Monthly Archives: October 2017

Who’s Eligible for Overtime?

Alexander Foxx, Associate Member, University of Cincinnati Law Review

 The Department of Labor exempts an employee in a “bona fide administrative capacity” from overtime compensation.[1] An exempt employee (1) is paid more than $455 per week, (2) is in a management or business operations role, and (3) exercises discretion and independent judgment in the role. [2] Courts are split in their interpretations of requirements (2) and (3). The issue for the federal circuit courts is whether bank underwriters qualify for overtime exemption.[3]

Currently, the Ninth and Second Circuits support an interpretation of overtime rules that entitles underwriters to overtime.[4] The Sixth Circuit favors an interpretation that underwriters are not entitled to overtime. The Sixth Circuit’s view, while troubling public policy, is the legally proper view.

While the circuits do not extend their rulings beyond the underwriters, their holdings serve as a signal for how overtime of similar job positions—namely, office jobs with little corporate power, but considered administrative positions—may be evaluated. This could impact a large portion of the economy. For example, franchise managers could be impacted.  Regardless of these considerations, I maintain that the Sixth Circuit’s view is the legally correct view and that underwriters are exempt from overtime.

The Sixth Circuit Approach

In Lutz v. Huntington Bancshares, Inc. the Sixth Circuit determined that underwriters were bona fide administrative employees and were exempt from overtime pay.[5] The court found the nature of the work that underwriters performed was critical to the overtime determination. A role that is fundamentally a management position will likely qualify for overtime exemption; a clerical or manual role, however, may entitle employees to overtime.[6] With this in mind, the Sixth Circuit opened its decision with a description of the underwriter position.[7]

The Sixth Circuit ruled the second prong of the overtime rule was fulfilled. The Court maintained that bank guidelines allow underwriters significant autonomy and that underwriters are bona fide administrative employees exempt from overtime under the second prong of the Department of Labor rule. The Court noted that underwriters use “judgement and experience” in granting loan modifications and interpreting loan applications objectively.[8] This view underpins the Court’s conclusion that underwriters “assist in the running and servicing of the Bank’s business by making decisions about when Huntington should take on certain kinds of credit risk,” fulfilling the second prong of the Department of Labor’s exemption requirement.[9] The Court differentiated the administrative nature of underwriters by distancing them from production-centered positions—positions which are typically overtime eligible.[10] The Court noted that the underwriters do not sell a product, but perform analyses similar to financial analysts, who are exempt from overtime compensation.[11] Given these factors, the Court concluded the second prong of the labor department rule was satisfied.

The Sixth Circuit then determined the third prong of the Department of Labor rule was satisfied because underwriters are permitted to exercise a large amount of judgment in their position. The Court observed that the bank guidelines imposed on underwriters allows for significant discretion in determining the approval of a loan application.[12] Given the discretion allowed by the guidelines, underwriters must “exercise independent judgment” in their position.[13]

The Sixth Circuit determined that underwriters were (1) administrative employees and (2) exercised professional judgment and discretion.[14] Therefore underwriters fulfilled the second and third prongs of the Department of Labor rule and exempted from overtime pay.

The Ninth and Second Circuits

In Davis v. J.P. Morgan Chase & Co. the Second Circuit differed from the Sixth Circuit, concluding that the second and third prongs were not satisfied because underwriters had little autonomy and managerial authority. The Second Circuit maintained that the guidelines promulgated by the bank provided a narrow route “in order to produce a yes or no decision” regarding the loan application.[15] This language indicated that the Second Circuit viewed bank guidelines as authoritative rules that bound the independent judgement of underwriters and subjected them to the production standards of the bank. The Second Circuit maintained that underwriter positions were not administrative positions, but production positions.[16] The Court noted that it is the primary duty of underwriters to “sell loan products under the detailed directions of the Credit Guide.”[17] Viewing underwriters as producers who (1) did not exercise independent judgement and (2) did not contribute to management decisions, the Second Circuit found that the overtime exemption requirements had not been met; neither the second or third prongs of the rule were fulfilled.[18]

