ARTICLES IN THIS ISSUE:
BY: Kevin M. Murphy and Valerie G. Preiss
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.
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.
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.