Where a company chooses to incorporate directly affects the fiduciary duties imposed upon its leadership and shareholders. Under the internal affairs doctrine, the law of the state in which a company is incorporated applies to disputes over the company’s internal workings, regardless of where the company is actually based or where the alleged conduct occurred. Consequently, the distinctions between Massachusetts and Delaware corporate law take on particular importance in the context of closely held corporations and LLCs, where each state’s case law and statutes uniquely impact the imposition of fiduciary duties and the extent to which such duties can be contractually waived. Understanding these differences is essential to making informed decisions on business formation and litigation strategy.
Fiduciary Duties In Closely Held Corporations
In both Massachusetts and Delaware, a corporate fiduciary, such as a director, generally owes a duty of care and a duty of loyalty, both of which impose a responsibility to act in the best interests of the corporation and/or its shareholders. Specifically, the duty of care requires a fiduciary to act in an informed and reasonable manner, and the duty of loyalty requires a fiduciary to act in good faith with the primary intent of furthering the best interests of the company. In the context of closely held corporations, including LLCs, Massachusetts and Delaware take divergent approaches as to whether shareholders may owe each other additional or enhanced fiduciary duties.
In Donahue v. Rodd Electrotype Co. of New England, the Massachusetts Supreme Judicial Court held that a “close corporation” is typically one in which there is “(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.” The Donahue Court then held that “[s]tockholders in close corporations must discharge their management and stockholder responsibilities” under a standard of utmost good faith and loyalty.
Therefore, a controlling group of shareholders in a close corporation “may not, consistent with its strict duty to the minority, utilize its control of the corporation to obtain special advantages and disproportionate benefit from its share ownership.” Even if the majority shareholders demonstrate a legitimate business purpose for their actions, minority shareholders may still maintain a claim if they can establish that the same business purpose could have been achieved in an alternative manner less harmful to the minority. Importantly, minority shareholders in Massachusetts close corporations also owe fiduciary duties and may not intentionally engage in corporate conduct to their own personal advantage that is detrimental to the corporation and its other shareholders.
In Massachusetts, where a minority shareholder has a reasonable expectation of continued employment within a closely held company, the termination of such minority shareholder’s employment may be considered a “freeze-out” and, as such, be a breach of the majority shareholders’ fiduciary duties. In this regard, the remedy for a breach of a majority shareholder against the minority shareholder is, to the extent possible, to “restore to the minority shareholder those benefits which she reasonably expected, but has not received because of the fiduciary breach.” Massachusetts courts have the ability to award monetary damages, as well as impose a wide range of equitable remedies, such as reinstating corporate officers, forcing the distribution of dividends or even amending corporate operating agreements.
In contrast, a closely held Delaware company must be specifically incorporated as a “close corporation.” Even when incorporated as such, shareholders generally will not owe each other fiduciary duties unless the articles of incorporation or an agreement among the shareholders imposes such duties.  Consequently, the “protections afforded to minority stockholders in closely-held corporations under Delaware common law are no different than those in publicly-held corporations.” 
Majority shareholders in a closely held Delaware corporation, or shareholders who otherwise exert control over the close corporation, may act in a manner that unintentionally harms the interests of minority shareholders as long as such actions do not contravene the best interests of the corporation itself. The same holds true in the context of Delaware LLCs, except that managing members still owe fiduciary duties to the company and its passive members. However, if majority/controlling shareholders are found to have engaged in a transaction in which they would uniquely benefit, such shareholders must demonstrate that the transaction was entirely fair to the corporation, in terms of both price and dealing, and conducted with the utmost good faith. In Delaware, remedies for such breaches usually are limited to either monetary damages or equitable rescission of the contested transaction.
Contractually Limiting Fiduciary Duties
Contracts, which govern shareholder conduct, may supersede common law or statutory fiduciary duties. In Massachusetts, “[a]lthough a shareholder in a close corporation always owes a fiduciary duty to fellow shareholders, good faith compliance with the terms of an agreement entered into by the shareholders satisfies that fiduciary duty.” Consequently, claims for breach of fiduciary duty with respect to things such as employment or stock purchases may only arise when a prior agreement among the parties “does not entirely govern the shareholder’s actions.” To the extent an agreement does not directly address an issue, fiduciary duties apply.
In the LLC context, Massachusetts allows for greater flexibility regarding the limitation of fiduciary duties. Massachusetts Gen. Laws c. 156C, § 63, specifically provides that “[t]o the extent that, at law or in equity, a member or manager has duties, including fiduciary duties, and liabilities relating thereto to a limited liability company or to another member or manager . . . the member’s or manager’s duties and liabilities may be expanded or restricted by provisions in the operating agreement.” Additionally, “[t]he certificate of organization or a written operating agreement may eliminate or limit the personal liability of a member or manager for breach of any duty to the limited liability company or to another member or manager.” Contractual language limiting or modifying fiduciary duties “should be strictly, not expansively, construed.”
In JFF Cecilia LLC v. Weiner Ventures, for example, the plaintiff and defendant were members of a Massachusetts LLC that was primarily formed to develop a large real estate project. The plaintiff asserted claims based on the defendant’s failure to provide notice that it was publicly announcing the canceling of the development project.  The Superior Court recognized the enforceability of a clause in the LLC agreement, which stated that its members owed no fiduciary duties to the company or each other “except to the extent such duties are expressly set forth in this Agreement.” The court, however, found that the plaintiff still had a cause of action based on another section of the agreement, which imposed a duty upon its members to “consult with one another openly, fairly and in good faith,” to “work collaboratively” and to “use their reasonable efforts to keep one another informed of all known and material information with respect to” the company. Likewise, in Butler v. Moore, the relevant LLC agreement stated that its members were not “obligated to present an investment opportunity to the Company even if it is similar to or consistent with the business of the Company. . . [and they had the] right to take for their own account or recommend to others any such investment opportunity.” Nonetheless, the court refused to interpret such provisions as allowing its members to take, “for their own personal benefit,” those opportunities that already had been presented to the company. 
Similar to Massachusetts, in Delaware where a corporate “dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim . . . [and] any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.” Likewise, Delaware statutorily allows provisions in LLC agreements in which a member or director’s fiduciary duties are “expanded or restricted or eliminated.” For example, in Marubeni Spar One, LLC v. Williams Field Servs. – Gulf Coast Co., L.P., the Chancery Court dismissed a claim for breach of fiduciary duty because the LLC agreement stated that the “Operating Member shall have no liability under this Agreement or otherwise to the Company or any Member for any actions taken in its capacity as Operating Member or for any actions it fails to take unless it breaches its obligations under this Agreement as a result of its gross negligence, fraud or willful misconduct.”
Although parties to a Delaware LLC agreement are not allowed to waive “the implied contractual covenant of good faith and fair dealing,” even this limitation is narrowly applied. As the Chancery Court explained, when an LLC “agreement eliminates fiduciary duties as part of a detailed contractual governance scheme, Delaware courts should be all the more hesitant to resort to the implied covenant. . . . “[r]especting the elimination of fiduciary duties requires that courts not bend an alternative and less powerful tool into a fiduciary substitute.”
Both Massachusetts and Delaware allow closely held corporations and LLCs to indemnify their directors and managers for any defense costs, settlements or judgments, which might arise from an alleged breach of their fiduciary duties. Pursuant to Mass. Gen. Laws c. 156D, § 8.51, a corporation may indemnify a director against any liability as long as the director: (1) has acted in “good faith;” (2) “reasonably believed that his conduct was in the best interests of the corporation or that his conduct was at least not opposed to the best interests of the corporation;” and (3) “had no reasonable cause to believe [the ] conduct was unlawful.” Massachusetts law also mandates that a corporation indemnify a director for their defenses costs if such director “was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party.”
