April 7, 2015
By Ben Jumonville, Senior Associate

Introduction

The Louisiana Business Corporation Act (LBCA) ushered in a sweeping revision of the business corporation laws in Louisiana.[1] The LBCA became effective on January 1, 2015, and introduced many significant changes to Louisiana’s corporation laws. The new law may look familiar to attorneys who have practiced outside of the state because the LBCA is based on the Model Business Corporation Act (Model Act), which is the source of corporation law in 30 other states.[2]

Of the various changes made by the LBCA, one of the most notable is the increased protection of minority shareholders in closely held corporations. Minority shareholders need special protection because their ability to see a return on investment lies almost exclusively in the hands of the majority stakeholders. In a typical corporation where governing authority lies with an elected board of directors, a majority shareholder can take full control of the organization by electing himself and those loyal to him to the board of directors. With control of the board, a majority shareholder then has the power to remove any remaining minority shareholders from the board, refuse to pay them dividends, terminate their employment with the organization, and take other actions that deny them participation or financial rights. In a closely held corporation, these actions are particularly harmful to minority shareholders because their investment is “effectively trapped.”[3] Unlike the stock of publicly traded firms, the stock of a closely held corporation cannot be readily sold in a market.[4]

In an effort to increase fairness, the LBCA implements a number of rules that are designed to alleviate the plight of the minority shareholder. In particular, the most noteworthy protections under the new law are: (1) a remedy for shareholders who have been oppressed by their corporation; (2) shareholder-friendly revisions to the procedures for asserting appraisal rights; and (3) the introduction of “unanimous governance agreements” which allow shareholders to contract around the traditional corporate structure.

I. The Oppression Remedy

Perhaps the most striking feature of the LBCA is the introduction of the remedy for shareholder oppression.

Under the LBCA, shareholders can now force the corporation to buy out all of their shares at “fair value” if they can prove that the corporation has engaged in oppression.[5] No such remedy existed under the old law.

The LBCA defines oppression as those corporate practices, which “considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder.”[6] Both the conduct of the petitioning shareholder and the “reasonable expectations” of all shareholders in the corporation are relevant factors in determining whether the corporation acted in fairness and good faith.[7] This statutory definition is unique to Louisiana, as the Model Act does not provide a definition of oppressive conduct.[8]

The shareholders ability to demand a buyout under the LBCA is a major deviation from prior Louisiana law as well as the Model Act. Under the Model Act, a shareholder bringing an action for oppressive treatment can only petition for the dissolution of the company.[9] Then, after the dissolution proceeding has been initiated, the corporation or other shareholders may elect to purchase the shares of the petitioning shareholder if they wish to avoid the dissolution proceeding.[10]

The LBCA, on the other hand, provides that petitioning for a buyout of their shares is the shareholder’s exclusive option.[11] The corporation can then elect to convert the buyout proceeding into a proceeding for a “court-supervised dissolution of the corporation.”[12] The comments to the LBCA explain that these changes were made in order to allow the corporation to contest the shareholder’s allegations of oppression without risking an involuntary dissolution of the entire company and to align the LBCA’s oppression remedy with those remedies that have been provided in the modern jurisprudence.[13]

Equally important as the shareholders’ new right to a buyout is the fact that the LBCA oppression remedy precludes the practice of discounting the value of shares for lack of marketability or minority status.[14] Although courts in many jurisdictions have rejected the idea of discounting, the jurisprudence in Louisiana had previously suggested that discounting should be applied.[15] Nevertheless, the LBCA explicitly rejects the use of discounting, clearing the air of any question as to its application under the new law.[16]

Although the LBCA will likely be seen as a big win for minority shareholders, it has nevertheless been criticized on narrow grounds. One such criticism is the exclusive nature of the buyout remedy.[17] As one commentator pointed out, courts in several other jurisdictions have exercised their “remedial flexibility” by imposing remedies other than a buyout or dissolution.[18] These decisions suggest that alternative remedies are more appropriate in certain scenarios of oppressive conduct.[19]

Additionally, the offending corporation may not have sufficient financial resources to purchase all of the oppressed shareholder’s interest.[20] In such cases, the LBCA requires that the court order the corporation to furnish the shareholder with an unsecured promissory note within 30 days of the date of the judgment that is due in 10 years.[21] But this provision gives the court significantly less discretion than its counterpart in the Model Act, where a court is empowered to “enter an order directing the purchase upon such terms and conditions as the court deems appropriate.”[22] For instance, a court operating under the Model Act rules would be able to order that the purchase price be paid in installments or extend the amount of time to complete the buyout, whereas the LBCA appears to restrict this sort of flexibility.[23]

Finally, the LBCA has been criticized for allowing shareholders to waive their right to the oppression remedy.[24] Because minority shareholders in closely held corporations are often not sophisticated investors, “a waiver of the right to withdraw . . . may simply reflect a minority shareholder’s overtrust, unsophistication, and desire not to ‘rock the boat,’ rather than an informed weighing of the pros and cons of relinquishing a legal right.”[25]

II. Appraisal Rights

The LBCA provisions concerning appraisal rights also favor minority shareholders.[26] Appraisal rights—or “dissenters’ rights” as they were called under the old law[27]—allow a shareholder to force the corporation to buy out all of their shares if the shareholder objects to certain transactions entered into by the corporation.[28] Although these rights existed under the old law, they are now much more accessible under the LBCA.

Rights of dissenters were of limited value to minority shareholders under the old law due to the fact that it was extremely difficult to satisfy the procedural requirements. The old law gave dissenting shareholders only 20 days from the date that they were mailed an unexplained copy of the certificate of merger to demand that the corporation pay them a stated fair value for their shares.[29] During this time period, the shareholder was also required to find a bank (located in the same parish as that of the corporation’s registered office) to act as an escrow agent for their shares and obtain from the bank a letter acknowledging its status as escrow agent. The shareholder would then need to deliver the escrow acknowledgement letter and the demand for fair value to the corporation.[30] If the shareholder satisfied all of these procedural requirements, the corporation could then simply reject the shareholder’s demand for fair value of his shares.[31] This placed the burden back on the shareholder, who then had 60 days from the corporation’s rejection of the demand to file a valuation suit.[32] Even assuming that the shareholder was able to comply with all of these requirements, the shares could still potentially be subjected to discounting due to minority status at the valuation proceeding. [33]

The LBCA completely overhauls the procedures for asserting appraisal rights. Of importance to minority shareholders, the new law moves many of the procedural burdens from the shareholder to the corporation.

The new procedure can be summarized as follows: First, after approving any transaction where appraisal rights may be available, a corporation must send its shareholders a statutory form of notice that provides instructions on how to preserve their appraisal rights.[34] Then, the corporation—not the shareholder—must make arrangements with a bank to serve as an escrow agent for the affected shares.[35] The corporation is required to send the shareholder instructions on how to deposit their shares with the bank, as well as certain financial information to aid in calculating the value of his shares. Additionally, the corporation must provide the shareholder with a simple form for demanding a fair value price for his shares that is to be filled out and returned to the corporation.[36] Upon receipt of the form, the corporation has 30 days to pay the shareholder what the corporation believes is the fair value of the affected shares.[37] If the shareholder is dissatisfied with the corporation’s valuation, then the shareholder must notify the corporation within 30 days of receipt of the payment. The burden is then on the corporation to initiate a valuation proceeding.[38] Finally, the LBCA expressly prohibits the discounting of shares for minority status or lack of marketability.[39]

Similar to the remedy for oppression, the LBCA makes appraisal rights the exclusive remedy for shareholders in situations where appraisal rights are triggered.[40] However, this rule of exclusivity does not overly burden shareholders because the rule only applies if shareholders are allowed to assert appraisal rights without notifying the corporation in advance of their intent to do so.[41]

III. Unanimous Governance Agreements

Prior to the enactment of the LBCA, Louisiana was known as a “particularly hostile jurisdiction” to shareholder agreements.[42] Shareholder agreements were routinely struck down as violations of public policy because the courts deemed that those agreements, which somehow limited the discretion of directors, would hinder their ability to fulfill their fiduciary duties.[43] Bringing Louisiana into the modern age, the LBCA puts that outdated policy to rest by giving shareholders broad discretion to structure the governance of their organization through what the LBCA calls “unanimous governance agreements.”[44]

Under the LBCA, shareholders may enter a special unanimous agreement that has the power to override otherwise statutorily-required rules regarding the governance of their organization.[45] This new contractual freedom allows the shareholders to completely do away with the traditional corporate structure that was required under the old law. For instance, the shareholders can even agree to abolish the board of directors and place the entire control of the corporation in the hands of one person.[46]

As noted above, shareholder agreements that purported to give certain rights to minority shareholders by limiting the discretion of the board of directors in some way would have been struck down as violations of public policy prior to the enactment of the LBCA. Under the LBCA, such agreements are expressly permitted. As a result, through the power of a unanimous governance agreement (UGA), minority shareholders now have the ability to negotiate for such rights as guaranteed representation on the board of directors, continued employment with the organization, and regular dividend payments.

Commentators have identified at least two shortcomings of using shareholder agreements as a means to protect minority shareholders from oppressive conduct by the corporation.

First, to the extent that a unanimous governance agreement can benefit minority shareholders, it can also harm them. The UGA provisions in the LBCA simply provide for greater freedom of contract with regard to structuring the governance of corporations. Furthermore, as one commentator has observed, “the move to increasing contract rights has led to a concomitant ability among investors to decrease their fiduciary obligations.”[47]

For instance, consider the LBCA’s definition of oppression, which states that any unanimous shareholder agreement will be taken into account when determining whether a corporation has engaged in oppression.[48] If shareholders of a corporation were to execute a UGA that explicitly denies certain participation or financial rights to minority shareholders, then those shareholders will have a much tougher time proving oppression.

