USCIS Issues New Rule for Highly Skilled Workers: U.S. Citizenship and Immigration Services

U.S. Citizenship and Immigration Services (“USCIS”) issued its long-awaited final rule regarding highly skilled workers from Australia, Chile, Singapore, and the Commonwealth of the Northern Mariana Islands (“CNMI”), along with amendments favoring employment-based immigration. In summary, this rule:

  • facilitates more favorable processing of H-1B1 and E-3 treaty-based extension of status petitions;

  • adds E-3 Australian, H-1B1 Chilean/Singaporean, and CW-1 CNMI nationals to the list of those work-authorized nonimmigrants who can secure up to 240 days of continued employment authorization beyond their current expiration date simply by filing their timely extensions with USCIS before their current status expires;

  • clarifies that principal E-3 and H-1B1 nonimmigrants are authorized to work incident to their status and thus do not have to obtain independent employment authorization (applied in practice but not officially adopted as a formal regulation); and

  • expands the type of evidence that foreign nationals being sponsored under EB-1 outstanding professor and researcher permanent residency petitions can submit to include “comparable evidence” of their outstanding professor or research work.

This rule is expected to take effect on February 16, 2016.

Article By Robert S. Groban, Jr., Pierre Georges Bonnefil, Patrick G. Brady & Jang Hyuk Im of Epstein Becker & Green, P.C.
©2015 Epstein Becker & Green, P.C. All rights reserved.

Tax Talk: When Reporting Gifts at Discounted Values, a Qualified Appraisal is Crucial

A common method for transferring wealth from one generation to the next involves contributing assets to a partnership or limited liability company, then transferring minority interests in the partnership or LLC to descendants or other family members.  Done correctly, the technique allows donors to reduce their taxable estates by making gifts at reduced values, because of discounts for lack of control and lack of marketability.  In so doing, the donor also effectively shifts the tax on any appreciation of the underlying assets to the younger generation.

In order to benefit from this estate planning technique, however, it is crucial that the gift is adequately disclosed on a gift tax return and its value backed by a qualified appraisal or a detailed description of the method used to determine the fair market value of the transferred partnership or LLC interest.  Unfortunately, we have encountered situations recently in which a gift was not supported by a qualified appraisal, leading the Internal Revenue Service to challenge the value claimed by the donor and to propose additional gift tax, penalties and interest.  Such challenges can lead to significant uncertainty, stress and legal expense—even if the donor’s valuation ultimately is sustained.

This article describes what constitutes a qualified appraisal and the information that is necessary if no appraisal is provided, and offers some practical advice for donors based on our recent experiences dealing with the IRS in audits and administrative appeals involving disputed gift tax valuations.

IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, requires donors to disclose whether the value of any gift reflects a valuation discount and, if so, to attach an explanation.  If the discount is for “lack of marketability, a minority interest, a fractional interest in real estate, blockage, market absorption, or for any other reason,” the explanation must show the amount of, and the basis for, the claimed discounts.  Moreover, in order for the statute of limitations to begin running with respect to a gift, the gift must be adequately disclosed on a return or statement for the year of the gift that includes all of the following:

  • A complete Form 709;

  • A description of the transferred property and the consideration, if any, received by the donor;

  • The identify of, and relationship between, the donor and each donee;

  • If the property is transferred in trust, the employer identification number of the trust and a brief description of its terms (or a copy of the trust);

  • A statement describing any position taken on the gift tax return that is contrary to any proposed, temporary or final Treasury regulations or IRS revenue rulings; and

  • Either a qualified appraisal or a detailed description of the method used to determine the fair market value of the gift.

While most of these requirements are straightforward, the last generally requires the donor to provide a more complete explanation.  Fortunately, the IRS has published regulations that describe what constitutes a qualified appraisal and what information must be provided in lieu of an appraisal.

With respect to the latter, the description of the method used to determine fair market value must include the financial data used to determine the value of the interest, any restrictions on the transferred property that were considered in determining its value, and a description of any discounts claimed in valuing the property.  If the transfer involves an interest in a non-publicly traded partnership (including an LLC), a description must be provided of any discount claimed in valuing the entity or any assets owned by the entity.  Further, if the value of the entity is based on the net value of its assets, a statement must be provided regarding the fair market value of 100% of the entity (determined without regard to any discounts in valuing the entity or any assets owned by the entity), the portion of the entity subject to the transfer, and the fair market value of the transferred interest as reported on the return.[1]

Donors and their counsel will rarely have the expertise needed to provide such a description.  While it may be relatively simple to provide some of the factual information, determining the appropriate actuarial factors and discount rates is a highly complex and specialized field.  Moreover, even if a donor or his or her counsel happened to have the relevant expertise, a description that is not prepared by an independent expert may be viewed suspiciously by the IRS because of a lack of impartiality.  Moreover, if the description (or the appraisal, for that matter) is prepared by the donor’s counsel, it may negate the attorney-client privilege, at least with respect to any work papers prepared by the attorney in connection with the description or appraisal.

