Kenney et al. v. Am. Board of Internal Medicine, 2019 WL 4697575 (E.D. Pa., Sept. 26, 2019)
In what may be the first of numerous decisions on this subject, the Federal District Court in Philadelphia dismissed a complaint, brought on Sherman Act and RICO grounds, challenging recertification requirements adopted by the American Board of Internal Medicine (ABIM), a medical specialty certification board in internal medicine. Other similar complaints are pending against other specialty medical boards and their umbrella organization, the American Board of Medical Specialties. ABIM originally provided “lifetime” Board certification to physicians who passed ABIM’s initial certification examination. ABIM later adopted maintenance of certification (MOC) requirements for its Board-certified internal medicine specialist physicians, including requiring Continuing Medical Education (CME) credits every two years and passage of a recertification examination every 10 years. ABIM “grandfathers” physicians certified by ABIM before 1990 and exempts them from MOC requirements. Although specialty certification is independent of state licensing of physicians, most medical practices and hospitals require it for employment and hospital privileges, and most insurances require it in order to reimburse specialty medical procedures. Plaintiffs asserted that ABIM had unlawfully “tied” initial certification and MOC in violation of antitrust law, arguing that initial certification and recertification are separate “products.” The Court categorically rejected that argument, holding that that ABIM certification is a single “product” and that initial certification and MOC are merely elements or parts of that “product.” Likewise, the Court rejected the argument that ABIM exercises illegal monopoly power over MOC, again noting that MOC is not a separate “product” or market. The RICO claim was dismissed as well for lack of allegations of injury. In a key ruling with ramifications even beyond the antitrust arena, the Court held that “ABIM has the right to control who it is certifying and what standards and requirements are necessary.”
Siva v. American Board of Radiology, 2019 WL 6130818 (N.D. Ill. Nov. 19, 2019)
Similar to the Kenney case, a radiologist challenged the MOC requirement imposed by the American Board of Radiology (ABR) under the Sherman argument. As with ABIM, ABR had once offered lifetime certification but later instituted a requirement that radiologists granted initial certification also complete MOC to maintain their certification. The plaintiff argued that ABR’s initial certification and MOC were separate and unlawfully tied products, reasoning, in part, that “[i]f MOC were genuinely essential to the purposes of board certification and therefore of a piece with initial certification, … ABR would require it for everyone, not only younger doctors.” The court rejected that argument: “This was once a one-stage process, and it is now a multi-stage process, but it does not follow that the certification process consists of separate products; now as ever, there is only one product.” The court dismissed plaintiff’s claims on the same grounds as—and citing—Kenney: “what ABR sells to its certified physicians—and, indirectly, to the other industry participants who rely on ABR’s credentialing of physicians—is essentially an endorsement based on a ‘formula, including all that it entails’ … for assessing physicians’ knowledge, skill, and understanding.”
Dowling v. Terrace City Lodge 1499 IBPOE, 163 A.D.3d 767 (N.Y. App. Div. Jul. 18, 2018)
The defendant, Terrace City Lodge, a nonprofit corporation, entered into a contract to sell real property to the plaintiff. This contract was executed by a trustee of the defendant but was not approved by its board or members (as is required by New York’s Not-For-Profit Corporation Law). The defendant eventually tried to repudiate the contract, and the plaintiff sued. The Appellate Court upheld the lower court’s grant of summary judgment in favor of the defendant with respect to the plaintiff’s request for specific performance, as the sale did not have the required approval by the board or members of the nonprofit corporation.
Risto v. Screen Actors Guild, 2018 WL 7016345 (C.D. Cal. Nov. 6, 2018)
Plaintiff performance artists brought this action against the Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) and American Federation of Musicians of the United States and Canada (AFM) (collectively, the Unions) and the Trustees of the AFM and SAG-AFTRA Intellectual Property Rights Distribution Fund (Trustees), alleging breach of fiduciary duties owed to the plaintiffs by the Trustees. The basis of this claim was a Services Agreement between the Unions and the Trustees, establishing that, in exchange for the Unions providing “data and services,” the Fund would pay the Unions 3% of the amount distributed per distribution cycle. This amounted to 3% of the 5% of the royalties which were generally paid to non-feature artists. According to the plaintiffs, a number of the Trustees were so closely related to the Unions as to constitute a conflict of interest. Defendants filed a motion to dismiss. The Court denied the motion to dismiss the fiduciary duty claim, finding the plaintiffs to have sufficiently alleged a breach of duty based on loyalty, as well as on the basis of the Trustees’ duties of reasonableness, good faith, diligence, and prudence. The Court dismissed with leave to amend the plaintiffs’ claim of breach of impartiality.
