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.

Ankura Cyber Threat Intelligence Bulletin: August – September 2022

Over the past sixty days, Ankura’s Cyber Threat Investigations & Expert Services (CTIX) Team of analysts has compiled key learnings about the latest global threats and current cyber trends into an in-depth report: The Cyber Threat Intelligence Bulletin. This report provides high-level executives, technical analysts, and everyday readers with the latest intel and insights from our expert analysts.

Download the report for an in-depth look at the key cyber trends to watch and help safeguard your organization from constantly evolving cyber threats with the latest cyber intelligence, ransomware, and threat insights.

 Our latest report explains the following observations in detail:

Law Enforcement Works with Threat Intelligence to Prosecute Human Traffickers

In the age of high-speed internet and social media, criminals have evolved to use information technology to bolster their criminal enterprises and human traffickers are no different. Whether it be through the clearnet or dark web, human traffickers have leveraged the internet to scale their operations, forcing law enforcement to reevaluate how to best combat this problem. In response to the changes in trafficker tactics, techniques, and procedures (TTPs), governments across the world have responded with legislation and policies in an attempt to better thwart the efforts of these criminals. Researchers from Recorded Future’s Insikt Group have published compelling reports as a proof-of-concept (PoC) for a methodology on how law enforcement agencies and investigators can utilize real-time threat intelligence to leverage sources of data in order to aid in tracking, mitigating, and potentially prosecuting human sex traffickers. Download the full report for additional details on law enforcement efforts to prosecute human traffickers and more on the Insikt Group’s findings.

Emerging Threat Organization “MONTI”: Sister Organization or Imposter Threat Group?

Over the past several weeks a new, potentially imposter, threat organization has mimicked the tactics, techniques, procedures (TTPs), and infrastructure of the Conti Ransomware Group. Tracked as MONTI, this doppelganger organization emerged in the threat landscape in July 2022 after compromising a company and encrypting approximately twenty (20) hosting devices and a multi-host VMWare ESXi instance tied to over twenty (20) additional servers. While the July attack pushed the group into the limelight, analysts believe that attacks from the doppelganger organization go back even further into the early summer of 2022. Similarities discovered between Conti Ransomware and the alleged spinoff Monti Ransomware include attack TTPs alongside the reuse of Conti-attributed malicious payloads, deployed tools, and ransom notes. Additionally, the encrypted files exfiltrated by Monti contain nearly identical encryption, which could indicate code re-usage. Read the full report to find out what CTIX analysts expect to see from this group in the future.

Figure 1: Conti Ransom Note

Figure 2: Monti Ransom Note

Iranian State-Sponsored Threat Organization’s Attack Timeline Targeting the Albanian Government

In July 2022, nation-state Iranian threat actors, identified by the FBI as “Homeland Justice”, launched a “destructive cyber-attack” against the Government of NATO-member Albania in which the group acquired initial access to the victim network approximately fourteen (14) months before (May of 2021). During this period, the threat actors continuously accessed and exfiltrated email content. The peak activity was observed between May and June of 2022, where actors conducted lateral movements, network reconnaissance, and credential harvesting.

This attack and eventual data dumps were targeted against the Albania-based Iranian dissident group Mujahideen E-Khalq (MEK), otherwise known as the People’s Mojahedin Organization of Iran. MEK is a “controversial Iranian resistance group” that was exiled to Albania and once listed by the United States as a Foreign Terrorist Organization for activity in the 1970s but was later removed in late 2012. Albania eventually severed diplomatic ties with Iran on September 7, 2022, and is suspected to be the first country to ever have done so due to cyber-related attacks. For a more detailed analysis of this attack and its ramifications, download our full report.

 Figure: Homeland Justice Ransom Note Image

Banning Ransomware Payments Becomes Hot-Button Issue in State Legislature

There is a debate occurring in courtrooms across the United States regarding the ethics and impacts of allowing businesses to make ransomware payments. North Carolina and Florida have broken new ground earlier this year passing laws that prohibit state agencies from paying cyber extortion ransom demands. While these two (2) states have been leading the way in ransomware laws, at least twelve (12) other states have addressed ransomware in some way, adding criminal penalties for those involved and requiring public entities to report ransomware incidents. Download the full report to discover what experts think of government ransomware payment bans and the potential effects they could have on ransomware incidents.

Threat Actor of the Month: Worok

ESET researchers discovered a new cluster of the long-active TA428 identified as “Worok.” TA428 is a Chinese advanced persistence threat (APT) group first identified by Proofpoint researchers in July 2019 during “Operation LagTime IT”, a malicious attack campaign targeted against government IT agencies in East Asia. Download the full report for an in-depth look at Worok’s tactics and objectives, and insights from our analysts about the anticipated future impact of this group.

New List of Trending Indicators of Compromise (IOCs)

IOCs can be utilized by organizations to detect security incidents more quickly as indicators may not have otherwise been flagged as suspicious or malicious. Explore our latest list of technical indicators of compromise within the past sixty (60) days that are associated with monitored threat groups and/or campaigns of interest.

