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What is a Structured Settlement?

A structured settlement most commonly results from a personal injury lawsuit involving product liability, vehicle accidents, wrongful death, medical malpractice and negligence.

A structured settlement is a second option when settling a personal physical injury claim.  The settlement plan can be designed to meet the unique needs of the injured party. Instead of accepting a cash settlement in a single lump sum, the injured party may receive payments spread out monthly or yearly via an annuity contract issued by an insurance company.  The damages awarded are funded in the form of an annuity contract issued by an insurance company. 

The settlement structure is typically as follows:

• A company (usually an insurance company) is selected by the defendant to structure the settlement.

• The structured settlement company purchases an annuity contract and sends the payments from the annuity to the plaintiff. The payments are fixed in time and amount.

• The structured settlement company retains ownership of the annuity even though the plaintiff is the beneficiary.

Structured Settlement – Tax Benefits and Principal Protection

Instead of receiving cash in a lump sum, a structured settlement allows the injured party to receive future periodic payments made through a structured settlement annuity. There are three main advantages of a structured settlement.

First, it is TAX FREE. Structured settlements are covered under section 104 of the Internal Revenue Code of 1986 and therefore totally tax free, both federally and at the State level.  This tax treatment differs significantly from a lump sum settlement because investment proceeds made with lump sum settlement proceeds (such as interest and dividends) are subject to both Federal and State taxes.

Second, structured settlements offer inherent spending protections. Since the settlement money is received over a period of time, the injured party enjoys protection from bad judgment, bad advice, bad spending habits, or bad luck. The injured party does not have the worry associated with managing a huge sum of money that must last a lifetime. In fact, a structured settlement can survive bankruptcy.

Third, a structured settlement is guaranteed by highly-rated life insurance companies and their benefits do not fluctuate based on the volatile financial markets.  Put simply, the injured party has peace of mind knowing that their future payments will be made as promised and in an amount expected. 

Should you Structure Your Personal Injury Settlement? 

If you suffer from a personal injury resulting from any type of accident, a structured settlement may be the strategic choice for you.  In addition to additional tax incentives, it guarantees you and your family a stream of income over a period of time.  Managing a large lump sum settlement can cause additional stresses in life, knowing that you and your loved ones will have a certain payment each month or year can provide a tremendous feeling of security.  The attorneys at The Digesti Law Firm LLP can help you make a decision whether your personal circumstances counsel you to receive your personal injury settlement in a lump sum or in a structured settlement.  

One of the principle benefits of a commercial arbitration agreement is that it provides for an efficient, formal decision-making process instead of protracted and expensive litigation.  A considerable reason that arbitration is a more efficient then litigation is because most arbitration decisions are final and very few issues can be appealed.  This long-standing principle, however, has changed and changed in a significant way.    

In the past, courts could not review an arbitration decision on the merits

Generally speaking, a court will not review an arbitration proceeding on the merits to determine whether the law has been correctly stated and correctly applied.  This has created problems because arbitration awards generally must be enforced by courts even if it appears that the arbitrators incorrectly applied the law to the facts, or ignored the law altogether.  Despite this glaring problem, this has been each court’s duty since the Moncarsh v. Heily & Blase case in 1992 (see Moncarsh, 3 Cal. 4^th 1) (stating that “in the absence of some limiting clause in the arbitration agreement, the merits of the award, either on questions of fact or of law, may not be reviewed except as provided in the statute”)).

In California, courts may now review arbitration decisions for legal error

The law in California (and possibly in Nevada in the near future) has changed.  The California Supreme Court recently held that the parties to a contract can agree to allow for judicial review of legal error by an arbitrator as long as the parties structure the arbitration clause to trigger a statutory ground for review.  (Cable Connection, Inc. v. DirectTV, Inc. (2008) 44 Cal. 4^th 1334). 

The arbitration clause in the DirectTV contract stated that “the arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.” 

The key here is the statutory trigger the clause referred to – California Code of Civil Procedure § 1286.2(a), which states “a court shall vacate the award if the court determined . . . the arbitrators exceeded their powers.”  The genius of the language in this arbitration clause is that by defining an arbitrator’s powers so that they have no power to commit legal error, CCP 1286.2(a) is triggered and a court is allowed to vacate an award because of legal error.  Put differently, before DirectTV a party could not appeal an arbitrator’s award because a legal error was committed.  However, if the arbitration clause is properly drafted, a party can now appeal a decision based upon legal error by utilizing CCP 1286.2(a). 

