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Two California Supreme Court decisions address whether the entire gross proceeds of certain treasury activities should be included in the sales factor.
A lawsuit has been filed in New Jersey challenging the Constitutionality of the throw-out rule.
Texas legislation modified the state’s franchise tax to provide a margins tax.
During 2006, numerous state statutes were added, deleted or modified; court cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued, released and withdrawn. Part I of this article, in the March 2007 issue, focused on nexus, Internal Revenue Code (IRC) Sec. 338(h)(10) transactions, allocable/apportionable income and tax base. Part II, below, covers some of the more important developments in apportionment formulas, unitary groups/filing methods, administration and other significant corporate state tax issues.
A multistate corporation’s business income is apportioned among the states using an apportionment percentage for each state having jurisdiction to tax the corporation. To determine the apportionment percentage, a ratio is established for each of the factors included in the state’s formula. Each ratio is calculated by comparing the corporation’s level of a specific activity in the state to the total corporation activity of that type everywhere; the ratios are then summed, weighted (if required) and averaged to determine the corporation’s apportionment percentage for the state. The apportionment percentage is then multiplied by total corporation business income.
While apportionment formulas vary, many states use a three-factor formula that includes sales, payroll and property. Because use of a higher-weighted sales factor generally provides tax relief for in-state corporations, most states accord more weight to the sales factor than to the other factors. Changes in the apportionment formula may also be used to provide relief or tax benefits to specific industries or to reflect properly the operations of a particular industry. Recent apportionment developments are summarized below.
Among other provisions, HB 1001, Laws 2006, provided for a transition to a single-factor formula for tax years beginning after 2010. The sales factor will be weighted at 60% for 2007; 70% for 2008; 80% for 2009; 90% for 2010; and 100% starting in 2011.
HB 859, Laws 2006, increased the corporate income tax sales-factor weighting from 60% to 70%.
For tax years beginning after 2006, HB 4874, Laws 2006, provided a single-sales-factor apportionment for taxpayers whose principal business in the state is manufacturing or any form of collecting, buying, assembling or processing goods and materials within the state, or selling, distributing or dealing in tangible personal property within the state. Qualifying taxpayers can take advantage of any resulting tax savings on a phased-in basis for tax years 2007–2010, relative to their tax liabilities owed under the previous standard four-factor double-weighted sales-factor apportionment formula.
An administrative law judge (ALJ) ruled 52 that an interstate pipeline company could include in its payroll factor compensation paid to a parent for personnel that performed operational and administrative functions for the company. The ALJ explained that the “payroll factor” statute does not require that compensation be paid to direct employees and can include amounts paid for “loaned” nonemployees that perform the same services as direct employees, because both contribute to income production.
In another ruling, an ALJ held 53 that a truck manufacturer had to source to Alabama (i.e., include in the numerator of the sales factor) sales from trucks/parts that were ultimately delivered to customers in the state, even though initial physical delivery and title passage occurred at its out-of-state facility, when third-party carriers retrieved the products on behalf of the Alabama customers.
The most significant apportionment developments during 2006 were the California Supreme Court’s decisions addressing whether the entire gross proceeds generated by certain treasury activities should be included in the sales factor. The state supreme court affirmed 54 the court of appeal to hold that the entire gross proceeds received by Microsoft Corp. on redemption of marketable securities at maturity constituted “gross receipts” under (1) the state’s definitional provisions, (2) the legislative history behind the Uniform Division of Income for Tax Purposes Act (UDITPA) and (3) prior decisions of the State Board of Equalization (SBE). However, the court held that “in this instance,” the Franchise Tax Board (FTB) met its burden of proving by “clear and convincing evidence” that the standard apportionment formula did not fairly represent the extent of Microsoft’s business activity in California. Under the facts, Microsoft’s income from marketable securities constituted 2% of total income and 73% of gross receipts.
Similarly, in General Motors Corp., 55 the state supreme court affirmed in part and reversed in part a court of appeal decision, remanding the case for further proceedings consistent with its Microsoft decision. Specifically, the state supreme court held that a repurchase agreement is more closely analogous to a secured loan than a sale for UDITPA purposes; thus, only the interest received under the agreement should be treated as a gross receipt. With regard to marketable securities held until maturity, the court stated that the conclusion in Microsoft applied equally to the marketable securities held to maturity by General Motors. Because neither the trial court nor the appeals court had occasion to address the FTB’s alternative apportionment- formula arguments, the state supreme court remanded the case for further proceedings, to allow the FTB to make this case. The court of appeal then remanded the case to the trial court for examination of the distortion issue. With respect to the application of the research credit issue in General Motors, the court held that only the taxpaying corporation that performed the research is entitled to the credit.
The state supreme court declined to review two other “gross versus net sales factor” cases (Toys “R” Us, Inc., 56 and The Limited Stores, Inc. 57) that it had previously accepted and put on hold, sending them back to the courts of appeal with instructions to vacate their prior decisions and reconsider in light of the court’s recent rulings in Microsoft and General Motors.
The FTB also proposed regulations section 25137-14, providing detailed rules on the apportionment of income earned by mutual fund service providers. In general, the proposed regulation addresses the types of services performed by these businesses and offers rules on the corresponding sales-factor assignment of receipts derived from these services. The proposed regulation adopts a shareholder-location sales factor, under which the sales factor is as-signed using a ratio of shares owned by shareholders in California to shares owned by shareholders located everywhere.
Amended Income Tax Rule 35.01.550 provides exceptions to the general rule that income-producing activity for purposes of the sales factor generally does not include transactions and activities performed on behalf of the taxpayer. The amendments provide that income-producing activity includes transactions and activities performed on behalf of a taxpayer when (1) the taxpayer sells its product exclusively through independent contractors; (2) the independent contractors can work only for the taxpayer; or (3) excluding the transactions and activities of the independent contractors would lead to an unreasonable result. The amendments also provide that only the direct costs paid by the taxpayer are considered.
The DOR issued amended rules 64 addressing activities that result in the assignment of gross receipts to the state for purposes of the apportionment-formula sales factor; how to calculate the payroll and property factors; and apportionment and allocation for financial organizations and loan companies.
The DOR clarified 65 that goods, merchandise or property imported from outside the U.S. and received in a Louisiana foreign-trade zone are deemed received outside of the state and are excluded from the numerator of the revenue ratio.
Amended Reg. Sec. 03.04.03.08(B) provides that the items in both the numerator and denominator of each factor must be adjusted by the applicable statutory addition and subtraction adjustments.
The Appellate Tax Board (ATB) held 66 that electricity is not tangible personal property for purposes of computing the sales factor. Based on this decision, the DOR explained 67 that receipts from the sale of electricity will be sourced as “other than sales of tangible personal property,” and that this apportionment method will be applied to all tax years within the statute of limitations (SOL) for assessment or abatement.
In another development, the DOR amended Reg. 830 CMR 63.38.7, regarding the sales-factor calculation for mutual fund sales corporations, to address the assignment of mutual fund sales to Massachusetts in related-party transactions.
The Department of Treasury (DOT) provided guidance and standardized its policy on the application of the “costs of performance” method as it pertains to the single-business-tax (SBT) sales factor. 68 This guidance applies to the provision of services, the sale of intangible and real property and the rental of property.
Amended rule NJAC 18:7-8.11 clarified that, if a trademark licensee is authorized to sell a trademarked product both in and outside the state, the licensor is considered to be using the product in New Jersey for apportionment purposes based on the same ratio as the licensee’s in-state revenue relative to revenue from all sources.
The state supreme court affirmed 72 that a subsidiary without employees could not impute a payroll factor based on the use of affiliated-company employees or independent contractors, for either corporate franchise or net income tax purposes. The subsidiary had paid for the imputed services using intercompany accounts, booking these costs as payroll expenses.
Amended Rules 34 TAC 3.549 and 34 TAC 3.557 provide that, for reports due after April 20, 2006, receipts from the servicing of loans secured by real property are apportioned to the location of the real property that secures the loan being serviced. Membership or enrollment fees paid for access to benefits are receipts from the sale of an intangible asset and are apportioned to the payer’s legal domicile.