For these reasons and others, we strongly recommend that donors obtain an appraisal from an independent, reputable valuation firm before claiming discounts with respect to a gift of a partnership or LLC interest.  The applicable Treasury regulations provide that the requirement described above will be satisfied if, in lieu of submitting a detailed description of the method used to determine the fair market value of the transferred interest, the donor submits an appraisal of the transferred property prepared by an appraiser who meets all of the following requirements:

  • The appraiser holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis;

  • Because of the appraiser’s qualifications, as described in the appraisal that details the appraiser’s background, experience, education, and membership, if any, in professional appraisal associations, the appraiser is qualified to make appraisals of the type of property being valued; and

  • The appraiser is not the donor or the donee of the property or a member of the family of the donor or donee or any person employed by the donor, the donee or a member of the family of either.

Further, the appraisal itself must contain all of the following:

  • The date of the transfer, the date on which the transferred property was appraised, and the purpose of the appraisal;

  • A description of the property;

  • A description of the appraisal process employed;

  • A description of the assumptions, hypothetical conditions, and any limiting conditions and restrictions on the transferred property that affect the analyses, opinions and conclusions;

  • The information considered in determining the appraised value, including, in the case of an ownership interest in a business, all financial data used in determining the value of the interest that is sufficiently detailed to allow another person to replicate the process and arrive at the appraised value;

  • The appraisal procedures followed, and the reasoning that supports the analyses, opinions, and conclusions;

  • The valuation method used, the rationale for the valuation method and the procedure used in determining the fair market value of the asset transferred; and

  • The specific basis for the valuation, such as specific comparable sales or transactions, sales of similar interests, asset-based approaches, merger-acquisition transactions and the like.[2]

While there is no firm rule on when or how often appraisals must be obtained, appraisals that are more than a year old may be less reliable—particularly if there is good reason to believe that the value of the underlying assets has changed—and thus more vulnerable to challenge.

An appraisal that meets all of the requirements described above is not unassailable, of course, but if the IRS does choose to challenge a gift tax valuation that is supported by such an appraisal, the donor will be in a significantly stronger position in the resulting examination or proceeding than a donor who failed to obtain a qualified appraisal or opted to rely on a stale appraisal.

In sum, obtaining a qualified appraisal is a crucial step in any estate planning or gifting strategy that involves making gifts of assets valued at a discount.  Although donors may occasionally balk at the time and expense of preparing a reliable appraisal, it is almost certainly less time-consuming and costly than battling the IRS in an examination, administrative appeal or in litigation and should give donors confidence that their gifts are unlikely to be successfully challenged by the IRS.

Article By Ivan H. Gold of Schiff Hardin LLP
© 2015 Schiff Hardin LLP

[1] Treas. Reg. § 301.6501(c)-1(f)(2)(iv).

[2] Treas. Reg. § 301.6501(c)-1(f)(3).

Agriculture, Food, and Health Issues to Watch for 2016

Label Food Organic.jpgAs the agriculture and food industries head into the new year, a number of important cases and regulatory issues that have the potential to dramatically affect the industry are front and center. Below, an overview of the status of several of the key cases and issues that related industries should keep an eye on during 2016.

Waters of the United States

On October 9, 2015, following an earlier ruling by the U.S. District Court for the District of North Dakota, the United States Circuit Court for the Sixth Circuit issued a nationwide stay of the so-called “Waters of the United States” or “WOTUS” rule. The stay halted implementation of the WOTUS rule, pending resolution of jurisdictional issues that were the subject of oral argument on December 8, 2015. Those jurisdictional issues are focused on whether the Sixth Circuit is the proper venue to hear challenges to the rule. A ruling is expected in 2016.

A number of district court cases across the country also remain pending, and the District of North Dakota’s earlier injunction against implementation of the WOTUS rule in 13 states, including Missouri, remains in place.

Vermont Act 120

On October 8, 2015, the U.S. Circuit Court of Appeals for the Second Circuit heard oral argument of an appeal filed by the Grocery Manufacturers Association and other plaintiffs seeking review of the U.S. District Court for the District of Vermont’s denial of their Motion for Preliminary Injunction on April 27, 2015. The motion sought a preliminary injunction enjoining implementation of Vermont Act 120, passed on May 8, 2014, with an effective date of July 1, 2016. Act 120 would, among numerous provisions, mandate new labeling requirements on the part of manufacturers and other food processors for any food that is “produced with genetic engineering,” “partially produced with genetic engineering,” or “may be produced with genetic engineering.” Violators of Act 120 are subject to civil penalties of up to $1,000 per day, per product.

A decision is expected in the first two quarters of 2016 in advance of the July 1, 2016, effective date of the law.

Federal Activity Regarding GMOs and the Safe and Accurate Food Labeling Act

The U.S. House of Representatives passed the Safe & Accurate Food Labeling Act (SAFL) on July 23, 2015. The SAFL Act would, among other things, serve to pre-empt any state laws governing labeling of GMO-containing food products, including Vermont’s Act 120 due to become effective on July 1, 2016. Despite pressure on the U.S. Senate to address the SAFL Act and pass a companion or similar bill before the end of 2015, efforts to include any such bill or related provisions in the year-end omnibus spending bill were unsuccessful. Senate Agricultural Committee Group leaders, including Sen. Debbie Stabenow, D-Mich., have pledged to make the issue a top priority in January 2016, and many expect Sen. John Hoeven, R-N.D., to play a role in trying to secure passage of a bipartisan bill.

