Hodnett v. Hodnett (Miss. Ct. App. 2018) – No Family Exception to the Automatic Presumption of Undue Influence in Attorney-Client Relationships

Written by: Austin Boyd

Member, American Journal of Trial Advocacy

Introduction:

Recently, in Hodnett v. Hodnett,[1] the Court of Appeals of Mississippi issued an opinion involving an attorney that drafted a series of transactions for her parents, which resulted in her obtaining the entire estate of her parents.[2] Interestingly, her brother, whom she had also represented in an unrelated matter, received nothing from their parents estate.[3] The brother, Tim Hodnett, then sued his sister, Sarah Hodnett, to “set aside a deed to the family farm from their mother to a revocable trust [which named the sister as sole beneficiary].”[4] The brother argued that an automatic presumption of undue influence was created when his sister drafted legal documents for her parents because of their attorney-client confidential relationship.[5] To see how this plays out, it is useful to provide some background information around the presumption of undue influence in attorney-client relationships.

Section 81 of Corpus Juris Secundum states that:

A confidential relationship exists, for purposes of establishing undue influence in the creation of a trust, where a person is so situated as to exercise a controlling influence over the will, conduct, and interest of the grantor. A confidential relationship involved in a trust case may not be misused, unfairly and unreasonably, to the advantage of the dominant party. A transfer of property to the dominant party must be a deliberate and voluntary act of the grantor, and must be fair, proper, and reasonable under the circumstances. In accordance with rules as to deeds, the mere fact that a confidential relationship exists between the grantor and the grantee does not alone invalidate a trust, especially where it appears that the grantor had competent and independent advice of an attorney, or the trust was not procured through improper means attended with circumstances of oppression or overreaching. This rule applies even though the relationship of conservator, guardian, or administrator exists between the grantor and the trustee. Where, however, the person in whom confidence is reposed exerts his or her influence to procure an advantage at the expense of the grantor, the trust may be deemed invalid and may be set aside. Whether such close and confidential relationships exist between the parties as to enable one to dominate and control the other is ordinarily a question of fact dependent on the circumstances of each case.[6]

Section 380 of Corpus Juris Secundum further provides: “[a] rebuttable presumption of undue influence applies to all transactions between an attorney and client for the benefit of the attorney.”[7] Once the presumption has been created, it can be rebutted as mentioned above. This could be done as follows:

The presumption of undue influence arising from transactions between those in confidential or fiduciary relationships may be rebutted by competent evidence or by clear and convincing evidence. To rebut the presumption of undue influence, it is necessary to show that the person alleged to have been influenced had competent and disinterested advice, or that he or she performed the act or entered into the transaction voluntarily, deliberately, and advisedly, knowing its nature and effect, and that his or her consent was not obtained by reason of the power and influence to which the relation might be supposed to give rise. Also, the presumption may be rebutted by proof that the transaction was fair, just, and equitable.[8]

Facts of this Case:

In Hodnett, the lower court found that the sister had a confidential relationship with her mother when the deed was executed due to her preparing various legal documents during the years leading up to that execution.[9] The confidential relationship between the daughter-attorney and mother-client raised the presumption that the deed was the “product of undue influence.”[10] On appeal, the daughter argued that the lower court applied the wrong legal standard in concluding there was a confidential relationship.[11]

Reasonableness and Fairness of the Transaction:

The daughter’s argument on appeal was based on Rule 1.8(c) of the Mississippi Rules of Professional Conduct, which provides that: “[a] lawyer shall not prepare an instrument giving the lawyer or a person related to the lawyer as parent, child, sibling, or spouse any substantial gift from a client, including a testamentary gift, except where the client is related to the donee.”[12] The Court of Appeals looked further to the comments of the rule and noted that  “such gifts are permissible only ‘if the transaction meets general standards of fairness.’”[13] The Court then quoted cases from the Supreme Courts of South Dakota, Wisconsin, and California, which elaborated on this principle.[14] One of these quotes was from a “similar case,” which stated “Rule 1.8(c) cannot be used to excuse substantial gifts which are facially disproportionate to gifts made to other relatives in the same class.”[15]

Per se confidential relationship and public policy:

 Next, the Court stated that under Mississippi law, “an attorney-client relationship is a per se confidential one.”[16] After noting that the Mississippi Rules of Professional Conduct are not substantive law, the Court of Appeals cited a Mississippi Supreme Court case that reasoned the general public policy behind the rule was to protect the people from fraud:

[T]he law declares that when there is a fiduciary or confidential relation, and there is a gift or conveyance of dubious consideration from the subservient to the dominant party, it is presumed void. This is not because it is certain the transaction was unfair; to the contrary, it is because the Court cannot be certain it was fair. As stated in Meek v. Perry, “if the court does not watch these transactions with a jealousy almost invincible, in a great majority of cases, it will lend its assistance to fraud.” Further, this is a “policy of the law, founded on the safety and convenience of mankind … preventing acts of bounty.” And, the Court will not permit such a transaction to stand, “… though the transaction may be not only free from fraud, but the most moral in its nature.” “The rule of law in these cases is not a rule of inference, from testimony, but a rule of protection, as expedient for the general good.”[17] (internal citations omitted).

