Author: National Law Forum

A group of in-house attorneys developed the National Law Review on-line edition to create an easy to use resource to capture legal trends and news as they first start to emerge. We were looking for a better way to organize, vet and easily retrieve all the updates that were being sent to us on a daily basis.In the process, we’ve become one of the highest volume business law websites in the U.S. Today, the National Law Review’s seasoned editors screen and classify breaking news and analysis authored by recognized legal professionals and our own journalists. There is no log in to access the database and new articles are added hourly. The National Law Review revolutionized legal publication in 1888 and this cutting-edge tradition continues today.

Bouncing Back with Shaun Sethna [PODCAST]

Finding the right home for your career can do wonders to change your perspective. For Shaun Sethna, the move in-house was exactly what he needed to go from feeling like work as something he had to do to work being something he enjoyed. In this episode of Bouncing Back, he talks to Rebecca Glatzer about his career journey, the bumps along the way and his growth mindset.

Shaun Sethna is Deputy General Counsel at Altisource, a FinTech and services provider to the mortgage and real estate industries.  Shaun has been at Altisource for almost 10 years, where his practice focuses on technology transactions and M&A.  He also developed and helps to manage a team focused on contracts, compliance, and general legal support to Altisource’s technology, mortgage cooperative and insurance businesses. Previously Shaun was at Schlumberger in Houston, and he got his start in the IP practice group at King & Spalding LLP in Atlanta. Shaun received his undergraduate degree in Industrial Engineering from the Georgia Institute of Technology and his J.D. from Columbia Law School.  Shaun’s favorite aspect of his job is managing and developing teams.

Article By Rebecca Glatzer of Major Lindsey & Africa

For more business of law legal news, click here to visit the National Law Review.

©2022 Major, Lindsey & Africa, an Allegis Group Company. All rights reserved.

What Taxpayers in the U.S. and Abroad Need to Know about FBAR Compliance

United States taxpayers have an obligation to report their foreign financial accounts (i.e., offshore or foreign bank accounts) to the federal government. While there are thresholds that apply, these thresholds are relatively low, so most offshore account holders will need to file reports on an annual basis. One of these reports is the Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR (Foreign Bank Account Report).

For U.S. taxpayers, FBAR compliance is extremely important. This is true for taxpayers residing both domestically and overseas. The FBAR is required for US citizens because foreign banks don’t have the same reporting obligations as US-based institutions. Noncompliance in reporting foreign bank accounts can lead to civil or criminal penalties; and, in many cases, failure to file an FBAR will lead to an examination of the taxpayer’s other recent tax filings as well.

“The obligation to file an FBAR applies to most U.S. taxpayers with offshore bank accounts. While many taxpayers are unaware of the FBAR filing requirement, this unawareness is not an excuse for noncompliance. Taxpayers with delinquent FBARs can face substantial penalties regardless of why they have failed to file.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Technically, FBARs are due on Tax Day along with taxpayers’ annual income tax returns. However, all taxpayers receive an automatic extension to October 15—with no need to file a request and no risk of incurring additional penalties.

10 Key Facts about FBAR Compliance for U.S. Taxpayers

As the extended October 15 FBAR deadline is fast approaching, here is an overview of what taxpayers in the U.S. and abroad need to know:

1. The FBAR Filing Requirement Applies to U.S. Taxpayers Who Hold Foreign Financial Accounts

The FBAR filing requirement applies to U.S. taxpayers who hold foreign financial accounts. It also applies to taxpayers who have “signature or other authority” over these foreign accounts. These obligations exist under the federal Bank Secrecy Act (BSA). Taxpayers covered under the BSA must file FBARs with the Financial Crimes Enforcement Network (FinCEN) annually.

While the FBAR filing requirement applies to most types of foreign financial accounts, there are exceptions. For example, FBAR compliance is not required with respect to accounts:

  • Owned by governmental entities
  • Owned by foreign financial institutions
  • Held at U.S. military banking facilities
  • Held in individual retirement accounts (IRAs)
  •  Held in certain other retirement plans

FinCEN has publicly taken the position that accounts solely holding cryptocurrency also do not qualify as foreign financial accounts for purposes of FBAR compliance. However, FinCEN has also stated that it “intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding [FBARs] to include virtual currency as a type of reportable account.” As a result, U.S. taxpayers who hold cryptocurrency overseas should continue to review FinCEN’s regulatory announcements to determine if their offshore cryptocurrency accounts will trigger FBAR compliance obligations in the future.

2. The FBAR Reporting Threshold is $10,000

The requirement to file an FBAR applies only to U.S. taxpayers whose foreign financial accounts exceed $10,000 during the relevant tax year. This is an aggregate threshold, meaning that it applies to all foreign financial accounts jointly, and the obligation to file an FBAR is triggered if the aggregate value of a taxpayer’s foreign financial accounts exceeds the $10,000 threshold at any point and for any length of time.

3. U.S. Taxpayers Must File Their FBARs Online

A person residing in the United States who has a financial interest in or signatory power over a foreign financial account is required to file an FBAR if the total value of the foreign financial accounts at any time during the calendar year exceeds $10,000. While U.S. taxpayers have the option to e-file their annual income tax returns, taxpayers must file their FBARs online. Taxpayers can do so through FinCEN’s website.

4. The IRS Enforces FBAR Compliance

Even though U.S. taxpayers must file their FBARs with FinCEN, the Internal Revenue Service (IRS) is responsible for enforcing FBAR compliance. This means that taxpayers that fail to meet their FBAR filing obligations must be prepared to deal with the IRS when it uncovers their delinquent filings. It also means that delinquent filers must follow the IRS’s procedures for coming into voluntary compliance to avoid unnecessary penalties—as discussed in greater detail below.