The DOT explained 73 that, for corporate income tax purposes, capital gain from the sale of stock earned by an out-of-state-headquartered affiliate included in an in-state combined corporate income tax return should be sourced to Virginia for sales-factor purposes, because the affiliate’s income-producing activity resulting in the capital gain occurred in the state based on costs of performance.
In another development, the DOT ruled 74 that a perishable food-products manufacturer had to source sales ultimately shipped to out-of-state wholesaler distribution hubs or unrelated distribution centers to Virginia, because they were held at in-state refrigerated loading docks rented by the purchasers for two to three days prior to their ultimate transportation outside the state.
In another development, the state tax appeals commission held 76 that the sale of telephone directory advertising constitutes the sale of a service, rather than the sale of tangible personal property, because its purchasers are the advertising customers, not the directory recipients.
A DOR hearing officer ruled 78 that a taxpayer was required to include four subsidiaries (a holding company, financing company, trademark company and real estate investment trust (REIT)) in its combined corporate income tax return, because the group was under common ownership and common management; had reconciled accounting systems; and exhibited substantial interdependence, integration and ties at its basic operational levels. In addition, the company could not claim a deduction for dividends received from the REIT, because such intercompany transactions had to be eliminated on the state combined income tax return.
In another development, the SBE ruled 80 that a company filing state corporate franchise/income tax returns could not include insurance company subsidiaries in a state combined report, despite claims that their exclusion resulted in distortion of noninsurance-company income attributable to California sources.
The DOR adopted amended Rule 560-7-3-.13 on the filing of consolidated returns.
Although the taxpayers filed income tax returns on a water’s-edge basis, the state tax commission ruled 81 that the election was barred, because the taxpayer had not filed water’s-edge election Form 14, Idaho’s Water’s Edge and Consent Form.
The DOR ruled 83 that a retailer was required to file a combined adjusted-gross-income tax return with its two wholly owned royalty and management subsidiaries, to better reflect its Indiana-source income.
The DOR similarly ruled 84 that a group of affiliate banks and credit card companies that were deemed to be operating as one interdependent unitary business was required to file a combined financial institutions tax return.
The DOR also required 85 a company to file a combined return with various affiliates that sold similar products or operated as procurement companies, to more fairly reflect the overall income earned in the state by the unitary business.
In the legislative area, HB 1001, Laws 2006, required a corporation that files combined income tax returns to petition the DOR within 30 days after the end of the taxpayer’s tax year for permission to discontinue filing combined returns.
The court of appeals reversed the trial court to hold 86 that 2000 legislation retroactively prohibiting refund claims based on unitary return filings for years prior to 1996 exceeded Constitutional limits and violated the taxpayers’ due process rights. Accordingly, the previous summary judgment in the DOR’s favor was reversed, and the case was remanded to determine whether, on its merits, the taxpayers were entitled to their pending refund claims. Unitary filing was formally prohibited in the state in 1996.
quests to file a consolidated or combined return to be received prior to the date set for filing the SBT (or the extended due date) by the proposed consolidated or combined group’s parent.
The state supreme court reversed 89 a tax court decision to hold that a multinational firm did not have to include its 99% distributive share of net income and apportionment factors from its French-organized and operating partnership (MPF) in determining its in-state unitary taxable income. When the MPF’s shareholders subsequently invoked the Federal “check-the-box” regulations to treat the MPF as a partnership, it did not alter that entity’s foreign nationality.
A state chancery court held 9 0 that the state consolidated return provisions, requiring that each member of an affiliated group carry on all of its business activities solely in the state to be eligible to file on a combined basis, violated the Commerce Clause.
An ALJ found 91 that a distribution company successfully demonstrated arm’s-length intercompany pricing with its parent and, thus, was not required to file a combined report for Article 9-A state franchise tax purposes.
State rules were amended 92 to provide that taxpayers in a unitary group including both financial organizations and nonfinancial corporations must file a single unitary combined return.
The Department of Taxes adopted regulations section 1.5862(d), addressing unitary combined reporting requirements, effective for tax years beginning after 2005.
For tax years beginning after 2004, HB 31, Laws 2006, generally conformed state law to the Federal income tax rules for taxation of trusts, estates and their beneficiaries, and conformed state law to the Federal tax classification of business trusts.
Twice during 2006, the San Francisco county superior court held that the annual limited liability company (LLC) fee is unconstitutional. In Northwest Energetic, it held 94 that the fee was unconstitutional when applied to an LLC that had registered to do business in the state, but had never actually commenced any activities there. In Ventas Finance I, 95 the court went further, and held that the fee cannot be reformed to add an apportionment mechanism. Following the Northwest Energetic decision, the FTB provided guidance on filing related protective refund claims for the LLC fee. 96 Both cases have been appealed. In the meantime, the FTB is required to enforce the statute until the appellate court issues a final determination that it is unconstitutional. LLCs that have paid such fees may file protective refund claims for any years open under the SOL.
In another development, the FTB announced 97 that each series within a Delaware series LLC is a separate business entity for franchise tax purposes.
For tax years beginning after 2005, SB 638, Laws 2006, eliminated the optional group income tax returns that partnerships, S corporations, trusts or estates or other passthrough entities previously were allowed to file on behalf of their nonresident individual owners. The new law requires all such businesses to pay income taxes at the highest marginal rate (currently, 5%) on each nonresident member’s share of income from the business, if the income is at least $1,000. The new law also clarifies that S corporations, LLCs, limited liability partnerships and limited partnerships are subject to the $250 business entity tax, whether they are formed under the laws of Connecticut or another jurisdiction.
New Income Tax Rule 35.01.01.050 clarified that LLCs and members will be treated according to their Federal classification and that the income tax administrative rules apply in accordance with that classification, even though the LLC and member may not be specifically mentioned in a rule.
Effective for tax years beginning after 2005, HB 403, Laws 2006, provided that a disregarded entity doing business in the state can be included in its parent’s return; S corporations can be included in a state consolidated return; and Kentucky income tax credits from lower-tiered passthrough entities can flow through to the ultimate individual owners.
In another legislative development, HB 1, Laws 2006, replaced the alternative minimum calculation with a new limited liability entity tax that will be imposed on corporations and limited liability passthrough entities (except those entities specifically exempted), effective for tax years beginning after 2006.
In an August 22, 2006 letter to the Kentucky Society of Certified Public Accountants, 99 the DOR explained that withholding from nonresident individuals is allowed only for nonresident individual partners in a general partnership for calendar years ending Dec. 31, 2005 or Dec. 31, 2006. Additionally, recently enacted HB 1 eliminates entity-level income taxation on passthrough entities and restores provisions that require nonresident withholding from individual partners, members and shareholders for tax years beginning after 2006.
SB 319, Laws 2006, clarified that for tax years beginning after 2005, business trusts not taxed as corporations for state purposes are taxed as pass-through entities and subject to the passthrough entity (PTE) tax. The business trust will pay the PTE tax based on the share of income distributed to the beneficiary of the business trust that is a nonresident or nonresident entity.
Amended 20 NYCRR section 1-2.6 and Parts 3 and 4 provide guidance on the computation of tax under Article 9-A for corporations that are partners in partnerships or members of LLCs treated as partnerships under Article 9-A.
SB 1741, Laws 2006, provided that, for tax years beginning after 2006, the corporate franchise tax will be imposed on LLCs that elect to be taxed as C corporations for Federal income tax purposes.
SB 300, Laws 2006, generally granted automatic S corporation state tax treatment for corporations that elect S status for Federal income tax purposes beginning in 2006.
The DOR ruled 101 that, when computing a corporation’s excise tax base, the portion of income or loss that has been passed through to the taxpayer, but reported on the Tennessee excise tax return of a second-tier limited partnership, should be deducted from (or added to, in the case of a loss) the taxpayer’s Federal taxable income or loss before the net operating loss and special deductions.
