The Going Price to Stay in Bed with Boeing? About $9 Billion

By Darshan Chulani, Senior Staff Writer

Earlier today, Washington Governor Jay Inslee signed into law the largest tax break awarded by a state to a single company – Boeing.[1] The measure, totaling roughly $8.7 billion, had immense support in both the House and the Senate, passing by a margin of 75-11 and 42-2, respectively.[2] The bill was aimed at ensuring that Boeing’s next-generation fuel efficient airplanes, the 777X series, would be produced in Washington.[3] The airplanes will incorporate lighter materials and smaller, more efficient engines, thereby making them more attractive in an era of high fuel costs.[4] However, in order for production planning to commence, an extension of the current labor agreement between the company and the local machinists’ union must be reached.[5] The proposed agreement will be up for vote amongst the entire Machinists District 751 membership this week.[6] The major question is whether the incentives will actually lead to new jobs in the state while stemming the flow of unionized jobs to right-to-work states.

The measure that was signed into law extends most current exemptions and credits, while adding a few new ones, all of which will be in effect until 2040.[7] First, it extends virtually all of the tax breaks that Boeing currently enjoys and which were slated to expire in a few years, including business and occupation (B&O) taxes (paid on gross economic activity). Second, it expands exemptions for sales and use of new airplane manufacturing facilities.[8] Both of these provisions are conditional upon Boeing’s actual production of certain key 777X components in Washington state, most notably the wings (the most complex part of the airplane) and final assembly.[9]

Boeing has enjoyed preferential tax treatment in Washington state for decades, the most recent incentive package being authorized in 2003.[10] The elements of that package that will be extended until 2040 include sales and use tax exemptions for computer and design equipment, leasehold excise tax exemptions for port facilities, and a host of B&O taxes relating to airplane repairs, airplane development, and aerospace expenditures.[11] The expanded sales and use tax exemptions apply to Boeing and its suppliers for the construction of buildings to manufacture “super efficient airplanes” and their components.[12]

Proponents of the measure cite to job retention and growth as primary motivators. The incentives are estimated to preserve or add 56,000 within the state.[13] Legislators are right to fear the exodus of well-paying technical jobs to right-to-work states such as South Carolina, where Boeing already manufactures some aircraft.[14] Others are worried about these jobs being moved overseas, with Japan being touted as a possible location for wing assembly.[15] Additionally, Governor Inslee cited data showing that the $8.7 billion investment is expected to produce new state revenue over the course of its lifetime, as measured by Boeing’s current yearly economic activity of $76 billion a year.[16]

Critics of the measure point to the fact that the incentive package is one-sided in favor of the company, and that the legislature should have demanded more.[17] They argue that the bill lacks language regarding clawback provisions if Boeing does move some jobs, whether relating to the 777X or older aircraft models, out of state in the future.[18] Additionally, Republicans in both houses point out the unfairness of not awarding similar incentives to small and mid-sized businesses not in the aviation sector.[19] Some commentators have pointed out that the incentives will allow Boeing to, in effect, offer its products to foreign airlines (the largest anticipated buyers of 777Xs) at subsidized prices at the expense of Washington taxpayers.[20]

However, it seems as though the majority of state legislators saw no choice but to approve the package as a means of maintaining Washington’s enviable position as the hub of aircraft manufacturing in North America. The real question is whether Boeing will honor its end of the bargain and continue to invest in its Washington-based facilities and workforce. The decentralized nature of airplane manufacturing has already seen Boeing open a new plant in South Carolina in 2004, one year after the most recent Washington state tax incentives.[21] The impact of the measure should be clear by 2019, when the state Joint Legislative Audit and Review Committee (JLARC) is first required to review the public policy objectives and results.[22] Alternately, if Boeing does not open a new 777X facility by 2017, the incentive package will automatically be void.[23] All this depends, of course, on whether the labor agreement will be agreed. However, many suggest that the 777X will be produced in Washington regardless of outcome of the current labor negotiations.[24]


A version of this posting was originally published on Funding Society: A Tax Law & Policy Blog.


[1] See Reid Wilson, Washington Just Awarded the Largest State Tax Subsidy in U.S. History, Washington Post GovBeat (Nov. 12, 2013),

[2] See Washington State Clears Boeing Tax Breaks, (Nov. 10, 2013),

[3] See Warren Wise, Washington Governor Signs Boeing Tax Incentives Into Law; Union Vote Set for Wednesday, The Post and Courier (Nov. 11, 2013),

[4] See Id.

[5] See Inslee Touts Boeing 777X Deal While Region Waits for Union Vote, Federal Way Mirror (Nov. 11, 2013),

[6] See Id.

[7] See generally S.B. 5952, 63rd Legis. Sess. (Wash. 2013).

[8] See Id.

[9] See Senate Bill Report, ESSB 5952, 63rd Legis. Sess. (Wash. 2013) at 3, available at; see also Wilson, supra note 1.

[10] See Dominic Gates, Union Deeply Split on Boeing’s 777X Offer, Seattle Times (Nov. 11, 2013),

[11] See Senate Bill Report, supra note 9, at 2.

[12] See Inslee Touts Boeing 777X Deal, supra note 5.

[13] See Gates, supra note 10.

[14] See Alwyn Scott, Analysis: Boeing, Washington Machinists May Find Compromise on 777X, Reuters (Nov. 12, 2013),

[15] See Washington State Clears Boeing Tax Breaks, supra note 2.

[16] See Wilson, supra note 1.

[17] See Jim Camden, Some Question if State Getting Enough for Boeing Tax Breaks, The Spokesman-Review (Nov. 7, 2013),

[18] See Id.

[19] See Senate Bill Report, supra note 9, at 5.

[20] See Wilson, supra note 1.

[21] See Scott, supra note 14.

[22] See Senate Bill Report, supra note 9, at 4.

[23] See Id.

[24] Scott, supra note 14.


Mascots at Risk of Becoming an Endangered Species

By Thomas AhmadifarAssociate Managing Editor

On September 11, 2013, the Missouri Supreme Court heard oral arguments in the case of Coomer v. Kansas City Royals Baseball Corporation.[1]  In what appears a simple tort claim for monetary damages, the Missouri Supreme Court could turn how Americans experience live sporting events on its head (and not like this) if it upholds the Missouri Court of Appeals.  As a former collegiate mascot (in full disclaimer), I fear the greater implications of Coomer.

