including the full four factor McDonnell-Douglas test in the jury instructions.

The plaintiff in Craddock asserted that the third and fourth McDonnell Douglas factors contained in the jury instructions essentially confused the jury. The third and fourth questions on the verdict form asked:

3.  Did plaintiff prove by a preponderance of the evidence that the reason advanced by Defendant for her termination was a pretext for race discrimination? Yes or No. (Emphasis added).

To which the jury answered Yes.

4.   Did plaintiff prove by a preponderance of the evidence that she was the victim of intentional race discrimination when she was terminated? Yes or No.

To which the jury answered No.

Since the jury answered “no” as to the ultimate question of whether the plaintiff was the victim of intentional discrimination, the trial court determined that the plaintiff had not proven intentional discrimination on the basis of race and entered a judgment accordingly. The plaintiff contended that these instructions were essentially confusing and that by answering “yes” to the third question, the jury was finding in favor of the plaintiff on her claim for race discrimination. The 6th Circuit commented that the use of the McDonnell Douglas factors in jury instructions is unnecessary and could lead to jury confusion.[2] The court further noted that the verdict form appears to split the “ultimate question” of intentional discrimination into two distinct inquiries that unnecessarily overlap.[3] But the 6th Circuit affirmed the trial court finding there was not any plain error.[4]

Although the court found that the trial court did not commit reversible error, the opinion did include some considerations on the inclusion of the McDonnell Douglas factors in the future. First, if there was proof that a jury struggled with the instructions or verdict form in their deliberation, this could be the basis for a challenge if substantial prejudice could be shown. However, because this determination is subjective in nature and the fact that this jury did not struggle in their deliberation based on the inclusion of the McDonnell Douglas factors in the jury verdict form, does not mean that including the factors in the jury instructions or verdict form will never cause a jury to struggle.

The majority opinion highlighted the fact that instruction on the factors “can be inadvisable” and that specifically including the “first two steps risks confusing the jury.”[5] The court went on to note that several sister circuits have either cautioned against the inclusion of the factors or outright barred the inclusion of the factors in jury charges. The 5th Circuit has deemed the use of the factors in jury instructions “inappropriate and unnecessary,” while the 11th Circuit has outright demanded they not be used while instructing the jury.[6] The 2nd Circuit has characterized the factors’ inclusion in jury instructions as “not the proper vehicle for evaluating a case that has been fully tried on the merits.”[7] While the majority seemed to caution against the inclusion of the factors, McKeague, in his concurrence, noted that the inclusion was a “mistake.”[8]

McKeague opined that the factors “seldom help the jury decide the ultimate question” and that the “inclusion … might tend to confuse the issue”.[9] He noted that the factors were best served in the context of the pretrial phases of litigation and that the factors are not tailored to helping a jury in their determination of the ultimate question of intentional discrimination.[10] He did acknowledge that the third factor could be helpful to the jury, but hinted that it would only add minimal value.[11] Finally, McKeague highlighted the 6th Circuit’s “clear preference” for avoiding jury instructions that are excessively legalistic and misleading formulations of the McDonnell Douglas factors as they tend to confuse juries.[12]

So where does that leave the inclusion of the McDonnell Douglas factors in jury instructions moving forward? It seems that the McDonnell Douglas factors should not be included in full in the jury instructions, and that even inclusion in part might have little utility for the jury. Inclusion of the factors further complicates the issue and could circumvent the actual charge of the jury in determining the ultimate question of intentional discrimination. The majority opinion hints that the McDonnell Douglas factors should not be included, indicated by their citation to sister circuits guidance on the topic and their own determination of the pitfalls of inclusion. This, coupled with the concurrence of McKeague, suggests that the 6th Circuit is signaling district courts to avoid use of the factors to prevent confusion and streamline the deliberation of the jury.

Both the majority opinion and the concurrence emphasized that the plaintiff retains at all times the ultimate burden of persuading the trier of fact that the defendant intentionally discriminated against the plaintiff.[13] Removing at least the first two factors from the jury instructions could mitigate the risks associated with potentially confusing the jury as to the ultimate point of proving intentional discrimination and could eliminate any claim of “substantial prejudice” which therein would lend itself to further litigation and other potential issues for a client. As to the third factor (pretext), the jury instruction should only mention pretext and not say “pretext for discrimination.” This is because even if the plaintiff can establish that the proffered reason was not the actual reason for the termination or adverse employment action, that alone does not mandate a finding of intentional discrimination.[14]  

Rick Bennett is a partner in the Memphis Office of Phelps Dunbar LLP and focuses his practice on the representation of employers in all aspects of labor and employment law. He received his law degree from the University of Memphis Cecil C. Humphreys School of Law in 1988. He may be reached at rick.bennett@phelps.com or 901-259.7121. Rachel Ducker, a rising third year law student at the University of Alabama School of Law, contributed to the writing of this article.

