ICCFA Fall Management Conference October 10, 2013 James J. Kutz Jason G. Benion Post & Schell,...

ICCFA Fall Management Conference

October 10, 2013

James J. KutzJason G. BenionPost & Schell, PC17 North Second StreetHarrisburg, PA 17101(717) 731-1970jkutz@postschell.comjbenion@postschell.com

Federal Court & the Political Quagmire of Unconstitutional Laws: Heffner v. Murphy

Where Are We Going?

Before AfterHeffner v. Murphy

Implications for the rest of the county

Subject to change…

A little history…

• 1895: First “undertaker” law

• 1931: First funeral director law

• January 14, 1952: Current Funeral Director Law enacted

When the FDL was enacted…

Segregation was still legal

Brown v. Board of Education, 347 U.S. 483 (1954).

“Miranda” rights were 14 years away

Miranda v. Arizona, 384 U.S. 436 (1966).

The last Union Civil War veteran…

would not die for another 4½ years.

The “Audit Report”

Why?

• Outdated• No health purpose• No consumer protection purpose in law• Board does not reflect deathcare industry

At the time, the Board agreed…

The State Board of Funeral Directors

• 9 members:

Commissioner of the Bureau of Professional and Occupational Affairs

Designee from the Bureau of Consumer Protection in the Office of Attorney General

2 public members*

5 licensed funeral directors

*One of whom is the trade association’s attorney

Appointment to the Board

• Appointed by the Governor, with the advice and consent of the Senate

• Legislative oversight Senate Consumer

Protection & Professional Licensure Committee*

House Professional Licensure Committee*

*Leaders are funeral directors

Regulatory Capture

FTC Report on Funeral Industry Practices (1978)

Regulatory Capture

PA Audit Report (1994)

Not much has changed

Heffner v. Murphy

• Filed on May 20, 2008

• 30 Plaintiffs: funeral directors, funeral homes, cemeteries, crematories, salespersons, and unlicensed individuals

• Constitutional challenge to 12 aspects of the Funeral Director Law

Overview of ClaimsThe Pennsylvania Funeral Director Law --

1. Prohibited anyone but licensed funeral directors from owning funeral homes.

2. Prohibited a funeral director from owning more than two funeral homes.

3. Prohibited a funeral director from passing on a home to a non-licensee.

4. Required funeral homes to operate under the name of their current owner or predecessor name.

5. Prohibited serving food in funeral homes.

6. Allowed inspections of funeral homes, at any time, for any reason, and without a warrant.

Overview of Claims

7. Prohibited a funeral director from working at more than two locations.

8. Prohibited a funeral director from supervising more than one location.

9. Required every funeral home to have an embalming preparation room.

10. Prohibited anyone but licensed funeral directors from selling cremation.

11. Prohibited funeral directors from owning funeral merchandise companies.

12. Prohibited commissions and most forms of compensation for salespeople.

District Court and Third Circuit Support

• Plaintiffs ICCFA Funeral Consumer

Alliance Institute for Justice

• Defendants NFDA PFDA

Heffner v. Murphy

• On May 8, 2012, the court granted summary judgment in favor of Plaintiffs on 11 counts, and in favor of Defendants on 1 count.

• Gave the Board 90 days to react to the decision.

• They didn’t…

Heffner v. Murphy

• On August 22, 2012, the court: Declared 11 aspects of the Funeral

Director Law unconstitutional Enjoined the Board from enforcing those

aspects of the law Awarded Plaintiffs $1.1 million in

attorneys’ fees

How the law has changedThe Pennsylvania Funeral Director Law --

1. Prohibited anyone but licensed funeral directors from owning funeral homes.

2. Prohibited a funeral director from owning more than two funeral homes.

3. Prohibited a funeral director from passing on a home to a non-licensee.

4. Required funeral homes to operate under the name of their current owner or predecessor name.

5. Prohibited serving food in funeral homes.

6. Allowed inspections of funeral homes, at any time, for any reason, and without a warrant.

struck down

struck down

struck down

struck down

struck down

struck down

How the law has changed

7. Prohibited a funeral director from working at more than two locations.

8. Prohibited a funeral director from supervising more than one location.

9. Required every funeral home to have an embalming preparation room.

10. Prohibited anyone but licensed funeral directors from selling cremation.

11. Prohibited funeral directors from owning funeral merchandise companies.

12. Prohibited commissions and most forms of compensation for salespeople.

struck down

struck down

struck down

struck down

struck down

upheld

What’s Next?