A second disadvantage of UGAs as protective measures for minority shareholders is that investors in closely held corporations often do not feel the need to contractually protect themselves at the outset of their investment.[49] Scholars have said that this trend is caused by the fact that many investors in closely held corporations are relatively unsophisticated and often have an overly trusting nature that prevents them from anticipating the possibility that they will be treated unfairly.[50]

Conclusion

The LBCA arms minority shareholders with several new protective measures in the hope of creating a fairer environment for those invested in closely held corporations. Although these measures are not without their drawbacks, they effectively target problem areas that could have been used to exploit minority shareholders under the old law. Furthermore, the LBCA brings Louisiana’s minority shareholder protections in line with those offered by a majority of U.S. jurisdictions.

_________________

[1] La. Rev. Stat. Ann. §§ 12:1-101–1704 (Supp. 2015).

[2] Glenn G. Morris, The Model Business Corporation Act as Adopted in Louisiana, La. Bankers Association (2014) (unpublished educational material), available at http://www.lba.org/files/Glenn%20Morris%20-%20The%20New%20Business%20Corporation%20Law.pdf, archived at http://perma.cc/MB94-UEAC.

[3] Douglas K. Moll, Shareholder Oppression and the New Louisiana Business Corporation Act, 60 Loy. L. Rev. 461, 467 (2014).

[4] Id.

[5] See La. Rev. Stat. Ann. § 12:1-1435(C) (Supp. 2015). “Fair value” for purposes of the oppression remedy is defined as “the value of the corporation’s shares determined immediately before the effectuation of the corporate action to which the shareholder objects, using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and without discounting for lack of marketability or minority status.” Id. § 12:1-1301(4).

[6] Id. § 12:1-1435(B).

[7] Id.

[8] Moll, supra note 3, at 477.

[9] See Model Bus. Corp. Act. §§ 14.30–34 (2011).

[10] Id.

[11] La. Rev. Stat. Ann. § 12:1-1435(L) (Supp. 2015).

[12]  Id. § 12:1-1438(A).

[13]  Id. § 12:1-1435 cmt. b.

[14] See id. § 12:1-1301(4). In some jurisdictions, courts have interpreted “fair value” to mean the price at which a willing buyer would pay in an open market. Accordingly, these courts will discount the value of minority shares in a closely held corporation in order to reflect the reality that minority shareholders lack the ability to control the organization or otherwise liquidate their investment. Moll, supra note 3, at 498.

[15] Moll, supra note 3, at 498; McMillan v. Bank of the South, 514 So. 2d 227 (La. Ct. App. 1987).

[16] La. Rev. Stat. Ann. § 12:1-1301(4) (Supp. 2015).

[17] Moll, supra note 3, at 501.

[18] Id. at 502.

[19] Id.

[20] Id. at 495.

[21] La. Rev. Stat. Ann. § 12:1-1436(E) (Supp. 2015).

[22] Model Bus. Corp. Act. § 14.34(e) (2011).

[23] Moll, supra note 3, at 495.

[24] Id. at 489–91.

[25] Id.

[26] See La. Rev. Stat. Ann. §§ 12:1-1301–1340 (Supp. 2015).

[27] Former La. Rev. Stat. Ann. § 12:131 (repealed 2015).

[28] La. Rev. Stat. Ann. § 12:1-1302(A) (Supp. 2015).

[29] Former La. Rev. Stat. Ann. § 12:131(C)(4) (repealed 2015).

[30] Id.

[31] Id. § 12:131(D).

[32] Id. § 12:131(E).

[33] McMillan v. Bank of the South, 514 So. 2d 227 (La. Ct. App. 1987).

[34] La. Rev. Stat. Ann. § 12:1-1320 (Supp. 2015).

[35] Id. § 12:1-1322.

[36] Id. §§ 12:1-1320(D), 1-1322.

[37] Id. § 12:1-1324(A).

[38] Id. § 12:1-1326.

[39] Id. § 12:1-1301(4).

[40] Id. § 12:1-1340(B).

[41] Id. § 12:1-1340(D). Such advance notice was required under the old law. Former La. Rev. Stat. Ann. § 12:131(C) (repealed 2015).

[42] Goldblum v. Boyd, 341 So. 2d 436, 446 (La. Ct. App. 1976).

[43] See id.

[44] La. Rev. Stat. Ann. § 12:1-732 (Supp. 2015).

[45] Id.

[46] Id. § 12:1-732(B)(1).

[47] Michael K. Molitor, Eat Your Vegetables (Or at Least Understand Why You Should): Can Better Warning and Education of Prospective Minority Owners Reduce Oppression in Closely Held Businesses?, 14 Fordham J. Corp. & Fin. L. 491, 543 n.224 (2009) (quoting Mary Siegel, Fiduciary Duty Myths in Close Corporate Law, 29 Del. J. Corp. L. 377, 466 (2004)).

[48] La. Rev. Stat. Ann. § 12:1-1435(B) (Supp. 2015).

[49] Molitor, supra note 47, at 563.

[50] Id. at 564.

April 2, 2015
By Ryan Boutet, Senior Editor

Introduction

Organizations and how they are managed have changed substantially over the course of American history. This Post is intended to serve as a comment on how those changes have affected one particular type of professional: the in-house attorney. Part I seeks to explain the historical trends of these changes and argues that the degradation of the role of in-house counsel in the mid-20th century was perpetuated by the use of the control model of management. Part II describes the now-popular organizational commitment model of management and illustrates that the rise of the general counsel in the modern era has been characterized by organizations’ adoption of that doctrine.

I. The Historical Role of the General Counsel

As corporations have evolved over the course of the last 200 years, so have the roles that corporate counsel play in those organizations. As one professor has noted, the “star of in-house lawyers” has risen and fallen over time.[1]

A. Mid-19th Century to Early 20th Century

In the second half of the 19th century, corporate legal jobs were highly desirable. Positions with railroad companies, for example, were considered to hold great prestige and offer tremendous salaries.[2] Until the late 1930s, the general counsel of an organization was generally paid at a rate that equaled 65% of the CEOs pay, but “more importantly, he . . . was usually one of the three highest paid individuals in the company.”[3] Moreover, during this time period, opportunity for advancement outside of the legal department for subordinate lawyers was ample, and eventually, in addition to purely legal jobs, lawyers who began their careers as in-house counsel tended to dominate senior corporate managerial positions.[4] For illustration, 75% of the CEOs of what were considered to be the “major companies” of the first few decades of the 20th century were lawyers. Today, the number is closer to five percent.[5] Scholars have referred to this period as “the golden age of corporate counsel.”[6]

B. Mid-20th Century

As times began to change, so too did the role of the in-house corporate counsel. Low levels of government regulation made financial transactions less complex, and business school graduates began to take hold of corporate America.[7] Fewer and fewer senior managers saw the need to devote large amounts of resources to corporate law departments, which led to decreased compensation and advancement opportunities.[8] As such, highly qualified and talented lawyers began to seek positions at outside firms.[9]

As corporations still needed competent representation—and law firms needed revenue—these outside firms began to court companies for legal services, which led the prestige of in-house positions, as well as the number of corporate legal positions available, to plummet.[10] The situation was perpetuated by the fact that as companies performed less of their own legal work, their legal resources—statute books, case-law reporter books, and law libraries in general—became out of date and created barriers to entry, making law firm lawyers “the gatekeepers of legal knowledge.”[11]

Although the number of in-house legal departments decreased substantially during this time,[12] the lawyers that remained had their roles dramatically changed. First, they became primarily liaisons between management and outside counsel. As Professor Daly notes, “for a considerable period of time in recent history, general counsel functioned essentially as conduits between corporate clients and the outside law firms. Their status was that of middle management.”[13] As such, the in-house legal departments became cost centers rather than value creators. Even Carl D. Liggio, Sr., one of the more renowned and respected chief in-house lawyers of his generation,[14] characterized those holding the position as ill-equipped to create value:

During the 1960s and 1970s . . . the corporate counsel role was deemed a parking pace for those associates who couldn’t make partner.   They would be placed with their corporate clients and, in exchange . . . the law firms expected loyalty of their former associates in the form of business that would be channeled back to their former employers.[15]

As the lawyers who retained their corporate jobs lacked expertise and the resources necessary to handle increasingly convoluted and specialized transactions, their responsibilities “were confined to corporate housekeeping and other routine matters.”[16]

One might argue that this era was characterized by what management experts call the “control model.”[17] The “control model” is a management strategy that was utilized primarily during the early part of the 20th century, which focused on the job in a top-down approach where work was split into small, fixed jobs for which workers could be held accountable.[18] As in-house lawyers were seen as unable or unfit to participate in the management of their own roles within the organization, they were given menial tasks as middlemen and were left to handle only routine legal matters. This scenario was perpetuated because it created a reputation within the industry as a job for the inept, which meant smaller salaries and fewer advancement opportunities, leading to qualified lawyers being dissuaded from applying for these jobs when openings were available. A lower skill set and low compensation contributed to the lack of employee motivation typical of the control model. Corporate counsel did not even have the freedom or input to select the outside lawyers they would be working with: they were essentially straw men for their former employers who helped them obtain their job when their opportunities for advancement at the law firm were nil.

C. The Impetus for Change

During the end of the 20th century, corporations began to see the benefit of evolving the in-house counsel role by implementing a management strategy more akin to what is known as the commitment model. This “shift in power” from outside law firms to in-house counsel corresponded with a quadruple in the number of salaried lawyers between 1962 and 1982.[19]

Scholars have pointed to at least three primary factors that they believe were the impetus for this change. First, and probably foremost, the amount of legal fees charged by outside firms has risen drastically over the past few decades. In 1972, revenues from legal services were approximately $10.9 billion.[20] By the end of 2000, this number had increased to nearly $150 billion, and of this amount, nearly 40%, or $58 billion, were commercial legal services.[21] In 1989, a survey compiled by Ernst and Young suggested that 13% of the responding organizations indicated that their in-house capabilities enabled them to reduce their legal bills.[22] These figures alone would likely have compelled organizations to look for a change in the way they were managing these legal departments, but these costs were not rising in a vacuum.

