Lawyer The Arkansas
A publication of the Arkansas Bar Association
Vol. 54, No. 2, Spring 2019
online at www.arkbar.com
Inside: College Athletics and Sports Betting Human Trafficking Issue for Cubans and MLB Class Action Practice Captive Insurance Criminal and Civil Corporate Misconduct
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PUBLISHER Arkansas Bar Association Phone: (501) 375-4606 Fax: (501) 375-4901 www.arkbar.com EDITOR Anna K. Hubbard EXECUTIVE DIRECTOR Karen K. Hutchins EDITORIAL BOARD Anton Leo Janik, Jr., Chair Haley M. Heath Luke K. Burton Dr. Frankie Martin Griffin Judge Brandon J. Harrison Ashley Welch Hudson Jim L. Julian Philip E. Kaplan Tory Hodges Lewis Drake Mann Gordon S. Rather, Jr. David H. Williams OFFICERS President Suzanne Clark Board of Governors Chair J. Cliff McKinney II President-Elect Brian M. Rosenthal Immediate Past President Anthony A. “Tony” Hilliard President-Elect Designee Paul W. Keith Secretary Glen Hoggard Treasurer Joseph F. Kolb Parliamentarian Aaron L. Squyres Young Lawyers Section Chair Sarah C. Jewell BOARD OF GOVERNORS James Paul Beachboard Kandice A. Bell Margaret Hobbs Benson Chase Carmichael Earl Buddy Chadick Sterling Taylor Chaney Brian M. Clary Grant M. Cox Carol C. Dalby Bob Estes Brent Eubanks Robert (Skip) L. Henry III Joshua D. McFadden James E. McMenis Brandon K. Moffitt Brant Perkins Colby T. Roe Albert J. Thomas III Robert M. Veach H. Wayne Young, Jr. LIAISON MEMBERS Judge Charles E. Clawson Patti Julian Judge Jeff C. Harper Sarah C. Jewell Jason B. Hendren Harry Truman Moore Lori D. Howard Richard L. Ramsay Karen K. Hutchins
The Arkansas Lawyer (USPS 546-040) is published quarterly by the Arkansas Bar Association. Periodicals postage paid at Little Rock, Arkansas. POSTMASTER: send address changes to The Arkansas Lawyer, 2224 Cottondale Lane, Little Rock, Arkansas 72202. Subscription price to non-members of the Arkansas Bar Association $35.00 per year. Any opinion expressed herein is that of the author, and not necessarily that of the Arkansas Bar Association or The Arkansas Lawyer. Contributions to The Arkansas Lawyer are welcome and should be sent to Anna Hubbard, Editor, ahubbard@arkbar.com. All inquiries regarding advertising should be sent to Editor, The Arkansas Lawyer, at the above address. Copyright 2019, Arkansas Bar Association. All rights reserved.
The Arkansas
Lawyer Vol. 54, No. 2
features
12 The Intersection and Integrity of College Athletics and Sports Betting in Arkansas By Matt McCoy 18 Resolving (then Un-resolving) the Human Trafficking Issue for Cubans Joining America’s National Pastime By Jason Browning 24 Arkansas Insurance Department Eager for Creation or Re-Domicile of Captive Insurance Programs By Haley M. Heath and Samuel C. Baber 30 Spring Break on the Road to Justice By Helen C. Gratil
32 Shattered Class: Looking Beyond Certification in Arkansas Class Actions By Jess Askew III and Andrew King 38 DOJ Relaxes the Standard to Receive Cooperation Credit for Criminal and Civil Corporate Misconduct By Kerry L. Myers
Contents Continued on Page 2
Lawyer The Arkansas Vol. 54, No. 2
in this issue ArkBar News
4
ArkBar Annual Meeting
16
2018-2019 Sustaining Contributors
42
Disciplinary Actions
45
Arkansas Bar Foundation
49
In Memoriam
50
Classified Advertising
52
columns
President’s Report
7
Suzanne Clark
Young Lawyers Section Report
9
Sarah C. Jewell
YOU ARE THE EXPERTS Contact the Association if you have article ideas for The Arkansas Lawyer magazine. For more information on the submission process, go to www.arkbar.com Questions? 501-801-5680 or ahubbard@arkbar.com
Arkansas Bar Association
2224 Cottondale Lane, Little Rock, Arkansas 72202
HOUSE OF DELEGATES Delegate District A-1: Geoffrey Denzil Hamby, Susan K. Kendall, George M. Rozzell, Ryan Scott, Vicki S. Vasser-Jenkins Delegate District A-2: Payton C. Bentley, Earl Buddy Chadick, Leslie Copeland, M. Scott Hall, Jason M. Hatfield, Brian C. Hogue, Sarah Coppola Jewell, Jarid Markus Kinder, Alan Lee Lane, Richard Kyle Lippard, John Pesek Delegate District A-3: James A. Arnold II, Sarah E. Capp, Craig L. Cook, Keith M. Kannett, Samuel M. Terry Delegate District A-4: Justice Paul Danielson Delegate District A-5: Johnny L. Nichols Delegate District A-6: Delegate District A-7: Samuel J. Pasthing Delegate District B: Darryl E. Baker, David Biscoe Bingham, Jordan Broyles, Bart W. Calhoun, Tim J. Cullen, Thomas J. Diaz, Tony Anthony DiCarlo III, Jason W. Earley, Edie Ervin, Jesse J. Gibson, Shana Woodard Graves, Christopher Heil, D. Michael Huckabay, Jr., Ashley Welch Hudson, Amy Dunn Johnson, Jamie Huffman Jones, Victoria Leigh, Kathleen Marie McDonald, J. Cliff McKinney II, Jeremy M. McNabb, David Stockley Mitchell, Jr., Meredith S. Moore, Ruthanne Nash Murphy, Jordan Rogers, Scott Michael Strauss, Jonathan Q. Warren, David H. Williams, Heather Goodson Zachary Delegate District C-1: Robert F. Thompson Delegate District C-2: Barrett Moore Delegate District C-3: Robert J. Gibson, Warren Curt Hawkins, Ryan M. Wilson Delegate District C-4: Kara Lynn Byars Delegate District C-5: Christopher Michael Bryant, Matthew Coe, Kathie A. Hess Delegate District C-6: Pamela Osment, Danny M. Rasmussen Delegate District C-7: Ginger M. Stuart Delegate District C-8: Margaret Dobson, George A. Lea, Carla M. Martin Delegate District C-9: LeAnne P. Burch, Katelyn Burch Busby, Lee Douglas Curry Delegate District C-10: Amy Freedman, Joshua R. Thane Delegate District C-11: Sterling Taylor Chaney, Taylor Andrew King Delegate District C-12: Kurt J. Meredith, Brenda Sue Simpson Delegate District C-13: Brian M. Clary, John Andrew Ellis Law Student Representatives: Clayton Rowe, University of Arkansas School of Law; Kyla Bishop, UA Little Rock William H. Bowen School of Law
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The Program is structured to provide affordable pricing whether you are a Solo Practitioner or a large corporation. The ABA Retirement Funds Program is available through the Arkansas Bar Association as a member benefit. Please read the Program Annual Disclosure Document (April 2018) carefully before investing. This Disclosure Document contains important information about the Program and investment options. For email inquiries, contact us at: joinus@abaretirement.com. Securities offered through Voya Financial Partners, LLC (member SIPC). Voya Financial Partners is a member of the Voya family of companies (“Voya”). Voya, the ABA Retirement Funds, and the Arkansas Bar Association are separate, unaffiliated entities, and not responsible for one another’s products and services. CN700696_0121-2019
ArkBar News Congratulations to the New ArkBar Members Admitted to the Practice of Law in 2019 Cynthia A. Aikman Amie Katherine Alexander Salama Douha Almahayni Brandon Kevin Bains Jeffrey Douglas Baker Caitlin Elizabeth Bennett Gregory Haynes Bevel Christopher Brian Birch Rachel Brand Rebecca D. Brannon Brian J. Brenon David Allen Brose Donald M. Brown Pete Anthony Brunson John Mark Burgess John Taylor Caldwell Alexander W. Chak Sara Caroline Charlton KenDrell Deon Collins Chancie Kae Coomer Susan Gay Cross James Carlisle Dale James Robert Davis Sarah Jean DeBusk Lindsey Rose Drake Brittnee K. N. Edmondson Haley Grace Ethridge Amber Meeshell Farris James Garth Fennegan Armando Javiel Fonticiella David Neil Franklin Rachel Katherine Freeman Andrew Graham Gillis Maya Susan Goree Lauren Linn Graham Thomas Weaver Griffin Joshua M. Hardin Colin C. Heaton Melissa Kimberly Hodges John Burley Howell Victor D. Huhem Carol Alice Humphrey Elizabeth Marie James Kurtis Lynn John Bridget Suzanne Johnson Tera D. Johnson Jeremy Grey Johnston Andrew F. Kirkendall
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The Arkansas Lawyer
Richard O. Leeper Jeffrey Robert Lilly Lori Listopad C. Joshua Logan Anthony Alden Marcon Jonathan Louis May Westin Elizabeth Meyer Nakisha N. Miller Emily Whipple Nadeau Zachary Lee Nicholson Eric Ryan Olson Neil Pansey Stephanie Jordan Patton Valerie Anne Paul Jared L. Perry Roger Allen Porter Marcus Aaron Priest Natalie E. Ramm Amanda Ray Daisy Reyes Edwin S. Richardson Daina Marie Rodriguez Philard L. Rounds Tanya Buler Scarbrough Erik Schneider Zachary T. Sellers Jody Lee Shackelford Peter Roger Shults Justin Aaron Smith Asher Steinberg Matthew D. Stombaugh Justin V. Sumner Emily Andrews Tanner Andrew D. Thomas Dakota Jean Thornbury Shastady R. Wagner Vincent M. Wagner Larry Jack Walker Chase Rigsby Waters Matthew M. Wetsell Luke Davis Whetstone Elizabeth Whitfield Benjamin Dean Williamson Timothy Oden Wilson
Kristen Frye Celebrates 10 Years with ArkBar Kristen Frye has been instrumental in administering ArkBar’s CLE programs for most of the 10 years she has been with the Association. She served as CLE Coordinator for eight years before being promoted to CLE Director in the Fall of 2017. Her role has expanded even further in 2019 and she now serves as the Association’s Director of Education and Administrator of Staff Relations. Kristen lives in Benton with her Kristen Frye husband Rob, two sons Talan and Ryker, daughter Scarlett and dog Dexter Tate. “Kristen has continued to grow in her new position using her experience and attention to detail to help focus on vertically streamlining staffing assignments,” Executive Director Karen K. Hutchins said. “Her efforts have created more efficiencies for the Association. She continues to elevate the high quality of the Association’s legal educational offerings for both in-person events and webinars.”
ArkBar Welcomes New Staff Member Cynthia Barnes joins the Association’s staff as Office and Data Administrator. Cynthia brings extensive administrative and customer service experience to the Association with her background as an adjudicator for Disability Determination for the Social Security Administrator, enumerator for the National Association for Statistical Services and as an administrative coordinator for the Little Rock Convention and Visitor’s Bureau. Cynthia Barnes A native of North Little Rock, Cynthia has twin daughters Cecily and Cassandra and two grandchildren Khi and Zion. “We are very glad to welcome Cynthia to our staffing team,” Executive Director Karen K. Hutchins said. “Cynthia’s administrative background will be instrumental in supporting the Association’s data-driven systems. Her happy personality will be the first impression for all who enter the Bar Center. Cynthia will also be supporting Kristen in executing Continuing Legal Education events throughout the state.”
Weekly Case Summaries of significant Arkansas Supreme Court and Arkansas Court of Appeals cases are provided exclusively for members. Receive your quick preview early—join the ArkBar Case Summaries community on ACE.
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ArkBar News
Oyez! Oyez!
ArkBar at BLI
ACCOLADES ArkBar Past President Carolyn Witherspoon, director and founder of Cross, Gunter, Witherspoon and Galchus, was recently inducted into the Arkansas Women’s Hall of Fame. Carolyn was the first woman to serve as president of the Arkansas Bar Association. Steven W. Quattlebaum was recently selected as a member of the 2019 Lawdragon 500 Leading Lawyers in America, the seventh time he has received this distinction.
APPOINTMENTS AND ELECTIONS Andrea Woods was recently named new chair of Conway Regional Board of Directors. Governor Hutchinson has named three people to state judge posts: Gunner DeLay to the judgeship in the 12th Judicial District; Marc McCune to a circuit judgeship in the 21st Judicial District; Josh Newton as state district court judge for the 32nd District. J. Cliff McKinney II of Quattlebaum, Grooms & Tull PLLC, has recently been elected as president of the Arkansas Access to Justice Foundation Board.
WORD ABOUT TOWN The Rose Law Firm has named Mark Murphey Henry, Adam Hopkins and Madeline Taylor as members of the law firm. Rachael Padgett, Nathan Read and Stanton Strickland have been named members of Mitchell Williams Selig Gates & Woodyard in Little Rock. After serving 12 years as mayor of Little Rock, Mark Stodola has returned to the private sector, joining Barber Law Firm PLLC as an attorney. The law firm of Matthews, Campbell, Rhoads, McClure & Thompson, PA in Rogers announced two new partners, Scott Tidwell and Ryan P. Blue; partner Craig A. Campbell retired January 2019 from the firm. Graham Law Firm of Magnolia has announced the addition of M. Michael Kinard to the law firm where he will serve of counsel. Wood, Schnipper & Britton of Hot Springs announced that John S. Stobaugh has been elected partner and the firm is changing its name to Schnipper, Britton & Stobaugh effective May 1, 2019. Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. announced Lindsey Vechik has joined the firm in Rogers. Friday, Eldredge & Clark, LLP announced the hiring of new attorneys Amie K. Alexander and Michael McCarty Harrison. The Howerton Law Firm in Fayetteville announced that their office moved to 3900 N. Front Street, Suite 101. Please send Oyez announcements to ahubbard@arkbar.com.
Thank You for Your Membership Λορεμ ιπσυμ δολορ σιτ αμετ, χονσεχτετυερ αδιπισχινγ ελιτ, σεδ διαμ νονυμμψ νιβη ευισμοδ τινχιδυντ υτ λαορεετ δολορε μαγνα αλιθυαμ ερατ ϖολυτπατ. Υτ ωισι ενιμ αδ μινιμ ϖενιαμ, θυισ νοσ ♦
♦
2019-2020
The Arkansas Bar Association thanks you for your membership and commitment to sustaining our profession and association. We want to make sure that you get the most out of your membership. For a complete list of carefully-curated resources for your advantage please visit www.arkbar.com/for-attorneys/membership. Please contact Anna at ahubbard@arkbar.com if you would like a copy of the new member decal shown here for your website or email.
ArkBar President-Elect Paul W. Keith continued his leadership journey at the American Bar Association’s (ABA) Bar Leadership Institute held in Chicago March 13-15, 2019. Pictured from left, ArkBar Executive Director Karen Hutchins, ABA President Robert Carlson, ABA Presidentelect Judy Perry Martinez, and Paul W. Keith.
Wills for Heroes Events
Sarah Jewell and Jordan Rogers Many thanks are owed to the attorneys who volunteered at the April 6 and May 4 Wills For Heroes pro bono estate planning legal clinics in Fayetteville and Little Rock. Arkansas Access to Justice and ArkBar YLS teamed up to provide free legal services to over 130 clients and their spouses. The Wills for Heroes pro bono clinics specifically serve police, firefighters, first responders, and veterans, in order to thank them for the services they provide to our community every single day. The attorneys donated their time to create simple wills, powers of attorney for healthcare, and living wills for local heroes. Please see Sarah’s YLS report on page 9 for more information on these events. Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
5
INNOVATION COMES STANDARD
Fastcase is one of the planet’s most innovative legal research services, and it’s available free to members of the Arkansas Bar Association. LEARN MORE AT
WWW.ARKBAR.COM
6
The Arkansas Lawyer
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PRESIDENT’S REPORT
Heavy Lifters Suzanne Clark
Our Association is always looking for ways to better serve our members. Fastcase, the weekly case summaries of Arkansas Supreme Court and Court of Appeals opinions, the numerous discounts offered for insurance or practice management programs—these are all important benefits that come with membership. However, one of the most valuable services the Bar Association provides its members is keeping abreast of proposed changes in the law that impact our profession or the administration of justice. During each legislative session, the Bar Association’s Legislation Committee reviews literally every bill filed in the General Assembly. The Legislation Committee is perhaps the hardest working committee of the Association. This year, our Legislation Committee was chaired by Aaron Squyres. Aaron also serves as the Association’s Parliamentarian and was Vice Chair of the Governance Task Force which has proposed our new governance structure. So the next time you see Aaron, please give him a big “thank you!” His dedication, and the dedication of the other committee members, is demonstrated by the time and effort required each week of the legislative session. There are 11 voting members on the committee. Three members are elected by the House of Delegates—one from each Bar district; the President, President
Elect, and President-Elect Designee; the Chair of the Jurisprudence and Law Reform Committee; the Committee Chair; and each year the President can appoint one member, who then serves for three years, so the final three members of the committee are by appointment. The review process is divided between 10 members on the committee. Each is assigned a number and the committee member reads each bill ending in their assigned number. The President gets a reprieve from reviewing bills, which means the other 10 members do the heavy lifting. Each Friday afternoon, any bills that have been identified as impacting the practice of law, an area of practice, or an issue impacting substantial justice, are raised for discussion. Very often, these bills are submitted to various sections for comment. Obviously, the committee members are not expert in all areas of law. We need the feedback of our members who have that expertise. For example, a bill modifying the process for filing a materialman’s lien will be submitted to the Construction Law Section for comment. The feedback is essential to whether the committee takes a position in support or in opposition to a bill. So, please, during each legislative session, when you see an email for your sections requesting comment, take the time to review the bill and let us know your thoughts. Often when there are problems
with a bill, it is simply because the drafters cannot anticipate all the unintended consequences that may arise with a proposed change in the law. Our Director of Government Relations, Jay Robbins, interacts with our legislators daily during the session. Sometimes all it takes is a conversation about our concerns and a quick resolution may be reached. There are times, however, when the committee will take a position in opposition to the legislation. For example, Senate Joint Resolution 15, a proposed constitutional amendment involving term limits, will be on the ballot in next year’s election. SJR15 originally included term limits for Arkansas judges. President-elect Brian Rosenthal and Past President Tony Hilliard appeared before the Senate Judiciary Committee on behalf of the Bar, to speak against the inclusion of judges in the joint resolution. Thankfully, the version of SJR15 approved for inclusion on the 2020 ballot does not place term limits on Arkansas judges. All of us who have had the chance to serve on the committee have learned a great deal in the process. If you have an interest in this important committee, let your House of Delegates representative know you would like to be considered for election. It is hard work, but very rewarding. It allows us to inform our members and the public about changes in the law. The vast majority of the work of this com-
Suzanne Clark is the President of the Arkansas Bar Association. She is the founder of the Clark Law Firm, PLLC in Fayetteville.