Food Safety Modernization Act Roll-Out

The Food Safety Modernization Act (FSMA) was signed into law on January 4, 2011, and represents the most comprehensive overhaul of the U.S. food safety regulatory scheme since the passage of the Food, Drug and Cosmetic Act in 1938. For nearly five years, the U.S. Food and Drug Administration (FDA) has been developing the seven final rules that implement FSMA. Each final rule impacts a different fundamental area of the U.S. food system.

In September and November 2015, the FDA issued the first five of the seven final rules: (1) Preventive Controls for Human Food; (2) Preventive Controls for Animal Food; (3) Foreign Supplier Verification Program; (4) Standards for Produce Safety; and (5) Accredited Third-Party Certification. The issuance of these rules initiates the countdown for the relevant compliance deadlines for covered entities.

It is anticipated that the final two FSMA rules regarding Sanitary Transportation and Intentional Adulteration will be issued on March 31, 2016. The Sanitary Transportation final rule will establish criteria for the sanitary transportation of food, including criteria targeted at shipping conditions and practices, employee training, and record keeping. The Intentional Adulteration final rule will require domestic and foreign food processing facilities to address vulnerabilities in their operations to prevent acts on the food supply intended to cause large-scale public harm. In 2016, the FDA will also be working with certain alliance groups to further develop FSMA compliance and enforcement guidance.

FDA Menu Labeling Requirements

Section 4205 of the Affordable Care Act charges the FDA with establishing labeling requirements for certain retail food establishments and vending machines. On December 1, 2014, the FDA issued two rules requiring calorie information to be listed on menus and menu boards at retail food establishments if they are a part of a chain of twenty or more locations operating under the same name and offering for sale substantially the same restaurant-type food items.

In July 2015, the FDA announced that the compliance deadline for the menu labeling rule was being extended by one year. All covered establishments (e.g., restaurants, grocery stores, and gas station convenience stores) now have until December 1, 2016, to identify calorie count and other information on their menus and menu boards as required by the FDA menu labeling rules.

Article By Laura A. Bentele, Scott K.G. Kozak & Jonathan D. Valentino of Armstrong Teasdale
© Copyright 2016 Armstrong Teasdale LLP. All rights reserved

New Rule Provides Additional Flexibility, Enhanced Opportunities for Certain Highly Skills Workers

visaOn January 13, 2016, the Department of Homeland Security (“DHS”) released an advance copy of an updated rule providing additional flexibility and enhanced opportunities for certain highly skilled workers. It covers workers who are in the U.S. in H-1B1 (from Chile and Singapore), E-3 (from Australia), temporary workers in the Commonwealth of the Northern Mariana Islands (CNMI)-Only Transition Worker (CW-1), and immigrant classification for outstanding professors and researchers (EB-1).

Current regulation (8 CFR § 2741.12(b)(20)) allows other high skilled workers in the following nonimmigrant visa categories to continue to work for up to 240 days beyond their current expiration date as long as they file a timely extension request before the expiration date:

  • H-1B specialty occupation workers,
  • L-1 intracompany/multinational corporation transferees,
  • O-1 extraordinary ability aliens,
  • E-1/E-2 treaty traders and investors,
  • TN NAFTA professionals, and
  • Certain international organizational workers and so on.

Because the nonimmigrant visa categories of H-1B1 and E-3 were created after the prior regulation was published, visa holders in these categories have not been able to continue to work unless they submitted their extension requests early or paid an additional $1,225 USCIS premium processing fee for expedited services.

Additionally, DHS added in its regulation allowing immigrant visa (“green card”) applicants to include important patents or prestigious peer-reviewed funding grants as evidence to establish their eligibility as an internationally recognized outstanding professor or researcher in their specialized academic field. Under 8 CFR 204.5(i)(3)(i), USCIS would accept an applicant’s claim to have met the statutory requirement for having satisfied two of the six criteria, such as receipt of major prizes or awards, original authorship of scholarly articles, serving as a judge of the work of others. Although important patents or prestigious peer-reviewed funding grants previously could be used to support the international recognition criterion for final merits review by USCIS, DHS has now codified this as threshold eligibility evidence to meet the statutory requirement.

The final rule is scheduled to be published in the Federal Register on January 15, 2016 with an effective date of February 16, 2016.

Article By Minnie Fu of Jackson Lewis P.C.

