Wednesday, February 12, 2014

Equal Protection of Grocery Stores in the Sale of Alcoholic Beverages

Equal Protection of Grocery Stores in the Sale of Alcoholic Beverages

      Kentucky has had, since the end of Prohibition, a statute providing, inter alia, that a package license for the sale of wine and spirits may not be issued to any retailer whose business is otherwise comprised primarily of the sale of either staple groceries or gasoline and lubricating oil.  KRS § 274.230(7).  The effect of this statute is that while grocery stores and gas stations/convenience stores may sale beer, they are precluded from selling wine and spirits.  It is because of this statute that you all can see, for example, a Kroger grocery store immediately adjacent to a Kroger wine and spirits shop, they each having separate entrances.  In that the separate store does not derive a significant portion of its sales from staple groceries, the separate store being considered distinct from the grocery store, this statutory prohibition is satisfied.
      In 2011 Maxwell’s Pic-Pac, a Louisville based grocery store and the Wine With Food Coalition asserted that this statutory distinction lacks a “rational basis,” and as such violates the Equal Protection rights of the impacted groceries and gas stations.  In 2012 Judge Heyburn issued his ruling on that challenge, determining that, irrespective of distinctions that may have existed shortly after the repeal of Prohibition between grocery stores and pharmacies (during Prohibition, pharmacies were still allowed to distribute “medicinal” alcohol), those distinctions have long since ceased.  Rather, today, grocery stores often contain pharmacies while pharmacies often sell staple groceries.  His decision was in turn appealed to the Sixth Circuit.
      On January 15, 2014, the Sixth Circuit issued its decision in this case, reversing the determination of Judge Heyburn and finding that the statute satisfied the Equal Protection clauses rational basis standard.  The basis of this determination is not, however, entirely clear.  With respect to grocery stores, the Court noted that certain individuals have objections to either alcoholic beverages in general or to, in particular, wine and spirits.  Reasoning that everyone is obligated to regularly purchase groceries, the Court found that precluding grocery stores from selling wine and spirits preserves that environment as one in which Kentuckians with those objections are not forced to confront wine and spirits.  As to gas stations/convenience stores, the court’s reasoning is even less clear, never really explaining how they are distinct from other retailers who are permitted to sell wine and spirits.
      Ultimately, the decision of the Sixth Circuit Court of Appeals is rather unsatisfactory.  Judge Heyburn’s decision contained a detailed analysis of Equal Protection law and a careful review of each of the proffered basis that would support the existence of a rational basis for the statute.  The Sixth Circuit neither explained its rational basis analytic paradigm nor detailed exactly what theory or theories applied to distinguish grocery stores and gas stations/convenience stores from other retailers.  As of this writing a motion for reconsideration or rehearing en banc is pending before the Sixth Circuit.
      My law partner Stacy Kula and I have written an article reviewing this decision and in particular criticizing the analysis (or specifically, the lack of analysis) utilized by the Sixth Circuit.  That article has been accepted for publication by The Kentucky Law Journal Online and is available on both SSRN and on the SKO website. Here is a LINK to the article.

The Fifth Circuit Court of Appeals Confirms What We All Feared, Namely That We Do Not Understand Series

The Fifth Circuit Court of Appeals Confirms What We All Feared,
Namely That We Do Not Understand Series

A recent decision of the Fifth Circuit Court of Appeals considered and largely remanded to the trial court a dispute turning in part on the characteristics of the series of a limited liability company.  In doing so the Fifth Circuit confirmed that many important questions with respect to series remain unresolved.  That lack of clarity cautions against the use of the series structure in all but the most highly-lawyered environments.  Alphonse v. Arch Bay Holdings, L.L.C., No. 13-30154, 2013 WL 6490229 (5th Cir. Dec. 11, 2013). 
The suit began simply enough, a “plain vanilla” foreclosure action.  Alphonse’s home was foreclosed upon pursuant to a “confession of judgment” clause that was enforceable under Louisiana law.  Arch Bay Holdings, L.L.C. – Series 2010B, the holder of the mortgage note, filed a petition to enforce under the confession of judgment clause.  Ultimately, Alphonse’s house was sold at a sheriff’s auction.  Alphonse did not participate in or otherwise challenge the foreclosure action.  He did, however, after the completion of the foreclosure, bring this action in federal court against Arch Bay Holdings, L.L.C., of which Series 2010B was a component, and Specialized Loan Servicing, LLC (“SLS”), the mortgage servicing agent, charging violations under the Louisiana Unfair Trade Practices Act and the federal Fair Debt Collection Practices Act, those suits being based upon alleged irregularities arising out of “robo-signing.”  In response, Arch Bay Holdings and SLS moved to dismiss on the basis of the Rooker-Feldman doctrine and res judicata.  Alphonse argued that his claims were separate from an objection to the foreclosure itself and that the res judicata effect thereof did not bar his claims.
The trial court granted that motion to dismiss on the basis that the Rooker-Feldman doctrine precluded the federal court from reviewing the state court foreclosure action.  Alternatively, the district court also found that res judicata barred the claims against Arch Bay.  Last, the district court determined as well that the claims against Arch Bay based upon the Louisiana Unfair Trade Practices Act should be dismissed on the basis that Delaware law determines the liability for Arch Bay for the activities of Series 2010B, the latter being the real party in interest and the separate juridical entity from Arch Bay.  With respect to this analytic path, in the words of the Court of Appeals, “Alfonse sued the wrong defendant.”  This appeal followed.
With respect to the District Court’s reasoning as to res judicata, an intervening decision of the Fifth Circuit, Truong v. Bank of America, NA, 717 F.3d 377, 381 (5th Cir. 2013), directed that res judicata should not attach, and for that reason this panel of the Firth Circuit reversed that of the trial court as to  Rooker-Feldman abstention.  Still, Arch Bay and SLS asserted that the trial court’s dismissal should be upheld on additional grounds of res judicata and the separate legal status of Series 2010B from Arch Bay.
Those arguments would ultimately be unavailing.