mittee goes on behind the scenes with little controversy or fanfare. When a controversial piece of legislation arises, often regarding some aspect of tort reform, we have members on both sides of the debate who feel very strongly with regard to the role of the Association. We try very hard not to take positions that will divide our membership, while maintaining our commitment to advance the administration of justice. However, there is a tremendous amount of work that goes on by our Legislation Committee that goes entirely unnoticed. Please join me in thanking Jay Robbins, Chairman Squyres, and the committee members for their service and dedication to our Association and the rule of law. Legislation Committee Aaron L. Squyres, Chair Sterling Taylor Chaney Suzanne G. Clark Lee D. Curry Glen Hoggard Jamie Huffman Jones Patricia R. Julian Paul W. Keith Carla M. Martin J. Cliff McKinney II Brian M. Rosenthal George M. Rozzell
Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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A Complete and Accurate Record Since 1980
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YLS REPORT
Spirit of Service By Sarah C. Jewell This spring, YLS has been busy serving our communities! On April 6, 2019, YLS held a Wills for Heroes pro bono estateplanning legal clinic at Good Shepherd Lutheran Church in Fayetteville. We prepared basic wills, powers of attorney for healthcare, and living wills for nearly 40 first responders, firefighters, police officers, and military personnel. As one of the first weekends of spring, April 6 was a busy Saturday in Fayetteville. A sergeant at University of Arkansas Police Department reached out to express the interest of his officers to participate as clients, but they had duties at other local events on April 6. YLS answered the call and set up a special Wills for Heroes clinic at the U of A Police Department on April 10, where we served nearly 20 more of our local heroes. On May 4, 2019, the Arkansas Access to Justice Commission hosted YLS for a Wills for Heroes clinic in Little Rock. At this event alone, we served nearly 70 of our local heroes! Thanks to all of the members of the Arkansas Bar Association who volunteered their time and talents to serve members of our communities who sacrifice so much every day to help us all. Special thanks to Jordan Rogers, YLS member and Program Coordinator at Arkansas Access to
Justice Commission, for his assistance with logistics and planning. I have received overwhelming gratitude from the clients we served for whom wills, powers of attorney for healthcare, and living wills have provided peace of mind. Continuing in the spirit of service, YLS will sponsor a service project at Annual Meeting on the afternoon of June 12, 2019, at the Hot Springs Convention Center. Special thanks to our primary sponsor, McMath Woods P.A., and our junior sponsor, Davis Law Firm. It is because of their contributions that YLS will be able to hold a Feed the Funnel event through The Pack Shack. In just an hour, 50 volunteers can pack over 10,000 meals to feed those in need in Hot Springs. If you haven’t yet, sign up to volunteer an hour of your time at our Feed the Funnel service project: https://fs2.formsite.com/arkbar/ packshack/index.html. Anyone can volunteer, not just young lawyers! After the service project, YLS will host a reception co-sponsored by the Arkansas Trial Lawyers Association at The Avenue located inside The Waters Hotel from 7-10 pm on June 12th. All are invited, and YLS members look forward to the fellowship! ď Ž
Sarah C. Jewell is the Chair of the Young Lawyers Section. She is an attorney with McMath Woods P.A. in Fayetteville.
Thank you to all of our volunteers who helped with the Access to Justice and YLS Wills for Heroes events in Little Rock and Fayetteville.
Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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ArkBar News Law Day 2019 Spend a Day with a Judge Contest Summary of the 2019 Regular Session of the 92nd General Assembly coming in the Summer 2019 issue of The Arkansas Lawyer
In observance of Law Day, the Legal Related Education Super Committee of the Arkansas Bar Association conducted a state-wide contest for Arkansas high school students, with winners receiving the select honor to “Spend a Day with a Judge.” The day began with a breakfast and award presentation at the Rose Law Firm in Little Rock. After the presentation, the students traveled to their individual judge’s locations to “Spend a Day with a Judge.” Thank you to Beverly Brister, Chair of the Legal Related Education Committee, for organizing the event as well as the Law Day art and essay contests. Also thank you to Brian Rosenthal and the Rose Law Firm for sponsoring breakfast, and thanks to all of the judges (Justice Goodson, Chief Justice Kemp, Judge Compton, Judge McGowen, Judge Taylor, and Judge Gruber) and Anthony McMullen for going above and beyond, and to all of you who judged the contests. The winning art is on display at the State Capitol, 2nd Floor Rotunda.
Anthony McMullen, Beverly Brister, Piper Harris, Judge Mary S. McGowan, Brian Rosenthal
Justice Courtney Goodson and Beau Alexander, 1st Place Artist
Chief Judge Rita Gruber and Nathan Campbell, 2nd Place Artist (tie)
Judge Cathleen Compton and Lauren Lewis, 2nd Place Artist (tie)
Chief Justice Dan Kemp and Sophie Simmons, 1st Place Essay
Judge Richard Taylor and Malaika John, 2nd Place Essay
Judge Mary McGowan and Piper Harris, Honorable Mention Essay
The voice of the Arkansas lawyer
For more information or to submit proposals, contact Jay Robbins at the Arkansas Bar Association’s office at (501) 801-5665.
Not pictured: Mariam Abboud, Third place essay
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The Arkansas Lawyer
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2019 Arkansas High School Mock Trial Competition Thank you to all of the volunteers who made the 2019 Mock Trial Competition a success. More than 300 students from 25 high schools competed in the Arkansas Bar Association’s Mock Trial Regional Competitions on March 2 in Fayetteville, Jonesboro and Pine Bluff. Twelve teams from nine high schools went on to compete in the State Championship on March 30 at the Pulaski County Courthouse. Conway High School defeated Little Rock Central High School in the championship round of the competition to become the 2019 Arkansas High School Mock Trial Champion. Conway High represented the state of Arkansas at the 2019 National High School Mock Trial Championship in Athens, Georgia, on May 16-19, 2019. Arkansas Supreme Court Chief Justice Dan Kemp presided over the final round. Association President Suzanne Clark, President-Elect Brian Rosenthal, President-Elect Designee Paul Keith, and Bar Foundation President Jason Hendren served as scoring judges. Additional congratulations should go to Springdale Har-Ber High School, whose teams ranked third and fourth in the competition. The more than 40 local attorneys and judges who volunteered to help with the coordination and judging of the competition are listed below. Please consider volunteering for the 2020 Mock Trial Competition. We will need volunteers across the state to help with the regional competitions. No prior Mock Trial experience is necessary. The Mock Trial Committee provides a volunteer orientation prior to each round of competition. Watch for more information at www.arkbar.com/armocktrial.
Travis Alton Adams Ryan R. Agnew Andrew D. Ballard Matthew Lee Bender Kael Keith Bowling Spencer Sims Bowling T. Scott Brisendine Beverly I. Brister Kelly Brown Judge Waymond M. Brown Mary Elizabeth Buckley Johnathan Russell Carter Suzanne G. Clark Brian M. Clary Cory S. Crawford Lee D. Curry Meagan Elizabeth Davis Natalie J. Dickson Shannon Lee Fant Hugh A. Finkelstein Therese M. Free Tammy Brasuell Gattis Sarah E. Greenwood Adrienne Morris Griffis Floyd A. Healy
Michael B. Heister Hadley Marie Hindmarsh Stuart C. Hindmarsh Rick D. Hogan Denise Reid Hoggard Glen Hoggard Ben Hooten Max M. Horner, Jr. James M. Hornsey, Jr. Johnathan D. Horton Lori D. Howard Christopher M. Hussein Michael B. Johnson Grant Jones Paul W. Keith Dawn R. Kelliher Hannah Grace Kelly William C. Mann, III Judge Price Marshall, Jr. Jonathan P. Martin Skye Martin Heather Renee Martin-Herron Judge Mary Spencer McGowan Anthony L. McMullen Randel K. Miller
Barrett Moore Andrew Michael Nadzam Camille Marie Neemann Helane Marie Nelson Ashley Elizabeth Norman Stephen M. Northington Trae Aaron Norton Jennifer S. O’Kelley Jonathan Chad Owens Constance Brown Phillips Dequeshia Prude Susan M. Purtle Jeffrey W. Puryear Stephanie Renee Qandah Herbert C. Rule III Brooke Nicole Smith Samantha Stephenson Albert J. Thomas III Jordan Brown Tinsley James D. Tomlin Zachary R. Trail Magistrate Judge Joe Volpe Jack Vernon Walker, Jr. Matthew D. Wells Dennis M. Zolper Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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The Intersection and Integrity of College Athletics and Sports Betting in Arkansas By Matt McCoy
L
ast May, the United States Supreme Court struck down the Professional and Amateur Sports Protection Act of 1992 (“PASPA”).1 The federal law restricted state-authorized sports betting primarily to Nevada for the last 25 years.2 Following the high court’s decision, several states moved swiftly to legalize sports betting. On November 6, 2018, Arkansas became the seventh state outside of Nevada to legalize sports betting after voters approved a constitutional amendment to legalize casino gambling in four counties.3 The Arkansas Racing Commission will now oversee casino licensing and become the state’s regulatory body for sports betting.4 This article discusses the potential impact of expanded sports wagering on collegiate athletics, strategies proposed or enacted by states to address them, and the current legal framework for sports betting in Arkansas.
Matt McCoy is the Senior Associate General Counsel for Athletics at the University of Arkansas. As an Assistant Attorney General, he represented the state of Arkansas and the Arkansas Racing Commission in gaming law challenges. 12
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Post-PASPA Concerns With greater availability to wagering outlets, many school leaders throughout the country fear student-athletes will become more vulnerable to illicit offers.5 Most major athletic governing bodies have also expressed concern with the expansion of sports betting.6 The NCAA, for example, was the lead plaintiff in the PASPA lawsuit and has long opposed gambling in every form.7 The Association still prohibits collegiate student-athletes and athletic personnel from wagering on sporting events on the belief that it undermines the integrity of sports contests and jeopardizes the welfare of student-athletes and the athletics community.8 This position is not unsupported. College point-shaving schemes are among the nation’s most notorious gambling scandals. The most infamous and widespread conspiracy occurred in 1951. It involved 86 games, 32 players, and 7 schools, including Kentucky and City College of New York (the only team to win an NCAA and NIT championship in the same year).9 Since then, there has been at least one major point shaving scandal involving college sports in each of the last five decades—the Dixie Classic scandal that involved basketball players from N.C. State and UNC in the 1960s,10 Boston College in the 1970s, Tulane in the 1980s, Northwestern and Arizona State in the 1990s,11 and Toledo in the 2000’s.12 If history is any indication, college sports will likely remain a target of corruptible influence. Michael Franzese, former captain of the Columbo crime family, agrees. Last fall, he shared with the University of Arkansas Athletic
Department how easy it is to coerce studentathletes into gambling scams.13 “You look for a kid already in trouble with a bookmaker, and he can’t pay,” Franzese explained. “So you tell him he’s got three choices: bring the money tomorrow, help us out by shaving points—or else.”14 Despite compliance efforts to curb student-athlete gambling, a 2016 NCAA survey of more than 84,000 college athletes over four years suggests that they are still at risk for the type of exploitation Franzese described.15 The study showed that 55% of males gambled and 24% violated NCAA bylaws by wagering on sports. Among Division I male athletes, 11% of football players and 5% of basketball players reported betting on their college sport.16 In addition to point shaving, athletic leaders have also expressed concern that corrupt oddsmakers and gambling opportunists will attempt to extort non-public information from program insiders for pecuniary gain.17 Safeguarding Strategies To address concerns with the rapid expansion of gambling across the country, the NCAA formed a working group to develop policies and guidance to protect game integrity, manage sports data, monitor gambling activity, and increase education in the postPASPA landscape.18 While the NCAA and
universities work to hold student-athletes and athletics personnel accountable for their conduct, state lawmakers are responsible for enacting gaming laws and regulations to maintain public confidence in wagering and safeguard against undue influence from those outside the authority of sports organizations. Varying strategies have been proposed and adopted to address these goals. Integrity Fees One strategy advanced by professional sports leagues to address financial implications associated with increased sports gambling is the “integrity fee.” The fee is essentially a tax on legal sports betting payable to the league governing the sporting event being wagered upon. Pro leagues contend the fee (typically 1% of a sports wager) is necessary to fund additional monitoring efforts and compensate organizations for their intellectual property.19 Some schools have also urged lawmakers to adopt fees to offset compliance costs.20 An American Gaming Association study suggests that such fees may make sports betting nonviable for states. According to the report, added costs reduce tax revenues which could otherwise be used for local enforcement. The study further submits that fees compress sportsbook margins which reduces the availability of competi-
tive offerings and may undermine the fee’s intended purpose by making illegal alternatives more attractive than the legal market.21 Integrity-fee legislation has been filed in several states,22 including Arkansas,23 but has yet to win approval in any jurisdiction. Prohibit Wagers on In-State College Teams Among states that have legalized sports betting, Delaware,24 New Jersey,25 New Mexico,26 and Rhode Island27 prohibit wagering on in-state college sports teams as a strategy to mitigate risks associated with increased gaming within their borders. Similar legislation was filed this year in Arkansas28 and is under consideration in other states.29 It remains to be seen whether or not such prohibitions, or a lack thereof, will impact athletic compliance or deter illegal activity. Nevada, for example, lifted a long-standing ban that precluded gambling on its college sports teams in 2001.30 To date, there have been no public reports of gambling fraud associated with a college team in Nevada. In the end, “[i]f someone is inclined to cheat within a sports-gambling system,” reasoned John Wolohan, Syracuse Sports Law Professor, “they will do it whether it is legal or not.”31 Research recently released appears to support this notion. It is estimated that out
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of $8.5 billion dollars wagered by Americans on the NCAA Men’s Basketball Tournament this past March, 7.6 million was likely bet by illegal means.32 According to Wolohan, greater transparency in the regulated market has increased the likelihood of discovering potential problems with athletic events.33 In both the Tulane and Arizona State point shaving scandal, Las Vegas oddsmakers were reportedly the first to identify irregular betting patterns which led to the discovery of the scams.34 Cooperation among Stakeholders While increased transparency and regulation may help root out gambling corruption, the incidents at Tulane and Arizona State demonstrate that these types of violations are difficult for schools to uncover by themselves. As a result, several state regulatory commissions have adopted provisions directing sports betting operators to share information with athletic governing bodies, members, and leagues related to unusual or suspicious betting activity.35 Most states have also expanded wagering prohibitions to include individuals identified by athletic organizations who hold positions of influence or authority over participants, have access to confidential information, or are professionally connected to events.36 Prohibit In-Game Proposition Bets The Iowa and Tennessee legislatures recently passed sports betting bills that prohibit in-game proposition bets on in-state collegiate athletes.37 In-game proposition bets are wagers on team or individual performance or non-performance during a game (e.g., the number of interceptions a quarterback will throw). The outcome of such bets are perhaps the easiest to manipulate and most susceptible to corruption because they are often dependent on the actions of only one player.38 In a letter to the Arkansas Racing Commission, four athletic directors at in-state schools recommended that the state’s regulations prohibit proposition bets on Arkansas’ college teams and include the cooperation measures discussed above.39 The Commission did not adopt any of the recommendations.40 Sports Betting in Arkansas Prior to the approval of The Arkansas Casino Gaming Act of 2018, gambling outside of Hot Springs and West Memphis had 14
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been illegal in Arkansas for the better part of the last century.41 As a result, Arkansas has no statutes that directly prohibit cheating at casino-style games like blackjack, craps, and slot machines,42 unlike Nevada or other states where gaming fraud has been criminally sanctioned within a legal gambling framework.43 Arkansas law does, however, prohibit the transmission of sports information for gaming purposes44 and bribing athletic participants,45 but these laws are somewhat antiquated.46 The first statute, for example, references “telegraph ticker tape” and “teletype” as an example of a “gaming device,” but it does not address mobile devices or online communications which are now primary mediums for disseminating information.47 The current law exempts “radio stations” and “newspapers” when sharing sports information as news, entertainment, or advertising, but it does not exempt television programs, streaming, podcasts, or other online formats.48 Dissemination of sports information is a crime under the statute, but a violation appears to be punishable by a maximum fine of $500 and six months in jail.49 Sports bribery is a felony in Arkansas if a “participant” in any sport “give[s],” “promise[s],” “offer[s],” “solicit[s],” or “accept[s]” “any valuable thing” to lose or “limit the margin of victory” in a sport for which he/she has any connection.50 The definition of “participant” includes athletic players, managers, coaches, and trainers, but it does not expressly include game officials (e.g., umpires, referees, etc.), individuals who hold positions of influence or authority over participants, or are professionally connected to the sporting event (e.g., school, league, or conference administrators), or who may have access to confidential information (e.g., teachers, tutors, physicians, etc.).51 The statute does not address a situation where a “participant” fixes a game for a friend or relative and does not “give,” “promise,” “offer,” “solicit,” or “accept” any “valuable thing.”52 Conclusion As more states enact sports gambling legislation, there are divergent opinions as to how to regulate the activity. As a result, professional sports leagues and other interested parties have called upon Congress to intervene. Federal legislation has already been introduced in the form of the Gaming Accountability and Modernization Enhancement Act53 and the Sports Wagering Market Integrity
Act of 2018.54 Both propose to set minimum standards for sports betting. To date, neither bill has been approved by Congress, but as state-level sports wagering becomes more widespread, they may be a harbinger of increased federal regulation in the future. Endnotes: 1. Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461, 200 L. Ed. 2d 854 (2018). 2. 28 U.S.C. § 3702(1). See also, 28 U.S.C. § 3704(a)(1)–(2) (permitted continued existence of sports betting in Nevada, Oregon, Delaware, and Montana). 3. Ark. Const. amend. 100, § 2(c), The Arkansas Casino Gaming Act of 2018 (“Casino gaming” definition includes “accepting wagers on sporting events”). 4. Id. at § 4(a). 5. Edelman, A., College Sports Warns Against Move to Legalize Betting, NBC NEWS, Feb. 19, 2018, https://www.nbcnews.com/ politics/politics-news/college-sports-warnagainst-moves-legalize-betting-n848856. 6. Schad, T., NFL, MLB, NBA, NCAA and Others React to Supreme Court Decision of Sports Betting, USA Today, May 14, 2018, https://www.usatoday.com/ story/sports/2018/05/14/sports-bettingnfl-mlb-nba-ncaa-reaction-supremecourt/607459002. 7. See supra note 1. 8. See 2018-2019 NCAA Div. I Manual: Constitution, Operating Bylaws, Administrative Bylaws—NCAA Division I Manual (2018), §§ 10.02.1, 10.02.2, 10.3, 10.3.1, 10.3.1.1. See also, the Official Site of the NCAA, Sports Wagering, NCAA (2019), http://www.ncaa.org/enforcement/sportswagering. 9. See Goldstein, J., Explosion: 1951 Scandals Threaten College Hoops, ESPN, Nov. 19, 2003, http://www.espn.com/classic/s/ basketball_scandals_explosion.html. See also, The Big Money, Time Magazine (Feb. 26, 1951). 10. See Alexander, C., How Sports Gambling Left a Taint on NC State, UNC Basketball Programs, The News & Observer, May 15, 2018, https://www.newsobserver.com/ sports/article211118629.html. 11. See Chase, C., Biggest Scandals in Sports Gambling History, USA Today, May 16, 2018, https://ftw.usatoday. com/2018/05/11-biggest-scandals-in-sportsgambling-history; Goldstein, J., Recent Scandals: BC, Tulane and Northwestern,
ESPN CLASSIC, Nov. 19, 2013, http:// www.espn.com/classic/s/basketball_scandals_recent.html. 12. KOLO 8 News Now, New Details Emerge In Toledo Point Shaving Scandal (May 7, 2009), https://www.kolotv.com/ sports/headlines/44547647.html. 13. Franzese, M., personal communication (Oct. 30, 2018). 14. Id.; see also, Jordan, P., You Fix the Game, I Break Your Legs, New York Times, Oct. 28, 2007, https://www. nytimes.com/2007/10/28/sports/ playmagazine/28talkingpoints.html. 15. Paskus, T., & Derevensky, J., Trends in Student-Athlete Gambling Behavior and Attitudes, NCAA, Nov. 2017, http://www. ncaa.org/sites/default/files/2017RES_wagering_executive_summary_20171129.pdf. 16. Id. 17. Paskus, supra note 15. 18. See Davies, C., NCAA Exploring Added Protection Through Sports Betting Examinations (July 20, 2018), https://sbcamericas. com/2018/07/20/ncaa-exploring-addedprotection-through-sports-betting-examinations. 19. See Sacks, A. & Ryan, A., The Impact of Integrity Fee on Sports Betting Handle, American Gaming Assoc., 2019 https:// www.americangaming.org/wp-content/ uploads/2018/03/Oxford-AGA_LeagueFee_National.pdf. 20. See Meyer, C., Legalized Gambling is Close. So is a Big Decision for NCAA Schools, Pittsburgh Post-Gazette, July 17, 2018, https://www.post-gazette.com/ news/state/2018/07/17/legalized-sportsbetting-pennsylvania-ncaa-gamblingrules-pa-west-virginia-marshall-paspa/ stories/201807170006. 21. Meyer, supra note 20. 22. S.B. 3432, 101st Gen. Assem., Reg. Sess. (Ill. 2018); H.B. 1325, Ind. Gen. Assem., Reg. Sess. (Ind. 2018); and S.B. S7900C, N.Y. Leg. Assem., Reg. Sess. (N.Y. 2018). 23. See S.B. 669, 92nd Ark. Gen. Assem., Reg. Sess. (2019) (proposes 1% “integrity fee” to be paid to a professional or amateur athletic association for amount wagered on its athletic events). 24. 10 Del. Admin. Code § 204-2.0; Del. Admin. Code tit. 29, § 4803 (“sports lottery” definition). 25. N.J. Admin. Code § 13:69N-1.1 (“Prohibited sports event” definition).