The opinion of the Ninth Circuit in McKeen-Chaplin v. Provident Sav. Bank (the most recent of the three cases) closely paralleled the decision of the Second Circuit. The Ninth Circuit further expounded upon the difference between production and administrative roles. Administrative positions guide the “overall course or policies”[19] of the business, while production roles are concerned with the “day-to-day” operations of necessary business tasks.[20] Only administrative roles qualified for overtime exemption under the Department of Labor rule. In examining the nature of the underwriter position, the Ninth Circuit noted that underwriters are narrowly confined to the risk profile assigned to them by the bank and therefore are not administrators who exercise independent judgment.[21]

The Sixth Circuit Decision is Legally Proper, but Troubling Policy

The Sixth Circuit correctly classifies underwriters as overtime exempt employees. The position of underwriter is a role necessary to the management of bank business operations and therefore meets the second prong of the Department of Labor’s rule. Underwriters are instrumental to the revenues of lending institutions. Without underwriters, borrowers cannot be examined properly, and if borrowers cannot be examined properly, loans will likely default at a much higher rate. In short, underwriters make sure that loans are only given to people who will pay the loan back with interest. Given that underwriters are an essential part of the business operations of a bank, but do not work directly in a “production”[22] role[23] (this role falls to the loan originator)[24], it is a natural conclusion that they guide the business and operations of the bank. Opposition may argue that underwriters are a “production” role and thereby entitled to overtime under the McKeen decision—analogous to a factory line worker.[25] This view ignores the fact that underwriters do not produce loans—this task falls to the loan originator,[26] an individual who works in a different capacity (and usually a different office or city) than the underwriter. The position of underwriter is an administrative position that satisfies the second prong of the Department of Labor Rule.

The position of underwriter also completes the third prong of the Department of Labor’s rule. The third prong requires an exempt employee to demonstrate discretion or independent judgment in his or her role. Underwriters are evaluating the ability of individuals to pay back loans, which, at base, is a determination of an individual’s trustworthiness. An evaluation of trustworthiness cannot be undertaken without independent judgment. The opposition may argue that the guidelines provided to underwriters eliminate this judgment. This view ignores that underwriters are granted wide discretion within these policies and may be granted exceptions to these policies.[27] Underwriters therefore satisfy the third prong of the Department of Labor’s rule.

Despite the fact that underwriters do not seem to be eligible for overtime under the Department of Labor rule, the Sixth Circuit’s ruling raises troubling public policy questions. Namely, poor compensation of valuable employees should not be encouraged. If an employee is working over 40 hours per week in an “administrative” position, the employee is likely performing valuable tasks for the business. It would seem appropriate that such employees are compensated at a level that would make the potential benefits of litigation seem small. In short, it would seem prudent if the banks paid their underwriters more so the employees do not feel pressured to sue.

The Sixth Circuit seems to concur that underwriters are an important piece of the lending process and that they exercise professional judgment on a regular basis. As such, it is troubling that such valuable employees feel the need to bring suit against their employer for more compensation. Compensation in the labor market should be addressed by an efficient market—the supply of a certain skillset will demand equivalent compensation. Efficient markets seem to fail in the case of underwriters. Underwriters are clearly valuable and necessary employees that perform a task that is not automatable. However, given this litigation, underwriters feel as though their compensation is not adequate for their skillset. This may indicate a market that is out of equilibrium.[28] While legally proper, a legal decision that supports the under-payment of employees and an inefficient market is troubling.

If employees feel they are adequately compensated for their skillset they will not feel the need to bring suit against their employer for overtime compensation. If the underwriters had been paid a salary that they considered fair, they likely would not have felt the need to bring suit—the cost of litigation would not have been outweighed by the marginal pay increase. Employees that feel fairly treated and fairly may sue their employer less—a court decision is unnecessary to reach this conclusion.

Conclusion

The circuit split regarding overtime pay has no resolution on the horizon, especially given recent political developments.[29] It is troubling that the legal status of overtime pay—an instrumental compensation component of the labor market—is so fluid. A ruling from the Supreme Court would not be remiss.

While the split persists, the Sixth Circuit decision should be viewed as the legally proper conclusion. The Sixth Circuit correctly recognizes underwriters as instrumental business administrators who exercise substantial professional discretion. However, if companies endeavor to compensate employees at a market rate this may moot overtime litigation and the Department of Labor rule and create the desired market equilibrium.

[1] 29 C.F.R. § 541.200(a).