In the context of LLCs, Massachusetts law provides even wider latitude in determining the scope of indemnification. Indeed, the burden of denying indemnification may be placed on the company. LLCs can indemnify their members and managers “against any and all claims and demands whatsoever,” without having to establish that the member actually acted in good faith or with any particular intention or knowledge. An LLC may not provide any form of indemnification if the member or manager is specifically found in the course of a proceeding “not to have acted in good faith in the reasonable belief that his action was in the best interest of the limited liability company.”
In Delaware, the circumstance under which a corporation may indemnify a director is similar to Massachusetts in that the person must have acted in good faith with the reasonable belief that he, she or they were acting in the best interest of the corporation, and with no reason to believe his, her or their conduct was unlawful. Delaware corporations are required to provide indemnity for defense costs incurred by qualified individuals who succeed on the merits of their case. Delaware provides additional statutory guidance to determine when a person qualifies for indemnification. In this regard, the termination of an action by judgment, order or settlement (except where such judgment is based on a guilty plea) “shall not, of itself, create a presumption that the person did not act in” a manner entitling him, her or them to indemnification. A company cannot provide any indemnification if a person has “been adjudged to be liable to the corporation unless and only to the extent that the” relevant court makes a separate determination that despite such judgment the person is still entitled to indemnification.
In Delaware, “[n]o criteria are established by statute to govern the indemnification that limited liability companies may offer.” Pursuant to 6 Del. C. § 18-108, “a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.” The statute “defers completely to the contracting parties to create and delimit rights and obligations with respect to indemnification and advancement,” and does not in itself create any right or limits to indemnification.
In the context of closely held corporations, Massachusetts and Delaware take somewhat divergent approaches to the imposition and waiver of fiduciary duties among shareholders. Shareholders in closely held Massachusetts companies owe each other heightened fiduciary duties, and such duties can only be eliminated by contractual agreements that specifically address the duties or situations under which such duties may arise. Consequently, founders of, or investors in, closely held companies who seek heightened protections against the potential misconduct of their fellow shareholders, may favor Massachusetts incorporation. In contrast, shareholders in closely held Delaware companies generally do not owe each other fiduciary duties, and Delaware takes a more expansive approach with respect to allowing the elimination of fiduciary duties that could be imposed upon such shareholders. Accordingly, parties whose priority is to avoid potential liability, or the threat of such liability, from their fellow shareholders, may prefer Delaware incorporation.
In either state, potential shareholders should carefully review any contractual arrangements among the shareholders, including by-laws, purchase agreements and employment contracts. Such contracts may supersede, modify or eliminate what would otherwise be the parties’ default fiduciary duties. Awareness of these key distinctions between Massachusetts and Delaware corporate law is essential to making informed decisions about incorporation, investment and litigation.
 Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001). The majority of states adhere to the internal affairs doctrine. Notably, California and New York have particular statutory exceptions to the doctrine, which require consideration of whether the company has substantial contacts with the forum state. See Cal. Corp. Code § 2115; N.Y. Bus. Corp. L. §§ 1317–20.
 Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 586 (1975) (holding that the categorization of company as a “close corporation” is a factual inquiry); Allison v. Eriksson, 479 Mass. 626, 636 (2018) (in determining whether an LLC is closely held company, a court also examines the manner “in which a particular LLC is structured”).
 Id. at 593 (1975); Butler v. Moore, No. CIV. 10-10207-FDS, 2015 WL 1409676, at *61 (D. Mass. Mar. 26, 2015) (“As a matter of logic and fairness, there is no reason why the fiduciary duties of members of a closely held LLC should be materially different from those of shareholders of a closely held corporation.”); Blank v. Chelmsford Ob/Gyn, P.C., 420 Mass. 404, 408 (1995) (“They may not act out of avarice, expediency, or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.”).
 Donahue, 367 Mass. at 598.
 Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 851-52 (1976).
 Donahue, 367 Mass. at 593; Zimmerman v. Bogoff, 402 Mass. 650, 658 (1988)
 Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 536 (2014) (“Freeze-outs can occur when a minority shareholder is deprived of employment.”); Pointer v. Castellani, 455 Mass. 537, 551 (2009).
 Brodie v. Jordan, 447 Mass. 866, 870–71 (2006) (internal quotations omitted)
 Allison v. Eriksson, 479 Mass. at 638.
 Pursuant to Del. Code Ann. tit. 8, § 342, a Delaware company may incorporate as a close corporation. Such corporate form places restrictions on the number of stockholders and types of stock transfers, as well as prohibits any “public offering” of the company’s stock. However, the statute does not impose any additional fiduciary duties.
 Blaustein v. Lord Baltimore Capital Corp., No. CIV.A. 6685-VCN, 2013 WL 1810956, at *14 (Del. Ch. Apr. 30, 2013), aff’d, 84 A.3d 954 (Del. 2014) (explicitly contrasting its view with the approach of Massachusetts courts).
 Id. (citing Gilbert v. El Paso Co., 1988 WL 124325 (Del. Ch. Nov. 21, 1988))
 Feeley v. NHAOCG, LLC, 62 A.3d 649, 662 (Del. Ch. 2012) (“Managers and managing members owe default fiduciary duties; passive members do not.”)
 Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993)
 Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, No. CV 11802-VCL, 2018 WL 3326693, at *49 (Del. Ch. July 6, 2018), aff’d sub nom. Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100 (Del. 2019).
 Merriam v. Demoulas Super Markets, Inc., 464 Mass. 721, 727 (2013).
 Selmark Assocs., Inc., 467 Mass. at 539 (“[T]o supplant the otherwise applicable fiduciary duties of parties in a close corporation, the terms of a contract must clearly and expressly indicate a departure from those obligations.”).
 Mass. Gen. Laws Ann. ch. 156C, § 63.
 Mass. Gen. Laws Ann. ch. 156C, § 8.
 Butler v. Moore, No. CIV. 10-10207-FDS, 2015 WL 1409676, at *73 (D. Mass. Mar. 26, 2015); Selmark Assocs., 467 Mass. at 539 (2014) (“[T]o supplant the otherwise applicable fiduciary duties of parties in a close corporation, the terms of a contract must clearly and expressly indicate a departure from those obligations.”).
 JFF Cecilia LLC v. Weiner Ventures, LLC, No. 1984CV03317-BLS2, 2020 WL 4464584, at *11 (Mass. Super. July 30, 2020)
 Butler, 2015 WL 1409676, at *73.
 Id. at *74.
 Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010)
 6 Del. C. § 18-1101
 Marubeni Spar One, LLC, 2020 WL 64761 at *10; see In re Sols. Liquidation LLC, 608 B.R. 384, 407 (Bankr. D. Del. 2019) (finding that plaintiffs’ claims for the defendants’ alleged breach duty of loyalty and good faith were precluded by the LLC agreement, which eliminated such duties).
30] 6 Del. C. § 18-1101.
 Lonergan v. EPE Holdings, LLC, 5 A.3d 1008, 1018 (Del. Ch. 2010).
 Mass. Gen. Laws Ann. ch. 156D, § 8.51
 Mass. Gen. Laws Ann. ch. 156D, § 8.52.
 Mass. Gen. Laws Ann. ch. 156C, § 8
 Del. Code Ann. tit. 8, § 145.
Branin v. Stein Roe Inv. Counsel, LLC, No. CIV. A. 8481-VCN, 2014 WL 2961084, at *4 (Del. Ch. June 30, 2014).