Jackson Lewis P.C. © 2015

2016 TSCA Chemical Data Reporting – Are You Prepared?

The Toxic Substances Control Act (TSCA) Chemical Data Reporting (CDR) rule (40 C.F.R. Part 711) will require U.S. manufacturers and importers of certain chemical substances to report information on these substances to the U.S. Environmental Protection Agency (EPA) by September 30, 2016. Industry should be well aware of and theoretically has ample time to meet this deadline, but the 2016 CDR is more complicated, more onerous, and requires more information than the 2012 CDR. Particularly given the significant penalties for CDR noncompliance (up to $2-5,000 per chemical per site), companies should devote significant time and effort to ensuring full compliance with this requirement.

Companies should be preparing now for the CDR submission period in 2016.

  • CDR reports must be submitted between June 1 and September 30, 2016.

  • Companies must report if they manufactured in or imported into the U.S. at least 25,000 pounds (lbs.) of a TSCA Inventory listed substance at any one U.S. site during any one of the following calendar years – 2012, 2013, 2014, or 2015.

  • Certain regulated chemicals (e.g., chemicals subject to TSCA section 5 significant new use rules (SNUR)) are subject to a lower, 2,500 lbs./year, manufacture / import volume threshold for these calendar years. —

  • CDR reports must include detailed, chemical-specific and site-specific manufacture / import and processing / use information for calendar year 2015 (the “principal reporting year”), and production volume information for each calendar year from 2012 to 2015.

  • Information reported for the CDR can be claimed as TSCA confidential business information (CBI) only if “upfront” substantiation is provided.

EPA regulations governing CDR appear at 40 C.F.R. Part 711. For additional information, visit http://www.epa.gov/cdr.

The CDR Program

Since 1986, U.S. manufacturers and importers have been required to periodically submit under TSCA certain basic information on many of the now over 85,000 chemicals appearing on the TSCA Chemical Substance Inventory (Inventory). Information submitted to EPA under this reporting requirement has been used as a tool for regularly updating the Agency and the public as to potential human and environmental exposure to substances in U.S. commerce.

In 2011, EPA overhauled this reporting requirement, which was originally known as the TSCA Inventory Update Rule (IUR) rule. The new “CDR” rule ushered in significant changes to reporting requirements beginning with the first CDR submission period, which ended in August 2012. For the 2012 CDR, about 1,600 U.S. companies reported activities for about 7,700 chemicals at about 4,800 sites. The second CDR reporting period will occur between June 1 and September 30, 2016 (to recur at 4-year intervals thereafter). Given the broader time period beginning in 2016 during which chemical production can trigger CDR reporting, in the future even more companies will likely be subject to and have to report on more chemicals.

Basic Thresholds and Reporting Requirement

For the 2016 submission period, companies must report for the CDR if, at one or more U.S. sites, they manufactured in or imported into the U.S. at least 25,000 pounds (lbs.) of a reportable chemical substance during any one of the calendar years 2012, 2013, 2014, or 2015. The CDR reporting form is known as the “Form U.”

The Form U requires companies to provide a variety of information, including technical contact information, and a Chemical Abstracts (CA) Index Name and corresponding Chemical Abstracts Service (CAS) Registry Number (CASRN) (if available) for each reportable substance.

To the extent that it is known or reasonably ascertainable, the Form U requires reporting of the following information on manufacture / import activities for each reportable substance at each site:

  • Volume of the substance that is manufactured or imported;

  • Number of workers reasonably likely to be exposed to the substance at each site;

  • Physical form(s) of the substance as it leaves the submitter’s possession, along with the associated percent production volume; and

  • Maximum concentration of the substance as it leaves the submitter’s possession;

  • Volume of a substance used on site;

  • Volume of a substance that is directly exported and not domestically processed or used;

  • Whether an imported substance is physically at the reporting site; and

  • Whether a substance is being recycled, remanufactured, reprocessed, or reused.

For the 2016 submission period, companies must also report production volume, by substance and site, for each of the calendar years 2012, 2013, 2014, and 2015.

Processing and Use Information

As was the case under the 2012 CDR, companies are required under the 2016 CDR to report detailed “processing and use” information associated with downstream domestic customer facilities regardless of whether the facilities are controlled by the manufacturer or importer. For the 2012 submission period, information on processing and use activities was required only for substances manufactured or imported in quantities ≥ 100,000 lbs. in the principal reporting year. This higher threshold, however, has been eliminated such that, other than substances specifically exempted from this required as described and listed at section 711.6, this extensive processing and use information is now required for all CDR-reportable substances.

Required processing and use information includes the following:

  • Type of industrial processing or use operations at downstream sites;

  • Approximate number of sites and estimated number of industrial processing and use workers reasonably likely to be exposed to each substance for each combination of processing or use code and industrial function category;

  • Estimated percentages of the submitter’s production volume for each processing or use code and corresponding industrial function category;

  • Whether the products are intended for use by children; and

  • Maximum concentration of the reportable chemical substance in each commercial and consumer product category.

Processing and use information must be reported if it is “known to or reasonably ascertainable by” the manufacturer or importer. This is a considerably lower standard compared to the previous IUR requirement to report information that was “readily obtainable.”