Matter of The People of The State of New York v. The Lutheran Care Network, Inc., 167 A.D.3d 1281 (N.Y. App. Div. Dec. 20, 2018)
The Lutheran Care Network, Inc. (TLCN), the defendant in this case, is a nonprofit corporation that controls a number of other nonprofit corporations, of which it is the sole member. The petitioner in this case alleged that TLCN violated state law and breached fiduciary duties by transferring funds to itself from Coburg, one of its related organizations, and by making Coburg pay “unreasonable management fees.” The lower court directed TLCN to adopt a conflict of interest policy and dismissed all other claims. The petitioner appealed. The Appellate Court upheld the lower court’s dismissal of the first cause of action, in which the petitioner requested an injunction enjoining TLCN from operating control over an affiliate in a manner inconsistent with organizational purpose or with the law, reasoning that there is no great likelihood of that happening in the future, as TLCN had by this point in time implemented mitigating procedures. The Appellate Court reversed the dismissal of the petitioner’s second and third claims, which alleged improper management of Coburg, because it found that there existed genuine issues of material fact as to whether TLCN improperly utilized Coburg’s surplus or engaged in related party transactions that were not in Coburg’s best interest. The dismissal of the fourth cause of action, seeking rescission of management fees paid to TLCN by Coburg, was also reversed, as the availability of that relief depended on the resolution of issues of fact related to the second and third claims. The Court also held that the lower court erred in applying the business judgment rule, citing issues of fact regarding whether TLCN exceeded its authority in managing Coburg.
Cook v. Marshall, 2019 U.S. Dist. WL 917598 (E.D. Louisiana Feb. 21, 2019)
Cook, a trustee of The Marshall Heritage Foundation (Foundation) brought this case against Marshall, a trustee of the Peroxisome Trust (Trust) to recover sums that the Trust allegedly owed the Foundation as its beneficiary. The original Marshall Heritage Foundation was previously the sole beneficiary of the Trust but had recently split into two smaller foundations: The Foundation that is a party to this action and the Marshall Legacy Foundation. Cook contended that the Trust became obligated, after the split, to pay half of its previous annual payment to the Foundation and half to Marshall Legacy. Cook alleged that the Trust’s failure to complete payments constituted a breach of fiduciary duty. Marshall, in response, contended that the Foundation is not a beneficiary of the Trust and that Cook lacked standing to bring the suit because he was not a valid trustee of the Foundation. Both parties moved for summary judgment. The Court first found that Cook was an official trustee, and therefore did have standing to bring the suit. Marshall’s claim that there was no fiduciary duty between the trusts was based on the argument that the Foundation was not “in being and ascertainable” at the time of the Trust’s creation, which is required for an entity to be deemed a beneficiary under Section 9:1803 of the Louisiana Trust Code. The Court explained, however, that this section did not apply to the Trust, as there is an exception for “mixed purpose trust,” of which category the Trust is a member. The Court granted Cook’s motion for summary judgment, reasoning that the Foundation became a beneficiary of the Trust “by virtue of succeeding to the assets of the original Marshall Heritage Foundation.”
Employment & Labor
Restaurant Law Center v. City of New York, 360 F. Supp. 3d 192 (S.D.N.Y. Feb. 6, 2019) (4th Cir. 2019)
A restaurant trade association and its associated nonprofit legal arm challenged a New York City “Deduction Law” that requires fast food employers to create and administer a payroll deduction scheme under which employees could donate a portion of their wages to certain nonprofit organizations registered with the city. In order to register for the donations, these nonprofit organizations had to register with the city’s Consumer Affairs department. Labor organizations were not eligible for registration for the program. The plaintiffs claimed that the Deduction Law violated the First Amendment and brought facial and as applied challenges claiming that it was preempted by the National Labor Relations Act (NLRA) and the Labor Management Relations Act (LMRA). Both parties moved for summary judgment, and the Court granted the defendants’ motion. The court first held that the trade association had standing in its own right to challenge the Deduction Law under 42 U.S.C. § 1983, which prohibits deprivation of Constitutional rights under color of state law, even though the Deduction Law was targeted at the trade association’s members, because the association redirected its time, money, and resources to educating its members and preparing its response to the law, to the detriment of other priorities, and litigation was not the core of the association’s activities. By contrast, the court held that the nonprofit legal arm lacked standing because the litigation did not divert resources from the organization’s core priorities.