 6 Del. C. § 18-108.
 Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 591 (Del. Ch. 2006).
Nicholas Nesgos is a Partner in the Complex Litigation Group at Arent Fox. He handles a wide variety of business disputes including disputes among shareholders in closely held companies.
Benjamin Greene is an Associate in the Complex Litigation Group at Arent Fox LLP. Benjamin represents a range of individual and corporate clients in complex commercial, employment and real estate litigation.
DACA, Dreamers, and the Limits of Prosecutorial Discretion: DHS v. Regents of the University of CaliforniaPosted: August 17, 2020
by Ilana Etkin Greenstein
On June 18, 2020, the U.S. Supreme Court issued a narrow 5-4 opinion in Department of Homeland Security et. al. v. Regents of the University of California et. al., Slip Op. No. 18-587 591 U.S. __ (2020) (“Regents”) that halted the Trump Administration’s plan, announced in September 2017, to “immediately terminate” the Deferred Action for Childhood Arrivals (“DACA”) program. The decision extended the life of an immigration policy which, since inception in 2012 under the Obama Administration, has provided more than 600,000 young undocumented immigrants with stays of deportation and the opportunity to live and work with authorization in the United States. In response to the Regents setback which left the DACA Memorandum in place, on July 28, 2020, DHS announced interim changes that pending its reconsideration of the DACA termination, DHS would continue to reject all new and pending DACA requests and associated employment authorization applications as it had been since 2017, would shorten the renewal of DACA and associated work authorization to one year, and exercise its discretion to reject applications for advance parole and to terminate or deny any deferred action requests. This article reviews Regents’ affirmation of the principles of reasoned agency decision-making and its implications for the DHS’ future actions to scale back or completely and permanently terminate DACA.
The History: Failed Legislation and the Dreamers
Beginning in 2001 with the Development, Relief, and Education for Alien Minors (“DREAM”) Act, and in the 18 years that followed, at least ten versions of legislation were introduced in Congress, including most recently in May 2019, to provide undocumented minors with a path to immigration status and citizenship. A movement of popularly known as the “Dreamers” sprang up in support. While the various versions of the Dream Act contained some key differences, each would have provided a pathway to legal immigration status for certain undocumented individuals brought to the U.S. as children. Although each bill enjoyed voter and bipartisan Congressional support—with some versions garnering as many as 48 co-sponsors in the Senate and 152 in the House—none became law.
Acts of Administrative Grace: DACA and DAPA
DACA was established on June 15, 2012 as an act of administrative grace for the Dreamers in the absence of Congressional action. The program was instituted and implemented through a DHS policy memorandum entitled “Exercising Prosecutorial Discretion with Respect to Individuals Who Came to the United States as Children” (“DACA Memorandum”) and issued at the direction of then-President Barack Obama. Unlike the Dream Act, DACA does not confer an immigration status or provide a pathway to citizenship, but is the exercise of prosecutorial discretion to forbear from exercising removal actions with respect to certain non-citizens between the ages of 15 and 30, who had been brought to the United States as children more than five years previously, and who had either graduated from high school or college in the U.S., earned a G.E.D., or served in the U.S. Armed Forces. DACA-eligible individuals who are granted deferred action in two-year increments are also eligible under preexisting regulations for certain attendant benefits, such the opportunity to apply for employment authorization, renewable for as long as the recipient remains eligible for DACA and the DACA Memorandum remains in effect. The valid scope of the DACA program depends on the Executive Branch’s inherent authority to exercise prosecutorial discretion within the framework of existing law.
Two years after the initial DACA memo, DHS issued a new memorandum to expand DACA eligibility by removing the age cap, extending the DACA renewal and work authorization to three-year increments, and adjusting the date-of-entry requirement from June 15, 2007 to January 1, 2010, and to create a new, related, program titled Deferred Action for Parents of Americans and Lawful Permanent Residents (“DAPA Memorandum”). DAPA would have offered approximately 4.3 million undocumented parents of U.S. citizen or lawful permanent resident children the same forbearance from removal and opportunity to apply for work authorization as afforded to DACA recipients. Like the DACA Memorandum, the DAPA Memorandum expressly stated that the DAPA policy “confer[s] no substantive right, immigration status or pathway to citizenship.”
Litigation, an Administrative About-Face, and More Litigation
Before DAPA went into effect, Texas and 25 other states with Republican governors filed suit against the U.S. seeking injunctive relief from both DAPA and the DACA expansion, arguing that DAPA violates the Constitution and federal statutes. On February 16, 2015, a preliminary injunction issued barring the implementation of DAPA, which was affirmed by a three-member panel of the Fifth Circuit Court of Appeals with one dissent, and by a deadlocked 4-4 Supreme Court which left the lower court’s preliminary injunction in place. On June 15, 2017, the newly inaugurated Trump Administration rescinded the DAPA Memorandum, and the state plaintiffs voluntarily dismissed the pending litigation, terminating the hope that the case would reach the Supreme Court on the merits.
Three months later, on September 5, 2017, then-Attorney General Jefferson B. Sessions III announced that DACA conferred federal benefits that exceeded the scope of DHS’s authority. Subsequently, in 2017 and 2018, DHS issued memoranda to rescind the 2012 DACA Memorandum, with then-Acting Secretaries Elaine Duke and Kirstjen Nielsen, respectively, ordering their constituent bureaus to wind down the program.
In response, several groups of plaintiffs filed suit in federal district courts in California, New York, and the District of Columbia, arguing that DHS’s decision to rescind DACA was arbitrary and capricious in violation of the Administrative Procedure Act (“APA”) and infringed the plaintiffs’ right to equal protection under the Fifth Amendment. The cases made their ways up through the Second, Ninth, and D.C. Circuits, respectively. While those appeals were pending, the government filed for certiorari in three of those cases—Regents (18-587), Trump v. National Ass’n for the Advancement of Colored People (18-588), and Wolf v. Batalla Vidal (18-589)—which were granted and consolidated for Supreme Court review and oral argument on November 12, 2019.
The Regents Decision: Federal Jurisdiction and the Limits of Prosecutorial Discretion
On June 20, 2020, Chief Justice John Roberts, joining the Court’s four more liberal justices, wrote the narrow Regents decision that vacated the DHS’s 2017 rescission of the DACA Memorandum. The scope of the Regents decision was limited. The Court did “not decide whether DACA or its rescission are sound policies,” did not affirm the legality of the DACA program, or order the DHS to restore and maintain the DACA policy in full force pending any agency reconsideration of the policy. Indeed, there was no dispute that the scope of DHS’ prosecutorial discretion includes the legal authority to rescind the program. Rather, the dispute was narrowly about whether the agency followed reasoned agency decisionmaking procedures in doing so, and whether the Court had jurisdiction to review the agency’s decision.
As a preliminary matter, on the threshold issue of reviewability, the Court held that neither of the jurisdiction-stripping provisions of the Immigration and Nationality Act (“INA”), 8 USC §1252(b)(9), which bars judicial review of claims arising from an “action or proceeding brought to remove an alien” from the United States, nor §1252(g), which bars review of cases “arising from” decisions “to commence proceedings, adjudicate cases, or execute removal orders,” divested it of jurisdiction to review whether DHS’s termination of the DACA program was arbitrary and capricious under the Administrative Procedure Act. Slip Op. at 12.
The Court also determined that there was no plausible inference that the rescission was motivated by racial animus in violation of the Equal Protection Clause of the Fifth Amendment.