The District Court had found, without any apparent factual investigation, that Arch Bay and Series 2010B had a similar identity of interest.  Distinguishing another Fifth Circuit case in which a subsidiary and parent were found, for purposes of res judicata, to effectively be alter egos of one another, the Fifth Circuit wrote:
The court’s analysis in Zatarain [v. WDSU-Television, Inc., 1995 WL 295317, at *3 (E.D. L.A. May 8, 1995), aff’d on other grounds, 70 F.3d 1143 (5th Cir. 1996)] turned on facts such as the common CEO/President, which were particularly pertinent to the plaintiff’s discrimination claim.  In contrast, here the court dismissed Alphonse’s claims and found an identity of interest without any factual development.  2013 WL 6490229, *4.
Further, the Court noted that the legally distinct status of Series 2010B from Arch Bay requires additional investigation.  To that end:
However, as discussed below, the separate juridical status of a Series LLC with respect to third-party plaintiffs remains an open question.  We remand because there are insufficient facts in the record to determine whether the Series LLC in this case is truly separate.  The important question is that the res judicata identity of parties questioned – whether a Series 2010B and its parent Arch Bay have identical interests – ought in fairness be considered together of whether the question of whether Series 2010B is in fact a distinct juridical entity.  Id.
Before returning to the question of analyzing a series, the Court also dismissed the assertion that res judicata should attach to bar any claim against SLS on the basis that SLS, even while an agent of Series 2010B, may not have shared the same interest as it did. 
Returning to the question of the legal relationship between Arch Bay and Series 2010B, the Court first reviewed Delaware’s law of LLCs (incorrectly stating that it was reviewing “the Delaware Corporate Code”, specifically § 215 of the Delaware LLC Act and there emphasizing the fact that a series “shall have the power and capacity to, in its own name … sue and be sued.”  While noting that Louisiana law provides that “the laws of the state or other jurisdiction under which a foreign [LLC] is organized shall govern its organization, its internal affairs, the liability of its managers and members that arose solely out of their positions as manager and members.”  [La. Rev Stat. Ann. § 12:1342], the Court noted that the District Court failed to consider:

The possibility that liability to a third party like Alphonse constitutes external rather than internal affairs.  2013 WL 6490229, *6.
From there, the Court of Appeals wrote:
In light of the fact that the district court failed to consider the external-internal affairs conflict-of-law question under Louisiana law, dismissal under Federal Rule of Civil Procedure 12 without leave to amend what is error.  We remand to the district court to consider this question, perhaps with the benefit of factual development.
I have otherwise written (Again, For the Want of a Theory: The Challenge of the “Series” to Business Organization Law, 46 American Business Law Journal 311 (2009); The Man Who Tells You He Understands Series Will Lie To You About Other Things As Well, 16 J. Passthrough Entities 53 (Mar./Apr. 2013))  that the number of issues involving LLCs that are not yet understood is significant.  As has been repeatedly stated, whether the limited liability shield afforded in a state of organization will be respected in a state that does not similarly provide for series remains to be resolved and how that analysis should be undertaken is open to dispute.  The Alphonse case expands upon that caution, reminding us that irrespective of the structuring of the relationship between a series and the parent organization and the rights between them vis-à-vis those members and managers associated with the series, there is the additional question of how a third party to that relationship should be treated.  While, all things being equal, the application of res judicata as applied to business entities in a group would be expected, it remains to be seen whether a more loose or more strict variant thereof will be applied.  Essentially, this is the “Wild Wild West” of business organization laws, and almost every conceivable question remains still to be addressed.