5. FBAR Filers May Also Need to File IRS Form 8938

In addition to filing an annual FBAR, U.S. taxpayers who own foreign financial accounts may also need to file IRS Form 8938. The obligation to file this form applies to U.S. taxpayers who own foreign financial assets (not solely foreign financial accounts) that exceed the thresholds established under the Foreign Account Tax Compliance Act (FATCA).

6. There are Special Mechanisms for Filing Delinquent FBARs

When individuals learn that they are at risk of facing an IRS audit or investigation due to failure to file an FBAR, their first instinct is often to file any and all delinquent FBARs right away.

However, this is not the IRS’s preferred approach, and it can expose taxpayers to penalties and interest unnecessarily.

The IRS offers two primary mechanisms for U.S. taxpayers to correct FBAR filing deficiencies—one for civil violations and one for criminal violations. The primary mechanism for correcting civil violations is to make a “streamlined filing,” while taxpayers who are at risk for criminal prosecution must make a “voluntary disclosure” to IRS Criminal Investigation (IRS CI).

As the IRS explains, the option to make a streamlined filing is “available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.” The ability to make this certification of non- willfulness is critical. If a taxpayer falsely certifies to non-willfulness (or if the IRS determines that a taxpayer’s certification is fraudulent), the IRS can reject the taxpayer’s streamlined filing and pursue criminal enforcement action.

For those who have willfully failed to file FBARs, coming into compliance generally involves using IRS CI’s Voluntary Disclosure Practice (VDP). As stated by IRS CI, “If you have willfully failed to comply with tax or tax-related obligations, submitting a voluntary disclosure may be a means to resolve your non-compliance and limit exposure to criminal prosecution.” However, as IRS CI also states, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution.”

With this in mind, when seeking to correct past FBAR filing failures, U.S. taxpayers need to make informed and strategic decisions. To do so, they should rely on the advice of experienced legal counsel. While streamlined filings and voluntary disclosures both provide protection from prosecution, they offer protection under different circumstances, and taxpayers must follow a stringent set of procedures to secure the available protections.

7. Failure to File an FBAR Can Lead to Civil or Criminal Prosecution

One of the key requirements for securing protection under the IRS’s streamlined filing compliance procedures or the VDP is that the taxpayer must not already be the subject of an IRS audit or investigation. When facing audits and investigations related to FBAR noncompliance, taxpayers must assert strategic defenses focused on avoiding civil or criminal prosecution.

Both the BSA and FATCA provide federal prosecutors with the ability to pursue civil or criminal charges. Typically, civil cases focus on unintentional violations, while prosecutors pursue criminal charges in cases involving intentional efforts to conceal foreign financial assets from the U.S. government. However, prosecutors may choose to pursue civil charges for “willful” violations as well; and, in some cases, asserting a strategic defense will involve focusing on keeping a taxpayer’s case civil in nature.

8. The Penalties for FBAR Non-Compliance Can Be Substantial

Why is it important to keep an FBAR non-compliance case civil? The simple answer is that in civil cases prison time isn’t on the table. Under the BSA, U.S. taxpayers charged with intentionally failing to file an FBAR can face a criminal fine of up to $250,000 and up to five years of federal imprisonment.

But, even in civil cases, a finding of FBAR noncompliance can still lead to substantial penalties. For non-willful violations, taxpayers can face fines of up to $10,000 per violation. For willful violations prosecuted civilly, taxpayers can face fines of up to 50% of the undisclosed account value or $100,000, whichever is greater (subject to a maximum penalty of 100% of the account value).

9. U.S. Taxpayers Who Have Questions or Concerns about FBAR Compliance Should Seek Help

Given the substantial risks of FBAR non-compliance, U.S. taxpayers who have questions or concerns about compliance should seek help promptly. They should consult with an experienced attorney, and they should work closely with their attorney to make informed decisions about their next steps.

10. FBAR Filers Must Keep Records On-Hand

Finally, in addition to filing their FBARS with FinCEN online, U.S. taxpayers who are subject to the BSA must also comply with the statute’s recordkeeping requirements. Minimally, taxpayers must retain the following records for each account they disclose on an FBAR:

  • Account number
  • Account type
  • Name on the account
  • Name and address of the foreign bank holding the account
  • Maximum value of the account during the relevant tax year

According to the IRS, “the law doesn’t specify the type of document to keep with this information,” and taxpayers typically “must keep these records for five years from the due date of the FBAR.”

Article By Dr. Nick Oberheiden of Oberheiden P.C.

For more tax law legal news, click here to visit the National Law Review.

Oberheiden P.C. © 2022

Nineteen States Have Banned TikTok on Government-Issued Devices

Governors of numerous states have issued Executive Orders in the past several weeks banning TikTok from government-issued devices and many have already implemented a ban, with others considering similar measures. There is also bi-partisan support of a ban in the Senate, which unanimously approved a bill last week that would ban the app from devices issued by federal agencies. There is already a ban prohibiting military personnel from downloading the app on government-issued devices.

The bans are in response to the national security concerns that TikTok poses to U.S. citizens [View related posts].

To date, 19 states have issued some sort of ban on the use of TikTok on government-issued devices, including some Executive Orders banning the use of TikTok statewide on all government-issued devices. Other state officials have implemented a ban within an individual state department, such as the Louisiana Secretary of State’s Office. In 2020, Nebraska was the first state to issue a ban. Other states that have banned TikTok use in some way are: South Dakota, North Dakota, Maryland, South Carolina, Texas, New Hampshire, Utah, Louisiana, West Virginia, Georgia, Oklahoma, Idaho, Iowa, Tennessee, Alabama, Virginia, and Montana.