During a 2009 Kansas City Royals baseball game, the Royals’ mascot “Sluggerrr” was in the midst of a hot dog toss while standing on the third base dugout when he attempted a behind the back throw of a hot dog wrapped in aluminum foil.  Instead of falling in the lap of a hungry fan, the hot dog struck Mr. Coomer in the eye and he later had to undergo numerous surgeries for a detached retina and a cataract.  In overturning the jury of Jackson County and finding for Mr. Coomer, the Missouri Court of Appeals ruled that Sluggerrr created the risk of flying hot dogs faced by Mr. Coomer rather than the inherent nature of the baseball game.[2]

Holding that a risk created by a mascot is not inherent to the nature of the sporting event would be a major development on a largely undeveloped issue.  Very few cases have ruled on whether a mascot owes a duty of care towards fans at sporting events.[3]  Generally, courts deny flying object claims against sports teams under the “baseball rule,” where attendees of live sporting events assume the risk of being hit by objects originating on the field of play.[4]  The “baseball rule” is based on the principle that a flying baseball from the field of play is an “inherent [risk] . . . that [inures] in the nature of the sport itself.”[5]  But according to the Court of Appeals, flying promotional items are not inherent risks derived out of the nature of the sport.[6]  Or, as a California court found in a 1997 case, mascots are not “essential” elements of a sport, thus they cannot be wrapped into the protection of the “baseball rule.”[7]

As a former collegiate mascot, even I find it hard to argue that the actions of mascots are “essential” to the on-field nature of a sport.  However, that should not simultaneously squash the argument that mascots are essential to a sporting event.  There is a reason mascots are often housed within the marketing departments of athletic departments or professional teams.[8]  Their role is to enhance the interactive element of a sporting event, providing fans an opportunity to hug, high-five, and take pictures with the distinctive symbol of the team.  Furry heads, oversized feet, and scripted skits add an element of hilarity and excitement for all ages that can spice up even the most mediocre of on-field play.  Because of their prevalence and popularity (there are sporting events entirely comprised of mascots), there is a strong argument that mascots are an essential element of sporting events themselves, one in which spectators have come to expect; albeit not an essential element that is within the inherent nature of the on-field play.

What being essential to a sporting event might mean for a legal standard of care is an open question just as much as whether flying promotional objects can fall within the “baseball rule.”  After all, lawsuits against mascots for their antics are nothing new and may be entirely legitimate.  As with many tort claims, the dispositive issue is not only whether the tortfeasor had a legal duty towards the victim, but also whether the tortfeasor was negligent in his or her behavior.  Putting on a furry suit should never be a carte blanche for one’s actions.  But exposing mascots to liability for actions that are frequent and traditional to their role at sporting events (i.e. known and expected) could force professional and college teams to scale back or eliminate the presence of mascots as a precaution.  It would essentially mean teams have walking (but not talking) legal liabilities and some teams may be unable to afford such a risk.  At a time when mascot popularity is arguably at an all-time high (including a new show on Hulu called “Behind the Mask”), this might cause an immeasurable number of victims.

There has to be a line somewhere.  I will admit that I threw aluminum wrapped hot dogs into crowds during my two-plus years of mascoting.  I have attempted a behind the back throw of a t-shirt that landed in a face rather than a pair of hands. I once even ice-skated into and over a small child because I had limited visibility below my eye-level due to the construction of the mask I was wearing. Sluggerrr might indeed deserve to be liable for the toss of that ill-fated hot dog back in 2009 and Mr. Coomer might be entitled to damages.  And regardless of its outcome, Coomer may serve as the warning shot to mascots and teams that greater precautions should be taken: always bubble wrap projectile objects; greater use of handlers in higher risk environments; better mask construction; limit skit-based mascot activities to certain identified zones.  But while a result that increases precaution is important, mascot extinction would be a travesty.[9]


[1] See Docket for September 2013, Supreme Court of Missouri, (last visited November 2, 2013); see also Coomer v. Kan. City Royals Baseball Corp., No. WD73984 & WD74040, slip op. (Mo. Ct. App. Jan. 15, 2013), available at

[2] Coomer, No. WD73984 & WD74040, slip op. at 5.

[3] See Bill Draper, Fan Injured by Hot Dog Suing Kan. City Royals, Yahoo Sports (Nov. 1, 2013),–mlb.html.

[4] E.g., Sheppard by Wilson v. Midway R-1 Sch. Dist., 904 S.W.2d2 57, 262 (Mo. Ct. App. 1995).

[5] Coomer, No. WD73984 & WD74040, slip op. at 6.

[6] Id.

[7] Lowe v. Cal. League of Prof’l Baseball, 65 Cal. Rptr. 2d 105 (Cal. Ct. App. 1997).

[8] See, e.g., Screech, Wash. Nationals, (last visited Nov. 2, 2013) (placing the webpage for “Screech” the eagle mascot within the “Fan Forum” tab of the Washington National’s website).

[9] After all, mascots are that one unique element of sports that unite teams, institutions, fans, joy, heartbreak, and above all, humor. See, e.g., NUFootball Family, This is Northwestern Football, (June 21, 2013),; ESPN, Oregon Duck – This is SportsCenter, (Dec. 1, 2009),; Officialbennythebull, Benny the Bull 2012-13, (July 13, 2013),

CFPB is on Safe(r) Footing after Filibuster Deal

By Thomas Ahmadifar, Associate Managing Editor

In January of 2013, the United States Court of Appeals for the District of Columbia Circuit threw the legal world into a frenzy by narrowly interpreting the Recess Appointments Clause (RAC) of the United States Constitution.[1]  The Noel Canning v. N.L.R.B. decision placed the National Labor Relations Board (NLRB) at risk of losing its ability to govern, but it also had a potential impact on other parts of the Federal Government.

As I described in an American University Business Law Review Case Analysis earlier this year, Noel Canning might also have hurt the United States Consumer Financial Protection Bureau (CFPB), because its director, Richard Cordray, was also a RAC appointment.  With its director possibly invalid, prior CFPB actions may have become void.  And, any future actions were similarly uncertain because the United States Senate refused to act on Director Cordray’s nomination.[2]   Senate Republicans were holding up the Director’s nomination because they had reservations about the construction of the CFPB.  Particularly, Senate Republicans wanted to replace the directorship position with a board, subject the CFPB to the congressional appropriations process, and establish a “safety and soundness check” for financial regulators.[3]

Since the January decision, there have been two important developments regarding the CFPB’s limbo-status after the D.C. Circuit’s decision in Noel Canning: one legal and one political.  First, on June 24, 2013, the Supreme Court of the United States granted certiorari to review the D.C. Circuit’s ruling on the RAC.[4]   Oral arguments have yet to be scheduled.[5]  Second, on July 16, 2013, the Senate orchestrated a “Filibuster Deal” that pushed through Director Cordray’s confirmation.[6]  In the Filibuster Deal, Democratic Senators agreed not to alter the Senate’s current filibuster rules.  In addition, the President agreed to withdraw several of his original nominees to the NLRB.  In return, Republican Senators allowed through several executive nominations, including Director Cordray whose nomination had been pending for 729 days.[7]

The CFPB gained two principal victories in the Filibuster Deal.  First, the fledgling agency created in the Dodd-Frank Act gained its first official director, whose signature will finally carry clear and inarguable weight.[8]  Second, Senate Republicans agreed to put down their guns pointed at the CFPB’s construction, at least temporarily.  In the wake of the deal, Senator Lindsey Graham (R-SC) admitted that it was wrong for Senate Republicans to hold up the confirmation vote of a valid nominee over substantive objections with the design of the agency.[9]

However, the Filibuster Deal does not mean that the CFPB is out of the weeds just yet.  It appears some members of Congress remain committed to changing the current structure of the Bureau.  In a September 2013 hearing, House Republicans hammered away at Director Cordray for the CFPB’s lack of oversight.[10]  Rep. Jeb Hensarling (R-Tex.), chairman of the House Committee on Financial Services, proclaimed, “The CFPB is arguably the single most powerful and least accountable federal agency in the history of America.”[11]  He continued, “[T]he CFPB is uniquely unaccountable even to itself, since it is fundamentally not an it, not a they, only a he.”[12]

In addition to future political questions, there remains the Supreme Court’s pending review of the Noel Canning case.  Should the Court rule against the NLRB, parties subjected to CFPB actions prior to July 2013 may be able to challenge the validity of such actions on grounds that Director Cordray did not have authority at the time.  This is unlikely due to reasons such as regulated parties trying to build forgoing goodwill with the Bureau, but the risk remains.  Thus, while the Filibuster Deal certainly removed legal and political questions regarding the CFPB’s current authority, the controversial agency may still have to keep its suit of armor on for a while longer on both fronts.