To complete the presumption argument, the Court provided that “a presumption of undue influence arises even without a showing that the recipient played an active part in the preparation or execution of the instrument” due to the gifts being inter vivos and the existence of a confidential relationship between the daughter-attorney-donee and the mother-client-donor.[18]

Jurisdictions Vary on Exceptions Involving a Lawyer that is a Family Member:

 Acknowledging that other states, such as Ohio, “have allowed attorneys to prepare wills and deeds for family members to the attorney’s benefit without an automatic presumption of undue influence,” the Court of Appeals of Mississippi was not aware of any “Mississippi authority making an exception to this general rule for an attorney who is a relative of the grantor.”[19] Further, the court reasoned that even if the lower court erred by not finding an exception for a lawyer that drafted legal instruments for relatives, the error would be harmless due to the “particular facts of [the] case.”[20]

Holding:  

Ultimately, the Court of Appeals of Mississippi held that the lower court did not err in finding a presumption of undue influence.[21]The Court stated that there was clear evidence in the record that proved there was a confidential relationship between the daughter and mother, regardless of any per se confidential relationship.[22] There was “little evidence” that the parents of the attorney-daughter had any mental incapacity or “physical dependency.”[23] However, the Court provided that “a confidential relationship can be founded on trust just as it can upon physical weakness or dependence.”[24] Additional evidence showed that the daughter prepared all of the documents that ultimately led to her “inheriting [her parents] entire estate,” was attorney-in-fact for both of them, and had a “longstanding attorney-client relationship” with her parents.[25]

Further, the evidence revealed that the daughter used the power of attorney to execute the deed from her father to her mother “when he was dying of cancer,” and had not advised her parents to consult with independent, outside counsel.[26] Additionally, the lower court found that the daughter “had concealed the terms of the trust—if not its existence—from her brother, whom she had previously represented as an attorney.”[27] Ultimately, the daughter received the entire estate of her parents and the brother received nothing.[28] To conclude, the Court of Appeals of Mississippi stated “[a]ttorneys should be held to a higher standard than laymen, to protect both the general good and integrity and reputation of the legal profession.”[29]

Conclusion:              

As always, it is best practice to verify the law of your jurisdiction. If your parents, grandparents, or similar family member requests you to draft legal documents, in which you will be a beneficiary, research the law in your jurisdiction and reach out to other lawyers who routinely do this in practice.


[1]2018 WL 1805477 (Miss. Ct. App. 2018).

[2]Hodnett v. Hodnett, 2018 WL 1805477, at *4 (Miss. Ct. App. 2018).

[3]Hodnett, 2018 WL 1805477, at *4. 

[4]Id. at *1.

[5]Id. at *1, *3.

[6]90 C.J.S. Trusts § 81 (2018).

[7]95 C.J.S. Wills § 380 (2018).

[8]25 Am. Jur. 2d Duress and Undue Influence § 45 (2018).

[9]Hodnett, 2018 WL 1805477, at *4.

[10]Id.

[11]Id.

[12]MS R RPC Rule 1.8.

[13]Hodnett, 2018 WL 1805477, at *3.

[14]Id.

[15]Id. (citing In re Discipline of Mattson, 651 N.W.2d 278, 288 (S.D. 2002)).

[16]Id. at *3.

[17]Id. at *4 (citing Estate of McRae v. Watkins, 522 So.2d 731, 737 (Miss. 1988)).

[18]Id. (citing In re Will of Moses, 227 So.2d 829, 835 (Miss. 1969)).

[19]Hodnett, 2018 WL 1805477, at *4 (citing Krischbaum v. Dillon, 58 Ohio St.3d 58, 567 N.E.2d 1291, 1296–97 (1991)).

[20]Id. at *4.

[21]Id. at *5.

[22]Id. at *4.

[23]Id.

[24]Id. (citing Norris v. Norris, 498 So.2d 809, 812 (Miss. 1986)).

[25]Hodnett, 2018 WL 1805477, at *4.

[26]Id.

[27]Id. at *4.

[28]Id.