The DOR explained 105 that, because the state’s income tax policy “piggybacks” that of the IRS, tax shelters that are listed and deemed abusive by the Service will be considered abusive for Louisiana income tax purposes.
The DOR explained 106 the enactment of new penalty provisions applicable to taxpayers, return preparers and promoters of abusive tax shelters and the manner of their enforcement.
The Department of Taxation and Finance adopted rule 20 NYCRR Part 2500.1, providing a definition of a New York reportable transaction and the disclosure requirements for participating in one.
During 2006, the DOR undertook a settlement initiative that ended Dec. 15, 2006 and was directed at certain transactions that created tax benefits, deductions or losses that the DOR considered eligible. The settlement agreement required taxpayers to (1) waive all rights to appeal or refund of any amounts paid pursuant to the initiative, except for refunds due as the result of Federal changes or mathematical or computational errors; and (2) unwind transactions or dissolve entities involved in “eligible transactions” and “ineligible transactions” (if any) or adjust methodology for filing as prescribed by the DOR for all future years.
SB 139, Laws 2006, required taxpayers and material advisers to disclose a reportable transaction, allowed the tax commission to identify state-specific listed transactions and, in addition to other penalties, imposed a 10% penalty on tax underpayments attributable to reportable transactions.
Further, taxpayers are required to attach a disclosure statement for any listed transactions from 2004, 2005 and 2006, to their 2007 Utah income tax returns.
HB 4630, Laws 2006, required disclosure of certain tax shelters; imposed penalties for participating in or promoting abusive tax-shelter transactions and failing to report listed transactions; and increased the SOL on assessments for failure to disclose a listed transaction. Emergency Rule 110 C.S.R. 10J provides guidance on the disclosure and regulation of tax shelters created to avoid paying state income taxes.
Amended rule 830 CMR 62C.30.1 explains how taxpayers must report and adjust state tax due after a change in Federal taxable income, tax credits or taxable estate.
The DOR explained 108 that, for purposes of tolling the state’s general three-year SOL for assessments and refunds, the extension due date is used, rather than the original due date.
In another development, HB 1892, Laws 2006, reduced from two years to six months the period within which a taxpayer is required to report its Federal taxable income changes determined by the Federal government.
The tax commissioner ruled 109 that when a taxpayer has a Federal change made to its taxable income as a result of a transfer-pricing adjustment, it may file an application for refund (and an amended state return) with the state generally no later than one year after the adjustment has been agreed to or finally determined for Federal income tax purposes, even if this timeframe is beyond the state’s general three-year SOL.
SB 583, Laws 2006, extended from 90 days to one year the period within which taxpayers must file an amended return when the IRS changes the taxpayer’s Federal taxable income or the taxpayer files an amended Federal return.
The state court of appeals ruled that a taxpayer that was ineligible for state corporate income tax refunds, due to filing the claims beyond the applicable three-year SOL, could not alternatively refile for the same refunds using a state extension statute reserved for amended Federal returns. 110 Specifically, the court explained that the state’s extension for filing an amended state corporate income tax return applies only to returns filed within 180 days of a final Federal determination; it does not apply to situations, as in this case, in which the amended Federal return was based on the company’s choice to amend, rather than as a result of an IRS review and examination process.
SB 484, Laws 2006, increased to seven months the period for which the comptroller may extend the time for a corporation to file an income tax return; it applies to tax years after 2005.
TIR 06-21 111 permits an automatic six-month extension to file a tax return, without the need for application, for certain taxpayers. This TIR does not apply to financial institutions, insurance companies, utility companies, urban redevelopment companies or any other corporation required to file Form 355-7004 Misc., Application for Extension of Time to File Certain Massachusetts or Foreign Corporate Excise Returns, to request an extension of time to file a tax return.
In another development, HB 4169, Laws 2006, contained numerous state tax law changes, including new penalties for taxpayers and preparers that fail to disclose “inconsistent positions” with respect to returns filed in other states, or positions resulting in understatements if there is no substantial authority for the treatment.
The DOT provided new administrative appeal guidelines 114 for tax assessments; the guidelines will be formally adopted by the DOT as a regulation.
In a case involving whether a company was engaged in a unitary business with a partnership in which it owned a 50% interest, the tax appeals commission held 115 that the DOR could obtain a copy of the company’s consolidated Federal income tax return for the tax year at issue as part of discovery.
Among other provisions, H 5845, Laws 2006, eliminated the 2007 15% corporate surcharge that otherwise would have applied to all corporations that pay more than the $250 minimum tax.
A 4706, Laws 2006, imposed a 4% surcharge on the corporate business tax for periods ending after June 30, 2006 and before July 1, 2009. Starting with calendar-year 2006, the new law also increased the minimum tax from $500 to $2,000, depending on New Jersey gross receipts.
SB 2005, Laws 2006, reduced the corporate tax rate from 9% to 8.75% for tax years beginning after 2006.
A state superior court dismissed 116 a suit challenging the validity of the additional 50% amnesty penalty imposed on taxpayers that failed or declined to participate in the state’s two-month 2005 amnesty program. The court agreed with the FTB that the case was not ripe for judicial decision, because the tax years at issue were still in protest status, and there is no amnesty penalty to contest until the protested assessment is sustained and a final deficiency assessment made.
The U.S. Supreme Court held 118 that state and municipal taxpayers lacked standing to challenge the validity of Ohio’s franchise tax investment credit. Subsequently, the Court let stand the decision of the U.S. Court of Appeals, Sixth Circuit, 119 holding that an Ohio personal property tax exemption was Constitutional.
For more information about this article, contact Ms. Boucher at kboucher@deloitte.com.
52 Plantation Pipe Line Co. v. AL Dep’t of Rev. (DOR), AL DOR, Admin. Law Div., Dkt. No. CORP. 05-948 (5/23/06).
53 Paccar, Inc. v. AL DOR, AL DOR, Admin. Law Div., Dkt. No. CORP. 04-715 (1/11/06).
54 Microsoft Corp. v. CA FTB, 39 Cal.4th 750 (2006).
55 General Motors Corp. v. CA FTB, 39 Cal.4th 773 (2006), rev’g and rem’g CA Ct. App., 2d Dis. (6/30/04).
56 Toys “R” Us, Inc. v. CA FTB, No. S143422 (transferred after hold 11/15/06).
57 The Limited Stores, Inc. v. CA FTB, No. S136922 (transferred after hold 11/15/06).
58 CA FTB, Notice No. 2006-3 (9/28/06).
59 CA FTB, Legal Ruling No. 2006-01 (4/28/06).
60 CA FTB, Legal Ruling No. 2006-02 (5/3/06).
61 IN DOR, Rev. Rul. No. 2006-02IT (2/22/06).
62 IN DOR, Ltr. of Finding No. 01-0358 (8/23/06).
63 Miller Brewing Co. v. IN DOR, 831 NE2d 859 (IN Tax Ct. 2005).
64 103 KAR 16:270, 16:090, 16:290 and 16:150 (effective 8/7/06).
65 LA DOR, Rev. Rul. No. 06-018 (11/3/06).
66 EUA Ocean State Corp. v. Comm’r, MA ATB, Dkt. Nos. C258405-406, C258424-425, C258882-883, C259158-159, C259653 and C262566-568 (4/24/06).
67 MA Taxpayer Info. Rel. (TIR) No. 06-9 (6/12/06).
68 Internal Policy Directive (IPD) 2006-8, MI DOT (9/29/06).
69 NH DOR, Amended Rev 301, 302, 303.01 and 303.02 (effective 8/25/06).
70 General Engines Co., Inc. v. Div. of Tax’n, NJ Tax Ct. (lawsuit filed 12/8/06).
71 Stonebridge Life Insurance Co. v. Dep’t, OR Tax Court, TC No. 4705 (2/22/06).
72 UPS Worldwide Forwarding, Inc. v. Comm’th, 890 A2d 368 (PA 2005).
73 VA Pub. Doc. No. 06-130 (10/25/06).
74 VA Pub. Doc. No. 06-86 (8/30/06).
75 WI DOR, Tax 2.49 and 2.495 (effective 7/1/06).
76 Ameritech Publishing, Inc. v. WI DOR, WI Tax App. Comm., Dkt. No. 01-I-227(P) (8/22/06).
77 AT&T Corp. v. DOR, AL DOR, Admin. Law Div., Dkt. No. CORP. 05-403 (6/30/06).
78 AZ DOR, Hearing Officer Case No. 200600035-C (9/15/06).
79 The new law is operative for tax years starting after 2005, except that for taxpayers that made a water’s-edge election prior to 2006, the provisions do not apply until the end of the current election period.
