Piliero, Mazza & Pargament, PLLC  Vol. 3, Issue 3   May/June 2001

An Update for Federal Contractors and Commercial Businesses


SMALL BUSINESS SBA Proposes New Markets Venture Capital Program

LEGISLATION Senate Small Business Committee Holds hearing on "Red Tape Reduction"

LABOR LAW Supreme Court Decision Supports Enforceability of Employee Arbitration Agreements


SBA Proposes New Markets Venture Capital Program

On April 23, 2001, the Small Business Administration (SBA) issued a new proposed rule for the implementation of the New Markets Venture Capital Program (NMVCP) and extended the effective date of the interim rule that was issued on January 22, 2001. The SBA intends to implement the NMVCP through the proposed rule and withdraw the interim final rule before it becomes effective.

The goal of the NMVCP is to provide increased entrepreneurial and employment opportunities in low-income geographic areas by creating an economic infrastructure in these areas and encouraging business growth through program-supported investment.

The new proposed rule is based in large part on the interim rule, but has several technical and substantive changes. Some of the major changes include the following: (1) withdrawal of the provision that allows NMVC companies to include noncash contributions in their calculation of private capital; (2) revision of the comprehensive business plan requirements to make clear that NMVC companies are to use licensed professionals when assistance of that type is necessary; (3) adding a requirement that, at the end of each fiscal year, at least eighty percent (80%) of the dollars used by NMVC companies to finance business concerns must be invested in equity capital investments in smaller enterprises located in low income areas; and (4) requiring the SBA=s prior written approval before an NMCV company can finance a small business which is not engaged in a "regular and continuous business operation" (i.e., companies that merely receive payments such as rent, dividends or royalties).

These changes are intended to further the goals of the NMVCP by clarifying the requirements for the Program and providing greater incentives for small business investment companies to participate in the Program.

The SBA intends to issue a final rule implementing the NMVCP prior to June 22, 2001.


  Supreme Court Decision Supports Enforceability Of Employee Arbitration Agreements

On March 21, 2001, the United Stated issued a 5 - 4 decision in Circuit City Stores, Inc. v. Saint Clair Adams which held that pre-dispute arbitration agreements between an employer and employee are enforceable in most circumstances under the Federal Arbitration Act (FAA). Although much of the holding was devoted to an interpretation of the statutory language of the FAA, the majority decision indicates its strong support for the use of arbitration in resolving employment disputes. The Court noted that "there are real benefits to arbitration in the employment context," including avoiding the costs of litigation involved with the resolution of disputes in the courts.

The case involved an employee, Saint Clair Adams, who signed an arbitration agreement at the time he was hired by Circuit City in 1995. Under the terms of the arbitration agreement, all disputes relating to Adams' employment were to be "exclusively" resolved by final and binding arbitration before a neutral arbitrator. The agreement made it clear that it covered all disputes including disputes under state and federal laws, such as "the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, and the American with Disabilities Act." Adams resigned in 1996 and then sued Circuit City in California state court claiming that his co-workers harassed him because he was gay and that Circuit City was liable for employment discrimination under California's Fair employment and Housing Act.

Circuit City then filed a suit in federal district court in California seeking to enjoin Adams' state court action. The district court granted Circuit City's request and held that Adams was required to submit his claims to binding arbitration pursuant to the terms of his agreement. Adams appealed this decision to the Ninth Circuit Court of Appeals. The Ninth Circuit reversed the district court and held that the arbitration agreement was included in a "contract of employment" and, therefore, was excluded from enforcement under the FAA.

On appeal, the Supreme Court reversed the Ninth Circuit. The Supreme Court held that the Ninth Circuit's interpretation of the FAA exclusionary clause as applying to "contracts of employment" was too broad. Rather, the Supreme Court held that exclusion applied only to contracts of employment of transportation workers.

The Supreme Court's decision added additional support to earlier decisions by many federal circuit courts that have held that mandatory arbitration clauses in employment contracts are generally enforceable. Moreover, although not part of the Court's specific holding, the decision reflects the Supreme Court's belief that the FAA pre-empts state laws that otherwise restrict or limit the ability of employees and employers to enter into arbitration agreements.

The decision does not address, however, whether Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, or the Americans with Disabilities Act (ADA) may limit the enforceability of arbitration clauses. Additionally, it is unclear whether mandatory arbitration clauses can limit class action suits. Consequently, there remains some uncertainty regarding the effect of mandatory arbitration agreements in an employment setting, particularly in connection with an employee's enforcement of rights under federal statutes that provide for resolution of discrimination suits in federal court.

Nevertheless, the Circuit City decision provides substantial additional support for enforcement of mandatory arbitration clauses for most employers. Employers that would prefer to avoid the costs of litigation in courts and resolution of disputes by pro-employee juries should consider the implementation of company-wide arbitration plans.

It is critical, however, that such plans be drafted in accordance the Supreme Court's decision and other case law that address the enforceability of arbitration agreements. In order to increase the likelihood that a mandatory arbitration agreement will be deemed enforceable, it must be entered into voluntarily and must be fair and written in simple enough terms for an average employee to understand.



Senate Small Business Committee Holds Hearing on “Red Tape Reduction”

On April 24, 2001, the Senate Small Business Committee held a hearing to evaluate the effectiveness of the Small Business Regulatory Enforcement Fairness Act (Act) five years after its passage. The Committee, chaired by Senator Christopher S. Bond, heard testimony from spokespersons for the Small Business Administration (SBA) and the General Accounting Office (GAO), as well as other interested parties.

The purpose of the Act, commonly known as the “Red Tape Reduction Act,” is to strengthen protections afforded to small businesses by requiring regulatory agencies to determine economic impact on small business prior to implementing new rules. The Act, which builds on the Regulatory Flexibility Act of 1980 (“RFA”), requires agencies to assist small businesses through the publishing of regulatory guides and the establishing of small business development centers. Agencies must also convene review panels and solicit recommendations from small businesses during the rulemaking process.

At the hearing, Shawne Carter McGibbon of the SBA’s advocacy office testified that, although the Act has been responsible for an estimated $12 billion in regulatory cost savings for small businesses in the years 1998 through 2000, not all agencies are in full compliance. According to Ms. McGibbon, some agencies choose to ignore the regulatory requirements. As a result, agency compliance with the Act is inconsistent. Because some agencies tend to view the Act’s regulatory analysis provision as “a mere procedural hurdle” rather than “an integral part of the regulatory process,” the Act loses some of its effectiveness.

GAO’s Victor Rezendes of the Strategies Issues Team indicated that terms such as “significant economic impact” or “substantial number” contained in the Act provide no standard for measurement. He also questioned how Congress intended “compliance costs” for small business to be measured, whether as a percentage of annual revenues or as a percentage of work to strengthen the Act, terms such as these must be more clearly defined.

Other GAO spokespersons described an instance in which the Environmental Protection Agency (EPA) ignored the impact one of its rules would have on over 40 different industries. In another instance, EPA’s failure to consider the impact on small businesses during its rulemaking process resulted in over 1000 small businesses being heavily burdened with additional costs.

Testimonies such as this prompted Senator Bond to conclude that “repeated agency failures to abide by the law strongly suggest that Congress may need to amend the “Red Tape Reduction Act,” and tighten requirements placed on federal bureaucrats to uphold small business protections in the statutes.”

The Legal Advisor will monitor and report on any draft legislation resulting from this Senate Small Business Committee hearing.


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