Tag Archives: complaint

zenefits

Zenefits Compliance Saga Takes a Turn

Things happen fast in the start-up world.

Early yesterday, I wrote a post on how Zenefits’ compliance challenges in Washington state could cost the company millions of dollars in lost commissions. While noting that it was only a matter of time before someone at Zenefits lost his job over the situation, I had no idea that Zenefits CEO Parker Conrad would resign later in the day, citing the compliance problems.

In a press release cited by VentureBeat.com announcing Conrad’s departure, Zenefits’ new CEO, David Sacks, who had been COO, declared, ”I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.” (The entire press release is worth reading).

The loss of a founder and CEO is another cost Zenefits will pay for the alleged failure to comply with states’ insurance laws. I don’t believe they’re done paying for their mistake, however.

What follows is a slightly edited version of my earlier article:

Washington regulators are investigating Zenefits’ alleged use of unlicensed agents selling insurance policies in the state. This is not only embarrassing for a company as brash and boastful as Zenefits, but the company’s finances could be substantially affected, too. Not just because, if found guilty of this felony, Zenefits could face a multimillion-dollar fine. The far greater risk to Zenefits is the prospect of losing commission income — a lot of it.

William Alden at BuzzFeed News has done a great job pursuing the story of Zenefits’ unlicensed sales. Now Alden is reporting that, based on public records, it seems “83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses….”

The potential fallout is quite substantial even though only a small number of sales are involved — just 110 policies out of 132 sold or serviced by Zenefits in Washington between November 2013 and August 2015. “Soft dollar” costs include a damaged brand because of the bad press, distractions at all levels of the company and the need to address whether the company is ignoring other consumer protections.

Then there are the hard costs. 110 policies times the maximum $25,000 per violation that Washington can impose means fines of as much as $2.8 million. Financial penalties imposed by other states could add to this figure. While paying a $2.8 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% of what Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As Alden points out, the fallout from this investigation could result in carriers dumping Zenefits, and that could cost the company far more than any criminal fines.

Carriers require agents to meet several requirements before contracting with them, and agents must continue to meet these requirements to keep the agreement in-force. Common provisions include being appropriately licensed, maintaining adequate errors and omissions coverage and not committing felonies or breaching fiduciary responsibilities. Fail to meet any of these requirements, and agents can find their contract terminated for cause.

Terminations for cause usually allow insurance companies to withhold future commissions from the agent and, depending on the specific terms of the contract, from the agent’s agency, as well. If an agency or agent knows or should have known he was in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions.

Being found guilty of a felony in Washington state could allow a carrier — any carrier, anywhere in the country — to terminate Zenefits’ agent contract for cause. Late last year, Zenefits CEO Conrad claimed the company was on track to earn $80 million in 2015. So, let’s see, millions times 50% … carry the one … yeah, this hurts. A lot.

A nuclear outcome is highly unlikely. The Washington state investigation into Zenefits is continuing, and Zenefits, to date, has been found guilty of nothing.

Even if Washington regulators find Zenefits committed a felony, for reasons described in a previous post, the outcome is highly unlikely to be a fatal blow to the company. Insurance regulators have considerable leeway in determining fines and penalties. Absent proof that Zenefits intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude that this situation resulted from incompetence. The department might then impose a modest fine on Zenefits and subject the company to enhanced review of its licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as a result of what started off as a two-bit break-in. That kind of cascading escalation is extremely rare. What we’re seeing unfold in Washington state is probably not Zenefits’ Watergate moment.

Zenefits has already paid a small price for what it allegedly did. I’m guessing the whole mess has been a bit distracting to management. And the fact remains: Mishandling more than 80% of sales in a state is a sign of immense ineptitude, arrogance or both. Having this reality aired publicly is not good for Zenefits’ brand, and resources will need to be expended to make sure it doesn’t happen again. I’m not aware the company has fired anyone as a direct result of the lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down its controversial broker comparison pages in which the company used carefully selected criteria to compare itself to community-based agents. (I guess the company was reluctant to add “being investigated for multiple felonies” as one of the comparison points). This is a small sacrifice as the comparison page was likely an attempt to enhance search engine optimization rather than an effort to take business from the competition.

Zenefits has paid a small price. The open question is: How large a price will the company ultimately pay?

An Overlooked Attorney Fee Statute in Oregon

Companies doing business in Oregon should be aware of ORS 20.080, which can provide for attorney fees in cases seeking damages of $10,000 or less.  That statute provides that prevailing plaintiffs may be awarded attorney fees. It is important to be aware that, in ORS 20.080 cases seeking compensatory damages of $10,000 or less, the attorney fees can quickly approach or outstrip the compensatory damages.

This article will explore three key questions that clients generally have when defending against an ORS 20.080 case: 1) How does the plaintiff receive attorney fees?; 2) Do courts require plaintiffs to strictly comply with ORS 20.080?; and 3) How can defendants escape attorney fees in ORS 20.080 cases?

1. How Does the Plaintiff Receive Attorney Fees Under ORS 20.080?

Generally, a plaintiff has a claim for attorney fees under ORS 20.080 if the plaintiff: gives the defendant notice of a claim for $10,000 or less at least 30 days before the plaintiff files a lawsuit; provides enough documentation for the defendant to generally value the claim; and was awarded more at trial or arbitration than the defendant offered before the plaintiff filed the lawsuit. 