80 Appeal of Argonaut Group, Inc., CA SBE, Case No. 287738 (6/28/06).
81 ID State Tax Comm. Ruling Nos. 18901 and 18902 (5/26/06).
82 ID State Tax Comm. Ruling No. 18612 (9/29/05).
83 IN DOR, Ltr. of Finding No. 05-0512 (9/13/06).
84 IN DOR, Ltr. of Finding No. 02-0278 (6/1/06).
85 IN DOR, Ltrs. of Finding Nos. 05-0318 and 05-0319 (11/1/06).
86 Johnson Controls, Inc., v. KY Rev. Dep’t, KY Ct. App., Case No. 2004-CA-001566-MR (5/5/06).
87 103 KAR 16:200 (effective 8/7/06).
88 IPD 2006-3, MI DOT (5/8/06).
89 Manpower, Inc. v. Comm’r, MN S.Ct., A06-468 (12/7/06).
90 AT&T Corp. v. State Tax Comm’n, MS Chancery Ct., Hinds Cty, No. G-2000-31 S/2 (5/26/06).
91 In the Matter of Hallmark Marketing Corp., NY Div. of Tax App., No. 819956 (1/26/06).
92 OR DOR, amended OAR 150-314.280-(N) and 150-317.710(5)(b) (effective 7/31/06).
93 VA Pub. Doc. No. 06-52 (4/28/06).
94 Northwest Energetic Services, LLC v. CA FTB, CA Super. Ct., San Fran., No. CGC-05-437721 (4/13/06); for a discussion, see Dickerson, Hayes and Thomas, Tax Clinic, “California Superior Rules LLC ‘Fee’ Unconstitutional,” 38 The Tax Adviser (March 2007).
95 Ventas Finance I, LLC v. CA FTB, CA Super. Ct., San Fran., No. CGC-05-44000I (11/7/06).
96 This guidance can be found at http://www.ftb.ca.gov/forms/misc/3556.pdf.
97 See CA FTB, “Ask the Advocate,” March/April 2006 Tax News.
98 A103 KAR 15:020 (effective 9/1/06); 103 KAR 16:210 (effective 8/7/06).
99 The letter can be found at http://revenue.ky.gov/NR/rdonlyres/EEADE03A-49A8-429A-96C0-89A9B8B8B11C/0/KSCPAletter82206.pdf.
100 MA DOR, Ltr. Ruling No. 06-6 (4/24/06).
101 TN DOR, Ltr. Ruling No. 06-06 (3/14/06).
102 CA FTB, Notice No. 2006-1 (1/11/06). This initiative ended on March 31, 2007.
103 Ann. 2005-80, IRB 2005-46, 967.
105 LA DOR, Rev. Ruling No. 06-009 (6/29/06).
106 MA TIR No. 06-5 (4/13/06).
107 In the Matter of ICI Americas, Inc., Cal. SBE, Case No. 312753 (11/20/06).
108 NC DOR, Directive No. CD-06-1 (10/25/06).
109 Opin. of the Tax Comm’r No. 06-0001, OH Dept. of Tax’n (4/20/06).
110 Graham v. McKesson Information Solutions, LLC, GA Ct. App., Case Nos. A06A033 and A06A0334 (5/12/06).
111 MA TIR No. 06-21 (12/7/06).
112 HB 5356, 5357, 5358, 5359, 5360, 5361, 5362 and 4244 (signed by the governor 2/3/06).
113 Elliott v. Montana DOR, Mont., Case No. 05-336 (10/24/06).
114 VA Pub. Doc. No. 06-140 (11/29/06).
115 Louis Dreyfus Petroleum Products Corp. v. DOR, WI Tax App. Comm., Dkt. No. 03-I-132(P) (6/15/06).
116 General Electric Co. v. CA FTB, Cal. Super. Ct., San Fran., No. 449157 (8/30/06).
117 Journal No. 73, MI Senate, and Journal No. 71, MI House of Representatives (8/9/06).
118 DaimlerChrysler Corp. v. Cuno, S.Ct., 5/15/06.
119 Cuno v. DaimlerChrysler Corp, 6th Cir., 10/19/04, cert. den.
120 The commercial activities tax is a gross receipts tax and, thus, is beyond the scope of this article; for a discussion, see Tapia, Tax Clinic, “Beware Ohio’s CAT,” 37 The Tax Adviser (August 2006).
121 For more details, see Brookner and Brown, State and Local Taxes, “Sweeping Texas Franchise Tax Changes: The Margins Tax,” 37 The Tax Adviser (September 2006).

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Purpose. The work is devoted to the study of horizontal oscillation and the assessment of the motion stability of a single wheelset with independent wheel rotation, and to the comparison of stability indicators of the typical wheelset and the wheelset with independent wheel rotation. This is connected with the necessity to increase traffic speed of rolling stock, improve road safety and comfort of passengers. Methodology. To achieve this purpose we used the methods of mathematical simulation of railway rolling stock dynamics, as well as the linear algebra methods to assess the stability of solutions of the linear homogeneous differential equations. Findings. To solve the set task the design model of a single wheelset with independent wheel rotation was created. The wheelset is not a single solid body; each of the wheelset axles has a surplus degree of freedom. Thus, we obtained the system with 4 degrees of freedom. The design model allowed to obtain the system of linear homogeneous differential equations describing the oscillations of the represented wheelset in a horizontal plane on a straight track section. On the basis of the computer modeling were calculated the eigenvalues of the differential equation system coefficients and the asymptotic stability analysis of the wheelset motion with independent wheel rotation. The increment and the frequency of fluctuations were compared with similar indicators for the standard wheelset. The authors also discussed non-oscillatory forms of the wheelset motion and the issues of wheelset self-centering on the track. Originality. The result of the work is the mathematical model of the sinuous movement of a single wheelset, in two-dimensional formulation, with independent wheel rotation and the estimate of the dynamic indices during its motion on a straight track section without any irregularities. There were also proposed the ways to ensure the self-centering on the track of the wheelset with independent wheel rotation. Practical value. The developed mathematical model of the single wheelset motion with independent wheel rotation can be used to create the advanced designs of railway running gear of cars.
Verigo M.F., Kogan A.Ya. Vzaimodeystviye puti i podvizhnogo sostava [Interaction of track and rolling stock].Moscow, Transport Publ., 1986. 560 p.
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Degtyareva L.N., Osenin Yu.I., Myamlin S.V. Matematicheskoye opisaniye silovogo vzaimodeystviya koles i relsov [Mathematical description of the force interaction of wheels and rails]. Vіsnyk Dnіpropetrovskoho natsionalnoho universytetu zalіznychnoho transportu іmeni akademika V. Lazaryana [Bulletin of Dnipropetrovsk National University of Railway Transport named after Academician V. Lazaryan], 2009, issue 28, pp. 21-24.
Mikhaylov Ye.V., Semenov S.A. Analiz putey snizheniya iznosa v sisteme «greben kolesa-rels» [Analysis of ways to reduce the wear in the system, «wheel flange-rail»]. Vіsnyk Skhidnoukrainskoho natsionalnoho universytetu imeni V. Dalia [VolodymyrDahlEastUkrainianNationalUniversity], 2012, part 1, no. 5 (176), pp. 71-76.