26. See Street & Smith’s Sports Business Daily Journal, New Mexico Casino’s Sports Betting Will Exclude State’s D-I Programs, Sports Business Daily, Oct. 11, 2018, https://www.sportsbusinessdaily.com/Daily/ Issues/2018/10/11/Gambling/New-MexicoGambling.aspx (New Mexico has not legalized sports betting, but its 2015 Tribal Gaming Compact permits “any or all forms of Class III Gaming,” see https://www. nmgcb.org/tribal-compacts.aspx. Class III Gaming in 25 C.F.R. § 502.4(c) includes “[a]ny sports betting and pari-mutuel wagering.”). 27. See 42 R.I. Gen. Laws Ann. § 42-61.21. 28. See S.B. 498, § 2, 92nd Ark. Gen. Assem., Reg. Sess. (2019) (“Casino gaming” narrowly defined to “accepting wagers on sporting events which occur outside the State of Arkansas; and do not involve amateur athletes”). 29. H.B. 1275, 86th Tex. Leg. Assem., Reg. Sess. (2019); H.B. 1638, § 58.1-4038, 400th Va. Gen. Assem., Reg. Sess. (2019). 30. Ritter, K., Gaming Control Board Allows Betting on Nevada College Sports, Las Vegas Sun, Jan. 25, 2001, https://lasvegassun. com/news/2001/jan/25/gaming-controlboard-allows-betting-on-nevada-coll. 31. Wolohan, J., personal communications (Feb. 9, 2019). 32. American Gaming Assoc., 2019 March Madness Betting Estimates, AGA, Mar. 18, 2019, https://www.americangaming.org/ resources/2019-march-madness-bettingestimates. 33. Wolohan, supra note 31. 34. See Dewey, T., Las Vegas Book Makers Know a Fix When They See One, Las Vegas Review-Journal (Sept. 8, 2017), https:// www.reviewjournal.com/sports/betting/lasvegas-bookmakers-know-a-fix-when-theysee-one. 35. See D.C. Code Ann. § 2–534(a)(3) (D.C.); 13 Code Miss. R. Pt. 9, R. 3.19 (Miss.); N.J. Admin. Code § 13:69N-1.6 (N.J.); 58 Pa. Code § 1408.9(b) (Pa.); Tenn. Code Ann. § 4-51-315. 36. See D.C. Code Ann. § 22-1713 (D.C.); N.Y. Penal Law § 180.35 (N.Y); 42 R.I. Gen. Laws Ann. § 42-61.2-1 (R.I.); Md. Code Regs. 03.11.01.04 (Md.) (fantasy sports competitions); N.J. Admin. Code § 13:69N-1.1 (N.J.); 58 Pa. Code § 1401.7(b)(2), § 1401.8 (Pa.). 37. See S.B. 1168, 88th Iowa Gen. Assem.,
Reg. Sess. (2019) (definition of permissible “Sports Wagering”); Tenn. Code Ann. § 4-51-314. 38. Boshart, R., Compromise Advances Sports Betting Bill in Iowa House, Sioux City Journal, Mar. 20, 2019, https://siouxcityjournal.com/news/state-and-regional/ compromise-regulating-prop-bets-allows-iowa-sports-betting-bill-to/article_0e688bc75f42-596e-87d0-41966aadc66a.html. 39. Yurachek, H., Public Comments on Arkansas Racing Commission’s Sports Wagering Regulations (Feb. 8, 2019). 40. Ark. Admin. Code, 00.6.06.5-20. 41. Turner v. State, 153 Ark. 40, 239 S.W. 373, 375–76 (1922). 42. Cf. Ark. Code Ann. § 5-55-501 (Lottery fraud is a Class D felony). 43. Del. Code Ann. tit. 11, § 1471 (Del.); D.C. Code Ann. § 22-1713 (D.C.); Nev. Rev. Stat. Ann. §§ 465.070, 465.075, 465.083 (Nev.); N.J. Stat. Ann. §§ 5:12113—5:12-116 (N.J.); N.Y. Penal Law §§ 180.35-180.53 (N.Y.); 11 R.I. Gen. Laws Ann. §§ 11-7-9, -10, -12 (R.I.); W. VA. Code Ann. § 29-22D-21 (W. Va.). 44. Ark. Code Ann. § 5-66-114. See also, Ark. Code Ann. § 5-52-106 (misuse of confidential information by a public servant is a Class A misdemeanor). 45. Ark. Code Ann. § 5-66-115. See also, Ark. Code Ann. § 16-118-110 (an institution of higher education may pursue compensatory and punitive damages against “[a] person who knowingly induces or . . . causes a student-athlete to take actions that result in damages caused by violations of athletic association or conference regulations). 46. Supra note 44 and id. 47. Supra note 44 at (a)(2). 48. Id. at (b). 49. Id. at (c). Cf. 18 U.S.C. § 1084. 50. Supra note 45(b)–(d). 51. See id. 52. See id. Cf. 18 U.S.C. § 224—Bribery in Sports Contests (applies to “persons” broadly defined, but scheme must be “effectuated in whole or in part through the use in interstate or foreign commerce”). 53. Gaming Accountability and Modernization Enhancement Act of 2017, H.R. 4530, 115th Cong. (2017). 54. Sports Wagering Market Integrity Act of 2018, S. 3793, 115th Cong. (2018).
Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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Resolving (then Un-resolving) the Human Trafficking Issue for Cubans Joining America’s National Pastime
By Jason Browning
Jason Browning is an attorney at Mitchell Williams, and focuses his sports law practice on providing counsel to Major League Baseball players and player agents on all aspects of labor relations concerns. He advises clients on player salaries and negotiations with the Clubs, and represents players in salary arbitration hearings. As a certified player agent with the Major League Baseball Players Association (MLBPA), he is well versed in the Collective Bargaining Agreement (CBA) between the MLBPA and the 30 member Clubs of Major League Baseball. Jason is the subject of the book, “Pinstripe Defection: A Small Town Attorney’s Battle with the New York Yankees,” which chronicled the story of a five-year legal battle premised on a member club of Major League Baseball’s involvement in scouting and signing a Cuban defector. Jason also serves as counsel for physicians, hospitals and medical clinics in medical negligence, professional and medical liability, insurance defense, commercial litigation and complex products liability matters.
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n December 20, 2018, Major League Baseball (“MLB”), Major League Baseball Players Association (“MLBPA”), and the Cuban Baseball Federation (“FCB”) announced an Agreement allowing Cuban-based baseball players to sign with MLB teams without first resorting to defection or having to travel to another country before seeking entry into the United States. This Agreement came to fruition against the backdrop of the decades-long embargo against Cuba and the dangerous and corrupt practice of smuggling players into the United States. The motivation behind the historic Agreement is clear—alleviating the human smuggling of Cuban baseball players by criminal organizations. In the words of Dan Halem, MLB’s deputy commissioner and chief legal officer, “Cuban players coming to MLB have been smuggled out by human trafficking organizations that are often tied to other criminal organizations, and often they lose a big chunk of their bonus to pay for their passage out of Cuba.” Moreover, “unsavory characters continue to harass the player or their family if they believe they weren’t given the full amount.”1 “This is strictly about ending human trafficking; . . . [w]e are just trying to create a safe way for Cubans to play in the major leagues.”2 MLB entered into the historic Agreement with the FCB with the goal of stopping the smuggling of baseball players. The most recent, and likely most notorious, tale of smuggling (and kidnapping) efforts involves Yasiel Puig, outfielder for the Cincinnati Reds (formerly of Los Angeles Dodgers). According to a truly remarkable profile published in the Los Angeles Magazine in April 2014, Puig had made at least five attempts to leave Cuba with the intent of signing a free agent contract with an MLB club. His journey began when he was picked up by smugglers affiliated with a well-known Mexican crime syndicate. These smugglers were promised $250,000 by criminal elements from Miami and in return for getting Puig out of Cuba, Puig would owe 20 percent of his future earnings to the Miamian. Puig was hastened
to Mexico where Puig was essentially held captive while his captors communicated with sports agents in the United States demanding immediate payment of money. The captors threatened to “chop off an arm, a finger, whatever” if they did not receive payment.3 It was not until a “staged kidnapping” prompted by the original underwriter of Puig’s defection (the Miamian) to rescue Puig from the smugglers that Puig was able to make it to the United States, where he eventually signed a seven-year, $42 million contract. Yet, reports are that even after having reached the United States, Puig continued to receive death threats from his smugglers, even after having paid them $1.3 million in what was effectively a ransom. In 2007, a sports agent in the United States was convicted of smuggling five Cuban players into the country. The tale is not as harrowing as that of Puig’s adventures, but the clandestine, illegal activity existed nonetheless. The sports agent, Gustavo Dominguez, was found guilty of 21 felony counts of smuggling, conspiracy and harboring the Cuban players. The players defected from Cuba and made it to the Florida Keys. Once in U.S. territory, Dominguez orchestrated the transportation of the players to California where they were harbored, and left waiting to sign with interested clubs. Evidence included Dominguez paying $225,000 to an alleged drug trafficker and Cuban smuggler to finance the operation. While MLB and the FCB seek to eliminate the dangers arising from smuggling Cuban players, the current Administration touts the same protections but takes aim at the very mechanism that is specifically intended to afford those safeguards. Upon releasing the announcement of the historic Agreement, a senior Trump Administration official warned that it is “actively assessing the Obama-era policies that major League Baseball appears to have leveraged to enter into this arrangement with the Cuban Baseball Federation” under a premise that “[w]e do not condone the actions of any person or entity that contribute to the violation of human rights of Cuban citizens and the Cuban regime’s schemes to profit from the labor of its people abroad while keeping them in thrall to an oppressive political system.”4
A Brief History of Cuban Embargo As Cuba, under the regime of Fidel Castro, strengthened its ties with the Soviet Union in the early 1960s, the United States passed the Foreign Assistance Act of 1961, authorizing the president to impose a total embargo upon all trade between the United States and Cuba. Thereafter, the Department of Treasury, through the Office of Foreign Assets Control (“OFAC”), promulgated the Cuban Assets Control Regulations (“CACR”) which intended to limit the transfer of money from the United States to Cuba. Among other things, the CACR was initially aimed at prohibiting direct financial transactions with certain Cuban entities and subentities, including unblocked individuals. While OFAC, by and through the CACR, was charged with enforcing the embargo by forbidding certain transactions with Cuban nationals or entities (and most definitely the Cuban government), the Trading with the Enemy Act of 1917 (“TWEA”)5 gave the president unilateral authority to make changes to the regulations. Simply, the TWEA affords the president power to restrict (or remove restrictions from) any and all trade between the United States and its “enemies.”6 Ironically, there are Benefits to Defecting to a Third Country First Before exploring the terms of the Agreement and the protocols endorsed to end smuggling activities, it is important to understand why Cuban players often first defected to third countries with the hope of later making it to the United States to sign with an MLB Club. Certainly, the CACR prohibits signing Cuban players (and residents) directly, but from a financial viewpoint there was an added advantage to first obtaining residency in a third country before coming to the United States. MLB Clubs operate under Major League Rules. When a player is a resident of another country and is eligible to sign with an MLB Club, he does so as a “free agent”—in baseball parlance—giving him the right to negotiate with all 30 Clubs, thus increasing the Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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value of his contract. Rule 3 states that while a player who is a resident of another country can negotiate with any team, legal U.S. residents must be subject to the amateur (Rule IV) draft and be limited to signing with the one club that drafted him. Before Obama repealed the so-called “wet foot, dry foot” policy implemented in the 1990s, a Cuban citizen who defected and made it to the United States would obtain asylum, residency, and be given rights as a U.S. citizen. So, in the (business) world of baseball, if a Cuban player made it directly to the United States, he would be subject to the amateur draft, thus taking away his right to negotiate with all 30 clubs. Thus, ironically, it was actually more beneficial for a Cuban player to first defect to another country, obtain residency there, and then make himself available—as a “free agent”—to negotiate and sign with any of the MLB Clubs. Negotiation of the Agreement Puig’s and Dominguez’s stories are just a glimpse of the travails of hundreds of Cuban defectors who have experienced some form of smuggling or another. As MLB began negotiating with the FCB to establish a working mechanism to preserve the humanitarian concerns, it did so against the backdrop of the CACR regulations and certain amendments to transactions made in 2016. Specifically, Section 515.571(a)(5)(i) of the CACR was amended to authorize the receipt of salary or other compensation by a Cuban national provided that the national of Cuba is not subject to any special tax assessments by the Cuban government in connection with the receipt of the salary or compensation. Thus, even though a Cuban national could be paid by a U.S. company, including an MLB club, there nevertheless could not be any payment of such salary or compensation, directly or indirectly, to the Cuban government. That caveat was intended to ensure that no funds reach the Cuban regime. While this regulation may have helped usher in better relations with Cuban nationals, it did not remove the barriers entirely. Cuban nationals, including baseball players, would still have to obtain a passport from the Cuban government before going to the United States. The Cuban government, while acknowledging reforms directed at a more open relationship and freedoms to 20
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work abroad, still required that those nationals who did work outside the country pay a certain percentage of their income to the Cuban government, or they would receive no passport. That remuneration back to the Cuban government violates the CACR. In February 2015, MLB announced to all 30 MLB Clubs that Cubans would be considered free agents as long as a player signed an affidavit attesting that he is, or has established residency, in another country and will not, or cannot, return to Cuba. Thus, Cuban players no longer needed the previous “unblocking license” issued by OFAC, so long as the player cut off all ties (money, family, residency, etc.) with Cuba. While such efforts and attestation of a Cuban player were to be in keeping with the CACR, it nonetheless did not cure the sordid exploitative actions of smugglers to get Cuban players to defect and establish residency elsewhere.7 While MLB sought to achieve regulatory compliance with the CACR, it did not alleviate the rampant smuggling activities utilized to get players out of Cuba to another country. This mechanism likewise fostered sham affidavits. So, in 2016 MLB obtained a license from OFAC of the Treasury Department to negotiate with and enter into a business Agreement with the FCB for the signing and transfer of Cuban players. In turn, the Treasury Department determined that the FCB was not affiliated with the communist regime—the Cuban government. Thus, with the FCB being deemed separate or independent from the Cuban government, MLB and its member clubs were free to enter into an Agreement with the FCB for the signing of Cuban players—with no risk (perceived or real) of money flowing to the Cuban government—in keeping with the amended CACR. Simply, with the Treasury Department’s official determination that the FCB was not affiliated with the Cuban government, the Agreement between MLB and the FCB would be in compliance with the CACR. The key determination was that the FCB was independent from the Cuban government. The Agreement The Agreement between the MLB, MLBPA, and the FCB is on par with MLB’s agreements with other foreign leagues such
as the NPB (Japan), KBO (Korea) and CPBL (China). The key provisions of the Agreement, set to expire October 31, 2021, are: •
•
•
•
•
•
Only Cuban players who have a playing contract with the FCB are covered by the Agreement. Any Cuban player who does not have a contract with the FCB is eligible to sign with any MLB Club to the same extent as any other unsigned international amateur. All FCB players fall into one of two categories, FCB Professionals who are 25 years old or older with six or more years of professional experience and FCB Amateurs who are all other FCB Players who are at least 18 years old. Each off-season, the FCB must release all FCB Professionals who wish to sign with an MLB club. Once released by the FCB, all FCB players are treated the same as other international players under the Collective Bargaining Agreement between MLB and the MLBPA, and may negotiate and sign with any MLB club that is willing to pay a formulated release fee (to be paid by MLB club to FCB). The released FCB players will be scouted and signed in Cuba by MLB clubs, and will travel to the United States (or Canada) to perform services for their MLB club pursuant to a standard work visa. Additionally (and very significant to Cuban players), any former FCB player signed by an MLB club may return to Cuba during the off-season, and may play in off-season tournaments or leagues in Cuba. Any disputes between MLB and the FCB will be resolved through neutral arbitration before the International Chamber of Commerce.
