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Thelen, Reid, Brown, Raysman & Steiner, LLP

Contractor Awarded Damages for Union's Secondary Boycott
A contractor responsible for building part of a stadium’s concrete superstructure entered into a collective bargaining agreement with the carpenters’ union covering work in the Louisville (Kentucky) area, including the contractor’s portion of the stadium work. Another contractor was awarded the contract to supply and install stadium seating on the same project, but this contractor and its installation subcontractor refused to enter into a collective bargaining agreement with the union.

The union informed the seating subcontractor that it would establish a picket line, and the union specifically requested that the concrete contractor’s workers join the picket line. The day before the planned picketing, the project manager set up a reserve gate for the seating contractor’s and seating subcontractor’s employees, suppliers and visitors. But, the union’s office was closed by the time the project manager’s fax explaining the system arrived. So, the union workers did not know of the system before coming to work on the day of the picketing.

On the morning of the picketing, two gates had signs stating that the seating contractor and its employees, suppliers and visitors were prohibited from using those entrances. A third gate was labeled as being exclusively for the seating contractor, its employees, suppliers and visitors. Because the signs did not specifically mention the seating subcontractor – the announced target of the picketing – union members picketed all three gates, not just the one reserved for the seating contractor. All work on the project was shut down because other union members refused to cross the picket line.

The seating subcontractor’s name was added to the signs four days later, and the union stopped picketing at those gates not meant for the seating contractor and subcontractor. The day after the signs were changed, all other unions returned to work. One day later, the union stopped picketing after a letter arrived from its national headquarters advising that the strike was affecting a union contractor with a no-strike clause. At no time during the strike did the union encourage its members to return to work.

The concrete contractor sued the union, alleging injuries from the secondary boycott and a violation of the no-strike clause in the parties’ collective bargaining agreement. The U.S. District Court for the Western District of Kentucky held the union liable and awarded damages. The 6th U.S. Circuit Court of Appeals affirmed the finding of liability, affirmed the award of certain damages and reversed the denial of other damages. F.A. Wilhelm Construction Co. v. Kentucky State District Council of Carpenters, 293 F.3d 935 (6th Cir. 2002)

The union argued that the employees acted on their own initiative. Under the National Labor Relations Act, a union having a problem with a “primary” employer must focus on that employer only and may not pressure unrelated “secondary” employers. It is illegal for unions to encourage employees to unite against their employer so as to pressure their employer to refuse to deal with the primary employer. As the appeals court explained:

In a ""secondary boycott,"" a union brings economic pressure to bear on a ""primary employer"" to do something the union wants -- say, to agree to a union contract -- by inducing a ""secondary employer"" doing business with the primary employer to bring economic pressure on the primary employer -- say, to stop doing any further business with the employer. Under § 8(b)(4) of the Taft Hartley Act of 1947, a secondary boycott is illegal if the union seeks to persuade secondary employees to boycott the primary employer, but it is not illegal if the secondary employees act purely on their own initiative to boycott the services of the primary employer.

In considering a violation of §8 (b) (4) of the Act, a court must determine whether the union’s actions were directed at the secondary employer or whether there were merely ancillary consequences. A court need only find that one of the union’s objectives was to influence a secondary employer to pressure the primary employer; the sole object of the strike need not be focused on the secondary employer. This question of intent or motivation is determined based on the totality of the union’s conduct under the circumstances.

The District Court concluded, and the 6th Circuit agreed, that the union violated the Act by directly soliciting the concrete contractor’s employees before the picket line had been established and that the union intended to keep the concrete contractor’s employees off the job and to entangle the concrete contractor in a labor dispute against the seating subcontractor.

The National Labor Relations Act provides a private cause of action for violations of §8 (b) (4). The District Court found that the strike lasted 6½ days and awarded $44,548 in damages based on rental equipment costs, payment of expenses to key employees, increased labor costs and subcontractor expenses.

On appeal, the union argued that there was no secondary boycott, that no damages should have been awarded and that, even if damages were proper, the District Court erred in awarding damages for costs incurred in renting equipment because proof of loss was lacking. The concrete contractor argued that the District Court erred by refusing to award damages for loss of use of its own equipment.

The Sixth Circuit affirmed the District Court’s finding of an unfair labor practice and its award of damages for rental equipment prorated at the monthly rate. The appeals court reversed the damage award as to the contractor’s own equipment and remanded for recalculation consistent with its opinion.

The 6th Circuit held that once liability had been established, the contractor was entitled to recover all damages directly and proximately caused by the violation. It noted that idle equipment is a real loss to the contractor, regardless of whether the equipment is rented or owned by the contractor. The appeals court held that the contractor was not required to show damages arising from its own equipment with the degree of specificity required by the District Court, and it allowed compensation based on a prorated monthly rental rate.