[1] Noel Canning v. N.L.R.B., 705 F.3d 490 (D.C. Cir. 2013), cert. granted 133 S. Ct. 2861 (2013).

[2] See Jennifer Bendery, Richard Cordray CFPB Confirmation Imperiled By Senate Republicans, Again,, Feb. 1, 2013, (reporting that U.S. Senate Republicans plan to block any CFPB nominee until Congress changes the construction of the agency).

[3] Id.

[4] N.L.R.B. v. Noel Canning, 133 S. Ct. 2861 (2013).

[5] See generally National Labor Relations Board v. Noel Canning,, (last visited October 22, 2013).

[6] See Corey Boles & Kristina Peterson, Filibuster Deal Pulls Senate from Brink, Wall St. J., July 16, 2013,

[7] Id.

[8] See Thomas Ahmadifar, “Noel Canning v. N.L.R.B., 705 F.3d 490 (D.C. Cir. 2013),” (Apr. 12, 2013), (describing some of the many functions and responsibilities given to the Director of the CFPB).

[9] Josh Israel, Republican Senator Says his Party was Wrong to Block Vote on Consumer Financial Protection Bureau Head,, July 17, 2013,

[10] Julian Hattem, House GOP Renews Attacks on ‘Unbridled’ Consumer Bureau,” The Hill, Sept. 12, 2013,

[11] Id.

[12] Id.

United States v. Quality Stores, Inc.

By Davis Yoffe, Senior Staff Writer

On October 1, 2013, as U.S. government shutdown, the Supreme Court not only stayed open, but granted certiorari for the new term.  One of the cases the Supreme Court will hear, styled on appeal as United States v. Quality Stores, Inc.[1], is of special interest to tax practitioners.  The issue in the case is “[w]hether severance payments made to employees whose employment was involuntarily terminated are taxable under Federal Insurance Contributions Act” (“FICA”).[2]  The case deals with the following situation: a business lays-off a worker and pays that worker a $10,000 severance payment pursuant to an existing union agreement.  If the payment is subject to FICA, the laid-off worker and the employer each contribute half of a $1,530 total tax liability.[3]  If the payment is not subject to FICA, the employer and employee keep the money.  Since many businesses lay-off numerous employees during times of economic trouble, such as a restructuring or a bankruptcy, a large number of workers are affected.  As an example of these situations, if a bankrupt business pays $10,000 in severance payments to a thousand workers, it must collect $1,530,000 in FICA taxes.  Considering the frequency of lay-offs, the tax amounts nationally quickly add-up to the billions.[4]

The background is relatively simple.  A person makes income, which is subject to Federal income tax.  Income includes numerous types of earnings, including rent payments, interest, dividends, and, the most common, wages.  When creating the Social Security and Medicare programs, Congress decided to fund these programs with taxes on “wages.”[5] To collect these taxes, Congress enacted section 3102 of the FICA withholding chapter, requiring employers to withhold FICA taxes from wages.[6]  This system is similar to income tax withholding, where Congress requires employers to withhold income taxes from wages under section 3402 of the income tax withholding chapter.[7]  Although the term “wage” is defined slightly differently in the FICA and income tax-withholding chapters; a 1980s Supreme Court, Rowan Co. v. United States,[8] states the two terms should be read similarly.

The tax controversy at the center of this case began in the 1950s, when several large companies agreed to make payments to supplement state unemployment benefits received by laid-off workers as part of agreements with trade unions.[9]  Companies developed these plans at the behest of unions to provide increased economic security to laid-off workers and, in return, management received some flexibility from unions during economic downturns. [10]  However, severance payments could not be legally characterized as wages, because under some state laws a person could not receive state unemployment if an employee was still being paid.[11]  The IRS accommodated and stated severance payments were not wages provided the payments meant several criteria, most importantly that the payment be received along with state unemployment.[12]  The severance payments which met the IRS criteria were termed as supplemental unemployment benefit (“IRS SUB”) payments.[13]

Through their respective chapters in the Internal Revenue Code (“Tax Code”), both FICA and income tax are withheld from wages.  Since the IRS SUB provision defined these severance payments as not wages, employers did not withhold income tax.  After the business paid the laid-off employees and the employees filled their yearly W-2s, they would then be hit with an income tax bill for the amount the employer normally withheld.[14]  Congress corrected this problem by passing section 3402(o) of the income tax withholding chapter, titled “[e]xtension of withholding to certain payments other than wages,” in 1969.[15]  Section 3402(o) states “any supplemental unemployment compensation benefit paid to an individual . . . shall be treated as if it were a payment of wages” and required the employer to withhold the employee’s income tax liability from the payment.[16]  Section 3402(o)(2)(A) goes on to define several criteria for a “supplemental unemployment benefit” (“3402(o) SUB”) payment, generally requiring the payment to made in the circumstances of a lay-off.[17]  However, section 3402(o)(2)(A) does not require the person receiving the payment to receive it in connection with unemployment compensation, a main requirement of IRS SUB.[18]  As many severance payments do not depend on the employee receiving state unemployment, they will meet 3402(o) and not the IRS SUB definition.[19]

The current circuit split developed from how two U.S. courts of appeals, the Federal Circuit and the Sixth Circuit, read section 3402(o) of the income tax withholding chapter in the context of FICA taxes.  The Federal Circuit case involved a program initiated by railway company CSX to pay unionized employees to leave the company.[20]  After paying the FICA taxes and suing the government for a refund, CSX unsuccessfully argued the payments meant the criteria of 3402(o) SUB payments and, therefore, were not wages and were only treated “as if” wages for income tax holding.  Thus, CSX argued that then the IRS exceeded its authority by declaring them wages for FICA purposes.[21]  CSX believed since Rowan Co.  required wages to mean the same in both income tax withholding and FICA, if the payments were not wages for purposes of income tax withholding, they could not taxable as wages under FICA.[22]