Turning to the merits, the Court considered whether DHS’s decision to rescind DACA was arbitrary and capricious or, as the government asserted, an appropriate response to the Attorney General’s determination that the DACA program violated the INA and raised important policy concerns. The Court acknowledged that “[w]hether DACA is illegal is, of course, a legal determination, and therefore a question for the Attorney General.” The Court also recognized that DHS has the discretion to determine how to address the DOJ’s finding of illegality and relevant policy concerns. Nonetheless, the Court held that the APA required the agency to engage in a reasoned assessment of those legal and policy issues, including potential reliance on the program, in determining whether and how to end it.
In deciding that the agency termination of DACA was arbitrary and capricious because DHS failed to provide a reasoned explanation of the scope of the agency’s prosecutorial discretion and failed to exercise that discretion in a reasonable manner, the Court distinguished between dual facets of DACA that DHS had erroneously painted with a single brush: (1) protection from deportation (forbearance) and (2) eligibility for certain attendant benefits under other preexisting regulations, including employment authorization. The Court reasoned that, although the Attorney General had determined that DACA conferred federal benefits that exceeded the scope of DHS’s authority, there was not also consideration of “whether to retain forbearance and what if anything to do about the hardship to DACA recipients” with “legitimate reliance” on the DACA program benefits. Accordingly, the agency acted arbitrarily and capriciously without explanation, in violation of the requirement for reasoned decision-making under the APA, and the rescission must be vacated:
“Here the agency failed to consider the conspicuous issues of whether to retain forbearance and what if anything to do about hardship to DACA recipients. That dual failure raises doubts about whether the agency appreciated the scope of its discretion or exercised that discretion in a reasonable manner. The appropriate recourse is therefore to remand to DHS so that it may consider the problem anew.”
Tomorrow and Beyond: What Does the Future Hold for the Dreamers?
While Regents was pending before the Supreme Court, a separate suit was in the federal district court in Maryland, Casa de Maryland v DHS, also challenging the DACA rescission. On July 17, 2020, the court in that case entered its order vacating the DACA rescission memo in light of the Supreme Court’s decision in Regents, and enjoining the agency from implementing or enforcing the rescission. Casa de Maryland, in other words, explicitly restores the program to its pre-September 5, 2017 status.
On July 28, 2020, however, Acting DHS Secretary Chad F. Wolf issued yet another memorandum to the three constituent bureaus charged with implementing the DACA program. The Wolf memorandum clarifies the agency’s legal and policy concerns with continuing the program, rescinds DHS’ 2017 Duke and 2018 Nielsen memoranda, and instructs that DHS shall, among other things, reject all initial DACA requests. Whether the 2020 Wolf memorandum will withstand a legal challenge remains to be seen.
So where do these developments leave the hundreds of thousands of young people who are potentially eligible for DACA benefits? For those who had applied for and been granted DACA at some point in the past, the answer is relatively clear. Under the agency’s guidance as it existed prior to Regents:
- Current DACA recipients: People who currently have DACA can apply to renew it;
- Expired DACA recipients (less than one year): People whose DACA expired one year ago or less can apply to renew it;
- Expired DACA recipients (more than one year): People whose DACA expired more than one year ago may not apply for renewal, but may make an initial DACA request.
- Terminated DACA: People whose DACA has been terminated may file an initial request.
There is, however, no guarantee that the program will remain in place in the long term. The Executive has full authority to end the DACA program; all the Supreme Court required was that it refrain from doing so in an arbitrary and capricious manner, and that it articulate a reasoned explanation for its decision. Whether individuals who had never been granted DACA, but who are arguably eligible to apply now, remains unclear. The Supreme Court and Maryland District Court orders each require DHS to maintain the program under the 2012 guidelines unless and until the agency follows correct procedures to terminate it.
Additionally, for all that Regents did to provide a respite for those who have relied on DACA, a separate case remains pending in the federal district court in the Southern District of Texas that could have even greater stakes. In Texas v. U.S. (1:18-cv-068), state attorneys general challenge the constitutionality of DACA. That case, which is before the same judge who issued the injunction barring implementation of the DAPA memorandum, was stayed pending Regents. Now, with each side claiming that Regents supports its position, Plaintiffs have sought to have their summary judgment motion heard in August 2020, while the intervening DACA recipients have sought to stay the action.
Of course, even Texas v U.S. side-steps the core issue: the millions of young people who are working, studying, serving in our armed forces, contributing to our society every day and continue to have no immigration status at all. Although certainly a welcome respite for the hundreds of thousands of young people who have been protected under the policy over the years, DACA is still nothing more than an act of administrative grace with no permanent benefits and no potential for durable relief. It is not, strictly speaking, a legal status, and confers nothing more than an impermanent limbo. It remains that Congress has the ultimate authority to decide the future of the Dreamers – to let them languish in the shadows or to provide a path to durable legal status by legislation.
 S. 1291, 107th Cong. (2001).
 S. 1291, 107th Cong. (2001); S. 1545, 108th Cong. (2003); H.R. 1648, 108th Cong. (2003); S. 2075, 109th Cong. (2005); H.R.5131, 109th Cong. (2005); S.2205, 110th Cong. (2007); H.R. 1275, 110th Cong. (2007); H.R. 5241, 111th Cong. (2010); S. 729, 111th Cong. (2010); S. 3992, 111th Cong. (2010); H.R. 1842, 112th Cong. (2011); S. 952, 112th Cong. (2011); H.R. 1468, 115th Cong. (2017); H.R. 3591, 115th Cong. (2017) H.R. 2820, 116th Cong. (2019).
 In 2010, the bill fell just five votes short of the 60 necessary to proceed in the Senate. H.R. 5241, 111th Cong. (2010); 12/18/2010.
 Slip Op. at 29.
 Slip Op. at 9.
 Slip Op. at 19.
 Slip Op. at 21.
 Slip Op. at 29.
 CASA de Maryland, et al. v. Dept. of Homeland Security, et al., 8:17-cv-02942 (D.Md.)
 In addition to precluding new initial applications, the 2020 memo limits DACA extensions and associated employment authorization to periods of one year, and precludes the agency from granting DACA recipients authorization to travel outside the United States (advance parole).
 The distinction between initial and renewal applications relates only to the documentation required for each: Initial applicants must submit documentation to establish all of the eligibility requirements; renewal applicants are not required to resubmit documentation filed with their initial applications. https://www.uscis.gov/sites/default/files/document/forms/i-821dinstr.pdf
 Because most DACA recipients must be at least fifteen years old, there are a significant number of young people who did not qualify for DACA prior to the 2017 rescission, but who are now potentially eligible to apply. The Migration Policy Institute puts this number at approximately 66,000. https://twitter.com/MigrationPolicy/status/1273662071146778624
 In 2012, just prior to DACA’s implementation, the Migration Policy Institute estimated that there were approximately 3.2 million undocumented children and young adults under the age of 24 living in the United States. https://newscenter.sdsu.edu/education/cescal-conference/files/06163-7_Data_One_Sheet.pdf
Ilana Etkin Greenstein is Senior Technical Assistance Attorney at the Immigration Justice Campaign.
On December 2, 2019, in Capron v. Attorney General of Massachusetts, 944 F.3d 9 (2019) (“Capron”), the First Circuit Court of Appeals held that federal laws regulating the J-1 Visa Exchange Visitor Program for au pairs (“Au Pair Program”) do not preempt Massachusetts wage and hour laws applicable to domestic worker arrangements: Massachusetts Domestic Workers Bill of Rights Act (“DWBRA”), G.L. c. 149, §§ 190–191, and the Massachusetts’ Fair Wage Law, G.L. c. 151, § 1. This means that host families in the Commonwealth are obligated to pay au pairs at least the state minimum wage ($12.75/hour effective January 1, 2020) and overtime, higher compensation than the federal $7.25 hourly rate currently required under the Au Pair Program. It also means that host families–as employers of domestic workers–must become familiar with the DWBRA’s requirements because failure to comply with Massachusetts wage and hour laws can expose host families to substantial damages, including treble damages, attorneys’ fees and costs. See Andrea Peraner-Sweet, How to Hire a Domestic Worker and Stay Out of Trouble, 62 Boston Bar J. (Summer 2018).