Exemptions from CDR Reporting

Several categories of substances are exempt from CDR – certain polymers, microorganisms, and certain natural gas streams – so long as the specific substance is not subject to certain specified TSCA actions, such as proposed or final rules issued under section 4, 5(a)(2), 5(b)(4), or 6 of TSCA (e.g., test rules, significant new use rules), or to orders issued pursuant to section 5(e) or 5(f). Note that substances that are subject to an enforceable consent agreement (ECA) are similarly ineligible for these exemptions, even if the CDR reporter is not a signatory to the ECA. Also, otherwise polymeric substances resulting from hydrolysis, depolymerization, or chemical modification of polymers must be reported if the hydrolysis, depolymerization, or chemical modification occurs to such an extent that the resulting product is no longer totally polymeric in structure.

Exemptions also exist for substances that are produced or imported in small quantities for research and development, substances imported as part of an “article,” and substances manufactured or imported as an “impurity” or “non-isolated intermediate.” Other types of substances that are described at 40 C.F.R. § 720.30(h) are also excluded from CDR.

“Byproducts” are excluded from CDR if their only commercial purpose is to be burned as a fuel, disposed as a waste, or from which component chemical substances are extracted for a commercial purpose. Note, however, that any extracted component substances are potentially reportable for CDR.

Under section 711.6, certain petroleum process streams and other specifically listed “low interest” substances are exempt from the requirement to submit processing and use information. Manufacturers and importers of partially exempt substances, however, are still required to provide the traditional information required on the Form U if the general 25,000 / 2,500 lbs. production volume threshold is exceeded. EPA has established a process for revising these “partially exempt” substance lists.

Electronic Reporting

CDR reports must be submitted electronically using e-CDRweb, EPA’s free electronic reporting tool, to EPA’s Central Data Exchange (CDX).

CDR Violations, Penalties

EPA can assess substantial monetary penalties (up to $25,000 per chemical per site) for failure to comply with the CDR. Violations subject to penalties include seemingly minor CDR reporting violations such as late reporting, or reporting a slightly inaccurate manufacture or import volume. Companies would be well-advised to carefully review their production / import records and their prior CDR filing before preparing and submitting the 2016 report. If non-compliance occurs, companies may be able to rely on EPA’s “Audit Policy” (65 Fed. Reg. 19,618 (April 11, 2000)) to mitigate or eliminate penalties for past reporting errors or omissions, but companies should consult with legal counsel before examining past CDR compliance.

Confidentiality and Records Retention

To claim the chemical identity, site identity, or processing and use information as confidential business information (CBI), reporting companies must substantiate such CBI claims at the time of reporting. Submitters cannot claim information as CBI when it is identified as “not known to or reasonably ascertainable.” CDR records must be kept for 5 years.

Small Business Exemption

Certain small manufacturers are exempt from the CDR. A company may qualify for a small business exemption from reporting if it either: (1) produces less than 100,000 lbs. of the otherwise reportable substance and has total annual sales of less than $40 million (including those sales of the parent company); or (2) has annual sales of less than $4 million regardless of production / import volume.

This exemption does not apply for any substance that is the subject of a proposed or existing rule issued under sections 4, 5(b)(4), or 6; an order in effect under section 5(e); or relief that has been granted under a civil action under sections 5 or 7.

CDR Non-Compliance Issues

In our experience, many factors contribute to CDR non-compliance. These can include:

  • inaccurate manufacture and import volume tracking

  • failure to report / file all or some reportable substances

  • incorrect conclusions as to who is the “importer” of a substance

  • failure to report production volume to the required two significant figures of accuracy

  • nomenclature issues

  • “toll” manufacturing issues

  • misinterpretation of exemptions

  • failure to account for reportable “byproduct” and related stream manufacture

  • fractionation issues

As noted above, CDR violations are potentially eligible for EPA’s “Audit Policy,” and companies should strive to preserve their ability to use the Audit Policy to the extent possible and seek legal advice when necessary.

Article By Thomas C. Berger of Keller and Heckman LLP

© 2015 Keller and Heckman LLP

Avoiding Bias in Big Data

As the use of big data in almost every area of business continues to grow, companies need to carefully consider their own use. We’ve previously discussed data analytics and use restrictions in a three-part series (Part 1, Part 2, and Part 3), and this post will highlight another issue that can arise when using big data: discriminatory outcomes. The Federal Trade Commission (FTC) recently issued the report Big Data: A Tool for Inclusion or Exclusion? Understanding the Issues, which focuses on avoiding harmful bias in big data and certain consumer protection laws applicable to big data. The report gathered information and commentary from participants in a workshop that the FTC held last year and supplemented that information with additional research.

The report notes that companies’ use of big data has led to some major benefits, including increased educational attainment and access to employment for certain individuals, better access to credit using nontraditional methods, and healthcare tailored to individual patients’ characteristics.

The report, however, lists three main concerns with big data. First, as with all data, the quality of the data used in big data analytics, including its accuracy and completeness, is important. Second, big data is a great tool for showing correlations, but the FTC is quick to point out a well-known truth that correlation is not causation. Last, big data may be used to categorize consumers in a way that would lead to exclusion of certain populations from certain benefits. In particular, big data use may result in

  • companies mistakenly denying individuals opportunities based on the actions of others,

  • the creation or reinforcement of existing disparities,

  • the exposure of sensitive information,

  • the inadvertent targeting of vulnerable consumers for fraud,

  • the creation of new justifications for exclusion, and

  • higher-priced goods and services for lower-income communities.

