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This column discusses decisions issued by the U.S. Supreme Court during the 2004-2005 term in the area of labor and employment law. AGE DISCRIMINATION In Smith v. City of Jackson, 125 SCt 1536 (2005), the Supreme Court held that the Age Discrimination in Employment Act permits recovery for disparate impact claims, i.e., claims in which an employer’s policy or practice, neutral on its face, has a disproportionately negative impact on older workers. However, the Court found that petitioner Azel Smith failed to set forth a valid disparate impact claim. In October 1998, the city of Jackson, Miss., granted pay increases to police officers in order to raise their salaries up to the regional average. Officers with over five years of tenure received a smaller percentage increase in their salaries than their less-experienced counterparts. Most officers age 40 and over had more than five years of experience. Petitioner filed a disparate treatment and a disparate impact claim against the city in district court, arguing that the revised pay plan violated the ADEA because it intentionally discriminated against the officers age 40 and over because of their age, and adversely affected them because of their age. The district court granted summary judgment to the city for the disparate treatment claim, citing the city’s intent to raise salaries as a legitimate nondiscriminatory reason for the pay plan. The district court also dismissed petitioner’s disparate impact claim, holding that the ADEA does not allow disparate impact claims. The 5th U.S. Circuit Court of Appeals reversed the summary judgment for the disparate treatment claim. However, it affirmed the lower court’s dismissal of the disparate impact claim, holding that disparate impact claims are categorically unavailable under the ADEA. The Supreme Court, in an opinion written by Justice John Paul Stevens, reversed that holding and ruled that the ADEA does not prohibit disparate impact claims. First, the Court reasoned that the ADEA contains language identical to that of Title VII, which, as interpreted by the Supreme Court in Griggs v. Duke Power Co., 401 US 424 (1971), permits disparate impact discrimination claims. Second, the secretary of Labor’s report on age discrimination, composed prior to the enactment of the ADEA, reveals a congressional interest in remedying the discriminatory effects of employment actions that indirectly restrict the employment of older workers. Third, the DOL and the EEOC have consistently interpreted the ADEA to authorize relief for disparate impact claims. The Supreme Court’s decision also relied on the ADEA provision permitting otherwise-prohibited action “where the differentiation is based on reasonable factors other than age” (RFOA). According to the Court, the RFOA provision would have no effect if the ADEA only prevented intentional discrimination because an employment action based on a factor other than age could never be “otherwise prohibited” by the ADEA. In contrast, an employer defending a disparate impact age discrimination claim could apply the RFOA provision to argue that its use of a non-age factor that adversely impacted older workers was “reasonable.” However, the Supreme Court limited the scope of disparate impact liability under the ADEA. The Court noted that the amendment to Title VII contained in the Civil Rights Act of 1991 codifies disparate impact claims under Title VII and shifts the burden of persuasion to the defendant after the plaintiff presents a prima facie case of disparate impact. However, the amendment does not speak to the subject of age discrimination. Consequently, the Court held that the ADEA is bound by the pre-1991 disparate impact analysis, which, as set forth in Wards Cove Packing Co. v. Atonio, 490 US 642 (1989), mandates that the burden of persuasion always remain with the plaintiff-employee and only requires the employer to meet a burden of production when setting forth a business necessity defense. The Supreme Court held that the petitioner in Smith had not set forth a valid disparate impact claim. The Court stated that the petitioner failed to identify a discriminatory employment action because he did not cite a test, requirement or practice in the city’s pay plan that had an adverse impact on older workers. Furthermore, the Court held that the pay plan was based on an RFOA; the city reasonably granted larger-percentage salary increases to the junior officers to bring them in line with their counterparts in neighboring cities. Justice Antonin Scalia concurred in part and concurred in the judgment. He reasoned that the DOL and EEOC policy regulations, which authorize disparate-impact age claims, merit deference pursuant to Chevron U.S.A. v. Natural Resources Defense Council, 467 US 837(1984). Justice Sandra Day O’Connor, joined by Justice Anthony Kennedy and Justice Clarence Thomas, dissented in the opinion, arguing that language of the ADEA authorized only disparate-treatment claims. The dissent based its opinion on a clause in the ADEA requiring the discriminatory action to be “because of the individual’s age.” TITLE IX RETALIATION In Jackson v. Birmingham Board of Education, 125 SCt 1497 (2005), the Supreme Court held that Title IX provides a private cause of action for retaliation claims. Petitioner Roderick Jackson worked as a teacher and girls