The Au Pair Program And Its Compensation
As described in Capron, the Au Pair Program is a cultural exchange program regulated by the United States Department of State (“DOS”) through which foreign individuals can obtain J-1 Visas and be matched with United States host families to provide up to 45 hours a week of child care services while pursuing a post-secondary education. 22 C.F.R. § 62.31. The DOS administers the Au Pair Program through private placement agencies it designates to conduct DOS-approved exchange programs (“Sponsors). The Sponsors select and match participants with host families. 22. C.F.R. § 62.10.
The Au Pair Program regulations require Sponsors to ensure that au pairs are compensated “at a weekly rate based upon 45 hours of child care services per week and paid in conformance with the requirements of the [FLSA] as interpreted and implemented by the [Department of Labor (DOL)].” 22 C.F.R. § 62.31(j)(1). The DOL has determined that Au Pair Program participants are “employees” within the meaning of FLSA and, thus, entitled to federal minimum wage. 29 U.S.C. § 206(a). The FLSA, however, exempts live-in domestic workers from overtime payment. 29 U.S.C. § 213(b)(21). DOL regulations also permit deductions for the costs of room and board: either a fixed credit amount that is tied to a percentage of the federal minimum wage, or the actual, itemized costs, provided the itemized deductions are supported by adequate records. 29 C.F.R. § 552.100(c)–(d). Importantly, as the First Circuit notes, the FLSA contains a savings clause that “[n]o provision of this chapter or of any order thereunder shall excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under this chapter.” 944 F.3d at 18 (quoting 29 U.S.C. § 218(a)).
Massachusetts Au Pair Compensation
The DWBRA defines au pairs as “employees” and “domestic workers” and their host families as “employers.” G.L. c. 149, § 190(a). Under the DWBRA and Fair Wage Law, au pairs are entitled to the state minimum wage and overtime pay at 1.5 times the hourly rate for “working time” over 40 hours per week. G.L. c. 151, § 1; 940 C.M.R. 32.03(3). An au pair’s “working time” includes all hours that the au pair is required to be on duty including meal, rest and sleep periods unless during those periods the au pair is free to leave the host family’s premises, use the time for their sole benefit and is relieved of all duties during these time periods. Id., 32.02. Host families are required to keep records of an au pair’s hours worked. Id., 32.04(2). The DWBRA also permits deductions for lodging and food, if agreed to in advance and in writing by the domestic worker, which are at a fixed credit amount of $35 per week for a single-occupancy room and $1.25 for breakfast, $2.25 for lunch, and $2.25 for dinner. Id., 32.03(5)(b)-(c).
Additionally, au pairs are entitled to at least 24 consecutive hours of rest when working 40 hours per week, workers’ compensation, sick time, and notice of why and when the host family may enter their living space.
In 2016, in response to enactment of the DWBRA, Cultural Care, Inc., a Sponsor au pair placement agency and two former Massachusetts hosts (“Plaintiffs”), sought declaratory and injunctive relief from the United States District Court claiming that the federal laws governing the Au Pair Program impliedly preempted Massachusetts wage and hour laws with respect to au pairs. The District Court found no preemption and dismissed the action, and Plaintiffs appealed.
The Plaintiffs claimed that the Au Pair Program preempted Massachusetts wage and hour laws under “field preemption” and/or “obstacle preemption.” Under “field preemption,” Plaintiffs argued that the detailed regulatory scheme governing the Au Pair Program together with the federal interest in regulating immigration and managing foreign relations evidenced the federal government’s intent to “occupy the field” of regulation of au pairs, thereby preempting state laws and regulations that might otherwise apply to au pairs. 944 F. 3d at 22. Under “obstacle preemption,” Plaintiffs argued that compliance with Massachusetts wage and hour laws would create an obstacle to achieving the underlying purposes and objectives of the Au Pair Program by frustrating the federal intent to “set a uniform, nationwide ceiling” on compensation obligations and recordkeeping and administrative burdens. Id. at 26-27.
The First Circuit rejected Plaintiffs’ arguments, concluding that Plaintiffs failed to sustain their burden of proving either field or obstacle preemption. The Court determined that Plaintiffs’ reliance on the DOS’s comprehensive and detailed regulations was insufficient to demonstrate a federal intent to oust a whole field of state employment measures, a “quintessentially local area of regulation.” Id. at 22. Rather, the Court opined: “It is hardly evident that a federal foreign affairs interest in creating a ‘friendly’ and ‘cooperative’ spirit with other nations is advanced by a program of cultural exchange that, by design, would authorize foreign nationals to be paid less than Americans performing the same work.” Id. at 26.
The Court also rejected Plaintiffs’ obstacle preemption claim that enforcement of Massachusetts’ employment laws would frustrate a federal objective of establishing a nationally uniform compensation scheme for au pair participants. Noting that “the text of the au pair exchange regulations…does not supply the requisite affirmative evidence that the state law measures would pose an obstacle to the accomplishment of the purposes and objectives of the Au Pair Program,” the First Circuit concluded, “[i]n fact, the text of the regulations reflects the DOS’s intention to ensure that the regulations would accommodate the DOL’s [Department of Labor] determination that au pair participants are employees who are entitled to be protected by an independent wage and hour law that is not itself preemptive….[and] that the DOS contemplated that state employment laws would protect exchange visitor program participants from their employers.” Id. at 32-33 (underline in original).
What do host families need to know now?
It is not yet clear whether Capron will apply retroactively or whether Massachusetts host families will be liable for back wages for au pairs who were not compensated in accordance with state wage and hour laws. The Attorney General’s office has indicated that, “at this time,” its focus is on ensuring that au pair agencies bring their programs into compliance with Massachusetts laws and it does not intend to enforce the DWBRA or other wage and hour laws against host families. The Attorney General’s office does note, however, that it has no control over private litigation. As of the time of this writing, at least three putative class action suits and one other action, all by private individuals, have been filed in Middlesex Superior Court against several Sponsor au pair agencies. No action has yet to be filed against any host families.
Andrea Peraner-Sweet is a partner at Fitch Law Partners LLP. Her practice focuses on general business litigation with an emphasis on employment litigation as well as probate litigation. Andrea is a current member of the Boston Bar Journal.
Lauren D. Song is a Senior Attorney at Greater Boston Legal Services where her practice focuses on affordable housing preservation and development through public-private partnerships. Lauren is a current member of the Boston Bar Journal.
Modern technology allows individuals to conduct an ever-increasing number of activities through websites and internet-connected smartphone apps. The proprietors of those platforms frequently make their use subject to terms and conditions, some of which—such as arbitration clauses, forum selection clauses, waivers, licenses, and indemnification provisions—carry potentially significant legal consequences. Most users will not have read the terms and, in some instances, may not have even seen the terms or any reference to them. Do these terms amount to an enforceable contract? In at least some circumstances, the answer may be “no.” Answering the question in particular cases involves fact-intensive analysis and potential evidentiary challenges. Businesses offering such platforms, and their counsel, should be aware of these complexities and take precautions to maximize the likelihood that courts will enforce their terms.