Musayev Zh.S., Solonenko V.G., Dyusengalieva T.M. Sravnitelnyy analiz prodolnoy dinamiki zheleznodorozhnykh ekipazhey pri perekhodnykh rezhimakh [Comparative analysis of longitudinal dynamics of railway vehicles during transient conditions]. Vestnik MGTU imeni N. E. Baumana. Izvestiya vysshikh uchebnykh zavedeniy. Mashinostroyeniye – Bulletin of Bauman Moscow State Technical University, 2013, no. 1, pp. 33-37.
Fedyushin Yu.M., Pshinko A.N., Myamlin S.V., Donchenko A.V., Loboyko L.M. Osnovnyye dinamicheskiye pokazateli passazhirskogo vagona [The basic dynamic performance of passenger car]. Vіsnyk Dnіpropetrovskoho natsionalnoho universytetu zalіznychnoho transportu іmeni akademika V. Lazaryana [Bulletin of Dnipropetrovsk National University of Railway Transport named after Academician V. Lazaryan], 2005, issue 7, pp. 91-94.
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Вериго, М. Ф. Взаимодействие пути и подвижного состава / М. Ф. Вериго, А. Я. Коган. – Москва :Транспорт, 1986. – 560 с.
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SGS North America, Inc., et al.
The Claims Administrator, Garden City Group, confirms that settlement checks are being mailed to settlement class member participants on December 9, 2008.
To find out more about the terms of the Settlement, as well as when individuals must have been employed by SGS in order to be a Class Member, go to www.AyersSettlement.com; or contact the Claims Administrator, The Garden City Group, Inc., by mail at Ayers/Ferry v. SGS, c/o The Garden City Group, Inc., P.O. Box 9260, Dublin, Ohio 43017-4660, or by phone at 1-866-923-0867.
The Second Circuit Court of Appeals has proposed that the oral argument of the Plaintiffs’ appeal regarding attorneys’ fees be held the week of November 2, 2009. The schedule is subject to change. An opinion is typically rendered 3 to 6 months after the oral argument, although it can take substantially longer.
GARDEN CITY GROUP DID NOT MAIL CHECKS TO THE PLAINTIFFS ON 12/8/08 AS REQUIRED BY THE COURT ORDER. Plaintiffs’ counsel received word at the end of the day that GCG would not be mailing checks out of the funds it was holding in escrow for the plaintiffs. Garden City Group has the funds and the calculations necessary to mail the payments, but it refuses to do so until SGS transfer funds for its tax liability on the payments. SGS has failed to do so. SGS has represented that it will make payments for the employer share of taxes by December 12th at the latest. Plaintiffs are today requesting the Court to take immediate action to bring SGS and Garden City Group into conformance with the prior order and make sure that the funds are mailed immediately.
On October 16, 2008, the Court issued a decision denying the Plaintiffs’ motion to reconsider its refusal to award service payments and its limited award of attorneys’ fees. Under the terms of Settlement Agreement, the Claims Administrator, Garden City Group, will have 20 days from the Settlement Effective Date to mail each class member his or her settlement payment less any applicable taxes. If no appeals are filed, the Settlement Effective Date will be November 17, 2008, and settlement payment checks will then be mailed on December 8, 2008. (If an appeal of the attorneys’ fee award is filed the Settlement Effective Date will not be affected).
To see the Court’s decision denying the motion to reconsider service payments and attorneys’ fees click here (.pdf 145KB).
On September 9, 2008, the Court issued an Order approving the settlement in part. Specifically, the Order approved the settlement payments to the class but not the service payments to the class representatives and the class members that participated in discovery. The Court also denied a significant part of the legal fees. Click here for a copy of the Order. (.pdf 845KB) We will ask the Court to reconsider its ruling with respect to the parts of the Settlement it denied and its ruling on attorneys fees.
At this point, we cannot determine when settlement payments will be made. Settlement payments are to be mailed 51 days after the Court’s final order, if there are no appeals. However, we will not have a final order until the Court rules on the motion to reconsider the September 9 Order.
We will continue to post any and all developments on this website.
The parties are waiting for the Court to issue an order regarding approval of the settlement. We have had the final fairness hearing before the Court and have submitted a proposed order approving the settlement. We hope to receive the Court’s ruling shortly, but cannot predict or guarantee when. We will post any developments as soon as they arise. If the Court approves the settlement, the judgment will not be final until the 30-day appeal period has run. The settlement agreement provides that the claims administrator will make payments to the class within 20 days after the judgment is final.
At a "final fairness hearing" on July 30, 2008, the Court took the various submissions under advisement. The Court is expected to reach a decision shortly.
On March 10, 2008, the Court preliminarily approved the Parties’ settlement agreement to resolve the claims of SGS’ Oil, Gas and Chemical, automobile, and agriculture inspectors for 7.25 million dollars in funds. Under the terms of the settlement, class members have until July 8, 2008 to (1) submit a Claim Form indicating they wish to receive a share of the Settlement proceeds; or (2) submit a Request for Exclusion Form indicating they wish to be excluded from the Settlement. Class Members who submit neither form will be bound by the Settlement but will receive no share of the Settlement proceeds. Class Members may also submit comments or objections to the settlement. Notice of the settlement will be mailed to all Class Members on April 9, 2008. Click here to view a copy of the Notice for automobile inspectors (.pdf 47KB). Click here to view a copy of the Notice for OGC inspectors (.pdf 49KB). Click here to view a copy of the Notice for agricultural inspectors (.pdf 48KB). Individual notices that are being mailed will contain specific information about the minimum amount each class ember may receive in the settlement.
To find out more about the terms of the Settlement, as well as when individuals must have been employed by SGS in order to be a Class Member, go to http://www.AyersSettlement.com or contact the Claims Administrator, The Garden City Group, Inc., by mail at Ayers/Ferry v. SGS, c/o The Garden City Group, Inc., P.O. Box 9260, Dublin, Ohio 43017-4660, or by phone at 1-866-923-0867; or contact Class Counsel, Getman Law Firm, 9 Paradies Lane, New Paltz, New York 12561. To obtain Claim or Request for Exclusion Forms, contact The Garden City Group, Inc., by mail at Ayers/Ferry v. SGS, c/o The Garden City Group, Inc., P.O. Box 9260, Dublin, Ohio 43017-4660, or by phone at 1-866-923-0867. Claim Forms and Exclusion Forms must be submitted to Claims Administrator at Ayers/Ferry v. SGS, c/o The Garden City Group, Inc., P.O. Box 9260, Dublin, Ohio 43017-4660 no later than July 8, 2008.
4. It is very important that the Claims Administrator has your current contact information, including your current mailing address.
5. You must fill out and submit a claim form byJuly 8, 2008 to receive a share of the settlement, even if you are a Plaintiff in the Ayers v. SGS or Ferry v. SGS cases.
6. The Claims Administrator will determine the actual amount that you receive under the settlement. The value of individual claims will not be finalized until 30 days after the Court has granted final approval of the settlement.
On March 10, 2008, Judge Richard M. Berman granted "preliminary" approval to the settlement in this case. Click here to review the Preliminary Approval Order (.pdf 354KB). The Order allows the case to proceed as a class action, designates Getman Law Office as Counsel to the Class, and directs that Notice be issued to all members of the class. This Notice will be mailed by the Claims Administrator in this case within 30 days, advising each member of the class 1) what their rights are in the settlement, 2) the minimum amount that they can expect to receive under the settlement, and 3) how to participate in the settlement if they wish. A copy of the Notice will also be published on this website. At this point SGS inspectors are requested to await Notice before contacting Getman Law Office for information about the settlement. As part of the Order, Judge Berman set a final fairness hearing date of July 30, 2008 at 2:00 pm.
The trial for the Ayers v. SGS and Ferry v. SGS cases began as scheduled on October 24, 2007. With strong encouragement from Judge Berman on the first day of the trial, the parties agreed to the terms of a provisional settlement in this case, including who would be covered by the settlement, what claims would be released, and how much money SGS would pay to settle the claims. It was provisionally agreed that the case would be brought as a class action for all SGS OCG, Auto and Agriculture division inspectors who worked in applicable time periods, and that SGS would pay out 7.25 million dollars (plus interest from 12/24/07) in addition to what they had already paid to some inspectors. We are in the process of negotiating a more detailed agreement, which will specify the allocation of the settlement, the form of notice each inspector is to receive and the process leading up to the payout.