Indiana’s Attorney General filed suit against TikTok alleging that the app collects and uses individuals’ sensitive and personal information, but deceives consumers into believing that the information is secure. We anticipate that both the federal government and additional state governments will continue to assess the risk and issue bans on its use in the next few weeks.

Copyright © 2022 Robinson & Cole LLP. All rights reserved.
For more Cybersecurity Legal News, click here to visit the National Law Review.

When Corporate Legal Teams Break

Forward-thinking organizations that refocus their legal teams on the removal of systemic friction and value creation can better detect and forecast risk; however, organizations that have not modernized their legal teams often miss subtleties masking surprisingly deep areas of risk. Recent history shows nothing is too big to fail, but earlier risk detection may have helped avoid some of the most catastrophic losses.

The most recent and notable industry-wide example, of course, was the financial services industry, which triggered the Great Recession from 2007 to 2009.

In the world’s most infamous accounting scandal, Enron imploded in 2001, wiping out $74bn of shareholder funds and the pensions and jobs of thousands of employees. Enron’s auditor also collapsed. The organizations were interconnected and dependent systems. One fell, the other followed. Undetected risk festered and worsened, and the interconnectedness of these organizations and systems created a complex network that made detecting risk more difficult.

As modern society demands more capable systems, they become more interconnected and complex by necessity. As Meltdown: Why Our Systems Fail and What We Can Do About It posits, this staggering complexity means that tiny mistakes or simple accidents can lead to devastating catastrophes that often go undetected. The reasons for failure can stem from very different problems, but the underlying causes are similar.

In accounting scandals with nefarious actors, huge debts are obscured and once revealed, lead to corporate failure. In legal departments with good actors – led by a noble General Counsel (GC) who serves as the defender of the enterprise – business risks are obscured and once revealed, can lead to devastating consequences: bet-the-company litigation, core intellectual property battles, merger & acquisition failure, and crippling regulatory fines, to name a few.

Embracing digital helps identify and expose risk, but organizations set the stage for failure when legal, or other critical functions, don’t keep up, fail to embrace the digital evolution, become disconnected, and lack or lose visibility. Those organizations make decisions without a clear view of the legal implications, and they might not even know it because, for now, they operate with blind trust of the Office of the GC.

Corporations in all industries are “going digital” to remain competitive amidst technological disruption. This focus on digital starts with core products and service offerings, and then is pushed throughout the business to align company to product. The result? Faster moving businesses with a wave of demand pummelling the legal department…if not yet, then soon as digital initiatives across the business mature.

Most corporate legal departments simply do not have the systems required to keep up — providing consistent regulatory counsel, detecting and preventing impending litigation, or simply knowing who is doing what in the legal organization is already a challenge Risk is obscured. A “break” like we’ve never experienced is primed.

If we examine the ecosystem, the warning signs are there.

Catching up to other corporate functions

As demands on legal teams continue to grow and CFOs ask GCs to do more with less, quality suffers amid rising law firm rates and unchecked complexity. Corners get cut. Risks emerge while their likelihood to go undetected rises. Of course, when adding headcount is not an option, revamping processes and technology is often the answer.

In finance, accounting, information technology, and human resource departments, among others, advances in technology have enabled self-service, helped control costs, made it easier to compare costs, and increased quality choices. These corporate functions have embraced systems-level restructuring with artificial intelligence (AI), data analytics, cloud computing and “Big Data” to modernize working practices and improve performance.

In their often siloed and conservative world, most GCs and corporate legal departments, on the other hand, make crucial decisions guided as much by gut instinct as by data and industry benchmarks. For decades, they have resisted change or lacked sufficient resources to enable change in technology, working practices, and corporate culture. Now, with the real-time requirement for speed, scale, and transparency — that era is over.

To retain and increase influence, improve their performance and trim costs as recessionary fears grow, GCs would be wise to more fully modernize their legal departments quickly through an open, digitally-savvy, and collaborative working culture.

Collaborate and listen

Building a data-driven, digital, secure and scalable legal system is an ethical and commercial imperative for GCs. Technology is part of the solution but not the place to start.

To more proactively expose, manage and mitigate risk, executives and their boards need GCs to emphasize the imperative for a more analytical, data-based and efficient approach to corporate legal practice with concrete examples to punctuate the “Why.”

You could start with three actions.

  1. Educate yourself and your colleagues about trends in legal digitization, performance improvement and new working practices. A comprehensive source of information is the Digital Legal Exchange, a global institute of leading thinkers from academia, business, government, technology and law.
  2. Become Modern. Be the change. Lead the change. Make tough decisions about your top leaders and whether they are capable of a data and digital-first mindset and way of working. Change leadership is the prime point of failure for legal modernization efforts.
  3. Be ambitious in the scope of your reforms. Small, pilot projects (ie, e-signature or automated NDAs) won’t make much of an impact and won’t convince your board of the need for bold legal change.

Modernizing the legal system and companies’ legal departments can improve affordability and performance for clients, lawyers, company boards, and shareholders.

Absent modern means of detection, legal risk can proliferate unknown and unseen only to all too often reveal triggers of impending corporate failure when it’s already too late.

Article By Anusia Gillespie of UnitedLex

For more corporate law legal news, click here to visit the National Law Review.

© 2022 UnitedLex, All Rights Reserved

How to Unplug From Work During the Holidays

It can be challenging to fully unplug from work during the holidays, especially if you have a lot of responsibilities or if you run your own business.

But taking a break from work during this slower period can be beneficial for your mental health and overall well-being.