[2] See Lutz v. Huntington Bancshares, Inc., 815 F.3d 988, 992 (6th Cir. 2016) citing 29 C.F.R. § 541.200(a).

[3] Lutz at 990; Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 530 (2d Cir. 2009); McKeen-Chaplin v. Provident Sav. Bank, 862 F.3d 847, 849 (9th Cir. 2017)

[4] An underwriter is an employee of a lending institution that determines if a loan should be granted to a prospective borrower.

[5] Lutz at 990.

[6] 29 C.F.R. § 541.200(a).

[7] Lutz at 990-991. Underwriters receive loan applications from loan originators (for example, the branch banker that fills out a residential mortgage application with a customer). Upon receipt, underwriters evaluate the application for accuracy and determine if the loan will be approved. In determining loan approval, underwriters are subject to the guidelines of their bank. These guidelines outline lending procedures and risk profiles and, in large part, determine whether the underwriter can approve the loan.

[8] See id.

[9] Id at 990.

[10] Id.

[11] Id at 995.

[12] Id at 997.

[13] Id.

[14] Id at 998.

[15] Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 534 (2d Cir. 2009).

[16] Id. at 535.

[17] Id. at 534.

[18] Id. at 537.

[19] McKeen-Chaplin v. Provident Sav. Bank, 862 F.3d 847, 851 (9th Cir. 2017) citing Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 1125 (9th Cir. 2002) quoting Bratt v. Cty. of L.A., 912 F.2d 1066, 1070 (9th Cir. 1990).

[20] Id.

[21] McKeen at 852.

[22] Production: “often attributive :something not specially designed or customized and usually mass-produced.” Production, Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/production.

[23] Id.

[24] Lutz at 990.

[25] McKeen at 852.

[26] Lutz at 990.

[27] Lutz at 991.

[28] That labor markets may not always be in equilibrium is not a new hypothesis to economists. One explanation that is posited, and could apply here, is “sticky wages.” This means that wages to not adjust in sync with labor shortages and surpluses. See Sticky Wages, Renee Haltom, Federal Reserve Bank of Richmond, https://www.richmondfed.org/publications/research/econ_focus/2013/q1/q1, accessed September 26, 2017.

[29]  Reuters, U.S. Judge Strikes Down Obama Administration Overtime Pay Rule, New York Times, https://www.nytimes.com/reuters/2017/08/31/us/31reuters-usa-overtime.html.

 

 

 

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Cracked and Packed No More? A New Breed of Political Gerrymandering Litigation

Patrick Reagan, Associate Member, University of Cincinnati Law Review

Rather than run competitive re-election campaigns, some legislators have opted to have their victory drawn for them. Political gerrymandering decides elections before a single vote is cast and prevents people from having equal opportunities to exercise their constitutional right to freedom of political association. When legislators gerrymander, they either split voters of one party among multiple districts so they won’t constitute a majority, or concentrate them into a few districts where they constitute a supermajority—commonly known as “cracking” and “packing”, respectively.[1] Legislators did not just stand idly by while this became a problem—they created the problem. [2] With Gill v. Whitford, the Supreme Court should reaffirm Davis v. Bandemer and clarify Vieth v. Jubelirer by unequivocally holding that political gerrymandering claims are justiciable.

Davis and Vieth: ABrief Survey of Political Gerrymandering Jurisprudence

             In 1986, Davis v. Bandemer  held that political gerrymandering cases were justiciable.[3] In Davis, the plaintiffs claimed that their votes were diluted by new district lines drawn by the Indiana legislature after the 1980 census, in violation of the Equal Protection Clause of the Fourteenth Amendment.[4]. The plaintiffs pointed to the 1982 election where Democratic candidates for the Indiana House received 51.9% of the popular vote statewide, yet only 43 of the 100 seats to be filled.[5] The most surprising results occurred in Marion County, where Indianapolis is situated, and in Allen County, where Fort Wayne is located. Both counties were divided into multi-member House districts. Democratic candidates drew 46.6% of the vote in these districts in 1982, but only 3 of the 21 Democratic candidates were elected.[6]