Once the full settlement agreement is negotiated, the next step in the process is that Judge Berman will review the settlement to determine if it is fair to all inspectors. To that end, he has scheduled a hearing for preliminary approval of a detailed proposed settlement agreement on January 28, 2008. At that time, the Judge may give the settlement preliminary approval, or he may reject the settlement and/or propose revisions. Preliminary approval is not the same as final approval. Final approval can only be granted after all plaintiffs and class members are given the opportunity to consider and make comments on the settlement.
Under the terms of the proposed settlement (which is not yet approved), 30 days after Judge Berman has granted preliminary approval, the claims administrator (an outside company hired to calculate and administer the class claims) will send notice to all members of the class. Notice will include details about the settlement and inform class members of their rights and options under the settlement. Class members’ rights will include the right to participate in the settlement and be paid, to opt out of the settlement, or to object to the settlement. To participate in the settlement, class members, including Plaintiffs in the Ayers and Ferry actions, will have to fill out and return the claim form.
Under the provisional settlement, class members will have roughly 60 days from the date the claims administrator mails the notice to return their claim form or exclusion form. Class members who do not do either may not receive payment, but may still be bound by the class release. After the 60-day response period has run, the parties will move the Court for final approval of the settlement. Judge Berman will consider the parties motions and any objections to the settlement before ruling on final approval.
Fifty days after the settlement receives final approval (following review by Judge Berman), the class administrator will mail each participating class member his or her share of the settlement.
In light of the many variables still existing, the attorneys are unable to inform any individual exactly how much they will receive under the agreement. The details of the settlement can only be communicated through a notice approved by the Court and sent out by the claims administrator. This process is not quick, but it is mandated by the complex interplay of federal class action rules, wage and hour laws, and the U.S. Constitution.
1. It is very important that we have your current contact information, including your current mailing address.
2. You must fill out and submit a claim form within the 60-day period to receive a share of the settlement, even if you are a Plaintiff in the Ayers or Ferry cases.
3. The claims administrator will determine the actual amount that you receive under the settlement. The value of individual claims will not be finalized until 30 days after the Court has granted final approval of the settlement.
The settlement plan has not yet been provided to the Court for review. Under the terms of the tentative settlement, SGS was to have supplied payroll data to the Getman Law Office in mid-November. Unfortunately, much of that information has yet to be provided. According to SGS, the slow response relates to difficulties in obtaining all the information needed from its payroll service ADP. Plaintiffs expect to receive the necessary data within 1to 2 weeks and to have a tentative settlement to the Court within 2 weeks after the receipt.
During trial on Wednesday October 24, 2007, the parties reached a tentative settlement agreement to resolve the claims of SGS’ Oil, Gas and Chemical, automobile, and agriculture inspectors for 7.25 million dollars in funds additional to an estimated 1 million dollars already paid to some inspectors. The parties committed to presenting a settlement plan to the Court within 45 days. In the interim, SGS will be providing data on individual inspectors necessary for calculating individual claims. The specific amounts that will be due to each inspector if the settlement is approved will not be known until a formula for allocation is tentatively approved by the Court (no earlier than December 10, 2007). If the Court preliminarily approves a settlement with plan for allocation, a personal notice will be sent to each employee explaining the terms of the settlement applicable to them. Due to the procedural requirements for the Court’s and all parties’ approval, the payout to members of the class will not take place until mid-2008. Members of the class who have not provided us with their current telephone number and/or email address, should promptly provide this information using the "Information Request" form below.
Another important ruling has been issued in the consolidated Ayers and Ferry v. SGS cases. By Decision and Order dated October 10, 2007, U.S. Magistrate Judge Ronald L. Ellis struck 5 of defendants’ trial witnesses from participating in this case because the defendants failed to disclose them earlier. The witnesses are former in-house counsel Lisa Colchete, Chris Thuneman (Sr. VP or OGC), Mabel Coba (Payroll Manager), outside counsel Colin Page and Patrick McCarthy and Joseph DeBord. In addition, the Court directed defendants to immediately supply to plaintiffs documents concerning SGS’ communications with its attorneys, items that SGS failed to disclose for several years, and thereafter claimed were privileged under the attorney-client privilege doctrine.
ON 10/9/07 JUDGE BERMAN RULED THAT THE TIME AND ONE HALF METHOD OF CALCULATING BACK PAY MUST BE USED FOR ALL INSPECTORS WHO WERE NOT PAID IN COMPLIANCE WITH THE LEGAL REQUIREMENTS FOR THE FLUCTUATING WORK WEEK.
Judge Berman has set a further settlement conference before the Court for October 18, 2007, just prior to the commencement of trial which is scheduled for October 24, 2007.
This case is entering the final stages before trial. The parties are required to lay out their case for the court in what is called a Joint Pre-Trial Order on September 24th. In that document, each side identifies all the exhibits and all the testimony that it will use in its case. Judge Berman has already ruled that the plaintiffs have shown that SGS’s "Chinese Overtime" policy through April 2007 was illegal. Also, the Court ruled that the "Pay For Performance" plan was illegal too. The plaintiffs will argue some additional grounds for the illegality of the "Chinese Overtime" system, namely that salaries were set too low to guarantee the minimum wage for each hours of work. Even though the Court already addressed Chinese Overtime, this additional ground is important, should SGS appeal the decision. Plaintiffs also will expect to show the Court that the late payment of overtime prior to June 2006 was illegal. We argue that the later change SGS made shows that it was always practicable to make the timely payment. The biggest area of dispute is what method of damages the Court must use for OGC plaintiffs. Plaintiffs argue that SGS’s violation of the "fluctuating work week" requirements 29 CFR 778.114, mean that the Court must use the time and one half method. SGS argues that it must only pay back a small sum of money to bring its policies into retroactive compliance with the fluctuating work week method. SGS also argues that its violations of law were "in good faith."
Over the last month, there have been a flurry of motions on both sides, as well as numerous days of final depositions. Plaintiffs have numerous letter briefs to the court alleging that SGS has withheld information it was obligated to turn over. For example, on September 11, 2007, years after it was obligated to do so, SGS supplied a "Privilege Log" identifying 85 communications with lawyers it had concerning the FLSA. Up to that point, SGS had claimed only a few letters existed at all. Plaintiffs argue that the failure to disclose the communications requires that they be turned over.
SGS had asked for approximately 40 last minute all-day depositions of the opt-in plaintiffs in the Ferry case. Judge Berman allowed 6 depositions only, and limited them to 2 hours apiece. These depositions will take place on September 19 and 20 in Houston and Florham Park, NJ.
The trial commences on October 24th. We look forward to showing the full extent of SGS’s violations of law and hope to get the full measure of relief allowed by law.
The parties engaged in a formal mediation on August 2. Despite the Plaintiffs best efforts, no progress was made with respect to settling the case. The trial is scheduled to begin on October 24 of this year.
The mediation in this case has been postponed until August 2, 2007. The mediator will be Michael Young of JAMS mediation service in New York City.
Judge Berman has granted the plaintiffs request to set the case for an early a trial date. On May 14, 2007, the parties appeared before the Court and Judge Berman set trial for October 22, 2007. The Court indicated that no more than 3 days would be required for the trial. The trial will cover both the Ayers v SGS case as well as the Ferry v SGS case. Judge Berman has already ruled that the SGS fluctuating work week pay scheme violated the Fair Labor Standards Act. The plaintiffs believe that the law in this district and circuit, compels the Court to find that the plaintiffs are entitled to receive time and one half for each hour of overtime, not half-time. Defendant argues that the half time method should still be used to calculate damages. SGS lost this argument in a prior case in District Court in Florida, however. In addition to the question of which method is used to calculate damages, the trial should cover whether there are damages due for the late payment of overtime, how much is due to auto inspectors under the pay for performance plan, and whether SGS acted in "good faith" in paying as it did, thereby preventing the Court from awarding "liquidated damages" equal to the amount of back pay due to each plaintiff. The plaintiffs are very pleased that this matter is nearing closer to the entry of a final judgment. In addition, the parties will be conducting a mediation session with a private mediator in late June in an attempt to reach a settlement.