[29]Id. at *5 (citing Estate of McRae v. Watkins, 522 So.2d 731, 737 (Miss. 1988); Lowrey v. Will of Smith, 543 So.2d 1155, 1161–62 (Miss. 1989));

Sale of a House: Applying the Home Sale Gain Exclusion

By Lisa K. Cagle
Research and Writing Editor, American Journal of Trial Advocacy

Moving. . . the word conjures up feelings of anxiety, excitement, or even remorse. In the United States, most people will move at some time during their lives.[1] In fact, over 35 million Americans move annually[2] with many moves involving the sale of the home.[3]

Moving is expensive; whether a person hires professional movers or loads everything into a pickup truck, moving costs money. An average move costs $4,300 to relocate to a new state or $2,300 to relocate within the same state,[4] not exactly pocket change for most people. However, if the move involves the sale of a home, the sale may trigger capital gains taxes. A capital gain results when the sales price of a capital asset—for example, a house—is more than the cost to the owner.[5]

Fortunately, the IRS has also provided a means to allow a taxpayer to keep much of the profit from the sale of his or her home.[6] Let’s begin the journey into the world of capital gains by following the fictional story of Matthew. Matthew bought a house in 2004 for $100,000 and resided in that house for 10 years before selling that house in 2014 for $210,000. The $110,000 profit is considered capital gains, and, without an exclusion, Matthew would have to pay taxes on this $110,000. Fortunately for Matthew, the Home Sale Gain Exclusion exists and allows Matthew to exclude up to $250,000 ($500,000 if married filing jointly) in capital gains from the sale of his principal residence. This article will discuss the requirements of eligibility for the Home Sale Gain Exclusion.

The Home Sale Gain Exclusion

The Home Sale Gain Exclusion allows a taxpayer to exclude up to $250,000 ($500,000 if married filing jointly) from capital gains on the sale of the taxpayer’s main home once every two years.[7] To be eligible for this exclusion, the taxpayer must meet two requirements: use and ownership.[8] Additionally, these requirements do not need to be met concurrently to be eligible for the Home Sale Gain Exclusion. [9]

The first requirement states that the house is the main place where a person resides, also known as the principal residence.[10] This is what the IRS terms the “use requirement.”[11] Reasonable absences such as vacations and short-term hospital stays do not alter the location of a principal residence.[12] Additionally, the principal residence does not have to be a house. It could include a boat, a trailer, or even a vacant lot, provided the vacant lot was owned and used as part of the principal residence.[13] However, caution must be advised. Although the IRS defines “residence” broadly, not all residences may qualify under the Home Sale Gain Exclusion. In particular, a mobile home, under local laws, may not be considered a fixture, and, therefore, not qualify as a residence for purposes of the Home Sale Gain Exclusion.[14]

Additionally, the principal residence must be the primary residence. While over three million Americans own a second home,[15] the only residence that qualifies for the Home Sale Gain Exclusion is the primary residence: the one where the individual lives the majority of the year.[16]

The second requirement is the “ownership requirement.”[17] As the name suggests, this requires that the taxpayer owned the residence.[18] Notably, for a couple that is married filing jointly, only one of the spouses must have owned the residence for the required period of time.[19]

Finally, merely using and owning a residence is not enough to qualify for the Home Sale Gain Exclusion. There is also a time element involved: the taxpayer must have used and owned the residence for two out of the last five years dated from the time of the sale, known as the “test period.”[20] As previously stated, the use and ownership requirements do not have to be met concurrently, however, both must be met during the requisite five-year test period.[21] As an illustration, fictional character Jenny rented her house from 2011-2014, then purchased it and lived in it from 2014-2016, after which she moved out and rented it to another individual, while still retaining ownership. In 2018, Jenny decide to sell the house. Jenny meets the ownership requirement because she owned the house from 2014-2018: 4 years. She also meets the use requirement because she used the house as her primary residence from 2011-2016. Note that, for the purposes of the Home Sale Gain Exclusion, only the 5 years preceding the date of the sale may be applied; fortunately for Jenny, she still meets the use requirement because she lived in the house for 3 years during the test period (2013 is 5 years before the sale of the house and, using this as a starting date, Jenny lived in the house from 2013-2016: 3 years). Therefore, Jenny is likely eligible for the Home Sale Gain Exclusion.[22]

The Home Sale Gain Exclusion also applies to married couples. As an illustration is fictional married couple Sam and Susie. Sam purchased his house in 2010 and Susie moved into the house in 2011. In 2012, Sam and Susie got married to each other and Susie’s name was placed on the deed for the house. Then, in 2014, Sam and Susie sold their home. How does this effect their eligibility for the Home Sale Gain Exclusion? The IRS requires that only one spouse meet the ownership requirement:[23] in our example, Sam owned the home for 4 years prior to the sale, hence meeting the ownership requirement. However, the IRS requires that both spouses meet the use requirement.[24] In our example, Sam used the house for 4 years (2010-2014) and Susie used the house for 3 years (2011-2014). Therefore, as long as neither Sam nor Susie have used the Home Sale Gain Exclusion on a different residence in the previous two years, Sam and Susie will likely qualify for the Home Sale Gain Exclusion.[25]