The Affordable Care Act, Grandfathered Plans, and the Contraceptive Mandate

The Affordable Care Act, Grandfathered Plans,
and the Contraceptive Mandate


            The many challenges being brought by for-profit ventures they being exemplified by Hobby Lobby and Conestoga Wood, to the “contraceptive mandate” will be heard by the U.S. Supreme Court on March 25.  Those companies assert that the requirement that employee health insurance plans cover, on a no cost sharing basis, FDA approved contraceptives lack a “compelling interest” because so many plans, those that are “grandfathered,” are exempt.  For that reason it is important to understand what is and is not the effect of grandfathering. 

            Initially, the ACA requires that employer health insurance plans provide, on a no cost sharing basis, a variety of preventative care services. One, and only one, of those preventative care services is the coverage of FDA approved contraceptives.  There is no particular requirement that the plans cover contraceptives, but rather there is a requirement that the plans cover a class of goods and services of which contraception is a component.

            Plans which are grandfathered are exempt from a variety (albeit not all) of the requirements of the ACA  One of those exemptions is that grandfathered plans are not required to, on a no cost sharing basis, cover the same preventative services as are required of plans subject to the ACA.  In order for a plan to be grandfather it must essentially have not been amended or altered (e.g., reduced coverage, increased premiums) since the enactment of the ACA.  See Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34,538, 34,540 (June 17, 2010) (listing requirements for maintaining grandfathered status).  See also 26 C.F.R. § 54.9815-2714T(g) (2010)) (limited exemption of grandfathered plans from requirement to cover children to the age of 26).  The exact number of grandfathered plans as of any point in time is unknown.  Hence, while the possibility of grandfathered status is real, its actual utilization is unknown as to either the number of plans or the number of plan beneficiaries. 

            Even were reliable data as to the number of either grandfathered plans or the number of beneficiaries of grandfathered plans available, it would not follow that they do not provide/are not provided preventative care benefits, including contraception.  Many states have for years required that insurance policies issued in that state cover contraception.  See, e.g., State Policies in Brief: Insurance Coverage of Contraceptives, Guttmacher Inst.,  Hence, it must be expected that a grandfathered plan in one of those states will cover contraception.  True, that coverage might not be on a no cost sharing basis as is required by plans subject to the ACA, but there is coverage none the less.  Recall that Hobby Lobby, Conestoga Wood et al. are objecting not to contraceptive coverage on a no cost sharing basis, but to providing contraceptive coverage ab initio.

          Further, even in those states that do not by state law mandate coverage of contraception, there has been in place since 2000 an Equal Employment Opportunity Commission (EEOC) pronouncement that employers must cover the expenses of prescription contraceptives to the same extent they cover the expenses of other types of drugs and preventive care.  See EEOC Decision on Coverage of Contraception (Dec. 14, 2000), available at http:// It must be expected that many employers (as well as insurers) structured their plans to comply with this directive.  Other employers will have added contraceptive coverage to their sponsored plans for purely economic reasons.

            Consequently, even a complete listing of the grandfathered plans and a counting of the plan beneficiaries would not identify those without contraceptive coverage. Rather, from that unknown universe there would need to be deleted those beneficiaries who are any of:

(i)         resident in a state mandating contraception coverage;

(ii)        provided, consequent to either the EEOC direction or a court ruling, contraceptive coverage; or

(iii)       consequent to individual plan structure otherwise provided contraceptive coverage.

            Until the various plaintiffs who cite the scope of the grandfathering exemption are able to actually quantify its impact, a task that likely is impossible, they should not be permitted to rely upon a naked assertion of its wide scope in order to in turn argue the government does not have a compelling interest in enforcing the ACA as written.  As applied grandfathering of certain plans may have little if any impact.

Barrels of Fish and the Rise of Joan of Arc

Barrels of Fish and the Rise of Joan of Arc


Today marks the anniversary in 1429 of the so called "Battle of the Herring," of itself an unimportant event in that misnamed contest of wills identified as the 100 Years War (by the accepted measure it lasted 116 years).

English forces were laying siege to Orleans (they already held Paris), and a supply convoy was brings additional armaments and food. A joint French and Scottish force attempted to intercept, but in the ensuing battle they took significant casualties. In that the food supplies were made up in part of herring, the battle received its rather non-illustrious name. Crecy and Agincourt have come down thru history as momentous events; not so Herring.

Still, this small battle would have a significant impact upon the path of the war. It was at this time that the young woman who would come down through his tory under the name Joan of Arc was first seeking an introduction that would lead to meeting the Dauphin. She was making little headway, and the illiterate peasant was not likely to have found her way through the byzantine rules of the French court. That is, until, one of her visions allowed her to tell of the losses at the Battle of the Herring, news that had not yet reached that part of France. With that revelation she began her journey to the head of the French army and the ultimate relief of Orleans.