Our last update indicated that the Parties would appear before Judge Berman on March 21, 2007. SGS postponed that date. Instead, we appeared before Judge Berman on Monday, April 2, 2007. At the hearing, we addressed various issues, but most of the discussion was dedicated to the language of the notice of the opportunity to join the Ferry v. SGS case that will go to all OGC inspectors who worked for SGS in the past 3 years. Once we resolved the notice issues, SGS offered to engage a neutral, mutually acceptable mediator to help with settlement discussions. We agreed to participate in the mediation, and the Parties agreed to complete it by May 11. Judge Berman scheduled another conference for Monday, May 14.
On February 26, 2007, the Plaintiffs won a substantial victory in this case. U.S. District Judge Richard Berman issued a decision ruling that SGS’s "Chinese Overtime" method of paying OGC inspectors overtime, and its "Pay-for-Performance" method of paying Auto Inspectors overtime are impermissible violations of the Fair Labor Standards Act. The Judge did not rule on the issue of whether SGS paid inspectors overtime wages impermissibly late. That issue will be decided at trial, if necessary. The Judge denied SGS’ request to break up the class and force everyone to bring individual cases. (Although the Judge allowed the Plaintiffs to proceed as a class, he ruled that claims for overtime hours worked but not recorded cannot be part of this collective action because those claims did not involve company-wide polices. Plaintiffs who want to pursue those claims will have to do so in a separate action.) The Judge also denied all of SGS’ requests for summary judgment on individual issues. Click here to read the Decision (.pdf 1MB).
This decision significantly narrows SGS’ options, and we expect it will move the Parties much closer to a final resolution–but the case is not over. SGS’ liability is clear, but the Court did not specify how the damages are to be calculated and it did not order SGS to pay anything yet. Instead, the Court ordered the parties to "engage in good faith settlement negotiations" before March 21, 2007.
It is important to note that only those people who have joined the action will benefit from the case. OGC inspectors who are not yet part of the overtime litigation against SGS can join the Ferry v. SGS case by filling out the Consent to Sue form posted on our website. See the notes under the Ferry v. SGS case in our Current Cases section of this website.
On February 15, 2007 at 10 a.m., Judge Berman will hold oral argument on the plaintiffs’ motion for summary judgment (declaring the delayed receipt of overtime illegal, declaring the defendant’s "chinese overtime" system illegal, and declaring that the defendant illegally paid auto inspectors a lower rate for hours over 40 than for the non-overtime hours). The Court will also hear argument about the defendant’s motion for summary judgment and the motion to "decertify" the collective action. The argument is open to the public and to the plaintiffs in the case.
The Court has now consolidated the Ferry v. SGS case with the earlier filed Ayers v. SGS case. The plaintiffs in Ayers v. SGS have already made a motion to have the Court declare that SGS’s pay practices are unlawful as to OGC inspectors. The plaintiffs there have briefed the argument that SGS’s half-time pay scheme violates the law and that employees are owed back pay at the time plus one-half rate (and then doubled to pay employees "liquidated damages" under the law). Both sides have agreed that the Court’s ruling on the legality of the defendants’ pay scheme will also apply equally to this action. The plaintiffs believe that this will result in a quicker determination of this case.
Plaintiffs have moved the Court to declare the private settlement agreements arranged by SGS’s attorneys to be null and void. Click on this link to the Brief (.pdf 103KB) in order to review the filing. This brief demonstrates that Courts, from the Supreme Court on down, have routinely found that private waivers of FLSA rights cannot be enforced. After the motion was made, at a scheduling conference before Judge Kent of the Southern District of Texas, the Judge transferred this case to the Southern District of New York, due to its similarity to existing litigation there. That New York litigation is Ayers v. SGS, which is also brought by the Getman Law Office. For information on that case, see the Current Cases section of this website.
Plaintiffs have moved the Court for permission to send notice to all OGC inspectors to allow them to join this litigation. Click on the link to see the Plaintiffs Collective Action Brief (.pdf 109KB). The plaintiffs ask the Court to authorize notice, give the inspectors the opportunity to join this case, and to advise OGC inspectors that any settlement agreements SGS may have had them sign outside this litigation are null and void.
Additional OGC inspectors continue to join this litigation. At present there are a total of 22 plaintiffs who are bringing this litigation.
Inspectors who accepted a settlement from SGS are able to join this litigation through the filing of a "Consent To Sue" form, available above. Print out the form, fill it out completely, and fax, mail, or email the form to Getman Law Office. Defendant SGS is expected to argue that the signing of a waiver is effective, however the Supreme Court of the United States and more than 50 years of jurisprudence suggest otherwise. Individuals who accepted a private settlement from SGS’s lawyers are still protected from retaliation for filing a claim in this case, under the anti-retaliation protections of the Fair Labor Standards Act, 29 U.S.C. section 215(a)(3)and other provisions of the FLSA which provide for double damages for any such retaliatory act.
SGS appears to be trying to obtain a quick settlement from inspectors at far less than the true value of the claims. We are concerned that SGS may be offering this settlement now because of 2 pending lawsuits (Ayers v. SGS for 208 inspectors and Ferry v. SGS for 5 inspectors) brought by this office to collect the actual value of the overtime and liquidated damages that are due to inspectors. The period to join the Ayers case has passed, but OGC inspectors are able to join the Ferry v. SGS case and are actively doing so.
Getman Law Office believe that SGS is offering these settlements to prevent the thousands of current and former inspectors from filing suit because it knows it would likely have to pay much more in a lawsuit than it will if inspectors are fully informed about the value of their claim. We believe that SGS is hoping to obtain settlements without fully revealing the full information about the back wages and liquidated damages that OGC inspectors are due and therefore to trick them into giving up their overtime claims for much much less than they are worth. We urge inspectors to carefully consider SGS’s motivations in offering this settlement and to carefully consider the possible effects of settling claims at this point. We believe that accepting such a settlement without consulting an attorney about the value of an inspector’s claim could be a mistake.
OGC inspectors should know that a federal court in Florida and a jury already determined that SGS’ "Chinese Overtime" violated federal law. Ferrer v. SGS North America, 8:04CIV916 (MD Florida, Tampa Div). In that case, a jury awarded an OGC inspector more than 126,000 dollars in back overtime pay and liquidated damages for work for SGS. The case was afterwards settled by a secret settlement, which may have been greater or lower than the amount awarded by a jury. Likewise, any other inspector’s claim may be higher or lower than what was awarded in Ferrer v. SGS.
The U.S. Supreme Court has held that a "private" waiver of rights under the FLSA cannot be valid. Nevertheless, SGS is expected to argue that a "settlement" waiver is valid and acceptance of such a settlement may complicate bringing overtime claims to Court for their full value.
Any inspector who has questions about whether to take the settlement should contact Getman Law Office and speak with paralegals Janice Pickering or Carolyn Mow. All calls to this office are protected by attorney-client privilege and cannot be disclosed to SGS. SGS is prohibited from engaging in any form of retaliation against any employee who does not take the offered settlement or who brings their overtime claims in Court.
Click here to review the Complaint in this case (.pdf 239KB).

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The presence or absence of "a substantial new question of patentability" determines whether or not reexamination is ordered. The meaning and scope of the term "a substantial new question of patentability" is not defined in the statute and must be developed to some extent on a case-by-case basis, using the legislative history and case law to provide guidance as will be discussed in this section.
If the prior art patents and printed publications raise a substantial question of patentability of at least one claim of the patent, then a substantial new question of patentability as to the claim is present, unless the same question of patentability has already been: (A) decided in a final holding of invalidity by a federal court in a decision on the merits involving the claim, after all appeals; (B) decided in an earlier concluded examination or review of the patent by the Office; or (C) raised to or by the Office in a pending reexamination or supplemental examination of the patent.