The report outlines several laws that may apply to big data practices. These laws include the Fair Credit Reporting Act, federal equal opportunities laws (the report specifically lists the Equal Credit Opportunity Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Fair Housing Act, and the Genetic Information Nondiscrimination Act), and Section 5 of the Federal Trade Commission Act.

As to how one of these laws might apply to big data, consider the following example: A company asks a consumer for his or her zip code and social media behavior on an application, and then sends the application to a data analytics firm after removing the consumer’s identifying information. The firm analyzes the creditworthiness of people in the same zip code with the same social media behavior and provides an analysis of such information to the company, knowing that the analysis will be used for a credit decision. If the company uses the consumer’s information to create an analysis of a group that shares certain characteristics with the consumer and then ultimately uses that analysis to make a decision about the consumer, the FTC may very well view such analysis as a consumer report, and the Federal Credit Reporting Act would apply. However, if the company just used the same analysis to inform its general policies, it is unlikely that the FTC would argue that the Federal Credit Reporting Act would apply, because the consumer report was not used for a particular consumer. This example illustrates the distinctions that companies should consider when analyzing and using the data that they collect.

This list of applicable laws is nonexhaustive, and finding whether a practice violates any of these laws is a highly fact-specific inquiry. To assist businesses, the report provides two sets of questions that companies can use when engaging in data analytics—one for legal compliance and one for policy-related issues—and concludes that companies should be mindful of applicable laws when using big data analytics to ensure that their practices do not result in what could be unlawful bias.

Article By Vito Petretti & Katherine B. O’Keefe of Morgan, Lewis & Bockius LLP

Copyright © 2015 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Executive Action: Obama’s Legacy and 2016 Predictions (Part 2 of 2)

As promised in our previous post, today we conclude our predictions on President Obama’s 2016 executive activity.  While we believe the President’s final executive orders will target immigration and perhaps even corporate political expenditures, we predict executive agency action will cover a broad range of pressing labor and employment issues.  With federal legislative gridlock expected to continue through 2016, employers should prepare themselves for a barrage of agency activity, especially from the Equal Employment Opportunity Commission (“EEOC”), National Labor Relations Board (“NLRB”), and Department of Labor (“DOL”).  Our summary is below.

Expected Agency Activity of 2016

Based on the 2015 Supreme Court decisions in Young v. UPS and EEOC v. Abercrombie & Fitch Stores, Inc. and the EEOC’s interest in systematic discrimination in the workplace, we predict the EEOC will focus heavily on companies’ policies regarding pregnancy and religious discrimination and accommodation in 2016.  As a refresher, in Young the Court held a genuine factual dispute existed as to whether UPS provided more favorable treatment to at least some employees whose situation “cannot reasonably be distinguished” from Ms. Young’s —e.g., workers unable to lift up to 70 pounds due to reasons other than pregnancy limitations such as a workplace injury or a recognized disability.  In Abercrombie (blogged about here) the Court concluded an employer violates Title VII by rejecting an applicant in order to avoid making a religious accommodation, even if the employer only has an “unsubstantiated suspicion” that the applicant may eventually request an accommodation.

Along with discrimination/accommodation policies, we predict the EEOC and NLRB will focus on company-wide social media policies in 2016. While the NLRB has been hounding employers on social media policies since 2010, the EEOC did not really begin gathering information on the issue until 2014.   We believe 2016 will be the year the EEOC begins targeting employers’ social media policies to evidence discrimination.  We also predict the EEOC’s focus on gender identity discrimination and the NLRB’s focus on FLSA class action settlements will continue with full force into 2016.

With the DOL’s Final Rule on overtime exemption updates expected to roll out this year, we predict the agency will focus on wage-hour reform and that employers will be expected to get into compliance sooner rather than later. Although Solicitor of Labor Patricia Smith stated in November 2015 that final guidelines will not likely be issued until “late 2016,” we believe the DOL will push them out before November’s presidential election.  Employers should expect the Final Rule to increase the minimum salary exemption requirement from $455/week to $970/week.  We would not be surprised if the DOL also finalizes revisions to the duties test, which is a factor along with salary level used to determine whether an employee qualifies under a white collar exemption to minimum wage and overtime rules.

Although the 2016 federal legislation horizon looks bleak, President Obama and his executive agencies are poised for a busy final year. Stay tuned for further developments.

Article By Kristine M. Woliver of Squire Patton Boggs (US) LLP
© Copyright 2015 Squire Patton Boggs (US) LLP

Executive Action: Obama’s Legacy and 2016 Predictions (Part 1 of 2)

Federal legislation in 2015 was plagued by the same congressional gridlock that President Obama has faced throughout most of his presidency. The President has therefore turned to executive action to achieve many of his goals over the past seven years and we expect this trend to continue with gusto in 2016.  Below is a summary of our predictions for 2016’s executive orders and agency action.

