Corporate Compliance and Governance Blog

Cost-Effective Subpoena Compliance: Fulfilling Subpoenas Without Violating Applicable Privacy Laws

Complying with a wide variety of incoming subpoenas can be a burdensome task for corporate legal departments with increasingly limited money, time, and staff resources. Juggling and tracking multiple subpoenas including gathering voluminous amounts of documents and meeting court-imposed deadlines requires seamless coordination between individuals and across departments. Late or incomplete compliance with subpoenas can result in court-imposed penalties and adverse litigation outcomes against the company and vital stakeholders, especially if fulfillment is done in violation of certain financial, electronic communication, and medical information privacy laws.

Regardless of the nature of your business, your company will have to respond to any litigation subpoenas that it receives. If you fail to comply, courts may hold your company in contempt and possibly impose fines or penalties such as court costs, attorney’s fees, or sanctions. As an extreme case of noncompliance, two nonparties were held in contempt of court for their willful failure to comply with court-issued subpoenas and orders and assessed $216,169 for plaintiff’s attorney’s fees.

Besides complying with litigation subpoenas, companies in different industries may also need to comply with financial, electronic communications, or medical privacy laws. For example, telecommunication and internet service providers must comply with the Stored Wire and Electronic Communications Act (SWECA) under which persons aggrieved by the wrongful disclosures of electronic communications are afforded civil remedies including injunctive relief, actual damages, reasonable attorney’s fees and costs, and punitive damages if disclosures are willful or intentional. Similarly, financial institutions also face potential liability for not adhering to the stringent customer privacy protections embodied in the Right to Financial Privacy Act (FPA). For disclosing customer financial information in violation of FPA, financial institutions will be liable for actual damages, attorney’s fees and costs, and punitive damages if disclosure was intentional or willful. Additionally, health care providers and health plan administrators must be careful not to disclose protected personal medical information when responding to subpoenas except as permitted under the Health Insurance and Portability Accountability Act of 1996 (HIPAA).

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Olson v. Halvorsen, et al., C.A. No. 1884-VCL, Lamb, V.C. (Del. Ch. Oct. 22, 2008). The Chancery Court, in granting summary judgment to the defendant partners of a hedge fund, held that the Statute of Frauds applies to LLC operating agreements, an issue that had never before been addressed by the Court. The Court stated that (1) an oral LLC agreement provision or multiple provisions that cannot possibly be performed within one year are unenforceable, and (2) provisions of an oral LLC agreement that could possibly be performed within one year will remain enforceable. Here, the plaintiff argued that an “earnout” provision could be performed within a year, but the Court found it unenforceable because it called for payments of the LLC income over multiple years, as well as other requirements of the LLC partners that the Court believed could not be performed within one year.

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In today’s economic climate, garnishments have increased as much as 20% over 2007 and are expected to increase up to 38% in 2009. Without a robust compliance program, companies that receive a high volume of wage garnishments can face significant liability exposure to third-party creditors and governmental agencies (including child support enforcement agencies). Federal and state law can impose substantial civil penalties in addition to possible criminal charges for failing to comply with employee wage garnishments properly and in a timely fashion.

Developing a garnishment compliance program can be a challenging undertaking for companies with employees in a number of different states. Although the federal Consumer Credit Protection Act sets basic standards governing compliance with wage garnishments, each state can create supplemental wage garnishment laws adding further employee protections or imposing stiffer noncompliance penalties. As a result, complying with a patchwork of federal and state garnishment and employment laws can be a daunting task. Even so, strict compliance is a must because employers risk potential liability on at least two separate fronts. First, employers can face civil penalties and liability and even criminal charges for not properly withholding and remitting amounts to creditors and governmental agencies. Second, employers can be confronted by wrongful discharge or wrongful dismissal actions and severe civil penalties as high as $10,000 per violation for discharging or firing employees that are subject to a garnishment.

Continue reading " Third-Party Garnishment Liability: Are You Properly Managing Employee Wage Garnishments? " »