Article By Ted Theisen and Jason Hale of Ankura

For more data privacy and cybersecurity legal news, click here to visit the National Law Review.

Copyright © 2022 Ankura Consulting Group, LLC. All rights reserved.

Fair Market Value Defensibility Analysis: Why is It Different from a Fair Market Value Opinion?

Fair market value is a pinnacle issue for compliance under the Stark Law and Anti-Kickback Statute. Compensation arrangements that are required to be representative of fair market value under Stark/AKS include employment, independent contractor, medical directorships, exclusive service arrangements, call coverage, quality reviews, medical staff officer stipends, etc.

Many consulting firms provide fair market value opinions relying extensively on the application of benchmark data. Based upon CMS’s statements in the Stark Law Final Rules, although application of benchmark data is a resource that can be utilized, fair market value can and should include the application of market/service area issues (i.e., deficiency of specialty) or physician-specific issues (i.e., expertise, productivity).

Commercial reasonableness is a separate concept from fair market value under Stark/AKS. Commercial reasonableness also entails whether the application of benchmark/market factors are defensible.

When analyzing the defensibility of compensation arrangements, it is important to view fair market value and commercial reasonableness as if advocating the facts and circumstances of the proposed compensation arrangement before a governmental entity (i.e., CMS, OIG, DOJ). When an attorney is rendering a fair market value defensibility analysis, not only will the analysis be protected under the attorney-client privilege, but the analysis will also include references and attachments to all of the applicable documentation and relevant information in case the compensation arrangement is ever required to be defended.

Article By Bob Wade of Nelson Mullins

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

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

FRB and FDIC Issue Joint ANPR on Possible Resolution Requirements for Large Banking Organizations While FRB and OCC Approve U.S. Bank MUFG Union Bank Merger

The Federal Reserve Board (“FRB”) and Federal Deposit Insurance Corporation (“FDIC”) Board issued an Advanced Notice of Proposed Rulemaking (“ANPR”) titled “Resolution-Related Resource Requirements for Large Banking Organizations.” Separately, but relatedly (if for no other reason than the FRB put it in the same press release as the ANPR), the Office of the Comptroller of the Currency (“OCC”) and the FRB approved their respective applications for the merger of MUFG Union Bank into U.S. Bank.

The ANPR is seeking comment on possible changes to the resolution-related standards applicable to large banking organizations (“LBOs”) that are not global systemically important banks (“GSIBs”). Those possible changes that the FRB and FDIC are contemplating would bring some of what is required for GSIB resolution planning down to LBOs, particularly focusing on “Category III” firms with $250 billion to $700 billion in total assets. The main focus of the ANPR is on whether LBOs ought to be required to issue long-term debt similar to the total loss-absorbing capacity (“TLAC”) requirements for GSIBs. The ANPR notes that the Fed and FDIC are considering “whether an extra layer of loss-absorbing capacity could increase the FDIC’s optionality in resolving the insured depository institution,” but also costs associated with such a requirement.

The ANPR flows logically from remarks made by Acting Comptroller Hsu at the Wharton Conference on Financial Regulation in April (and which we discussed in a previous issue), and that Acting Comptroller Hsu noted in his statement when he voted in favor of the ANPR at the FDIC Board meeting.

As noted above, in the same press release announcing the ANPR, the FRB announced the approval of the application by U.S. Bancorp to acquire MUFG Union Bank. The FRB’s order noted that upon consummation, U.S. Bancorp’s consolidated assets would total approximately $698.7 billion, and noting the close proximity to becoming a “Category II” firm over $700 billion in assets imposed a unique commitment to give quarterly implementation plans for complying with Category II requirements. The commitment by U.S. Bancorp also could trigger a need for U.S. Bancorp to comply with Category II requirements by December 31, 2024, even if its asset size has not gone above the $700 billion threshold. FRB Governor Michelle Bowman issued a statement supporting both the issuance of the ANPR and the approval of U.S. Bancorp’s application, but questioned the appropriateness of imposing Category II requirements on a one-off basis. The OCC’s approval was conditioned, among other things, on U.S. Bank making plans for its possible operability in the event of a resolution in order to facilitate its sale to more than one acquiring institution.

Article By Daniel Meade of Cadwalader, Wickersham & Taft LLP

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

© Copyright 2022 Cadwalader, Wickersham & Taft LLP

Supreme Court Questions Whether Highly Compensated Oil Rig Worker Is Overtime Exempt

On October 12, 2022, the Supreme Court of the United States heard oral arguments in a case regarding whether an oil rig worker who performed supervisory duties and was paid more than $200,000 per year on a day rate basis is exempt from the overtime requirements of the Fair Labor Standards Act (FLSA).

The case is especially significant for employers that pay exempt employees on a day rate. It could have a major impact on the oil and gas industry in the way that it recruits, staffs, and compensates employees who work on offshore oil rigs and at remote oil and gas work sites. In addition, depending on how the Supreme Court rules, its decision could have much broader implications.