Military Family Tax Relief Act

Of course, not every individual can meet these requirements, and often military families are required to move before they become eligible for the Home Sale Gain Exclusion. Under the correct circumstances, the IRS allows the five years to be suspended. Under the Military Family Tax Relief Act of 2003 (MFTRA), “a member of the uniformed services or of the Foreign Service of the United States” who “is serving on qualified official extended duty” may suspend the five years for up to an additional ten years.[26] Qualified official extended duty means the individual (1) has been “called or ordered to active duty for an indefinite period, or for a definite period of more than 90 days,” (2) is serving more than 50 miles from their “main home,” and (3) is a member of the armed forces, Peace Corps, Foreign Service, or intelligence community.[27]

To explain ten-year suspension, let’s take a look at military couple Marco and Maddy. In 2003, Marco and Maddy were stationed in Grand Forks, North Dakota, where they bought and lived in a home. In 2006, the military couple were transferred to Andrews Air Force base, located in the deserts of southern California. Due to the less favorable real estate market near Andrews Air Force base, the couple decided to live on base and rent out their Grand Forks house. In 2014, after a boom in the Grand Forks real estate market, Marco and Maddy, who are now stationed at yet another military base, decide to capitalize on the Grand Forks market and sell their Grand Forks house. Using the suspended period provided under MFTRA, our fictional military couple are still likely eligible for the Home Sale Gain Exclusion. They meet both the ownership and use requirements: both Marco and Maddy lived/used and owned the home for 3 years (2003-2006). They also meet the qualified official extended duty requirements: (1) they are on active duty, (2) they are stationed at least 50 miles from their house, and (3) they are a member of the uniformed services, in this case, the Air Force. Therefore, Marco and Maddy may suspend their five years by up to ten years. This means that Marco and Maddy may suspend the five years for the 8 years they were on qualified official extended duty (2006-2014). The IRS describes this as “disregarding those [8] years.”[28] Because Marco and Maddy owned and used the home for more than 2 of the 5 years during the test period (ownership from 2003-2006 for a total of 3 years), Marco and Maddy are likely eligible for the Home Sale Gain Exclusion.

When moving isn’t your choice—Partial Exclusion of Gain

Many moves are necessitated due to reasons beyond an individual’s control. According to the U.S. Census Bureau, almost 10% of annual moves are due to a new job or a job transfer.[29] Another 5% are due to a change in marital status.[30] The IRS provides three exceptions that allow individuals to claim a partial exclusion of gain on their home when they are unable to meet all the requirements of the 2-out-of-5-year test.[31] According to the IRS: “You may qualify [for an exception] if you can demonstrate the primary reason for sale, based on facts and circumstances, is work-related, health-related, or unforeseeable.”[32]

The three exceptions are not broadly interpreted and are provided when the move is necessitated by a hardship. The first exception, work-related, is permitted if the new job is at least 50 miles farther from the taxpayer’s residence than the previous job.[33] The second exception, health-related, permits a partial exclusion of gain when the move was facilitated due to a personal illness requiring relocation closer to a healthcare provider, or if a family member’s illness required the taxpayer to relocate closer to “provide medical or personal care.”[34]

The third exception allows for a partial exclusion of gain if an individual underwent some unforeseen circumstance or hardship. The IRS provides some guidance on the types of situations it considers to be “unforeseen.” An unforeseen circumstance that causes an individual to move is “the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home,” such as natural disasters, acts of terrorism, death, divorce, or multiple births from the same pregnancy.[35]

Conclusion

Moving is expensive, but fortunately, the sale of a primary residence can be allowed some tax breaks. Under the Home Sale Gain Exclusion, individuals who have owned and used a house as the primary residence for at least two of the five years immediately preceding the sale may exclude up to $250,000—or $500,000 if married filing jointly—of the capital gains from the sale of the house as taxable income.


[1] 35 Interesting Moving Industry Statistics for 2018 and Beyond, Simply Self Storage (Oct. 31, 2017),https://www.simplyss.com/blog/moving-statistics/ [hereinafter “Simply Self Storage”].

[2] Simply Self Storage, supra note 1.

[3] See Number of Existing Homes Sold in the United States from 2005 to 2019 (in Million Units), Statista (Feb. 2018), https://www.statista.com/statistics/226144/us-existing-home-sales/ (showing that 5.51 million homes were sold in the U.S. in 2017).

[4] Simply Self Storage, supra note 1.

[5] Topic Number 409 – Capital Gains and Losses, IRS (Mar. 13, 2018), https://www.irs.gov/taxtopics/tc409.

[6] William Perez, Paying Capital Gains on the Sale of Your Home, The Balance (June 8, 2018),https://www.thebalance.com/sale-of-your-home-3193496; see also 26 I.R.C. § 121 (West 2018) (“Gross income shall not include gain from the sale . . . if, during the 5-year period ending on the date of the sale . . . such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”).