The court then found that the Deduction Law did not violate any First Amendment rights of fast food employers. The court explained that the Deduction Law does not compel speech by employers because it requires only that the employers transmit the employees’ speech (in the form of donations) to the designated nonprofit organization, and also that the Deduction Law did not interfere with the employers’ ability to communicate their own messages. As to the freedom of association claim, the court held that the Deduction Law does not implicate constitutionally-protected speech, noting that there was no evidence suggesting that the transactions at issue would be disclosed in such a way as to imply an association between employers and the nonprofits to which the employees choose to donate. The court also held that the Deduction Law did not compel fast food employers to subsidize their employees’ speech, explaining that incidental administrative costs do not rise to the level of an impermissible compelled subsidy. Finally, the Court held that the Deduction Law was not preempted by federal law, finding it valid in the face of both the as applied and facial challenges. The Deduction Law was facially valid because it incorporated and utilized federal law, standards, interpretations, and reasoning (including 501(c)(5) tax status) in defining labor organizations, meaning that the Consumer Affairs department was unlikely to be frequently deciding arguable questions of whether an organization is a labor organization. The “as-applied challenge,” in which the plaintiff claimed that “Fast Food Justice,” one of the organizations enrolled in the program, was arguably a labor organization, also failed. The court reasoned that “organizing” and “advocating” for workers, which Fast Food Justice does, is not the same thing as “dealing with” employers over the terms and conditions of employment, so the organization does not qualify as a labor organization.
Terry v. Acadiana Concern for Aids Relief Educ. & Support Inc., 2019 U.S. Dist. WL 2353226 (W.D. La. April 26, 2019)
In this case, the defendant argued that it is not an employer under La. R.S. 23:967, the Louisiana Whistleblower Statute, because it is a nonprofit corporation, which is excluded from the definition of “employer” under the Louisiana Employment Discrimination Law (LEDL). Plaintiff argued that this definition of “employer” does not apply to the Louisiana whistleblower statute. Although the statute itself does not define “employer,” federal district courts applying Louisiana law have consistently applied the LEDL’s definition of “employer,” which exempts nonprofit entities from the definition of employer. Neither the U.S. Court of Appeals for the Fifth Circuit nor the Louisiana Supreme Court have ruled on the issue, and the state appellate courts are split. The Terry court decided that the LEDL does not define “employer” for purposes of the whistleblower statute. Accordingly, the court held that the ordinary definition of “employer” therefore applied to plaintiff’s whistleblower claim, and that nonprofit entities are subject to the whistleblower statute.
Sanders v. Christwood, L.L.C., 2019 U.S. Dist. WL 2617179 (E.D. La. June 26, 2019)
Christwood is a nonprofit entity that operates a retirement community consisting of independent living, assisted living, nursing, and memory care units. Contrary to the outcome in the Terry case, the Court found that Christwood, as a nonprofit entity, could not be held liable under the Louisiana Whistleblower Statute. Plaintiff alleged that an incident occurred in the assisted living unit that was required to be reported to the State and that her superiors asked her to falsify paperwork. Plaintiff alleged that she was demoted from her position as assisted living unit director and constructively discharged because she refused to participate in what she alleged to be an illegal practice of altering official paperwork. The whistleblower statute prohibits an employer from retaliating against an employee who reports, threatens to report, or refuses to participate in an illegal work practice. Without reference to the Terry decision, the Sanders court found that “courts have consistently applied the definition of ‘employer’ as set forth in La. Rev. Stat. § 23:302,” and that nonprofit entities are not subject to the whistleblower statute.
Setarehshenas v. Nat’l Commission on Certification of Physician Assistants, 16-cv-284 (E.D.N.Y. Dec. 3, 2018)
The plaintiff graduated from a Physician Assistant education program but did not apply for or sit for the Physician Assistant National Certifying Exam (PANCE) within the six-year eligibility period following completion of education, as established by the policies of the nonprofit National Commission on Certification of Physician Assistants (NCCPA). The plaintiff petitioned NCCPA for an extension but was denied it. Following an unsuccessful internal appeal of NCCPA’s decision, the plaintiff brought suit claiming that NCCPA discriminated against him because of his prior conviction for health care fraud, in violation of New York State and New York City human rights laws. Both the State and City laws prohibit, with limited exceptions, a decision “to deny any license or employment to any individual by reason of his or her having been convicted of one or more criminal offenses.” The term “license” is defined under both statutes as “any certificate, license, permit or grant of permission required by the laws of this state ... as a condition for the lawful practice of any occupation, employment, trade, vocation, business, or profession.” A federal district court granted NCCPA’s motion for judgment on the pleadings, holding that, because “NCCPA is not a licensing authority within the meaning of these provisions of law,” NCCPA’s certification could not be treated as equivalent to licensure, even though the certification is a “condition precedent to licensure” as a physician assistant in all 50 states.