In the March edition of this newsletter, attorney Scott Simmons previewed the case of Muldrow v. City of St. Louis, then pending before the U.S. Supreme Court. A few weeks later, the court issued its decision in Muldrow, overturning the 8th Circuit’s holding that the plaintiff alleging a violation of Title VII must, but could not, prove that her allegedly discriminatory transfer caused her a “materially significant disadvantage.”[1] Instead, the Supreme Court held that plaintiffs simply must show “some” harm respecting the terms and conditions of their employment,[2] thereby intentionally lowering the bar Title VII plaintiffs must meet to prove an adverse employment action.[3] 

The Supreme Court’s Decision

To recap, plaintiff Muldrow, a city police officer, sued the city under Title VII, alleging that she was transferred to a less desirable position against her wishes because of her sex. Muldrow’s rank and pay remained the same after the transfer, and she retained a supervisory position.[4] However, she asserted several reasons why the transfer was disadvantageous to her, including that it was less prestigious, more administrative, involved fewer networking opportunities and “important investigations,” had a less regular and desirable work schedule, and did not come with a work-provided car as her old position did.[5] 

Writing for a unanimous (in holding) court, Justice Kagan focused on the text of Title VII and specifically rejected what she considered to be the “heightened standard” that the 8th Circuit and other Courts of Appeal have placed on plaintiffs alleging claims of discriminatory job transfer. Historically, absent a change of pay or rank, it has been difficult for plaintiffs to prove that job transfer or reassignment amounts to an adverse employment action. However, the court noted that Title VII prohibits discrimination with respect to an individual’s “compensation, terms, conditions, or privileges of employment.”[6] Showing “some ‘disadvantageous’ change in an employment term or condition” made because of the employee’s sex is sufficient showing to meet the statutory requirements.[7] Citing sexual harassment precedent, the court reasoned that “[t]he ‘terms [or] conditions’ phrase … is not used ‘in the narrow contractual sense;’ it covers more than the ‘economic or tangible.’”[8]  To dismiss a case because a plaintiff cannot prove that the harm she suffered from the transfer was sufficiently “significant,” as the 8th Circuit did, “[o]r serious, or substantial, or any similar adjective suggesting that the disadvantage to the employee must exceed a heightened bar,” added requirements not borne by statute.[9] 

The court’s decision intentionally lowers the bar for proving the “adverse employment action” element of a disparate treatment claim when the alleged adverse action is transfer. Indeed, the court cites several appellate court decisions involving claims of discriminatory transfer in which the court held that the harm alleged by the plaintiff was not sufficiently significant to amount to an adverse employment action. The court then clarified that the new “simple harm” standard would necessitate different results in those cases.[10] 

Although the holding was unanimous, the three concurring decisions reflect a lack of unanimity on what the required showing of harm actually is or should be. Justice Thomas would require that a plaintiff prove “more-than-trifling-harm,”[11] while Justice Alito disparages the majority opinion for articulating a standard that is different from the Court of Appeals only in its terminology, rather than its actual substance[12]. And Justice Kavanaugh would do away with any “harm” standard; rather, he opines, “[t]he discrimination is the harm,” and the actual injury suffered is relevant only to proving damages.[13]

Impact of the Decision

Since the opinion was released in mid-April, and as of this writing, it has already been cited 49 times by federal courts of appeal and district courts. Despite Justice Alito’s misgivings, Muldrow will undoubtedly alter the way lower courts view discriminatory transfer cases, and likely other types of disparate treatment claims. 

The 6th Circuit, for example, had previously articulated the following standards for proving adverse employment action in a transfer case: “that an employee’s transfer may constitute a materially adverse employment action, even in the absence of a demotion or pay decrease, so long as the particular circumstances present give rise to some level of objective intolerability,”[14] and that “[a]n adverse employment action requires ‘a materially adverse change in the terms and conditions of [a plaintiff's] employment,’ such as a ‘significant change in employment status,’ and not including a bruised ego.’”[15] Both of these statements appear to contradict Muldrow.