An "earlier concluded examination or review" of the patent is: (A) the original examination of the application which matured into the patent; (B) the examination of the patent in a reissue application that has resulted in a reissue of the patent; (C) the examination of the patent in an earlier concluded reexamination or supplemental examination; (D) the review of the patent in an earlier concluded trial by the Patent Trial and Appeal Board, such as a post-grant review, inter partes review, or covered business method review of the patent; or (E) any other contested proceeding which has been concluded and which involved the patent.
The answer to the question of whether a "substantial new question of patentability" exists, and therefore whether reexamination may be had, is decided by the examiner, and if reexamination is denied, requester may obtain reconsideration only pursuant to MPEP § 2648. If reexamination is granted, the decision that a reference raises a SNQ is final and non-appealable by the patent owner. See 35 U.S.C. 312(c).
A prior art patent or printed publication raises a substantial question of patentability where there is a substantial likelihood that a reasonable examiner would consider the prior art patent or printed publication important in deciding whether or not the claim is patentable. If the prior art patents and/or publications would be considered important, then the examiner should find "a substantial new question of patentability" unless the same question of patentability has already been decided as to the claim in a final holding of invalidity by a federal court or by the Office in an earlier concluded examination or review or was raised to or by the Office in a pending reexamination or supplemental examination of the patent. For example, the same question of patentability may have already been decided by the Office where the examiner finds the additional (newly provided) prior art patents or printed publications to be merely cumulative to similar prior art already fully considered by the Office in an earlier concluded examination or review of the claim or a pending reexamination or supplemental examination of the claim.
(B) The same question of patentability as to the claim has not been decided by the Office in an earlier concluded examination or review of the patent, raised to or by the Office in a pending reexamination or supplemental examination of the patent or decided in a final holding of invalidity (after all appeals) by a federal court in a decision on the merits involving the claim. If a reexamination proceeding was terminated/vacated without resolving the substantial question of patentability question, it can be re-presented in a new reexamination request.
It is not necessary that a "prima facie" case of unpatentability exist as to the claim in order for "a substantial new question of patentability" to be present as to the claim. Thus, "a substantial new question of patentability" as to a patent claim could be present even if the examiner would not necessarily reject the claim as either anticipated by, or obvious in view of, the prior art patents or printed publications. The difference between "a substantial new question of patentability" and a "prima facie" case of unpatentability is important. See generally In re Etter, 756 F.2d 852, 857 n.5, 225 USPQ 1, 4 n.5 (Fed. Cir. 1985).
Note that the clarification of the legal standard for determining obviousness under 35 U.S.C. 103 in KSR International Co. v. Teleflex Inc. (KSR), 550 U.S. 398, 82 USPQ2d 1385 (2007) does not alter the legal standard for determining whether a substantial new question of patentability exists. See the discussion in MPEP § 2616. It should be also noted that the "substantial new question of patentability" standard for granting reexamination on a request for an inter partes reexamination is the same as the "substantial new question of patentability" standard for granting reexamination on a request for an ex parte reexamination.
"The threshold for initiating an inter partes review is elevated from ‘significant new question of patentability’--a standard that currently allows 95% of all requests to be granted--to a standard requiring petitioners to present information showing that their challenge has a reasonable likelihood of success." H.R. Rep. No. 112-98 (Part 1), at 47.
Thus, the reasonable likelihood standard requires a showing that is "elevated" from that of the substantial question of patentability question standard.
If a reexamination proceeding was terminated/vacated without resolving the "reasonable likelihood" question, it can be re-presented in a new reexamination request (but note that for an ex parte reexamination request, a substantial new question of patentability must be raised).
In order to further clarify the meaning of "a substantial new question of patentability," certain situations are outlined below which, if present, should be considered when making a decision as to whether or not "a substantial new question of patentability" is present.
A "substantial new question of patentability" is not raised by the prior art if the Office has previously considered (in an earlier concluded examination or review of the patent or in a pending reexamination or supplemental examination of the patent) the same question of patentability as to a patent claim favorable to the patent owner based on the same prior art patents or printed publications. In re Recreative Technologies, 83 F.3d 1394, 38 USPQ2d 1776 (Fed. Cir. 1996).
In deciding whether to grant a request for reexamination of a patent, the examiner should check the patent’s file history to ascertain whether any of the prior art now advanced by requester was previously cited/considered in an earlier concluded examination or review of the patent or in a pending reexamination or supplemental examination of the patent. For the sake of expediency, such art is referred to as "old art" throughout, since the term "old art" was coined by the Federal Circuit in its decision of In re Hiniker Co., 150 F.3d 1362, 1365-66, 47 USPQ2d 1523, 1526 (Fed. Cir. 1998).
In a decision to order reexamination made on or after November 2, 2002, reliance on old art does not necessarily preclude the existence of a substantial new question of patentability that is based exclusively on that old art. See Public Law 107-273, 116 Stat. 1758, 1899-1906 (2002), which expanded the scope of what qualifies for a substantial new question of patentability upon which a reexamination may be based. Determinations on whether a substantial new question of patentability exists in such an instance shall be based upon a fact-specific inquiry done on a case-by-case basis. For example, a substantial new question of patentability may be based solely on old art where the old art is being presented/viewed in a new light, or in a different way, as compared with its use in the earlier examination(s), in view of a material new argument or interpretation presented in the request.
MPEP § 2258.01 provides a discussion of the use of "old art" in the examination stage of an ordered reexamination (as a basis for rejecting patent claims).
A prior decision adverse to the patentability of a claim of a patent by the Office based upon prior art patents or printed publications would usually mean that "a substantially new question of patentability" is present. Such an adverse decision by the Office could arise from a reissue application which was abandoned after rejection of the claim and without disclaiming the patent claim.
Any prior adverse final decision by the Director of the Office, or the Patent Trial and Appeal Board or Board of Patent Appeals and Interferences (Board), on an application seeking to reissue the same patent on which reexamination is requested will be considered by the examiner when determining whether or not a "substantial new question of patentability" is present. To the extent that such a prior adverse final decision was based upon grounds other than patents or printed publications, the prior adverse final decision will not be considered in determining whether or not a "substantial new question of patentability" is present.
While the Office would consider decisions involving substantially identical patents or printed publications in determining whether a "substantial new question of patentability" is raised, the weight given to such decisions will depend upon the circumstances.
As to A - C which follow, see Ethicon v. Quigg, 849 F.2d 1422, 7 USPQ2d 1152 (Fed. Cir. 1988).
When the initial question as to whether the prior art raises a substantial new question of patentability (SNQ) or there is a reasonable likelihood that the requester will prevail (RLP) as to a patent claim is under consideration, the existence of a final court decision that a patent claim is not invalid in view of the same or different prior art does not necessarily mean that no SNQ/RLP is present, because of the different standards of proof and different standards of claim construction applied by the federal district courts and the Office. While the Office may accord deference to factual findings made by the court, the determination of whether a SNQ/RLP exists will be made independently of the court’s decision on validity, because it is not binding on the Office. See, e.g., In re Swanson et al., 540 F.3d 1368, 1378 (Fed. Cir. 2008) (Federal Circuit approved of the Office’s interpretation in MPEP § 2242). Note, where the requester was a party to the prior litigation resulting in the final court decision that a patent claim is not invalid, see MPEP § 2686.04, subsection II(B) for a discussion of the application of the estoppel provisions of the inter partes reexamination statute.
A non-final holding of claim invalidity or unenforceability will not be controlling on the question of whether a substantial new question of patentability/a reasonable likelihood that the requester will prevail is present.
However, a final holding of claim invalidity or unenforceability, after all appeals, binds the Office. In such cases, a substantial new question of patentability/a reasonable likelihood that the requester will prevail would not be present as to any claims finally held invalid or unenforceable.
Note: Any situations requiring clarification should be brought to the attention of the Office of Patent Legal Administration.