Expected Action: Executive Orders in 2016

On January 5, President Obama announced several executive orders seeking to expand background checks and place new licensing requirements on gun show and online gun dealers. During the State of the Union address on January 12, the President expressed his frustrations with stalled immigration reform and corporate influence in politics.  Throughout the remainder of his term, the President might take action on a variety of issues affecting employers nationwide, including:

  • Implementing 2014 Immigration Orders extending work permits to certain undocumented workers. The Fifth Circuit held [pdf] in November 2015 that a federal district court properly blocked the Department of Homeland Security from implementing Obama’s immigration plan, opening the door for Supreme Court review. If the High Court grants the Obama Administration’s certiorari petition and reverses the injunction order, the President will be able to substantively implement a sizable chunk of his long-stalled immigration reform.

  • Improving job portability for beneficiaries of employment-based visa petitions. President Obama’s Department of Homeland Security announced proposed changes to its regulations on this immigration issue, among others, on December 31, 2015. The comment period for the Proposed Rule extends through February 29.

  • Restricting Citizens United and its progeny by requiring contractors to disclose certain political contributions. President Obama has a longstanding and vocal opposition to this case and its effect on corporate political expenditures. The President stated on January 12 during the State of the Union address that he has had a difficult time working with republicans “making sure the system’s not rigged in favor of the wealthiest and biggest corporations.”

It is likely the President’s policies will extend beyond his own executive orders to the federal agencies under his administration, our predictions to be summarized tomorrow in Part 2.

Article By Kristine M. Woliver of Squire Patton Boggs (US) LLP
© Copyright 2015 Squire Patton Boggs (US) LLP

Amazon to Control Delivery by Drone?

People are talking about and news organizations are covering Amazon’s announced plans to deliver goods by drone in the not-too-distant future.  However, fewer are talking about or covering Amazon’s effort to be the only company that can autonomously deliver goods by drone.  On March 25, 2014, Amazon filed a United States patent application directed to aspects of a drone delivery system.  Pursuant to current patent law, the application was published on October 1, 2015, roughly 18 months after the application was filed.  While the application is still pending and not yet an issued patent, it provides an interesting look at the scope of protection Amazon is seeking for its drone delivery system.

Under current proposed FAA regulations, drones cannot be flown outside of the line of sight of the operator.  A much greater range will be needed for an effective drone delivery network.  Amazon is proposing to send its drones as far as 15 miles from a regional fulfillment center.  The drones would take off vertically from a warehouse floor, fly at low altitude over a suburban landscape and then descend into the backyards of their destination points.  There they would lay the package on the lawn before lifting off to return to the warehouse for another run.  The success of such a system will depend upon receiving FAA approval.  FAA approval of such a system is likely to be contingent upon demonstrating that the system can be operated without causing a hazard.  In other words, the drones will need to be equipped  with “sense and avoid” technology that prevents them from crashing into things.

Amazon’s pending patent application, Pub. No. US 2015/0277440 A1, contains claims that are broadly directed to a propeller driven automated mobile vehicle having a laser based rangefinder configured to determine a distance to an object, to a distance determining system for an automated mobile vehicle having a distance determining element positioned to emit a laser signal that reflects off a reflective exterior surface of a motor, and to an automated mobile vehicle having a plurality of motors where the alignment axis of at least two of the motors are not parallel and each motor has a distance determining element.  These claims have not yet been examined by the Patent Office.  Upon examination, the scope of the claims will likely have to be narrowed to distinguish them from prior art.  However, it seems clear that Amazon is interested in pursuing broad protection for “drones” having a distance determining element, which is likely to be a necessary component of any “sense and avoid” technology.  Thus, the potential exists that Amazon will obtain patent protection broadly covering drone delivery systems.

The way the Amazon patent application is written, it seeks to avoid the need for human involvement to ensure that vehicles do not collide with other drones, manned aircraft, or other objects or structures on the ground.  It also discusses a system for automatically sensing and avoiding objects.  Thus, the “automated mobile vehicles” of the application and recited in the claims appear to be directed to autonomous drones.  However, at this stage it is not yet clear whether the claims in any patent that issues will be limited to autonomous drones, but might also cover remotely-piloted drones.  It remains to be seen whether the examination process will push Amazon into limiting the claims to autonomous operation.

The Amazon patent application also discusses the distance determining elements being used to detect the presence of objects and to then cause the automated mobile vehicle to alter its path to avoid the object.  Thus, the distance determining elements seem to be used not only for unloading positioning, but also for sense and avoid in flight.  While in a remotely piloted context, a sense and avoid system may not need to actually determine distances to other objects.  The remote pilot could rely on visual displays of the surrounding environment of the drone to avoid collisions.  However, in an autonomous operation, it is difficult to envision any sense and avoid system that would not need to know at least the distance from the drone to surrounding objects to function.  Amazon appears to be using this need to know such distances in the autonomous context to preempt the field.  In other words, a patent covering any autonomous drone that determines distance to surrounding objects might preclude any other drones from being able to have a functioning sense and avoid capability.

