Of interest to those
involved in vaccine litigation, which has been exploding across the
country, are provisions included in the Homeland Security Act of 2002 and
the proposed repeal of vaccine manufacturer-friendly provisions. On
November 25, 2003, President Bush signed into law the Homeland Security
Act, H.R. 5005, as amended by S. Amdt. 4901, 107th Cong., 2nd Sess. §§ 1714-1717
(Nov. 19, 2002); H.R. 5710, 107th Cong., 2nd Sess. §§ 1714-1717 (Nov. 13, 2002).
The legislation included clarifications to the National Childhood Vaccine Injury
Act, 42 U.S.C. § 300aa-1. et seq. (the "Vaccine Act"). The Vaccine Act established
exclusive original jurisdiction in the U.S. Court of Federal Claims to handle the
voluminous claims that vaccines have caused injuries to children. The exponential
rise in autism diagnoses in the past 15 years has prompted claims that mercury in
the preservatives in some childhood vaccines causes autism.
Rather than file in the Vaccine Court, where
recovery caps are in place, plaintiffs have been trying to get their cases heard
in state courts by alleging state common law claims not specifically covered by the
Vaccine Court’s jurisdiction. Most of these efforts have had limited success. However,
the costs of litigating these claims has been high for vaccine manufacturers,
distributors and other defendants (even power plants and local doctors who administered
the vaccines have been named). Therefore, legislative efforts were made to limit
the liability of the vaccine manufacturers, and particularly to clarify that the
component preservative thimerosal was within the definition of a vaccine and therefore
within the jurisdiction of the Vaccine Court. Consequently, it would also be clear that
manufacturers and distributors of thimerosal would be covered by the Vaccine Act and
not subject to suit in state court until the jurisdiction of the Vaccine Court was
exhausted. Even as these clarifying amendments passed late last year, legislators
made clear their opposition and intent to seek repeal in 2003, rather than hold up the
passage of the anti-terrorism provisions of the Homeland Security Act.
The current status of the repeal
measures, which would leave open to judicial interpretation what
constitutes a "vaccine" for purposes of Vaccine Court jurisdiction, is as
follows. Two house bills seek to repeal the 2002 amendments to the Vaccine
Act in total. H.R. 237, sponsored by Rep. Dan Burton (R-Indiana), was
introduced in January of this year and on February 3, 2003 it was referred
to the House Subcommittee on Health for consideration. Rep. Thomas Allen
(D-Maine) introduced an identical bill, H.R. 248. There appears to be
bi-partisan support in the perceived fight against the pharmaceutical
giants whom some allege have used political influence to gain legal
advantage.
In an update of legislation pending
at the end of 2002, Congressman Greenwood (R-Pennsylvania) re-introduced
his 2002 legislation to cap non-economic damages recovery by plaintiffs in
health care lawsuits at $250,000 per occurrence, the Help Efficient,
Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2003 (H.R. 5). On
March 21, 2003, the bill was read for the second time in preparation for
being sent to the Senate floor. It has been placed on the Senate
Legislative Calendar under General Orders, Calendar No. 49.
Congressman Robert Andrews’ (D-New
Jersey) bill from last year to allow treble damage recovery for injuries
sustained from a product that is not in compliance with either a mandatory
or a voluntary standard issued by the Consumer Product Safety Commission
was re-introduced as H.R. 405 and was referred to Committee in early
February.
In January, Rep. Peter DeFazio
(D-Oregon) introduced H.R. 446 to establish an Emergency Malpractice
Liability Insurance Commission whose purpose would be to investigate and
determine whether a causal relationship exists between skyrocketing
medical malpractice insurance premiums, rising jury awards, decreased
accessibility and affordability of health care, and the increase in the
number of physicians moving, quitting or retiring from the practices in
the field of medicine. The Commission will make recommendations, based on
a study of statistical trends and testimony, that can be considered by
Congress to alleviate the impact of the crisis in medical malpractice
liability insurance. The bill, which has nine co-sponsors, was referred to
the House Subcommittee on Health on February 14, 2003.
"SO, YOU HIRED
AN OFF-DUTY POLICE OFFICE AS YOUR SECURITY GUARD - WHAT COULD GO WRONG?"
BY: Valerie G. Preiss
Special Police Officers (SPOs) are off-duty deputy sheriffs, metropolitan or county
police officers or other law enforcement officials who possess unique training and
experience. Retailers and other business owners value these attributes and routinely
hire SPOs as loss prevention agents and security guards, either as direct employees or
as contractors.
