United States: Supreme Court Docket Report October Term, 2002 – Number 1

1. Americans with Disabilities Act - Application of 15-Employee Threshold to Professional Corporation. The Supreme Court granted certiorari in Clackamas Gastroenterology Assocs. P.C. v. Wells, No. 01-1435, to decide whether courts should apply an "economic realities" test to determine whether the shareholders of a professional corporation count as "employees" for the purpose of determining whether the corporation is a "covered entity" under the Americans with Disabilities Act (ADA).

The ADA defines a "covered entity," which is subject to the ADA’s anti-discrimination and accommodation provisions, as "an employer, employment agency, labor organization, or joint labor-management committee." 42 U.S.C. § 12112(2). An "employer" is "a person engaged in an industry affecting commerce who has 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year." Id. § 12112(5)(A). An "employee" is defined as "an individual employed by an employer." Id. § 12111(4).

Deborah Anne Wells, an employee of Clackamas Gastroenterology Associates, P.C., from 1986 until 1987, sued Clackamas under the ADA. During the relevant time period, four physicians, all of whom participated in the management and operation of the medical practice, were the shareholders and directors of Clackamas. It was undisputed that unless the physician-shareholders were counted as employees, Clackamas would have too few employees to be considered a covered "employer" under the ADA. Applying an "economic realities" test, the district court held, in an unpublished opinion, that the physician-shareholders were more properly considered "partners" than "employees." Accordingly, it concluded that Clackamas was not a "covered entity" under the ADA and dismissed Wells’ ADA claim.

A divided panel of the Ninth Circuit reversed. 271 F.3d 903 (2001). The court of appeals held that an entity’s decision to use the corporate form precludes it from arguing that it is exempt from the ADA’s coverage because in reality it operates more like a partnership. Id. At 905. The court explained that it would be unfair for the corporation to secure "‘the best of both possible worlds’ by * * * assert[ing] its corporate status in order to reap the tax and civil liability advantages and * * * argu[ing] that it is like a partnership in order to avoid liability for unlawful employment discrimination." Id. The court also noted that the physician-shareholders had employment agreements with the clinic. Id. at 905-06. Judge Graber dissented, contending that "economic realities are more important than labels," id. at 907, and that ADA coverage should turn on the size, not the form, of a particular business, id. at 908.

The court acknowledged that several circuits, construing other federal employment discrimination statutes having language similar to the ADA, have applied an economic realities test to determine whether shareholders in a professional corporation are "employees." See EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177 (7th Cir. 1984); Devine v. Stone, Layton & Gershman, P.C., 100 F.3d 78 (8th Cir. 1996); Fountain v. Metcalf, Zima & Co., P.A., 925 F.2d 1398 (11th Cir. 1991). The Ninth Circuit elected to align itself with the Second Circuit, which has declined to adopt the test. See Hyland v. New Haven Radiology Assocs., P.C., 794 F.2d 793 (2d Cir. 1986).

This case is of special interest to professional and/or limited-purpose corporations, which could be subject to the mandates of the ADA and other federal anti-discrimination laws if and only if their shareholders are counted as employees under the statute.

2. Appellate Procedure - Cross Appeal - Timeliness. Rule 4(a)(3) of the Federal Rules of Appellate Procedure provides that a notice of cross-appeal must be filed within 14 days after the notice of appeal is filed. The Supreme Court granted certiorari in Zapata Industries Inc. v. W.R. Grace & Co., No. 01-1766, to determine whether this deadline is mandatory and jurisdictional or instead is a rule of practice permitting the appellate courts to consider late-filed cross-appeals in appropriate cases.

Zapata sued W.R. Grace in federal district court in the Southern District of Florida, seeking a declaration that two of Grace’s patents were invalid and unenforceable. Grace counterclaimed for infringement and sought enforcement of its patents against Zapata. After a jury trial, the court declared that the patents were invalid for obviousness and entered judgment against Grace on its counterclaim. The court also dismissed as a matter of law other counts through which Zapata had raised alternate legal theories for holding Grace’s patents invalid or unenforceable.

Grace filed a timely notice of appeal in the Federal Circuit, but Zapata did not receive notice of the appeal until 18 days later - four days after Rule 4(a)(3)’s deadline for filing a cross-appeal. Upon receiving the notice, Zapata immediately filed its notice of cross-appeal seeking reversal of the lower court’s dismissal of its alternative theories. The Federal Circuit granted Grace’s motion to dismiss the cross-appeal as untimely, holding in an unpublished decision that Rule 4(a)(3) establishes a jurisdictional requirement that cannot be waived by the court.

There is a persistent and acknowledged split among the Circuits regarding whether Rule 4(a)(3)’s 14-day deadline is jurisdictional or is subject to exceptions. The confusion arises out of the lower courts’ construction of Torres v. Oakland Scavenger Co., 487 U.S. 312 (1988), in which the Supreme Court held that the time limit for filing an initial appeal under Rule 4(a)(1) is jurisdictional. Because the opinion’s language can be interpreted as encompassing all of Rule 4, the First, Third, Sixth, Seventh, and Federal Circuits have held that the time limit for cross-appeal under Rule 4(a)(3) also is jurisdictional. The Second, Ninth, and District of Columbia Circuits, however, have held that courts have discretion to allow untimely cross-appeals if the late filing was due to excusable neglect and will not cause prejudice to the opposing party.

This case is of interest to all businesses that are regularly involved in litigation in the federal courts.

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