basketball coach in a Birmingham, Ala., public high school. Jackson discovered that the girls’ team was not getting equal funding and access to athletic equipment and facilities, and he complained about the unequal treatment to his supervisors. Subsequent to his complaints, Jackson began receiving negative work evaluations, and was ultimately removed as coach. He filed suit in district court under Title IX, contending that the Board of Education retaliated against him for complaining about its discriminatory treatment of the girls’ basketball team. The district court, affirmed by the 11th U.S. Circuit Court of Appeals, dismissed Jackson’s claim, holding that Title IX does not provide a private cause of action for retaliation, but only permits private claims based on intentional sex discrimination. In a 5-4 decision, Justice O’Connor, writing for the Court, explained that retaliation against someone who complains about sex discrimination is a form of intentional sex discrimination prohibited under Title IX. Although Title IX does not mention retaliation as a cause of action, the Court found that the term “discrimination” in Title IX is construed broadly to encompass a wide range of intentional unequal treatment. The Court also noted that Title IX does not require the victim of the retaliation to also be the victim of the alleged sex discrimination. In addition, the Court held that the Board of Education had notice that it could be held liable for retaliation under Title IX because previous Supreme Court cases have broadly interpreted Title IX to encompass diverse forms of intentional sex discrimination. Last, the Court pointed out that it would be difficult for Title IX to provide protection against sex discrimination if it did not protect those who complain about such unlawful practices. The Court remanded the case to determine whether Jackson could prove that the Board of Education retaliated against him because of his sex discrimination complaints. Justice Thomas, joined by Chief Justice William Rehnquist, Justice Scalia and Justice Kennedy, dissented, arguing that the language of Title IX does not expressly permit retaliation claims. The dissent reasoned that retaliation does not constitute discrimination “on the basis of sex,” because the petitioner’s sex is not the source of the discriminatory action. TAXATION OF SETTLEMENTS In Commissioner of Internal Revenue v. Banks, 125 SCt 826 (2005), the Court held that a litigant in an employment discrimination case whose recovery constitutes income must record the contingent fee paid to his attorney as “gross income” on his federal income tax returns. In the consolidated cases, petitioners Banks and Banaitis received settlements from employment discrimination claims, and paid a portion of their awards to their attorneys, pursuant to contingent fee agreements. When filing their federal income tax returns, the petitioners did not include the portions of their awards that they paid to their attorneys as a part of their gross incomes. The commissioner of internal revenue issued a notice of deficiency to the petitioners, and the Tax Court upheld the commissioner’s determination. In Banks‘ case, the 6th U.S. Circuit Court of Appeals held that the contingent fee does not constitute gross income because the litigation recovery was not relatively certain to be paid when the contingent fee contract was established. In Banaitis‘ case, the 9th U.S. Circuit Court of Appeals applied Oregon state law to hold that contingent fee agreements constitute a partial transfer of the client’s property and not an anticipatory assignment of the client’s income required to be recorded as part of the taxpayer’s gross income. Justice Kennedy, writing for a unanimous Court, reversed the circuit courts, reasoning that a contingent fee is an anticipatory assignment of a portion of the client’s income because the client always retains control over the income-generating asset — the litigation claim. The Court dismissed as irrelevant the inexact value of the plaintiff’s claim at the moment the contingent fee agreement is signed. However, the Court mentioned that the subsequent enactment of the American Jobs Creation Act of 2004 permits a taxpayer to make an above-the-line deduction from his gross income for any attorney’s fees paid in connection with an action involving a claim of unlawful discrimination. Thus, while Banks requires litigants of employment discrimination claims to record attorney’s fees as a part of their gross income, the decision has no effect on the amount of taxes such litigants will ultimately pay. PENDING DECISION On April 21, 2005, the Supreme Court heard oral arguments in Graham County Soil & Water Conservation District v. United States ex rel. Wilson, in which the Court is poised to resolve whether the timeliness of retaliation claims under the False Claims Act is governed by the six-year statute of limitations provision included in the FCA or by a state’s statute of limitations for wrongful discharge claims. A decision is expected this month. John P. Furfaro is a partner at the firm of Skadden, Arps, Slate, Meagher & Flom and Maury B. Josephson is a principal in the Law Office of Maury B. Josephson. Risa M. Levine, an associate, and Alicia M. Simmons, a summer associate, at Skadden, Arps assisted in the preparation of this column.

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