There have been recent developments in federal
civil rights law which impact businesses which employ SPOs (as well as other security
guards) and could expose them to liability for discriminatory acts and the attorneys’
fees allowed under federal fees statutes. See, e.g., Chapman v. The Higbee Company,
319 F3d 825 (6th Cir., Feb. 11, 2003); Phillip v. University of Rochester, 316 F.3d
291 (2nd Cir. Feb. 20, 2003). Historically, Section 1981 of Title 42 of the United
States Code, was intended to prohibit racial discrimination in certain specified
activities, including the making and enforcement of contracts. Section 1981 can trace
its roots to the Civil Rights Act of 1866. Section 1981 can be implicated in suspected
shoplifting scenarios if the patron is asked to leave the store or prevented from
making a purchase or a return, as this satisfies the statutory requirement regarding
freedom to contract.
For many years, federal courts had held that the
provision of Section 1981 that provides all persons shall have the right to “the full
and equal benefit of all laws and proceedings for the security of persons and property”
inferred a requirement state action, i.e., action by the government or its agents – not
by a private entity or individual. This is akin to Section 1983 civil rights violations,
for example, cases where the police use excessive force in the making arrests of racial
minorities. Where there is no state action, then Section 1981 simply does not apply.
For example, when a security guard falsely accuses a patron who is a member of a racial
or ethnic minority of shoplifting and tells him or her to leave the store, those actions
may be state a cause of action for defamation but there is no federal civil rights action.
Chapman v. The Higbee Company d.b.a. Dillard Dept
Stores, Inc., 319 F.3d 825 (6th Circuit, February 11, 2003).
In Chapman, a sales assistant suspected African
American patron Lynette Chapman of shoplifting after discovering a sensor tag in the
dressing room Chapman had just exited. She notified store security, who was an off-duty
sheriff’s deputy in full uniform and badge and sidearm. The SPO and a female manager
searched Chapman’s purse. The SPO instructed the store manager to take Chapman into a
fitting room and have her remove her coat and suit jacket and lift up her shirt (in the
SPO’s presence). After finding nothing, the store manager apologized and Chapman left
the store (but of course the damage had been done).
Chapman alleged that the sensor tag was on the
dressing room floor when she entered it and the store’s assumption that she has concealed
merchandise was based on her race. A Caucasian woman had exited the fitting room prior
to Chapman’s entry. (Note that the store manager did not actually see Chapman conceal
any merchandise. The proper procedure prior to approaching a patron is to verify that
the fitting room is empty tags or merchandise prior to the patron’s entry. Retailers and
SPO should never take an unsupported accusatory approach like this.)
Alleging racial discrimination, Chapman sued under
Section 1981 and the Fourth Amendment, which prohibits unreasonable searches and seizures.
She claimed the store violated her right to full and equal benefit of the law per section
1981 and that the SPO acted under color of state law when he initiated the bodily search.
The trial court and a divided panel of the appellate
court dismissed both claims as there was not governmental involvement in the search. The
court reasoned that Section 1981 did not protect against private impairment of the statute’s
equal benefits clause, and that the off-duty sheriff was working in a private capacity when
the search occurred.
If that sounds reasonable, just wait. A full panel of
the U.S. Court of Appeals for the Sixth Circuit disagreed. The Court ruled 6-3 that the
equal benefits clause does apply to private conduct and it ruled 9-0 that there were
sufficient facts alleged to warrant a jury question as to the Fourth Amendment claim
(which there is no doubt requires state action). Note that the store had a policy in its
manual that prohibited strip searches and if hidden items were suspected, that the police
were to be called. The SPO violated that policy and while in full police uniform conducted
a search of Chapman and her property.
The Sixth Circuit, in a split with other circuits,
characterized Section 1981 as “unambiguous” in protecting against the impairment of its
equal benefits clause (anti-discrimination language) by private discrimination. The store
had argued that state action was required with respect to the right implicated here, the
right to make and enforce contracts. However, the Sixth Circuit (Ohio, Kentucky, Tennessee),
as well as the Second Circuit (New York, Vermont, Connecticut) have now agreed that the
actions of private retailers and SPOs acting on their behalf may violate Section 1981. The
cases merely permit the cause of action to go forward. There still remains the fact question
as to whether the actions of the SPO were motivated by racial discrimination.