In addition to the rising costs of legal services (and probably also a factor in the increase of those costs), more stringent governmental regulation is a factor that scholars have highlighted in the evolution of the role of corporate counsel. Compliance with these increased regulations made legal issues increasingly more complex and necessitated “corporate client’s need for lawyers who were well versed in all aspects of their clients’ business operations and therefore equipped to advise clients on a daily basis with respect to compliance issues.”[23] Carl Liggio, Sr., has noted that, until the 1960s, only four federal agencies really had an everyday impact on corporate America: the Federal Trade Commission, the Department of Justice, the Internal Revenue Service, and the Securities and Exchange Commission.[24] The “changing nature of commerce” and a “plethora of legislation” from Congress created a “host of agencies” in the 1960s. All of a sudden, four federal agencies became at least 10—many of which had new state counterparts.[25]   Some have put the current number of federal agencies that “could affect all aspects of a corporation” at over 80.[26]

The third primary factor has been the recognition by corporations of the value of having lawyers on staff who understand the complexities of the business itself. “Unless you were part of the organization and saw it on a day-to-day basis,” Liggio noted, “it would be more difficult to provide the quality services businesses needed.”[27]Professor Duggin agreed that “familiarizing outside counsel with the details necessary for effective representation required large cash outlays.”[28] Avoiding these expenditures when they are unnecessary and providing a realm of experience and expertise outside the primary business function corporate lawyers generally serve creates value for the organization. Utilizing in-house lawyers allows corporations to have an employee who is “comfortable in the worlds of business management and law, [who] can translate and mediate between the concepts of business risk and the vocabulary of the law.”[29]

II. The Commitment Model

In the commitment model, “jobs are designed to be broader than before,” to “combine planning and implementation,” and “to upgrade operations, not just maintain them.”[30] In this model, “individual responsibilities are expected to change as conditions change, and teams, not individuals, are the organizational units held responsible for performance.”[31] Some management scholars contend that the model is characterized by four principles: clarity, competence, appreciation, and influence.[32]Other scholars have characterized the principles as: (1) identification with the organization’s goals and/or mission manifested as pride in and defense of the organization; (2) long-term membership in the organization and intention to remain in the organization, often termed loyalty; and (3) high levels of extra role behavior, that is behavior beyond required performance.[33] Regardless of how the principles are phrased, they are essentially the same, and they are not watertight compartments but are inter-related.

A. Clarity

The need for clarity, or identification with the organization’s goals and mission, was essential to the transformation of the role played by corporate counsel in the 1970s and 1980s.   Having to rely on outside counsel that did not understand the business necessitated expenditures simply to get these lawyers up to speed, and the organizations realized that having in-house lawyers on the ground every day involved in both legal and business issues would reduce cash outlays and provide synergy.[34] During this era, in-house lawyers were involved in “any big strategic issue at the heart of the organization,” in addition to providing legal services.[35]

B. Competence

In order to cut legal costs and provide the business synergy that these organizations were hoping for, corporations needed the best and brightest lawyers available. In other words, if counsel were to be involved in strategic decisions, competence was essential. One major equalizer in obtaining the requisite level of competence was the Internet. Prior to this era, it was law firms that had large legal libraries rather than corporations. One commentator referred to the outside firms as being “the gatekeepers of legal knowledge.”[36] The rise of the Internet brought with it LexisNexis and Westlaw—subscription-based online legal research databases that are updated multiple times daily. These services allowed in-house lawyers the same access to information as law firms and lessened what were once extremely high barriers to entry.[37]   In addition to this technological revolution in lawyering, corporations were able to attract highly competent attorneys due to their emphasis on work-life balance.[38] Whereas an outside law firm might require an attorney to bill clients for 2,000 hours per year,[39] corporate lawyers do not have to bill their time, allowing them to work only as many hours as it takes to perform their tasks.[40]   Although these attorneys are not required to work more than a requisite number of hours per week, many still bring work home with them or work on their days off because of their commitment and the appreciation they receive from the organization.

C. Appreciation

Appreciation is high with the majority of in-house lawyers. One way that organizations show appreciation to these individuals is through salary. In the modern era, corporate lawyers are being paid close to what their counterparts at outside firms are making, and outside major metropolitan areas these attorneys make more than their outside colleagues.[41] More importantly, the organization’s appreciation of its in-house counsel differs from law firms in that corporate culture allows in-house lawyers “to be judged solely based on their merits and abilities.”[42] As such, many bright and talented young lawyers who lack the ability to be “rainmakers” to the outside firm because of a “lack of the disposition or marketing talent” are attracted to in-house legal practice because their mobility is not limited by an inability to generate new business.[43]

D. Influence

The last and arguably most important principle of the commitment model is influence, which, when combined with the others, leads to high levels of extra role behavior—also known as citizenship behavior. Influence boils down to members of the organization believing that their opinions are not only tolerated but are openly valued.[44] The integration of in-house lawyers into the strategic decision making process is probably the most prominent evidence of influence in the management of corporate counsel. Not only are the lawyers able to provide their input when sitting at the table with their clients, but the organization acknowledges that they benefit when their non-legal employees seek that advice.

Another indicator that influence is high comes from the legal work itself. In law firms, lawyers are obligated to answer to their clients for any particular line-item on the services invoice. A six-hour charge for legal research on a discrete issue may go by unnoticed, or it may be hotly contested and negotiated down and cut in half. However, the client demands that the quality is more akin to the six-hour work product. When corporate counsel are attacking a problem for the business units that they represent, however, they must be even more cognizant of cost. In-house lawyers must evaluate “whether a Volkswagen might be as cost-effective as a Rolls Royce.”[45] The autonomy afforded these employees in making the judgments that they could not afford to assume the risk of not using the “Rolls Royce” approach is highly indicative of the influence that these employees have.[46]

Conclusion

During the 1970s and 1980s, the in-house legal profession underwent somewhat of a renaissance and returned to its prominence of what was once coined as its “golden age.”   Although perpetuated primarily by the rising legal costs of an increasingly complex legal landscape, the profession flourished due to senior managers adopting principles that leadership and management scholars refer to as the commitment model. As a result, these professionals have had their roles expanded within these organizations and are expected to collaborate with and provide advice to their business unit colleagues—making the general counsel of the present  “more consigliore than just lawyer.”[47]

________________

[1] S.H. Duggin, The Pivotal Role of the General Counsel, 51 St. Louis U. L.J. 990, 995 (2007).

[2] Id. at 995 (citing Lawrence M. Friedman, A History of American Law 490 (3d ed. 2005)).

[3] Carl D. Liggio, A Look at the Role of Corporate Counsel: Back to the Future—Or Is It the Past?, 44 Ariz. L. Rev. 621, 621 (2002).

[4] Duggin, supra note 1, at 995.

[5] Liggio, supra note 3, at 621.

[6] Duggin, supra note 1, at 995. See also Liggio, supra note 3, at 621.

[7] Duggin, supra note 1, at 995.

[8] Whereas in the 1930s, the general counsel earned 65% of the CEOs salary, by the 1970s the figure was closer to 30% of the CEOs compensation. See Liggio, supra note 3, at 622.

[9] Duggin, supra note 1, at 996.

[10]Liggio, supra note 3, at 622.

[11] Id. at 625.

[12] During this time, of the Fortune 1000 companies, nearly 25% did not have in-house legal staffs. Today, “almost all such companies have internal legal staffs.” Id. at 623.

[13] Mary C. Daly, The Cultural, Ethical, and Legal Challenges in Lawyering for a Global Organization: The Role of the General Counsel, 46 Emory L.J. 1057, 1059­­–60 (1997) (citing Margaret Cronin Fisk, General Counsel Expanding Beyond Traditional Roles, Nat’l L. J. June 21, 1993 at 19, 28).

[14] Carl D. Liggio, Sr., is the former General Counsel of Ernst and Young and co-founder of the American Association of General Counsel.

[15] Liggio, supra note 3, at 622.

[16] Daly, supra note 13, at 1060.

[17] See William Slaughter, Ph.D., & Christel Slaughter, Ph.D., Address to LSU Flores MBA Program: Seminar in New Developments in Business Administration (Feb. 3, 2015) (on file with the author).

[18] Richard E. Walton, From Control to Commitment in the Workplace, Harv. Bus. Rev., Mar. 1985, at 77.

[19] Daly, supra note 13, at 1059.

[20] Liggio, supra note 3, at 625.

[21] Id.

[22] Daly, supra note 13, at 1060 n.12.

[23] Id. at 1061.

[24] Liggio, supra note 3, at 623.

[25] Of the new federal agencies, the ones considered to have the greatest affect on corporate affairs include the Occupational Safety and Health Administration (OSHA), the Equal Employment Opportunity Commission (EEOC), the Federal Communications Commission (FCC), the Environmental Protection Agency (EPA), the Federal Energy Regulatory Commission (FERC), and the Consumer Product Safety Commission (CPSC). Id.

[26] Liggio, supra note 3, at 624. Of course, this does not even begin to touch upon the thousands of individual state agencies that a national or international organization is likely to encounter, most of which likely lack uniformity in their regulations.

[27] Id. at 634.

[28] Duggin, supra note 1, at 998.

[29] Howard B. Miller, Law Risk Management and General Counsel, 46 Emory L.J. 1223, 1223 (1997).

[30] Walton, supra note 18, at 77–78.

[31] Id.

[32] See Slaughter & Slaughter, supra note 17.

[33] Richard W. Scholl, Ph.D., Organizational Commitment, Labor Research Ctr., The University of Rhode Island (2008), available at http://www.uri.edu/research/lrc/scholl/webnotes/Commitment.htm, archived at http://perma.cc/H73M-U5E6.

[34] Daly, supra note 13, at 1066.

[35] Id. at 1060.

[36] Liggio, supra note 3, at 625.

[37] Id. at 633.

[38] Id. at 628.

[39] This number is based upon information conveyed to the author over the course of numerous interviews with employers, colleagues, and career service professionals. Although 2,000 hours seems like an extremely manageable number if every hour worked was an hour billed by the attorney, most attorney find the ratio of hours billed to hours spent at the office to be between 0.66­–0.75. Therefore, to bill 2,000 hours in a year (if no vacation time is taken), an attorney must work between 51 and 59 hours per week. If two weeks of vacation are taken, the range is then between 53 and 60 hours per week.