The First Circuit and the Massachusetts Appeals Court have addressed this issue in cases involving the terms and conditions of a ride-sharing app and an email account. See Cullinane v. Uber Techs., Inc., 893 F.3d. 53 (1st Cir. 2018); Ajemian v. Yahoo!, Inc., 83 Mass. App. Ct. 565 (2013). In each case, the court concluded that users were not bound by the terms and conditions. Cullinane, 893 F.3d at 64; Ajemian, 83 Mass. App. Ct. at 575-76. Both courts employed a two-part test to assess whether the terms at issue amounted to an enforceable contract, asking: (1) whether the terms were “reasonably communicated” to the user, and (2) whether the terms were accepted by the user. Ajemian, 83 Mass. App. Ct. at 574-75; Cullinane, 893 F.3d at 62 (citing Ajemian). This two-part test is consistent with the approach taken by other courts around the country. E.g., Meyer v. Uber Techs., Inc., 868 F.3d 66, 76 (2d Cir. 2017) (applying California law and articulating the test on a motion to compel arbitration as whether “the notice of the arbitration provision [contained in the terms] was reasonably conspicuous and manifestation of assent unambiguous as a matter of law.”).
A Spectrum of User Interfaces
Analysis of whether the requirements of “reasonable communication” and “acceptance” are satisfied begins with the interface presented to the user. While the possible variations are endless, interface designs tend to fall within three general categories, often referred to as “clickwrap,” “browsewrap,” and “sign-in-wrap” (sometimes called “hybridwrap”). In “clickwrap” interfaces, the user is required to take a distinct, affirmative action to indicate assent to the terms, such as checking a box or clicking a button stating “I agree.” Courts considering this category of interface generally have little trouble finding the necessary notice and assent. E.g., Wickberg v. Lyft, Inc., 356 F. Supp. 3d 179, 184 (D. Mass. 2018).
On the other end of the spectrum is “browsewrap,” where a user receives notice of the terms only by means of a link at the bottom of the webpage (often undifferentiated from other links) or buried in the menus or settings of an app. A typical browsewrap interface does not offer any notice outside of the terms themselves that the user is purportedly agreeing to be bound. Nor does it offer the user any reason to follow the link and read the terms. Courts generally find that browsewrap interfaces do not create enforceable agreements. See Ajemian, 83 Mass. App. Ct. at 576 (“[W]e have found no case where [a forum selection clause] has been enforced in a browsewrap agreement”).
The question becomes more complicated and fact-intensive in the case of “sign-in-wrap” interfaces, where the user is informed that signing in, creating an account, or taking some other specified action (but not an action distinct from the user’s intended use of the website or app) will signify assent to the terms, which are often available by following a link within or adjacent to the text of the notice. In such cases, the enforceability of the terms depends on how clearly the interface design notifies the user that he or she will be bound by taking the specified action. Compare Cullinane, 893 F.3d at 64 (finding that the design of Uber’s account creation interface did not provide adequate notice to user) with Meyer, 868 F.3d at 79 (assessing a different version of Uber’s account creation interface and finding that the design did provide adequate notice).
The Importance of Good Design
Several common design features of “sign-in-wrap” interfaces have received judicial attention in determining issues of enforceability. While courts do not demand perfection, incorporating multiple design features that promote notice of the terms and make clear the user’s manifestation of assent will increase the likelihood that the terms will be enforced.
Clearly important are the size and color of the language informing the user that proceeding will signify agreement to the terms and the link to the terms. Making these elements as large as other elements on the screen (preferably larger) and in a color that contrasts with the background so as to promote their readability will bolster the argument that the terms were reasonably communicated to the user. A perception that the notice or link is hidden in tiny or otherwise difficult-to-read font may cause a court to find that the user did not have adequate notice. Compare Meyer, 868 F.3d at 78-79 (enforcing terms where text notifying user that creating account would signify assent to the terms, although small, was clearly visible, in contrasting color on an uncluttered screen) with Cullinane, 893 F.3d at 62-64 (holding terms unenforceable in part because the notification appeared in a dark gray, small, non-bold font on a black background and because the screen contained many other elements in equal or larger font size).
The design of the interface should also make obvious to the user that the full content of the terms are available to read by following a link. See Cullinane, 893 F.3d at 63 (questioning “whether a reasonable user would have been aware that the gray rectangular box was actually a hyperlink”). Although blue underlined text may be the quintessential indicator of a hyperlink, other appearances may also be adequate, so long as they are sufficiently differentiated from the surrounding text. E.g., Wickberg v. Lyft, Inc., 356 F. Supp. 3d 179, 181 (D. Mass. 2018) (pink, non-underlined link); Selden v. Airbnb, Inc., No. 16-cv-00933 (D.D.C. Nov. 1, 2016) (red, non-underlined links).
The placement of the notice and link are also important. If the notice and link appear above the button a user clicks to proceed, a user reading from top to bottom would encounter these elements, and have an opportunity to investigate the linked terms, before encountering the button to proceed. Courts have also enforced terms where the notice and link are placed below, but in reasonable proximity to, the relevant button. Compare Meyer, 868 F.3d at 78 (finding that placement of the notification text and link directly below the relevant button, immediately visible without any scrolling, contributed to enforceability of terms) with Specht v. Netscape Communs. Corp., 306 F.3d 17, 23 (2d Cir. 2002) (not enforcing terms where reference to the terms would have been visible “only if [the user] had scrolled down to the next screen”); see also McKee v. Audible, Inc., No. CV 17-1941-GW(Ex), 2017 U.S. Dist. LEXIS 174278, at *27-28 (C.D. Cal. July 17, 2017) (placement of notice and link to terms at the bottom of the screen “approximately 30-40% of the screen’s length below” the button to proceed, separated by a horizontal line, contributed to inadequate notice).
Placing the notice and link below the relevant button creates another potential obstacle to enforcement of the terms: if the screen prompts the user to enter information such as a username, password, or email address, users on a smartphone or tablet may see a software keyboard appear on the screen when they begin to enter the requested information. Because this software keyboard generally appears at the bottom of the screen, it may obscure the notice and link. At least one court has found that this contributed to lack of the necessary notice, see McKee, 2017 U.S. Dist. LEXIS 174278, at *27-28, although it is reasonable to argue that what matters is what the user sees before he or she engages the keyboard.
Courts also give attention to the particular words used to inform the user that proceeding will signify assent to the terms. If the user is not required to take any action to assent to the terms other than the actions inherent in the ordinary use of the website or app (such as signing in or creating an account), the consequences of that action should be clear to the user. One way to accomplish this is to match the language of the notice to the action the user takes. For example, if the user is required to click a button labelled “Create Account,” the notice should inform the user that “by clicking ‘Create Account’ you indicate acceptance of our terms and conditions.” Where the words used for the notice do not parallel the description of the action, a court may question whether it is sufficiently clear to a user that he or she is assenting to the terms by taking that action. See, e.g., TopstepTrader, LLC v. OneUp Trader, LLC, No. 17 C 4412, (N.D. Ill. Apr. 18, 2018) (declining to enforce terms where user clicked a button labelled “Sign Up,” accompanied by a statement reading “I agree to the terms and conditions,” because the website “gave the user no explicit warning that by clicking the ‘Sign Up’ button, the user agreed to the [t]erms”); see also McKee, 2017 U.S. Dist. LEXIS 174278, at *22-23 (identifying lack of parallel wording as a factor weighing against enforcement of the terms); but see Meyer, 868 F.3d at 80 (“Although the warning text used the term ‘creat[e]’ instead of ‘register,’ as the button was marked, the physical proximity of the notice to the register button and the placement of the language in the registration flow make clear to the user that the linked terms pertain to the action the user is about to take.”).