Phillip v. University of Rochester, 316 F.3d 291
(2nd Cir. January 21, 2003).
Although not a SPO case, Phillips is instructive to
show the change in interpretation of when a private entity, such as a business, may be liable
under civil rights statutes. In this case, several African-American students were arrested
and jailed and alleged a Section 1981 violation (as well as state law claims) against the
university and its security guards. A private security guard at a private university told
minority students gathering in the lobby to break it up and asked for identification. Police
were called and arrests were made based on what the police observed. All charges were all
dropped after a night in jail. While the trial court ruled against the students for failing
to allege state action, the appellate court reversed and allowed the federal claim to go
forward, finding, as did the Chapman court, that no government action was required to state
a claim against the private entities.
At least three other federal circuits do require state
action for Section 1981 claims and finding none, dismissed the cases against private
businesses. This does not mean that common law causes of action, such as defamation, assault
and battery, etc. cannot be pursued; but that the claims are not civil rights violations.
See e.g.Youngblood v. Hy-Vee Food Stores, Inc., 266 F.3d 851 (8th Cir. 2001) (North Dakota,
South Dakota, Nebraska, Minnesota, Iowa, Missouri, Arkansas); Brown v. Phillip Morris, Inc.
250 F.3d 789 (3rd Cir. 2001) (Pennsylvania, New Jersey, Delaware, Virgin Islands); Mahone
v. Waddle, 564 F.2d 1018 (3rd Cir. 1977) (dicta prior to the 1991 amendments to Section
1981). See also Garrett v. Tandy Corp d.b.a. Radio Shack, 295 F.3d 94 (1st Cir., July 9,
2002) (Maine, New Hampshire, Massachusetts, Puerto Rico)
In Garrett, an African American male purchased
several items from Radio Shack and store employees courteously waited on him. When he
left the store, a laptop was missing and an employee told police he suspected the
plaintiff. The police searched the plaintiff’s house and car and found nothing. The
Section 1981 claim was dismissed because the store had not engaged in the requisite
state action; the defamation claim was reinstated.
It could be that the split in the circuits will
be addressed by the Supreme Court if the underlying cases are not otherwise resolved.
Because the decisions in the First, Third and Eighth Circuits predate the February
decisions in Chapman and Phillips, it will be interesting to see if the February cases
are followed in other circuits.
These cases are a reminder that the law is
expanding as to the liability of retailers and business owners for the actions of their
SPOs even when acting in their private interests. Businesses need to be aware of the
law in the states where they do business and take all necessary precautions in training
and enforcing security policies and procedures. A legal advisor should be consulted to
aid you in navigating this area of the law.
***************
AN OVERVIEW OF THE FUTURE OF INTERNAL AUDIT DEPARTMENTS -
UNDER THE REQUIREMENTS OF SARBANES-OXLEY
BY: Edward J. Krill
Based on the failures of a number of publicly held corporations to provide accurate
and complete financial reports to the public, and their resulting financial collapse,
Sarbanes-Oxley was passed and signed July 30, 2002. The basic requirements of the
law and the status and responsibilities of external auditors and audit committees are
by now well known. Less well defined in the law is the role of internal audit staff
in designing and implementing internal controls and identifying risks of inaccurate
financial reporting. Recent SEC recommendations provide some guidance, but much has
yet to be written.
This is a brief summary of the duties and
responsibilities that I believe are or will soon be required by the new law. It is my
recommendation that each function listed below be performed by an independent internal
audit staff, reporting directly to the company’s Audit Committee. Conceptually, the
Internal Audit Department, consistent with the goal of Sarbanes-Oxley to promote
independence for both external and internal auditors, should be unto itself and apart
from any significant reporting relationship to management.
The new role of the internal auditor means physical
separation from the accounting and finance functions, opportunities to meet alone with
the Audit Committee of the Board, the ability to carry out investigations without the
knowledge or approval of management and hiring, advancement and performance evaluation
by the Internal Audit Committee. Effective management of these functions requires a
budget that is approved by the Board and administered without involvement by executive
management. Clarification of reporting relationships is essential, and should not be
done without communication designed to promote understanding of the need for this
independence.