It’s really important to not feel guilty about taking some time off or deciding that you don’t necessarily want to take time off, maybe want to spend time building your brand and business and if you do, I have plenty of tips for that as well!

Here are a few tips for unplugging from work during the holidays:

  • Set boundaries: Let your coworkers and clients know that you will be unavailable during specific times, such as during the holidays or on a certain day of the week. This will help prevent you from feeling pressure to respond to work-related messages or calls while you are trying to relax.
  • Create a relaxing routine: Plan activities that will help you relax and unwind, such as exercising, reading or spending time with family and friends. Having a relaxing routine can help you disconnect from work and focus on self-care.
  • Avoid checking work emails or messages too often. Try to resist the temptation to check work emails or messages all the time while you are on vacation. If you must check your email, set a specific time each day to do so and limit the amount of time you spend on it.
  • Take breaks from work-related tasks: If you are working on a project or task during the holidays, take regular breaks to rest and recharge. This will help you avoid burnout and maintain a healthy work-life balance.
  • Plan in advance: This is a great time of year to repurpose your content and utilize social media scheduling tools so that you don’t actually need to be present online to post. That being said, if you post anything you should still check social media so that you can engage with the comments on your posts, because that helps increase visibility. Let what you already have work, harder and smarter for you!

By setting clear boundaries, creating a relaxing routine and taking breaks from work-related tasks, you can help ensure that you fully unplug from work and enjoy your time off during the holidays!

Which of these tips resonate with you and do you have any others to add?

PS – If you’re looking for ways to build your brand during downtime here are a few ideas:

  • Use this time to assess your brand and identify areas for improvement. This could involve updating your website, revamping your social media accounts, or reassessing your target audience.
  • Create valuable content that can be shared during downtimes. This could be blog posts, videos, podcasts or other forms of content that showcase your expertise and add value to your audience.
  • Engage with your audience on social media or through email newsletters. Keep your audience updated on your brand and continue to provide value, even during downtimes.
  • Partner with other brands or influencers to cross-promote your products or services. This can help expose your brand to a new audience and increase your reach.
  • Take advantage of any downtime to learn new skills or attend workshops or conferences. This will help you stay current and improve your expertise, which can benefit your brand in the long run. (Check out my YouTube channel for lots of videos!)
  • Use downtime to reflect on your brand and consider new ways to innovate and stand out in your industry. This could involve launching new products or services, or finding unique ways to differentiate your brand.

Which one of these will you try? Happy holidays!

Article By Stefanie M. Marrone of Stefanie Marrone Consulting

For more business of law legal news, click here to visit the National Law Review.

Copyright © 2022, Stefanie M. Marrone. All Rights Reserved.

District of Columbia to Eliminate the Tip Credit: a Specter of the Future?

Currently, employers in the District of Columbia (like the majority of states) are permitted to count customer tips toward the minimum hourly wage they must pay to certain service employees. This practice is often referred to as taking a “tip credit.” Said differently, an employer is allowed to pay particular service employees a cash wage that is less than the minimum wage by relying on tips the employee receives from customers to make up the difference between the subminimum wage paid directly by the employer and the applicable federal or state minimum wage. In the District of Columbia, employers currently are allowed to pay their tipped workers a subminimum wage of $5.35 per hour, with the expectation that customers’ tips will cover the balance of the $16.10–per-hour minimum wage.

In early November 2022, nearly 74 percent of D.C. voters approved Initiative 82, the “District of Columbia Tip Credit Elimination Act of 2022,” which will gradually eliminate use of the tip credit in the District of Columbia by 2027. In 2027, the District will join the small group of states that currently prohibit use of the tip credit (Alaska, California, Minnesota, Montana, Nevada, and Oregon). In 2018, 55 percent of D.C. voters approved a different initiative, which would have phased out the tip credit, but the Council of the District of Columbia overturned the voter-approved initiative. Since then, the composition of the D.C. Council has changed, and the council is expected to implement Initiative 82.

Under Initiative 82, starting in January 2023, the District of Columbia’s minimum cash wage (i.e., the subminimum wage paid by the employer when an employer utilizes a tip credit) of $5.35 will increase by a dollar or two every year until it reaches minimum wage. Correspondingly, the maximum tip credit an employer can take in the District of Columbia will be reduced gradually until 2027 when the tip credit is eliminated. It is worth noting that the D.C. Council has not yet implemented Initiative 82, so employers may want to monitor what cash wage rates and tip credits are officially implemented to ensure compliance with the District of Columbia’s wage laws and tip credit notice requirements. As the end of the year approaches, employers may also want to review any changes to state minimum wage and minimum tip credit amounts that may become effective on December 31 or January 1.

The “DC Committee to Build a Better Restaurant Industry” was the campaign committee behind Initiative 82. The fact that voters approved the tip credit elimination initiative by nearly 20 percentage points more than the 2018 initiative shows that the campaign committee may indeed impact the fate of the tip credit. Other groups like “One Fair Wage” have also taken aggressive lobbying action to convince lawmakers and voters in other states to eliminate the tip credit. In early 2022, One Fair Wage announced a $25 million campaign to try to convince twenty-five states to remove the tip credit by 2026. According to One Fair Wage’s website, “One Fair Wage policy would require all employers to pay the full minimum wage with fair, non-discriminatory tips on top.” In addition to the District of Columbia, the group has campaigned in Illinois, Maine, Massachusetts, Michigan, and New York.