The terms of the Agreement foster free movement of Cuban players and the MLB Clubs’ rights to sign such players without violating the embargo (and regulations enforcing same). Most importantly, Cuban players will have all the benefits of but none of the deleterious effects of having to defect
to another country in the hopes of making it to the United States. Again, the direct aim of this Agreement is “strictly about ending human trafficking.”8 The Current Administration Rejects the Agreement Although premised on warmer relations with the Cuban government, and expressed in terms of preserving human rights, immediately after the historic Agreement was announced by MLB and the FCB, the Trump Administration criticized its terms as endorsing the Cuban government’s ability to profit from U.S. businesses while exploiting Cuban players. The historic Agreement was denounced as one that would greenlight continuous human rights violations and exploitations. Just as President Obama used his executive authority per the TWEA to warm relations and re-establish ties with Cuba, President Trump could utilize the same executive authority to scale back the relations. Senator Marco Rubio of Florida vowed to fight the Agreement. Similar to the mantra of Administration officials, Senator Rubio expressed concern the Agreement would “further exploit the Cuban people.”9 Senator Rubio had reportedly asked the Secretary of State, Mike Pompeo, to side against the Treasury Department’s findings and rule that the FCB is indeed controlled by the Cuban government, thus nullifying the Agreement. Pompeo requested a ruling that the Cuban government controls the FCB in an effort to nullify the Agreement. Thus, on April 8, 2019, it was announced that OFAC, having consulted with the U.S. Department of State, determined that any payments made to the FCB are unauthorized per § 515.571(e) of the CACR because such payments are in turn made to the Cuban government—a complete reversal of the Treasury Department’s determination in 2016. By simply finding that the release fee paid will go to the Cuban government (arguably driven only by political motivation without any accompanying findings of fact), the historic Agreement was deemed null and void. The criticisms prompting the reversal of the Treasury Department’s initial findings do not take into account that the intent of the Agreement between MLB and FCB was
Kudos, Gordon! Trusted Counselor, Esteemed Colleague, Invaluable Mentor
Congratulations, Gordon Rather, on the great honor of being named the 2019 recipient of the James H. McKenzie Professionalism Award from the Arkansas Bar Foundation and Arkansas Bar Association. We’re proud to celebrate this achievement with you and thank you for your commendable integrity, character and leadership in the legal profession and the community.
expressly to avoid the type of exploitation over which the Administration expresses concern. The position that the Agreement actually propagates the exploitation of Cuban citizens is unfounded. There may be no greater exploitation of a Cuban player than placing him in the hands of a smuggling cartel while being captive to a seemingly perpetual ransom and very real threat of physical harm. Rather than subjecting otherwise eligible Cuban players to the dangers and oppressive conditions arising from having to defect, they would have been able to sign directly with any of the 30 MLB Clubs. Instead of criticizing efforts to alleviate human trafficking, the historic Agreement between MLB and the FCB should have been applauded. Rescinding this Agreement will serve to continue the very oppression the Administration denounces, by again forcing Cuban nationals to defect to third countries (which will often be at the hands of smugglers) before they may seek the opportunity to play here in America.
Endnotes: 1. Dave Sheinin and Karen Young, MLB, Cuban Baseball Federation Reach Agreement; Trump Administration signals it has issues with deal, The Washington Post, December 19, 2018. 2. Id. 3. Jesse Katz, Escape from Cuba: Yasiel Puig’s Untold Journey to the Dodgers, Los Angeles Magazine, April 14, 2014. 4. Sheinin and Young, supra note 1. 5. 50a U.S.C. §§ 1-40 (transferred and now codified 50 U.S.C. §§ 4301–4341). 6. 50 U.S.C. § 4305(a),(b)(1). 7. See Samuel Rubenfeld, MLB Policy Changes Make Cuban Baseball Players Fee Agents in U.S., Wall Street Journal, February 4, 2015. 8. MLB announces Cuban players won’t have to defect to play in U.S., www.cbsnews.com, December 20, 2018. 9. See Franco Ordoñez, Trump Administration aims to stop professional baseball deal with Cuba, McClatchy DC Bureau, www.mcclatchydce.com, December 29, 2018.
Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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CONGRATULATIONS It’s time to renew your membership for the 2018-2019
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65 Years of service & solutions We are proud to celebrate 65 years of service and solutions. Since 1954, the foundation of our law firm has been, and continues to be, our solid, long-term relationships with clients — they are the core of who we are.
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Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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Arkansas Insurance Department Eager for Creation or Re-Domicile of Captive Insurance Programs
By Haley M. Heath and Samuel C. Baber
I
t has been two years since Governor Hutchinson signed Act 370, which improved the regulatory environment for captive insurance companies domiciled in Arkansas, into law. However, as of January 2019, only six captive insurance companies are domiciled in Arkansas.1 In the 2019 session, the Legislature further expanded the state’s insurance captive law to make the state’s regulatory environment even friendlier to insurance captives. In light of the changes to the regulatory scheme, both the state and many of its businesses would benefit from lawyers recommending that their clients consider whether the creation of a new captive insurance program is right for the business and consider whether any existing captives should be brought home to Arkansas.
Heath
Baber
Haley M. Heath is an attorney with Fuqua Campbell, P.A. in Little Rock where her practice focuses on commercial litigation with an emphasis on intellectual property law. Samuel C. Baber is an attorney with Fuqua Campbell, P.A. in Little Rock. His primary areas of practice are general litigation, family law and real estate transactions and disputes. 24
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What is a Captive Insurance Program? Before being able to advise clients regarding the benefits of a captive insurance program, Arkansas attorneys must know what a captive insurance program is. Captive insurance programs are a tax-deductible form of self-insurance available for businesses. Insuring losses through a captive provides businesses with huge tax incentives and also allows the business to save, invest, and at times distribute, a portion of its premiums not paid for its own losses. Essentially, a captive insurance policy is one in which a company purchases insurance from a subsidiary that it owns and controls. Through a captive, a business can pay money to its subsidiary in the form of premiums to insure the parent business’s losses. If done correctly, premiums paid into the captive are tax deductible. In order for the premiums to be tax deductible as an insurance expense, the captive must be able to prove that it is a valid insurance company. To be a valid insurance company, the captive must obtain an insurance license and actually provide insurance to the parent company or its affiliates. The Supreme Court has long held that to be considered an insurance company for tax purposes, insurance must include elements of risk shifting and risk distribution.2 Captive insurance makes sense for businesses on two different ends of the insurance loss perspective: (1) for businesses who have real insurable risk but historically low losses and (2) for businesses whose losses are so high so as to make the risk uninsurable in the common market other than through reinsurance. For this second category of business, a business can
“Creating a captive insurance company can be an extremely profitable business decision for a client to make. However, the creation comes with significant risks of penalty under IRS regulations if done incorrectly.”
self-insure enough of its high-risk potential losses through a captive in order to be able to obtain reinsurance to avoid catastrophic losses to the business that could not otherwise be avoided by purchasing insurance in the marketplace. History of Captives Captive insurance companies in America are said to have been created during the Truman presidency during union revolts against the steel industry during the Korean War.3 During that time, the steel industry saw its insurance premiums rising to a level that threatened the industry’s businesses’ financial stability.4 At that time, a war veteran and insurance agent named Frederic Reiss began seeking creative solutions for a large steel industry client who was struggling to purchase insurance at an affordable rate.5 Reiss discovered that rather than having his client purchase insurance from the big-name insurance companies, he could create a new insurance company, wholly owned by Reiss’ client.6 Reiss’ client could pay its premiums to the subsidiary, and the subsidiary could insure the client’s losses up to the point of losses covered by a reasonably priced reinsurance policy.7 Thus began the first formal captive insurance companies in the United States. At that time, the subsidiary businesses processed and paid their own claims, though now more commonly the subsidiary contracts with a Plan Administrator to process and pay claims. In fact, Reiss created the first captive claims management company
and domiciled it in Bermuda, which began a long trend of businesses forming their insurance captive subsidiaries offshore or through Native American tribes. Typically, the captive subsidiary would be domiciled offshore as well. However, various states eventually realized the money being domiciled offshore or in tribes could be domiciled in the states; 29 states now have captive-enabling legislation.8 Arkansas Stumbles into the Captive Market Arkansas entered the captive insurance regulatory business with emergency-clauseenabled legislation in 2001.9 The text of that act reads “that captive insurers are making a presence in Arkansas and are not currently subject to a comprehensive specialized regulatory scheme. Therefore, an emergency is declared to exist and this act being immediately necessary for the preservation for the public peace, health and safety . . . .” Reading this text, it is evident that Arkansas’ first approach to captive insurance companies was not a friendly one but was rather a protective approach from this new form of insurance entering the state. By 2003, legislators began attempting to ease the strict regulations first enacted for captive insurers in Arkansas. The legislature again used the emergency clause to make new regulation go into effect immediately stating that the General Assembly found and determined that “the present regulatory scheme places undue burdens on captive insurers.”10
But, in 2005, the Legislature again amended the captive regulation, reverting back to a more protective, less-captive-friendly scheme. The 2005 Act reads “the laws of this state as to insurance regulation and the Governmental Bonding Board, among others, are inadequate for the protection of the public . . . .” The captive market remained largely untouched in Arkansas from 2005 through 2013. Arkansas Embraces Captives In 2017, perhaps realizing that captive insurance companies were a permanent new business trend, Arkansas determined that it “d[id] not have a needed, competitive presence in the field of captive insurance companies” and enabled legislation to “attract new captive insurance companies to the state . . .” and again revised and loosened the regulatory scheme.11 In the 2019 session, the legislature further loosened restrictions on captives, for example by reducing the capital and surplus requirements for certain types of captives, making it easier for a foreign captive to merge or convert into an Arkansas captive, and allowing more options for the creation of sponsored captive insurance companies.12 With the 2013, 2017, and 2019 legislation, Arkansas’ captive insurance legislation is now very straightforward and lacks any extra restraints on captive subsidiaries not existent in other states and domiciles. That is, Arkansas is now on par and often more
Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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business-friendly than other domiciles for the benefits provided to insurance captive subsidiaries. However, the business and labor industries have not seized on the changes in Arkansas law. Arkansas businesses continue either to use typical insurance companies or to create and domicile their own captive insurance subsidiaries in places other than Arkansas. As previously noted, as of January 2019, only six captive subsidiaries were domiciled in Arkansas. The first captive insurance company to be domiciled in Arkansas was Diamond Risk Insurance, LLC, which is the whollyowned captive insurer of Baptist Health created in 2016.13 The Arkansas Insurance Department has placed easing the process of creating or redomiciling subsidiary captive insurance companies near the top of its priorities. The current Arkansas Insurance Commissioner, Allen Kerr, has stated that the Arkansas Insurance Department “has made significant legislative changes and resource commitments to welcome new captive applicants . . . and we stand ready to provide competent support and assistance to anyone seeking to form a captive insurer.”14 Creating a Captive Under Arkansas Law If an Arkansas business determines that self-insurance makes sense for the business, either from a tax savings standpoint or because of the costs of premiums paid yearly to an unrelated insurance company, it should consider forming and domiciling a captive in-state. The creation of the captive insurance company is similar to the creation of any other company under Arkansas law. The company can take the form of any business organization authorized under Arkansas law.15 Like other Arkansas business entities, the company must have articles of incorporation and bylaws.16 The captive insurance subsidiary must be licensed to do business in Arkansas, hold at least one board of directors meeting per year, maintain its registered office in Arkansas, and have a registered agent in Arkansas.17 Further, the captive insurance company cannot have a name that is deceptively similar or likely to be confused with any other existing business name registered in Arkansas, including, for example, the parent company.18 Attorneys familiar with the process of cre26
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ating business entities under Arkansas law will have no trouble setting up the captive business subsidiary, and the requirements for the business entity are just like any other under Arkansas law. The members or shareholders of a captive insurance company may be other business entities. After the creation of the business entity that will be the subsidiary captive insurance company, the captive insurance subsidiary has to apply for an insurance license from the Arkansas Insurance Department to provide insurance in Arkansas.19 In assisting clients with the creation of captive insurance companies, the authors have found the current Arkansas Insurance Department to be extremely easy to work with in the licensing process. The subsidiary seeking a captive insurance license under Arkansas law must submit its bylaws and articles of incorporation along with a statement under oath of the subsidiary’s president or secretary showing the subsidiary’s financial condition.20 In order to obtain an insurance license, at least one member of the board of directors of a captive formed in Arkansas must be a resident of the United States or a United States territory.21 In the application process, Arkansas lacks the hefty application fees charged by many other states.22 What Type of Insurance Can a Captive Provide in Arkansas? Under Arkansas law, a captive insurance company can provide all forms of insurance not prohibited by law.23 Captive insurance companies are expressly allowed to provide workers’ compensation insurance.24 Captive insurance companies are also expressly allowed to provide reinsurance.25 Captive insurance companies cannot provide personal motor vehicle or homeowner’s insurance coverage or any component of these coverages.26 The captive cannot insure or reinsure any risks other than the risks of its parent and affiliated companies or controlled unaffiliated businesses. That is, a captive insurance company cannot act as a general insurer for business other than its parent company and affiliates.27 Types of Captives Available Under Arkansas Law Arkansas law allows for the creation of various types of captives, an in-depth dis-
cussion of which is outside the scope of this article. For purposes of a high level look at captives under Arkansas law, Arkansas allows for industrial insured captive insurance companies, pure captive insurance companies, association captive insurance companies, branch captive insurance companies, producer reinsurance captive insurance companies, and sponsored captive insurance companies. Each different captive type serves a unique purpose. Restrictions and Requirements for Captives Under Arkansas Law The most critical requirements for the creation of a captive insurance company in Arkansas, as in all domiciles, are the capital and surplus requirements. A pure insurance captive must possess and maintain “unimpaired paid-in capital” of not less than $100,000.28 A reinsurance captive company must have capital in the amount of not less than $300,000.29 There are different capital requirements for other types of captives (stock insurer, special purpose, etc.) provided in section 1604, but none of the capital requirements exceed $500,000.30 Each different type of captive must also maintain a specific surplus amount ranging from $150,000 for pure captive insurance companies to $500,000 for other forms of captives not serving as a mutual insurer.31 The capital and surplus must be available to pay any expenses of or claims against the captive insurance companies at all times. Notably, Arkansas’ capital and surplus requirements are lower than the vast majority of other available domiciles, making Arkansas a very competitive market for captives.32 In the 2019 session, the General Assembly expressly incorporated roughly a dozen sections from the Arkansas Insurance Code to apply to captive insurance companies.33 In addition to the capital and surplus requirements, Arkansas requires that a representative of the Arkansas Insurance Department examine all captives created under Arkansas law at least once every three years “or whenever the Insurance Commissioner determines it to be prudent.” The examination requires the Department representative to inspect and examine the affairs of the captive and to ascertain its financial condition and its ability to fulfill its obligation.34 Notably favorable to the captive entity, docu-
ments provided to the Department during the examination are confidential, may not be made public by the Department, and are not subject to subpoena.35 Further, captives have to make a report of their financial statements to the State, but no captive is required to report its financials to the State more than once a year, and the regulation provides flexibility in the filing dates of the financial statements.36 Although certain forms of captive insurance companies are governed by the investment requirements contained in the Arkansas Insurance Code, pure captive insurance companies and industrial captive insurance companies are not governed by the restrictions on investments included in the Arkansas Insurance Code. This gives the parent company a great amount of control over the money it pays for premiums, and the subsidiary captive can invest the premium moneys with more reduced restrictions than those placed on general insurance companies. However, a captive company should not make a loan to the parent company, although there are limited exclusions to this restriction.37 Captives are also prohibited from joining or contributing financially to a plan, pool association, or guaranty or insolvency fund.38 Notably in Arkansas, no captive insurance company is required to join a rating organization.39 Tax Rates on Captives Under Arkansas Law The state taxes paid by captive insurance companies maintaining at least 50% of their capital in the state of Arkansas are very low (ranging from two hundred fifty thousandths of one percent to fifty thousandths of one percent) depending on the amount of premiums paid to the captive.40 Further, regardless the amount of premiums run through a captive insurance subsidiary, taxes on the captive insurance company are capped at a maximum of $100,000.41 This means that creating a captive subsidiary can result in significant savings for a client. Re-Domiciling Foreign Captives Now that Arkansas’ tax rate for captive insurance companies is so low and the regulatory environment is captive-friendly, Arkansas businesses may consider re-domi-
ciling their foreign captives in Arkansas. Being domiciled in Arkansas provides the ease of working with locally elected officials and civil servants, prevents out-of-state travel for director meetings, allows the business to keep its premium money in Arkansas, and eliminates the need to use a variety of legal and tax professionals in other states. The licensing regulations establish a procedure for filing as a “reciprocal insurer” if an entity is licensed as a captive in another state.42 Further, perhaps the most significant change in the captive legislation from the 2019 session is that it now expressly contemplates mergers and conversions of foreign insurance captives.43 Federal Tax Implications Remain Although Arkansas has now become captive-friendly, the federal government is increasingly wearisome of captives being used as tax shelters rather than as actual insurance companies. As noted, captives can generate huge tax benefits for the parent company. All premiums are treated as tax deductible to the parent. As such, there are extensive IRS regulations in place to ensure that captives are actually insuring real losses, that premiums are appropriate in light of the insured risk, and that the risks are sufficiently diversified. A captive cannot be created to insure losses that will never occur. The IRS has begun to pay close attention to how captives are used, and has begun examining captives to determine whether the captives are actually paying out an appropriate level of claims per year. Those examinations have led to the IRS’s issuance of Notice 2016-66, which identifies a series of “transactions of interest,” including where a captive directly or indirectly makes financing back to the parent from the paid premiums. The IRS requires that the participants provide direct notice to the IRS of such transactions and any “substantially similar transactions.” The IRS has, as of yet, provided no guidance as to what constitutes a “substantially similar transaction.” A captive insurance program provides great financial benefits to a client, but it must be created with care to avoid risks of violating IRS laws that come with stiff penalties.44 Clients using a captive must make sure to include a tax professional in the creation of the company. Additionally, pursuant to Section 831(b) of the Internal Revenue Code, if a captive
insurance company’s gross premium income is $2,300,000 or less, it can elect to avoid tax on its premium income and only owe tax on its investment income, meaning the investment income of the parent company that is paid as premiums to the 831(b) subsidiary is deductible to the parent, and not taxable to the subsidiary. This is an extremely beneficial tax device, but it is highly important to note that the IRS is extremely discerning with regard to these “831(b) captives,” and this election should only be made under limited circumstances after in-depth analysis from legal and accounting professionals.45 Conclusion: Is My Client or Business a Good Candidate for a Captive Under Arkansas Law? Arkansas now has a friendly regulatory environment for captives. As such, Arkansas businesses and their attorneys should consider whether a captive insurance company is a good insurance alternative for the business. In considering whether captives are right for a business, the business and its attorney should consider: • • • •
• •
The nature and diversity of the risks and losses to be insured Whether reinsurance is available The tax benefits and liability created by the use of a captive Whether the business has adequate capital and surplus to form its captive insurance company The investment opportunities for the captive The captive’s ability to distribute premiums
Creating a captive insurance company can be an extremely profitable business decision for a client to make. However, the creation comes with significant risks of penalty under IRS regulations if done incorrectly. If an Arkansas business elects to create a captive or already has a captive domiciled elsewhere, it makes sense to create the captive in Arkansas or re-domicile it here, as the regulatory environment is as friendly as any other and more friendly than most. Domiciling the captives in Arkansas would allow Arkansas businesses to work with local state and regulatory officials and keep their money in the state.
Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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Endnotes: 1. Arkansas Expecting Continued Growth After Adding Two New Captives in 2018, Captive Insurance Times (Feb. 11, 2019), available at https://insurance.arkansas.gov/ news/2016/jan/26/kerr-approves-first-kindinsurance-company. 2. Helvering v. LeGierse, 312 U.S. 531 (1941). 3. Strauss, Peter J., The Business Owner’s Guide to Captive Insurance Companies 139 (2017). 4. Id. 5. Id. at 140. 6. Id. 7. Id. 8. Captives by State, Insurance Information Institute, https://www.iii.org/ publications/a-firm-foundation-howinsurance-supports-the-economy/a-50-statecommitment/captives-by-state. 9. See Ark. Acts 2001, No. 1391 § 24. 10. Ark. Acts 2003 No. 466 § 54. 11. See Ark. Acts 2017 No. 370 § 1. 12. Ark. Acts 2019, No. 521 § 5. 13. See Kerr Approves First-of-Kind Insurance Company, Arkansas Insurance Department, Arkansas.gov (January 26, 2016), 28
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available at https://insurance.arkansas.gov/ news/2016/jan/26/kerr-approves-first-kindinsurance-company/. 14. Arkansas Expecting Continued Growth After Adding Two New Captives in 2018, Captive Insurance Times (Feb. 11, 2019), available at https://insurance.arkansas.gov/ news/2016/jan/26/kerr-approves-first-kindinsurance-company. 15. Ark. Code Ann. § 23-63-1606. 16. Ark. Code Ann. § 23-63-1602(c)(1). 17. Ark. Code Ann. § 23-63-1602. 18. Ark. Code Ann. § 23-63-1603. 19. Ark. Code Ann. § 23-63-1602. 20. Ark. Code Ann. § 23-63-1602(c)(1). 21. Ark. Code Ann. § 23-63-1606. 22. See Comparison of Captive Insurer Jurisdictions, Society of Actuaries at § 3.4, available at https://www.soa.org/globalassets/assets/ files/resources/research-report/2017/research2017-comparison-captive-insurer-report.pdf. 23. Ark. Code Ann. § 23-63-1602. 24. Ark. Code Ann. § 23-63-1602(a). 25. Ark. Code Ann. § 23-63-1611. 26. Ark. Code Ann. § 23-63-1602(a)(4). 27. Ark. Code Ann. § 23-63-1602(2)-(3),(6). 28. Ark. Code Ann. § 23-63-1604(b). 29. Ark. Code Ann. § 23-63-1604(a).
30. Ark. Code Ann. § 23-63-1618. 31. Ark. Code Ann. § 23-63-1605. 32. See supra note 22. 33. Ark. Code Ann. § 23-63-1616 (revised 2019). 34. Ark. Code Ann. § 23-63-1608(a). 35. Ark. Code Ann. § 23-63-1608(b). 36. Ark. Code Ann. § 23-63-1607. 37. Ark. Code Ann. § 23-63-1610. 38. Ark. Code Ann. § 23-63-1613. 39. Ark. Code Ann. § 23-63-1612. 40. Ark. Code Ann. § 23-63-1614. 41. Ark. Code Ann. § 23-63-1614(d). 42. Ark. Code Ann. § 23-63-1602(b). 43. Ark. Code Ann. § 23-63-1606(f) (revised 2019). 44. See, e.g., Avrahami v. Commissioner of Internal Revenue,149 TC No. 7 (2017) (where the captive insurance entity was clearly a sham-entity created as a tax haven with unreasonably high premiums that were paid back to the parent, the IRS sought $275,000 in penalties on top of deficiencies in tax of $1,370,000). 45. See IRS 2018 ‘Dirty Dozen’ Tax Scams: Abusive Tax Shelters Make the List, IRS.gov, https:// www.irs.gov/newsroom/irs-2018-dirty-dozentax-scams-abusive-tax-shelters-make-the-list.
Veteran
justice alert. Defective 3M Dual-Ended Combat ArmsTM Earplugs In a startling settlement in July 2018, the 3M Corporation agreed to pay $9.1 million in a False Claims Act lawsuit to settle allegations that it knowingly supplied the United States military with defective earplugs. Servicemembers and combat veterans who were issued 3M Dual-Ended Combat ArmsTM Earplugs Version 2 (CAEv2) have reported multiple side effects, including • Hearing loss • Tinnitus, or ringing in the ears • Permanent hearing damage • Deafness Military personnel who have been diagnosed with these problems after using the defective earplugs may file lawsuits against the manufacturer alleging that 3M knowingly supplied the defective earplugs, leaving servicemembers vulnerable to injury. We can help injured parties seek justice. Medical devices and drugs that cause harm must be challenged. Veterans need an experienced advocate. Associate the unique expertise of The Law Office of David H. Williams for 3M CAEv2 Combat Earplug and other complex medical and product defect cases. 211 S. Spring Street Second Floor Little Rock, AR 72201 (877) 492-3030 (501) 372-0038 david@dhwlaw.net dhwilliamslawfirm.com
David H. Williams
Vol. 54 No. 2/Spring 2019 The PRESERVE Arkansas Lawyer 29
THE JURY TRIAL
Spring Break on the Road to Justice By Helen C. Gratil Photos l to r: Judy Light; Veronica Tess Myers; Libby Nelson, Sarah Koch and Lisa Roam
Every year since 2011, Legal Aid of Arkansas launches Spring Break on the Road to Justice (SBR2J), an experiential learning opportunity for law students in pro bono and public interest work. The program takes a group of eight students to various pockets of rural Arkansas with high poverty rate, under the supervision of Legal Aid and volunteer attorneys, to provide free legal services to underserved populations. Past projects include Fair Housing, Family Law, Estate Planning, and Expungement clinics. This year Legal Aid hosted three students from the University of Arkansas School of Law and four students from William H. Bowen School of Law for a four-day SBR2J program from March 18-21, 2019. The group rendezvoused in Mountain View on a perfect spring day for orientation, training and setting up camp. Executive Director Lee Richardson, an Izard County native, gave a history and overview of Legal Aid and of the landscape in which it endeavors to engage and serve. Often, students start the program with a limited understanding of Legal Aid’s role in our community, staging Mr. Richardson, a Legal Aid servant of nearly three decades, as the perfect narrator. “I don’t really know what I was expecting when I came here but it turned out to be an enlightening experience. A lot of people don’t understand the need for Legal Aid or what Legal Aid does for people. It was a great experience for me to learn about other people in these rural counties,” says Drew Rodgers, a 1L from Bowen. The project’s 2019 focus was on estate planning in strategically-targeted Izard, Stone and Marion counties. The number of residents age 60+ and living in poverty in this area are significantly higher than the average statewide. Roads leading to their incredibly remote rural locations are narrow and 30
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winding, widening the justice gap further for the already marginalized population. “I heard about the Wills Clinic when Greneda reached out to our Director at Kindness Incorporated. Today Lisa helped me. It is something I have been thinking about for a long time but didn’t do anything about it because of money and time. So many people are thinking like me and they will not be making excuses if it is this easy,” said client Judy Light. Judy is a 60-year-old Mountain Home resident of some 40 years. Greneda Johnson is the Director of Private Attorney Engagement. Lisa Roam, a 1L from Bowen, under the supervision of Legal Aid Delta Regional Manager Teresa Franklin, created a Power of Attorney, Beneficiary Deed, Will and Living Will for Judy. In the short span of three days, the students served a total of 74 community members and created 207 documents. SBR2J is established as an inspirational gateway into public service for aspiring young advocates. “I was fortunate to participate in Legal Aid’s very first Spring Break Road to Justice as a first year law student in 2011. During the trip we traveled to parts of the state I had never been before even though I grew up in Arkansas. My eyes were opened to the great need in our state for equal access to the courts despite one’s financial circumstances. This was my first exposure to public service work, and I believe my desire to pursue a career in public service began with this trip,” reflects Legal Aid Staff Attorney Sarah Barnett. Three other SBR2J alumni served as staff attorneys at Legal Aid after their spring break experience. The intent of the program is to be a guiding light for impassioned Arkansas lawyers looking to serve the community. For Sara Koch, 1L from University of Arkansas School of Law, “This was a really great opportunity because Arkansas is my
home state and I love it but I never really have been exploring the rural areas. Legal Aid is something that I want to be a part of but I didn’t know how. This opportunity really got my foot in the door. It made me feel so good to see the relief on one client’s face when I drafted this one simple document for her. After she read it over she felt so secure. It meant so much that my small amount of work could mean so much for someone’s life. I believe if I could do this for 50 more people I could make the world a better place.” Through SBR2J Legal Aid bridges passion for service with those in need. SBR2J is a sustainable program due to its high return on investment. Each cohort costs about $4,500 and is made possible by the kind support of partners like University of Arkansas Student Bar Association. That modest amount has immeasurable statewide impact. Veronica Tess Myers from Little Rock, a single parent of an adult child with pervasive level of care diagnosis, drove all the way to Mountain View to take advantage of the Wills Clinic. Her primary concern is to ensure her son is taken care of and not institutionalized or placed at a housing development center should anything happen to her. She did not know how to get that done or how she could afford it. She walked away with a Living Will, Durable Power of Attorney for Health Care, Statutory Power of Attorney, and Last Will and Testament for her. “The service was exceptional. It is a much-needed resource especially for low- to middle-income single parents,” she gushes. If you wish to help support this program, please contact Lee Richardson at lrichardson@arlegalaid.org. To volunteer for Legal Aid, contact Greneda Johnson at gjohnson@ arlegalaid.org. Potential clients should call 1-800-952-9243 or visit us online at arlegalaid.org.
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Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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Shattered Class: Looking Beyond Certification in Arkansas Class Actions By Jess Askew III and Andrew King
This article examines several open questions about Arkansas class-action practice after a class is certified, including whether individualized trials are required, the finality of a judgment from a trial on common issues, class counsel’s obligations after a class-wide trial on common issues, and whether notice to class members should describe the trial plan.
M
ore than 30 years ago, the Arkansas Supreme Court liberalized the state’s class action procedure1 to allow class certification if a predominant common issue exists, even if bifurcated or “splinter” proceedings are later necessary to adjudicate individualized issues.2 To the authors’ knowledge, this procedure has not actually been used in any Arkansas court; no case has been tried on class-wide, common issues and then splintered into individual trials on non-common issues of damages, defenses, and the remaining elements of the claim.3 While the phrase “certify now, worry later” may describe Arkansas class-action practice,4 after 30 years the time has come to understand what “later” holds. This article discusses unresolved questions that lie beyond a class-wide trial on common issues where individualized issues remain. In many instances, a class-wide trial will result in an inconclusive, limited adjudication of common issues and no final or collectible money judgment. This suggests that in splintered cases, the architecture of the entire case is more consequential than the decision on class certification. In some circumstances, defendants should be willing to take a class action to trial on a common issue and then deal with the individualized issues that remain for each class member, if the class prevails on the common question.
Askew
King
Jess Askew III and Andrew King are partners at Kutak Rock LLP in Little Rock. They have defended dozens of class-action cases on a multitude of topics, including consumer rights, shareholder litigation, oil-and-gas leases, wage-and-hour claims, health care, insurance, and products liability. 32
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The splinter trial hypothesis In 1988, the Supreme Court held in International Union of Elec., Radio & Machine Workers v. Hudson that it would no longer prohibit class certification out of concern that a defendant’s right to present defenses to individual claims would “splinter” the action into separate cases.5 The Court relied on the trial court’s “substantial power to manage a class action” under Rule 23 of the Arkansas Rules of Civil Procedure, even if damages and individual defenses to the claims of each class member would have to be tried in a “splintered” second phase of trial.6 The Court’s holding in Hudson was foreshadowed by its decision in Arkansas Louisiana Gas Co. v. Morris one month
earlier, in which it affirmed certification of common questions on “eight or ten different theories of recovery” despite individual questions of detrimental reliance as to an estoppel theory.7 In Hudson and Morris, the Court accepted the premise that a prima facie case of liability on certain class-wide claims could be established through aggregate proof. So long as the defendants had the opportunity to litigate individual damages, defenses, and elements after the common claims, the efficiency purposes of the Rule 23 class-action procedure were satisfied.8 Eight years later, in SEECO, Inc. v. Hales (“Hales I”), the Court discussed Hudson and Morris as part of a five-case “compendium” in which it “established a procedure of handling the common issues first, recognizing that the trial court, in its discretion, could later resolve the individual questions.”9 The other cases in the “compendium” turned on whether individualized proof was necessary to establish class-wide liability, even if damages and proximate cause would be determined individually.10 The Court concluded that the class-wide claims for fraud were properly certified, even though “lack of reliance and diligence” may be raised by the defendants.11 The Court further noted that the case could be splintered for the trial of individual issues, if necessary.12 Along with relaxing the Rule 23 standard in Hales I to permit certification where some
elements of class-wide claims could require individualized proof, the Supreme Court increasingly restricted the level of inquiry that a trial court could put into the merits of the plaintiff ’s cause of action in deciding whether to certify.13 Citing the United States Supreme Court’s decision in Eisen v. Carlisle & Jacquelin,14 the Arkansas Supreme Court in 1996 emphasized that for a class certification ruling, “it is totally immaterial whether the petition will succeed on the merits or even if it states a cause of action.”15 A 1999 decision went further, holding that affirmative defenses should not be considered at the class certification stage.16 Consistent with Hudson and Hales I, the Court’s decisions continued to note that a trial court could “decertify should the action become too unwieldy” but declined “to speculate on the questions of bifurcated trials” with respect to the constitutional rights to a jury trial or due process.17 Over the course of 30 years since Hudson, the Arkansas Supreme Court’s approach to class actions has diverged substantially from federal procedure, which requires a “rigorous analysis” of the Rule 23 standards, permits consideration of the merits of the underlying claims, and encourages the trial court to evaluate a plan for actually trying the case, all at the class-certification stage.18 Hales went to trial, resulting in a jury verdict on class-wide liability and damages.19 On appeal, the Supreme Court rejected the
defendants’ argument that splinter trials were required by its decision in Hales I. The Court deferred to the trial court’s discretion not to hold separate trials because there was common evidence in the form of monthly royalty statements and two letters sent to all class members.20 To date, there is no Arkansas appellate case in which a class action was certified, tried on class-wide issues, and then bifurcated, severed, or de-certified for splinter trials on individualized issues.21 When are individualized trials required? Assuming the possibility of splinter trials is more than a mirage, then there must be some circumstances where individualized trials are not only permitted as a matter of discretion, but necessary to protect a defendant’s right to a fair trial. After all, in many other jurisdictions, the need for individualized determinations of fact or law would result in denial of class certification.22 But the problems with aggregate proof also affect the structure of the trial process. Where individualized issues exist, courts have found it impermissible to use representative trials for a few class members and extrapolate from those results an outcome that can be applied to each class member’s claim.23 While “trial by extrapolation” or “trial by formula” is not per se prohibited,24 such a procedure cannot be employed as a substitute for individualized proof for individu-
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alized injuries.25 There are three primary problems with an extrapolation approach that could apply in an Arkansas court:26 (1) due process concerns, both from the perspective of the defendant27 and absent class members;28 (2) the constitutional right to a jury trial which requires nine of 12 jurors to agree to a verdict,29 and may bar a second jury from re-examining a decision by a first jury;30 and (3) the separation of powers between the judicial and legislative branches, to the extent that extrapolation may result in modifying the substantive law and elements of proof for a cause of action.31 For these reasons, “courts have largely abandoned trial by extrapolation, as it is strongly disfavored and arguably unconstitutional.”32 Where “trial by extrapolation” is not a legally valid procedure, then a class-wide trial should not be conducted on any issue where the class-wide evidence would be insufficient in an individual action to meet the plaintiff ’s burden of proof.33 This is because class members who do not opt out of a case are bound by the outcome of class-wide proceedings.34 A class representative’s failure to meet the burden of proof on any element of a claim could expose the individual class members to a res judicata bar against their claims, even if some common issues were established on a class-wide basis.35 To address this risk to class members, the trial court should determine, early on, whether separate splinter trials on individualized issues will be necessary. Moreover, as discussed further in this article, we believe that the issue of individualized trials should be decided before notice of the class action is sent to class members, so that they can be fully informed as to what is at stake and what “splinter later” means for them if they do not exercise the right to opt out.