HRH, LLC v. Teton Cty., 2018 U.S. Dist. WL 8131667 (October 11, 2018)
The defendants, Alliance of Route 390 (Alliance), an unincorporated nonprofit organization, and six active members of the Alliance, contended that the plaintiff, HRH, LLC, included improper defendants in a malicious prosecution claim. The Court noted that at common law, officers of unincorporated associations have at least some liability in tort for the actions of the association, as do members. However, the Uniform Unincorporated Nonprofit Association Act, as adopted in Wyoming, alters this structure. Specifically, the statute provides that a person is not liable for the breach of contract or tortious act or omission of a nonprofit association solely on the basis that the person is a member, a person authorized to participate in management of the nonprofit association, or a person considered to be a member by the association. The court found that the comments within the statute make clear that the provisions’ intent is to preserve only the type of direct liability that a person has under other law, such as liability on a contract that the person has personally guaranteed or entered into on behalf of an undisclosed or partially disclosed principal, or liability for a tort with respect to which the person is actually a tortfeasor. The court found that one of the active member defendants, whom the plaintiff alleged was liable under a theory of conspiracy based on his association membership and role, did not have any direct liability for malicious prosecution and was dismissed as an individual defendant.
Ewing Insurance Services, Inc. v. Texas Independent Automobile Dealers Association, 2019 WL 1575397 (Tex. Ct. App. Apr. 12, 2019)
This case was initiated by Ewing Insurance Services and its president, challenging the action of the Texas Independent Automobile Dealers Association (TIADA), a 501(c)(6) organization, in revoking Ewing’s membership. A customer had filed claims with TIADA, alleging that Ewing was conducting a “scam” by collecting insurance premiums and converting them for Ewing’s own use. After revoking Ewing’s membership, TIADA then published a statement to its members publicizing the revocation. Plaintiffs alleged negligent misrepresentation, defamation, business disparagement, and intentional infliction of emotional distress. The district court granted summary judgment in favor of TIADA, and Ewing appealed. The defamation claim hinged on Ewing’s characterization that TIADA’s published statement depicted the membership as “revoked for unethical behavior.” TIADA’s published statement merely recited the motion for revocation that was made, the bylaws provision under which it was made, and that it was passed, which were all indisputably true facts. The Court of Appeals therefore affirmed the district court’s grant of summary judgment in favor of TIADA on all claims, with the exception of the negligent misrepresentation claim, which it reversed and remanded on technical grounds.
State v. Grocery Mfrs. Ass’n, 425 P.3d 927 (Wash. Ct. App. September 5, 2018)
The Grocery Manufacturers Association (GMA) appealed a trial court judgment imposing an $18 million civil penalty under the Washington State Fair Campaign Practices Act (FCPA) in connection with GMA’s activities opposing a 2013 Washington ballot initiative that would have required all packaged food products to identify ingredients containing genetically modified organisms (GMOs). GMA did not register with the state as a political committee, nor did it comply with reporting and disclosure requirements for political committees, nor disclose the companies contributing to a segregated account it had created to oppose the ballot initiative. The Court of Appeals affirmed the trial court’s ruling and the civil penalty, holding that because GMA created the account with the intention of receiving contributions to oppose the ballot proposition, it met the FCPA’s statutory definition of “political committee.” The Supreme Court of Washington has granted a petition for review of the Court of Appeals’ decision.
Federal Election Commission Advisory Opinion 2018-12 (May 21, 2019)
Defending Digital Campaigns, Inc. (DDC) is recognized as a “bi-partisan” nonprofit corporation under District of Columbia law and is exempt from federal income tax under Section 501(c)(4) of the Internal Revenue Code. According to its articles of incorporation, DDC’s purpose is “to provide education and research for civic institutions on cybersecurity best practices and to assist them in implementing technologies, processes, resources, and solutions for enhancing cybersecurity and resilience to hostile cyber acts targeting the domestic democratic process.” The DDC specifically aims to provide these services to federal candidates and tailors its education and training to campaigns. DDC’s counsel indicated that DDC may, at some future point, consider accepting monetary donations from sources other than individuals and foundations in order to provide the described services to “Eligible Committees” free of charge or at reduced charge. Eligible Committees are all active, registered national party committees and active, registered federal candidate committees satisfying one of the following requirements: a House candidate’s committee that has at least $50,000 in receipts for the current election cycle and a Senate candidate’s committee that has at least $100,000 in receipts for the current election cycle; a House or Senate candidate’s committee for candidates who have qualified for the general election ballot in their respective elections; or any presidential candidate’s committee whose candidate is polling above five percent in national polls. The Commission concluded that the current threat of foreign cyberattacks presents unique challenges to Commission enforcement of section 30121 on contributions and donations by foreign nationals, and that this highly unusual and serious threat warranted granting DDC’s request to offer free or reduced-cost cybersecurity services, including facilitating the provision of free or reduced-cost cybersecurity software and hardware from technology corporations, to federal candidates and parties.