As we discussed in a June 2021 article, employers already are under siege with respect to the tip credit at the federal level. One of President Biden’s objectives has been to eliminate the tip credit on a nationwide basis, but because the tip credit exists in the statutory text of the Fair Labor Standards Act (FLSA), the U.S. Congress would need to amend the FLSA to accomplish that goal. However, through regulatory action that was finalized late last year, the U.S. Department of Labor (DOL) burdened the service industry with a harsh standard for maintaining compliance with tip credit regulations. In late 2021, the DOL released a rule that restored the pre-Trump-era 80/20 rule and added a new thirty-minute rule. Compliance with the new rule effectively created its own deterrent against continued use of the tip credit.

Ironically, a significant percentage of service industry employees actually oppose these initiatives to eliminate use of the tip credit because of the potential negative impact it will have on their total income. The U.S. Bureau of Labor Statistics indicates that, as of May 2021 (the most recent data available), individuals working as waiters and waitresses earned on average nearly $14 per hour. This is nearly twice the current federal minimum wage $7.25.

Many service industry employees advocate against elimination of the tip credit because they anticipate that employers may seek to offset the additional hourly labor costs by shrinking the workforce, decreasing hours, or recovering the added expense through higher menu prices or service charges, which may eat into the tips customers are willing to leave their servers. Many employers that have stopped utilizing the tip credit pay full minimum wage by automatically tacking a service fee onto customer bills. Unlike tips, employers can keep all, or portions of, an automatic charge, so long as the employer complies with local or state laws requiring adequate notice to customers about how the charge will be used.

Once the 118th Congress is sworn in this coming January, it is unlikely that employers will see much change regarding use of the tip credit at the federal level. Nevertheless, some state legislators may press forward with their efforts to eliminate use of the tip credit at the state level. For service industry employers that operate nationwide, there are mounting challenges to complying with federal and state tip regulations. Employers may want to continue to monitor states where legislation is targeting elimination of the tip credit and may wish to consider measures to address the additional labor costs that will follow.

© 2022, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.
For more Labor and Employment Law news, click here to visit the National Law Review.

TCPA Turnstile: 2022 Year in Review (TCPA Case Update Vol. 17)

As 2022 comes to a close, we wanted to look back at the most significant Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”) decisions of the year.  While we didn’t see the types of landscape-altering decisions that we saw in 2021, there’s still plenty to take note of.  We summarize here the biggest developments since our last update, listed by issue category in alphabetical order.

Arbitration: In Kelly v. McClatchy Co., LLC, 2022 WL 1693339 (E.D. Cal.  May 26, 2022), the District Court denied the defendant’s motion to compel arbitration because the contractual relationship between the parties had terminated before the unwanted calls were made. Plaintiffs had originally signed defendant’s Terms of Service which bound them to an arbitration provision for all legal disputes. Plaintiffs then cancelled their subscriptions which subsequently ended the enforceability of the Terms of Service against them. However, plaintiffs then received unwanted calls from Defendant seeking service renewals which the court deemed were not covered by the arbitration clause, even under a theory of post-expiration enforcement.

ATDS: Following Facebook v. Duguid, 141 S. Ct. 1163 (2021), courts are still struggling to define an “automatic telephone dialing system,” and the Third Circuit weighed in through Panzarella v. Navient Sols., Inc., 2022 WL 2127220 (3d Cir. June 14, 2022).  The district court granted defendant’s motion for summary judgment on the grounds that plaintiffs failed to show that an ATDS was used to call their phones. The Third Circuit upheld the summary judgment ruling but did not decide whether the dialing equipment used constituted an “ATDS” under the TCPA. Rather, its ruling hinged on the fact that defendant’s dialer pulled phone numbers from its internal database, not computer-generated tables. As such, the Third Circuit found that even though the system may very well be an unlawful ATDS system under the TCPA, if it is not used in that way, defendants could not be held liable.

In an interesting move, the court in Jiminez v. Credit One Bank, N.A., Nco Fin. Sys., 2022 WL 4611924 (S.D.N.Y. Sept. 30, 2022), narrowed the definition of an “ATDS,” choosing to reject the Second Circuit approach in favor of the Third Circuit’s approach in Panzarella. Here, plaintiff alleged that defendant used a dialing system to send numerous calls without consent. The Second Circuit follows the majority view that, if a system used to dial numbers has the ability to store or generate random numbers, the call made violates the TCPA, even if the random dialing function is not actually utilized. But the court in Jiminez found the Third Circuit’s reasoning persuasive and applied it to the case, finding that plaintiff failed to show the dialing system was actually used in a way that violated the TCPA. It granted summary judgment to defendants on the TCPA claims because the evidence showed the numbers used were all taken from a pre-approved customer list, not generated from random dialing.

Similarly, in Borden v. Efinancial, LLC, 2022 WL 16955661 (9th Cir. Nov. 16, 2022), the Ninth Circuit also adopted a narrower definition of an ATDS, finding that to qualify as an ATDS, a dialing system must use its automation function generate and dial random or sequential telephone numbers. This means that a mere ability to generate random or sequential numbers is irrelevant, the generated numbers must actually be telephone numbers. Given the circuit split on this issue, it seems likely that the Supreme Court will eventually have to weigh in.

Notably, in May 2022, the FCC issued a new order which will target unlawful robocalls originating outside the country. The order creates a new classification of service providers called “Gateway Providers” which have traditionally served a transmitters of international robocalls. These providers are domestic intermediaries which are now required to register with the FCC’s Robocall Mitigation database, file a mitigation plan with the agency, and certify compliance with the practices therein.