[40] In Houston, Texas, the baseline hours for a salaried lawyer are based on “9/80s.” This means the attorney works 9 hours a day for 9 days of the pay period and takes the 10th day off.

[41] Liggio, supra note 3, at 628.

[42] Id.

[43] Id.

[44] See Slaughter & Slaughter, supra note 17.

[45] Liggio, supra note 3, at 631.

[46] Id.

[47] Id. at 635.

March 31, 2015
By Jeffrey Birdsong, Senior Associate

The United States Court of Appeals for the Second Circuit faced a conflict between the principles of administrative and tax law in the 2013 case of IRS v. WorldCom.[1] In WorldCom, the status of revenue rulings as non-binding guidance documents clashed with the duty of consistency in IRS tax application. WorldCom offered the perfect opportunity for the United States Supreme Court to resolve this ambiguity and a circuit split, but the Court denied certiorari.[2]

In 2003, the IRS applied a tax on landline telephone use to WorldCom, the bankrupt telecommunications company acquired by Verizon.[3]  WorldCom challenged the tax application, claiming that the relevant product did not meet the criteria of the tax statute.[4] WorldCom acted as an intermediary in the back-end infrastructure of the Internet, receiving user data from local phone companies and transmitting it to a centralized internet access point. In effect, WorldCom purchased access to the customer’s data from local phone companies, as opposed to traditional phone service.

The landline telephone tax applies when a customer purchases a product that offers the “privilege of telephonic quality communication.”[5] The case hinged on the interpretation of that definition because WorldCom was not a typical telephone service user; rather, WorldCom purchased access to a customer’s Internet data. The Second Circuit found that the phrase “telephonic quality” as used in the statute referred to the technological capacity of the channel to transmit voice signals regardless of whether the channel was used for voice communications.[6] Because the specific type of cable used in the product could maintain vocal communication as well as data, the product offered “telephonic quality communications,” and WorldCom was subject to the tax.[7] In WorldCom, the IRS applied the tax counter to their existing position in Revenue Ruling 79-245.[8]

I. Tax Law

Rulemaking is a function of administrative agencies such as the IRS. Tasked by Congress with fleshing out the details of statutes through regulations, the IRS creates publications to inform the public.[9] Revenue rulings, a specific type of IRS publication, are “an official interpretation by the [IRS] of the internal revenue laws and related statutes . . . published for the information and guidance of taxpayers.”[10] They are issued upon the request of a taxpayer, and the IRS applies the law to a generic version of that taxpayer’s situation.[11] Though published, revenue rulings lack the legal force of a regulation; however, they do reflect the current IRS position on any number of matters.[12]

Revenue Ruling 79-245 provides guidance to WorldCom and similar issues. In the IRS ruling, a taxpayer purchased a teleprocessing system to verify credit cards. The issue was whether the ancillary equipment used—e.g., computers, modems, etc.—qualified for the landline telephone tax. The IRS stated that the use of the equipment was not taxable but that the use of the phone line qualified as “the privilege of telephonic communication.”[13] In its analysis, the IRS noted that, though the line was not used for phone calls, the modem could be unplugged and swapped with a telephone. In other words, it was wholly up to the consumer whether they would plug in a modem or a telephone. Accordingly, the IRS said that because the privilege was available, “it is immaterial whether the subscriber exercises the privilege.”[14] Revenue Ruling 79-245 stands for the proposition that if a taxpayer purchases a service that allows phone calls, it is subject to the landline telephone tax.

The IRS may change its policy over time; however, the duty of consistency prevents the IRS from applying that new position until it is announced. In theory, a taxpayer should not be taxed for behavior before the announced revision. Historically, the IRS applied the duty against taxpayers.[15] That is, a taxpayer could not change the classification of property year to year in an attempt to circumvent IRS regulations.[16] Eventually, courts inverted the duty and began applying it to the IRS.[17]

The official position of the IRS is that “taxpayers generally may rely upon revenue rulings . . . in determining the tax treatment of their own transactions.”[18] From this pronouncement, courts began to hold that “taxpayer[s] may rely on the legal standard implied by the revenue ruling.”[19] Part of the confusion regarding the doctrine is that it has not been applied uniformly.[20] The Supreme Court has never spoken on the application of the duty of consistency to the IRS, though several circuits have adopted its use.[21]

Pursuant to Revenue Ruling 79-245, the product WorldCom purchased from the local phone companies was ineligible for the tax. WorldCom purchased back-end connectivity to end-user’s computers, and WorldCom could not plug in a telephone to make voice calls.

In WorldCom, the IRS amended their position from the earlier revenue ruling. Nevertheless, they announced the new policy only by alerting WorldCom to the company’s tax deficiency, violating the duty of consistency. The duty should forbid such a retroactive application of new policy; however, this tax law duty of consistency does not comport with administrative law standards governing the nature of guidance documents.

II. Administrative Law

Administrative agencies execute laws passed by Congress. One aspect of this execution is rulemaking, interpreting statutes and promulgating rules that give effect to the intentions of Congress. In this process, agencies publish rules that carry the force of law and are binding on the agency and the public.[22] These rules are subject to a strict procedural framework.[23] The agency must announce to the public that a rule is being created, seek input on the content of the proposed rule, and publish the final rule in the Federal Register.[24]

Often, agencies publish documents that are not in furtherance of a congressional statute and are not supported by the force of law. Administrative agencies publish documents that detail the general purpose of the agency’s actions, clarify agency interpretations and litigation positions, or establish internal procedures. Though useful to the agency and the public, these guidance documents are not created with heightened scrutiny and are not binding on the agency.

An IRS revenue ruling is precisely this type of document. Taxpayers have the right to ask the IRS to explain the effect of a particular statute on the individual taxpayer.[25] The IRS then issues a revenue ruling presenting the taxpayer’s issue in generic terms and applies the law to that particular issue. Because these documents are not rules created to further the statutory intent of Congress, they are not subject to notice and comment. These individual applications of the law are not binding on the agency or any future taxpayer.

Given the nonbinding nature of guidance documents—e.g., revenue rulings—the IRS’ adoption of a new policy without alerting taxpayers is permissible. WorldCom illustrates this reality. According to the IRS policy in Revenue Ruling 79-245, the product WorldCom purchased was not taxable as a telephone service.[26] The IRS shifted from that stated policy when it applied this tax to WorldCom. Though permissible under administrative law, application of the new policy to behavior that took place before the announced change appears to violate the duty of consistency.

If tax law doctrine requires the IRS to apply their stated position as it stood the day of the behavior, then retroactively applying new law is impermissible. If administrative law holds that by their nature guidance documents—such as revenue rulings—are not binding, then the duty of consistency is a fallacy. Though WorldCom displayed this dichotomy, the Second Circuit did not analyze the applicability of the duty of consistency.[27] The circuit found for the IRS, subjected WorldCom to the tax, and skewered the duty of consistency. It is unclear how these doctrines interact, and the Supreme Court failed to seize the opportunity to provide the necessary clarity.

It is possible that the Court denied certiorari because they disapproved of the duty of consistency or wanted to let the duty further percolate at the appellate level, regardless of the Second Circuit’s treatment of the issue. In the face of a growing docket, the Supreme Court might have denied certiorari because the stakes were relatively low—$26 million—and because these facts are unlikely to appear again before the Court. The product in WorldCom has been obsolete for years, and the case only arose in the process of WorldCom’s bankruptcy.

Regardless of the non-prospective nature of the facts, the Supreme Court may still grant certiorari to settle doctrinal disputes like this one. The Supreme Court should have resolved this fundamental discrepancy between tax and administrative law, but their silence leaves this inquiry unresolved.

_______________

[1] IRS v. WorldCom, Inc., 723 F.3d 346 (2d Cir. 2013).

[2] See WorldCom, Inc., v. IRS, 135 S. Ct. 56 (2014). The case created a circuit split between the Federal Circuit and the Second Circuit.  See USA Choice Internet Servs., LLC v. United States, 522 F.3d 1332 (Fed. Cir. 2008). At issue was the IRS’ method of analyzing how a taxpayer structured its transactions. Specifically, whether the IRS should focus on products the taxpayer purchased, as opposed to products the taxpayer could have purchased.

[3] See 26 U.S.C. § 4251 (2012).

[4] 26 U.S.C. § 4251 (2012).

[5] 26 U.S.C. § 4252(a) (2012).

[6] WorldCom, 723 F.3d at 355.

[7] Id.

[8] Rev. Rul. 79-245, 1979-2 C.B. 380.

[9] See Leandra Lederman, The Fight Over “Fighting Regs” and Judicial Deference in Tax Litigation, 92 B.U. L. Rev. 643 (2012).

[10] Rev. Proc. 89-14, 1989-1 C.B. 814.

[11] Treas. Reg. § 601.601(d)(2)(i)(a) (2010).

[12] Id.

[13] Rev. Rul. 79-245, 1979-2 C.B. 380.

[14] Id.

[15] See Stephanie Hoffer, Hobgoblin of Little Minds No More: Justice Requires an IRS Duty of Consistency, 2006 Utah L. Rev. 317 (2006).

[16] Id.

[17] See Estate of McLendon v. Comm’r, 135 F.3d 1017 (5th Cir. 1998).

[18] Rev. Proc. 89-14, 1989-8 I.R.B. 20.

[19] Hoffer, supra note 15, at 337.

[20] Steve R. Johnson, Reasoned Explanation and IRS Adjudication, 63 Duke L.J.1771, 1804–05 (2014).

[21] See id.

[22] 5 U.S.C. § 553 (2012).

[23] Id.

[24] Id.

[25] Rev. Proc. 89-14, 1989-1 C.B. 814

[26] Rev. Rul. 79-245, 1979-2 C.B. 380.

[27] See IRS v. WorldCom, Inc., 723 F.3d 346 (2d Cir. 2013).