[7] Publication 523 (2017), Selling Your Home, IRS (Feb. 16, 2018),  https://www.irs.gov/publications/p523 [hereinafter “IRS”].

[8] IRS, supra note 7.

[9] Topic Number 701 – Sale of Your Home, IRS (Feb. 1, 2018),https://www.irs.gov/taxtopics/tc701 [hereinafter “Sale of Your Home”].

[10] Walter D. Schwidetsky, Exclusion of Gain on the Sale of a Principal Residence, Interest Deductions, Home Office Rules, 8, American Bar Association, https://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/symposia/2007/schwidetzky.authcheckdam.pdf (last visited Aug. 1, 2018).

[11] Sale of Your Home, supra note 9.

[12] IRS, supra note 7; Schwidetsky, supra note 10, at 3.

[13] IRS, supra note 7; Schwidetsky, supra note 10, at 2.

[14] Logan Allec, Home Sale Gain Exclusion Rules Under Section 121: How Does the Primary Residence Tax Exemption Work?,Money Done Right (Jan. 22, 2018), https://moneydoneright.com/home-sale-gain-exclusion/; see also Norris v. Thomas, 215 S.W.3d 851, 859 (Tex. 2007) (finding that “dock-based umbilical cord providing water, electricity, and phone service may help make a boat habitable” but did not qualify the boat as a residence for tax purposes).

[15] Number of Households With People Who Own a Second Home in the U.S. 2018 to 2020, Statista(July 2018),https://www.statista.com/statistics/228894/people-living-in-households-that-own-a-second-home-usa/.

[16] Allec, supra note 14; see also IRS, supra note 7 (explaining the “facts and circumstances” test to “determine which property is

[the taxpayer’s]

main home”).

[17] Sale of Your Home, supra note 9.

[18] IRS, supra note 7.

[19] Id.

[20] Id.

[21] Sale of Your Home, supra note 9.

[22] This illustration does not factor in nonqualified use that may impact the amount eligible for the Home Sale Gain Exclusion.

[23] IRS, supra note 7.

[24] Id.

[25] This illustration presumes that Sam and Susie did not use their home for other nonqualified uses.

[26] Military Family Tax Relief Act of 2003 § 101(a), 26 I.R.C. § 121(d)(9)(A) (West 2018).

[27] IRS, supra, note 7.

[28] Id.

[29] CPS Historical Migration/Geographic Mobility Tables, United States Census Bureau, Table A-4 (June 12, 2018),https://www.census.gov/data/tables/time-series/demo/geographic-mobility/historic.html.

[30] Id.

[31] IRS, supra note 7. For guidance on calculating a partial exclusion of gain, see id. (providing charts and step-by-step guidance in calculating capital gain).

[32] IRS, supra note 7.

[33] Id.

[34] Id.; see also IRS, supra note 7 (stating that a health-related event occurs when the move is (1) “to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member”; or (2) “to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury”).

[35] IRS, supra note 7.

The Culture of Silence: The Impact of #metoo on Nondisclosure Agreements

Photo Credit: https://questfusion.com/non-disclosure-agreements-critical-startup/

By: Whitney Lott

Associate Editor, American Journal of Trial Advocacy

Introduction

While the #MeToo movement has forced national reflection, a new enemy of safety in the workplace has come to light: the nondisclosure agreement.  Nondisclosure agreements, once an anomaly of the tech industry, are now taking center stage in the national consciousness with its connection to the #Metoo movement. Employers of predators must now take stock if they are partially to blame for the culture of silence surrounding abuse in their companies due to the proliferation of these nondisclosure agreements. The use of nondisclosure provisions or confidentiality provisions in settlement agreements has forced victims of sexual misconduct, including the victims of Harvey Weinstein, Bill O’Reilly and even Larry Nassar, to remain silent on matters concerning the sexual abuse or harassment perpetrated on them.[1] The use of these provisions is the long-standing practice for businesses that are now being reevaluated. These reevaluations are due not only because of the harm caused to the victims of the misconduct, but also because of the vulnerability of the unaware public. These provisions, while being legally upheld in the past, are facing legal jeopardy by new state statutes which are now finding such provisions void and unenforceable.

What are nondisclosure agreements?

 A nondisclosure agreement, sometimes called a confidentiality agreement, is an agreement where an employee agrees to not reveal any confidential or proprietary information during the term of her employment and after the termination of her employment.[2] These agreements are legally binding contracts between an employer and employee.[3] Nondisclosure agreements differ from nondisclosure provisions that exist as a part of a settlement arrangement with a company. Nondisclosure or confidentiality provisions are a longstanding and vital part of settlement agreements as well. One of the major benefits of a company considering settlement is preventing the claims from being released and causing damage to the company. This is especially true of settlements with victims of sexual harassment claims. Due to the rise of the #MeToo movement and public awareness of the perveance of sexual harassment, businesses have come under fire for the use of nondisclosure agreements. These agreements are used to silence victims and potentially increase the vulnerability of other employees. Nondisclosure agreements are vital to many companies for the legitimate purpose of protecting trade secrets and proprietary information; however, the use of nondisclosure agreements to protect the company from bad press has enhanced the culture of silence in the face of abuse in many of these companies.[4] 

What is happening?