            In holding political gerrymandering claims as justiciable, the Court stated that it has “consistently adjudicated equal protection claims in the legislative districting context regarding inequalities in population between districts.”[7] It further held that Davis survived a Baker v. Carr analysis,[8] and referenced the “one person, one vote” principle of Reynolds v. Sims.[9] To further support the court’s holding of justiciability, Justice White surveyed the Court’s racial gerrymandering jurisprudence[10] and wrote specifically that “[i]n the multimember district cases, we have also repeatedly stated that districting that would ‘operate to minimize or cancel out the voting strength of racial or political elements of the voting population’ would raise a constitutional question.”[11] He then pointed to Gaffney v. Cummings [12] which  “upheld against an equal protection political gerrymandering challenge a . . . scheme that was formulated in a bipartisan effort to try to provide political representation . . . proportional to the strength of political parties in the State.”[13] In Justice White’s view, Gaffney was the exact kind of political gerrymandering claim that was at issue in Davis, just without the explicit holding that such claims are justiciable.[14] He also wrote that holding political gerrymandering claims as non-justiciable political questions would transform the Baker v. Carr factors into an “ad hoc litmus test” of the Court’s reactions to whether a claim is desirable and warrants judicial intervention.[15] Thus, the heart of the underlying claim in Davis was that “each political group in a State should have the same chance to elect representatives of its choice as any other political group.”[16]

            The Davis court never agreed on a set standard by which political gerrymandering claims could be evaluated. The standard eventually applied in the lower courts[17]—that a plaintiff in a political gerrymandering case needed to prove “intentional discrimination against an identifiable political group and an actual discriminatory effect on that group”[18]—was only articulated in a separate plurality opinion by Justice White.[19]

The Court reversed course eighteen years later in Vieth v. Jubelirer. In Vieth, a plurality held that political gerrymandering claims were not justiciable.[20] Justice Scalia’s plurality opinion rested on three central conclusions: (1) political gerrymandering has been around for a long time;[21] (2) Article I, § 4 of the Constitution gives Congress the power to alter state legislative maps;[22] and, (3) political gerrymandering claims are a political question.[23] The driving reason behind this plurality opinion, however, was the standard adopted by the lower courts mentioned above. To Justice Scalia, it had a record of “puzzlement and consternation,”[24] and “[e]ighteen years of judicial effort with virtually nothing to show for it justif[ied] [the Court] in revisiting the question whether the standard promised by Bandemer exists.”[25] Because of the lack of a concrete standard, the appellants in Vieth suggested a new standard: that a plaintiff “must ‘show that the mapmakers acted with a predominant intent to achieve partisan advantage,’ which can be shown ‘by direct evidence or by circumstantial evidence that other neutral and legitimate redistricting criteria were subordinated to the goal of achieving partisan advantage.’”[26] Justice Scalia rejected this standard as too vague and un-manageable.[27] Justice Kennedy joined the judgment of the Court but stated that he “would still reject the plurality’s conclusions as to nonjusticiability.[28] He argued that even though “no such standard has emerged in this case should not be taken to prove that none will emerge in the future.”[29]

Whitford, the First Amendment, and an Opportunity for the Supreme Court

            Twelve years after Vieth, and thirty years after Davis, Whitford v. Gill was decided. The plaintiffs were Democratic voters in Wisconsin who brought the challenge after the 2012 and 2014 elections, in which Republicans received 48.6% and 52% of the statewide popular vote yet won 60 and 63 of 99 legislative seats, respectively, under the map drawn after the 2010 census. The district court agreed that the map infringed on the plaintiff’s First Amendment right to freedom of association and Fourteenth Amendment right to equal protection.[30]

Gill is different from Davis and Vieth in two main ways. First, the underlying claim contains both First Amendment and Equal Protection arguments. Specifically, the plaintiffs argue that by disadvantaging voters based on their political affiliation, Wisconsin violated their First Amendment right to freedom of political association.[31] Equal protection is also a powerful claim, but has a checkered history with political gerrymandering cases, as demonstrated by Davis and Vieth. The First Amendment provides a stronger basis for holding political gerrymandering claims as justiciable, because the Court has held for over four decades that the freedom of political association is a constitutionally-protected right.[32] Part of political association is working to elect candidates sharing one’s beliefs; thus, gerrymandering a map to disfavor certain political groups places a heavy burden on the First Amendment right of political association. That in and of itself makes the First Amendment argument more logical, because legislators are suppressing the ability of a group to express its views and exercise its freedom of association. While there isn’t a Supreme Court case setting a level of scrutiny for burdens on political association, the Seventh Circuit has previously held that strict scrutiny should apply.[33] If, however, the Gill Court goes so far as to hold that political gerrymandering suppresses political speech, strict scrutiny will apply.[34]