Finally, the timing and context in which the terms are presented can also contribute to the enforceability of the terms. Several courts have observed that, where the terms are presented in conjunction with a purchase or the creation of an account involving a transactional relationship, an average user is more likely to understand that the transaction or relationship will be subject to the terms. See Meyer, 868 F.3d at 80 (“The transactional context of the parties’ dealings reinforces our conclusion.”); Selden v. Airbnb, Inc., No. 16-cv-00933 (D.D.C. Nov. 1, 2016) (“The act of contracting for consumer services online is now commonplace in the American economy. Any reasonably-active adult consumer will almost certainly appreciate that by signing up for a particular service, he or she is accepting the terms and conditions of the provider.”).
Litigating the question of whether a user is bound by the terms of a website or app can present challenges beyond analyzing the interface type and design choices. Because the party seeking to enforce the terms bears the burden to prove adequate notice and manifestation of assent, that party (often the proprietor of the website or app) will need to present evidence of what the user actually saw and did. Where that party is seeking to enforce an arbitration or forum selection clause, it will likely want to satisfy this burden early in the case, before conducting discovery.
The proponent of the terms thus should maintain records of when the user accessed the website or app and what it looked like at those times. Because websites and apps are occasionally redesigned, and terms are occasionally updated, simply presenting screenshots of the current version of the website or app is unlikely to satisfy the burden of establishing what the user saw and did. Instead, the proponent of the terms must be prepared to establish when the user took the relevant action on the website or app, what the operative version of the website or app looked like at that time, and which version of its terms were presented to the user. Providing such evidence may be particularly challenging depending on the amount of time that has passed and the ability of the proponent to access or recreate historic versions of the website or app.
Presenting evidence of how the interface appeared to a particular user may be further complicated if the appearance varied based on the device used to access it. A website, for example, may appear differently when viewed on a laptop or desktop computer screen than when viewed on a smartphone. The differing screen size may affect what is immediately visible to the user without scrolling and the relative conspicuousness of the notice and terms vis-à-vis other elements. In the case of smartphone users, there might also be meaningful variation in the appearance of the interface depending on the size of the phone used. See, e.g., Cullinane, 893 F.3d at 56 n.3 (noting the 3.5 inch screen size of the iPhone used to access the app in question and reproducing the screenshots in the opinion to correspond to that size). Inability to identify the device used could prevent early enforcement of an arbitration clause or forum selection clause and require further discovery. Conversely, the party challenging the terms might argue insufficient notice by offering competing evidence as to what he or she saw when using the website or app. For example, even if the proponent can establish that the user accessed the website on a desktop computer, the user may have done so in a browser window that occupied less than the full screen, changing the appearance of the interface and potentially the adequacy of the notice. A user will not, however, avoid enforcement of the terms simply by asserting that he or she does not recall seeing notice of the terms or did not read the terms.
Given the potential consequences of enforcement of terms, such as application of an arbitration clause foreclosing a class action, challenges to enforcement will likely continue to arise. Prudent counsel will do well to guard against such challenges through recommending careful design choices and electronic records retention.
John A. Shope is a partner in the Boston office of Foley Hoag, where he specializes in class action defense, consumer law, and commercial arbitration. He also serves as an arbitrator for the AAA and CPR.
Kevin J. Conroy is a litigation associate Boston office of Foley Hoag. Kevin focuses on complex business disputes and shareholder disputes.
by Jonathan I. Handler, Jillian B. Hirsch, and Emily Zandy
Recently, the Massachusetts Supreme Judicial Court ( “SJC”) and the United States District Court for the District of Massachusetts both issued important decisions addressing implied waiver of the attorney-client privilege and work product doctrine under Massachusetts law. The decisions turned on application of the “at issue” doctrine: the implied waiver of privilege that occurs when a party puts otherwise privileged information “at issue” in litigation. Massachusetts courts have previously held that privilege waiver occurs when the privilege holder affirmatively interjects the substance of otherwise privileged information into a claim, counterclaim or defenses and an opposing party needs access to that information to respond properly.
But Massachusetts courts have not, until now, explored in detail the considerations of fairness that factor into whether waiver has occurred. The courts’ decisions in Clair v. Clair, No. SJC-11256, 2013 Mass. LEXIS 10 (Mass. Jan. 25, 2013), and Columbia Data Products v. Autonomy Corp. Ltd., C.A. No. 11-12077-NMG, 2012 U.S. Dist. LEXIS 175920 (D. Mass. Dec. 12, 2012), provide practitioners with much-needed guidance on those considerations by making clear that litigants cannot use privileged material as both a sword and a shield. In other words, litigants may not base their legal positions on privileged material while simultaneously denying their opponent access to that information on the ground that it is privileged.
The “At Issue” Waiver Doctrine
Under the “at issue” waiver doctrine, the attorney-client privilege is waived where a litigant affirmatively places the subject of its own privileged material at issue in litigation so that the opposing party must access that privileged material to defend the claim asserted against it. As the First Circuit noted in In re Keeper of Records, the logic behind the doctrine is most apparent in cases involving an “advice of counsel” defense where a client asserts reliance on his or her attorney’s advice as a defense to another’s claim. According to the First Circuit, “when such a defense is raised, the pleader puts the nature of its lawyer’s advice squarely in issue, and, thus communications embodying the subject matter of the advice typically lose protection.”
Outside the “advice of counsel” context, the reach of the “at issue” doctrine is less predictable and, as a result, perhaps more controversial. In interpreting “at issue” waiver, many courts have adopted some permutation of the standard articulated by the U.S. District Court for the Eastern District of Washington in Hearn v. Rhay, in which the Court concluded that implied waiver should be found when three conditions exist:
(1) assertion of the privilege was a result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.
However, this approach has been much criticized on the grounds that it conflates the question of waiver with separate issues of relevance.
Previous Massachusetts Cases Addressing The “At Issue” Doctrine
The SJC first addressed the “at issue” waiver doctrine in Darius v. Boston. In Darius, the SJC recognized that “a litigant may implicitly waive the attorney-client privilege, at least partly, by injecting certain claims or defenses into a case.” However, the court emphasized that application of the doctrine was subject to certain limitations. First, the court stated that “[a]n ‘at issue’ waiver, in circumstances where it is recognized, should not be tantamount to a blanket waiver of the entire attorney-client privilege in the case.” By definition, “it is a limited waiver of the privilege with respect to what has been put ‘at issue.’” Second, the court made clear that “there can be no ‘at issue’ waiver unless it is shown that the privileged information sought to be discovered is not available from any other source.”
Relying on Darius, other Massachusetts courts have since addressed the “at issue” doctrine, applying the two-part framework set forth above in deciding whether to find waiver. However, not until Clair and Columbia Data did the courts offer much guidance on how considerations of fairness bear on the judicial application of the “at issue” doctrine.
The Clair Case
Clair involves the dissolution of Clair Auto Group, a chain of automobile dealerships owned by four brothers. In 2007, the brothers sold the majority of the companies’ dealerships, real estate, and other assets to Prime Motor Group (“Prime Motors”). In coordination with that sale, the brothers devised a plan to transfer corporate life insurance policies on their lives from the Clair companies to the brothers individually. Following the sale, and at the death of two of the four brothers, familial relations deteriorated. The two surviving brothers refused to recognize their deceased brothers’ widows as partial owners in the remaining assets, and the widows, in turn, suspected that the brothers were using post-sale assets for personal rather than business-related purposes.