The broadest claims in the Amazon patent application just recite a “distance determining element.”  In a narrower claim, the application specifies “the distance determining element is at least one of an ultrasonic ranging module, a laser rangefinder, a radar distance measurement module, stadiametric based rangefinder, a parallax based rangefinder, a coincidence based rangefinder, a Lidar based rangefinder, Sonar based rangefinder, or a time-of-flight based rangefinder.”  Thus, at this stage, Amazon is trying to cover all of the named techniques, any combination of those techniques, as well as anything else that could broadly be considered a distance determining element.

As noted, the Amazon patent application is still just pending and has yet to be examined.  Amazon may have other patent applications pending that have not yet been published, and therefore are not yet open to review by the public.  FAA regulations are also still developing.  Thus, much remains to be determined even as it relates to Amazon itself.  Other entities may also be working on drone delivery systems and/or have pending patent applications that have not yet been published.  Domino’s Pizza is said to have tested delivering pizzas by drone.  Skype’s co-founders have set up Starship Technologies to develop a ground-based drone that would be able to deliver groceries to customer’s homes.  It will be very interesting to see how the intellectual property protection for drone delivery systems plays out.

Article By Thomas J. Daly of Lewis Roca Rothgerber LLP

©2015 All Rights Reserved. Lewis Roca Rothgerber LLP

HHS Issues Final Rule on HIPAA and Firearm Background Check Reporting

On January 6, as part of President Obama’s executive action to combat gun violence, HHS promulgated a final regulation modifying the HIPAA Privacy Rule to allow certain HIPAA covered entities to disclose limited information to the National Instant Criminal Background Check System (NICS).

Background:  The NICS, maintained by the Federal Bureau of Investigation (FBI), is the national database used to conduct background checks on persons who may be disqualified from receiving firearms based on federal or state law.  Federal law identifies several categories of potential disqualifiers, known as “prohibitors” including a federal mental health prohibitor.  By statute, the federal mental health prohibitor applies to individuals who have been committed to a mental institution or adjudicated as a mental defective.  The Department of Justice has promulgated regulations that defines these categories to include the following individuals:

  • individuals committed to a mental institution for reasons such as mental illness or drug use;

  • individuals found incompetent to stand trial or not guilty by reason of insanity, or

  • individuals who have been otherwise determined by a court, board, commission, or other lawful authority to be a danger to themselves or others or to lack the mental capacity to contract or manage their own affairs as a result of marked subnormal intelligence or mental illness, incompetency, condition, or disease.

However, there is currently no federal law that requires state agencies to report data to the NICS, including the identity of individuals who are subject to the mental health prohibitor.  HHS believes that HIPAA poses a potential barrier to such reporting. Under current law, HIPAA only permits covered entities (e.g., state mental health agencies) to disclose such information to the NICS in limited circumstances: when the entity is a “hybrid” entity under HIPAA (and the Privacy Rule does not apply to these functions) or when state law otherwise requires disclosure, and thus disclosure is permitted under HIPAA’s “required by law” category.

Final Rule:  HHS finalized its proposed rule without any substantive changes. Under the final rule, a new section 164.512(k)(7) of the HIPAA Privacy Rule expressly permits certain covered entities to disclose information relevant to the federal mental health prohibitor to the NICS.

The permitted disclosure applies only to those covered entities that function as repositories of information relevant to the federal mental health prohibitor on behalf of a State or are responsible for ordering the involuntary commitments or the adjudications that would make someone subject to the prohibitor.  Thus, most treating providers may not disclose protected health information about their own patients to the NICS, unless otherwise permitted by the HIPAA Privacy Rule.  HHS also clarifies that individuals who seek voluntary treatment are not subject to the prohibitor.

The rule limits disclosure only to the NICS or an entity designated by the State to report data to the NICS.  And only that information that is “needed for purposes of reporting to the NICS” may be disclosed, though HHS gives States the flexibility to determine which data elements are “needed” to create a NICS record (consistent with requirements of the FBI, which maintains the NICS).  At present, the required data elements for the NICS are: name; date of birth; sex; and codes identifying the relevant prohibitor, the submitting state agency, and the supporting record.  The NICS also allows disclosure of certain optional data elements (e.g., social security number and identifying characteristics).  HHS notes that applicable covered entities may disclose such optional data elements “to the extent necessary to exclude false matches.”

HHS declined many commenters’ suggestion to expand the rule to permit the disclosure of information about individuals who are subject to state-only mental health prohibitors. HHS fears that expanding the scope of the permitted disclosure would disrupt the careful balance between public safety and encouraging patients to seek mental health care.

Finally, in the preamble, HHS defended its statutory authority to make this change, despite the fact that Congress did not address HIPAA in recent legislation to strengthen the NICS.  HHS explained that the “HIPAA statute confers broad authority on the Department to specify the permitted uses and disclosures of PHI by HIPAA covered entities.”

Article By Dena Feldman of Covington & Burling LLP

© 2015 Covington & Burling LLP