National awareness of these nondisclosure agreements has caught the attention of the federal and state legislatures, along with many state governors. During the past year states, such as Tennessee, Washington, Vermont, and Maryland, have taken the lead in banning confidentiality clauses as conditions of employment contracts.[5]  For example, Governor Larry Hogan signed “Disclosing Sexual Harassment in the Workplace Act of 2018” into law in May of 2018.[6] This law prevents employees from waiving future claims related to sexual harassment or retaliation claims for sexual harassment claims.[7] Maryland has gone further in requiring companies of over fifty employees to disclose how many sexual harassment claims have been settled in the last ten years and the number of claims that included a nondisclosure agreement.[8] If more states move in this direction, then the main benefit of nondisclosure agreements, preventing bad publicity, would be eliminated. Further, Arizona, New York, and California have attacked nondisclosure agreements directly in cases of sexual misconduct.

Washington now restricts preemptive nondisclosure agreements required by employers that restrict the disclosure of sexual harassment.[9] The Washington law does contain an exception that the nondisclosure provision will still be valid in settlement agreements.[10] This differs from the California law passed later in 2018. Washington Senate Bill 5996 makes all nondisclosure agreements – even those made before the law – void and unenforceable.[11] Following Washington’s lead, on September 30, 2018, Governor Brown of California signed a bill into law which prohibits the use of nondisclosure provisions within settlement agreements in cases involving sexual assault, sexual harassment, and sex discrimination by making them void as a matter of law and public policy.[12] 

The Federal Outlook

The federal government has always joined the hunt for an answer on how to encourage the disclosure of sexual harassment claims. The U.S. Senate introduced the Ending the Monopoly of Power Over Workplace Harassment through Education and Reporting Act (“EMPOWER Act”) which prohibits nondisclosure agreements over sexual harassment as a term of employment.[13] The bill would also require that companies reveal in their SEC filings how many sexual harassment settlements occurred along with the amounts of those settlements.[14] However, the EMPOWER legislation saw little movement, and the session of Congress ended without its passage.[15] However, the use of these nondisclosure agreements has caught the attention of the Equal Employment Opportunity Commission (“EEOC”). EEOC Commissioner Chai Fledblum issued a warning to businesses to tread lightly with these agreements; he stated “It is important for employers to know that we are looking at these agreements.”[16] The EEOC is not meant to protect the interests of private parties exclusively, but it has another role of enhancing the public interest of preventing employment discrimination.[17] Courts have ruled that any agreement that causes the interference in communication between the EEOC and an employee “sows the seeds of harm to the public interest.”[18] The culture of silence built up around nondisclosure agreements is forcing the EEOC to begin to look into the agreements to ensure that the accusers are not prohibited from filing complaints to the EEOC or preventing the EEOC from properly investigating accusations of harassment. The agreements would be unlawful if they prevented employees from aiding the EEOC in its investigations into employment cases.

Some businesses are not waiting for the government entities to foreclose on the use of nondisclosure agreements but are willing to forego the use of these provisions. For example, Microsoft no longer requires employees who make claims of sexual harassment to sign forced arbitration agreements.[19] According to Brad Smith, the President of Microsoft, “The silencing of people’s voices has clearly had an impact in perpetuating sexual harassment.”[20] Ultimately, the pressure on these companies to stop the use of nondisclosure agreements and provisions will only increase from both the legislative branch and the general public.

Conclusion

 The environment of silence that once protected sexual misconduct abusers within companies and captured national attention is now being attacked by state legislatures. These legislatures are eliminating the availability of nondisclosure agreements and provisions used in cases involving sexual harassment and abuse. Further, the EEOC has sent signals to companies that these provisions and agreements will not be permitted in preventing the accusers and witnesses of sexual abuse from speaking to the EEOC investigators during employment cases. 


[1] Jessica Levinson, Non-disclosure agreements can enable abusers. Should we get rid of NDAs for sexual harassment?, NBC News Think, (Jan. 24, 2018),  https://www.nbcnews.com/think/opinion/non-disclosure-agreements-can-enable-abusers-should-we-get-rid-ncna840371.

[2] Basic Legal Transactions, Business Transactions § 25:2, Westlaw (database updated Nov. 2010).

[3] See Nondisclosure Agreement, Black’s Law Dictionary (10th ed. 2014).

[4]Ann Fromholz & Jeanette Laba, #metoo Challenges Confidentiality and Nondisclosure Agreements, 41 L.A. Law. 12, 12 (2018).