ORS 20.080 provides that:

“(1) In any action for damages for an injury or wrong to the person or property, or both, of another where the amount pleaded is $10,000 or less, and the plaintiff prevails in the action, there shall be taxed and allowed to the plaintiff, at trial and on appeal, a reasonable amount to be fixed by the court as attorney fees for the prosecution of the action, if the court finds that written demand for the payment of such claim was made on the defendant, and on the defendant's insurer, if known to the plaintiff, not less than 30 days before the commencement of the action or the filing of a formal complaint under ORS 46.465, or not more than 30 days after the transfer of the action under ORS 46.461. However, no attorney fees shall be allowed to the plaintiff if the court finds that the defendant tendered to the plaintiff, prior to the commencement of the action or the filing of a formal complaint under ORS 46.465, or not more than 30 days after the transfer of the action under ORS 46.461, an amount not less than the damages awarded to the plaintiff.

“(2) If the defendant pleads a counterclaim, not to exceed $10,000, and the defendant prevails in the action, there shall be taxed and allowed to the defendant, at trial and on appeal, a reasonable amount to be fixed by the court as attorney fees for the prosecution of the counterclaim.

“(3) A written demand for the payment of damages under this section must include the following information, if the information is in the plaintiff's possession or reasonably available to the plaintiff at the time the demand is made:

“(a) In an action for an injury or wrong to a person, a copy of medical records and bills for medical treatment adequate to reasonably inform the person receiving the written demand of the nature and scope of the injury claimed; or

“(b) In an action for damage to property, documentation of the repair of the property, a written estimate for the repair of the property or a written estimate of the difference in the value of the property before the damage and the value of the property after the damage.

“(4) If after making a demand under this section, and before commencing an action, a plaintiff acquires any additional information described in subsection (3) of this section that was not provided with the demand, the plaintiff must provide that information to the defendant, and to the defendant's insurer, if known to the plaintiff, as soon as possible after the information becomes available to the plaintiff.

“(5) A plaintiff may not recover attorney fees under this section if the plaintiff does not comply with the requirements of subsections (3) and (4) of this section.

“(6) The provisions of this section do not apply to any action based on contract.”

2. Do Courts Require Plaintiffs to Strictly Comply With ORS 20.080?

The short answer is no.  Although ORS 20.080 requires that plaintiffs make their demands in writing to the defendant AND the defendant’s insurer, if known, courts generally do not require plaintiffs to strictly comply with this portion of the statute.  Under Schwartzkopf v. Shannon the Cannon’s Window & Other Works, Inc., 166 Or App 466, 471, 998 P2d 244 (2000), a person may act as an agent for the defendant (and therefore may be considered “the defendant”) for purposes of ORS 20.080 if that person has authority to defend or settle a claim for the defendant.  Under Schwartzkopf, trial court judges have allowed plaintiff’s lawyers to provide notice to the defendant’s insurer without providing notice to the defendant, even though the plain language of ORS 20.080 requires that the plaintiff provide notice to both.  In these kinds of cases, the insurer has usually already engaged in some kind of negotiations for the defendant or has gathered facts for and on behalf of the defendant, giving the plaintiff evidence of agency.  Therefore, under ORS 20.080 and Schwartzkopf, if the insurer is the only person who receives a demand, practically and generally speaking, the insurer should treat that demand as sufficient notice as long as it was made at least 30 days before plaintiff filed the lawsuit.

Courts do generally require plaintiffs to send any additional written information that the demand would include, such as additional medical bills, to the defendant (or the defendant’s insurer) as soon as possible if the plaintiff obtains such information after the plaintiff has made her written 20.080 demand and before she has filed the lawsuit.

However, in the initial written demand, courts generally give plaintiffs leeway and, as long as the plaintiff has provided the defendant with enough documentation to generally value the claim, the plaintiff generally does not have to strictly comply with the statute and provide all of the documentation “reasonably available at to the plaintiff at the time.”  For example, if you are provided with an ORS 20.080 notice from a plaintiff’s lawyer that includes most of the medical records and bills but does not include copies of the x-rays, a trial judge will generally hold that the plaintiff’s lawyer substantially complied with ORS 20.080 and that the claim may proceed.

3. How Can Defendants Escape Attorney Fees in ORS 20.080 Cases?

The only way the defendant can escape attorney fees in ORS 20.080 cases is if the defendant makes an offer to the plaintiff before the lawsuit is filed that is more than the damages ultimately awarded to the plaintiff. In other words, if the plaintiff recovers $5,000, but the defendant offered $3,000 before the lawsuit was filed, the plaintiff gets her attorney fees.  If the plaintiff recovers $5,000, but the defendant offered $8,000 before the lawsuit was filed, the plaintiff does not receive her attorney fees.

If the lawsuit is filed and the defendant has a counterclaim of up to $10,000 and the defendant prevails in the lawsuit, the defendant gets its reasonable attorney fees.  What is “reasonable” is decided by the court.

In Oregon, it is important to notify your attorney right away after receipt of an ORS 20.080 letter to ensure that you strategize appropriately.  Although it may seem unpalatable, generally the best strategy is for defendant to make its best offer first, to minimize the risk of an award in excess of the offer and exposure to attorney fees. Many times, lawyers don’t receive cases until the lawsuit is filed and, in ORS 20.080 cases, that is usually too late; the plaintiff’s attorney fee claim is already in play.