The second way Gill is different is in the standard[35] proposed by the plaintiffs for the Court to apply to political gerrymandering claims. The plaintiffs propose using a mathematical formula called the Efficiency Gap (EG). The EG has the potential to give the Court a judicially-manageable standard for political gerrymandering claims. To briefly state, it measures which party is better at converting its votes to legislative seats. If a party’s advantage is outside of an accepted range, that indicates the map might be gerrymandered.[36]

This proposed formula represents a potential solution to the issues faced by both the Davis court and the Vieth court. Baker v. Carr also requires a judicially-manageable standard for a case to avoid being deemed a non-justiciable political question.[37] The EG formula is a smart way to evaluate these claims, because it uses an unbiased, scientific method. Determining whether legislators gerrymandered a map logically requires sensitive inquiries into the factual background of a map’s construction and legislators’ intent. Judges interpret facts differently, and without an objective standard to evaluate these claims, any conclusions that they draw could be problematic.

In his Vieth concurrence, Justice Kennedy kept the door open for a judicially-manageable standard to emerge. If the Court holds that these claims are justiciable, expect a new wave of political gerrymandering claims to appear on dockets across the country—especially if the Court adopts the EG standard. Maps across the country that previously could not be proven to be racially discriminatory, for instance, could be successfully challenged based on the allegation that they are politically discriminatory. The role of legislators in drawing electoral maps will be heavily scrutinized, as the EG provides the clearest way of measuring gerrymandering. The blind eye the Court has turned to gerrymandering due to the lack of a standard by which to evaluate claims has allowed this practice to become a national problem. Legislators have broad authority to make laws, but they should not be permitted to abuse the power with which they are entrusted to gerrymander themselves to victory.[38] That makes the EG an even more attractive formula by which these claims should be evaluated, because math helps courts avoid highly subjective and sensitive factual inquiries that currently render these claims nonjusticiable.

Conclusion

For the Court to hold in Gill v. Whitford that political gerrymandering claims are nonjusticiable—thus removing the possibility of judicial review of political gerrymandering—would be like putting the fox in charge of the henhouse Legislators, armed with sharp consultants, reams of maps, and Excel tricks and gimmicks would have no incentive to draw fair districts if they knew there would be no judicial review for political gerrymandering, just as it is today. No one’s vote should be diluted just because of their political beliefs. reaffirm voters’ First Amendment right of political association by adopting the EG formula in Gill v. Whitford to unequivocally hold that political gerrymandering claims are justiciable.

 

[1] A particularly illustrative example of cracking and packing is illustrated in the following article. Emily Bazalon, The New Front in the Gerrymandering Wars: Democracy vs. Math, The New York Times (Aug. 29, 2017), https://www.nytimes.com/2017/08/29/magazine/the-new-front-in-the-gerrymandering-wars-democracy-vs-math.html?mcubz=3&_r=0.

[2] The Washington Post catalogued some of the most gerrymandered districts in the country. Christopher Ingraham, America’s most gerrymandered congressional districts, The Washington Post (May 15, 2014), https://www.washingtonpost.com/news/wonk/wp/2014/05/15/americas-most-gerrymandered-congressional-districts/?utm_term=.4cb8154dfc90.

[3] Davis v. Bandemer, 478 U.S. 109, 110 (1986) (holding that the Court was “not persuaded that there are no judicially discernible and manageable standards by which political gerrymander[ing] cases are to be decided.”).

[4] Id. The map included fifty single-member districts for the Indiana Senate, and 7 triple-member, 9 double-member, and 61 single-member districts for the Indiana House; Id. at 109.

[5] Id.

[6] Id.

[7] Id. at 118.

[8] Id. at 122-123.

[9] 377 U.S. 533 (1964).

[10] Racial gerrymandering has a better-developed body of case law. See, e.g., Thornburg v. Gingles, 478 U.S. 30 (1986); Cooper v. Harris, 137 S. Ct. 1455 (2017).

[11] Davis, 478 U.S. at 119 (quoting Fortson v. Dorsey, 379 U.S. 433 (1965)).