In fact, the 6th Circuit has already applied Muldrow to repudiate the “intolerability” standard. In Milczak v. GM, LLC, a case brought under the ADEA, although the court affirmed the district court’s grant of summary judgment, it found that the plaintiff’s involuntary transfers and work reassignments constituted adverse employment actions where the plaintiff alleged that they impacted his opportunity for overtime, involved inadequate training, required him to supervise difficult employees, required working undesirable hours, failed to utilize his skills, and required him to work by himself.[16] Relying on Muldrow, the court held that two inter-departmental transfers constituted adverse employment actions, even while holding his allegation that he received lower raises and bonuses did not. This case demonstrates that, in the aftermath of Muldrow, courts will view discriminatory transfer claims more favorably than they did previously.    

In stating that the burden of proving that an “adverse employment action” occurred should not be onerous, the Supreme Court also likely impacted the way non-transfer discrimination cases will be analyzed in the future. The court specifically distinguished Muldrow’s case from the “materially adverse,” reasonable person standard adopted in Burlington Northern & Sante Fe Railway Co. v. White.[17] In White, the court held that Title VII’s anti-retaliation provision “covers those (and only those) employer actions that would have been materially adverse to a reasonable employee or job applicant,” meaning that “the employer's actions must be harmful to the point that they could well dissuade a reasonable worker from making or supporting a charge of discrimination.”[18] But while the anti-retaliation provisions are designed to prevent employers from taking actions to dissuade employees from asserting their rights under the law, “[t]he anti-discrimination provision ... simply ‘seeks a workplace where individuals are not discriminated against’” based on protected traits, and there is no intent to distinguish “between significant and less significant harms.”[19] It is easy to see how the holding and rationale of Muldrow can be used to establish that other employment actions short of discharge, pay decreases, and even job transfers constitute adverse employment actions giving rise to a federal discrimination claim.  

Of course, the extent of the harm suffered by employees alleging discrimination will still be an important factor in “weeding out” weak employment cases. Not only must employees still articulate “some harm” that disadvantaged them in the workplace, but, perhaps more practically, employees alleging discrimination will still need to effectively demonstrate harm in order to prove that damages are warranted. Still, the court’s decision in Muldrow sends a clear message that, in making out a prima facie case of discrimination under the federal employment statutes, the focus should be more on the discriminatory nature of the acts of the employer than on the extent of the harm suffered by the employee.

Maha M. Ayesh is the associate dean for academic affairs and an assistant professor at the Lincoln Memorial University (LMU) Duncan School of Law. Prior to joining LMU Law in 2020, she worked for several years as a plaintiffs-side employment litigator in Knoxville.

The U.S. Court of Appeals for the D.C. Circuit, in Stern Produce Company Inc. v. NLRB, No. 23-1100 (D.C. Cir. Mar. 26, 2024), reversed the Labor Board’s decision in Stern Produce Company, 372 N.L.R.B. No. 74 (Apr. 11, 2023), and rejected the Board’s holding that Stern Produce had engaged in unlawful surveillance by directing a driver to uncover his onboard camera.  In so doing, the Court was extremely critical of the Board saying:

The Board’s majority and its General Counsel …. should have brushed up on the ancient and wise legal doctrine de minimis non curat lex—that is, the law does not concern itself with trifles. Or should not.

Background

This case arose in July 2021, when Ruiz, a truck driver, parked his truck to take a lunch break and covered the truck’s inward-facing camera. Ruiz’s truck was equipped with one camera with a street view and another with a view of the driver and the truck’s cab. At some point, Ruiz’s manager sent Ruiz a text message: “ [Y]ou can’t cover the camera it’s against company rules.” Later, Ruiz saw the message and replied: “OK Bud muy [sic] lunchtime.”

The evidence showed the supervisor did not know that Ruiz was on a lunch break. There was no set time for drivers to stop for lunch. Ruiz testified that after this solitary incident, the manager “never once touched the subject ever again.”

The union filed a charge alleging Stern Produce had violated Section 8(a) (1) of the National Labor Relations Act. The Board’s General Counsel agreed and filed a complaint against the company for creating an impression of surveillance by texting about the camera rule.