[5] See Zoe Greenberg, What Has Actually Changed in a Year, N.Y. Times, (Jan. 9, 2019), https://www.nytimes.com/interactive/2018/10/06/opinion/sunday/What-Has-Actually-Changed-in-a-Year-me-too.html.

[6] Larry R. Seegull & Jill S. Distler, Maryland’s Sexual-Harassment Disclosure Law Takes Effect Soon, Soc’y for Hum. Res. Mgmt. (Sept. 18, 2018), https://www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/maryland-sexual-harassment-law-takes-effect-soon-.aspx.

[7] Id.

[8] Id.

[9] Catherine Morisset, Washington Bars Sexual Harassment Nondisclosure Agreements, Fisher Phillips (Mar. 22, 2018),https://www.fisherphillips.com/resources-alerts-washington-bars-sexual-harassment-nondisclosure-agreements.

[10] Id.

[11] Id.

[12] Cal. Civ. Proc. Code § 1001 (West 2019).

[13] Ending the Monopoly of Power Over Workplace Harassment through Education and Reporting Act, S. 2994, 115th Cong. (2018).

[14] Id.

[15] Id.

[16] Ann Fromholz & Jeanette Laba, #metoo Challenges Confidentiality and Nondisclosure Agreements, 41 L.A. Law. 12, 12 (2018) (quoting Daniel Wiessner, EEOC Monitor: Harassment settlements in agency’s sights, Reuters (Dec. 12, 2017), https://www.reuters.com.).

[17] Id.

[18] E.E.O.C. v. Astra U.S.A., Inc., 94 F.3d 738, 744 (1st Cir. 1996); See id. at 744-45 (“[W]eighing the significant public interest in encouraging communication with the EEOC against the minimal adverse impact that opening the channels of communication would have on settlement, we agree wholeheartedly with the lower court that non-assistance covenants which prohibit communication with the EEOC are void as against public policy.”).

[19] Nick Wingfield & Jessica Silver-Greenberg, Microsoft Moves to End Secrecy in Sexual Harassment Claims, N.Y. Times (Dec. 19, 2018),   https://www.nytimes.com/2017/12/19/technology/microsoft-sexual-harassment-arbitration.html.

[20] Id.

Black (enough?) Letter Law: What’s the Threshold to Qualify for Minority Race Status?

By Averie Armstead

Member, American Journal of Trial Advocacy


Ralph Taylor is a 55-year-old who has lived majority of his life as a white man.[1] In 2010, the Lynnwood, Washington citizen took a home DNA test, and now Taylor identifies as multiracial.[2] The DNA test “estimated he was 90 percent Caucasian, 6 percent indigenous American and 4 percent Sub-Saharan African.”[3] After receiving the results, Taylor applied for state certification so his company, Orion Insurance Group, would be considered a minority-owned business.[4] The Washington Office of Minority & Women’s Business Enterprises (OMWBE) approved Taylor’s application because there was no criteria to define a threshold to qualify for minority race or ethnicity.[5] However, Taylor’s Federal Disadvantaged Business Enterprise (DBE) application was denied for failure to provide sufficient evidence that he was a member of a recognized racial minority group.[6] Taylor filed suit in the United States District Court of the Western District of Washington.[7]

The Lawsuit:

Orion Ins. Grp., et al. v. Wash. State Office of Minority & Women’s Bus. Enter., et al.

            OMWBE, established more than twenty years ago, was created to ensure equality among minority business owners seeking transportation contracts in Washington.[8] Applications are approved on a case-by-case basis.[9] The goal of the program is that no less than ten percent of authorized federal funds are expended through “small business concerns that are owned and controlled by socially and economically disadvantaged individuals.”[10] On May 16, 2014, OMWBE notified Taylor that it was questioning his membership of the Black or Native American groups.[11] Taylor stated that he identified himself as Black American and Native American, however Taylor acknowledged that he did not have any documentation regarding his membership in either respective group.[12]

In reevaluating Taylor’s application, OMWBE found that (1) Taylor’s birth certificate did not indicate race, failing to prove membership of a minority race group; (2) Taylor provided an African American woman’s death certificate – claiming her to be an ancestor – but failed to prove any relationship to the woman; (3) Taylor’s DNA test, indicating he is 6% Native American and 4% Sub-Saharan African failed to prove membership of a minority group; (4) Ancestry by DNA has a 3.3% “statistical noise” associated with each test, meaning Taylor’s ancestry would more accurately be 2.7% Native American and 0.7% Sub-Saharan African, and the test results were insufficient to prove minority group membership; (5) Taylor’s two submitted letters, where the authors stated they considered Taylor to be of mixed heritage, failed to identify Taylor as Black or Native American; and (6) Taylor’s NAACP membership, Ebony magazine subscription, and interest in “Black social issues” failed to prove membership of a minority race group.[13]