The Federal Circuit found for the government by reasoning the language of 3402(o) suggested it applied exclusively to the income tax withholding chapter of the Tax Code.  Additionally, the court interpreted the “as if” language in the statue as to not mean all payments were not wages, instead holding:  “to say that all payments falling within a particular category shall be treated as if they were a payment of wages does not dictate, as a matter of language or logic, that none of the payments within that category would otherwise be wages.”[23]  The court believed the payments at issue in the case were all part of 3402(o) SUB payments for purposes of the income tax withholding, but only the IRS SUB payments could be considered not wage payments for FICA.[24]  Essentially, the language of 3402(o) implied 3402(o) SUB payments were a wide category embracing two subcategories:  FICA taxable SUB payments; which were FICA wages, and the IRS SUB payments; which were not FICA wages under the revenue ruling, yet remained income.[25]  As the Federal Circuit read 3402(o) to not require all 3402(o) SUB payments be considered non-wages, it held Rowan Co. did not void the pertinent revenue ruling.[26]

The next case arose in the Sixth Circuit and dealt with the bankruptcy of the agriculture specialty retailer company, Quality Stores, which had become insolvent in 2001.  Quality Stores paid its managers and long-term employees to discourage them from searching for jobs while still employed by Quality Stores during the bankruptcy proceeding.[27]  However, compensation was not connected to receiving state unemployment.  Quality Stores paid the FICA taxes on these payments and then initiated a refund suit and won in the lower courts.  On appeal to the Sixth Circuit, Quality Stores again won its refund, causing the current circuit split.[28]

The Sixth Circuit agreed with taxpayer’s arguments, the same argument made by the taxpayer in CSX Corp., involving the “as if” wages of the statute and 3402(o)’s title.[29]  Congress, in committee reports, documented 3402(o) SUB payments are not subject to withholding for income tax because, as the legislative history states, “they do not constitute wages or remuneration for services.”[30]  The court invalidated the IRS revenue rulings as the plain language and legislative history both stated all 3402(o) SUB were not wages and Rowan Co. required the IRS not to interpret wage differently for each chapter.

In the petition for certiorari to the Supreme Court, the government’s argument consisted of three points.  Firstly, the term wages as defined in the Tax Code is intentionally broad and included SUB payments.[31]  The government stated the payments are “remunerations” and hence wages because they were calculated based upon the employees’ former positions, salaries, and length of employment.[32]  The payments were meant to keep current employees from job searching during bankruptcy.  Consequently the employees were providing a service, refraining from looking for new work while still employed, in return for the payments.[33]

Secondly, the IRS’s Revenue Ruling only exempted from FICA payments designed to supplement state unemployment.[34]  The government alleged that since Quality Stores’ severance payments do not take into consideration state unemployment, the payments do not meet the IRS’s criteria for exemption.[35]

Thirdly, the taxpayer made an erroneous interpretation of the 3402(o) in arguing all SUB payments were not subject to FICA taxes.  The government argued that the 3402(o)(1) language stating the payments “shall be treated as if it were a payment of wages,” applies only to the income tax withholding chapter and not the FICA tax chapter.[36]  As Congress meant 3402(o) to increase income tax withholding and wrote 3402(o) broadly to include both payments which meant the IRS SUB definition and those which the IRS considered wages.[37]  The government quoted the memorable metaphor from CSX Corp. to backup this logic: “[t]o say that for some purposes all men shall be treated as if they were six feet tall does not imply that no men are six feet tall.”[38]  The statute drafters did not concern themselves with the fact income tax withholding covered severance payments outside of the IRS SUB definition, because those payments were already subject to income tax withholding as wages and, thus, there would no practical effect to defining them as wages again.[39]

Quality Stores’ argument rested essentially on one point and followed the Sixth Circuit reasoning.  Namely, wages are defined the same way in both the FICA and income tax withholding chapters and Rowan Co. stated that both chapters are to be construed together.[40]  The FICA tax chapter’s statement that the SUB payments should be treated “as if” they were wages and the title of 3402(o) states the payments are “other than wages.”  Therefore, the payments are not wages for either chapter and are not subject to FICA taxes.[41]

The Supreme Court has not scheduled oral argument for United States v. Quality Stores, Inc.  The case is likely to be decided by eight justices because Justice Kagan took no part in the certiorari grant, suggesting she formerly worked on this case as solicitor general and will recuse herself.


[1] In re Quality Stores, Inc., 693 F.3d 605 (6th Cir. 2012), cert. granted, 81 U.S.L.W. 3680 (U.S. October 1, 2013) (No. 12-1404).

[2] Id.

[3] FICA outlines two separate flat taxes. The first supports the Social Security fund, a 12.4% tax on the first $113,700 in person’s wages, paid half by the employer and half by the employee. See 26 U.S.C. §§ 3101(a)-(b), 3111(a)-(b) (2006). An additional 2.9% on all wages, also half paid by the employer and half by the employee, supports the Medicare fund. See id. § 3102(a).

[4] See Laura Saunders, When Severance Pay Is Subject to Payroll Tax, Wall St. J., Oct. 26, 2012, available at (claiming refunds top two billion dollars).

[5] Anthony J. Badger, The New Deal: the Depression Years, 1933-1940, 231 (1989) (explaining the program was not to be funded from general revenue).

[6] See 26 U.S.C. § 3102 (imposing the duty of tax collection on employers).  Congress broadly defined wages for purpose of FICA as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” 26 U.S.C. § 3121(a).  Employment is defined as “any service, of whatever nature, performed . . . by an employee for the person employing them.” Id. § 3121(b).

[7] See id. § 3402 (stating all employers must withhold income tax liability from wages).  For income tax withholding, “wages” are defined as “all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of remuneration paid in any medium other than cash.” Id. § 3401(a).

[8] 452 U.S. 247 (1981).

[9] See CSX Corp. v. United States, 518 F.3d 1328, 1334–1335 (Fed. Cir. 2008).

[10] See id.

[11] See id.

[12] See Rev. Rul. 56-249, 1956-1 C.B. 488 (stating amounts paid to individuals are not wages if they meet eight criteria, including a connection to state unemployment).  This is the first of several revenue rulings dealing with these payments, the most recent and the one at issue in Quality Stores is from 1990. See Rev. Rul. 90-72, 1990-2 C.B. 211 (requiring payment not be in lump and be linked to state unemployment).

[13] See Rev. Rul. 56-249, 1956-1 C.B. 488.

[14] See In re Quality Stores, 693 F.3d 605, 611 (6th Cir. 2012).

[15] See 26 U.S.C § 3402(o) (defining it as payments paid to an employee as part of plan, as the result of involuntary separation as part of a downsizing, to the extent it is included in gross income) (emphasis added).

[16] See id. § 3402(o) (emphasis added).

[17] See id. § 3402(o)(2)(A).  The requirements of 3402 are the following:  “[T]he term “supplemental unemployment compensation benefits” means amounts which are paid to an employee, pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation from employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent such benefits are includible in the employee’s gross income.” See id.

[18] Compare id. (requiring the payment be received in the general circumstances of a lay-off) with Rev. Rul. 90-72, 1990-2 C.B. 211 (requiring the payment be tied with receiving unemployment).

[19] See, e.g., In re Quality Stores, 693 F.3d 605, 608 (6th Cir. 2012) (noting plan did not require receiving state unemployment); CSX Corp. v. United States, 518 F.3d 1328, 1331-333 (Fed. Cir. 2008) (same).

[20] CSX Corp. v. United States, 518 F.3d 1328, 1330-1333 (Fed. Cir. 2008).