[12] Gaffney v. Cummings, 412 U.S. 735 (1973). This might be helpful for the appellees in Gill v. Whitford.

[13] Davis, 478 U.S. at 119.

[14] Id. Justice White then went on to cite numerous cases where the Court summarily affirmed or dismissed for want of a substantial federal question cases involving political gerrymandering. Furthermore, because those cases were all summarily decided, that did not preclude the Court’s consideration of Davis. Id. at 121.

[15] Id. at 126.

[16] Id.

[17] Vieth v. Jubelirer, 541 U.S. 267, 268 (2004).

[18] Davis, 478 U.S. at 127 (citing Mobile v. Bolden, 446 U.S. 55, 67-68 (1980)).

[19] Id.

[20] Vieth v. Jubelirer, 541 U.S. 267, 268 (2004).

[21] Id. at 274 (“[p]olitical gerrymanders are not new to the American scene). Justice Scalia then traces their colonial and early modern history.

[22] Id. at 275.

[23] See Id. at 277-279.

[24] Id. at 282.

[25] Id. at 281.

[26] Id. at 284.

[27] Id. at 288. (“[e]ven if the standard were relevant, however, it is not judicially manageable.”).

[28] Id. at 311 (Kennedy, J. concurring).

[29] Id. Justice Scalia called this a “never-say-never approach.” Id. at 303.

[30] Whitford v. Gill, 218 F. Supp. 3d 837, 930 (W.D. Wis. 2016).

[31] Whitford, 218 F. Supp 3d at 883-884 (“[w]e conclude, therefore, that the First Amendment and the Equal Protection clause prohibit a redistricting scheme which (1) is intended to place a severe impediment on the effectiveness of the votes of individual citizens on the basis of their political affiliation, (2) has that effect, and (3) cannot be justified on other, legitimate legislative grounds.”).

[32] Cousins v. Wigoda, 419 U.S. 477, 487 (1975) (“’[t]he right to associate with the political party of one’s choice is an integral part of . . . basic constitutional freedom.’”) (quoting Krusper v. Pontikes, 414 U.S. 51, 56-57 (1973); Williams v. Rhodes, 393 U.S. 23, 30-31 (1968) (“this freedom [political association] protected against federal encroachment by the First Amendment is entitled under the Fourteenth Amendment to the same protection from infringement by the States.”).

[33] Wren v. Jones, 635 F.2d 1277, 1285 (7th Cir. 1980). The court relied on Branti v. Finkel, 445 U.S. 507 (1980), and Elrod v. Burns, 427 U.S. 347 (976), in which the Court applied a high level of scrutiny when government employees were discharged for their political beliefs.

[34] Citizens United v. Federal Election Comm’n, 558 U.S. 310, 340 (2010).

[35] Id. at 854-855. ((1) intent to gerrymander for partisan advantage; (2) partisan effect, which can be proven by showing the efficiency gap (EG)—based on a mathematical formula—between the parties exceeded an acceptable interval (proposed to be 7%); and (3) a duty of the defendants to rebut the presumption of unconstitutionality created by the first two elements by showing that the partisan gerrymander was necessary.)

[36] Id. The formula first requires one to calculate how many votes are cast for a party in excess of the number needed to win (which measures packing); then it requires one to calculate how many votes are cast by a party for a losing candidate (which measures cracking).[36] Each party’s respective number of wasted votes is then divided by the total number of votes cast in the election, and it is the relative comparison of those two numbers that determines the EG.[36] An EG of zero would mean both parties are wasting equal numbers of votes, and an EG in favor of one party or the other means that party wasted votes at a lower rate than the other party.[36] Thus, an EG in favor of Party A means that party was more efficient at translating its votes into legislative seats. Wisconsin’s EG under this new map was 11.69% in favor of Republicans, which contradicted what should happen in elections held under a fairly-drawn map. Id.

[37] Baker, 369 U.S. at 217.

[38] See Robert Draper, The League of Dangerous Mapmakers, The Atlantic (October 2012), https://www.theatlantic.com/magazine/archive/2012/10/the-league-of/309084/. This in-depth analysis shows just how out of control gerrymandering has become.