During the arguments in Helix Energy Solutions Group, Inc. v. Hewitt, the justices questioned whether, despite the employee’s high earnings, he was eligible for overtime compensation because he was paid by the day and not on a weekly salary basis. There is no express statutory requirement that an employee be paid on a “salary basis” to be exempt from overtime requirements, but such a requirement has long been included in the regulations issued by the U.S. Department of Labor (DOL) applicable to the FLSA’s white-collar exemptions. Notably, Justice Brett Kavanaugh suggested during the arguments that the regulations may be in conflict with the text of FLSA, although Helix did not raise this issue in its petition for certiorari.

Background

The case involves an oil rig “toolpusher,” an oilfield term for a rig or worksite supervisor, who managed twelve to fourteen other employees, was paid a daily rate of $963, and earned more than $200,000 annually. Between December 2014 and August 2017, when Michael Hewitt was discharged for performance reasons, he worked twenty-eight-day “hitches” on an offshore oil rig where he would work twelve-hour shifts each day, sometimes working eighty-four hours in a week. After his discharge, Hewitt filed suit alleging that he was improperly classified as exempt and therefore was entitled to overtime pay. The district court ruled in favor of Helix.

In September 2021, a divided (12-6) en banc panel of the U.S. Court of Appeals for the Fifth Circuit held that Hewitt was not exempt from the FLSA because his payment on a day-rate basis did “not constitute payment on a salary basis” for purposes of the highly compensated employee (HCE) exemption that is found in the FLSA regulations.

The Fifth Circuit further concluded that the employer’s day-rate pay plan did not qualify as the equivalent of payment on a salary basis under another FLSA regulation because the guaranteed pay for any workweek did not have “a reasonable relationship” to the total income earned. In other words, the court found that the employee was not exempt because the $963 he earned per day was not reasonably related to the $3,846 the employee earned on average each week.

Oral Arguments

Oral arguments at the Supreme Court focused on the interplay between the DOL’s HCE regulation, 29 C.F.R. § 541.601, and another DOL regulation, 29 C.F.R. § 541.604(b), which states that an employer will not violate the salary basis requirement under certain limited circumstances even if the employee’s earnings are computed on an hourly, daily, or shift basis.

At the time of Hewitt’s employment, the HCE exemption required an employee to be paid at least $455 per week on a “salary or fee basis” and to earn at least $100,000 in total annual compensation. Those threshold amounts have since been increased to $684 per week and $107,432 per year.

The other regulation, 29 C.F.R. § 541.604(b), states that an employee whose earnings are “computed on an hourly, a daily or a shift basis” may still be classified as exempt if the “employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled workweek.”

Hewitt earned double the minimum total compensation level for the HCE exemption. Since the minimum salary level for the exemption was only $455 per week, and Hewitt was guaranteed that he would be paid at least $963 per week for each week he worked at least one day, Helix argued that he was exempt from the FLSA’s overtime requirements because the HCE exemption was completely self-contained and to be applied without regard to other regulations, including the “salary basis” test and the minimum guarantee regulation. Hewitt argued that the HCE exemption required compliance with either the “salary basis” test or the minimum guarantee regulation since he was admittedly paid on a day rate basis.

However, Justice Ketanji Brown Jackson suggested that it was not that simple. Justice Jackson said the question of salary basis is more about the “predictability and regularity of the payment” for each workweek. “What he has to know is how much is coming in at a regular clip so that he can get a babysitter, so that he can hire a nanny, so that he can pay his mortgage,” Justice Jackson stated. Justice Jackson echoed the language of the salary basis test requiring that an exempt employee be paid a predetermined amount for any week in which she performed any work.

Similarly, Justice Sonia Sotomayor asked Helix, “so what you’re asking us to do is take an hourly wage earner and take them out of 604, which is the only provision that deals with someone who’s not paid on a salary basis.” Justice Sotomayor additionally raised the FLSA’s goal of “preventing overwork and the dangers of overwork.”

In contrast, Justice Clarence Thomas suggested that Hewitt’s high annual compensation relative to the average worker is a strong indication that he was paid on a salary basis and should be exempt. “The difficulty is just, for the average person looking at it, when someone makes over $200,000 a year, they normally think of that as an indication that it’s a salary,” Justice Thomas stated.

Justice Kavanaugh asked if the issue of whether the DOL regulations conflict with the FLSA is being litigated in the courts. He said, “it seems a pretty easy argument to say, oh, by the way, or maybe, oh, let’s start with the fact that the regs [sic] are inconsistent with the statute and the regs [sic] are, therefore, just invalid across the board to the extent they refer to salary.” He further stated, “if the statutory argument is not here, I’m sure someone’s going to raise it because it’s strong.”

Key Takeaways

It is difficult to predict how the Supreme Court will rule in this case. A decision that requires strict adherence to the regulation’s reasonable relationship test, even when the minimum daily pay far exceeds the minimum weekly salary threshold, would have a significant negative impact on the manner in which certain industries compensate their workers. It also could lead to even more litigation by highly compensated employees, many of whom make more money without receiving overtime pay than what many people who currently are paid overtime compensation make.