March 30, 2015
By Jacob Ecker, Executive Senior Editor

Introduction

Imagine a business sale contract between Buyer and Seller for the transfer of Seller’s business assets and goodwill.[1] Seller is a natural gas well servicing company active in the Haynesville Shale in North Louisiana. Seller is looking to get out of that business, and Buyer, a private equity firm,[2] is looking to purchase Seller’s assets and set up a management team to run its newly acquired company.

As part of this deal, the parties agree that the Seller will not compete in the Haynesville Shale area, with the agreement listing those parishes specifically. Considering the continuing interest that Buyer will have in making sure that Seller does not come back into the area and start competing after having sold off its assets and goodwill—including all of its customer lists—the parties want to agree to a term of five years of restraint from competition in the area. However, the parties’ attorneys tell them that unlike in most states, Louisiana only allows the restraint to last for two years.[3] Because of this limitation, Buyer wants to reduce the price of the sale on the theory that without a longer protection period, Buyer will be subject to the risk of Seller coming back into the area and recapturing the goodwill he sold to Buyer.[4]

Whereas most other states have recognized a distinction between the more frequently litigated employment noncompetes and noncompetes in the sale of a business by providing for more lenient rules in the latter context,[5]  Louisiana has failed to do so.[6] The reason for this difference in other states is clear—sale of business noncompetes just seem more fair.[7]

The boom of the oil and gas industry and investment by private equity funds in oil and gas services[8] expose a fundamental problem with the current formulation of sale-of-a-business noncompete rules in Louisiana. Under the current regime, these businesses are left without the tools necessary to protect the legitimate business interests surrounding their investments—the purchase of goodwill—which, in many cases, need protection well beyond the two years that Louisiana currently allows. The current version of Louisiana Revised Statutes section 23:921(B) is too restrictive given the looser policy imperatives in this context as compared to employment noncompetes. The Louisiana Legislature should reevaluate these differences and modify the temporal restraint in business-sale noncompetes to allow for restraints of up to five years from the date of the sale.

Part I of this Post examines the policy rationale for Louisiana Revised Statutes section 23:921(B), concluding that the actual policy considerations in business-sale noncompetes with respect to duration do not correspond with the formal rules in the statute. Part II then proposes a solution to the inequitable duration rules in Louisiana and examines a possible repercussion of that solution, providing guidance for the courts in dealing with that possibility.

I. Rules and Policy—Why a Two-Year Maximum Duration Is the Wrong Rule for Business-Sale Noncompete Policy

A noncompete is “[a] promise, [usually] in a sale-of-business, partnernship, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.”[9] The policies differ somewhat depending on the type of noncompete at issue.[10] In Louisiana, though the policy interests for noncompetes in business sales are quite different from other contexts, the rules are identical across the board.[11]

A. Rules of Enforceability for Louisiana Business-Sale Noncompetes

Business-sale noncompetes are allowed under certain circumstances as an exception to the general rule of unenforceability of noncompete agreements.[12] People, including juridical persons, “who sell[] the goodwill of a business may agree with the buyer that the seller or other interested party in the transaction[] will refrain from” certain competition.[13] Specifically, the parties can agree that the seller will not “carry[] on or engag[e] in a business similar to the business being sold,” or solicit customers of the business being sold.[14] However, for such an agreement to be enforceable,[15] the agreement must list the parishes and/or municipalities constituting the geographic scope of the restraint and may not “exceed a period of two years from the date of the sale.”[16]

Under current law, these requirements are identical regardless of the type of noncompete, such that courts often use employment noncompete jurisprudence in examining business-sale noncompetes.[17] One example of this type of crossover is Boswell v. Iem, where the seller of a drapery business agreed “not [to] compete in this or any similar business with purchaser for a period of three (3) years in the Shreveport-Bossier City area, and in the area within the radius of 50 miles thereof.”[18] In coming to the conclusion that such an agreement was unenforceable as overly broad both with respect to duration and geography,[19] the court cited several employment cases in stating that “[c]ourts strictly construe agreements limiting competition.”[20]

B. Employment Noncompete Policy “Encroachment”[21]

Although crossover like that demonstrated by the Boswell case is necessitated by the current statute’s identical duration requirement[22] in business-sale and employment noncompetes, the underlying policy considerations for these two contexts are vastly different. Examining the interests at play in the two types of agreements illustrates this difference. These policy considerations show that the Louisiana Legislature failed to consider these disparate policies, such that the valid interests of both buyers and sellers of a business’s goodwill are unjustly hampered.

Courts all across the country subject employment noncompetes to strict interpretation. The basic policy reasons for this position are (1) the unequal bargaining power inherent in the employment relationship, (2) the short-lived nature of the value given in exchange for a noncompete agreement, and (3) the idea that noncompetes require employees to surrender the only asset of value that they possess—their labor.[23] These considerations lead to the idea that specific limitations should be placed on the scope of allowed agreements because the employees have no real control over the end agreement (reason one), the employer has no legitimate interest in requiring that the employee not compete past a certain period of time and outside a certain area (reason two), and the employee has a significant countervailing interest in a narrow restriction (reason three).[24]

In the context of the sale of a business, none of these fundamental rationales hold true. Instead, buyer and seller are usually on relatively equal footing with respect to bargaining power,[25] the consideration is often more valuable and longer lasting, and the noncompete does not hinder the seller’s fundamental ability to earn a living.[26] With respect to bargaining power, it is usually the case that the noncompete provision is negotiated between the parties, both of whom are fully represented.[27] In terms of value, business-sale noncompetes provide much more substantial value for both buyers and sellers than in the employment context. Specifically, the consideration, part of the total sale price for the business, is often quite substantial. In one Louisiana case, for example, the sale price with which the noncompete was associated was $1.6 million.[28] Additionally, noncompetes, as components of these sales, add value to the sales themselves because for the goodwill to have value to the buyer and for that value to translate into a high sale price, the risk that the goodwill might be taken from the buyer by the seller soon after the sale must be eliminated.[29] Without a noncompete, the seller could potentially sell something (the goodwill) and take it back without having to pay for it.[30] Finally, the concern in employment noncompetes that the employee is restricting his or her only valuable asset is not implicated in this context because the seller is receiving a sale price for what he or she is voluntarily alienating.[31]

This policy distinction, though not recognized in Louisiana, has been well developed in other states across the country. In Texas, a state similarly situated to Louisiana with respect to oil and gas investment, courts have found lifetime noncompetes within limited geographic scopes valid in situations similar to that in Boswell.[32]  In one such case, the Texas Court of Appeals for the First District found that a party’s reliance on employment noncompete case law “[was] misplaced . . . [since] the case does not involve the sale of a business.”[33] Even beyond the context in which Texas courts will allow noncompetes of unlimited duration, which are usually situations with very limited geographic scopes,[34] courts allow business-sale noncompetes to last far longer than employment noncompetes.[35] Even California, an outlier state that completely bans employment noncompetes, allows business-sale noncompetes.[36] Moreover, California courts routinely allow duration of greater than that allowed in Louisiana. In Laird v. Steinmann, for example, a California appellate court a noncompete of five years for the sale of an industrial laundry business in Los Angeles County.[37]

II. Applying the Proper Policy in Louisiana—A Legislative Solution

One commentator proposed in a 2012 article that courts no longer use the strict interpretation rule adopted from employment noncompetes in the business-sale noncompetes.[38] However, it is unlikely that the courts will move from their current position without legislative change, especially given the nature of the business-sale noncompete rules as an exception to the general rule that noncompetes are unenforceable as against public policy.[39] Thus, this Post offers a modest legislative amendment that lawmakers and interested parties can all support—an extension of the permissible duration from two to five years.[40] Such an amendment, though it would not fix all problems of “encroachment” in courts’ analyses, would be an important first step in that direction and one that would be likely to garner support from industry groups.[41]

Although it is unlikely that this amendment would face significant opposition, one problem might arise in the courts. Amending the statute to have different requirements in subsection B and C,[42] the business sale and employment noncompete rules, respectively, will mean that courts will have to distinguish between situations in which to apply subsection B and those in which to apply subsection C. In many circumstances, the distinction will be clear because the seller will not subsequently go to work for the buyer. In circumstances where this does occur, however, some guidelines will help courts to decide which rules to apply.

Assuming that one owner of the seller entity (i.e., a shareholder, partner, etc.) transitions into a managerial or other employment role with the buyer, which is the only time these guidelines should be necessary, the first thing that courts should examine is the location of the noncompete agreement—whether it is contained in the sales contract or in a separate employment agreement. Although not dispositive, this consideration could be helpful in cases where there is only a single owner of the seller entity and that owner is going to work for the buyer. Another consideration should be the existence of two separate noncompetes. There is nothing in the statute that prevents the parties from agreeing to a noncompete ancillary to the sale of the business. Under this Post’s proposal, agreeing to a business-sale noncompete would be allowed to continue for five years from the time of the sale. The statute would also not prevent parties from agreeing to an employment noncompete, which would be allowed for up to two years after termination of the employment.[43] Finally, if all other considerations fail to prove helpful, courts should simply look to all the circumstances surrounding the sale and employment negotiations to determine whether the parties intended the agreement to protect the goodwill being sold or whether it was to protect the buyer from competition for any other reason. If a court should find that the agreement is not to protect goodwill, it should treat the agreement as an employment noncompete.

____________________

[1] Goodwill is defined as “[t]he value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology.” Definition of Goodwill, Investopedia.com, http://www.investopedia.com/terms/g/goodwill.asp, archived at https://perma.cc/XXB9-JXTE (last visited Mar. 17, 2015).

[2] This type of transaction is very common in today’s oil and gas market. See Refilling the Pipeline: The Plunging Oil Price Has Pummelled Private Equity But May Now Help It, The Economist (Feb. 14, 2015), available at http://www.economist.com/news/finance-and-economics/21643066-plunging-oil-price-has-pummelled-private-equity-may-now-help-it-refilling, archived at https://perma.cc/U62P-94TX.

[3] See La. Rev. Stat. Ann. § 23:921(B) (Supp. 2015) (two year rule).

[4] See discussion infra Part I.B.