Given the finding of an illegal secondary boycott, neither the District Court nor the Sixth Circuit found it necessary to reach the issue of whether the no-strike clause in the union contract was breached.

07-19-2006

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Thelen, Reid, Brown, Raysman & Steiner, LLP

How to Remove a Stale Mechanic's Lien from Title to Property in California
"In California, as in most states, any person or company that works on property has a powerful tool to make sure they are paid: the mechanic’s lien. Liens are authorized as a matter of right in the California Constitution.

If the property owner does not pay for construction work, the contractor may record a document that gives notice of its Claim of Mechanic’s Lien against the property. The document is recorded with the Recorder in the county where the property is located and will be a cloud on title to the property, signifying to the world that a contractor believes it is entitled to draw the dollar amount of its claim from the equity in the property. Depending on the type of contractor and whether the owner has recorded certain notices that construction is complete, the contractor has either 30, 60 or 90 days to record notice of its mechanic’s lien.

It is quite easy for a contractor to record the mechanic’s lien claim. It simply must prepare the single-page document and present it to the county Recorder along with any recording fees. There is no judge or jury to determine whether the mechanic’s lien claim is valid at the time it is recorded. So, as soon as the lien is recorded and without any testing of its validity, a contractor can put a cloud on the property’s title that can make mortgage lenders and potential property buyers shy away from the property.

Occasionally, and unfortunately, an unscrupulous contractor may abuse this process. Because the county Recorder will not question the merits of the claim, a contractor could record a mechanic’s lien against the property even if the owner correctly believes no money is due and owing.

After recording the mechanic’s lien, a contractor in California has exactly 90 days to file a complaint (lawsuit) in court to seek a judgment allowing the sheriff to hold a foreclosure sale on the property and use the proceeds to pay the amount of the mechanic’s lien claim. If the contractor does not file the foreclosure complaint within the 90 days, the mechanic’s lien becomes unenforceable or “stale.” But, even a stale mechanic’s lien still will appear on the property’s title report until officially expunged and still can cause concerns to the potential buyers and mortgage lenders.

There is a procedure available to property owners that will allow them to remove the stale mechanic’s lien from property records. Pursuant to Civil Code §3154, the property owner may file a verified petition seeking a court order acknowledging that that the stale mechanic’s lien is unenforceable. The petition must state the following: (1) the date that the lien was recorded; (2) a description of the property; and (3) allegations that no action to foreclose the lien has been taken, no extension of credit has been recorded, the lien claimant is unwilling to execute a release and the owner has not filed for bankruptcy.

The lien claimant must receive service of the petition at least 10 days before the date set for hearing on the petition. Finally, the property owner will be required to prove that service of the petition and the order fixing the date for hearing both were made in compliance with the statute.

When property owners prevail on their petitions, they can recover some or all of their attorney fees from the mechanic’s lien claimant.

Once the court order is obtained, the property owner can record notice of the order with the county Recorder, clearing the title. Then any prospective buyer or lender who sees the lien claim in a title report also will see the court order stating that it is invalid.

07-19-2006

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Thelen, Reid, Brown, Raysman & Steiner, LLP

Subpoenaed Non-Party Must Produce Documents, Testify Before Arbitrators
Courts have recently addressed the scope of arbitrators’ power to obtain evidence from non-parties.

Section 7 of the Federal Arbitration Act authorizes the issuance of non-party subpoenas to “summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.”

In the recent case, arbitrators issued subpoenas for non-party depositions and document discovery, which the U.S. District Court for the Southern District of New York held were beyond the scope of §7. Odjfell ASA v. Celanese AG, 328 F.Supp.2d 505 (S.D.N.Y. 2004) Later, the arbitrators issued subpoenas to other non-parties directing them to appear and testify in an arbitration proceeding and to produce certain documents. The non-parties in this second round of subpoenas objected, claiming that the subpoena was “a thinly disguised effort to obtain pre-hearing discovery.” Because the testimony and document production were made returnable before the panel, the U.S. District Court for the Southern District of New York compelled compliance. Odjfell ASA v. Celanese AG, 348 F.Supp.2d 283 (S.D.N.Y. 2004).

The 2nd U.S. Circuit Court of Appeals affirmed the second decision and set forth several key factors that persuaded the court that the subpoenas should be enforced. Stolt-Nielsen SA v. Celanese AG, 430 F.3rd 567 (2nd Cir. 2005). First, the witness gave his testimony in the physical presence of the arbitration panel. Second, the panel ruled on evidentiary issues such as admissibility and privilege. Third, the testimony given became part of the arbitration record to be used by the arbitrators in deciding the case. All of these factors distinguished the testimony from a deposition and were consistent with the powers granted by §7. The court declined to address whether §7 authorizes arbitrators to issue pre-hearing nonparty discovery subpoenas.