a second phase of trial within the same case,38 severed into a multitude of individual actions,39 or decertified so that class members can file individual actions if they so choose.40 Under Arkansas case law, it is an open question whether the same jury must sit for both phases of trial;41 however, separate juries are generally permitted in the federal system as long as the second jury does not secondguess any fact issues decided by a previous jury.42 Whichever approach the trial court takes, the outcome of the first phase of trial will not, by itself, result in a final, collectible judgment.43 But the distinctions between bifurcation, severance, and decertification could have a significant effect on whether the common-issue determination results in an appealable order. If the trial court bifurcates the case, the common-issue verdict will not be appealable until the subsequent phase or phases of the trial are held.44 A decertification or severance, on the other hand, should be followed by a final judgment as to the class representative’s individual claims once they are fully adjudicated.45 The question of bifurcation, severance, or decertification could also affect whether class counsel has a continuing obligation to prosecute claims on behalf of class members. In the instance of bifurcation or severance, class counsel would likely have a continuing obligation to pursue the individual issues unless the trial court permits withdrawal.46 For decertification, however, the class counsel would probably be relieved of obligations to the class, but may claim a lien on the class members’ future recoveries.47 In either situation, it would be appropriate for a new notice to be sent to class members that explains the outcome of the first phase of trial and their rights going forward.48
What happens after a class-wide determination of common issues? Supposing a case is tried on common issues but individualized issues remain, two outcomes are possible. The first possibility, a defense verdict on the common issues, will result in a final judgment that “wipe[s] out the possibility of a claim for every class member.”36 In the event of a verdict for the class on common issues, the “individual class members will still have to prove the fact and extent” of individualized elements.37 Presumably the trial court will have discretion as to whether the “splinter trials” are tried in
Should the notice to class members contain details about the splinter-trial plan? Rule 23(c) of the Arkansas Rules of Civil Procedure requires that in any class action where monetary relief is sought, the trial court must direct “the best notice practicable under the circumstances” to all class members who can be identified through reasonable effort. The rule further requires a clear and concise statement of the nature of the action, the class definition, the right to exclusion, and the binding effect of a class judgment on class members.49 The notice is an integral part of class members’ due process right to decide
34
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whether they will participate and be bound by the outcome of the case, win or lose.50 In Arkansas, the order prescribing notice to class members is “fundamental to the further conduct of the action and, thus, immediately appealable as a matter of right.”51 In a splinter-later class action, the binding effect of a class-wide trial on common issues depends on the architecture of the case and what comes later, that is: Which issues will be tried in a common trial? Which issues will be left to individualized determinations? How and when will the individualized determinations be made? For a class member, this information is necessary not only to understand the binding effect of the classwide outcome, but also to understand what must be proven on the individual elements after a successful class-wide outcome, and to gather and preserve supporting evidence. In a situation where the trial court proposes to determine individualized issues through extrapolation (despite the significant problems presented by such an approach), the class member should be adequately informed of the risk of a res judicata bar due to a failure of proof at trial. Not every class action is “too big to try” An early determination of the scope of a class-wide trial will also permit defendants to make a more informed decision whether to take the common issues to trial. In some instances, defendants may find that the action is not “too big to try.”52 For example, the certified class in Arkansas Department of Veterans Affairs v. Okeke had 297 members53 over a three-year class period with potential claims for unpaid overtime for working during their 30-minute lunch breaks.54 Therefore there was a natural “ceiling” to the amount of class-wide damages under the Arkansas Minimum Wage Act. Beneath that ceiling, the total amount of class-wide damages was further limited by arithmetic. That is, even if an employee worked during every lunch break in a fiveday work week, there was no overtime claim if the employee worked 37.5 regular hours or less the rest of that week.55 So, even if the class-wide allegations of lunch-break overtime violations had been proven in Okeke, the damages calculation would necessarily exclude every week for every employee who worked 37.5 hours or less.56 But rather than risk a class-wide trial, the defendant in Okeke settled the case.57
Conclusion The “certify now, splinter later” logic for class certification has its roots in the trial court’s ability to manage a case under Rule 23. As a result of Arkansas’ relaxed classcertification standard, the trial court’s trial management plan and order directing class notice in splinter cases will often turn out to be more consequential than its decision on class certification. Even if the class won on common issues, most certified cases would not reach a conclusive class-wide judgment under the splinter-trial framework. For more than 30 years, litigants and scholars have contemplated these points with limited guidance from the appellate process.58 The time has come for Arkansas courts and litigants to develop a realistic and fair classaction trial process for splinter cases that protects the rights of both absent class members and defendants. Endnotes: 1. Kenneth S. Gould, New Wine in an Old Bottle—Arkansas’s Liberalized Class Action Procedure—A Boon to the Consumer Class Action?, 17 U. Ark. Little Rock. L.J. 1, 1 (1994); see also John J. Watkins, A “Different” Top Ten List: Significant Differences Between State and Federal Procedural Rules, 45 Ark. Law. 12, 14 (2010). 2. BNL Equity Corp. v. Pearson, 340 Ark. 351, 362, 10 S.W.3d 838, 844 (2000). 3. To test this point, the authors engaged in legal database research and surveyed other members of the Arkansas legal community who are knowledgeable about class-action practice. None of the individuals surveyed could recall a class action that was tried on common issues and then splintered for individualized proceedings. 4. Watkins, supra note 1, at 14–15; F. Ehren Hartz, Comment, Certify Now, Worry Later: Arkansas’s Flawed Approach to Class Certification, 61 Ark. L. Rev. 707 (2009). 5. Int’l Union of Elec., Radio & Machine Workers v. Hudson, 295 Ark. 107, 116–18, 747 S.W.2d 81, 86–87 (1988) (citing Drew v. First Fed. Savings & Loan Ass’n of Ft. Smith, 271 Ark. 667, 610 S.W.2d 876 (1981)); see also Arkansas La. Gas Co. v. Morris, 294 Ark. 496, 500, 744 S.W.2d 709, 711 (1988) (Hickman, J., concurring) (“I think the court has moderated its view regarding class actions.”); Gould, supra note 1, at 12–13. 6. Hudson, 295 Ark. at 117–18, 747
S.W.2d at 87. 7. 294 Ark. 496, 497–99, 744 S.W.2d 709, 709–10 (1988). 8. Hudson, 295 Ark. at 120, 747 S.W.2d at 88; Morris, 294 Ark. at 499, 744 S.W.2d at 710–11. 9. 330 Ark. 402, 409, 954 S.W.2d 234, 238 (1997). 10. Id. at 409–12, 954 S.W.2d at 238–40 (citing Lemarco, Inc. v. Wood, 305 Ark. 1, 804 S.W.2d 724 (1991), Summons v. Mo. Pac. R.R., 306 Ark. 116, S.W.2d 240 (1991), and Arthur v. Zearley, 320 Ark. 273, 895 S.W.2d 928 (1995)). 11. Hales, 330 Ark. at 414, 954 S.W.2d at 241. 12. Id. at 414–15, 954 S.W.2d at 241. 13. See First Nat’l Bank of Fort Smith v. Mercantile Bank of Jonesboro, 304 Ark. 196, 201, 801 S.W.2d 38, 41 (1990) (citing Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974)). 14. 417 U.S. 156 (1974). 15. Farm Bureau Mut. Ins. Co. of Ark., Inc. v. Farm Bureau Policy Holders and Members, 323 Ark. 706, 709, 918 S.W.2d 129, 130 (1996) (citing Eisen and Miller v. Mackey Int’l, Inc., 452 F.2d 424 (5th Cir. 1971)). 16. Fraley v. Williams Ford Tractor & Equip. Co., 339 Ark. 322, 336, 5 S.W.3d 423, 432 (1999) (discussing numerosity requirement); see also BNL Equity Corp., 340 Ark. at 357, 10 S.W.3d at 841 (declining to consider affirmative defenses as to any class certification requirement). The wisdom of this approach is beyond the scope of this article. 17. Teris, LLC v. Chandler, 375 Ark. 70, 83–84, 289 S.W.3d 63, 73 (2008) (quoting BNL Equity Corp., 340 Ark. at 362, 363–64, 10 S.W.3d at 845); see also, e.g., GGNSC Arkadelphia, LLC v. Lamb ex rel. Williams, 2015 Ark. 253, at 16, 18–19, 465 S.W.3d 826, 834–35, 836; Arkansas Media, LLC v. Bobbitt, 2010 Ark. 76, at 11, 360 S.W.3d 129, 136–37; Rosenow v. Alltel Corp., 2010 Ark. 26, at 11–12, 358 S.W.3d 879, 887–88. 18. General Telephone Co. v. Falcon, 457 U.S. 147, 161 (1982); see also Gould, infra note 52, at 23, 40; Watkins, supra note 1, at 15; Hartz, supra note 4, at 726–28. 19. SEECO, Inc. v. Hales, 341 Ark. 673, 683, 22 S.W.3d 157, 163 (2000) (“Hales II”). 20. Id. at 709, 22 S.W.3d at 179. Sixteen years later, a federal court certified a similar class action against SEECO, Inc.
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based on claims of fraud and breach of contract. Smith v. SEECO, Inc., Case No. 4:14CV00435 BSM, 2016 WL 10586286, at *5 (E.D. Ark. Apr. 11, 2016). The case was tried to a jury and resulted in a defense verdict. See Smith v. SEECO, Inc., 2017 WL 5639951, at *1 (E.D. Ark. Oct. 31, 2017). Along with five other firms, the authors served as counsel to defendants in the Smith case and parallel state-court litigation. See SEECO, Inc. v. Snow, 2016 Ark. 444, 506 S.W.3d 206; SEECO, Inc. v. Stewmon, 2016 Ark. 435, 506 S.W.3d 828. 21. See supra note 3. See also, e.g., Arkansas Department of Veterans Affairs v. Okeke, 2015 Ark. 275, at 12, 466 S.W.3d 399, 406 (noting that “the class can be decertified after common questions have been litigated, if the circuit court decides it is appropriate to do so”), and Okeke v. Ark. Dep’t of Veteran Affairs, Case No. 60CV13-2403, Order ¶ 2 (Pulaski County Cir. Ct. Jun. 30, 2016) (denying bifurcation because “requiring 297 class members to appear for and testify at trial would be inefficient and defeat the purpose of class certification”). 22. See, e.g., Wal-Mart Stores, Inc. v. Dukes,
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564 U.S. 338, 366 (2011) (reversing class certification under Fed. R. Civ. P. 23(b)(2) because “Wal-Mart is entitled to individualized determinations of each employee’s eligibility for backpay”). 23. See William B. Rubenstein, Newberg on Class Actions § 11:21, at 72 (5th ed. 2014). 24. Id.; Hickory Secs. Ltd. v. Republic of Argentina, 493 Fed. App’x 156, 159 (2d Cir. 2012). 25. Dukes, 564 U.S. at 361 (“claims for individualized relief do not satisfy” Fed. R. Civ. P. 23(b)(2)); Hickory Secs., 493 Fed. App’x at 160 (“[I]f an aggregate approach cannot produce a reasonable approximation of the actual loss, the district court must adopt an individualized approach.”); Windham v. Am. Brands, Inc., 565 F.2d 59, 72 (4th Cir. 1977) (“[D]ifficulties inherent in proving individual damages [cannot] be avoided by the use of a form of ‘fluid recovery.’”). 26. Rubenstein, supra note 23, at 76–82. 27. State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 416–17 (2003) (“The Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor. . . . To the extent an award is grossly excessive, it furthers no legitimate purpose and constitutes an arbitrary deprivation of property.”); Advocat, Inc. v. Sauer, 353 Ark. 29, 54, 111 S.W.3d 346, 360 (2003) (citing Campbell, 538 U.S. 408) (in context of punitive damages, due process prohibits an award that “was neither reasonable nor proportionate to the wrong committed”); see also Philip Morris USA v. Williams, 549 U.S. 346, 353–54 (2007) (due process forbids punishing a defendant for injuries to persons the plaintiff does not represent). 28. See Dukes, 564 U.S. at 363; Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985); Mazzei v. Money Store, 829 F.3d 260, 268 (2d Cir. 2016). 29. Ark. Const. art. 2, § 7. 30. Gasoline Prods. Co. v. Champlin Refining Co., 283 U.S. 494, 497 (1931) (applying reexamination clause of Seventh Amendment to U.S. Constitution); Cimino v. Raymark Indus., Inc., 151 F.3d 297, 320 (5th Cir. 1998); see Teris, LLC, 375 Ark. at 84, 289 S.W.3d at 73 (declining to address separate jury issue in appeal from class certification). 31. See Ark. Const. amend. 80, § 3 (rules of practice and procedure “shall not abridge, 36
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enlarge or modify any substantive right”); Dukes, 564 U.S. at 367 (applying federal Rules Enabling Act, which forbids interpretation of rule to modify substantive rights); In re Fibreboard Corp., 893 F.2d 706, 711 (5th Cir. 1990) (holding that separation of powers bars court from avoiding individualized trials of individual issues); Southwestern Refining Co. v. Bernal, 22 S.W.3d 425, 438 (Tex. 2000) (“Aggregating claims can dramatically alter substantive tort jurisprudence.”). 32. Rubenstein, supra note 23, at 82 (citing Alexandra D. Lahav, The Case for “Trial by Formula,” 90 Tex. L. Rev. 571, 609 (2012)). 33. Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1048 (2016) (“[T]he study here could have been sufficient to sustain a jury finding as to hours worked if it were introduced in each employee’s individual action.”); Mazzei, 829 F.3d at 268 (decertifying class because class representative failed to meet burden of proof “through class-wide evidence at trial”); Engle v. Liggett Group, Inc., 945 So. 2d 1246, 1267–68 (Fla. 2006) (decertifying case after Phase I trial for “individualized issues such as legal causation, comparative fault, and damages”). 34. Smith v. Bayer Corp., 564 U.S. 299, 314 (2011); Hall v. Equity Nat’l Life Ins. Co., 730 F. Supp. 2d 936, 945–46 (E.D. Ark. 2010) (holding that res judicata and collateral estoppel bar re-litigation of case settled as a class action in an Arkansas court); Smith v. Philip Morris Cos., 335 P.3d 644, 661 (Kan. Ct. App. 2014) (“[A] defendant in a class action case is entitled to be protected against later suits by plaintiffs who failed to opt out of the class and who later assert claims identified in the class certification order and notice to the prospective class members.”); Ross v. Ark. Communities, Inc., 258 Ark. 925, 929, 529 S.W.2d 876, 879–80 (1975). 35. Arkansas law does not permit a judgment in favor of a plaintiff who fails to meet the burden of proof before the close of the plaintiff ’s evidence. Ark. R. Civ. P. 50(a); see Williamson v. Elrod, 348 Ark. 307, 312, 72 S.W.3d 489, 493 (2002) (permitting the plaintiff to cure failure to meet the burden of proof after the time for a directed verdict motion would essentially shift the burden of proof to the defendant). 36. GGNSC Arkadelphia, LLC, 2015 Ark. 253, at 15, 465 S.W.3d at 834 (quoting Farmers Ins. Co. v. Snowden, 366 Ark. 138, 149–50, 233 S.W.3d 664, 672 (2006)).
37. Mejdrech v. Met-Coil Sys. Corp., 319 F.3d 910, 912 (7th Cir. 2003); In re Copley Pharm., Inc., 158 F.R.D. 485, 492 (D. Wyo. 1994). 38. Ark. R. Civ. P. 42(b)(1); see, e.g., In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512, 586 (S.D.N.Y. 2011) (suggesting that question of reliance would be decided during a second phase of trial). 39. Ark. R. Civ. P. 18(b). This option seems to be the least desirable of the three, and the Reporter’s Note to the 2001 amendment suggests that the procedure should be “used sparingly.” 40. See Engle, 945 So. 2d at 1269 (decertifying for class members to file individual actions). 41. Hales I, 330 Ark. at 414, 954 S.W.2d at 241; David Newbern et al., 2 Arkansas Practice Series: Arkansas Civil Practice & Procedure § 25:3 n.9 (5th ed. 2010). 42. In re Rhone-Poulnec Rorer Inc., 51 F.3d 1293, 1302 (7th Cir. 1995) (under the Seventh Amendment, “the district judge must carve at the joint” when bifurcating a trial). 43. John Cheesman Trucking, Inc. v. Dougan, 305 Ark. 49, 51, 805 S.W.2d 69, 70 (1991) (holding that an order finding liability in first phase of a bifurcated trial is not a final judgment); see also In re Vivendi Universal, 765 F. Supp. 2d at 583. 44. See John Cheesman Trucking, 305 Ark. at 52, 805 S.W.2d at 71 (holding that Ark. R. Civ. P. 54(b) “does not provide a mechanism for appeal from bifurcated trials of liability/ damages issues”). 45. Ark. R. Civ. P. 23(b) (allowing the class certification order to “be altered or amended at any time before the court enters final judgment”); cf. Mazzei, 829 F.3d at 265 (awarding a money judgment to class representative and decertifying class). 46. Ark. R. Civ. P. 64(b). 47. Ark. Code Ann. § 16-22-304. 48. See Ark. R. Civ. P. 23(c). 49. Ark. R. Civ. P. 23(c)(2). 50. Shutts, 472 U.S. at 811–12 (“If the forum State wishes to bind an absent plaintiff concerning a claim for money damages or similar relief at law, it must provide minimal procedural due process protection.”); Spano v. The Boeing Co., 633 F.3d 574, 584 (7th Cir. 2011) (“If the unnamed members of the class have received constitutionally adequate representation, then the judgment in the class action will resolve their claims, win or lose.”).