[5] Hosp. Consultants, Inc. v. Potvka, 531 S.W.2d 657, 663 (Tex. Civ. App. 1975) (“[A] restrictive covenant in connection with the sale of a business or goodwill is quite different from a post-employment restriction. A transfer of goodwill cannot be accomplished effectively unless the transferor agrees not to diminish the value of the thing transferred by refraining from competing with his transferee.”); Siobhan Ray, Don’t Hop on the Bandera Wagon Just Yet: Enforcing Sale-of-Business Covenants Not to Compete in Texas, 65 Baylor L. Rev. 682, 686 (2013).

[6] La. Rev. Stat. Ann. § 23:921(B)–(C) (Supp. 2015). The other requirements of a valid noncompete are also the same between the two types. Id. In the context of these other requirements, though—that the agreement specify the “parish or parishes, or municipality or municipalities, or parts thereof” in which the putative competitor “carries on a like business”—there is no need to distinguish between the two types. See id.

[7] See discussion infra Part I.B.

[8] Haynesville Shale: News, Map, Videos, Lease and Royalty Information, Geology.com, http://geology.com/articles/haynesville-shale.shtml, archived at https://perma.cc/Z99Z-5KRP (last visited Mar. 9, 2015).

[9] Black’s Law Dictionary 420 (9th ed. 2009).

[10] See id. (discussing enforceability in these various contexts).

[11] See generally La. Rev. Stat. Ann. § 23:921 (Supp. 2015).

[12] See id. § 23:921(A)(1), (B).

[13] Id. § 23:921(B).

[14] Id.

[15] Id. § 23:921(A)(1).

[16] Id. § 23:921(B). One important aspect of all noncompetes in Louisiana is that the geographic scope can be reduced to an acceptable area if that specification is found to be overbroad when the parties include a severability clause within their noncompete agreement. See SWAT 24 Shreveport Bossier, Inc. v. Bond, 808 So. 2d 294, 308–09 (La. 2001); AMCOM of La., Inc. v. Battson, 666 So. 2d 1227, 1227, 1229 (La. Ct. App. 1996), rev’d, 670 So. 2d 1223 (La.) (mem.). However, this nuance is not discussed in detail here. For a more detailed discussion of the doctrine of reformation, see Albert O. “Chip” Saulsbury, IV, Devil Inside the Deal: An Examination of Louisiana Noncompete Agreements in Business Acquisitions, 86 Tul. L. Rev. 713 (2012).

[17] For a thorough discussion of cases that apply the general policy against noncompetes in the context of employment to business-sale noncompetes, see Saulsbury, supra note 15, at 730–37.

[18] Boswell v. Iem, 859 So. 2d 944, 945 (La. Ct. App. 2003) (internal quotations omitted).

[19] It appears that the court refused to reform the geographic scope of the agreement since the noncompete did not contain a severability clause. Id. at 945.

[20] Id. at 947. Although some of the cases that the court cited involved business sales, the courts classified them as employment noncompetes by applying the strictures of the employment noncompete subsection.  See id.

[21] Chip Saulsbury used the term “encroachment” in this context in his 2012 article. Saulsbury, supra note 16, at 730.

[22] Although the conflation of these policies is not limited to the duration limitation, this Post focuses primarily on the duration requirement as its target for legislative reform and thus, limits its consideration to that requirement here.

[23] Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 647–48 (1960). Many employment noncompetes have only continued employment as consideration, though some have more valuable things, such as expenses on training, provision of customers, etc. See id. However, in these situations, the value of the consideration deteriorates relatively quickly. Cf. id.

[24] Id.

[25] Saulsbury, supra note 16, at 740–42.

[26] Id. at 738–740, 743–44.

[27] Blake, supra note 23, at 647; Saulsbury, supra note 16, at 741.

[28] USI Ins. Servs., LLC v. Tappel, 28 So. 3d 419, 421 (La. Ct. App. 2009).

[29] Plunkett v. Reeves Apothecary, Inc., 351 So. 2d 867, 868 (La. Ct. App. 1977).

[30] This is especially true in Louisiana, where there is no implied warranty against competition. Saulsbury, supra note 16, at 742–43. See Barrera v. Ciolino, 636 So. 2d 218, 224–25 (La. 1994) (“Sale of a business and its good will does not preclude the seller from competing in a similar business, not even shortly thereafter and in the immediate vicinity.”).

[31] See Saulsbury, supra note 16, at 738–42.

[32] See, e.g., Oliver v. Rogers, 976 S.W.2d 792, 801 (Tex. App. 1998) (holding lack of time limitation did not render noncompete unreasonable as a matter of law); Clay v. Richardson, 290 S.W. 235 (Tex. Civ. App. 1926) (upholding lifetime noncompete in the town on seller of a theater).

[33] Oliver, 976 S.W.2d at 801. For other Texas business-sale noncompete cases, see Heritage Operating, L.P. v. Rhine Brothers, LLC, No. 02-10-00474-CV, 2012 WL 2344864, at *5 (Tex. App. June 21, 2012); Bandera Drilling Co., Inc. v. Sledge Drilling Co., 293 S.W.3d 867, 874–75 (Tex. App. 2009); Farmer v. Holley, 237 S.W.3d 758, 760 (Tex. App. 2007); York v. Dotson, 271 S.W.2d 347, 348 (Tex. Civ. App. 1954); Greenstein v. Simpson, 660 S.W.2d 155, 159 (Tex. App. 1983); Randolph v. Graham, 254 S.W. 402, 403–04 (Tex. Civ. App. 1923).

[34] See, e.g., Oliver, 976 S.W.2d at 801 (agreement limiting scope to a three-mile radius out from the office location); Clay, 290 S.W. at 235 (agreement limiting scope to one town).

[35] See supra note 31.

[36] Cal. Bus. & Prof. Code § 16601 (Westlaw 2014) (“Any person who sells the goodwill of a business . . . may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carried on a like business therein.”).

[37] Laird v. Steinmann, 218 P.2d 780 (Cal. Ct. App. 1950).

[38] Saulsbury, supra note 16, at 750.

[39] La. Rev. Stat. Ann. § 23:921(B)–(C) (Supp. 2015). Saulsbury also proposes separating the business-sale rules into a separate statute so that they no longer fall as an exception to the general policy against noncomepte  as a way to instruct courts that they should not be interpreted as strictly as employment noncompetes. Saulsbury, supra note 16, at 747–48. Although this approach might yield better results, such a comprehensive reform might not be necessary because lengthening the duration for business-sale noncompetes would likely alleviate many of the problems that these transactions face in Louisiana.

[40] Five years of enforceability has become the standard duration in this context. Cf. Steven E. Runyan, Employment Non-compete Agreements: Disfavored Does Not Mean Not Enforceable, KGRLaw.com (Feb. 24, 2014), http://www.kgrlaw.com/employment-noncompete-agreements-disfavored-mean-enforceable-2/, archived at http://perma.cc/2THK-RJPD (“[W]here a non-competition agreement is entered into in conjunction with the sale of a business, courts have regularly upheld give year non-competition agreements for the selling party.”).

[41] Cf. Saulsbury, supra note 16, at 740–41.

[42] See La. Rev. Stat. Ann. § 23:921(B)–(C) (Supp. 2015).

[43] This author recommends that counsel adopt this practice to avoid any doubt as to whether a noncompete should be analyzed under subsection B or subsection C.

March 17, 2015
By A.J. Million, Senior Associate

Introduction

In recent months, public outrage and demonstrations have surrounded a grand jury investigation in Ferguson, Missouri, where a grand jury declined to indict Officer Darren Wilson in connection with the shooting death of Michael Brown.[1] Fueling the riots were comments made by the prosecutor after he released the transcripts of witness testimony before the grand jury.[2]

Contrary to a longstanding tradition of grand jury secrecy,[3] Missouri Sunshine Laws allowed the prosecutor to release transcripts of the grand jury proceedings as well as a statement summarizing the evidence.[4] Since the release of these transcripts, several scholars and commentators have expressed concern over the prosecutor’s presentation of the evidence.[5]

Recently, a grand juror, who investigated the incident and participated in deciding whether to indict Officer Wilson, has sought to join the ongoing public discussion over the presentation of evidence to the grand jury.[6] However, grand jury secrecy laws prohibit a grand juror from publicly disclosing anything relating to the investigation.[7] To discuss these matters of public debate, “Grand Juror Doe” has filed a lawsuit seeking to declare Missouri’s grand jury secrecy laws unconstitutional because he claims, as applied, these laws allegedly violate his First Amendment rights.[8]

As discussed below, Grand Juror Doe’s lawsuit presents a difficult question of balancing competing public policies. A district court ruling in this case must balance Grand Juror Doe’s First Amendment rights to discuss matters of public importance against Missouri’s diminished interests in preserving the secrecy of grand jury proceedings, and its strong interest in maintaining the secrecy of deliberations.  Ultimately, this dilemma puts the district court in an unenviable position attempting to fashion the proper substantive holding that reflects the compelling interests of all parties involved.