07-19-2006

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Pepper Hamilton, L.L.P.

IRS Provides Guidance on the Revocation Process for Section 83(b) Elections
The Internal Revenue Service (IRS) recently issued guidance in the form of Revenue Procedure 2006-31, which formalizes the procedures for a taxpayer to receive consent to revoke an election under Internal Revenue Code Section 83(b) to accelerate the recognition into gross income of the value of restricted property (e.g., restricted stock, partnership interests) transferred in connection with the performance of services. The revenue procedure became effective June 13, 2006.

A Section 83(b) election must be filed with the IRS no later than 30 days after the date the property is transferred to the employee (or other service provider). The election can only be revoked upon the commissioner’s consent, which will be given only in situations where (i) the taxpayer is under a mistake of fact (defined as an unconscious ignorance of a fact that is material to the transaction), and (ii) the revocation is requested within 60 days of the date on which the taxpayer first discovers the mistake of fact. The mistake of fact exception is extremely narrow in scope and will only be applicable in very limited circumstances (e.g., a mistake as to the underlying value of the property, a mistake as to the substantial risk of forfeiture associated with the property, or even a mistake as to the tax consequences of making the Section 83(b) election are not considered by the IRS to constitute a mistake of fact). An example of a mistake of fact is a true scrivener type error - the company authorizes the issuance of Class A shares to the employee, but actually delivers class B shares. The election as to the Class B shares may be revoked within 60 days of finding the problem. Consent to revoke the election generally will be given, regardless of the reason for which it was filed, if the request is filed on or before the due date for making the original election (i.e., within 30 days of the date the property transfer occurs).

Revenue Procedure 2006-31 provides that the request for consent to revoke a Section 83(b) election be made under the general letter ruling request procedures (Revenue Procedure 2006-1 or its successor). Specifically, the request must include the following: (i) a complete description of the facts and other related documentation required under the letter ruling request procedure; (ii) the date the election was made; (iii) a copy of the election; (iv) a description of the mistake of fact as to the underlying transaction; (v) the date on which the mistake of fact first became known to the taxpayer; and (vi) whether the revocation request is being made on or before the due date of the original election.

Pepper Perspective

Until now, the elections were completely irrevocable, even if a revocation was attempted within 30 days of filing the election, and any relief is welcome relief. The value of the relief, however, remains to be seen. Most Section 83(b) elections are filed close to the due date to begin with, leaving little time for an automatic revocation. In addition, the literal definition of a mistake of fact for a later revocation is so narrowly drawn that it’s hard to see much usefulness for more nettlesome issues, such as valuation problems and understanding the impact of a Section 83(b) elections.

07-19-2006

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Pepper Hamilton, L.L.P.

NJ 'Mansion' Tax Expanded to Commercial Property Sales
On July 8, 2006, the New Jersey Legislature passed Assembly Bill No. 4701 as part of a series of last-minute measures to close the state’s multi-billion-dollar budget gap. The bill expands the application of the New Jersey “mansion tax” to sales of commercial property. Purchasers of commercial property for a consideration exceeding $1 million are now required to pay a 1 percent fee on the total purchase price of the property at the time the deed is recorded. Previously, only purchasers of residential property were subject to the mansion tax. The following are highlights of the new legislation:

The new law takes effect on August 1, 2006, and applies to transfers of commercial property on or after that date. The mansion tax would not apply to property transfers if the conveyance documents are recorded no later than July 31, 2006. For all deeds presented for recording between now and July 31, 2006, proof of receipt from the County Clerk/Registrar or proof of delivery from an overnight courier should be obtained as evidence that the mansion tax is inapplicable to the transaction.

The new law has a “safe harbor” provision for transactions in which the real estate sales contract is fully executed before July 1, 2006. In these instances, the commercial property’s purchaser must pay the mansion tax if the deed is recorded after August 1, 2006. However, if the deed from the commercial transaction is recorded prior to November 15, 2006, the purchaser is eligible to receive a refund of its mansion tax payment. The safe harbor would not apply to any deed recorded after November 15, 2006, even if the sales contract was fully executed prior to July 1, 2006.

A complete exemption from the mansion tax applies if the transfer of the real property is incidental to a corporate merger or acquisition, and the equalized assessed value of the real property transferred is less than 20 percent of the total value of all assets exchanged in the merger or acquisition. A new form of affidavit will be created by the New Jersey Division of Taxation for mansion tax exemptions in these situations.

A Seller’s Affidavit of Consideration still must be attached to the deed for commercial property regardless of the consideration amount. Likewise, a Buyer’s Affidavit of Consideration must be attached to the deed for commercial property regardless of the consideration amount and regardless of whether the transfer may be exempt from the new mansion tax.

Purchasers of commercial property should be aware of this new tax imposition when negotiating contracts.

07-19-2006

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Pepper Hamilton, L.L.P.