51. U.S. Bank, N.A. v. Milburn, 352 Ark. 144, 152, 100 S.W.3d 674, 680 (2003). 52. Cf. Kenneth S. Gould, A Dynamic Development Under the Arkansas Rules of Civil Procedure: Arkansas’s Favorable Approach to Class Actions, 45 Ark. Law. 20, 21 (2010) (“[T]he defendant may be faced with the prospect of a judgment resulting from a single trial that, because of the class size, could be overwhelming.”). 53. Okeke, supra note 21, Order ¶ 2 (Pulaski County Cir. Ct.). 54. Okeke, 2015 Ark. 275, at 4, 466 S.W.3d at 402. 55. Ark. Code Ann. § 11-4-211(a); Okeke, 2015 Ark. 275, at 5, 466 S.W.3d at 403. Five 30-minute lunch breaks is 2.5 hours, so if an employee otherwise worked 37.5 hours or fewer, he or she would not have an overtime claim. (2.5 + 37.5 = 40) According to the United States Bureau of Labor Statistics, the average work-week in the United States is 34.5 hours. See United States Dep’t of Labor, Bureau of Labor Statistics, The Employment Situation—January 2019 at 3, USDL-19-0140 (Jan. 2019), available at https://www.bls.gov/news.release/pdf/empsit.pdf (last visited Feb. 14, 2019). 56. This reasoning led to the reversal of a class certification order in a similar case, Arkansas Department of Veteran Affairs v. Mallett, 2015 Ark. 428, at 8, 474 S.W.3d 861, 866 (“A determination of [the defendant]’s liability under [the Arkansas Minimum Wage Act] would require a highly individualized inquiry as to each employee’s hours worked during a given week, because, if the employee did not work through lunch, and if the employee failed to work more than forty hours in a given work week, there could be no liability on the part of the [defendant].”). The Supreme Court later dismissed the case because the minimum wage claim against the Department of Veteran Affairs, as a state agency, was barred by sovereign immunity. Arkansas Dep’t of Veteran Affairs v. Mallett, 2018 Ark. 217, at 2–3, 549 S.W.3d 351, 352. 57. Okeke v. Ark. Dep’t of Veteran Affairs, Case No. 60CV13-2403, Order on Joint Motion for Approval of Class-Action Settlement (Pulaski County Cir. Ct. Aug. 1, 2016). 58. See Watkins, supra note 1, at 15; Hales II, 341 Ark. at 709, 22 S.W.3d at 179.
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DOJ Relaxes the Standard to Receive Cooperation Credit for Criminal and Civil Corporate Misconduct
By Kerry L. Myers
A
ll corporate counsel and attorneys practicing in the area of compliance, white collar crime and fraud need be aware of recent significant changes in United States Department of Justice (hereinafter “DOJ”) policies and standards concerning employees involved in corporate criminal and civil misconduct. Assessment, investigation and negotiation of criminal and civil corporate misconduct cases has shifted as a result of a pronouncement from DOJ at a recent international conference concerning the Foreign Corrupt Practices Act. These new relaxed standards significantly ease the previous requirements for corporations seeking cooperation credit from the federal government when investigating employee misconduct and apply in both criminal and civil enforcement proceedings. The revision was just announced by Deputy Attorney General Rod J. Rosenstein on November 29, 2018, speaking at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act.1 These changes soften the prior policies imposed by Roaenstein’s predecessor, Deputy Attorney General Sally Yates, in a September 2015 memorandum commonly known among practitioners as the “Yates Memo.”2 As a result of the new relaxed standard, general counsel handling corporate misconduct cases will find their investigations and negotiations less difficult and costly. Corporations are now allowed greater flexibility and discretion during the investigation of these cases so long as all individuals substantially involved in the misconduct are identified and disclosed. However, all directors, executive managers and senior officials involved in any wrongdoing must still be identified and disclosed.
Professor Myers teaches forensic accounting, money laundering and business law at the University of South Florida in Tampa. 38
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The Yates Memo The Yates Memo was released in 2015 by DOJ in an attempt to quell substantial public criticism of DOJ’s failure to prosecute any high-level banking executives following the international banking crisis of 2007–2008. In 2013, the respected Public Broadcasting Station published a Frontline documentary titled The Untouchables produced by Nick Verbisky and Martin Smith.3 This wellresearched and sourced documentary included extensive interviews
with high-ranking DOJ and Federal Bureau of Investigation officials who were trying to explain their joint failure to prosecute any Wall Street executive who was directly involved in, and profited from, the global financial crisis caused by the collapse of the subprime mortgage market. This crisis resulted in a record taxpayer bailout for the U.S. financial industry to prevent a further collapse of the world financial system and spawned a grassroots protest movement called “Occupy Wall Street.” Many citizens of modest means lost substantial retirement assets accumulated over many years of employment and felt betrayed because, in their view, Wall Street created a crisis that allowed Wall Street executives to profit at the direct cost to the average taxpayer through both reduced assets and greater tax outlays. In other words, many believed that Wall Street sold out Main Street. DOJ was hit with even stronger criticism a year later. The Honorable Jed S. Rakoff, Senior Judge of the United States District Court for the Southern District of New York, also published an editorial in a New York magazine titled The Financial Crisis: Why Have No High-Level Executives Been Prosecuted, which also criticized the federal government’s lack of significant enforcement against high-level banking executives arising from a financial crisis that caused staggering losses to investors and taxpayers alike.4 While it is highly unusual in the first instance for a sitting federal judge to publicly criticize a federal agency in a magazine article, Judge Rakoff ’s comments were noteworthy for another reason. Prior to taking the bench, Judge Rakoff was employed by DOJ as Chief of the Business and Securities Fraud Prosecutions Unit in the Office of the United States Attorney for the Southern District of New York. Reacting to these complaints, DOJ responded by releasing the “Yates Memo” in 2015. It stated that the main focus for prosecution of corporate misconduct cases would be “seeking accountability from the individuals who perpetrated the wrongdoing.”5 To further strengthen DOJ’s pursuit of individual corporate wrongdoing and accomplish its goal, the Yates Memo required an entity to provide DOJ all relevant facts concerning all individuals involved in corporate misconduct for the company to receive cooperation credit during criminal sentencing or civil enforcement.6 This policy required corporate counsel to specifically identify and disclose
every participant to corporate misconduct regardless of the cost or circumstances. It soon became known as the “all or nothing” standard among practitioners. As a practical matter, this policy was also sometimes criticized for causing protracted resolutions and expanded costly investigations just to comply with the mandate to discover and report all facts and individuals. Many questioned the policy because it required the entity to investigate, identify and disclose even lowlevel employees who were somehow connected, but not substantially involved in, the misconduct, as these individuals would probably not be a subject of enforcement anyway.7 This also resulted in the policy not being strictly enforced in all cases to avoid unjust results and unnecessary delays.8 The DOJ Corporate Enforcement Policy In late 2017, DOJ formalized existing practice and the Yates Memo into a corporate enforcement policy designed to “increase the volume of voluntary disclosures.”9 The new policy set forth in the U.S Attorney’s Manual continued the Yates Memo’s commitment to hold individuals accountable for criminal activity as a deterrence to corporate corruption while also providing the company with an incentive to establish effective compliance and ethics programs to identify and control misconduct. The policy established a rebuttable presumption that DOJ would decline prosecution or civil enforcement against a company if the corporation satisfied the DOJ triple standard to voluntarily selfdisclose misconduct, fully cooperate with DOJ and timely remediate the misconduct through disgorgement, forfeiture and restitution.10 The policy also discussed “aggravating factors” which included executive management’s involvement in the misconduct as well as recidivism.11 However, the 2017 policy retained the “all or nothing” standard as originally pronounced in the Yates Memo. Entities would still be required to provide to DOJ all relevant facts concerning all individuals involved in corporate misconduct so DOJ could assess individual accountability. The New Relaxed Standard The new standard just announced for criminal and civil cases abandons the previous “all or nothing” standard in favor of a more practical rule limiting the individuals that a company is now required to identify and disclose to DOJ. Under the relaxed stan-
dard, corporations must now make a good faith attempt to identify all individuals who were substantially involved in, or responsible for, misconduct.12 Deputy Attorney General Rosenstein directly addressed DOJ concerns in his speech stating: When the government alleges violations that involved activities throughout the company over a long period of time, it is not practical to require the company to identify every employee who played any role in the conduct. That is particularly challenging when the company and the government want to resolve the matter even though they disagree about the scope of the misconduct. In fact, we learned that the policy was not strictly enforced in some cases because it would have impeded resolutions and wasted resources. Our policies need to work in the real world of limited investigative resources.13 So a company can now receive cooperation credit even if it cannot, or does not want to, identify all individuals involved in misconduct so long as those substantially involved are disclosed to DOJ. Rosenstein also restored greater discretion to DOJ civil litigators announcing even more sweeping changes in civil enforcement proceedings: The idea that a company that engaged in a pattern of wrongdoing should always be required to admit the civil liability of every individual employee as well as the company is attractive in theory, but it proved to be inefficient and pointless in practice. Our civil litigators simply cannot take the time to pursue civil cases against every individual employee who may be liable for misconduct, and we cannot afford to delay corporate resolutions because a bureaucratic rule suggests that companies need to continue investigating until they identify all involved employees and reach an agreement with the government about their roles. Therefore, we are revising the policy to restore some of the discretion that civil attorneys traditionally exercised – with supervisory review.14
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DOJ attorneys in a civil case can now: 1.) Award maximum cooperation credit to corporations who “identify every individual substantially involved in or responsible for misconduct.”15 2.) Allow partial credit to corporations assisting the government investigation, “without the need to agree about every employee with potential individual liability.”16 3.) Consider an individual’s financial condition and ability to pay when making decisions such as civil releases, etc.17 However, Rosenstein did make a special point to reiterate that corporate directors and executive managers will still be held to a higher level of scrutiny. No cooperation credit is available to corporations who fail to identify all wrongdoing by senior officials, including members of senior management or the board of directors, or who do not act in good faith: I want to emphasize that our policy does not allow corporations to conceal wrongdoing by senior officials. To the contrary, it prohibits our attorneys from awarding any credit whatsoever
to any corporation that conceals misconduct by members of senior management or the board of directors, or otherwise demonstrates a lack of good faith in its representations. Companies caught hiding misconduct by senior leaders or failing to act in good faith will not be eligible for any credit.18 Conclusion Significant practical considerations follow these changes. Criminal case resolution should now be easier and less costly without requiring potential corporate defendants to conduct exhaustive investigations to identify all participants in misconduct. Many corporate misconduct cases involve low-level employees who were unwittingly involved or merely following directions from a superior. In reality, these employees and others not substantially involved in the corporate misconduct are seldom prosecuted anyway. But, it remains to be seen how DOJ attorneys and defense counsel will define “substantial involvement” in the criminal context. In the civil context, flexibility is restored to the litigants to work out a reasonable compromise considering all the facts present. The
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availability of both maximum as well as partial cooperation credit encourages good faith corporate investigations and disclosures to the government. However, a bright line remains appropriately drawn with the requirement to identify all directors and executive managers involved; these are the individuals who are responsible for establishing effective compliance and ethics programs, and setting an ethical tone at the top for the entire entity, and these are the employees who are in the best position to commit fraud through management override. Endnotes: 1. Deputy Attorney General Rod J. Rosenstein, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act, Nov. 29, 2018, https://www.justice.gov/opa/speech/deputyattorney-general-rod-j-rosenstein-deliversremarks-american-conference-institute-0. 2. Deputy Attorney General Sally Q. Yates Memo to the Ass’t Att’y Gen’l, Antitrust Div., et al., “Individual Accountability for Corporate Wrongdoing,” dated Sept. 9, 2015, https:// www.justice.gov/archives/dag/file/769036/ download. 3. Nick Verbisky and Martin Smith, The Untouchables, https://www.ps.org/wgbh/ frontline/film/untouchables/, first aired on January 13, 2013. 4. See: Jed Rakoff, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted, NYREV, January 9, 2014, https:// nybooks.com/articles/2014/01/09/financialcrisis-why-no-executive-prosecutions/. 5. Yates Memo, supra note 2. 6. Id. 7. Rosenstein, supra note 1. 8. Id. 9. U.S. Attorney’s Manual Title 9-47.120, FCPA Corporate Enforcement Policy, www. justice.gov/jm/jm-9-47-120. 10. Id. 11. Id. 12. Rosenstein, supra note 1. 13. Id. 14. Id. 15. Id. 16. Id. 17. Id. 18. Id.
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2018-2019
Sustaining Contributors Benefactors 2018-2019 Mark H. Allison Larry W. Burks Thomas M. Carpenter Suzanne G. Clark Steven A. Cosse Steven B. Davis Justice Robert H. Dudley Jack East III Bob Estes Brent J. Eubanks John F. Gibson Jr. Judge Donald Goodner
Benefactors are members who make a sustaining contribution of $250/year in addition to membership dues to support Association programs. Judge David F. Guthrie David Michael Hargis R. Victor Harper Joseph Hickey Denise Reid Hoggard Paul W. Keith William H. Kennedy III Charles Knox Lincoln II Michael R. Mayton J. Cliff McKinney II Michael Millar Brandon K. Moffitt
Margaret Woodward Molleston Timothy J. Myers Debby Thetford Nye William L. Owen William Lance Owens John V. Phelps Joseph H. Purvis Richard L. Ramsay Bill D. Reynolds Brian M. Rosenthal Judge John R. Scott Don Allen Smith
James W. Smith James D. Sprott Mary Beth Sudduth W. H. Taylor William A. Waddell Jr. Eddie H. Walker Jr. David J. Whitaker Tom D. Womack Judge Susan Webber Wright
Patrons 2018-2019 Philip S. Anderson Elizabeth Ann Andreoli Barry D. Barber Melody Peacock Barnett Kay Baxter James Paul Beachboard Roy T. Beard III David L. Beatty Paul B. Benham III Michael Stephen Bingham Allen W. Bird II Judge Samuel N. Bird Charles Tad Bohannon Senator Will Bond Ted Boswell Robert Bruce Branch, Sr. Silas H. Brewer, Jr. Fred E. Briner 42
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Patrons are members who make a sustaining contribution of $100/year in addition to membership dues to support Association programs. Bill W. Bristow Paul Byrd Robert D. Cabe John C. Calhoun, Jr. Worth Camp, Jr. Donald K. Campbell III Mary Catherine Caroom Earl Buddy Chadick Roger U. Colbert Charles T. Coleman Randy Coleman Jon B. Comstock Nate Coulter Judge James O. Cox Michael A. Crockett J. B. Cross James E. Crouch Tim J. Cullen www.arkbar.com
F. Thomas “Tom” Curry Thomas A. Daily Judge Robert T. Dawson Judge Beth M. Deere Terry Dugger Warren E. Dupwe Don A. Eilbott Byron M. Eiseman, Jr. Frances S. Fendler Laura K. Ferner Lyle D. Foster Matthew L. Fryar Price C. Gardner Buck C. Gibson Charles Clifford Gibson III Pamela B. Gibson Sam E. Gibson Greg R. Giles
Stephen Richmond Giles John P. Gill Dent Gitchel Morton Gitelman Ronald L. Griggs Justice (ret.) James H. Gunter, Jr. Judge Barbara A. Halsey Frank S. Hamlin Alexandra K. Harper Charles L. Harwell Richard F. Hatfield Rosanna Henry Paul Herrod Anthony A. Hilliard R. H. “Buddy” Hixson Glen Hoggard Brian C. Hogue Cyril Hollingsworth
Thank You for Your Support Patrons (cont.) 2018-2019 Don Hollingsworth Robert Howard Hopkins Robert E. Hornberger Frank Huckaba Michelle C. Huff Rebecca B. Hurst Karen K. Hutchins James W. Hyden Hon Michael E. Irwin Randolph C. Jackson Judith M. Johnson Glenn W. Jones, Jr. Robert S. Jones Jim Julian David W. Kamps Philip E. Kaplan Sean T. Keith Donald H. Kidd Judson C. Kidd Joseph F. Kolb Peter G. Kumpe Howard Baker Kurrus Special Judge David N. Laser John Charles Lessel
Stark Ligon Judge John R. Lineberger Stephen A. Lisle Gabriel D. Mallard Richard Bryant Marshall David R. Matthews Michael S. McCrary Bobby McDaniel Josh E. McHughes James “ Jim” A. McLart, III James E. McMenis Philip Miron Judge Chalk S. Mitchell Michael W. Mitchell Harry Truman Moore Jeffrey H. Moore Judge Randall W. Morley Sheffield Nelson Judge William David Newbern Robert A. Newcomb Stephen B. Niswanger Edward T. Oglesby Judge James E. O’Hern, III William L. Patton, Jr.
Kristin L. Pawlik Brant Perkins Kathryn E. Platt Donald C. Pullen Brian H. Ratcliff Gordon S. Rather, Jr. Robert Jeffrey Reynerson Judge Curtis E. Rickard William B. Roberts William S. Robinson Charles D. Roscopf John L. Rush Don M. Schnipper Frank B. Sewall Shaneen K. Sloan Robert D. Smith III Michael W. Spades, Jr. Aaron L. Squyres Jean D. Stockburger James H. Swindle Justice Annabelle Imber Tuck Richard Edwin Ulmer Marcus L. Vaden James R. Van Dover
Glenn Vasser Vicki S. Vasser-Jenkins Janelle Diane Waack Danyelle J. Walker Judge Bill H. Walmsley Judge John C. Ward Stan L. Warrick John Dewey Watson Timothy Fagan Watson, Sr. Judge Gordon Webb J. Adam Wells Carolyn B. Witherspoon Marsha C. Woodruff Ronald G. Woodruff Andrea Grimes Woods Eric Lane Worsham Dennis M. Zolper
Become a Benefactor or Patron Member Your gift strengthens the Association by helping to support its mission and many projects. You will receive: • recognition as individual sponsors in The Arkansas Lawyer magazine • a specialty ribbon for your name badge at the Annual Meeting • recognition at the Annual and Mid-Year Meetings Show your support when you renew your membership by adding a sustaining contribution on your membership form for the 2019-2020 Bar Year that begins July 1, 2019. For questions, contact Michele Glasgow at 501-801-5661 or mglasgow@arkbar.com. Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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ARKANSAS CHAPTER
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* The National Distinguished Neutrals is an invitation-only professional association of over 1000 litigator-rated mediators & arbitrators 44 TheAcademy ArkansasofLawyer www.arkbar.com throughout the US and a proud sponsor of the AAJ and DRI. For more info, please visit www.NADN.org/about
DISCIPLINARY ACTIONS
Judicial Discipline & Disability Commission Actions On February 22, 2019, the Arkansas Judicial Discipline and Disability Commission announced an agreed public Reprimand and an agreement not to serve in the judiciary against Retired Circuit Court Judge Philip Smith, Third Judicial District in RE JDDC case #17-345. The full press releases can be found online at http://www.state.ar.us/jddc/ decisions.html. Attorney Disciplinary Actions
Final actions from January 1, 2019 - April 4, 2019, by the Committee on Professional Conduct. Summaries prepared by the Office of Professional Conduct (OPC). Full text documents are available on-line either at http:// courts.arkansas.gov and by entering the attorney’s name in the attorney locater feature under the “Directories” link on the home page, or also on the Judiciary home page by checking under “Opinions and Disciplinary Decisions.” [The “Model” Rules of Professional Conduct are for conduct prior to May 1, 2005. The “Arkansas” Rules are in effect from May 1, 2005.] SURRENDER: BRACKETT, MARK A., Bar No. 2014259, of Searcy, Arkansas, in No. D-18-1006, petitioned to surrender his law license as a result of his closing his law office in August 2018, his acknowledgment that he had likely violated several Arkansas Rules, and his desire to not have to deal with at least three pending disciplinary complaints at OPC and possibly others to come. The Arkansas Supreme Court accepted his surrender on January 17, 2019. HENRY, MATTHEW M., Bar No. 2005167, of Little Rock, in No. D-19-201, petitioned to surrender his law license as a result of his guilty plea to a felony in USDC No. 18-cr-485 and his sentencing on
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February 22, 2019, to a term of 33 months in federal prison. From his IOLTA client trust account, between August 2015 and March 2018 Henry converted to unauthorized and personal use $25,000 from one client and over $400,000 from another client. Henry has been on interim committee suspension since March 7, 2018. On April 4, 2019, the Arkansas Supreme Court accepted his license surrender. KEARNEY, JEFFREY H., Bar No. 91249, of Pine Bluff, Arkansas. Following disbarment proceedings in No. D-16174, the Special Judge recommended Mr. Kearney be disbarred. In lieu of continuing through the disbarment process of briefing the case to the Arkansas Supreme Court, the Court granted Mr. Kearney’s petition to surrender his law license in No. D-19-35 on January 31, 2019. As a result of the Court granting Kearney’s motion to surrender, the disbarment case was dismissed on February 28, 2019.