I. Balancing Grand Juror Doe’s Asserted First Amendment Interests Against Governmental Interests Served by Grand Jury Secrecy

At the outset, it is important to note a critical distinction between grand jury proceedings and grand jury deliberations. Grand jury “proceedings” involve the witness testimony, documents, and exhibits received by the grand jury during its investigation.[9] During grand jury proceedings, the only people who may be present are the attorneys for the government, the witness being questioned, interpreters when needed, and a court reporter.[10]  Meanwhile, “deliberations” refers to the grand jurors’ discussions of the evidence presented and votes cast in rendering the jury’s decision.[11]  During deliberations and voting, no individuals other than the grand jurors may be present.[12]

The publication of information relating to alleged governmental misconduct has traditionally been recognized as being at the core of the First Amendment.[13] Grand Juror Doe’s complaint alleges that he wishes to publish information critical of a governmental actor—namely to criticize the prosecutor’s presentation of the evidence to the grand jury.[14] Grand Juror Doe’s exercise of this important First Amendment right, according to the complaint, is chilled by the threat of prosecution under Missouri’s grand jury secrecy laws.[15]

While political speech lies near its core, the First Amendment is not absolute.  Grand jury secrecy has operated as a traditional abridgement of speech dating back over 800 years.[16] In fact, the Supreme Court has upheld grand jury secrecy as a valid restriction on First Amendment rights.[17]  However, the Grand Jury is not “some talisman that dissolves all constitutional protections.”[18]

Although the Supreme Court has never directly addressed the extent to which grand jurors may exercise First Amendment rights, it has established a general framework for how these types of disputes should be resolved. When faced with a challenge to grand jury secrecy relating to witnesses, the Supreme Court has determined that a court “must [] balance asserted First Amendment rights against [the state’s] interests in preserving the confidentiality of its grand jury proceedings.”[19]  Accordingly, Grand Juror Doe’s First Amendment rights must be weighed against Missouri’s interests in preserving the confidentiality of its grand jury proceedings.[20]

The Ferguson grand jury situation presents a unique scenario that alters the normal balance of governmental interests in grand jury secrecy.  Under normal circumstances, when a grand jury decides not to indict, the state has strong public policies in favor of keeping both grand jury proceedings and deliberations confidential.[21]  Secrecy of the proceedings allows the grand jury to serve as a “bulwark of liberty” and protect citizens from oppressive prosecutions or false accusations.[22]

However, when the grand jury decides to return an indictment, the justifications for grand jury secrecy are often diminished because subsequent proceedings are matters of public record.[23] Like the publicity that follows a grand jury indictment, the prosecutor in this case publicly disclosed the testimony of witnesses appearing before the grand jury.[24] Although this diminishes many public policies relating to grand jury secrecy,[25] Missouri still has a strong public policy in favor of insuring the continued secrecy of grand jury deliberations.[26]

Grand Juror Doe’s First Amendment Rights Outweigh Missouri’s Interests in Preserving Secrecy of Grand Jury Proceedings

Supporting Grand Juror Doe’s position is the fact that the Missouri prosecutor chose to release the transcripts of the grand jury proceedings.[27] Because the Missouri prosecutor exercised the option to release the transcripts of the grand jury proceedings, Grand Juror Doe should have the ability to discuss the evidence contained in those transcripts because the witness testimony is now public knowledge.[28] Enforcing grand jury secrecy against a grand juror while a prosecutor is making public comments regarding the proceedings effectively makes the 12 grand jurors the only citizens that are not free to take part in a debate on a matter of public importance. Such a restriction on First Amendment rights should not be tolerated.

Justice Scalia has cautioned against allowing grand jurors to respond to public criticism after grand jury proceedings. In his concurring opinion in Butterworth v. Smith, Justice Scalia warned that allowing grand jurors to react to public criticism may subject “grand jurors to a degree of press attention and public prominence that might in the long run deter citizens from fearless performance of their grand jury service.”[29] While this argument is valid, basic principles of equity militate toward allowing Grand Juror Doe to speak about matters that are already public record. The lawful, public release of grand jury proceedings should open the door to Grand Juror Doe exercising his First Amendment rights to comment on matters of public importance.

Missouri’s Interests in Preserving Secrecy of Grand Jury Deliberations Outweigh Grand Juror Doe’s First Amendment Rights

On the other hand, although the right to discuss matters of public importance remains strong, Missouri’s interest in preserving the confidentiality of grand jury deliberations outweighs Grand Juror Doe’s First Amendment rights. When participants in a discussion expect the public dissemination of their remarks, they “may well temper candor with a concern for appearances . . . to the detriment of the decision-making process.”[30]

One can argue in favor of allowing open discussion of grand jury deliberations by analogizing to petit juries. According to this line of reasoning, because petit jurors can be interviewed by the press following the verdict, so too should grand jurors be available for interviews. With public access to petit jurors who have greater power to assess liability, determine damages, or convict defendants, some argue it follows that there should be public access to grand jurors who hold lesser power to investigate or indict.[31] This argument is persuasive here, where the prosecutor has made the transcripts of witness testimony public, which is functionally similar to the trial setting.

However, important distinctions remain between a petit jury and a grand jury. The most important distinction is that jeopardy attaches to the petit jury. For petit juries, jeopardy attaches early in the process—when a petit jury is sworn.[32]  On the other hand, with grand juries a new prosecution effort can begin should the grand jury decide not to indict.[33] Society has a greater interest in ensuring a fair outcome and understanding the deliberative processes of a jury that has the final say on guilt or innocence than it does in a jury that decides whether to indict.  Allowing grand jurors to freely discuss whether to indict insures that grand jurors are free to exercise discretion in order to prevent oppression by an overzealous prosecutor.[34]

There are also important distinctions related to the source of public commentary.  The Missouri prosecutor’s public statements are based off his own impressions of the witnesses’ demeanor and other evidence presented to the grand jury.  A grand juror, on the other hand, “observes the testimony of all witnesses and participates directly in the process of determining whether an indictment should be issued. A juror, therefore, is in a position to disclose information that arguably could inhibit the deliberative process.”[35]

Balancing Grand Juror Doe’s interest in publicly discussing deliberations against Missouri’s interest in maintaining the institutional integrity of grand jury deliberations weighs heavily in favor of maintaining grand jury secrecy. If Grand Juror Doe was able to discuss what occurred during the deliberations or the vote of the grand jury, then future grand jurors may not vote his or her conscience due to a belief that he or she is the only one with a particular opinion.  Also, the grand juror may not voice his or her dissenting opinions for fear of public retribution if an opinion is disclosed.

A juror failing to speak his mind due to fear or timidity is a potential situation facing every grand jury panel, and later disclosure of the deliberations may influence future grand jurors to suppress their words or actions out of fear of publicity, rather than personality.[36] This would undermine the grand jury’s historical freedom as a bulwark of government oppression.[37] It is for these reasons that “not even the most radical scholars” have argued for allowing grand jury deliberations to become public.[38]

II. How the Court Should Rule

The conflicting results from balancing Grand Juror Doe’s First Amendment rights against Missouri’s continued application of its grand jury secrecy laws creates a difficult question of how to provide appropriate relief. Among others, four options come to mind.

Option #1

The first option would be to uphold the grand jury secrecy laws altogether. The benefits of this approach would be judicial efficiency of deciding the question only once, while also maintaining the longstanding tradition of grand jury secrecy of deliberations. The drawback to this approach is that it inhibits the political accountability of public officials, which the First Amendment strives to protect.[39] The problem would be especially acute here where the effect of keeping grand jurors—citizens who may be potentially critical of a public official acting in his official capacity—muzzled from speaking out about matters of public debate, while sanctioning the prosecutor’s narrative of events.

Option #2

Second, the district court could declare the entire grand jury secrecy scheme unconstitutional in the context of speech relating to both grand jury proceedings and deliberations. Similar to Option #1, this solution holds the benefit of judicial efficiency because the court would be required to decide the question once. This option would also allow Grand Juror Doe to engage in political discussions about the prosecutor’s role in presenting evidence to the grand jury when a police officer is under investigation. However, as discussed above, allowing the grand juror to discuss the deliberations would inhibit the free flow of ideas while in deliberations.

Option #3

Third, the district court could declare the grand jury secrecy laws as applied to Grand Juror Doe’s discussion of those matters that are already public knowledge unconstitutional, while upholding the grand jury secrecy laws as applied to discussions that may reveal the grand jury’s deliberations or vote. This third option would allow Grand Juror Doe to speak freely about the grand jury proceedings but would subject Grand Juror Doe to criminal sanctions for contempt of court should he or she reveal grand jury deliberations or the vote.

This option has the benefit of maintaining the appropriate balance of First Amendment rights versus Missouri’s interests. It would allow those 12 grand jurors to speak freely about matters of public concern, which rectifies the inequity of prohibiting only 12 people from discussing witness testimony that is publicly available. Also, this option would uphold the policy of protecting the institution of the grand jury by not revealing deliberations.

However, this option, although great in theory, would be practically untenable. More judicial resources would become tied up reviewing every public interview the grand juror gave in order to decide whether a statement reveals the deliberations of the grand jury.

The problem with allowing the grand juror to speak about his impressions of the witness testimony is that by virtue of his position as a grand juror on the case, his statements may implicitly reveal the deliberations or votes of the grand jury.

For example, in the complaint, Grand Juror Doe states that he or she wishes to correct an inaccurate public perception that there was no support for any charges.[40] If Grand Juror Doe publicly said, “Contrary to news reports and the prosecutor’s statements, several of us found there was strong evidence in the record to indict Officer Wilson,” would that implicitly reveal the deliberations? Would emphasis on the word “several” be sufficient to convey that there was a majority of the grand jury that was in favor of returning an indictment? If so, the statement would clearly be revealing the votes and deliberations of the grand jurors, which undermines the institution of the grand jury.

Option #4—A Hybrid Option

A fourth, hybrid option, would be an extension of Option #3.  The court could declare unconstitutional the grand jury secrecy laws as applied to Grand Juror Doe’s discussion of those matters that are already public knowledge, while upholding the grand jury secrecy laws as applied to discussions that may reveal the grand jury’s deliberations or vote.  Additionally, however, the court would allow the grand juror to submit a comprehensive statement for the district court judge to review in camera. The judge should redact only those statements that can be fairly said to reveal the grand jury’s deliberations and votes. While this option is effectively a form of prior restraint, which is disfavored, the unique circumstances of this case justify its use.

This hybrid option benefits from the judicial efficiency in Options #1 and #2 in that it would require the district court to only review the statement one time.

This option strikes an appropriate balance between Grand Juror Doe’s First Amendment rights, Missouri’s compelling interest in the secrecy of grand jury deliberations, and efficient use of judicial resources. Grand Juror Doe would be able to engage in political speech critical of government actors, which lies at the core of the First Amendment, while also protecting the free flow of ideas during grand jury deliberations.