Class Certification: In Drazen v. Pinto, 41 F. 4th 1354 (11th Cir. July 27, 2022), the Eleventh Circuit considered the issue of standing in a TCPA class action. Plaintiffs’ proposed settlement class included unnamed plaintiffs who had only received one unsolicited text message. Because the court held in an earlier case (Salcedo v. Hanna, 936 F.3d 1162 (11th Cir. 2019)) that just one unwanted message is not sufficient to satisfy Article III standing, it found that some of the class members did not have adequate standing. The district court approved the class with these members in it, finding that those members could remain because they had standing in their respective Circuit and only named plaintiffs needed to have standing. The Eleventh Circuit held otherwise and vacated the class certification and settlement in the case. It remanded, allowing for redefinition of the class giving all members standing.

Consent: Chennette v. Porch, 2022 WL 6884084 (9th Cir. Oct. 12, 2022), involved a defendant who used cell phone numbers posted on publicly available websites, like Yelp and Facebook, to solicit client leads to contractors through unwanted text messages. The court rejected defendant’s argument that plaintiffs consented to the calls because their businesses were advertised through these public posts with the intent of obtaining new business. Beyond that, the court also found that even though these cell phones were used for both personal and business purposes, the numbers still fell within the protection of the TCPA, allowing plaintiffs to satisfy both statutory and Article III standing.

Damages: In Wakefield v. ViSalus, 2022 WL 11530386 (9th Cir. Oct. 20, 2022), the Ninth Circuit adopted a new test to determine the constitutionality of an exceptionally large damages award. Defendant was a marketing company that made unwanted calls to former customers, soliciting them to renew their subscriptions to weigh-loss products. After a multi-day trial, a jury returned a verdict for the plaintiff with a statutory damages award of almost $1 billion. The Ninth Circuit reversed and remanded to the district court to consider the constitutionality of the award. While the district court’s test asked whether the award was “so severe and oppressive” as to violate defendant’s due process rights, the Ninth Circuit instructed it to reassess using a test outlined in a different case, Six Mexican Workers. The Six Mexican Workers test assesses the following factors in determining the constitutionality of the damages award: “1) the amount of award to each plaintiff, 2) the total award, 3) the nature and persistence of the violations, 4) the extent of the defendant’s culpability, 5) damage awards in similar cases, 6) the substantive or technical nature of the violations, and 7) the circumstances of each .” We are still awaiting that determination on remand.

Standing: In Hall v. Smosh Dot Com, Inc., 2022 WL 2704571 (E.D. Cal July 12, 2022), the court addressed whether plaintiff had standing under the TCPA as a cell phone plan subscriber where the text messages were only received by someone else on the plan; in this case, plaintiff was the subscriber and her minor son was the recipient of the unwanted text messages. The court granted defendant’s motion to dismiss for lack of standing because she could not show that status of a subscriber alone could convey adequate standing under Article III.

In Rombough v. State Farm, No. 22-CV-15-CJW-MAR, (N.D. Iowa June 9, 2022), the court evaluated standing under the TCPA based on a plaintiff’s number being listed on the Do Not Call list. It determined that being on the DNC was not an easy ticket into court, plaintiff needed to allege more than just having its number on the list. Rather, the plaintiff need have actually registered their own numbers on the list.

© 2022 Vedder Price
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Office of Science and Technology Policy Requests Public Input on Biotechnology Regulation

  • The Office of Science and Technology Policy (OSTP) issued a request for information (RFI) today in which it invites public comment on the Coordinated Framework for the Regulation of Biotechnology (the “Coordinated Framework”).
  • The Coordinated Framework, which is a Federal regulatory policy for ensuring the safety of biotechnology products, was first issued in 1986, updated in 1992— to affirm that federal regulation should focus on characteristics of the product and the environment into which it being introduced, and not on the process by which it is produced—and then updated again in 2017 to clarify the roles of EPA, FDA, and USDA. And, in September of this year, Executive Order 14081 directed the three agencies to clarify and streamline regulations to support the safe of use of biotechnology products.
  • Accordingly, the RFI requests comment on seven questions related to the Coordinated Framework. The questions include a request for comment on identification of any regulatory gaps, inefficiencies, or uncertainties; data or information to improve any identified issues; and new or emerging biotechnology products that the agencies should be prepared to address. Comments to the RFI are due by February 3, 2023. Also, on January 12, 2023, OTSP will host a virtual event in which it will listen to public feedback on the RFI.

Article By Food and Drug Law at Keller and Heckman

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© 2022 Keller and Heckman LLP

Caremark Liability Following the SEC’s New ESG Reporting Requirements

Recent developments in the Court of Chancery concerning a corporate board’s duty to monitor and provide oversight over a corporation’s operations, so-called Caremark claims, are likely to intersect with the Securities and Exchange Commission’s (“SEC”) proposed new ESG disclosure obligations to create a new category of corporate risk.  In this article, we discuss the recent trends in Delaware law that have led to a revitalization of Caremark and the SEC’s current proposals for enhanced ESG disclosure, the intersection of which can be expected to result in litigation and other corporate risk, and some commonsense steps corporations can take to mitigate this potential new category of risk.

The “Caremark” Doctrine

One of the more notable developments in Delaware case law in recent years has been the revitalization of “Caremark duty” claims.  Caremark actions traditionally were notoriously difficult to plead—in explaining the doctrine, the Chancery Court famously called it “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”  In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996). In recent years, however, the Delaware courts have breathed new life into the Caremark doctrine by allowing these types of claims to proceed to discovery.

Specifically, the Caremark doctrine was returned to potency in 2019 following the Delaware Supreme Court’s decision in Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).  Although Marchand did not change the Caremark standard, it demonstrated the Delaware courts’ greater willingness to permit Caremark claims to pass the motion to dismiss phase if they could be plausibly pled.  Marchand ultimately laid the groundwork for a number of subsequent rulings demonstrating the renewed vitality of Caremark claims—not only have at least four Caremark suits survived a motion to dismiss since Marchand, but there are also several ongoing Caremark suits in Delaware.