[21] See id. at 1330-1331, 1337 (summarizing CSX’s main argument and, as a secondary argument, CSX argued the U.S. Senate report in passing 3402(o) stated “these benefits are not wages”).

[22] See id. at 1342.

[23] Id.

[24] See id. at 1340.

[25] See id. at 1342.

[26] See id.

[27] See In re Quality Stores, 693 F.3d 605, 608-609 (6th Cir. 2012)(explaining the company offered from, at most, eighteen months to, at least, one week of severance pay based on position and time spent at the company).

[28] See id. at 616.

[29] See id. at 611 (acknowledging 3402(o) is entitled “[e]xtension of withholding to certain payments other than wages” and 3402(o)(1) states a SUB payment “shall be treated as if it were a payment of wages”) (both emphasis in original).

[30] See id.

[31] Petition for a Writ of Certiorari at 9–12, United States v. Quality Stores, Inc, No. 12-1408,  (petition for cert. filed July 30, 2013).

[32] See id. at 9–11 (explaining the payments amounts were calculated using length of employment and position and acted as compensation for past service).

[33] See id. at 10.

[34] See id. at 14.

[35] See id.

[36] See id. (writing 3402(o)(1) states it only applies “[f]or the purpose of this [income tax withholding] chapter (and so much of chapter F as relates to this chapter”).

[37] See id. at 15–19 (“Congress’s decision to restrict the scope the rule set forth in Section 3402(o) to chapter 24 suggests that Congress did not intent to, or any implication that might be drawn from the rule, to be applied outside the context of income tax withholding.”).

[38] See id. at 19.

[39] See id. at 19–20.

[40] Brief in Opposition at 4–9, Quality Stores, Inc. (No. 12-1408).

[41] See id.

Salem Financial: The Final Nail in the Coffin for STARS Shelters?

By Darshan Chulani, Senior Staff Writer

In late September, the U.S. Court of Federal Claims handed down a decision that is widely believed to spell the end of STARS transactions in their current form. Structured Trust Advantaged Repackaged Securities, or STARS, have been in use since the late 90s as a means of generating foreign tax credits.[1] Foreign tax credits are used to offset companies’ and individuals’ U.S. tax liabilities. The future of STARS was put in jeopardy earlier this year by the U.S. Tax Court in Bank of New York Mellon Corp. v. Commissioner of Internal Revenue, and the Court of Federal Claims reaffirmed this line of judicial reasoning in the case at hand.[2] Both courts identified the transactions as lacking economic substance, a key factor in differentiating legitimate transactions from sham transactions.[3]

The current case, Salem Financial Inc. v. United States[4], was brought by BB&T, a North Carolina bank, to file for a refund of the taxes it paid as a result of its participation in a STARS transaction from 2002 to 2007. BB&T also contended that it did not owe penalties as a result of the transaction. The $772 million at dispute includes $498 million for disallowed foreign tax credits and $113 million in penalties.[5]STARS are complicated transactions that serve “to generate large-scale foreign tax credits for a U.S. taxpayer, which could be used to enhance revenue and reduce taxes in the United States.”[6] The complexity of this particular transaction necessitated 21 days of trial, several of which were involved explaining the transaction rather than discussing the relevant legal issues.[7]

The STARS transaction in this case involved a complex series of back-and-forth transactions between BB&T’s U.S. subsidiaries and Barclays, a British bank. The structure of deal can be summarized as follows: BB&T established a Delaware trust containing roughly $6 billion in revenue-producing assets. The monthly revenue from these assets was taxable in the UK rather than in the U.S. because the trust administrator, a BB&T owned company, was based in that country. Barclays was nominated to receive the proceeds from the trust, but in turn was obligated to immediately re-contribute the amount to the trust. The subsequent transfer of revenues out of the UK generated UK tax credits, which were split between BB&T and Barclays. The companies used these credits to offset their UK tax liability, while BB&T retained the US tax credits generated as a result of the trust administrator’s UK domicile.

In an attempt to meet the economic substance doctrine and thus help give the transaction a business purpose, the STARS shelter included a loan of $1.5 billion from Barclays to a BB&T subsidiary. However, the first three years of this loan would be paid back to Barclays by itself.  The court found that the loan served “only to add a hoped-for business purpose to the tax avoidance scheme,”[8] and thus failed the economic substance standard.  In doing so the court denied BB&T’s request for refund, and upheld the penalties imposed on the BB&T.[9]

This judgment amounts to a vociferous rejection of the legitimacy of STARS. Further, it calls into question the versatility and transferability of foreign tax credits in the financial sector. It will be interesting to observe other challenges to STARS transactions, and whether courts will continue to find a lack of economic substance in similarly structured deals. The next chapter in this saga is BNY Mellon’s appeal of the Tax Court decision to the Second Circuit.

A version of this piece was originally published on “Funding Society: A Tax Law & Policy Blog.”

[1] Robert Wood, BB&T STARS Tax Shelter Loss Costs $660M Plus $112M Penalty, Forbes (Sept. 21, 2013),

[2] Bank of New York Mellon Corp. v. Commissioner of Internal Revenue, 140 T.C. 15 (2013).

[3] Andrew Zajac, BB&T Loses Court Bid to Recoup $688 Million in Taxes, Bloomberg (Sept. 21, 2013),

[4] Salem Financial Inc. v. United States, No. 10-192T, 2013 WL 5298078 (Fed. Cl. Sept. 20, 2013).

[5] Id. at 2.

[6] Id.

[7] Id.

[8] Id. at 3.

[9] Id. at 66-67.

FINRA’s Shedding Light in the Dark of Off-Exchange Markets

By Thomas AhmadifarAssociate Managing Editor

On September 30, 2013, the Financial Industry Regulatory Authority (FINRA) filed a rule with the U.S. Securities and Exchange Commission (SEC) to better regulate Alternative Trading Systems (ATSs).[1]  ATSs, which come in many forms, provide traders with alternative mediums to trade stocks outside of the traditional stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ.[2]  ATSs have grown in dominance to now account for over a third of all trading.[3]


Financial Industry Regulatory Authority

The FINRA rule proposal is one of the first definitive steps in the United States to better regulate ATSs.  Under the proposed rule, ATSs would have to provide FINRA with a weekly report comprised of the number of trades for each security.[4]  FINRA would then post the weekly reports on a public website.[5]  The proposed rule comes on the heels of a historic joint-lobbying push by the three major exchanges- NYSE, NASDAQ, and BATS Global Markets –in April 2013 to have regulators implement new rules for ATSs.[6]

The growth in ATSs has caused many to worry about new risks of trading in both on and off exchange markets. For instance, one principal type of ATS is known as a “Dark Pool,” which is a private electronic exchange run by an entity (often a large bank) that allows buyers and sellers to anonymously trade large volumes of shares at a single price.[7]  Opponents of Dark Pools argue that at present, Dark Pools are not required to report their trading volume.[8]  In April 2013, Credit Suisse, which runs the world’s largest dark pool (Crossfinder), decided to stop disclosing its trading volume.[9]  The privacy of Dark Pools provides an advantage to subscribers, who have access to trading opportunities at prices not necessarily available to the public. In addition, without full accounting of trading volume, reported prices of stocks based on public information may not reflect the accurate value of the stocks because they do not incorporate all trades and prices.