Due to the aforementioned reasons, in conjunction with the fact that Orion’s gross receipts for 2013 were $1,083,204,[14] OMWBE denied Taylor’s DBE application, noting that Taylor failed to prove he was socially and economically disadvantaged on the basis of race.[15] Furthermore, OMWBE found that even if Taylor was a member of either racial group, “the presumption of disadvantage has been rebutted.”[16] In September 2014, Taylor appealed the decision to the U.S. Department of Transportation (USDOT).[17] USDOT affirmed OMWBE’s denial of Taylor’s DBE application, concluding OMWBE’s decision was supported by substantial evidence in the administrative record.[18]

On July 1, 2016, Taylor filed suit, asserting claims for:  

(A) Violation of the Administrative Procedures Act, 5 U.S.C. § 706, (B) “Discrimination under 42 U.S.C. § 1983” (referenc[ing] Equal Protection), (C) “Discrimination under 42 U.S.C. § 2000d,” (D) violation of Equal Protection under the United States Constitution, (E) violation of the Washington Law Against Discrimination and Article 1, Sec. 12 of the Washington State Constitution, and (F) assert that the definitions in 49 C.F.R. § 26.5 are void for vagueness.[19]

Taylor sought damages and injunctive relief, seeking a declaration of definitions Black American and Native American.[20] The court, however, found that Taylor’s claims failed and OMWBE did not act arbitrarily or capriciously in denying his application.[21]

            The court addressed Taylor’s claim that he was denied because he was not “Black enough.”[22] Stating that Taylor disproportionally emphasized is genotype rather than his phenotype, the court defined phenotype as “all the observable characteristics of an organism, such as shape, size, color, and behavior, that result from the interaction of the organism’s genotype with its environment.”[23] Furthermore, Taylor did not provide any evidence that discrimination regarding federal dollars was due to his genotype as opposed to his phenotype, as well-documented by Congress.[24] Thus, the court found that Taylor’s reliance on his genotype was misplaced.[25]

Scientific Support?

            Interestingly enough, the fine print of direct-to-customer DNA testing says that results should only be used as a hobby.[26] At best, the results are an estimate; at worst, results are inaccurate.[27] Experts say that there is little scientific support behind genetic ancestry DNA results regarding ethnicity.[28] In fact, a CBC News investigation found that several DNA tests were suspicious.[29] One result claimed a sample had 20 percent Native American ancestry; the problem was the sample came from a dog, not a human.[30]

Therefore, one should question the science behind at home DNA tests altogether. Companies pride themselves in their advertising promising to uncover ethnic ancestry.[31] This million-dollar industry compares submitted DNA samples to a worldwide collection of already collected samples; however, companies do not tell the public whether they have 1,000 or 10,000 samples.[32] This poses the question, is Taylor’s “genetic ancestry” even plausible?

Moving Forward

            Taylor has appealed his case to the Ninth Circuit.[33] If Taylor wins, this case could redefine how race is determined, defined, and established for purposes of disenfranchisement initiatives.[34] So far, Taylor has spent up to $300,000 in legal costs to fix what he calls a “subjective and broken system.”[35] The Ninth Circuit Court of Appeals will hear oral arguments on Monday, December 3, 2018.


[1] Christine Willmsen, Lynnwood man tried to use a home DNA test to qualify as a minority business owner. He was denied – now he’s suing., Seattle Times (last updated Sept. 17, 2018 10:13 a.m.), https://www.seattletimes.com/seattle-news/lynnwood-man-tried-to-use-a-home-dna-test-to-qualify-as-a-minority-business-owner-he-was-denied-now-hes-suing/.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Orion Ins. Grp., et al. v. Wash. State Office of Minority & Women’s Bus. Enter., et al., No. 16-5582 RJB, 2017 WL 3387344, at *3 (W.D. Wash. Aug. 7, 2017).

[7] Id. at *1.

[8] Willmsen, supra note 1.  

[9] Id.

[10] Orion Ins. Grp., 2017 WL 3387344 at *1.

[11] Id. at *3.

[12] Id.

[13] Id. at *8.

[14] Id. at *2.

[15] Id. at *3.

[16] Orion Ins. Grp., 2017 WL 3387344 at *3.  

[17] Id.

[18] Id. at *4.

[19] Id.

[20] Id.

[21] Id. at *8 (“The OMWBE did not act in an arbitrary or capricious manner when it found that there was insufficient evidence that Mr. Taylor was a member of either the Black or Native American groups.”).

[22] Orion Ins. Grp., 2017 WL 3387344 at *9.

[23] Id. (citing In re Roslin Inst. (Edinburgh) 750 F.3d 1333, 1338 (Fed. Cir. 2014)).

[24] Orion Ins. Grp., 2017 WL 3387344 at *9.

[25] Id.

[26] Willmsen, supra note 1.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Willmsen, supra note 1.

[33] Id.

[34] Id.

[35] Id.