Under Caremark, there are two distinct types of claims.  The first type concern a board’s failure to implement a system of controls to prevent some unlawful misconduct that occurred.  The second type of claims concern a failure to monitor by the directors.  It is imperative, therefore, that boards focus on:  (1) establishing adequate information and reporting systems to monitor “mission critical” aspects of their company’s business; and (2) monitoring those systems once in place.

The SEC’s Proposed New Climate-Related Disclosures

On March 21, 2022, the SEC proposed new rules requiring companies to report extensive line-item disclosures on climate-related ESG issues, entitled: “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”  If implemented as written, the proposed rules would require registrants to make significant additional disclosures regarding the impact of climate-related risks on their business.

Among other things, under the proposed rules, registrants would be required to disclose:

  1. Greenhouse gas (“GHG”) emissions, regardless as to whether those emissions are deemed material by the company.  Emissions would now be reported by “scope” or type.

  2. “Climate-related risks” that are “reasonably likely to have a material impact,” including climate-related conditions and events that impact financial statements, business operations, or value chains.

  3. Governance disclosures related to climate risk, including how the board and management assess and manage these climate-related risks.

  4. Any targets or goals related to the reduction of GHG emissions.

These proposed new rules are part of the Biden Administration’s efforts to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk.”  Yet the sheer breadth, specificity, and complexity of the proposed rules would result in one of the most profound changes to public companies’ disclosure obligations in the history of the SEC.

Additional Caremark Exposure

The SEC’s climate-related disclosure rules will likely fuel ESG-related Caremark claims.  In particular, heightened disclosure requirements will provide ammunition for derivative or class action lawsuits and may expose companies to specific indirect risks, including heightened exposure to pre-suit discovery and proxy contests.

Direct Litigation Risk

The SEC’s new reporting requirements are likely to create new grounds for investors to assert liability claims against corporations and their boards of directors and management. Shareholders can be expected to leverage the new disclosures to seek to hold companies accountable for failing to properly oversee, mitigate or eliminate climate-related risk.  The revitalized Caremark doctrine is likely to be employed to allege boards and managers failed to oversee so-called “mission-critical” aspects of their business that generate climate-related risk.

In this vein, plaintiffs may choose to use disclosures required by the SEC’s proposed rules as the basis for a breach of duty to monitor or Caremark claim through either a derivative suit, brought on behalf of the company against its directors and officers, or a class action suit, brought on behalf of a class of injured shareholders or investors.  Caremark claims will likely arise if and when a board fails to exercise proper oversight with respect to climate-related risks or to consider proper mitigating steps. This new threat will be amplified for companies that (i) have yet to fully examine how ESG issues factor into their mission-critical operations or (ii) have yet to devote resources and personnel to measuring (using consistent, comparable and reliable data) and analyzing their own ESG-related risks. Companies need to be able to ascertain and address their most pressing ESG-related risks to avoid future Caremark liability.

Indirect Risks

Indirect risks from the proposed new disclosure regime may manifest in a variety of ways..  They can result in the disclosure of embarrassing or harmful information about a company, its board, or managers, and lead to the replacement of key company executives or directors by aggrieved shareholders.  Moreover, they give rise to issues that are expensive and resource-intensive to address.  While these risks are indirect to companies, they pose a direct threat to board members and managers.

Pre-Suit Discovery.  Boards can expect new disclosure requirements to enable shareholders to gain greater access to pre-suit discovery.  Section 220 of Delaware’s General Corporate Law provides shareholders with a qualified right to inspect a company’s books and records for suspected corporate wrongdoing or mismanagement, and need only demonstrate a “credible basis” to proceed.  The new ESG reporting requirements will likely provide shareholders with even more information as ammunition to fuel Section 220 demands.  Opening a company’s books to pre-suit discovery could expose boards, management, or companies to serious reputational harm, as well as provide fodder for future lawsuits against the current board.

Proxy Contests.  New ESG-related disclosures are also likely to generate greater turmoil in the form of proxy battles at the board level.  Historically, shareholder activists have been focused on addressing short-term profit, stock price and total shareholder return.  Yet activist campaigns containing an environmental or social objective have doubled as a proportion of campaigns overall during the five years between 2016 and 2021, including a successful campaign against Exxon to place directors on its board.  The proliferation of new ESG reporting requirements is expected to further fuel these contests, particularly with respect to companies that are perceived to be lagging on ESG commitments or expectations.

Avoiding Environmental-Caremark Claims

Companies should take several steps in preparation for the increased pressure expected to arise from the need to address ESG issues.

First, companies should be aware of the obligations and risks they face with regard to ESG issues.  That means determining what ESG-related risks could detrimentally impact a “mission-critical” aspect of a company’s business.  What is determined to be “mission-critical” will necessarily vary by company.

Second, once companies are cognizant of the ESG-related risks they face, they will need to start implementing appropriate governance structures so that they are aware of, and can take steps to address, ESG risks.  Directors should establish responsible committees and internal information and reporting procedures to ensure board members have proper oversight of these efforts.  This will allow boards to demonstrate their engagement in response to potential Caremark claims, as well as to respond to any ESG risks arising in the company’s operations.

Third, with these governance structures in place, companies must focus on generating, collecting, and analyzing consistent and comparable data on the ESG-related risks they face.  These data should be actively monitored by managers and board members so they can identify and address ESG risks before they result in catastrophic situations and resulting litigation.  And, if Caremark claims ensue, boards will be able to use these governance structures and reporting regimes to demonstrate that they have satisfied their oversight obligations.