In its defense, Stern Produce claimed it had treated Ruiz consistently with its policies and the manager’s message to Ruiz was merely reminding Ruiz of longstanding company policy. In its employee handbook, Stern Produce reserved the right to “monitor, intercept, and/or review” any data in its systems and to inspect company property at any time without notice. The handbook further instructed drivers that they “should have no expectation of privacy” in any information stored or recorded on company systems, including “[c]losed-circuit television” systems, or in any company property, including vehicles. And directly on point, the driver manual instructed drivers that “[a]ll vehicle safety systems, telematics, and dash-cams must remain on at all times unless specifically authorized to turn them off or disconnect.”

The Administrative Law Judge (ALJ) found that the message to Ruiz did not create an impression of surveillance, since the manager had engaged in “mere observation” in line with “longstanding company policies” about truck cameras.

The Board, however, reversed and found that because a supervisor’s texting employees was “out of the ordinary,” it amounted to illegal surveillance that could suppress union organizing activity. The Board cited a history of union support by the employee and criticized the supervisor’s failure to explain specifically why he had checked the camera footage when there was no driver or vehicle issue. The Board asserted that simply viewing the recording of an employee who broke a company rule and issuing discipline based upon it violated the NLRA even if the employee was not engaged in union advocacy or other protected activity.

D.C. Circuit’s Decision

On cross-petitions for review and enforcement of the Board’s decision, the D.C. Circuit rejected the NLRB’s analysis and supported the ALJ’s decision favoring the company.

The Court labeled the Board’s assertion that a supervisor’s single text message reminding an employee of the rule requiring that cameras be left uncovered could lead a reasonable driver to think he was being surveilled for union activities as “nonsense.” The Court stated:

A driver who knows he can be monitored (1) at any time, (2) without warning, and (3) for any reason, has every reason to expect to be watched while on the job—and, without more, no reason to assume that any particular instance of monitoring reflects an attempt by the company to weed out or suppress union activities.

The Court also criticized the Board for “altogether ignor(ing) the critical coercion element” that the plain text of Section 8(a)(1) requires to establish a violation. While the employee was a known union organizer, the Court said, that “cannot automatically render suspect any interaction between him and management in perpetuity.” The Court characterized the Board’s decision as “speculation” not based on “reasonable inferences” that could be drawn based on evidence in the case record. 

Conclusion

The D.C. Circuit’s decision in Stern Produce is one of several recent favorable outcomes for employers concerning the Board’s efforts to enforce their decisions. As the Board continues to veer left, pro-union, the federal courts can act as a barrier against overboard Board decisions.

Bruce E. Buchanan is special counsel at Littler’s Nashville office, where he practices management-side labor law and immigration law, focusing on immigration compliance. He may be reached at bbuchanan@littler.com or 615-514-4122.

Classic Domino’s ads warned to “Avoid the Noid.” Recently, the plaintiff’s bar has been the Noid for pizzerias and similar restaurants. These employers typically pay delivery drivers minimum wage, minus a tip credit, and reimburse the drivers for their vehicle costs. Not surprisingly, it is not practicable to reimburse exact costs. Instead, employers traditionally have used the IRS mileage rate for business deductions. More recently, though, some employers have turned away from the IRS rate, which as a national average overpays drivers in Tennessee, and instead used a regional rate. The plaintiffs’ bar has responded by filing Fair Labor Standards Act (FLSA) lawsuits alleging that employers have failed to reimburse drivers for their full costs, resulting in the drivers receiving less than minimum wage. Moreover, these disputes over pennies have morphed into six- and seven-figure litigation as FLSA collective actions.

On March 12, the U.S. 6th Circuit Court of Appeals in Parker v. Battle Creek Pizza, Inc., 95 F.4th 1009 (6th Cir. 2024), entered the fray by issuing a ruling in a consolidated appeal of two district court decisions. A Michigan court had granted partial summary judgment to employees, who argued that employers should use the IRS rate, while an Ohio court had granted partial summary judgment to employers, who maintained that reimbursing a “reasonable approximation” of costs sufficed.[1]  The 6th Circuit disagreed with both lower courts and remanded the cases for further proceedings. While the decision suggested one approach, the only thing certain going forward is that there will be more litigation.