UNITED STATES V. FOKKER SERVICES BV: EXECUTIVE POWER OVER DPAS SHOULD BE CHECKED

Author: Alexander Spaulding, Associate Member, University of Cincinnati Law Review

Today, due to the risk of unwarranted collateral damage to innocent employees, large corporations are too big to jail. After the Arthur Anderson case in 2002, where Enron’s accounting firm was criminally prosecuted, thousands of innocent employees lost their jobs.[1] In response, the Department of Justice (DOJ) has significantly increased its use of deferred prosecution agreements (DPAs) in cases in which corporations are criminally charged.[2] In a DPA, the prosecutor requires the corporation to fulfill certain punitive and rehabilitative obligations, such as paying fines and implementing new company policy. In return, the charges against the corporation are dropped.[3] Since prosecution is under the arm of the Executive branch, DPAs are largely free of any judicial scrutiny. In most cases, to the chagrin of some district court judges, the judiciary acts as a “rubber stamp” for DPAs. In 2015, when an Article III judge challenged this notion in United States v. Fokker Services BV[4], the DC Circuit upheld “the Executive’s long-settled primacy over charging,” by ruling that courts are not permitted to reject a DPA based on a finding that it is inadequate.[5] While DPAs serve a commendable protectionist purpose, Fokker goes too far in limiting the judiciary’s role in reviewing their terms. Prosecutors may now operate under the assumption that their DPAs will always be rubber stamped, even if a judge were to find them “grossly disproportionate” in light of the conduct, as was the case in Fokker.[6]

Fokker Services B.V.

Fokker Services B.V. is a Dutch aerospace company.[7] From 2005 to 2010, the company exported aircraft parts, technology, and services to multiple branches of the Iranian military, along with Sudan and Myanmar.[8] Furthermore, Fokker deliberately worked to evade US sanctions by performing various illegal methods to obscure their practices, such as deleting references to Iran and falsifying documents and records.[9] The company’s president and senior management were aware of both the laws and the illegal practices.[10] In 2014, the DOJ and Fokker agreed to an eighteen-month DPA, after which the company would receive amnesty.[11] The DPA required Fokker to pay a total of $21 million in fines, fully cooperate with the government, and implement a compliance policy.[12]

The District Court

The DOJ brought the DPA to the district court along with a motion to exclude the eighteen-month period under the Speedy Trial Act, which requires trials to begin within seventy days of filing charges.[13] The parties argued that the judge’s purview was “limited to reviewing the proposed exclusion of time pursuant to the Speedy Trial Act.”[14] However, Judge Richard J. Leon both denied the motion and rejected the DPA on the grounds that it was not in the public interest.[15] Judge Leon took specific objection to: (1) the company was fined no more than what it had illegally earned; (2) there was no independent monitoring established; and (3) no individuals were independently prosecuted or fired.[16] Judge Leon explained that the DPA was too lenient and therefore “did not constitute an appropriate exercise of prosecutorial discretion.”[17]

The Appeal

The parties appealed to the D.C Circuit on the grounds that the District Court should have granted the motion to exclude time, and should not have rejected the DPA.[18] The D.C Circuit vacated the District Court’s order, explaining that the Speedy Trial Act “confers no authority in a court to withhold exclusion of time pursuant to a DPA based on concerns that the government should bring different charges or should charge different defendants.”[19] The court further explained that the judiciary lacks the authority to second guess the Executive’s primacy in criminal charging, therefore, the District Court had overstepped by “rejecting the DPA based primarily on concerns about the prosecution’s charging choices.”[20] Furthermore, the D.C. circuit explained that the judiciary lacks the competence to review the government’s choices in a DPA, because its provisions manifest the government’s prosecutorial considerations which are “ill-suited for substantial judicial oversight.”[21] Thus, the court remanded with an order to exclude the eighteen months.[22]

Implications

On one hand, the Circuit Court’s ruling in Fokker gives strong guidance on the judiciary’s limited to non-existent role in evaluating and rejecting DPAs, which will allow corporations and federal prosecutors to negotiate comfortably in a predictable regime. However, the precedent set by the Fokker court only exacerbates a problem that legal scholars already lamented—that prosecutors hold an excessive amount of power in the realm of corporate criminal justice.[23] Now, when a DPA crosses a judge’s desk, he is to rubber stamp it, regardless of its contents.