One other major criticism of Dark Pools is the inherent risk of conflicts of interest and trading on private information. Because many operators of Dark Pools also have trading desks, there are risks that the owners of the Dark Pools may inappropriately “front run” trades in their own Dark Pool.[10]  The SEC has already brought an enforcement action against a Dark Pool operator for failing to disclose to its subscribers that it was selling their confidential trading information to an outside firm.[11]

The proposed FINRA rule would minimize many of the risks of ATSs.  By bringing ATS trading information to light on a weekly basis, the rule would help public stock prices adjust (at least) weekly to additional private information.  This would allow smaller non-institutional investors trade with similar information as the larger investors who can afford to subscribe to a Dark Pool or other ATS. It may decrease the advantage of trading on an ATS to the benefit of traditional exchanges, since prices in both public and private mediums may converge. In addition to price, it will also alert smaller investors to the stocks that may be more or less valuable based on volumes exchanged.

The FINRA proposed rule does not necessarily address the inherent risks of ATS operators front running trades.  In a world of high frequency trading where millions of shares are exchanged in a matter of seconds, a week is an eternity to wait to release ATS trading information. However, the proposed rule does at least increase the amount of available public information, which is the core principle of all securities regulation. It would aid the public exchanges in facilitating trades at prices that better reflect the true value of a stock, and it would help decrease the gap between institutional and private investors.

[1] John McCrank, U.S. Securities Watchdog Proposes New Rules for “Dark Pools, Reuters, Oct. 1, 2013, See generally U.S. Securities & Exchange Commission, Notice of Filing of Proposed Rule Change to Require Alternative Trading Systems to Report Volume Information to FINRA and Use Unique Market Participant Identifiers, Release No. 34-70676 (2013) [hereinafter FINRA Proposed Rule], available at

[2] See Nathaniel Popper, As Market Heats Up, Trading Slips into Shadows, N.Y. Times, Mar. 31, 2013,

[3] McCrank, supra note 1.

[4] Id.

[5] FINRA Proposed Rule, supra note 1, at 1.

[6] See Nathaniel Popper, Exchanges are Moving to Curb Private Trades, N.Y. Times, Apr. 8, 2013,

[7] See Haoxiang Zhu, Do Dark Pools Harm Price Discovery? 1 (2013), available at

[8] McCrank, supra note 1.

[9] Id.

[10] Front Running,, (last visited Oct. 20, 2013) (“The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information.”).

[11] Press Release, U.S. Securities & Exchange Commission, SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information (Oct. 3, 2012), available at

Anna Nicole Smith’s Eternal Bankruptcy Legacy

This week, the New York Opera and the Brooklyn Academy of Music are featuring the U.S. premier of Anna Nicole, an Opera based on the “tumultuous life of Anna Nicole Smith – stripper, playmate, and formidable tabloid queen.”[1] However, Anna Nicole Smith was also a formidably litigious client. In fact, she made it to the Supreme Court twice; her repeat performance took place in the 2010 hallmark case, Stern v. Marshall.[2]  The decision in Stern centered on what types of bankruptcy related claims an Article I federal Bankruptcy Court could adjudicate, as opposed to an Article III court. This year, Stern v. Marshall returns this year’s Supreme Court term for review in the case Exec. Benefits Ins. Agency (EBIA) v. Arkinson.[3]

Stern evolved from a bankruptcy proceeding brought in the U.S. Bankruptcy Court for the Central District of California by Anna Nicole Smith, legally known as Vickie Lynn Marshall, to recovery assets from her husband’s estate.[4]  Anna Nicole married multi-millionaire, J. Howard Marshall II about a year before his death, but was not included in his will.[5] Shortly after his death, Anna Nicole filed for bankruptcy in a federal Bankruptcy Court to extract money from her debtors. In an attempt to block Anna Nicole from obtaining assets from his father’s will, Pierce Marshall, filed a complaint in that bankruptcy proceeding alleging defamation against Anna Nicole.[6] Anna Nicole then filed a compulsory counterclaim against Pierce for tortious interference with a gift she expected to receive in J. Howard’s will.[7] After a bench trial, the Bankruptcy Court issued an order of summary judgment on Pierce’s defamation claim, and in 2000 issued judgment in favor of Anna Nicole on her counterclaim of tortious interference.[8] She was awarded $400 million in compensatory and $25 in punitive damages.[9]

Anna-Nicole-Smith-PostersHowever, Pierce wasn’t done fighting. He instead argued post-trial that the Bankruptcy Court lacked jurisdiction to hear the tortious interference counterclaim.[10] He claimed that Bankruptcy Court could not offer final judgment on the tortious interference claim because it was a “core proceeding” defined by § 157 but did not arise under Title 11 of the Bankruptcy Code because it was a state common law claim too far removed from the bankruptcy proceedings.[11] Therefore, only an Article III District Court could adjudicate the counterclaim based on a “proposed finding” from the Bankruptcy Court.[12] Pierce took this genius litigation move and turned a bankruptcy case into a separation of powers question by challenging Congress’ authority to vest jurisdiction over a controversy in a non-Article III Court.

28 U.S.C. § 1334(a) provides federal district courts with exclusive jurisdiction over Title 11 bankruptcy proceedings. However, when Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 (“1984 Act”),[13] it allowed federal bankruptcy judges to hear three categories of bankruptcy proceedings: “core” proceedings that arise under Title 11; “core” proceedings that arise in a Title 11 case; and “non-core” proceedings that are merely “related to a case under title 11.”[14] § 157(b)(2) lists actions that Congress deemed “core,” including “counterclaims by the estate against persons filing claims against the estate.”[15] “Core” proceedings allow Bankruptcy Judges to make final adjudications under their Article I powers. However, Bankruptcy Judges cannot make final adjudications in “non-core” proceedings, but can only provide an Article III court with “proposed findings [of fact] and conclusions [of law]” to be reviewed de novo.[16] Pierce’s argument posited to the Supreme Court was that the tortious interference counterclaim is statutorily defined as “core” based on § 157(b)(2), but does not “arise under” a Title 11 Bankruptcy proceeding. [17] Therefore, the Bankruptcy Court’s final judgment would have been void for lack of jurisdiction.

When Stern resurfaced at the Supreme Court on the jurisdictional issue, the Justices saw a bankruptcy case spiraling out of control and constitutionally questionable. First, the Court found § 157 to be lacking in guidance from Congress because it failed to distinguish between “core” proceedings arising under Title 11 and “core” proceedings that don’t arise under Title 11. Yet instead of reaching the constitutional question directly on the bankruptcy law issue, the Court determined that Pierce had consented to the jurisdiction of the Bankruptcy Court when he filed the defamation suit in that court. Therefore, the Court upheld the Bankruptcy Court judgment in favor of Anna Nicole.[18]

Instead of stopping there, the Court decided to continue to find § 157(b)(2)(C) unconstitutional.[19] Simply put, the Article I Bankruptcy Court “in this case exercised the ‘judicial Power of the United States’ in purporting to resolve and enter final judgment on a state common law claim.”[20] Yet, Article III of the Constitution vests the judicial power in the federal court system, and the separation of powers prohibits Congressional intrusion into the Judicial Branch. [21] Therefore, the Supreme Court in Stern created a chasm between the statutory 1984 Act that provides Bankruptcy Court jurisdiction for “core proceedings” and the Court’s declaration that Bankruptcy Court jurisdiction is unconstitutional over state common law claims not arising under Title 11.