I. The Parker Decision

A. The Parties’ Positions

The FLSA requires that the minimum wage of $7.25 per hour must be “paid finally and unconditionally or ‘free and clear’” of any “‘kick-back’” to the employer.[2]  Thus, if an employee must “provide tools of the trade,” the employer will violate the FLSA if “the cost of such tools purchased by the employee cuts into the minimum wage or overtime wages required ...”[3] With a minimum-wage employee, this means that the employer must reimburse 100% of the cost of such “tools.”[4]

The defendants, Battle Creek Pizza and Team Pizza, paid their drivers minimum wage, minus a “tip credit.”[5] Because the employees had to provide their own cars, they “incur[red] substantial expenses — for gas, maintenance, insurance, and so on, along with depreciation.”[6] Team Pizza reimbursed drivers $0.28 per mile, while Battle Creek Pizza reimbursed drivers $1.00 or $1.50 per delivery, depending on the timeframe.[7] The employers argued, and the Ohio court agreed, that they complied with the FLSA by reimbursing drivers for a “reasonable approximation” of their costs.[8] 

The plaintiffs, by contrast, argued that the “reimbursements fell short of the plaintiff’s expenses — thereby cutting into their statutory minimum wages.” Instead, they insisted, and the Michigan court agreed, that the employers should have used either actual costs or the IRS rate.

B. The 6th Circuit Rejected the Employers’ Position.

As a bad omen for the defendants, the 6th Circuit began by criticizing them for relying on “a daisy chain of regulations” to argue that “they can reimburse their drivers whatever the defendants themselves determine to be a reasonable approximation of the drivers’ costs.”[9] As a key link in the chain, the defendants cited § 778.217, which excludes the reimbursement of expenses from an employee’s “regular rate” so as not to inflate the employee’s overtime rate.[10] At the same time, § 778.217 “prevents an employer from deflating an employee’s regular rate” by exaggerating expenses and “disguising wages as reimbursements.”[11] To strike this balance, § 778.217 provides that “‘the actual or reasonably approximate amount’ of certain expenses ... will not be regarded as part of the employee’s regular rate[.]’”[12]

The employers tried to apply this “reasonably approximate amount” language from the overtime regulation to the minimum wage context, but the 6th Circuit declined to take this “inferential leap.”[13] The court first held that the language did not apply to vehicle costs even in the overtime context because “§ 778.217(b)(1) says that ‘[t]he actual amount’ — and not some reasonable approximation thereof — ‘expended by an employee in purchasing … tools’ will ‘not be regarded as part of the employee’s regular rate[.]’”[14] The court further reasoned that, while insufficiently reimbursing costs would not reduce the overtime rate, “when (as here) an employee’s hourly wage is the bare minimum wage, any underpayment of her cost of providing tools will cut inter her minimum wages.”[15]

The employers next urged the 6th Circuit to defer to a 2020 Department of Labor (DOL) Wage & Hour Division (WHD) Opinion Letter, which concluded that the “regulations permit reimbursement of a reasonable approximation of actual expenses incurred by employees for the benefit of the employer by any appropriate methodology; the IRS business standard mileage rate is not legally mandated by the WHD’s regulations  but is presumptively reasonable …”[16] The court, however, ruled that “the letter more briefly presents the same arguments we reject above, so we do not find it persuasive.”[17]

Lastly, the employers argued that “computing their drivers’ actual costs of providing vehicles for their work would be ‘impossible.’” The 6th Circuit, though, ruled that “the employers themselves created this situation:  first by paying their drivers the bare minimum wage; then by requiring them to provide their own vehicles to deliver pizzas on the defendant’s behalf; and finally by cutting it close (at least according to the allegations here) as to whether they have adequately reimbursed their drivers for the cost of providing those vehicles. Remove any of those elements and these cases likely do not get filed.”[18] Ultimately, the court concluded that the FLSA “specifies — to the penny — the minimum wage that an employer must pay ‘each’ of its employees. An employer must therefore pay each employee at least that amount, not a ‘reasonable approximation’ thereof.”[19]

C. The 6th Circuit Rejected the Employees’ Position.

The 6th Circuit next examined the plaintiffs’ insistence on the IRS rate. In rejecting this approach, the court stressed that “the Act’s specificity cuts both ways. For the plaintiffs too want to use an approximation — albeit a more generous one — for reimbursement of their vehicle costs.”[20] Notably, the IRS “rate is a nationwide average, which tends to overpay drives in states where gas taxes are relatively low (like Ohio) and underpay drivers where gas taxes are high (like California).”[21] Among other variables, the IRS rate overestimates depreciation costs for older vehicles.[22] Indeed, “the IRS rate does not even purport to measure the vehicle costs of any individual employee.”[23] The FLSA, though, “mandates that ‘each’ employee be paid at least the specified minimum wage. By its terms, that is an individual entitlement, not a generalized collective one.”[24]