Depending upon its breadth, a decision that the regulations are in conflict with the statutory text of the FLSA could provide a roadmap for additional challenges to other parts of the regulations. This could have a wide-ranging impact, as the DOL currently is in the process of preparing a proposal to revise its FLSA regulations. Then again, if a future litigant takes up Justice Kavanaugh’s invitation to challenge whether the salary regulations are overbroad compared to the language of the FLSA, the current effort to revise the regulations regarding exemptions for executive, administrative, and professional employees may be moot.

Article By Andrew P. Burnside, Steven F. Pockrass, and Zachary V. Zagger of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For more supreme court and litigation legal news, click here to visit the National Law Review.

© 2022, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

November 2022 Visa Bulletin – A Warning for EB-2 All Other Countries

The Visa Bulletin is released monthly by the Department of State and is used to determine when a sponsored foreign national can submit the final step of the green card process, or if already pending, when the final step can be adjudicated.

Below is a summary of the November Visa Bulletin, including Final Action Dates and changes from the previous month.

China:   EB-1 remains current; EB-2 holds at June 8, 2019; EB-3 freezes at June 15, 2018; EB-3 other workers advances three months to December 1, 2012.

India:   EB-1 remains current; EB-2 holds at April 1, 2012; EB-3 freezes at April 1, 2012; and EB-3 other workers remains April 1, 2012.

All Other Countries:   EB-1, EB-2 and EB-3 remain current (except for EB-3 Other Workers which has a cutoff date of June 1, 2020).

NOTE 1:  The November Visa Bulletin warns of possible future retrogression in the EB-2 All Other Countries category due to increased demand for overall visa numbers.

NOTE 2: USCIS will accept I-485 applications in November based on the Department of State’s slightly more favorable Dates for Filing chart.

This post was written by Courtland C. Witherup and the Immigration & Nationality Law Practice at Hunton Andrews Kurth.

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

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

USTR Seeks Comments on Section 301 Tariffs on Chinese Goods; Portal Opens Nov. 15

The Office of the U.S. Trade Representative (USTR) announced Oct. 17 that starting Nov. 15, it will begin soliciting comments on the effectiveness of Section 301 tariffs the Trump administration placed on Chinese goods. The notice and request for comments relate to USTR’s ongoing four-year statutory review of the Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.

In the Federal Registrar Notice, USTR said it is seeking “public comments on the effectiveness of the actions in achieving the objectives of the investigation, other actions that could be taken, and the effects of such actions on the United States economy, including consumers.”

The USTR is specifically interested in comments on the following:

  • The effectiveness of the actions in obtaining the elimination of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.
  • The effectiveness of the actions in counteracting China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.
  • Other actions or modifications that would be more effective in obtaining the elimination of or in counteracting China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.
  • The effects of the actions on the U.S. economy, including on U.S. consumers.
  • The effects of the actions on domestic manufacturing, including in terms of capital investments, domestic capacity and production levels, industry concentrations, and profits.
  • The effects of the actions on U.S. technology, including in terms of U.S. technological leadership and U.S. technological development.
  • The effects of the actions on U.S. workers, including with respect to employment and wages.
  • The effects of the actions on U.S. small businesses.
  • The effects of the actions on U.S. supply chain resilience.
  • The effects of the actions on the goals of U.S. critical supply chains.
  • Whether the actions have resulted in higher additional duties on inputs used for additional manufacturing in the United States than the additional duties on particular downstream product(s) or finished good(s) incorporating those inputs.

The continuing assessment of these additional duties has been criticized by some business groups and lawmakers who believe they have hurt both U.S. businesses and U.S. consumers but have not checked China’s behavior. They also have called for the reinstatement of previously issued exclusions and for a new, robust tariff exclusion process. Some labor and civil society groups, however, want the tariffs to remain in place. The fate of these tariffs is closely tied to the Biden administration’s ongoing review and the overall U.S.–China trade relationship. The controversial tariff program that covers upwards of $300 billion worth of imports from China has sparked lawsuits from more than 3,500 importers.

The comment period begins on Nov. 15 and extends until Jan. 17. USTR said it will post specific questions on its website Nov. 1 before the portal opens.

Article By Laura Siegel Rabinowitz, Donald S. Stein, and Madeline Orlando of Greenberg Traurig, LLP

For more trade regulation news, click here to visit the National Law Review.

©2022 Greenberg Traurig, LLP. All rights reserved.

First BIPA Trial Results in $228M Judgment for Plaintiffs

Businesses defending class actions under the Illinois Biometric Information Privacy Act (BIPA) have struggled to defeat claims in recent years, as courts have rejected a succession of defenses.

We have been following this issue and have previously reported on this trend, which continued last week in the first BIPA class action to go to trial. The Illinois federal jury found that BNSF Railway Co. violated BIPA, resulting in a $228 million award to a class of more than 45,000 truck drivers.