Now, the spirit of Stern returns to the Supreme Court with different parties in EBIA v. Arkinson.[22] The Ninth Circuit decided to take the Court to task by ruling it unconstitutional to allow a non-Article III bankruptcy judge to “enter final judgment in a fraudulent conveyance action against a nonclaimant to the bankruptcy estate.”[23] Relying on Stern, the Ninth Circuit held that a state common law claim of fraudulent conveyance does not fall within the equitable jurisdiction of the bankruptcy court merely because it may have some relationship to a bankruptcy case.[24] The court similarly declared that like Pierce, the appellant in this case waived their right to an Article III court.[25]  However, in EBIA, the Ninth Circuit found that the appellant implicitly consented to Bankruptcy Court by failing to timely object.[26] Thus, the question presented on certiorari to the Supreme Court is whether under Stern a litigant can implicitly consent to Bankruptcy Court when the 1984 Act provides no notice that Bankruptcy Court jurisdiction is not constitutionally required.[27]

The jurisdictional battle over bankruptcy proceedings make up a bulk of the major Supreme Court jurisprudence on the ability for Congress to delegate judicial power to non-Article III tribunals.[28] While the Court had been taking a progressively functionalist approach over the latter half of the twentieth century, Stern represents a shift to a formalist reading of Article III. This raises the question of whether the current Court will take a similarly textual reading of the 1984 Act in EBIA and possibly strike down part of the 1984 Act as unconstitutional.

Chief Justice Roberts likened Stern v. Marshall to the fictional case of Jarvis v. Jarvis from Charles Dickenson’s novel, Bleak House.[29]  A suit that is so complicated that no one knows the original issues, has passed through family generations, been adjudicated by numerous judges, with the original parties no longer alive.[30] Alternatively, it could be said that the courts, like the tabloids, simply cannot get enough of Anna Nicole Smith.

The AUBLR is looking forward to hearing the arguments in EIBA in the upcoming Supreme Court term.



Business and Marketing Editor, Diane Ghrist

[1] Brooklyn Academy of Music and New York City Opera Present Anna Nicole,

[2] Stern v. Marshall, 131 S.Ct 2594, 2601 (2011) (recognizing that the facts and procedural history of the second case had been already recounted in the first Supreme Court case, Marshall v Marshall, 547 U.S. 293 (2006)).

[3] In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Exec. Benefits Ins. Agency v. Arkinson, 133 S.Ct. 2880 (2013).

[4] Stern, 131 S.Ct. at 2601.

[5] Id.

[6] Pierce’s defamation theory was based on a lawsuit filed by Anna Nicole in a Texas probate court before J. Howard’s death. In that case, Anna Nicole asserted that Pierce had fraudulently induced J. Howard into signing a living trust, excluding Anna Nicole. She claimed that J. Howard had intended to give her half of his property. In re Marshall, 392 F.3d. 1122 (9th Cir. 2004) (describing in detail the Texas probate court suit). In the defamation complaint, Pierce alleged that Anna Nicole had “defamed him by inducing her lawyers to tell members of the press that he had engaged in fraud to gain control of his father’s assets.” Marshall v. Marshall, 547 U.S. 293, at 300-301 (2006).

[7] Stern, 131 S.Ct. at 2601 (recounting that “Vickie alleged that Pierce had wrongfully prevented J. Howard from taking the legal steps necessary to provide her with half his property).

[8] Id.; In re Marshall, 253 B.R. 550, 561-62 (Bkrtcy. Ct. C.D. Cal. 2000), rev’d In re Marshall, 600 F.3d 1037 (9th Cir. 2010).

[9] Id.

[10] Stern, 131 S.Ct. at 2601.

[11] 28 U.S.C. § 157 (b)(2)(C) (2006).

[12] Stern, 131 S.Ct. at 2602.

[13] Pub. L. No. 98-353, 98 Stat. 333 (codified as amended in scattered sections of 28, 5, and 11 U.S.C.).

[14] 28 U.S.C. § 157(a) (2006).

[15] Id. at § 157(b)(2)(C).

[16] Id. at §

[17] Stern, 131 S.Ct. at 2604.

[18] Id. at 2608.

[19] Id. (“Although we conclude that § 157(b)(2)(C) permits the Bankruptcy Court to enter final judgment on Vickie’s counterclaim, Article III of the Constitution does not.”).

[20] Id. at 2611 (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (plurality opinion)).

[21] U.S. Const. art. III, § 1; Stern, 131 S.Ct. 2594, at 2608 (2011).

[22] In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Exec. Benefits Ins. Agency v. Arkinson, 133 S.Ct. 2880 (2013).

[23] In re Bellingham, 702 F.3d at 556.

[24] Id. at 564-65.

[25] Id. at 566.

[26] Id. at 569 (noting that Stern had not been decided until EBIA was already on appeal, and therefore had no notice that an objection to Bankruptcy Court jurisdiction was possible).

[27] Petition for Certiorari, In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), appeal docketed sub nom. Exec. Benefits Ins. Agency v. Arkinson, No. 12-1200 (Apr. 3, 2013). The case is also aims to address a circuit split between the Ninth and Sixth Circuits on this issue stemming from the confusing decision in Stern.

[28] See e.g. Northern Pipeline Constr. Co v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (plurality opinion); Granfinanciera, SA, et al. v. Nordberg, 492 U.S. 33 (1989) (discussing the scope of Bankruptcy Court jurisdiction in light of the separation of powers with respect to Article III of Constitution).

[29] Stern v. Marshall, 131 S.Ct. 2594, 2600 (2011).

[30] Id. 

Judicial Ethics and the Aluminum Company of America

In today’s Wall Street Journal, an article appeared discussing the decline of the raw aluminum smelting company Alcoa.[1] The name Alcoa harks back to the 1945 section 2 antitrust case, United States v. Aluminum Co. of America (Alcoa), which most famously stated that a single firm controlling 33% of the relevant market is not enough to constitute a monopoly.[2] However, the case intriguing for another reason, it is one of the only cases written by a circuit court that carries the force of Supreme Court precedent through Congressional passage of a special law.[3] Congress was forced to pass the law because too many Supreme Court Justices recused from themselves from the case that the Court lacked quorum.[4]  Today, it is unimaginable for the Court to forfeit judicial review of a major legal issue due to corporate connections and appearances of biases. Yet Alcoa still raises the question in a time where many Americans lack confidence in the Supreme Court,[5] would the Court gain ethical credibility by abdicating review in cases in which multiple justices have conflicts of interest?