• Argument before the Court of Appeals on June 12, 2013

• Decision soon?

Why Federal Court?• Potentially less deference to state agency• Avoid the administrative process • Damages and attorneys’ fees• Familiarity with federal law• Discovery• Appeal• Time

“The best defense is a good offense!”

Why Not Federal Court?

• Delay

• Need to educate about administrative issues

• Cost

• Potentially greater deference to State

Ownership – Before

• Only a funeral director could own a funeral home.

• A funeral director could own only one principal location and one branch.

• Only a funeral director can inherit a funeral home.

Only PA and MD require owner to be a funeral director

Exceptions…

• Widows*• Estates*• Spouses, children, and grandchildren*• Pre-1935 corporations• Asset sale and leaseback

*Only of a Pennsylvania funeral director

Constitutional Claims

• “Dormant” Commerce Clause Benefits in-state interests at the

expense of out-of-state interests

• Substantive Due Process Is the regulation rationally related to a

legitimate government interest? Pure protectionism Exceptions swallow the rule

Ownership – After

• Ownership restrictions violate the Commerce Clause and Due Process Clause.

• The Board is enjoined from prohibiting individuals and entities who are not licensed funeral directors from owning a funeral home.

• The Board is enjoined from limiting the number of funeral homes that may be owned.

Funeral Home Names – Before

• Name of the licensed funeral director owner or a predecessor name.

• If funeral director Smith bought the Jones Funeral Home, Inc.: Smith Funeral Home Jones Funeral Home Smith-Jones Funeral Home

9 other states have a similar rule

Funeral Home Names – Before

Legal

• Terry Funeral Home, Inc. owned by Board Member Burrell

• Goldsteins’ Rosenberg’s Raphael Sacks, Inc.

• Jefferson Memorial Funeral Home*

Illegal

• Delaware Valley Cremation Center

• Griffiths Funeral Home, owned by Mr. Griffiths’ widow

Constitutional Claim

• First Amendment “Commercial Speech” Unless

commercial speech is unlawful or misleading, the government cannot prohibit it without a substantial reason

Funeral Home Names – After

• Name restrictions violate the First Amendment.

• The Board is enjoined from prohibiting any lawful and non-misleading name.

Food – Before

CT, MA, NJ, and NY also prohibit food

“No food or intoxicating beverages shall be served in any funeral establishment …”

“Beverages, if served, must be restricted to a separate room not used for the preparation and conduct of a funeral service.”

vs.

Constitutional Claim

• Substantive Due Process Beverage but not food makes no sense Experts: no health risk Board admitted “there is no reason” Customers can bring food?

Food – After

• Food prohibition violates the Due Process Clause.

• Board is enjoined from prohibiting the service of food in a funeral establishment.

Inspections – Before

“Inspectors … shall have the right of entry into any place, where the business or profession of funeral directing is carried on or advertised as being carried on, for the purpose of inspection and for the investigation of complaints coming before the board and for such other matters as the board may direct.”

38 states address funeral home inspections, but many impose limits

Constitutional Claim

• Fourth Amendment Prohibits

warrantless searches Even of

businesses No need: stolen

car parts vs. prep room

No limits on time, place, or scope

Inspections – After

• Warrantless inspections under the FDL violate the Fourth Amendment.

• The Board is enjoined from conducting warrantless inspections of funeral homes.

Place of Practice & Supervisor – Before

• A funeral director may practice at only one principal location and one branch. But may “assist” others, so long as it is

not “excessive.”

• A funeral director may supervise only one funeral home. But every location must have its own

full-time supervisor.

23 states place some restriction on supervisors/managers

Constitutional Claims

• Dormant Commerce Clause Denies out-of-state competitors the

competitive advantage of clustering Board admits: “not economically

feasible”

Constitutional Claims

• Due Process Clause

Applies regardless of call volume Goldstein’s Philadelphia locations vs.