The DirectTV decision may run afoul of federal arbitration law

Interestingly, the DirectTV opinion comes glaringly close to running afoul of a United States Supreme Court case, Hall Street Associates, L.L.C. v. Mattel, Inc.  There, the Court stated that under the Federal Arbitration Act, parties could not expand the scope of judicial review of arbitration decisions.  However, by cleverly relying upon statutory authority (CCP 1286.2(a)), the California Supreme Court may have nullified the application of Hall Street. 

What does the DirectTV decision mean for your business?

The DirectTV decision will undoubtedly be tested by businesses and their attorneys.  As it stands, the DirectTV decision only applies to review of legal errors and not factual errors.  However, the opinion can be construed as allowing for review of factual errors as well.  

It is highly advised that businesses modify their arbitration clauses to include the language necessary to allow a court to review an arbitrator’s decision for at least legal errors.  While binding arbitration may be a better business option than full blown litigation, if the arbitrator's decision is based upon incorrect legal reasoning, the arbitration is a failure.  Allowing a court to review a decision for legal error is a necessary protection that every business should have access to.  

How your business should modify your arbitration clause in all its contracts 

In California, your arbitration clause must trigger a statutory ground for review.  The clause in DirectTV provides an excellent example of what language you can add to your arbitration clause to ensure a court has the power to review your arbitrator’s decision for legal error.

"The arbitrator(s) shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error."

However, an arbitration clause could even conceivably include review for factual errors.  An example could read as follows:

"The arbitrator shall not have the power to commit errors of law, fact, or legal reasoning, and the award may be vacated or corrected by a court of competent jurisdiction.  The parties agree that the court shall have jurisdiction to review, and shall review, all challenged findings of fact and conclusions of law based on a de novo review of the arbitration record and evidence."

While allowing a court to review an arbitrator’s award for factual errors may allow for peace of mind, doing so takes away several benefits of arbitration including the relative informal presentation of evidence and increased efficiency in reaching a decision.  Whether your business decides to modify your arbitration clause for review of legal error or legal and factual errors, the decision must be based on sound business principles and business goals. 

Stay tuned – the DirectTV decision will undoubtedly be tested and revisited as businesses seek to extend review of arbitration decisions.  

The FTC recently released a staff report that could impact your online advertising.  Click here for the FTC report on legal online adverstising guidelines.  This report is "voluntary" meaning that it is not the law, but it is highly advised that your company abide by these voluntary guidelines as best as possible for the reasons that follow.

Why These Guidelines Important

Behavioral advertising is the process of tracking a user's online activities so that the user's specific interests can be identified.  Once a user's interests are identified, the web site can direct specific advertising to that user.  

The amount of data a company can collect on a user is staggering (for a full discussion, see The Behavioral Advertising Blog).  As the power of companies to collect user data grows, so does the FTC's concern with protecting people's privacy on the Internet.

But what does this mean, practically, for your company?  If a user sues you because they believe your behavioral advertising practices are deceptive and/or unfair trade practices, you should produce evidence that your company complied with the FTC's voluntary guidelines.  If you can demonstrate compliance, you may be able to avoid liability.  In other words, if you follow these guidelines to the best of your ability, you will potentially minimize your legal exposure.

The FTC's Four Behavioral Advertising Principles to Consider

The staff report identifies four behavioral advertising areas that a company should review and revise if necessary.

(1) Offering consumers notice and choice before you collect behavioral advertising data.  Translation = Before collecting behavioral data, a web site must give consumers notice of what information is being collected and a choice of whether the consumer wants that information to be collected. 

(2) Limiting the time you retain data and providing reasonable security for protection of the data.  Translation = There is no specific amount of time or level of security.  How long you can retain data and how secure that data must be depends on several factors including the sensitivity of the data and the type of business the company is engaged in.

(3) If you change your company's privacy practices, you must notify each user. Translation = If any portion of your behavioral advertising practices change, notify each user that you have collected data on and give them a choice on whether they will allow the change.

(4) Provide an "affirmative notice" before sensitive data on a user's online acitivity is collected. Translation = Provide a specific "opt-in" choice for users if "sensitive information" such as financial data, data about children, health information, sexual orientation, social security numbers, etc. are requested by your company.

Make User Privacy a Paramount Objective in Your Company

Excellent user privacy is not only a legal consideration, but great business as well.  If users know that you take their privacy seriously, they will become repeat customers and your potential legal liability will be minimized.  It is a policy that provides for happy customers and limited legal exposure.  If you have additional questions on online user privacy, do not hesitate to contact The Digesti Law Firm LLP here.