The issue of Supreme Court recusals was a focus of national debate as the Affordable Care Act (ACA) made its way up the judicial ladder. Justice Kagan had been the former U.S. Solicitor General and may have been involved in ACA litigation in the lower courts.[6] In addition, Justice Thomas’ wife had been involved in political action committees that aimed to overturn the ACA.[7] While other federal judges are subject to the Code of Judicial Ethics, which requires recusals when there is an apparent conflict of interest, the Supreme Court is not bound by the Code. In response to the public outcry surrounding Justices Kagan and Thomas’ decisions not to recuse, Chief Justice John G. Roberts Jr. mounted a defense in his annual report on the state of the federal judiciary.[8] Justice Roberts outlined the reasons why the Supreme Court should be exempt from sections Code based on the Court’s unique function as the arbiter of last resort.[9]

Before digging into his perspective on recusals, Chief Justice Roberts argues that the Code of Judicial Ethics applies only to lower federal courts because they are created at the discretion of Congress, and the Code of Judicial Ethics was the product of Congress.[10] In contrast, Article III of the Constitution created the Supreme Court. Roberts then outlines his defense of discretionary recusals at the Supreme Court based on two reasons: No higher court exists to review Supreme Court recusals and Supreme Court Justices cannot freely substitute for one another.[11]

Alcoa is a counter-argument to Chief Justice Roberts because it demonstrates how the Supreme Court can retain its credibility as an apolitical institution without loosing its central purposes. The Supreme Court could possibly create a special certification for the Congressional Judiciary Committee to review judicial recusals. In addition, as in Alcoa, the Supreme Court could abdicate jurisdiction to a circuit court when the Chief Justice feels the Court may appear conflicted. While Alcoa was an extreme case in which the Court could not reach a quorum, the unpopular Court today should consider taking extreme measures to assure the public of its credibility.  Otherwise, like the company Alcoa’s stock price today, the Court’s ethical footprint will continue shrinking.

[1] John W. Miller, Alcoa’s Hometown Footprint Is Shrinking, WALL ST. J.  (Sept. 16, 2013 9:42 PM), available at

[2] 148 F.2d 416, 424 (2d Cir. 1945) (“[I]t is doubtful whether sixty or sixty-four percent would be enough [to constitute a monopoly]; and certainly thirty-three percent is not.”).

[3] See ANDREW I. GAVIL, WILLIAM E. KOVACIC & JONATHAN B. BAKER, ANTITRUST LAW IN PERSPECTIVE: CASES, CONCEPTS AND PROBLEMS IN COMPETITION POLICY, 599 (2d ed. 2002) (discussing the history of the Second Circuit’s review of Alcoa).

[4] Id.

[5] See Andrew Dugan, Americans’ Approval of Supreme Court Near All-Time Low, GALLUP POLITICS (July 19, 2013), (noting that political polarization on the Court since 2000 has contributed to Americans’ lack of confidence in the Court).

[6] Eric Segall, A Liberal’s Lament on Kagan and Health Care, SLATE (Dec. 8, 2011 4:07 PM), supreme_court_should_elena_kagan_recuse_herself_.html.

[7] Doug Mataconis, House Democrats Call on Justice Thomas to Recuse Himself From Healthcare Litigation, OUTSIDE THE BELTWAY (Feb. 9, 2011),

[8] Chief Justice John G. Roberts Jr., 2011 Year-End Report on the Federal Judiciary, available at

[9] Id. at 7.

[10] Id. at 4.

[11] Id. at 9.


Business and Marketing Editor, Diane Ghrist




Access, Innovation, and Essential Medicines

“The idea of a better-ordered world is one in which medical discoveries will be free of patents and there will be no profiteering from life and death.”

-Indira Gandhi, World Health Assembly 1982.


Jayashree Watal

Jayashree Watal, Counsellor at the Intellectual Property Division of the World Trade Organization (WTO)[1], visited the Washington College of Law today to discuss the economics of the international pharmaceutical industry. Towards the beginning of her presentation she posed an unanswered question: in poor countries can the right to life be left to the state or should companies have moral responsibilities to supply life-saving medicines?

Since the mid 1970s, the pharmaceutical industry has depended more on the patent system than any other industry to profit from their drug products.[2] The prohibitive cost of developing therapeutic drugs and simplicity in copying chemical compounds drive these companies to the patent system for protection. While companies undoubtedly need to profit from the medicines they innovate, human rights lawyers additionally point to the need for poor citizens of the least developed countries to have access to those medicines, without which they would die. These lawyers argue that the U.N.’s Universal Declaration of Human Rights, which provides everyone with the right to life,[3] health, and medical care,[4] justifies access to life-saving patented medicines.

While Watal acknowledged that companies are unlikely to act morally absent incentives to do so, she also recognized that countries cannot expect companies to simply provide free medicine. To that point, she laid out two possible plans based in economics to encourage companies to increase access to medicines for the least developed countries.

Her first suggestion was for countries alongside companies to enter into a global agreement to create perfectly sealed markets. This means that companies would have to push countries to stop the importation and exportation of drugs on a free market entirely. Instead countries would be limited to the supply of drugs in their individual domestic markets. By creating perfectly sealed markets, Watal argued, pharmaceutical companies could effectively engage in tiered pricing. Therefore, a company could charge a higher price in an OECD country while charging a lower price in lesser-developed countries without the threat of parallel importation. However, she cautioned that such a global agreement must come from the companies and be fully embraced by industry to be feasible.

Her second concept was to reform domestic tax codes to allow concessions for the voluntary licensing of medicines. This means that the OECD countries with large pharmaceutical industries would need to look to domestic lawmakers to reform domestic law. However, this process may be extremely arduous and subject to political vulnerabilities in election cycles. She elaborated on this theory in a publication with economist F.M. Scherer.[5]

While either theory has their own unique legal hurdles, both take the position that companies need economic incentives to act morally. However, trends moving away from the stakeholder maximization norm and increasing public interest concerns suggest that companies may be changing their models to take into account the social good alongside profits.[6]

The WTO, World Health Organization, and World Intellectual Property Organization recently collaborated on a trilateral study regarding the intersections between trade, property, and health aimed at “enhance[ing] our shared understanding . . . and provide policy makers with a comprehensive compendium of issues at stake.”[7] Hopefully companies and lawmakers will carefully consider the compendium and find ways to provide essential medicines to the least developed countries and most needy people.

[1] Biography Jayashree Watal,

[2] Christopher Thomas Taylor & Aubrey Silberston, The Economic Impact of the Patent System: A Study of the British Experience,  231 (Cambridge University Press, 1973) (determining the pharmaceutical industry to be the most patent dependent industry).

[3] Universal Declaration of Human Rights, art. III.

[4] Id. at art. XXV.

[5] F. M. Scherer & Jayashree Watal, Post –TRIPS Options for Access to Patented Medicines in Developing Nations, J. 5 Int. Economic Law 913 (2002).

[6] Dana Brakman Reiser, The Next Big Thing: Flexible Purpose Corporations, 2 Am. U. Bus. L. Rev. 55 (2012) (discussing the ne corporate model that blends missions of earning profits and promoting social good), available at

[7] World Trade Organization, World Health Organization, and World Intellectual Property Organization, Promoting Access to Medical Technologies and Innovation: Intersections between public health, intellectual property and trade (Feb. 5, 2013), available at


Business and Marketing Editor: Diane Ghrist