Named plaintiff Richard Rogers filed suit in Illinois state court in April 2019, and BNSF removed the case to the US District Court for the Northern District of Illinois. Plaintiff alleged on behalf of a putative class of BNSF truck drivers that BNSF required the drivers to provide biometric identifiers in the form of fingerprints and hand geometry to access BNSF’s facilities. The lawsuit alleged BNSF violated BIPA by (i) failing to inform class members their biometric identifiers or information were being collected or stored prior to collection, (ii) failing to inform class members of the specific purpose and length of term for which the biometric identifiers or information were being collected, and (iii) failing to obtain informed written consent from class members prior to collection.

In October 2019, the court rejected BNSF’s legal defenses that the class’s BIPA claims were preempted by three federal statutes governing interstate commerce and transportation: the Federal Railroad Safety Act, the Interstate Commerce Commission Termination Act, and the Federal Aviation Administration Authorization Act. The court held that BIPA’s regulation of how BNSF obtained biometric identifiers or information did not unreasonably interfere with federal regulation of rail transportation, motor carrier prices, routes, or services, or safety and security of railroads.

Throughout the case, including at trial, BNSF also argued it should not be held liable where the biometric data was collected by its third-party contractor, Remprex LLC, which BNSF hired to process drivers at the gates of BNSF’s facilities. In March 2022, the court denied BNSF’s motion for summary judgment, pointing to evidence that BNSF employees were also involved in registering drivers in the biometric systems and that BNSF gave direction to Remprex regarding the management and use of the systems. The court concluded (correctly, as it turned out) that a jury could find that BNSF, not just Remprex, had violated BIPA.

The case proceeded to trial in October 2022 before US District Judge Matthew Kennelly. At trial, BNSF continued to argue it should not be held responsible for Remprex’s collection of drivers’ fingerprints. Plaintiff’s counsel argued BNSF could not avoid liability by pleading ignorance and pointing to a third-party contractor that BNSF controlled. Following a five-day trial and roughly one hour of deliberations, the jury returned a verdict in favor of the class, finding that BNSF recklessly or intentionally violated BIPA 45,600 times. The jury did not calculate damages. Rather, because BIPA provides for $5,000 in liquidated damages for every willful or reckless violation (and $1,000 for every negligent violation), Judge Kennelly applied BIPA’s damages provision, which resulted in a judgment of $228 million in damages. The judgment does not include attorneys’ fees, which plaintiff is entitled to and will inevitably seek under BIPA.

While an appeal will almost certainly follow, the BNSF case serves as a stark reminder of the potential exposure companies face under BIPA. Businesses that collect biometric data must ensure they do so in compliance with BIPA and other biometric privacy regulations. Where BIPA claims have been asserted, companies should promptly seek outside counsel to develop a legal strategy for a successful resolution.

For more Privacy and Cybersecurity Legal News, click here to visit the National Law Review.

© 2022 ArentFox Schiff LLP

FDA Updates Regulatory Definition of “Healthy” for the First Time Since 1994

The U.S. Food and Drug Administration (FDA) has issued a proposed rule (“Proposed Rule”)[1] that updates the definition of the “healthy” nutrient content claim under 21 C.F.R. § 101.65(d) for the first time since its issuance in 1994. The Proposed Rule, published on September 29, 2022, notes that “nutrition science has evolved since the 1990s” and that the proposed changes are intended to make the regulation “consistent with current nutrition science and Federal dietary guidance.”[2]

FDA is accepting comments until December 28, 2022.  Stakeholders should note that the proposed amendments may require companies to remove “healthy” claims from current labels and may make new products eligible to bear “healthy” claims. The comment period affords impacted companies the opportunity to provide FDA with input that could modify the current Proposed Rule. K&L Gates’ FDA team can assist clients with submitting comments and with assessing the impact of the Proposed Rule.

Highlights of the Proposed Rule

The changes in the Proposed Rule align with the FDA’s 2016 changes to the nutrition labeling regulation at 21 C.F.R. § 101.9,[3] primarily by refocusing the attention from limiting fat to limiting sugar intake.  The proposal also addresses several areas to make the regulation more consistent with current nutrition guidelines; for example, the Proposed Regulation would permit water, avocados, nuts, and seeds to bear the “healthy” claim, whereas products such as highly sweetened cereals would not be eligible for the claim.[4] 

Under the existing regulation,[5] a “healthy” food must meet certain criteria, including limits on total fat, saturated fat, cholesterol, and sodium, and minimum amounts (at least 10 percent of the Daily Value) of favorable nutrients (e.g., vitamin A, vitamin C, calcium, iron, protein, and dietary fiber).[6] In contrast, while continuing to place limits on the presence of certain nutrients (e.g., added sugar, sodium, saturated fat), the Proposed Rule’s updated “healthy” criteria take a very different approach to promoting the consumption of certain foods, consistent with the 2020-2025 Dietary Guidelines for Americans, through the new concept of “food group equivalents.” Specifically, to meet the proposed “healthy” claim criteria, a food would need to contain minimum amounts of one or more of the following food groups or subgroups: fruit, vegetables, grains, dairy, and protein foods. FDA’s proposed table of “food group equivalents” is reproduced below:

FDA Proposed Rule – Food Group Equivalents

Food Group Food Group Equivalent

 Examples
Vegetable 1/2 cup equivalent vegetable 1/2 cup cooked green beans; 1 cup raw spinach
Fruit 1/2 cup equivalent fruit 1/2 cup strawberries; 1/2 cup 100% orange juice; 1/4 cup raisins
Grains No less than 3/4 oz. equivalent whole grain 1 slide of bread; 1/2 cup cooked brown rice
Dairy 3/4 cup equivalent dairy 6 oz. fat free yogurt; 1 1/8 oz. nonfat cheese
Protein foods 1 1/2 equivalent game meat, 1 oz. equivalent seafood, 1 oz. equivalent egg, 1 oz. equivalent beans, peas, or soy products, or 1 oz. equivalent nuts and seeds 1 1/2 oz. venison; 1 oz. tuna; 1 large egg; 1/4 cup black beans; 1/2 oz. walnuts

In a change from the current “healthy” regulation, the Proposed Rule distinguishes between undesirable fat (i.e., saturated fat) and desirable fats (i.e., monounsaturated and polyunsaturated fats) in the diet. In this regard, the Proposed Rule reflects the impact of the 2015 citizen petition submitted by KIND LLC (Docket No. FDA-2015-P-4564[7]), a manufacturer of sweetened nut snack bars, which requested that FDA accommodate “healthy” claims for products containing monounsaturated and polyunsaturated fats but that are not “low fat” as defined under 21 C.F.R. § 101.62(b)(2).  KIND filed its petition after receiving a warning letter from FDA in 2015, requesting that they remove the “healthy” claim from products due to disqualifying levels of fat from nut ingredients (e.g., almonds, peanuts).  In a press release issued with submission of its petition, KIND highlighted that the current “healthy” regulation permits products like fat-free chocolate pudding, sweetened cereals, and toaster pastries to qualify as “healthy,” whereas foods like almonds, avocados, and salmon were ineligible due to their fat content.[8] In response to KIND’s petition, FDA had been exercising enforcement discretion since September 2016 for certain products not low in fat but that contain predominantly mono and polyunsaturated fats.[9]

Under the Proposed Rule, FDA has eliminated total fat and cholesterol from consideration for “healthy” claims.  Also, while a food product must adhere to limits for added sugars, saturated fat, and sodium, limits on unfavorable nutrients are no longer keyed to compliance with other nutrient content claim regulations (e.g., meeting the definition of “low saturated fat” under 21 C.F.R. § 101.62(c)(2)). The Proposed Rule expresses disqualifying levels for unfavorable nutrients as percentages of daily values under 21 C.F.R. § 101.9.

FDA summarizes the criteria for “healthy” claims by product type below.  Unlike the current regulation, the Proposed Rule would specifically allow all raw whole fruits and vegetables to qualify for the “healthy” claim because of their positive contribution to an overall healthy diet, as well as to allow water to bear the “healthy” claim:

FDA Proposed Rule – Eligible Products for “Healthy” Nutrient Content Claim

Product Criteria for bearing “healthy” claim
Raw, whole fruits and vegetables No additional criteria; all raw, whole fruits and vegetables may bear the claim.
Individual food products At least 1 food group equivalent per RACC from 1 food group, and Nutrients to limit.
Mixed products At least 1/2 food group equivalent each from at least 2 different food groups, and Nutrients to limit.
Main dish as defined at 21 CFR 101.13(m) At least 1 food group equivalent each from at least 2 different food groups, and Nutrients to limit.
Meal as defined at 21 CFR 101.13(l) At least 1 food group equivalent each from at least 3 different food groups, and Nutrients to limit.
Water Plain water and plain, carbonated water may bear the claim.

This proposed rule is likely the first of many that will bring FDA’s nutrient content claim regulations in line with its 2016 revisions to the nutrition labeling regulation.  The comment period for the Proposed Rule closes on December 28, 2022; comments can be submitted at https://www.federalregister.gov/documents/2022/09/29/2022-20975/food-labeling-nutrient-content-claims-definition-of-term-healthy#open-comment.

For more Food and Drug Legal News, click here to visit the National Law Review.

Copyright 2022 K & L Gates.

FOOTNOTES

[1] 87 Fed. Reg. 59168 (Sept. 29, 2022), https://www.federalregister.gov/d/2022-20975.

[2] Id. at 59174.

[3] For more information, see FDA, Changes to the Nutrition Facts Label, https://www.fda.gov/food/food-labeling-nutrition/changes-nutrition-facts-label.

[4] Id.

[5] 21 C.F.R. 101.65(d).

[6] 87 FR 59168, at pg. 59172, https://www.federalregister.gov/d/2022-20975/p-57.

[7] The petition is available at https://s3.amazonaws.com/kind-docs/citizen-petition.pdf.