Like the employers, the drivers asked the 6th Circuit to defer to an agency resource. Specifically, the DOL Field Operations Handbook (FOH) states that “the IRS rate ‘may be used (in lieu of actual costs and associated recordkeeping) for FLSA purposes.”[25] The FOH, however, “itself expressly disclaims any interpretive purpose.”[26]  In any event, the court ruled that the applicable regulation is “crystal clear” in requiring employers to reimburse employees for “the cost” of providing tools for work.[27] “What is difficult ... is calculating those expenses for a particular driver. But that is not because of any ambiguity in the regulation.”[28]

D. The Path Forward

Having rejected both parties’ positions, the 6th Circuit acknowledged that “the facts of this case present a dilemma.”[29] The “costs are undisputedly hard to calculate. Meanwhile, as in most cases, the plaintiff in FLSA cases bears the burden of proof. That combination of circumstances might allow employers to use lowball estimates of drivers’ costs and then leave it to them to prove those estimates wrong.”[30] Ultimately, the 6th Circuit remanded the case to the district courts, while suggesting that a burden-shifting approach may (or may not) work.

For example, the employee might present prima facie proof that a reimbursement was inadequate; the employer might then bear the burden of showing that the reimbursement bore a demonstrable relationship to the employee’s actual costs, and then the employee would bear the burden of proving the employer’s reasoning wrong. Or perhaps such an arrangement might not be appropriate. In any event the parties and the district courts might want to consider these or other ideas on remand.[31]

II. Choices for Employers

The 6th Circuit’s ruling in Parker leaves uncertainty not just for lower courts but also for employers. Tennessee employers could reduce litigation risk by reimbursing drivers based on the IRS rate, but that rate will exceed their actual costs, which could create a business disadvantage. Alternatively, an employer could use a regional model, which would save labor costs but increase litigation risk. Notably, lawsuits have even challenged regional rates calculated by Motus, the same company the IRS uses to compute the national rate. Ironically, the employee’s victory in persuading the 6th Circuit to focus on actual costs and an “individual entitlement” may undercut their class certification efforts. Finally, as additional protection, employers may consider requiring employees to sign arbitration agreements with class/collective action bars.

Brad Harvey is a member of Miller & Martin who focuses on labor and employment law and class action defense. He graduated from Duke University in 1991 and Vanderbilt University Law School in 1995. Harvey once came within an hour and two minutes of shattering the world marathon record.

[1] Id. at 1102.

In case you missed it, recordings from the recent TBA Business Law Forum are available on-demand as individual videos or in a convenient 1-Click CLE package. This package includes an interesting dual credit session for business lawyers that offers observations on professional responsibility and ethics using characters, transactions and business dealings from HBO Max's Succession. Another session features Tennessee Attorney General Jonathan Skrmetti, who provides an overview of important cases and developments that effect the practice of law, consumers and private business in Tennessee. Two sessions take a deep dive into the much discussed Corporate Transparency Act. The last session looks at the nonprofit and for-profit legal entities comprising the business of OpenAI (the developer of ChatGPT). As always, Business Law Section members receive a section member discount on both the individual videos and the 1-click package.

As the Jan. 1, 2025, reporting deadline of the Corporate Transparency Act (CTA) quickly approaches, many businesses across the country still have more questions than answers.

The CTA, which passed Congress in 2021 and went into effect on Jan. 1, requires businesses to report certain Beneficial Ownership Information (BOI) to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). FinCEN is responsible for managing the BOI database as part of its efforts to combat money laundering typically carried out through shell business structures. On July 9, during the House Financial Services Committee hearing, Treasury Secretary Janet Yellen indicated, “that the BOI database has received only about 2.7 million filings so far, only a fraction of the estimated 31 million businesses that must file by the deadline of Jan. 1, 2025.”[1] This significant gap highlights the urgency for businesses to comply with the CTA requirements to avoid potential penalties, including up to $500 per day of non-compliance.

Shortly after the CTA passed Congress in 2021, FinCEN previewed a set of three rules that would govern BOI requirements[2], access to the BOI database by government organizations[3], and align financial institutions’ requirements under the Bank Secrecy Act with the BOI database. The first two rules were issues by FinCEN in September 2022 and December 2023. As for the unreleased third rule, Yellen hinted during the same July 9 hearing that FinCEN is “hoping to get something out this fall." If business owners are lucky, they may have a complete set of rules prior to the Jan. 1, 2025, deadline.