SUSPENSION: MAHER, JENNIFER LYNN, Bar No. 2010126 of North Little Rock, in CPC No. 2018-006, by Findings & Order filed January 28, 2019, had her law license suspended for 12 months, with conditions upon reinstatement and $50 costs, for violations of AR Rule 8.4(b) (criminal conduct). Maher received property reported to have been stolen and tried to sell the property. One of the items was an iPad which, when being shown to a purchaser and powered on, displayed a message posted by the owner. Maher retrieved the iPad and destroyed it. Maher was charged with theft of property. Maher entered a plea of guilty to misdemeanor Theft By Receiving in Pulaski County District Court No. PCS17-2188, and was fined and ordered to pay $529 restitution. MAHER, JENNIFER LYNN, Bar No. 2010126 of North Little Rock, in CPC No. 2018-025, by Consent Findings &
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Experienced in Complex Public Service Matters For over 40 years, Dave Wilson has specialized in regulated and unregulated public and private service provider utility cases, both at state and federal levels. He’s maintained ongoing relationships within industries doing business in Arkansas and would be a valuable ally when the need arises. His work includes regulatory hearings, mediation, contract matters, trials, and appeals. In addition to being admitted to practice before the Supreme Court of the United States and the Washington D.C. Circuit Court of Appeals, his experience includes working closely with State and Federal authorities in Washington D.C. and Arkansas: • The Federal Energy Regulatory Commission (FERC) • The Arkansas Public Service Commission • Arkansas General Assembly and US Congress, and many local and cooperative boards and city councils • The Arkansas Department of Environmental Quality (ADEQ) • The Environmental Protection Agency (EPA) • The Pollution Control and Ecology Commission • The Nuclear Regulatory Commission
Order filed January 28, 2019, agreed to the suspension of her law license for 36 months, with conditions upon reinstatement and $50 costs, for violations of AR Rule 8.4(b) (criminal conduct). Maher was driving a vehicle and was stopped for speeding. The passenger in her car was on probation and had a search waiver on file. Suspected drugs and paraphernalia were discovered in a search inside the vehicle. Maher was charged with Possession of Controlled Substance with Purpose to Deliver. With the assistance of counsel, Maher entered a plea to the reduced charge of Possession of Controlled Substance and placed on probation for a period of 24 months. In a separate case, Maher and another individual were discovered sleeping in a storage unit. Inside the unit officers discovered suspected drugs and paraphernalia in plain sight. Maher was charged with Possession of Drug Paraphernalia. With the assistance of counsel, Maher entered a reduced charge of Possession of Drug Paraphernalia and placed on probation for a period of 24 months. 46
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To visit with Dave about a legal matter where he may be of service, call 501-376-4090. To learn more about Dave’s practice, and to see case examples, visit zacharydavidwilsonpa.com. References available upon request
REECE, DANA A., Bar No. 87142 of North Little Rock, in CPC No. 2018010, on a complaint by Justin Phillips in a criminal representation, by Consent Findings & Order filed January 18, 2019, agreed to a suspension of her law license for 36 months for violations of AR Rules 1.3, 1.4(a)(3), 1.4(a)(4), 3.4(c), and 8.4(d). Reece represented Phillips in a postconviction matter in which she charged $10,000 as a flat fee for representation in state court and an additional $5,000 for representation in federal court. No postconviction proceedings were filed in state court. Reece did file an action in federal court in March 2016. In June 2016, Phillips wrote the courts seeking information about his case, as he had not received any copies of pleadings filed on his behalf. On July 6, 2016, the federal court directed Reece to contact her client. On July 8, the federal district court clerk received a letter from Phillips stating that he had not had any contact with Reece. On July 8, 2016, the federal court directed Reece to contact Phillips within thirty days and to provide
the court with a response to Phillips’ letter. Reece did not provide the court with a response. On October 13, 2016, the federal court directed Reece to comply with its July 8 order or be subject to a show cause order. Reece did not respond to the court’s order. On November 10, 2016, the federal court issued a show cause order to Reece directing her to appear in court on November 17. Reece filed a notice of compliance and requested a continuance. A show cause hearing was held on November 22 and, after testimony, the federal court found Reece to have failed, without sufficient justification, to comply with its order, and that her failure to comply was a gross violation of the practice expected of counsel admitted to the federal court. The federal court referred Reece to OPC.
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From the ordinary to the most complex, no appeal is too small or large Writing Briefs to the Arkansas Court of Appeals, the Arkansas Supreme Court, the Federal Circuits and the United States Supreme Court
TSCHIEMER
LEGAL BRIEFING Handling all your briefing needs Robert Tschiemer is the author of the Arkansas Bar Weekly Case Summaries, available at www.arkbar.com. For a complete list of decisions see www.tschiemerlegalbriefing.com
Robert S. Tschiemer
Ark. Bar 84148 P.O. Box 549 Mayflower, AR 72106-0549 501.951.3303 (p) 501. 377.9866 (f) robert@tschiemerlegalbriefing.com www.tschiemerlegalbriefing.com
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Arkansas Bar Foundation Memorials and Honoraria The Arkansas Bar Foundation acknowledges with grateful appreciation the receipt of the following memorial and scholarship contributions received during the period February 1, 2019, through April 30, 2019. In Memory of Judge Harry F. Barnes Silas Brewer Edward T. Oglesby Hayden and Gordon S. Rather, Jr. Mary Ann and Don Schnipper Judy and Glenn Vasser Watts, Donovan & Tilley, P.A. In Memory of William Lewis “Bill” Blair Judge Bill Wilson and Judge Cathi Compton In Memory of Judge David M. “Mac” Glover Jennifer and Randy Coleman Patti and Charlie Coleman Jeffery Pence Donald C. Pullen Hayden and Gordon S. Rather, Jr. Charles D. Roscopf Judy and Glenn Vasser Watts, Donovan & Tilley, P.A. Mike Wilson In Memory of R. H. “Buddy” Hixson Judge Robert T. Dawson In Memory of George Jernigan, Jr. Jeffery Pence Charles D. Roscopf Mike Wilson In Memory of Bob Neighbors Jeffery Pence
In Memory of Alex Streett Judge Bill Wilson and Judge Cathi Compton In Memory of Edgar Thompson Mike Wilson In Memory of Lohnes Thomas Tiner, Sr. Michael R. Gott James McLarty In Memory of Gus Walton Justice Robert H. Dudley OTHER GIFTS AND SCHOLARSHIP CONTRIBUTIONS Arkansas Bar Foundation Judge Beth Deere Nancy and Judge John Fogleman Judge Rita and Judge Wayne Gruber Tracey and Jason Hendren Paula and Steve Sharum Justice Andree Layton Roaf Scholarship Fund The Arkansas Supreme Court Historical Society, Inc. In Honor of Gordon S. Rather, Jr. for his birthday and McKenzie Award recipient His family: Susan and Rick Richardson; Beth and Steve Gorman; Sarah and Geoff Richardson
In Memory of Burl C. Rottenberry III Silas Brewer Hayden and Gordon S. Rather, Jr.
Upcoming Events: Wednesday, June 12, 2019 • Hot Springs Convention Center Foundation Membership Meeting 11:00 a.m. (Room 202) Foundation Board of Directors’ Meeting 11:30 a.m. (Room 202) Foundation Annual Fellows’ Dinner 7:00 p.m. (Rooms 207-209) Friday, October 11, 2019 • Fassler Hall ~ Little Rock Third Annual Arkansas Bar Foundation Friendraiser: OktoberFellowsFest
Tax Free IRA Distributions to Charities With recent changes to the tax law regarding charitable deductions, this article addresses tax free IRA distributions to charities such as those contributed to the Arkansas Bar Foundation. The Foundation asked Maria Bean, CPA, of LANDMARK to write an article which addresses the advantages, stipulations and information concerning this topic. For individuals who are at least age 70½ and have either traditional or Roth IRA accounts, a Qualified Charitable Distribution (QCD) may offer several benefits. A QCD is a direct distribution from a retirement account to a qualified public charity, typically a 501(c)(3) organization. This type of distribution is considered a distribution for purposes of meeting the annual required minimum distribution obligation, so it can be useful in relation to funds that are already required to be distributed from a retirement account. In terms of distribution ordering rules, QCDs are always considered to be paid with taxable IRA balances first, allowing for more favorable treatment than the typical distribution ordering rules. Likely the most attractive benefit of making a QCD for traditional IRA account holders is the immediate 100% above-the-line income tax deduction that results. This means that a tax benefit from the contribution is realized even in years where the donor may be taking the standard deduction rather than itemizing his or her deductions. The income tax reporting for QCDs also lowers the adjusted gross income of the donor, which can be helpful in the calculation of certain benefit phase-out situations. If you are interested in knowing more about how a QCD may benefit your tax situation or how to make a QCD from your retirement account, please consult your IRA trustee and a tax advisor. —Maria K. Bean, CPA, Tax Director LANDMARK
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IN MEMORIAM Judge Harry F. Barnes of Camden died February 27, 2019, at the age of 86. Judge Barnes grew up in Joiner and was a graduate of Castle Heights Military Academy. He attended Vanderbilt University for two years, and he graduated from the U.S. Naval Academy in 1956 with an engineering degree. He served for 30 years in the United States Marine Corps. He retired from the Marine Corps Reserve in 1986 at the rank of Colonel. Judge Barnes graduated from the University of Arkansas School of Law in 1964. He was in the private practice of law in Camden for 20 years, initially as law partner of former representative, senator and governor, David Pryor. From 1975 until 1993 he served as a municipal and then circuit judge. In 1993, Judge Barnes was nominated by President Bill Clinton to a seat on the United States District Court for the Western District of Arkansas. After his confirmation by the U.S. Senate, Judge Barnes served as federal judge for the next 25 years. John Graham Black of Corning died February 8, 2019, at the age of 76. He was a former President of JW Black Lumber Company in Corning. He graduated from Corning High School in 1960, and earned a B.A. in English from St. Louis University in 1964, and a Law Degree from The University of Arkansas Law School in 1967. Judge David McGee “Mac” Glover of Malvern died March 23, 2019, at the age of 74. Mac attended Malvern Public Schools graduating in 1962. Mac was elected student body president at Malvern High School and developed a life-long love of politics and government. He attended the University of Arkansas at Fayetteville where 50
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he served as student body president, earning his B.A. in 1966. He attended law school in Fayetteville earning his J.D. in 1969, and after serving his country and working a short time as an Assistant Attorney General, he returned to his hometown of Malvern where he practiced law for 34 years. For 17 of those years, Mac practiced law with his father, Lawson. Mac used lawyering as a means of practicing the Golden Rule for a living. He also loved lawyers and in 1989 was elected as the President of the Arkansas Bar Association, an organization he dearly cared about and served for many decades. He was appointed Malvern District Judge and, through fate and the encouragement of some key friends, he ran for the Arkansas Court of Appeals unopposed in 2004. He was reelected, unopposed, in 2012. He was serving in his 14th year on the court when he died. He also invested in his community by serving as Malvern City Attorney. He volunteered his legal work to help develop the Solid Waste Authority and countless other community projects. On March 28, 2019, the Arkansas Supreme Court and Arkansas Court of Appeals issued Per Curiams in memory of Judge Glover commending him for his service to the legal profession and citizens of Arkansas. Judith Miram Gray of Fayetteville died January 29, 2019, at the age of 77. Judith received a B.A. in English Literature from the University of Arkansas Fulbright College of Arts and Sciences followed by a Juris Doctorate from the University of Arkansas School of Law in Fayetteville. R.H. “Buddy” Hixson of Paris died February 18, 2019, at the age of 82. Buddy was a graduate of Paris High School. After high school, Buddy attended Arkansas Tech University and then graduated from the University of Arkansas School of Law. Upon completion of law school, he opened a law
office in Paris where he continued his law practice for the next 55 years. He was a former municipal judge, completed legal work for several of the surrounding communities and served as the attorney for establishing numerous rural water systems. George Olin Jernigan, Jr., of Little Rock passed away February 24, 2019, at the age of 79. George graduated from Little Rock Central High before attending the University of Arkansas in Fayetteville. After receiving his JD from the University of Arkansas Law School he joined the U.S. Army and obtained the rank of Captain. After serving his country George returned to Little Rock and entered the private practice of law. He was a distinguished attorney and served as general counsel for Ward Industries in Conway as well as general counsel for the Arkansas Health Care Association. Judge Kevin Neil King of Highland died January 18, 2019, at the age of 64. Kevin was a graduate of Highland High School in 1972, the University of Arkansas in 1976, and the University of Arkansas School of Law in 1978. He practiced law and served municipal and district courts for 18 years. For the past 16 years, he had served the counties of Sharp, Lawrence, Randolph and Jackson as Circuit Judge of the Third Judicial District. Robert Lester Neighbors of Little Rock died April 6, 2019, at the age of 76. He graduated from the University of Arkansas in 1965 with a Bachelor of Science in Business Administration. He earned a Juris Doctor from the University of Arkansas School of Law, Little Rock Division, in 1969 and was admitted to the bar in that year. His first year after
IN MEMORIAM graduation from law school he was the law clerk for Pulaski Circuit Court judges Warren E. Wood and Tom F. Digby. He entered private law practice until being appointed Assistant United States Attorney for the Eastern District of Arkansas in 1976. He held that post until becoming an Administrative Law Judge for the Social Security Administration in 1991, where he remained until he retired on December 31, 2010. Walter Garrett Riddick III of Little Rock died April 11, 2019, at the age of 62. Walt graduated from Hall Senior High School, University of Arkansas, and University of Arkansas School of Law in 1981. While in private law practice, he was a commissioner on the Little Rock Planning Commission, serving as chairman in 1989, and worked for the Pulaski County Prosecutors office. After his father retired from the U.S. Attorney’s office, the two formed Riddick & Riddick, attorneys at law. After completing active duty, Walt worked with Jeff Graham as a family attorney. Walt was a member of the 431st Civil Affairs Unit of the U.S. Army and served in South America, active duty in the Gulf War and Desert Storm, active duty in Bosnia, and continued to be active in the Army Reserve until his retirement in 2011 as a Sergeant First Class. Burl Conrad (Buddy) Rotenberry III of Little Rock died January 31, 2019, at the age of 81. He went to public schools in Little Rock and North Little Rock and graduated in the class of 1955 from Little Rock Central High School. After graduating in the last graduating class of Little Rock Junior College, Buddy attended Little Rock University one more year and was then admitted to the University of Arkansas School of Law at Fayetteville. He graduated in 1962 with two degrees, a B.S.L. and a J.D. Buddy served eight years in the United States Naval Reserves. In 1976 he took what
was intended to be a temporary and transitional job as a Deputy Attorney General in the Arkansas Attorney General’s Office. This adventure led to a 34-year career in public service with the state of Arkansas. It also included serving as a cabinet level department head of a major department of state government, a six-year term as Chairman of the State Workers Compensation Commission, and finally the last 25 years as an administrative law judge for the Arkansas Public Service Commission. Alex G. Streett of Russellville died April 25, 2019, at the age of 80. Alex performed his undergraduate studies at Henderson University and the University of Arkansas, while also serving in the United States Army. Following the completion of his military service and undergraduate work, Alex received his Bachelor of Laws and Juris Doctorate degrees from the University of Arkansas School of Law in 1965. Alex was part of the unique Streett family, an Arkansas institution spanning five consecutive generations of Arkansas lawyers dating back to the Civil War and continuing today. This more than 200-year unbroken line of Arkansas Streett lawyers includes his great grandfather, grandfather, father, uncle, brother, two sons, a daughter, a niece, and several cousins. Alex began his career in 1965 by serving as a law clerk for Associate Justice Paul Ward of the Arkansas Supreme Court. He established his law practice, the Streett Law Firm, in 1966. He was elected by the people of the River Valley to serve as the prosecuting attorney for the 5th judicial district from 1971 to 1982.
was an attorney and judge. Later in life, he retired at 70 as Public Defender for Lonoke County. Edgar was a lifelong learner and seized the opportunities to learn new skills. He was a master electrician, a certified scuba diver, a photographer, and a 32nd degree mason. He also obtained a Remington Clay 500-in-a-row patch, hazard response training, and a commercial driver’s license. One of his biggest passions was flying and aviation. During college, he was an active member of the Civil Air Patrol. He acquired his Airline Transport License and Certified Flight Instrument Instructor Rating. Lohnes Thomas Tiner Sr. of Harrisburg died April 18, 2019, at the age of 87. Lohnes joined the Air Force in February 1950, prior to the start of the Korean War. Midway through his military career, he became a flight engineer, which enabled him to fly to all 50 states as well as Europe. Lohnes attended the University of Arkansas and graduated with a law degree in 1960. After passing the bar exam, he opened an office in Harrisburg and continued his law practice until his retirement in January 2018. Lohnes was fortunate to have found a career that he both excelled in and enjoyed. His specialty was criminal defense. The information contained herein is provided by the members’ obituaries.
Edgar Ross Thompson of Austin died January 5, 2019, at the age of 83. Edgar was a 1953 graduate of Little Rock Central High School and then went on to the University of Arkansas. Professionally, Edgar Vol. 54 No. 2/Spring 2019 The Arkansas Lawyer
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