[8] See KIND, Seven Years After KIND’s Citizen Petition, FDA Proposes New Definition of “Healthy,“ Press Release,  https://www.kindsnacks.com/media-center/press-releases/KIND+Citizen+Petition+FDA+proposes+new+definition+of+healthy.html

[9] FDA, Guidance for Industry: Use of the Term “Healthy” in the Labeling of Human Food Products, https://www.fda.gov/regulatory-information/search-fda-guidance-documents/guidance-industry-use-term-healthy-labeling-human-food-products

Supreme Court Takes Up FLSA High Earners Exemption

On October 12, 2022, the U.S. Supreme Court heard oral arguments in a case that considers whether a supervisor who earned over $200,000 annually may still be eligible for overtime pay under the Fair Labor Standards Act (FLSA). The case centers on the interpretation of the regulatory scheme surrounding highly compensated employees and their exemption status under the FLSA.

The Plaintiff in the case was a worker in a supervisory role on an oil rig and his compensation was based on a daily rate. The plaintiff argued that his daily rate of pay did not constitute a salary.  Prior to the Supreme Court, the Fifth Circuit en banc agreed with the Plaintiff and found that he was not paid a salary such that he was not an exempt employee under the FLSA.

This case has implications for how employers will pay workers, and whether there is potential exposure for overtime claims, even for highly compensated employees.

For more Labor and Employment legal news, click here to visit the National Law Review.

© Polsinelli PC, Polsinelli LLP in California

Pay-When-Paid Provisions Still Unenforceable in New York State

While New York State’s Prompt Payment Act (“PPA”) provides a potential workaround for the invalid pay-when-paid provisions that appear in many construction contracts, a recent decision from the State’s Appellate Division narrows, if not closes, that loophole.

In the construction industry, it is common for a general contractor to include “pay-when- paid” or “pay-if-paid”1 clauses in its contracts with subcontractors, essentially allowing the general contractor to avoid paying its subcontractors for their work until it receives payment from the owner and forcing subcontractors to assume the risk that the owner will fail to pay the general contractor. In 1995, New York State’s highest court in West- Fair Electric Contractors v. Aetna Casualty & Surety Co. invalidated such practice, declaring that pay-when-paid provisions are void and unenforceable as contrary to public policy. 87 N.Y.2d 148, 159 (1995). The Court found that pay-when-paid provisions prevent a subcontractor from enforcing its rights under New York State’s Lien Law because if the owner failed to pay the general contractor, then payment to the subcontractor would never be due, which is a “necessary element of the subcontractor’s cause of action to enforce its lien against the owner.” Id.; see also N.Y. Lien Law § 34 (holding that “[n]otwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable”).

Despite the holding in West-Fair, contractors continue to include pay-when-paid in contracts, and until recently the PPA offered a workaround to validate these seemingly invalid provisions.

In 2002, the New York State Legislature passed the PPA in order to facilitate the prompt payment to contractors and subcontractors. N.Y. Gen. Bus. Law § 756-a. The PPA contains a provision, however, that seems to provide an alternative to the disallowed pay-when-paid provision in construction contracts. Section 756-a(3)(b)(i) states:

Unless the provisions of this article provide otherwise, the contractor or subcontractor shall pay the subcontractor strictly in accordance with the terms of the construction contract. Performance by a subcontractor in accordance with the provisions of its contract shall entitle it to payment from the party with which it contracts. Notwithstanding this article, where a contractor enters into a construction contract with a subcontractor as agent for a disclosed owner, the payment obligation shall flow directly from the disclosed owner as principal to the subcontractor and through the agent.

N.Y. Gen. Bus. Law § 756-a(3)(b)(i) (emphasis added).

While the provision does clearly state in its second sentence that a subcontractor is entitled to payment “from the party with which it contracts,” the third sentence concerning agency seems to provide a way around the West-Fair Court’s clear mandate that pay-when-paid provisions are void, as long as the contractor is acting as an “agent for a disclosed owner.” Id. In that situation, the PPA arguably mandates that the payment obligation to the subcontractor flows directly from the owner, and not the general contractor. This principal-agent relationship is merely a reflection of the common law rule that an agent for a disclosed principal “will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal.” Mencher v. Weiss, 306 N.Y. 1, 4 (1953). Theoretically, the agency exception should not impair a subcontractor’s Lien Law rights because it can still file and enforce a mechanic’s lien, but it shifts the responsibility for payment from the general contractor to the owner, giving the general contractor a defense to the subcontractor’s nonpayment claims.

Until recently, not much has been said about the PPA’s agency provision. In March 2022, however, New York’s Appellate Division in Bank of America, N.A. v. ASD Gem Realty LLC rejected a general contractor’s claim that it was acting as an “agent for a disclosed owner” pursuant to § 756-a(3)(b)(i), holding that the general contractor was liable to the subcontractor regardless of whether or not the owner had paid the general contractor. 205 A.D.3d 1, 8-12 (1st Dep’t 2022). In that case, an owner (ASD Gem Realty LLC and ASD Diamond Inc., together “ASD”) hired a general contractor (Sweet Construction Corp. or “Sweet”) to perform construction and renovation work at its property. Id. at 3. ASD solicited proposals for the installation of partitions for the project and selected plaintiff Arenson Office Furnishings, Inc. (“Arenson”), who then entered into a subcontract with Sweet. Id. The subcontract provided that “[a]ll work to be performed pursuant to the ATTACHED SCOPE LETTER . . . and ‘SCC General Requirements.’” Id. at 4 (alterations in original). The Scope Letter contained the following clause: “Subcontractor understands that Contractor is acting as an agent for the Owner, and agrees to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract.” Id.