American Society for Testing and Materials, et. al. v. Public.Resource.Org, Inc., 896 F.3d 437 (D.C. Cir. Jul. 17, 2018)
Plaintiffs, six standards developing organizations, whose technical standards were incorporated by reference into law, brought actions for copyright and trademark infringement against a nonprofit organization that distributed the standards over the internet. The district court granted summary judgment for the plaintiffs and issued permanent injunctions prohibiting unauthorized use of the standards and trademarks. The U.S. Court of Appeals for the D.C. Circuit reversed the district court’s ruling, finding that genuine issues of material fact precluded determination of whether the defendant’s distribution of the standards constituted fair use. The appeals court remanded the case for a determination of the extent to which the standards were incorporated into law, the extent to which the standards were identifiable without the plaintiffs’ trademarks, the extent to which the defendant used the plaintiffs’ trademarks, and whether this use suggested sponsorship or endorsement by the plaintiffs. The appeals court did not reach the issue of whether standards retain their copyright after they are incorporated by reference into law.
PLR 20190610, 2019 WL 1096291 (I.R.S. October 15, 2018)
A public charity amended its articles of incorporation to contain a proper powers and dissolution clause under Section 501(c)(3) and claimed to provide “educational” activities in order to maintain its 501(c)(3) tax exemption status. However, the IRS determined that the organization did not meet the “operational test” requirement under Section 501(c)(3) because more than half of the organization’s activities were directed toward providing certification for operators in the eco-tourism business. The IRS found that certification activities were not in furtherance of an exempt purpose for an IRS Section 501(c)(3) organization. The IRS reasoned that although some public benefit may be derived from promoting professional standards through certification, the organization’s activities were primarily designed to promote the business interests of its members, which is consistent with 501(c)(6) status. Therefore, the organization did not meet the operational requirements for 501(c)(3) status, and revocation of its 501(c)(3) status was proper.
PLR 201843016, 2018 WL 5309862 (I.R.S. October 26, 2018)
For the same organization as PLR 20190610 above, the IRS found that more than a substantial part of the organization’s activities were the provision of non-exempt commercial services and carbon offset sales, with the majority of the organization’s revenue consisting compensation for business support services that are similar to those offered by for-profit services. The organization provided advisory and consulting services and assistance to for-profit business members and clients in the travel and tourism industry. The IRS found only incidental educational benefits or benefits to a charitable class and revoked its 501(c)(3) tax exempt status.
PLR 201844013, 2018 WL 5726773 (I.R.S. November 2, 2018)
The IRS denied an organization’s application for exemption under Section 501(c)(3) because the organization is operated for “the substantial non-exempt purpose of providing legal services to the general public in a manner indistinguishable from a commercial legal services entity.” The IRS also determined that the organization was ineligible to continue to serve as a supporting organization to a 501(c)(6) organization that advances the practice of real estate law because the financial support provided was not used exclusively for charitable purposes.
Freedom Path, Inc. v. I.R.S., 913 F.3d 503 (5th Cir. Jan. 16, 2019)
Freedom Path, Inc. brought this action against the IRS after the IRS denied its application for 501(c)(4) status. Freedom Path alleged that the IRS was identifying organizations with conservative political leanings and then making unreasonable requests for information and otherwise delaying action on their applications. Freedom Path sought a declaratory judgment from the district court that the Revenue Ruling 2004-6 test was facially unconstitutional and chilled its First Amendment rights. The district court denied the motion, dismissing Freedom Path’s “as-applied” challenge without prejudice, and holding that the Revenue Ruling was not unconstitutional. Freedom Path appealed. The Court of Appeals vacated and remanded the lower court’s decision for dismissal for lack of jurisdiction, finding that Freedom Path did not have standing to bring an “as-applied” challenge, on the grounds that Freedom Path has no net investment income, and therefore no tax burden and no injury no matter how the IRS labels its communications or expenditures. The Court of Appeals could not trace Freedom Path’s alleged chilled speech to the text of the Revenue Ruling, so the facial challenged failed as well.
Special thanks to Pillsbury 2019 Summer Associates Rose Lapp (University of Michigan Law School, 2020) and Tyrine S. Aman (Howard University School of Law, 2020) for their assistance in preparing the text.