Conclusion

Grand Juror Doe asserts a strong First Amendment interest in discussing matters of public importance—namely the role a prosecutor plays when presenting evidence of alleged police misconduct. The recent grand jury decision not to indict Officer Darren Wilson has created a public awareness of grand jury proceedings that may make Grand Juror Doe’s opinion especially relevant.

Against this interest, Missouri has a strong public policy interest in preserving the sanctity of grand jury deliberations. This public policy would be severely undermined should Grand Juror Doe be permitted to discuss the deliberations or votes of the grand jurors.

These two closely related forms of speech, one which should be permitted and one which crosses the line, creates at least four options a court may consider when fashioning a remedy for this case.

Ultimately, the district court ruling on this case must strike a balance between judicial efficiency, while also upholding the balance between Grand Juror Doe’s First Amendment rights to discuss matters of public importance against Missouri’s diminished interests in preserving the secrecy of grand jury proceedings.

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[1] What Happened in Ferguson?, NYTimes.com, http://www.nytimes.com/interactive/2014/08/13/us/ferguson-missouri-town-under-siege-after-police-shooting.html?_r=1, archived at http://perma.cc/CZ6E-2KEH (last visited Feb. 25, 2015).

[2] Id. See also David Zucchino, Prosecutor’s Grand Jury Strategy In Ferguson Case Adds To Controversy, LaTimes.com, (Nov. 25, 2014, 8:49 PM) http://www.latimes.com/nation/la-na-ferguson-da-analysis-20141126-story.html, archived at http://perma.cc/AW6H-6L6V.

[3] Richard M. Calkins, Grand Jury Secrecy, 63 Mich. L. Rev. 455, 456 (1965); J. Robert Brown, Jr., The Witness and Grand Jury Secrecy, 11 Am. J. Crim L. 169, 170–72 (1983).

[4] Complaint for Prospective Relief at ¶ 31, Grand Juror Doe v. McCulloch, No. 4:15-cv-00006 (E.D. Mo. Jan. 5, 2015), available at http://www.aclu-mo.org/files/4214/2047/0504/Grand_Jurur_Doe_Complaint_1-5-15.pdf, archived at http://perma.cc/ZP9M-JRNJ.

[5] Zucchino, supra note 2; What Happened in Ferguson?, supra note 1.

[6] Complaint for Prospective Relief at ¶ 34, Grand Juror Doe v. McCulloch, No. 4:15-cv-00006 (E.D. Mo. Jan. 5, 2015), available at http://www.aclu-mo.org/files/4214/2047/0504/Grand_Jurur_Doe_Complaint_1

5-15.pdf, archived at http://perma.cc/ZP9M-JRNJ.

[7] Grand jurors take an oath to keep secret the testimony of the witnesses before them, as well as the deliberations and votes of the grand jury. Mo. Rev. Stat. Ann. § 540.320, 310 (2015); Fed. R. Crim. P. 6(e)(2). A grand juror who discusses these proceedings or deliberations is subject to criminal prosecution for contempt of court.  Mo. Rev. Stat. Ann. § 540.320, 310, 120 (2015); Fed. R. Crim. P. 6(e)(7).

[8] Complaint for Prospective Relief at ¶ 1, Grand Juror Doe v. McCulloch, No. 4:15-cv-00006 (E.D. Mo. Jan. 5, 2015), available at http://www.aclu-mo.org/files/4214/2047/0504/Grand_Jurur_Doe_Complaint_1-5-15.pdf, archived at http://perma.cc/ZP9M-JRNJ.

[9] Calkins, supra note 3, at 456.

[10] Mo. Rev. Stat. Ann. §§ 540.105, 540.130 (Westlaw 2015); Fed R. Crim. P. 6(d)(1).

[11] See Step 4: Jury Deliberations, Your Missouri Courts, http://www.courts.mo.gov/page.jsp?id=1015, archived at http://perma.cc/62UJ-CE89 (last visited February 25, 2015).

[12] Mo. Rev. Stat. Ann. § 540.140 (Westlaw 2015); Fed R. Crim. P. 6(d)(2).

[13] See Butterworth v. Smith, 494 U.S. 624, 632 (1990).

[14] Complaint for Prospective Relief at ¶ 34, Grand Juror Doe v. McCulloch, No. 4:15-cv-00006 (E.D. Mo. Jan. 5, 2015), available at http://www.aclu-mo.org/files/4214/2047/0504/Grand_Jurur_Doe_Complaint_1-5-15.pdf, archived at http://perma.cc/ZP9M-JRNJ.

[15] Id. at ¶ 40.

[16] Calkins, supra note 3, at 456; Brown, supra note 3, at 170–72.

[17] Tim A. Baker, Grand Jury Secrecy v. The First Amendment: A Case For Press Interviews Of Grand Jurors, 23 Val. U. L. Rev. 559, 577 (1989)

[18] See Butterworth, 494 U.S. at 630.

[19] Id.

[20] Id.

[21] Traditionally, the governmental interests asserted in favor of continuing the confidentiality of grand jury proceedings are:

(1) To prevent the escape of those whose indictment may be contemplated; (2) to insure the utmost freedom to the grand jury in its deliberations, and to prevent persons subject to indictment or their friends from importuning the grand jurors; (3) to prevent subornation of perjury or tampering with the witnesses who may testify before [the] grand jury and later appear at the trial of those indicted by it; (4) to encourage free and untrammeled disclosures by persons who have information with respect to the commission of crimes; (5) to protect innocent accused who is exonerated from disclosure of the fact that he has been under investigation, and from the expense of standing trial where there was no probability of guilt.

Douglas Oil Co. v. Petrol Stops N.W., 441 U.S. 211, 219 n.10 (1979) (quoting United States v. Proctor & Gamble Co., 356 U.S. 677, 681–82 n.6 (1958)).

[22] Baker, supra note 17, at 577 (“Openness gives the assurance that proceedings are conducted fairly to all concerned, and it discourages perjury, misconduct of participants, and decisions based on secret bias or partiality.”).

[23] See Butterworth, 494 U.S. at 630–33 (recognizing that when a grand jury returns an indictment, the justifications for maintaining the secrecy of grand jury proceedings are diminished because the accused has certain pretrial rights to obtain witness lists and copies of testimony).

[24] What Happened in Ferguson?, supra note 1.

[25] See supra note 21.  Many of those governmental interests in grand jury secrecy are diminished when a prosecutor publicly reveals witness testimony.  As to the first governmental interest, preventing escape of a potential defendant, the Supreme Court has recognized that when an investigation results in a No True Bill, there is no longer a need to keep information from the targeted individual in order to prevent his escape because he will have been exonerated.  See Butterworth, 494 U.S. at 633. Second, there is no need to prevent the subornation of perjury of witnesses appearing at a later trial. United States v. Navarro-Vargas, 408 F.3d 1184, 1215 (9th Cir. 2005) (Hawkins, J., dissenting). See also United States v. Williams, 504 U.S. 36, 49 (1992). At any subsequent trial that may occur, a defendant has an opportunity to learn of the existence of a witness that the state may call at trial, as well that witness’ testimony before the grand jury.  Id. Also, the state has at its disposal penalties for perjury and tampering with witnesses. Butterworth, 494 U.S. at 633. Third, the policy of encouraging free and untrammeled disclosures by persons having information related to commission of crimes has already seriously been undermined by the public dissemination of the grand jury transcripts in Officer Wilson’s case.  Finally, Missouri’s grand jury secrecy laws have not protected the innocent accused from the disclosure of being under investigation.  Soon after the shooting and during the grand jury’s investigation, the public knew Officer Wilson was under investigation for shooting Michael Brown. See What Happened in Ferguson?, supra note 1.

[26] The remaining policy justification for grand jury secrecy is to insure the utmost grand jury in its deliberations and prevent the importuning of grand jurors. This public policy remains of vital importance following the return of a No True Bill by the grand jury. See Calkins, supra note 3, at 459 (A citizen serving as a grand juror “must be assured that the law will not permit him to be subjected to the malice and consequent injury that might result from an accused neighbor’s knowledge that he advocated and voted for the latter’s indictment.”).

[27] What Happened in Ferguson?, supra note 1.

[28] But see Butterworth, 494 U.S. at 633 (distinguishing between the sources of information).

[29] Id. at 636–37. See also Calkins, supra note 3, at 458 (1965) (Grand jurors “should be free from the apprehension that their opinions and votes may subsequently be disclosed by compulsion.”).

[30] United States v. Nixon, 418 U.S. 683, 705 (1974).

[31] See Baker, supra note 17, at 567.

[32] United States v. Navarro-Vargas, 408 F.3d 1184, 1215 (9th Cir. 2005) (Hawkins, J., dissenting). See also United States v. Williams, 504 U.S. 36, 49 (1992)

[33] Navarro-Vargas, 408 F.3d at 1215.

[34] Calkins, supra note 3, at 458. Although grand juries initially were designed to augment the King’s power, eventually grand juries began to meet underneath a veil of secrecy. “Secrecy proved to be an effective means of reducing the influence of the King and [guaranteeing] the impartiality of the grand jury.”  Brown, supra note 3, at 170.

[35] Brown, supra note 3, 187.

[36] See In re Monday Grand Jury Panel of Monmouth Cnty. Vicinage 9, 963 A.2d 388, 395 (N.J. Super. Ct. 2008).

[37] See Baker, supra note 17, at 563–64.

[38] Fred A. Bernstein, Note, Behind The Gray Door: Williams, Secrecy, And The Federal Grand Jury, 69 N.Y.U. L. Rev. 563, 578 n.89 (1994).

[39] See Butterworth v. Smith, 494 U.S. 624, 630 (1990).

[40] Complaint for Prospective Relief at ¶ 34, Grand Juror Doe v. McCulloch, No. 4:15-cv-00006 (E.D. Mo. Jan. 5, 2015), available at  http://www.aclu-mo.org/files/4214/2047/0504/Grand_Jurur_Doe_Complaint_1-5-15.pdf, archived at http://perma.cc/ZP9M-JRNJ (“In Plaintiff’s view, the current information available about the grand jurors’ views is not entirely accurate—especially the implication that all grand jurors believed that there was no support for any charges.”).