As it so happened, ASD ran into financial difficulties and Arenson did not receive payment from either ASD or Sweet. Id. at 5. While Arenson filed a mechanic’s lien against the property and commenced a lien foreclosure action, there was no surplus available to pay either Sweet or Arenson after the construction lender obtained a judgment of foreclosure and conducted a foreclosure sale of the property. Id. Arenson then filed a complaint against Sweet for violation of the PPA, claiming Sweet failed to pay Arenson for the stated reason that Sweet had not been paid by ASD. Id.

In response, Sweet argued that it was not liable to Arenson because Sweet was acting as an agent for ASD; Sweet was merely complying with ASD’s directive to hire Arenson. Id. Sweet claimed ASD told Sweet that ASD would be responsible for paying Arenson and, citing the subcontract’s payment language, claimed that Arenson could only expect payment from ASD, not Sweet. Id. Sweet also relied on § 756-a(3)(b)(i) of the PPA, arguing that pursuant to the third sentence, Sweet was only an agent for a disclosed owner and therefore was exculpated from personal liability. Id. at 6. Sweet argued that the agency provision of this section negated the second sentence of the provision (entitling the subcontractor to payment from “the party with which it contracts”). Id. (quoting N.Y. Gen. Bus. Law § 756-a(3)(b)(i)).

The lower court rejected those arguments, holding that the subcontract language was an unenforceable pay-when-paid clause and that the exception in the PPA at § 756- a(3)(b)(i) clearly provides (in its second sentence) that a subcontractor is entitled to payment “from the party with which it contracts” (and Sweet contracted with Arenson). Id. The lower court also explained that the PPA and related case law demonstrate that an unpaid subcontractor is entitled to multiple sources of payment, perhaps explaining any conflict between the second and third sentence of § 756-a(3)(b)(i). Id. at 6.

The Appellate Division in turn held that the lower court correctly determined that Sweet was not an agent for an undisclosed principal. Id. at 7. The Court relied on the fact that the signature line in the subcontract did not “indicate that Sweet signed the contract as agent on behalf of a disclosed principal or reflect any limitations,” and that the referenced SCC General Requirements included indemnifying Sweet, obtaining liability insurance in Sweet’s favor, and recognizing Sweet’s authority to issue safety violations and correct unsafe conditions. Id. at 7-8. The Court “reject[ed] Sweet’s attempt to divide a single contract into one that creates an agency for purposes of payment but not for any other purpose,” reaffirming “that the ‘dual roles’ of general contractor and agent are inconsistent.” Id. at 8 (quoting Blandford Land Clearing Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 260 A.D.2d 86, 95 (1st Dep’t 1999)).

As for the PPA, the Court also held that § 756-a(3)(b)(i) was inapplicable because, as explained, Sweet was not ASD’s agent and its interpretation of that provision “overlooks the entire purpose of the PPA and turns the statute on its head.” Id. at 11. The Court explained that the provision is actually designed to provide the subcontractor “with the panoply of statutory benefits and remedies that ordinarily would have inured to the contractor had the contractor acted on its own behalf, instead of as the owner’s agent,” and therefore, the “subcontractor is entitled to all of the article’s benefits and remedies that would have ordinarily flowed to the contractor.” Id. at 11-12. The Court pointed out that the principles of West-Fair applied to this case as well, even if West-Fair did not involve an agent relationship, because the central issue in both cases was forcing a subcontractor to assume the risk of an owner’s failure to pay its contractor. Id. at 12.

Therefore, despite clear language that Sweet was acting as an agent for the Owner, and despite Arenson’s agreement “to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract,” id. at 4, the Court found that this PPA exception to otherwise invalid pay- when-paid clauses did not apply.

In sum, contractors should be wary when attempting to use § 756-a(3)(b)(i) in conditioning payment to a subcontractor on payment from an owner, especially if the contractor is really just trying to separate its payment obligations from its general contracting responsibilities. Thus far, it appears New York State courts will not be sympathetic to such an arrangement, despite any potential carve out in the PPA.

For more Construction Industry Legal News, click here to visit the National Law Review.

© 2022 Phillips Lytle LLP

FOOTNOTES

1 While there is a difference between “pay-when-paid” and “pay-if-paid,” for purposes of this article, the two phrases are used interchangeably to mean a condition in a contract in which payment by the contractor to the subcontractor is contingent on the owner first paying the contractor. See Bank of Am., N.A. v. ASD Gem Realty LLC, 205 A.D.3d 1, 6 n.3 (1st Dep’t 2022).