Since its inception, many flaws have been highlighted, and concerns raised by opponents of the CTA. Arguably one of the greatest concerns is over the protection of the BOI database and fraudulent actors gaining access to the sensitive information reported. This concern is validated by an alert on BOI home page stating that, “FinCEN has learned of fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act.”[4] The alert illustrates these fraudulent attempts include request for payment to report BOI, or prompts recipients to click on a link or scan a URL to complete a “Form 4022.” According to the alert, FinCEN doesn’t even have a Form 4022 and there is no fee charged by FinCEN to report BOI.  

To address these concerns, businesses must be vigilant and ensure they are following the correct procedures for reporting BOI. It is crucial to verify the authenticity of any communication received regarding BOI reporting and to report any suspicious activity to FinCEN immediately. Additionally, businesses should stay informed about any updates or changes to the CTA requirements and seek guidance from legal and financial advisors to ensure compliance.

In conclusion, the approaching deadline for the Corporate Transparency Act presents a significant challenge for businesses across the country. With only a fraction of the estimated filings received so far, it is imperative for businesses to act swiftly and diligently to meet the reporting requirements. By staying informed, vigilant and proactive, businesses can navigate the complexities of the CTA and avoid falling victim to the early fraudulent CTA schemes or facing the stiff penalties for non-compliance.

Tommy Fridy is a corporate associate in the Memphis office of Wyatt Tarrant & Combs, LLP. He assists with counseling clients regarding mergers, acquisitions, dispositions and provides operational, regulatory and general transactional support. His practice also includes the development, leasing, acquisition and disposition of commercial real estate and lending.

[1] 2024 WLNR 11105643

In its legislative session in the spring of 2024, the Delaware General Assembly took up Senate Bill 313 (S.B. 313), proposed by the council of the Corporation Law Section of the Delaware State Bar Association. Among the items in the bill is a new corporate power, labeled for inclusion in the General Corporation Law of the State of Delaware (DGCL) as § 122(18). That new corporate power (together with amended introductory language to the entirety of DGCL § 122, is drafted as follows:

Every corporation created under this chapter shall have power, whether or not so provided in the certificate of incorporation, to:

Notwithstanding § 141(a) of this title, make contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, one or more actions); provided that no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State (other than § 115 of this title) if included in the certificate of incorporation. Without limiting the provisions that may be included in any such contracts, the corporation may agree to: (a) restrict or prohibit itself from taking actions specified in the contract, (b) require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation). Solely for purposes of applying the proviso in the first sentence of this subsection, a restriction, prohibition or covenant in any such contract that relates to any specified action shall not be deemed contrary to the laws of this State or the certificate of incorporation by reason of a provision of this title or the certificate of incorporation that authorizes or empowers the board of directors (or any one or more directors) to take such action. With respect to all contracts made under this paragraph (18), the corporation shall be subject to the remedies available under the law governing the contract, including for any failure to perform or comply with its agreements under such contract.

Despite passionate opposition, S.B. 313 passed in both houses of the Delaware General Assembly and was signed into law by Delaware Gov. John Carney on July 17.

While the new corporate power is undoubtedly useful to corporate counsel in validating stockholder agreements that shift power from the board of directors to one or more stockholders, it changes an important norm that has existed in Delaware law and provided an element of candor and equity that benefitted investors outside controllers.  Specifically, although state business associations law does not centrally concern itself with a public disclosure function, certain core matters of Delaware corporate governance and finance are required to be made public by their inclusion in the certificate of incorporation. The adoption of DGCL § 122(18) in S.B. 313 changes that landscape under Delaware corporate law. I recently described this effect of S.B. 313 in a weblog post.

[T]he fact of the matter has been that potential and actual stockholders of Delaware corporations have been able to rely exclusively on charter-based exceptions to the management authority of the board of directors — whether those exception are authorized in Subchapter XIV of the DGCL or otherwise. This has meant that prospective equity investors in a Delaware corporation knew to carefully consider a corporation’s certificate of incorporation to identify any pre-existing constraints on the management authority of the board of directors before investing. This also has meant that any new constraints on the board of directors’ authority to manage the corporation’s business and affairs required a charter amendment of some kind — either a board-approved and stockholder-approved amendment of the certificate of incorporation or the board’s approval of a certificate of designations under charter-based authority of which existing stockholders should be aware.