This unchecked authority enjoyed by the Executive threatens the protections of the separation of powers. Under the constitution, the authority to make the law, enforce the law, and review the law are separated among the branches of government. However, after Fokker, the Executive has the power to do all three through the use of DPAs. Without judicial incursion, the prosecutors have the ability to both create and interpret the laws. The DOJ has the ability to require companies to follow codes of its own choosing, effectively creating new laws for corporations to follow.[24] Furthermore, the DOJ has the authority to interpret both the laws and the offenses, as the laws essentially become whatever the prosecutors say they are, because the prosecutors ultimately control the private agreements.[25]

Criticism

Ultimately, the Fokker court went too far in limiting the judicial role in reviewing DPAs. Judge Leon was correct to ask whether the agreement was in the public interest, and correct to rule that it was not. Under this DPA, there were essentially no punitive or deterrent measures. The company was only required to pay back the money it had made illegally, there was no monitor imposed upon them to ensure that they followed the laws in the future, and not a single employee was prosecuted or even lost their job. As Judge Leon described, this punishment was “anemic,”[26] and it did little to ensure that other corporations would not engage in similar behavior, nor that the interests of justice were served. Fokker was selling parts and services to the military of a US enemy, and the Circuit Court defended the prosecution’s supreme right to form an insufficient deal.

Moreover, even if the Circuit Court had wanted to uphold the DPA in this case, they could have done so with less broad language. The Circuit Court should have explained how Judge Leon overstepped his discretion, and provided the criteria by which this discretion was analyzed. Instead, the court stated in a blanket manner that the judiciary should not interfere with the prosecutor’s agreements.

Conclusion

The Circuit Court’s ruling was overbroad. While there are many reasons that judicial review should be limited in the context of DPAs, such as Executive deference, prosecutorial efficiency, and trust that corporate criminal deals will be upheld, the judiciary should not be rendered mute on the issue. Not only are there significant implications regarding the separation of powers, but unjust agreements can be rubber stamped—as was the case in Fokker. In most cases, the judiciary should defer to the prosecutor anyway, so in the rare case, like Fokker, where the judge rejects a DPA, the rejection should not be per se invalid. The courts would do a great service by outlining the parameters of an agreement that is outside of the public interest, rather than rejecting any judicial review.

[1] See Corporate Crime Reporter, Arthur Andersen Corporate Criminal Liability and the Rise of Deferred and Non Prosecution Agreements, https://www.corporatecrimereporter.com/news/200/arthur-andersen-corporate-criminal-liability-and-the-rise-of-deferred-and-non-prosecution-agreements/.

[2] See Brandon L. Garrett, Too Big to Jail: How Prosecutors Compromise with Corporations 41, 44, 55 (2014).

[3] Id. at 5.

[4] 818 F.3d 733 (D.C. Cir. 2016).

[5] Id. at 743.

[6] 79 F.Supp.3d 160, 167 (2015).

[7] Id. at 161.

[8] Id. at 162

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] 18 U.S.C. §§ 3152–3156, 3161–3174 (2012).

[14] DOJ Supplemental Memorandum at 2, United States v. Fokker Servs. B.V., No. 14-CR-121 (RJL) (D.D.C. July 18, 2014), ECF No. 11.

[15] United States v. Fokker Servs. B.V., 79 F. Supp. 3d 160, 166 (D.D.C. 2015).

[16] Id.

[17] Id.

[18]  United States v. Fokker Services B.V., No. 15-3016, 2016 WL 1319266, at *1 (D.C. Cir. Apr. 5, 2016).

[19] Id. at 4.

[20] Id.

[21] Id at 9.

[22] Id. at 7.

[23] See Richard A. Epstein, The Deferred Prosecution Racket, Wall Street J. (Nov. 28, 2006). https://www.wsj.com/articles/SB116468395737834160.

[24]  See, e.g., Jennifer Arlen, Prosecuting Beyond the Rule of Law: Corporate Mandates Imposed Through Deferred Prosecution Agreements, 8 J. Legal Analysis 191, 192 (2016).

[25] Mike Koehler, Measuring the Impact of Non-Prosecution and Deferred Prosecution Agreements on Foreign Corrupt Practices Act Enforcement, 49 UC Davis L. Rev. 497, 505 (2015).

[26] Fokker Servs., 79 F. Supp. 3d at 167.