These are the functions that I expect internal
auditors to routinely perform now or in the not too distant future, as a result of
pressure from the external auditor and the government agencies that are charged with
enforcing Sarbanes-Oxley:
• Monitor the non-audit work by the external
audit firm to insure Audit Committee knowledge and approval;
• Require insiders who are contemplating trades
in the company’s stock to provide prior notice of at least 24 hours before executing the
trade, and, possibly the reason for the trade.
• Provide pre-release review of all quarterly and
annual SEC filings.
• Adopt and administer the Code of Ethics for
the company by establishing and enforcing the process for reporting employee concerns
regarding conduct that could impair the financial status of the company.
• Perform confidential investigations of reports
of fiscal impropriety or activity that may be illegal or inconsistent with the company’s
best financial interests.
• Assemble and review, to verify accuracy and
completeness, corporate officer outside activity reports that include, on a quarterly
basis, information on business ventures and partners, investments, debt, business
entertainment and contacts with major competitor’s representatives.
• Review income and liability recognition policy
compliance, especially relations with major vendors, customers, suppliers and contractors
to reduce the acceleration of income and the postponement of debt or liability.
• Participate at the front end of acquisitions,
mergers, sales and other major corporate transactions, not as a major author of strategy
or structure, but to ensure that the deal is structured so that its impact on the
corporation will not be disguised, and to promote clear, complete reporting of the event
to the SEC and the market.
• Avoid conflicts of interest by refraining from
performing basic accounting functions such as designing and implementing internal
controls, since evaluating your own work is seen as ineffectual.
• Control press releases, communications with
news media, brokers, stock analysts and financial reporting sources to limit overstatement
of positive news and excessive “spin” on negative news.
• Implement greater inventory control procedures
that do not rely on computer statistical sampling, for example, but more on actual
on-site, hands on sample counts of merchandise.
• Contribute to the performance evaluations of
managers on the basis of the accuracy and completeness of audited financial information.
• Hire your own accountants, attorneys,
information technology sources and other professional staff and reduce reliance on the
Big Four, the only remaining sources of legally compliant outside audit services.
Enforcement activity under Sarbanes-Oxley will
occur in any situation in which there is a sudden reversal of economic fortunes, a major
negative correction to the financial reports of the company and, as a result, a major
loss of value in the company’s stock or bankruptcy. In this situation, the Internal
Auditor wants to be able to say that everything was done to anticipate and prevent the
financial reversal, and the circumstances that led to the failure to see it coming.
Obviously, if activities occur within a company
that are covert, hidden from others and essentially fraudulent, there may be nothing
that could have been done to stop this kind of behavior. However, an expected focus of
SEC or other enforcement authority, reviewing a financial disaster caused by inaccurate
financial reporting, is certainly going to be the internal audit function.
In order to protect against the potential negative
politics of the Section 404 audit by the external audit firm, frequent communication and
documented statements of what is expected are essential. While it is important to be
certain that the Internal Audit function can withstand the scrutiny required by Section
404, it is important to avoid non-critical conformity to auditor demands that are
unreasonable, especially where resources are lacking. External auditors are under
tremendous pressure to meet the requirements of the Public Company Accounting Oversight
Board, and the prudent internal auditor will carefully monitor those requirements as
they unfold.
Many individuals that have been engaged in the
internal audit function for years will react to these changes by insisting that in their
company, they are an integral part of a cohesive management team, all working together
for the success of the enterprise. The reaction to this “corporate cop” prediction will,
understandably, be that this is a radical and unnecessary approach that would destroy
needed rapport within the company.
The view is expressed that cooperation, support and
participation are essential to the kind of relationships required to enjoy the trust,
confidence and support of senior company personnel. All of the foregoing views are
valid, and express important values within any organization, especially when there is a
firmly held belief: “It can’t happen here.” Nonetheless, competing considerations
should be weighed.
The problem is that this new law has begun to impose
expectations that are inconsistent with prior goals directed toward collegiality,
openness and providing assistance in the basic management of a company’s financial
processes. Given the requirement that the external audit will be required to evaluate
the effectiveness of internal controls, a requirement recently postponed but not changed,
a prudent internal auditor should consider the agenda above and do everything feasible
to establish the independence from management control and direction, necessary to carry
out the expanded functions of the job.
This transition will not be comfortable or easy for
most internal auditors, but it may go more smoothly if the needed changes are initiated
within the Department rather than being imposed from outside.
***************
Copyrights by Carr Maloney
P.C. All rights reserved. This paper addresses legal issues important
to business; however, this publication should not be used as a substitute
for legal advice.
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