On April 9, 2010, Claire M. Clair (“Claire”), the executrix of the estate of her husband, James E. Clair, Jr., and Jane M. Clair, the executrix of the estate of her husband, Mark J. Clair (together, the “Plaintiffs”), brought an action in Superior Court against the two surviving brothers, individually, Clair International Inc., and Clair LP (collectively, the “Defendants”), challenging the post-sale disposition of the business assets and seeking a declaratory judgment as to their ownership rights in the companies. The Defendants filed counterclaims alleging, among other things, that Claire’s deceased husband had breached his fiduciary duty to them.
During the course of discovery, Claire sought access to all privileged communications regarding valuation, purchase, and sale of the life insurance policies, including legal advice from corporate counsel. She argued that she was entitled to this information because the Defendants had waived the attorney-client privilege by placing such information “at issue” in their counterclaim. Relying heavily on its decision in Darius , the court agreed.
The court explained, consistent with Darius, that Claire’s ability to raise a defense depended upon her access to otherwise privileged information. Indeed, “at the heart of proving or disproving the counterclaim” were “disclosures that [Claire’s] [husband] may or may not have made to the Clair brothers and to corporate counsel” regarding the life insurance policies and transfer of ownership. The court concluded, therefore, that Defendants had “placed their otherwise privileged communications ‘at issue.’” Having determined that Claire had satisfied the first prong of the two-part test, the court turned to the second prong. The Clair court found that the only sources of this information were corporate counsel and the surviving brothers, “all of whom were within the circle of privilege held by the companies.” The court emphasized that Defendants “cannot have it both ways”; they may not rely on privileged communications as the basis of their counterclaim that Claire’s husband breached his fiduciary duty and simultaneously deny Claire a legitimate means to inquire into their assertions and raise a defense. .
Although the court granted Claire access to certain privileged information, it adhered to the Darius court’s call for a “limited” rather than “blanket” subject matter waiver. The court limited Claire’s discovery only to those privileged communications between the companies and their counsel that related to the life insurance policies at issue.
The Columbia Data Case
In March 2005, Columbia Data, a software company, entered into a license agreement with Connected Corporation (“Connected”). Under the license agreement, Columbia Data granted Connected a license to “integrate, market and distribute” its backup software. The parties agreed on the percentage of royalties to be paid and provided for Columbia Data’s right to retain an independent accounting firm to conduct an annual audit of Connected’s books and records. Iron Mountain later acquired Connected.
As of 2008, Iron Mountain had yet to make any royalty payments under the license agreement, citing poor sales of products incorporating Columbia Data’s software. In 2010, Columbia Data allegedly discovered that Iron Mountain had in fact sold products listed in the license agreement. Columbia Data confronted Iron Mountain, and the parties began negotiating over the payment of royalties.
Concerned that litigation was on the horizon, Columbia Data retained outside counsel, who in turn retained an accounting firm to conduct an audit of Iron Mountain’s books and records. Significantly, Columbia Data did not inform Iron Mountain that the accounting firm had been hired by outside counsel. The accounting firm ultimately concluded that Iron Mountain owed Columbia Data $23 million in royalty fees under the License Agreement. Accordingly, Columbia Data filed a complaint against Iron Mountain, seeking redress for copyright infringement, breach of contract, breach of implied covenant of good faith and fair dealing, and unfair and deceptive trade practices.
In the early stages of litigation, Columbia Data represented that its accounting firm was independent and insisted that the royalty audit was conducted according to the terms of the license agreement. But, six months after filing suit, Columbia Data took the opposite position when its litigation counsel retained the accounting firm as a testifying expert in the case. At that point, Columbia Data argued that because the accounting firm was its expert, its discovery obligations were limited to those required by Fed. R. Civ. P. 26(b)(4), which governs disclosure of expert testimony. In response, Iron Mountain filed a motion to compel.
The court ruled, as a threshold matter, that the materials at issue were not protected by either the work product doctrine or the attorney-client privilege; nonetheless, because the parties had briefed the “at issue” doctrine, the court addressed it. The court concluded that Columbia Data had affirmatively placed the “audit report, the audit process, and [the] [accounting firm’s] status as an independent auditor directly at issue in [the] litigation,” and, therefore, “fairness require[d] the defendants be allowed to explore the full panoply of information available to [the] [accounting firm] for its ‘independent’ audit.’” As the court emphasized, “[Columbia Data] cannot use [the] [accounting firm’s] status and work as an independent auditor as a ‘sword’ against the defendants, while relying on the attorney-client privilege and the work product doctrine as a ‘shield’ to prevent disclosure of related materials.”
The “At Issue” Doctrine Post-Clair and Company Data
In light of Clair and Columbia Data, practitioners now have a much better understanding of what arguments a court will likely find persuasive in considering the application of the “at issue” doctrine. While both courts applied the two-part framework set forth in Darius – namely, that waiver must be appropriately limited in scope and confined to instances where the information sought is not otherwise available – their analysis did not end there. Rather, they focused heavily on considerations of fairness, taking particular note of whether the party invoking the privilege did so as a means to gain an unfair tactical advantage in litigation. As the Columbia Data court aptly stated, litigants may not use protected information as “‘both a sword and a shield.’” Likewise, the Clair court emphasized that a party “cannot have it both ways.” Put another way, the courts will not tolerate, as a matter of fairness, a party relying on privileged material in support of a claim while simultaneously denying the opposing party access to that information because it is protected from disclosure.
Lawyers and clients must carefully weigh the risks of asserting a claim, counterclaim, or defense premised upon privileged material. They should contemplate whether the opposing party will need access to that information to respond. They should think about whether the opposing party can access that information from any other source. They should consider the potential consequences of having to disclose that privileged material to their opponent because, once they have put that material “at issue,” it may be too late to turn back. Finally, although courts to date have construed the scope of “at issue” waivers narrowly, there is always the risk that under certain circumstances, a court will adopt a more expansive construction.
Jonathan I. Handler is a partner in the Commercial Litigation department at Day Pitney LLP.
Emily A. Zandy is an associate in the Commercial Litigation department at Day Pitney LLP.
Jillian B. Hirsch is counsel in the Commercial Litigation and Probate Litigation departments at Day Pitney LLP.
 See e.g. Darius v. City of Boston, 433 Mass. 274, 277 (Mass. 2001) in which the court accepted “as a general principle, that a litigant may implicitly waive the attorney-client privilege, at least partly, by injecting certain claims or defenses into a case.”
2 XYZ Corp. v. United States (In re Keeper of Records), 348 F.3d 16 (1st Cir. 2003).
3 Id. at 23.
4 Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975).
5 433 Mass. 274 (2001).
6 Id. at 278.
7 Id. at 283.
9 Id. at 284.
10 See, e.g., McCarthy v. Slade Assocs., Inc., 463 Mass. 181, 190-93 (2012) (finding no waiver where information sought was otherwise available); Global Investors Agent Corp. v. Nat’l Fire Ins. Co., 76 Mass. App. Ct. 812, 816-19 (2010) (finding limited waiver of privilege where plaintiffs put at issue the advice of their counsel and information was unavailable from any other source).
11 Clair v. Clair, No. SJC-11256, 2013 Mass. LEXIS 10, at *32 (Mass. Jan. 25, 2013).
12 Id. at 34.
13 Id. at 33.
14 Id. at 34.
15 Columbia Data Products v. Autonomy Corp. Ltd., C.A. No. 11-12077-NMG, 2012 U.S. Dist. LEXIS 175920, at *53 (D. Mass. Dec. 12, 2012).
16 Id. at 55.
17 Id. at 52.
18 Clair, 2013 Mass. LEXIS 10, at *34.