Heffner’s “Northern Tier” locations

Board’s legislative initiative “Not economically feasible” for many

locations One supervisor for principal and branch

locations

Place of Practice & Supervisor – After

• Restrictions violate the Commerce Clause and Due Process Clause.

• The Board may not restrict the number of funeral establishments at which a funeral director may engage in the profession of funeral directing.

• The Board may not restrict the number of funeral establishments at which a funeral director may serve as a supervisor.

Preparation Room – Before

• “[E]very establishment in which the profession of funeral directing is carried on shall include a preparation room.”

26 states have some prep room requirement

Constitutional Claims

• Dormant Commerce Clause Denies out-of-state competitors the

competitive advantages of clustering and centralized embalming

Audit Report: $40,000 to $50,000 in 1994

Constitutional Claims

• Due Process Clause No requirement to use your own prep

room Board admits: “Significant trend in the

industry to consolidate embalming operations, resulting in many funeral establishments never actually using the preparation room.”

Audit Report “Burdensome” and “unnecessary” Results in higher costs for consumers All parties agree: get rid of it

Preparation Room – After

• Requirement violates the Commerce Clause and Due Process Clause.

• The Board may not require every funeral establishment to have a preparation room.

• But embalming must still occur in a preparation room. See 49 Pa. Code § 172(a).

Cremation – Before

• For decades, cemeteries and crematories provided cremation directly to the public.

• As cremation rates rose, the Board began prosecuting for the unlicensed practice of funeral directing.

• Wholesaler only rule

30 states have some restriction on direct disposition

Constitutional Claims

• Commerce Clause Pennsylvania funeral homes have monopoly

• First Amendment Cemeteries and crematories can perform

cremation, but can’t talk about it

• Due Process Clause Funeral directors are not required to know

cremation (they use cemeteries and crematories!)

Cremation – After

Meet the new boss, same as the old boss

• Cemeteries and crematories may not sell cremation directly to the public.

• A funeral director must act as the middle-man.

Merchandise Companies – Before

• The Future Interment Act permits anyone to sell preneed merchandise, if 70% of the sale price is placed in trust.

• The Funeral Director Law provides that a funeral director who enters into a preneed contract “to render funeral services” must place 100% of money accepted in trust.

• PFDA v. State Board of Funeral Directors, 494 A.2d 67 (Pa. Commw. Ct. 1985).

Merchandise Companies – Before

• Can a funeral director own and operate a merchandise company which trusts at 70%?

1991:“Grossman Memo”

1996: Model Incorporation Kit

2000s: Investigations and prosecutions

2007: Proposed regulation 16A-4815

For example, in NJ, cemeteries cannot sell monuments

Constitutional Claims

• First Amendment Prohibition on the corporate form

• Due Process Funeral directors can’t, but everyone else can?

• Contract Clause Outlaws contracts that were legal when made

Merchandise Companies – After

• Prohibition violates the First Amendment, Due Process Clause, and Contract Clause.

• The Board is enjoined from prohibiting a funeral director or funeral home from owning an entity which operates and trusts pursuant to the FIA.

Payment of Salespersons – Before

• Walker v. Flitton, 364 F. Supp. 2d 502 (M.D. Pa. 2005)

Payment of Salespersons – Before

• Prohibited from “paying a commission … to any person or persons for soliciting or for business secured, or paying any gratuity to any person with intent to have such person aid in securing business.”

• Unprofessional conduct includes, “Paying … a commission or a valuable consideration for the solicitation or procurement of clientele.”

Constitutional Claims

• First Amendment Walker is meaningless if salespeople can’t be

paid Right to be paid for honest speech Not just commissions; but what’s so bad about

commissions anyway?

Payment of Salespersons – After

• Prohibition on payment to salespeople violates the First Amendment.

• The Board is enjoined from prohibiting a funeral director or funeral establishment from paying a commission or other gratuity to an employee or agent for soliciting or securing business or for business secured.

What Does This Mean?

What Does This Mean?

What Does This Mean?

• New opportunities, but no new requirements

• A new Funeral Director Law?