Finally, once these systems are in place, companies should take steps to prepare for the adoption of the SEC’s new climate-related disclosure requirements.  The development of governance and reporting structures will undoubtedly aid in the collection of information for these purposes.  While taking these steps, it is advisable that corporate executives and boards seek input from subject matter experts and experienced legal counsel to help design and implement robust compliance and monitoring regimes that can help to discourage or forestall future litigation in the form of Caremark or other claims related to ESG issues.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
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SCOTUS Takes a Pass on “Gap Time” Dispute

It’s two months into argument season at the Supreme Court, and we’re always keeping our fingers crossed that the justices will take up a wage and hour issue and clear up some ambiguities in the law or a circuit split.

Top billing this SCOTUS term goes to Helix Energy Solutions Group, Inc. v. Hewitt, in which the Court will address whether a supervisor who earned more than $200,000 a year but was paid on a daily basis is exempt from the overtime laws as a “highly compensated employee” under 29 C.F.R. § 541.601, notwithstanding the salary basis rules in 29 C.F.R. § 541.602 and 29 C.F.R. § 541.604.  The Court held arguments on October 12, and you can read the transcript here.  We’ll report on that decision as soon as it’s published.

This week’s news is a denial of a petition for a writ of certiorari in Cleveland County, North Carolina v. Conner, a case about gap time.  The plaintiff in the case—an EMT worker—was paid under a fairly complex set of ordinance-based and contractual terms, but the gist of her claim was that the county shorted her on straight-time pay she was owed under her contract, and by doing do violated the Fair Labor Standards Act.  The district court dismissed the claim, on the ground that the FLSA governs minimum wage and overtime pay, but not straight-time pay (assuming no minimum wage violation).  On appeal, however, the Fourth Circuit noted that “there are situations … that fall between [the minimum wage and overtime] provisions of the FLSA.  It explained:

In addition to seeking unpaid overtime compensation, employees may seek to recover wages for uncompensated hours worked that fall between the minimum wage and the overtime provisions of the FLSA, otherwise known as gap time ….  Gap time refers to time that is not directly covered by the FLSA’s overtime provisions because it does not exceed the overtime limit, and to time that is not covered by the FLSA’s minimum wage provisions because … the employees are still being paid a minimum wage when their salaries are averaged across their actual time worked.  (Internal citations and alterations omitted.)

The Court of Appeals differentiated between two types of gap time—“pure gap time” and “overtime gap time”—with the former referring to unpaid straight time in a week in which an employee works no overtime, and the latter referring to unpaid straight time in a week in which the employee works overtime.  The court noted, correctly, that no provision of the FLSA addresses gap time of either type, and that there is no cause of action under the FLSA for “pure gap time” absent a minimum wage or overtime violation by the employer.  Such claims would arise, if at all, under state law.

On the other hand, the circuit court noted that courts are divided on whether an employee can bring an “overtime gap time claim” under the FLSA.  While the statute itself is silent on the issue, the U.S. Department of Labor’s interpretation of the FLSA—set forth in 29 C.F.R. § 778.315—states that:

[C]ompensation for … overtime work under the Act cannot be said to have been paid to an employee unless all the straight time compensation due him for the nonovertime hours under his contract (express or implied) or under any applicable statute has been paid.

In its simplest sense, the argument for recognizing “overtime gap time” claims under the FLSA is this:  Say an employer promises an overtime-eligible employee base pay of $1,000 per week for up to 40 hours of work, and the employee works more than 40 hours in a given week.  In that scenario, the employee’s hourly overtime rate would by $37.50 ($1000 ÷ 40 yields a regular rate of $25, and time-and-a-half on $25 is $37.50).  But if the employer only pays the employee $800 in base pay for the week and not the promised $1,000, the regular rate becomes $20 ($1000 ÷ 40) and the hourly overtime rate becomes $30 (time-and-a-half on $20).  So the employee is short-changed $7.50 on each overtime hour, which the Fourth Circuit found violates 29 C.F.R. § 778.315 and the spirit, if not the letter, of the FLSA.

“Pure gap time” is different, in this important sense:  it only arises when the employee has not worked any overtime in the week.  So there is no possibility of short-changing the employee on overtime pay, and—assuming the employee has, on average, received the minimum wage for all hours worked that week—no other provision of the FLSA that provides any relief.  (The employee is ostensibly free to seek relief under an applicable state wage payment law or common law for failure to pay promised compensation.)

The Fourth Circuit concluded that 29 C.F.R. § 778.315 has the “power to persuade,” and therefore is entitled to “considerable deference” under Skidmore v. Swift & Co., 323 U.S. 134 (1944).  As such, the court held that “overtime gap time claims” are indeed cognizable under the FLSA, and that “courts must ensure employees are paid all of their straight time wages first under the relevant employment agreement, before overtime is counted.”  The court acknowledged a circuit split on the issue, with the Second Circuit declining to afford deference to 29 C.F.R. § 778.315 and rejecting “overtime gap time” claims as lacking a statutory basis (“So long as an employee is being paid the minimum wage or more, [the] FLSA does not provide recourse for unpaid hours below the 40–hour threshold, even if the employee also works overtime hours the same week.”).

The county filed a petition for a writ of certiorari with the Supreme Court, presenting not only the question of whether the FLSA permits “overtime gap time” but also seeking clarification on how federal courts should apply the Skidmore doctrine to agency interpretations such as 29 C.F.R. § 778.315.  The Supreme Court denied the petition on December 12, leaving both questions for another day.

© 2022 Proskauer Rose LLP.
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