Nothing is Certain but Death, Taxes and Congressional Attempts to Amend the Berry Amendment
Once again, changes to 10 U.S.C. § 2533a – the Berry Amendment – have been included in the 2007 Defense Authorization Act by the Senate and the House of Representatives. The House, through H.R. 5122, seeks to expand the coverage of the Berry Amendment; and the Senate, with S. 2766, wants to reign in the amendment’s application in the area of specialty metals.

In the House version, a new section of the U.S. Code – 10 U.S.C. § 2533b – would limit Department of Defense (DOD) purchases of “strategic materials critical to national security” to U.S. sources unless certain exceptions are met. The new section would cover specialty metals and “item[s] critical to national security, as determined by the Strategic Materials Protection Board.” Section 2533b would create a Strategic Materials Protection Board, which would consist of the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology and Logistics; the Under Secretary of Defense for Intelligence; the Secretary of the Army; the Secretary of the Navy and the Secretary of the Air Force. House changes also would move specialty metals from coverage by the Berry Amendment to Section 2533b.

Sen. John Warner’s amendment to the Senate changes would provide a dual use items exception and a de minimis exception. The amendment also creates exceptions for procurements of commercial items containing specialty metals and specialty metals that are incorporated into electronic equipment. Commercial items under the Warner amendment would not include commercial items where noncommercial modifications exceeded five percent of its cost, other than commercial off-the-shelf fasteners, and forgings and castings for military unique-end items.

Whether the Warner amendment is a reaction to perceived “tightening” of the Berry Amendment’s specialty metal restrictions by DOD agencies is not known at this time. Also, it possible – like most proposed changes to the Berry Amendment – that neither the Senate nor the House changes will make it into the final version of the 2007 Defense Authorization Act. We will keep you posted on any future developments.

07-19-2006

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Pepper Hamilton, L.L.P.

Opening Pandora's Box: Organizational Conflicts of Interest
For the past three years, the Government Accountability Office (GAO) has issued several decisions concerning organizational conflicts of interest (OCI), which has become the “flavor of the month” in GAO protests. Disappointed contractors who submitted an offer often claim that the proposed awardee has an OCI that cannot be mitigated. But contractors should be wary about making a claim that an OCI exists. Should an OCI also exist within the disappointed contractor, it could open up a proverbial Pandora’s box.

Defining OCI

According to the Federal Acquisition Regulations (FAR), OCI arises when “because of other activities or relationships with other [organizations], an [organization] is unable or potentially unable to render impartial assistance or advice to the Government, or the [organization’s] objectivity in performing the contract work is or might be otherwise impaired, or an [organization] has an unfair competitive advantage.”

There are three types of OCI:

biased ground rules, where a company sets the ground rules for a future competition (for example, writing the specifications that competitors must meet)
unequal access to information, where a company has access to nonpublic information (typically through performance of a contract) that gives it an unfair advantage in the competition for a later contract
impaired objectivity, where a company is asked to perform tasks that require objectivity, but another role the company plays casts doubt on the company’s ability to be truly objective.
OCI Exceptions

Exceptions may place certain types of contracts out of reach of OCI. For example, FAR 9.505-2(a)(3) states that, “[i]n development work, it is normal to select firms that have done the most advanced work in the field. These firms can be expected to design and develop around their own prior knowledge. Development contractors can frequently start production earlier and more knowledgeably than firms that did not participate in the development, and this can affect the time and quality of production, both of which are important to the Government. In many instances the Government may have financed the development. Thus, while the development contractor has a competitive advantage, it is an unavoidable one that is not considered unfair; hence no prohibition should be imposed.” Though this and other exceptions do exist, determining whether or not it applies is a fact specific question.

One “exception” that a contractor has total control over is a mitigation plan. GAO’s analysis where OCI is identified generally focuses on whether OCI was mitigated. Contractors that have OCI mitigation plans are better positioned than those who do not to defend a protest and even raise OCI as a protest issue. Neither FAR nor case law provides specific guidance regarding appropriate steps for mitigating identified OCI. However, any mitigation plan should be tailored specifically to the particular OCI. For example, in an “unequal access to information” OCI, sharing more information with competing offerors may adequately mitigate the OCI. An “unequal access to information” OCI also can be mitigated by ensuring that those individuals who had access to the information that would give the offeror a competitive advantage are not part of the proposal drafting team, nor do they have access to or communicate with the members of the proposal drafting team. A “corporate mitigation” plan can also be used to identify potential OCIs and establish procedures that the organization will follow if OCI is identified.

As with most issues, establishing a written mitigation plan and a compliance program that assists in identifying potential OCIs should be done sooner rather than later. Once the issue is raised in a protest, a Pandora’s box has already been opened, and it may be too late for the contractor to do anything.

07-19-2006

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