Executive Summary: U.S. District Court Judge Sam R. Cummings has issued a preliminary injunction blocking the implementation of the U.S. Department of Labor's (DOL) "persuader rule" from being implemented on July 1 of this year. See National Federation of Independent Business v. Perez, Case 5:16-cv-00066-C (N.D. Texas, June 27, 2016). The injunction comes at the initial stages of the litigation. It is effective nationwide and will remain in effect while the case proceeds before the court through trial and pending any appeals. The DOL is expected to seek a prompt appeal. Earlier this month a Minnesota District Court Judge refused to enter a more limited injunction, but in doing so indicated his belief that the regulation was fundamentally flawed.
Judge Cummings found that the Plaintiffs in the case – five Texas business groups and the Attorneys General for 10 states – showed a substantial likelihood of success on the merits of their case should it proceed to trial, that they would be irreparably harmed in the absence of an injunction, and that, on balance, an injunction was necessary to preserve the status quo, which the Court noted had been in effect for more than 50 years. More specifically, the Court ruled that the DOL's attempt to treat exempt "advice" and certain persuader activity as mutually exclusive resulted in the DOL "drawing lines that are simply incoherent." (quoting Labnet, Inc. v. United States Dep't of Labor, 2016 U.S. Dist. Lexis 81844 at 15-16, Case No. 16-CV-0844, ECF No. 62 (D. Minn. June 22, 2016)). Further, the Court ruled that by treating advice and certain persuader activities as mutually exclusive the DOL "improperly reads an exception into the [LMRDA's] advice exemption that is not there, treating it as exempting all advice except advice that has an object to persuade." The Court also found the DOL's language to be arbitrary, capricious and an abuse of discretion. In doing so, the Court found that the DOL never adequately explained the rationale for changing a 50-year old interpretation. The Court rejected the DOL's stated reason – to improve transparency – since that interest would have existed even under the prior interpretation. Still further, the Court found that the DOL's new regulation "unreasonably conflicts" with state rules governing the practice of law in that the regulation undermines the attorney-client privilege and the confidentiality of those relationships. Finally, the Court held that the new regulation likely violates the Plaintiffs' First and Fifth Amendment rights.
This decision represents a full-scale rejection of the DOL's new regulation on all fronts.However, the regulation is not dead yet. We expect the DOL to promptly appeal the District Court's decision. Additionally, three lawsuits challenging the regulation have been filed, and two of the courts have raised substantial doubts about the long-term viability of the regulation. In any event, appeals of the lower courts' decisions will be taken, and the outcome, although promising, is far from certain.
IMPORTANT NOTE: As the final outcome of this and other cases challenging the new regulation is uncertain, we are still recommending that our clients consider executing a special engagement letter designed to grandfather future "persuader" activity under the old interpretation of the advice exemption.