 ... The enactment of proposed DGCL § 122(18) will make it more challenging for potential equity investors to identify the locus/loci of management power in the corporation. Although both the certificate of incorporation and any stockholder agreement would be required to be filed with the U.S. Securities and Exchange Commission for reporting companies (the latter as an instrument defining the right of security holders under paragraph (b)(4) or as a material contract (b)(10) of Regulation S-K Item 601), the current draft of proposed DGCL § 122(18) does not provide that a copy of any contract authorized under its provisions be filed with the Delaware Secretary of State or that its existence be noted on stock certificates (a requirement included in MBCA §7.32(c)). In addition, stockholders will lose their franchise if the stockholder agreement would otherwise have required a stockholder vote.

The bottom line is that information once required to be made public under Delaware corporate law will no longer necessarily be public under that law, and absent federal securities law disclosure mandates, may be effectively hidden from public view.

The new law therefore may introduce traps for the unwary. For example, investors may want to reevaluate their investment documentation and, as necessary or desirable, make alterations to require that the corporations in which they invest publicly disclose — or at least make available to them — information about any stockholder agreements or other nonpublic transactions affecting the management or control of the corporation. This reevaluation may also prompt investors to review voting and consent right provisions to ensure that, depending on the scale and type of investment, they are getting what they need to protect their bargained-for governance and finance rights for the duration of their investment.

Of course, as with any new legislation that alters policy objectives, the actual effects of DGCL § 122(18) remain to be seen. But litigation may be expected, as corporations and investors adjust to the altered landscape. Expect more to come on all of this, in other words. And note that legal counsel can no longer rely on the chancery court’s opinion (invalidating stockholder agreement provisions) in the case that prompted the legislation, West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024), in light of the adoption of DGCL § 122(18).

This article was contributed by Joan Heminway. She is the Rick Rose Distinguished Professor of Law at The University of Tennessee College of Law, a corporate finance lawyer, and a past chair of the TBA Business Law Section.

We have heard a lot about the climate disclosure rules that the Securities and Exchange Commission (SEC) adopted in March of this year. Soon after finalization, in early April, the SEC voluntarily stayed implementation of these final rules pending the completion of judicial review of the consolidated 8th Circuit cases as the rules face legal challenges by various stakeholders. The SEC did so expressing hope that the voluntary stay will facilitate the resolution of the current 8th Circuit challenge. It also hopes the stay will prevent potential regulatory uncertainty if registrants were to become subject to the new requirements during the legal proceedings challenging their validity. 

In May, the 8th Circuit issued an order for the briefing schedule of the consolidated litigation involving the SEC’s final climate disclosure rules.

The schedule includes the following important dates:

• June 14: Petitioners’ opening brief
• June 24: Briefs by supporting intervenors or amici
• August 5: Respondent’s consolidated response brief
• August 15: Briefs by supporting intervenors or amici
• Sept. 3: Petitioners’ reply brief

The SEC indicated in a related court filing that it would provide a new effective date for the final climate disclosure rules at the conclusion of its voluntary stay (assuming the rules survive litigation).

Sehrish Siddiqui is a member of the Corporate and Securities Group of Bass, Berry & Sims’ Memphis office, where she counsels a wide variety of public companies primarily in the areas of corporate finance, compliance and governance. She has served as counsel to underwriters, agents and issuers for more than 100 initial public offerings, follow-on offerings and at-the-market programs of various NYSE- and Nasdaq-traded entities. Her national and international clients include healthcare companies, real estate investment trusts, business development companies, retail and consumer product companies and investment banks.

Lauren Castor has been promoted to the position of Tennessee Lawyers Association Program (TLAP) clinical director. Castor has been a clinical case manager for the program since March 2021. In a release from TLAP, Executive Director J. E. "Buddy" Stockwell III said that Castor’s advancement is marked by years of excellent service and recent licensure by the state as an LPC-MHSP (temp). “Lauren is dedicated to supporting TLAP’s mission of providing excellent clinical support tailored specifically to the demanding needs of lawyers, judges and law students. Her clinical leadership will continue to generate advances in TLAP’s mission to provide confidential assistance, help to support fitness to practice law and education about mental health challenges in the legal profession,” he said.